TMI Blog2023 (11) TMI 278X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to the provision of IT support and related services (ITeS) segment - Comparable selection - TPO objected to the selection of filter of turnover less than Rs. 1 crore and introduced three new filters - HELD THAT:- Comviva Technologies Ltd company is earning income from various business activities including income from the sale of products/license fees without any operating segment which is functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude Comviva Technologies Ltd while benchmarking the international transaction pertaining to Provision of IT support and related services . XS Cad India Private Limited company treats its complete operations as a single segment, i.e. Information Technology Services . As noted above, the assessee has made relevant segment reporting in the notes to its financial statements. Since this company is earning revenue from various streams, therefore, in the absence of relevant segmental information, this company cannot be said to be functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude it. Nihilent Ltd. company is engaged in the development of applications across a wide range of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flawed - SCN asking why the transactions of Provision of Engineering and related services be benchmarked separately for FCEC, EEC, and EIC divisions? - HELD THAT:- As it is undisputed that this issue is recurring in nature and the ground raised is similar to that of earlier years. Further, the learned DR could not show us any material to deviate from the conclusion so reached by the coordinate bench in the preceding year. Thus respectfully following the judicial precedent in assessee s own case ITA No.6098 and 531/Mum./2018 [ 2019 (6) TMI 1444 - ITAT MUMBAI] we direct the TPO/AO to benchmark the international transaction pertaining to Provision of Engineering and related services by adopting an aggregate approach for all three divisions. As a result, ground no. 5 raised in assessee s appeal is allowed. Disallowance of expenditure u/s 14A r.w.r. 8D - HELD THAT:- As decided in Cheminvest Ltd. v. CIT [ 2015 (9) TMI 238 - DELHI HIGH COURT] held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Thus disallowance of expenditure under section 14A read with Rule 8D is not sustainable. Also decided in M/s Era infr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring of horns and electric motors for elevator application. For the year under consideration, the assessee filed its return of income on 30/11/2017, declaring gross total income of Rs. 203,94,21,362. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. Pursuant to the reference by the Assessing Officer ( AO ) under section 92CA(1) of the Act, the Transfer Pricing Officer ( TPO ) proposed a total transfer pricing adjustment of Rs. 12,42,61,908 vide order dated 19/01/2021, passed under section 92CA(3) of the Act. In conformity, the AO passed the draft assessment order dated 28/03/2021, under section 143(3) r/w section 144C(1) of the Act after making various additions/disallowances. While deciding assessee s objections against the addition/disallowances made by the TPO/AO, the learned DRP vide its directions dated 27/12/2021, granted partial relief to the assessee. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment on 29/01/2022 under section 143(3) r/w section 144C(13) of the Act. Being aggrieved, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch process and thus resorting to cherry picking of comparable companies: d) Selection of companies which are functionally not comparable and rejection of functionally comparable companies selected by the Assessee; e) Inconsistency in use of updated margins of comparable companies. The Appellant prays that the aforesaid adjustment be deleted. 5. Ground no. 5 TP Adjustment on account of provision of engineering and related services (Engineering) segment - INR 6,79,69,676 On the facts and in the circumstances of the case and in law, the Learned AO/TPO erred in making an adjustment for provision of engineering and related services by: a) Disregarding the TP Study maintained by the Appellant in good faith and with due diligence; and b) Disregarding the aggregation approach adopted by the Appellant by segregating the three divisions of the Appellant within the engineering and related services segment and thereafter applying the same benchmarking analysis to such segregated three divisions. The Appellant therefore submits and prays that the aforesaid adjustment be deleted. 6. Ground no. 6 Disallowance of expenses under Section 14A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the appeal hearing. 3. Ground no.1, raised in assessee s appeal is general in nature and therefore, needs no separate adjudication. 4. The issue arising in ground no.2, raised in assessee s appeal, is pertaining to overstating the total income of the assessee in the computation sheet forming part of the final assessment order. 5. During the hearing, the learned Authorised Representative ( learned AR ) submitted that the AO computed the total taxable income on page 17 of the final assessment at Rs. 218,46,93,421, however, while computing the total demand payable in the computation sheet annexed along with the final assessment order, the AO has considered the total income of Rs. 218,87,79,755. We find that pursuant to the DRP s direction the total transfer pricing adjustment was reduced to Rs. 12,01,75,576 from the original adjustment of Rs. 12,42,61,908, accordingly the total taxable income as proposed by the AO vide draft assessment order of Rs 218,87,79,753, was reduced to Rs. 218,46,93,421, vide final assessment order. Since while computing the total demand payable by the assessee, the AO has considered the total taxable income of 218,87,79,755, therefore, we dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering itself as the tested party, the assessee identified 10 comparable companies which had a working capital adjusted range of weighted average OP/TC of 6.16% to 15.15%, with a median of 10.03%. As the assessee computed its own PLI at 13.87%, accordingly, it claimed that the international transaction of Provision of IT support and related services is at arm s length price ( ALP ). 