TMI Blog2023 (3) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was also used by the assessee for benchmarking the international transaction. Thus, we are of the view that associated enterprise can be considered as a tested party, in the present case. Accordingly, we direct the TPO to conduct fresh benchmarking analysis after considering foreign associated enterprise as the tested party and arrive at the arm s length price for the international transaction pertaining to onsite development and project coordination fee . We also direct the assessee to provide all the data as may be required by the TPO for conducting the aforesaid exercise. In view of the above directions, the transfer pricing adjustment made by the TPO and upheld by the learned CIT(A) is set aside. We order accordingly. As a result, ground No. 1 raised in assessee s appeal is allowed for statistical purpose. Nature of expenses - Disallowance of custom duty paid - AR submitted that custom duty was paid towards debonding and shifting of the assets and therefore be allowed as revenue expenditure - HELD THAT:- From the perusal of record, we find that claim of the assessee was denied by the lower authorities without examining details pertaining to these assets as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is directed to provide the complete details to the AO regarding its claim of hedging against exchange fluctuation risk. Upon examination, if the claim of the assessee is found to be correct then the loss on account of forward contract to the extent same pertains to hedging against the risk of foreign exchange fluctuation be allowed to the assessee. As a result, ground No. 4 raised in assessee s appeal is allowed for statistical purpose. - ITA No.3033/Mum./2014, ITA No.301/Bang./2014 - - - Dated:- 26-7-2022 - SHRI PRAMOD KUMAR, VICE PRESIDENT AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER For the Assessee : Shri H.P. Mahajani For the Revenue : Shri Chandra Vijay ORDER PER SANDEEP SINGH KARHAIL, J.M. The present cross appeals have been filed by the assessee and Revenue challenging the impugned order dated 14/02/2014, passed under section 250, of the Income Tax Act, 1961 ( the Act‟) by the learned Commissioner of Income Tax (Appeals) IV, Bangalore [ learned CIT(A) ], for the assessment year 2008 09. 2. In its appeal, assessee has raised following grounds: The grounds stated here are independent of and without prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s without providing any cogent reasons for the same or pointing out any material deficiencies therein. 1.3.1 Incorrect rejection of AE us the tested party On the facts and in the circumstances of the case and in law, the learned TPO / AO erred in and the learned CIT(A) erred in upholding the rejection of selection of the Associated Enterprise as the tested party in the Transfer Pricing documentation maintained by the appellant, arrived at after detailed functional and economic analysis of the transacting parties and the international transaction under consideration as mandated by the Rule 108(2) of the Rules. 1.3.2 Premeditated application of own set of comparables by the learned TPO. On the facts and in the circumstances of the case and in law, the loamed TPO / AO erred using and the learned CIT(A) red in upholding the application of a standard benchmarking set without conducting a Function Assets and Risk Analysis ( FAR Analysis ) of the same in order to prove its applicability to the case by specious comparison of the international transaction of availing of service with the alleged comparable companies carrying out the business of provision of services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment to the international transaction of the appellant. 1.6 Incorrect calculation of adjustment to the international transaction The learned TPO / AO erred in computing and the learned CIT(A) erred in upholding the computation of the adjustment on the entire cost of the appellant and also erred in not restricting adjustment only to the extent of the international transaction under consideration which formed only 26.91% of the appellant's total costs. Ground No. 2- Disallowance of custom duty paid as revenue nature. The learned CIT(A) erred in confirming the action of the learned AO in making disallowance of Rs.11,78,884/ being Custom duty paid by the Appellant on de bonding of fixed assets belonging to STPI unit and customs duty for assets shifting treating the same as capital expenditure. Ground No. 3-Disallowance under section 14A of the Act 3.1 The learned CIT(A) erred in confirming the action of the leaned AO in disallowing expenditure of Rs.8,78,823/- under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962, as expense incurred in relation to earning of exempt income. 3.2 The leaned CIT(A) further erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly in subsidiary in USA (i.e. its associated enterprise) for on-site software and offshore support services rendered by the associated enterprise to the assessee. Based on the functions, asset and risk analysis, nature of international transaction and availability of comparable data, assessee selected the Transactional Net Margin Method ( TNMM‟) as most appropriate method with Profit Level Indicator ( PLI‟) of net cost plus markup. Further, associated enterprise was selected as a tested party on the basis that functions performed by it are less complex than as performed by the assessee. After search on international database, 11 USA based companies were selected as comparable to the associated enterprise having three-year weighted average margin of 7.13%. As, associated enterprise computed its own PLI at 6.16%, accordingly, the international transaction of onsite development and project coordination fee was claimed to be at arm s length price. 