TMI Blog2023 (4) TMI 1263X X X X Extracts X X X X X X X X Extracts X X X X ..... her ground of objection but there were no speaking directions in this regard. DR also could not point out that the DRP has taken into account this additional ground. The depreciation adjustment on account of comparable companies has to be taken into account as the assessee depreciates its fixed assets at a rate higher than the rate prescribed under Schedule-XIV of the Companies Act, 1956. Thus, this needs verification and, therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer/TPO for proper verification and adjudication. Needless to say the assessee be given opportunity of hearing by following the principles of natural justice. Comparable selection - E-lnfochips Limited is a product engineering and software research development service company. The portfolio of the EInfochips Limited is totally different as the product based company cannot be the criteria for including the same as it is not the proper comparable with the assessee company. There are no segmental details available for this comparable. There are abnormally fluctuating margin related to this comparable. Besides this, the TPO has accepted in the remand report that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertakes R D and owns intangibles which makes it dissimilar from the assessee s portfolio. Therefore, we direct the TPO/AO to exclude this comparable from the final list of comparables. Wipro Technology Services Limited engaged in providing software related support services, software application development, integration, maintenance support as well as technology infrastructure operations. These services are totally different than the provisions of software development services. The brand Wipro Technology Services Limited has substantial presence and, therefore, it is earning super normal profit compare to that of assessee company. Therefore, this company is not a valid comparable. Thus, we direct the TPO/AO to exclude this comparable. Maveric Systems Limited - From the annual report of this comparable, it is pertinent to note that this comparable company is in the same field to that of assessee company and merely excluding the said comparable in A.Y. 2010-11 for persistent loss was not applicable in the present A.Y. as loss was not in the Indian entity but related to government policies in U.K. Therefore, we direct the TPO/AO to include this company after due verification f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in various mutual funds, also expenditure was in respect of treasury operation and managing such investments which was incurred for earning the exempt income - HELD THAT:- Though the assessee has stated that the long term investment was in subsidiary and the correct investment related to non-trade is in respect of mutual funds. The aspect of exempt income has not been properly demonstrated by the assessee and, therefore, suo moto disallowance was not justifiable at this juncture. This aspect needs to be verified and, therefore, it is remanded back to the file of the AO for substantial verification though the contention of the assessee that the expenditure incurred on two employees handling treasury functions was the only expenditure in relation to earning of dividend income or any other substantial expenditure was incurred. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Therefore, ground is partly allowed for statistical purpose. - MS. SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI BHAGIRATH MAL BIYANI, ACCOUNTANT MEMBER For the Assessee : Shri Vishal Kalra, Advocate For the Revenue : Shri P.K. Mishra, CIT DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing Officer (TPO) has erred in law and on facts in proposing an adjustment of Rs.220,97,90,410/- to the Arm s Length Price (ALP) determined by the appellant in respect of the international transactions in connection with provision of software development services undertaken by the appellant with its Associated Enterprises (AE). In doing so, the ld. AO/DRP/TPO has erred in law and in facts as follows :- 4.1 Disregarding the functions, assets and risks analysis undertaken by the appellant. 4.2 Rejecting the economic analysis undertaken by the appellant and not computing the ALP in respect of the international transactions as determined by the appellant without providing any cogent reasons. 4.3 Ignoring the provisions of the Rule 10B(4) of the Income Tax Rules, 1962 ( the Rules ) which authoress abusage of multiple year data of comparable companies for the purpose of determination of the ALP under section 92F of the Act. 4.4 Rejecting the comparable companies identified by the appellant in its transfer pricing study. 4.5 conducting fresh search by rejecting the objections raised by the appellant in relation to selection/rejection/modification of filters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowed in entirety, no expenditure was incurred to earn exempt income. 