9. During the transfer pricing assessment proceedings, the TPO objected to the selection of filter of turnover less than Rs. 1 crore and introduced three new filters, i.e. (i) turnover filter of minimum 1/10th and maximum 10 times the turnover of tested party, (ii) export filter of more than 75%, (iii) availability of segmental account. By applying the aforesaid 3 additional filters, the TPO rejected three comparable companies selected by the assessee finding them same to be not satisfying the turnover filter. The TPO also introduced five new comparable companies, i.e. Comviva Technologies Ltd, XS Cad India Private Limited, Nihilent Ltd, Infobeans Technologies Ltd, and Cygnet Infotech Pvt. Ltd, claiming them to be satisfying all the filters. By rejecting the contentions raised by the assessee aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s will be at arm s length and the entire transfer pricing adjustment made in respect thereof will be deleted. Accordingly, in view of the submissions made by the learned AR, we are confining our findings in ground no. 3 only in respect of the aforesaid five comparables. Further, the other issues raised in ground no. 3 are treated as not pressed and are kept open for adjudication if they arise in assessee s case in the future. (i) Comviva Technologies Ltd. 12. The first comparable challenged by the assessee is Comviva Technologies Ltd. This company was included as comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis that it is functionally comparable to the assessee and satisfies all the filters. Before the learned DRP, the assessee submitted that this company is into diversified activities and no segmental data is available. The assessee further submitted that this company is involved in software publishing, consultancy, and supply and engaged in the writing of software of any kind following the directive of the users; software maintenance, and web page design. The DRP vide its directions rejected the objections filed by the assessee on the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed DRP, the assessee submitted that this company is engaged in diversified activities and has not provided segmental information bifurcating revenue generated from IT support and related services vis- -vis revenue generated from other activities. The DRP vide its directions rejected the objections filed by the assessee. Being aggrieved, the assessee has challenged the inclusion of this company as comparable. 16. During the hearing, the learned AR submitted that this company is functionally dissimilar to the assessee as it is involved in diversified activities, manpower recruitment, training and coaching. Further, it was submitted that there is no segmental data available to compare the same with the assessee. On the contrary, the learned DR vehemently relied upon the order passed by the lower authorities. 17. We have considered the submissions of both sides and perused the material available on record. From the perusal of the annual report of XS Cad India Private Limited for the financial year 2016-17, forming part of the paper book from pages 892-910, we find that this company earned income from the export and import of computer-aided design, training coaching, manpower re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On the other hand, the learned DR vehemently relied upon the order passed by the lower authorities. 20. We have considered the submissions of both sides and perused the material available on record. From the perusal of the annual report of Nihilent Ltd for the financial year 2016-17, forming part of the paper book from pages 738-891, we find that this company is engaged in the development of applications across a wide range of hardware and software platforms, develop solutions to integrate various applications across platforms, provide migration, re-engineering, and software maintenance services. Further, the company has claimed itself to be a global business consulting and IT service solutions integration company. We further find that 100% of the total turnover of the company is from IT consulting, software development, and related services. However, there is neither any bifurcation of revenue nor the availability of relevant segmental data. Further, we also find that the activities relating to exports are limited to software development and consultancy. Since, as noted above, the services rendered by the assessee under the ITeS segment are primarily in the nature of database ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the financial statement of this company, comprises of income from software services, without any further bifurcation of this revenue and segmental information. We find that even before the learned DRP the assessee raised this objection that no segmented financials of this company are available. Further, this fact was also accepted by the learned DRP that this company has only one segment, i.e. sale of software. However, the learned DRP proceeded to reject the objections filed by the assessee and held this company to be comparable to the assessee. Therefore, we are of the view that in the absence of relevant segmental information, this company cannot be held to be functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude Infobeans Technologies Ltd while benchmarking the international transaction pertaining to Provision of IT support and related services . (v) Cygnet Infotech Pvt. Ltd. 24. The next comparable challenged by the assessee is Cygnet Infotech Pvt. Ltd. This company was included as comparable by the TPO vide order passed under section 92CA(3) of the Act on the basis that it is functionally comparable to the assessee and satisfies all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Ltd, Infobeans Technologies Ltd, and Cygnet Infotech Pvt. Ltd, be excluded while benchmarking the international transaction pertaining to Provision of IT support and related services . Ground no. 3 raised in assessee s appeal is decided accordingly. 