7. The Assessing Officer made reference to the Transfer Pricing Officer ( TPO‟) for determination of arm s length price of the aforesaid international transaction. The TPO vide order dated 31/10/2011 passed under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have considered the rival submissions and perused the material available on record. In the present case, assessee develops software development services and hardware solutions for telecom equipment manufacturers, carriers and service providers. While, the associated enterprise has been set up primarily for the purpose of front end support for offshore business, liaison with clients and prospective clients, client interaction and limited project support. As per the transfer pricing study report, assessee provides following services with respect to development of software in different area of telecom industry: TMRDS India specialises in the development of toll tandem Switching system Software supporting Class IV services. Access Product (brand Name Litespan) Software Development, Customer Support, Verification and Validation of Software. Cellular Switch Software development. Wide Band Digital Cross Connect (Transmission) Switch Development. Adjunct Element Software Development for Telecom Network Elements. Signal Transfer Point (STP) development for Telecom Signaling Network. 11. On the other hand, services provided by associated enterprise could be classif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s site. Keep the client and TMRDS India updated on the status of the project. Provide any other similar, allied or incidental service in the US. 12. Further, from the perusal of risk profile of the assessee and associated enterprise, forming part of the transfer pricing study report, it is evident that assessee has assumed much more risk (i.e. market, credit, quality, timely delivery, technology obsolescence etc.) than the associated enterprise. As regards the assets employed, assessee has the technological capabilities, physical assets and trained manpower to undertake the offshore software development work. Further, it is pertinent to note that assessee develops and owns all the intellectual property (technical and marketing) relating to provision of software services to the clients. The assessee also employs routine tangible assets such as land and building, plant and machinery, furniture and fixtures etc., for the purpose of business. 13. It is pertinent to note that Revenue has not disputed any of the aforesaid aspects while rejecting the transfer pricing analysis conducted by the assessee by treating associated enterprise as the tested party. The learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in US, has selected comparables who are software development service providers. Thus, having considered the function, asset and risk profile of the foreign associated enterprise and the assessee, we are of the considered opinion that, in the present case, foreign associated enterprise is the least complex entity vis- -vis the assessee. Further, the relevant and reliable data for comparison with the associated enterprise is also available in public domain, which was also used by the assessee for benchmarking the international transaction. Thus, we are of the view that associated enterprise can be considered as a tested party, in the present case. Accordingly, we direct the TPO to conduct fresh benchmarking analysis after considering foreign associated enterprise as the tested party and arrive at the arm s length price for the international transaction pertaining to onsite development and project coordination fee . We also direct the assessee to provide all the data as may be required by the TPO for conducting the aforesaid exercise. In view of the above directions, the transfer pricing adjustment made by the TPO and upheld by the learned CIT(A) is set aside. We order accordingly. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer for de novo adjudication. Further, assessee is directed to provide complete details of the assets and demonstrate the debonding of the assets to the Assessing Officer. We further direct that upon examination if it is found that custom duty was paid for debonding of the assets, which were earlier brought in STPI premises, relief be granted to the assessee to that extent. As a result, ground No. 2 raised in assessee s appeal is allowed for statistical purpose. 21. The issue arising in ground No. 3, raised in assessee s appeal, is pertaining to disallowance under section 14A of the Act. 22. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the course of assessment proceedings, it was observed that the assessee company has claimed exempt income of Rs. 3,75,75,083, from dividends and profit on sale of shares. It was further observed by the Assessing Officer that assessee has not considered any expenditure for earning the aforesaid exempt income. Accordingly, the Assessing Officer vide order passed under section 143(3) read with section 144C of the Act disallowed Rs. 8,78,823 as expenditure under section 14A read with Rule 8D o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2)(iii) of the Rules. In this regard, it is the claim of the assessee that only investments which yield dividend income during the year should be considered. We find that claim of the assessee is supported by decision of Special Bench of the Tribunal in ACIT vs Vireet Investment (P) Ltd., [2017] 165 ITD 27 (Delhi Trib), wherein it was held that only those investments are to be considered for computing average value of investment, which yields exempt income during the year. Accordingly, we direct the Assessing Officer to only considered those investments, for purpose of computation of disallowance Rule 8D(2)(iii) of the Rules, which yield dividend income during the year. As a result, ground No. 3, raised in assessee s appeal is allowed for statistical purpose. 27. The issue arising in ground No. 4, raised in assessee s appeal, is pertaining to disallowance of foreign exchange loss. 28. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, it was observed that amount of Rs. 47,97,489, is debited as foreign exchange loss. It was found that the said amount is towards the loss on forward contract. The Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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