4. That on the facts and circumstances of the case and in law, the CIT(A) in sustaining the disallowance of Rs.6,48,60,628/- did not appreciate that: (i) administrative expenses debited to the profit and loss account had no bearing to the earning of dividend and non current investment. (ii) non-current investment of Rs.825.90 Crores was strategic investment in subsidiary companies and was not for earning any dividend. Subsidiary companies were merged with CSC India w.e.f. 01.04.2015 and during financial years 2009-10 to 2014-15, no dividend was earned from subsidiaries. Accordingly, noncurrent investment was not required to be taken into account in computing the disallowance under section 14A read with Rule 8D of the Rules. ITA No.319/Ind/2018 for A.Y. 2013-14 1. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals)-I, Indore [ the CIT(A) ] has erred in upholding the disallowance of Rs.6,54,95,133/- made under Section 14A of the Income Tax Act, 1961 ( the Act ) read with Rule 8D of Income Tax Rules, 1962 ( the Rules ) 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Rule 8D. The assessee filed objection against the draft Assessment Oder. The Dispute Resolution Panel (DRP) passed order under Section 144C(5) of the Act on 22.12.2015 directing the Assessing Officer to modify the Assessment Order as per the directions given under Section 144C(5) of the Act. In the directions, the AO observed that the DRP had upheld the disallowance of Rs.6,07,00,658/- made under Section 14A as per rule 8D. Also for upward adjustment of Rs.212,56,79,027/- on account of software services. The DRP confirmed the same. The Assessing Officer vide Assessment Order dated 05.02.2016 made addition of Rs.220,97,90,410/- towards upward adjustment on account of provision of Software Services and addition of Rs.6,07,00,658/- which is disallowed under Section 14A read with Rule 8D. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before us. 5. The Ld. AR submitted that the assessee company was incorporated in India on 13.09.1996. The assessee provides software development and maintenance services from STPI and SEZ registered units. The primary activities of the assessee relate to provision of software development services. For the services rende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer Pricing Officer with certain directions to revise the computation of the margin of the comparable companies. 6. The Ld. AR submitted that Ground no.1 is general in nature. Ground nos.2 3 are not pressed. Ground no.4 4.1 are general in nature. 7. Ground nos.1, 4 4.1 are general in nature and hence dismissed. 8. As relates to the Ground nos.2 3, the same are not pressed by the assessee and hence dismissed. 9. As regards to Ground no.4.2 related to rejecting economic analysis undertaken by the assessee, most specifically that of depreciation adjustment, the Ld. AR submitted that the assessee before the DRP by way of an additional ground claimed adjustment on account of depreciation vis- -vis comparable companies. The assessee depreciates its fixed assets at a rate higher than the rates prescribed under Schedule-XIV of the Companies Act, 1956. However, most of the comparable companies considered by the TPO follow rates as prescribed under Companies Act, following straight-line method. Thus, the comparable companies were charging depreciation at a rate lower than the assessee. The assessee sought adjustment because of the difference in the rates of depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer/TPO for proper verification and adjudication. Needless to say the assessee be given opportunity of hearing by following the principles of natural justice. Ground no.4.2 is partly allowed for statistical purpose. 12. As regards to ground no.4.3, the same is not pressed and hence dismissed. 13. Now coming to the ground of appeal no.4.4 to 4.7, the same are related to exclusion of comparable companies that of seven companies and inclusion of four comparables. 14. Firstly we will take up exclusion of comparable companies sought by the assessee. 14.1. E-lnfochips Limited : The Ld. AR submitted that E-lnfochips is a product engineering and software R D services company. It is engaged in manufacturing and designing of chips, owns IP, developed through dedicated R D expenditure incurred for product and hardware designing. In fact, there was disclosure to significant accounting policies in the said comparable as the Company is engaged in the development and maintenance of computer software and software development consulting and also manufacturing EVM and VDB Electronic Board (Hardware Division). The production and sales of software cannot be expressed in any generic unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F.Y. 2010-11 OP/TC E-Infochips Limited -14% 5% 57% The Ld. AR relied upon following decisions regarding abnormally fluctuating margin and supernormal profit: - PCIT vs. Allscripts India (P) Ltd. [2016] 241 Taxman 545 (Guj) - Cummins Turbo Technologies Ltd, UK vs. DDIT ITA Nos.161 269/PN/2013 - American Express India Pvt. Ltd. Vs. DCIT [2017] 83 taxmann.com 345 (Delhi - Trib.) - SAP Labs India Private Limited vs. ACIT: (ITA No 398 418/Bangalore/2010) - Adobe Systems Software India Private Limited vs. ACIT: (ITA No. 5043/Del/2010). - Teva India Limited vs DCIT (ITA No 6107/Mum/2009) - Sapient Corporation Private Limited vs. DCIT: (ITA No. 5263/Del/2010) - Quarks Systems Private Limited vs. DCIT: (ITA No. 100/Chd/2009) The Ld. AR further submitted that the TPO in assessee s TP assessment proceedings in AY 2010-11 rejected E-infochips as a comparable by treating income from hardware maintenance as income from sale of products. The Ld. AR relied upon the decision of Brintons Carpets Asia Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Product Testing - Product Maintenance and Support - Product Release and license Management - SAAS/SOA Services - Web 2.0 Services The company is maintaining inventories, which also proves that it is a software product company. The TPO in the remand report dated January 16, 2019, at page 9, has stated that E-zest Solutions Limited is actually not only a product development company, but is also rendering software product development services. Therefore, the contention of the assessee is incorrect to say that E-zest Solutions Limited is a software product company. In this regard, the TPO has relied on the information received under section 133(6) that the company is not having any revenue from sale of products during the subject year. In relation to the above allegations of the TPO, the Ld. AR submitted that from pages 767 to 770 of the paper-book, it is quite apparent that E-zest Solutions Limited is not just providing software development services but is also doing end to end product engineering and product development services, SAAS and other host of services, which are completely different from the assessee. Even assuming that during the year under consideration th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. Further, as regards insufficient data is concerned it has been submitted that the Annual Report of the company is available in the public domain and, thus, there is sufficient information to carry out the comparability analysis. He has further submitted that this company was considered as comparable in the AY 2010-11. The Ld. AR submitted that iGate has been excluded from the comparable list by the Tribunal vide order dated April 12, 2019 in ITA No. 160/lnd/2015 for A.Y. 2010-11. In view of the same, all the above contentions of the TPO that the said company is functionally comparable does not hold good. The Ld. AR relied upon the following decisions, wherein in the absence of segmental the company has been rejected: - Dialogic Networks (India) (P) Ltd. vs. DCIT: [2017] 78 taxmann.com 349 (Mumbai -Trib.). - Evalueserve SEZ (Gurgaon) (P) Ltd. vs. ACIT: [2017] 58 ITR(T) 234 (Delhi - Trib.) 14.8. The Ld. DR relied upon the directions of the DRP and order of the TPO/AO. 14.9. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that iGate Global Solutions Limited is in the nature of engineering design ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uctuating and the assessee earns a consistent steady returns for its activities. The TPO in the remand report dated January 16, 2019 has stated that the sale of software in the subject year is only 4,95,000/- which is 1.64% of the total turnover, therefore, the same will not affect the overall margin of the company. In this regard, the Ld. AR submitted that it is not the quantum of software product sold which makes the company functional or non-functional but it is per se the functional activities which would impact the comparability between the two entities. Further, the TPO in the report has not appreciated that Lucid owns considerable intangible and is spending considerable amount on research and development on yearly basis. Thus, Lucid is functionally not comparable as it owns intangibles, does research and development for developing new software products and is selling software products. The Ld. AR relied upon the following decisions relating to the comparable regarding fluctuating margin: - FCG Software Services (India) Private Limited: IT(TP)A No.1242/ Bangalore/2012) - CIT vs. Allscripts India (P) Ltd: [2016] 241 Taxman 545 (Gujarat) - Cummins Turbo Technologies Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o aligned directly to the customer. Around five percent of Persistent s employee base is dedicated to research and IP development and continuously tracking technology disruptions in the marketing. There were no segmental information is available. The TPO in the remand report dated January 16, 2019 has not made any adverse comments in relation to Persistent Systems Limited. The Ld. AR relied upon the following judicial precedents wherein the above stated comparable has been rejected: Functionally different: - Saxo India (P) Ltd. vs. ACIT: [2016] 176 TTJ 540 (Delhi - Trib.) - Dialogic Networks (India) (P) Ltd. vs. DCIT: [2017] 78 taxmann.com 349 (Mumbai - Trib.) - Mphasis Limited vs. ACIT: IT(TP)A No.14/Bang / 2012 - Trianz Holdings Private Limited vs. DCIT: IT(TP)A No.1568/Bang/2012 Income from sale of software: - Alcatel-Lucent India Ltd. vs. DCIT: [ITA No.6856/Del/2015] - Intoto Software India Private Limited (ITA No.1196 1197/Hyd) - FCG Software Services (India) Private Limited (IT(TP)A No.1242/ Bangalore/2012) Extra-ordinary events: The Ld. AR relied upon the following decisions wherein it has been held that in case of an extraordinary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue from product training is Rs.9.6 crores and the same has not been taken into consideration. The Ld. AR submitted that the TPO has erred in stating in the report that the segmental are available, it is clearly coming that no segmental are available and the segmental that are appearing in the Annual Report are related to services and product. Further, under the service segment there are different activities which are not comparable to the assessee, therefore, functionally the said company is not comparable to the assessee. The Ld. AR further submitted that this comparable undertakes R D and owns intangibles. The company is engaged in designing and installation of simulation technology and has invested considerable resources in R D for creation of niche solutions. For doing the work it owns significant intangibles. At page 1174 of the Paper book of the Directors report it has been reported that it h as secured contract for supply o: simulation and virtual training suite and it has successfully execute Silicon suite products for the Indian Army. The Ld. AR relied upon the following decisions wherein it has been held that companies owning intangibles cannot be accepted as compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er service agreement that Citigroup will provide business of $600 million to the Wipro Technology Services. Therefore, in terms of section 92B(2) of the Act the transaction has become international transaction and does not pass the related party/sales filter of 25% applied by TPO and hence should be rejected from the final comparable set. The Ld. AR relied upon the following decisions wherein the company has been rejected on account of high related party transaction on above facts: - Pr. CIT vs Saxo India (P) Ltd.: [2017] 397 ITR 160 (Delhi) - Saxo India (P) Ltd. Vs. ACIT: [2016] 176 TTJ 540 (Delhi - Trib.) - Agilent Technologies (International) (P) Ltd. Vs. ITO: [2018] 91 taxmasn.com 59 (Delhi - Trib) The Ld. AR submitted that the company has fluctuating margins for a period of over three years. Since FAR profile of company is different from FAR profile of assessee the same cannot be considered for the purposes of comparability, especially, when the margins are also fluctuating and the assessee earns a consistent steady returns for its activities. The Ld. AR relied upon the following case laws: - FCG Software Services (India) Pvt Ltd: (IT(TP) A No.1242/ Bangalore/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantial presence and, therefore, it is earning super normal profit compare to that of assessee company. Therefore, this company is not a valid comparable. Thus, we direct the TPO/AO to exclude this comparable. 15. Now coming to the inclusion of comparables companies :- 15.1 Maveric Systems Limited: The Ld. AR submitted that the company is engaged in the business of software development and testing services. The services are comparable to the assessee and it satisfies all filters applied by the TPO. The Ld. AR submitted that the TPO in the impugned year has not disputed the functional comparability of the comparable. The reason given for exclusion is that in the present year due to government policies in UK the company has incurred business losses. The TPO has accepted the said comparable both in AY 2012-13 as well as AY 2013-14 and has made no TP adjustment. The Ld. AR submitted that the performance due to government policy is not an unusual event. The Ld. AR submitted that the company in the Director's report has stated about company's business performance in various geographies. While the company did not perform well in the European market as the business was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O has alleged the said company has a high RPT/sales ratio, which is factually incorrect. The company in the annual report in the related party disclosures has actually disclosed director's remuneration as a related party transaction. The same amount is also reported as remuneration to director's. S. No. Particulars Reference Amount in INR 1 Income from services rendered Page 48 of Annual repot 2,85,81,327 2 Payment of rent 4,46,400 3 Expenses for services rendered 11,81,22,488 4 Total Related party transactions transactions (A) 14,71,50,215 5 Total operating income (B) 61,89,54,542 6 Percentage of related party transactions to turnover (A)/(B) 23.77% For the purpose of computation of RPT/sales ratio, Director's remun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the functional profile of the company, it has only been rejected as a comparable on the ground that it reports financials for a different financial year, which in view of the courts cannot be held to be the reason for rejection of this company as a comparable. The Ld. AR relied upon the following decisions wherein inclusion of R Systems has been upheld: - Mercer Consulting (India) (P.) Ltd. vs DCIT: [2014] 150 ITD 1 (Delhi - Trib.) - affirmed by Punjab Haryana High Court in [2017 390 ITR 615 - Business Process Outsourcing (India) Pvt. Ltd. vs ACIT: ITA No. 238/Bang/2016 - Baxter India (P.) Ltd. vs ACIT: [2017] 85 taxmann.com 285 (Delhi - Trib.) - Exevo India (P.) Ltd. Vs. ITO: [2016] 72 taxmann.com 339 (Delhi - Trib.) - CIT vs McKinsey Knowledge Centre India Pvt. Ltd.: (ITA 217/Del/2014) 15.8. The Ld. DR submitted that this company has 2 segments i.e. Software Development Segment Customisation Services and Business Process Outsourcing. The Ld. DR submitted that assessee has excluded certain comparable on the basis of TPO and hence this comparable should not be included. 15.9. We have heard both the parties and perused all the relevant material available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard both the parties and perused all the relevant material available on record. It is pertinent to note that for A.Y. 2011-12 this comparable company has incurred losses and, therefore, there was abnormal profit pattern. Filters taken by the TPO has not been satisfied by this comparable and, therefore, rightly rejected by the TPO. This comparable, therefore, should not be included in final list of comparables. 16. As regards to ground nos.4.8 4.9 related to Foreign Exchange Gain which is considered non-operating in nature and working capital adjustment, the Ld. AR submitted that the assessee in its TP study computed its margin i.e. operating profit to total cost considering the foreign exchange gain as part of operating profits as the same has arisen solely on account of export of services, being core operations of the assessee. The Ld. AR submitted that the TPO without considering the foreign exchange gain of Rs.3,31,37,000/- arising on account of export of software services, computed the margin of the assessee at 11.68 as against 14.32. The Ld. AR submitted that the operation margin as per audited accounts, as per assessee and as per the TPO are tabulated as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d PCIT vs. Finserv. 17/2016 as well as PCIT vs. Cashedge India Pvt. Ltd. (ITA No.279/2016). The Ld. AR also relied upon the decision of Hon ble High Court in the case of CIT vs. Infosys Technologies Ltd., 349 ITR 606 ITR and CIT vs. Encore Software Limited (ITA No.1142/2006). 18. As regards working capital adjustment, the Ld. AR submitted that the TPO gave the working capital adjustment, however, the margins of the comparable companies were incorrectly computed. Pursuant to directions issued by the DRP, the assessee gave updated working capital computation alongwith submissions for giving effect to the DRP Directions. The TPO has not considered the assessee s computation and has retained the incorrectly computed margins after giving working capital adjustment. The Ld. AR submitted that directions may be issued to the TPO to verify the same and compute the ALP of the international transaction basis the corrected margins. 19. The Ld. DR relied upon the order of the TPO/AO and directions of the DRP. 20. We have heard both the parties and perused all the relevant material available on record. In respect of foreign exchange gain which is considered as non-operating in nature, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of Hon ble Delhi High Court in the case of HT Media Limited vs. Pr. CIT, 399 ITR 596 and CIT vs. Taikisha Engineering India Limited, 370 ITR 338 as well as Joint Investments (P) Limited, 372 ITR 694. The Ld. AR further submitted that without prejudice to the above submissions, no disallowance was required to be made under Section 14A read with Rule 8D as the investment of Rs.18,65,61,000/- was held in subsidiary Fortune Infotech Limited and no new investment was made nor has any existing investment been disinvested in the relevant year. The assessee in A.Y. 2011-12 has earned no exempt income. The exempt dividend income has only been earned on current investments, which are held in mutual funds. The Ld. AR relied upon the decision of Hon ble Apex Court in the case of PCIT vs. Oil Industry Development Board, 262 Taxman 102 and PCIT vs. Chettinad Logistics Private Limited, 257 Taxman 2. The Ld. AR also relied upon the decision of Hon ble Delhi High Court in the case Cheminvest Limited vs. CIT, 378 ITR 33 and PCIT vs.IL FS, 399 ITR 483. 23. The Ld. DR submitted that for earning investment of Rs.18,65,61,000/- the assessee has suo moto disallowed such amount of Rs.20,37,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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