28. The issue arising in ground no. 4, raised in assessee s appeal, is pertaining to transfer pricing adjustment in relation to the provision of facilitation support services (Marketing Support Services). 29. The brief facts of the case pertaining to this issue are: The assessee is also engaged in providing marketing support services in India in relation to products of the associated enterprises. The assessee functions as a communication channel between the associated enterprises and the customers in India. The associated enterprises support the assessee by providing an overview and understanding of the products dealt with so as to enable the assessee to promote these products in the Indian market. Once the customers are identified, the associated enterprises negotiate and conclude the price and other terms and conditions of the contract directly with the customers. The assessee is not involved in the acquisition process. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudication, if they arise in assessee s case in the future. (a) Axience Consulting Private Ltd. 33. The first comparable challenged by the assessee in respect of an international transaction of Provision of Facilitation Support Services is Axience Consulting Private Ltd. This company was included as comparable by the TPO vide order passed under section 92CA(3) of the Act. Before the learned DRP, the assessee submitted that this company is not functionally comparable to the assessee as it is engaged in a diversified range of services. It was further submitted that there is no information relating to segmental breakup in the annual report of this company. The learned DRP vide its directions rejected the objections filed by the assessee and held that this company is also engaged in market research analysis for its clients and experience in business intelligence of specialised nature is rendered for its clients, and thus is functionally similar to the assessee. Being aggrieved, the assessee has challenged the inclusion of this company as comparable. 34. We have considered the submissions of both sides and perused the material available on record. It is undisputed that unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market research and public opinion polling, therefore we find no merit in the submission of the assessee that no segmental information pertaining to various services rendered by this company is available. Accordingly, we uphold the inclusion of Axience Consulting Private Ltd for benchmarking the international transaction of Provision of Facilitation Support Services . (b) MCI Management India Private Ltd. 35. The next comparable challenged by the assessee in respect of international transaction of Provision of Facilitation Support Services is MCI Management India Private Ltd. This company was included as comparable by the assessee, however the same was excluded by the TPO vide order passed under section 92CA(3) of the Act on the basis that the same is functionally different. Before the learned DRP, the assessee submitted that this company is involved in the provision of event management services which is in the nature of marketing support services. The assessee further submitted that this company was included as a comparable to the assessee in the assessment year 2014-15 and there is no change in the business activities of this company in this year. The learned DRP, vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices, we are of the view that it is functionally comparable to the assessee. Accordingly, we direct the AO/TPO to include this company as a comparable for benchmarking the aforesaid transaction. 38. To sum up, we uphold the inclusion of Axience Consulting Private Ltd, while we direct the inclusion of MCI Management India Private Ltd. as a comparable for benchmarking the international transaction pertaining to Provision of Facilitation Support Services . Ground no. 4 raised in assessee s appeal is decided accordingly. 39. The issue arising in ground No. 5, raised in assessee s appeal, is pertaining to transfer pricing adjustment in relation to the provision of engineering and related services segment. 40. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year, the assessee provided engineering and related services to its associated enterprises in respect of products manufactured and sold by the associated enterprises. Once the associated enterprises receive orders from the customers, the engineering and related services are outsourced by the associated enterprises to the assessee. In the transfer pricing study report, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment years in order to keep the issue alive since the decision of the DRP cannot be challenged by the Department. In conformity with the learned DRP s directions, the AO passed the impugned final assessment order. Being aggrieved, the assessee is in appeal before us. 41. We have considered the submissions of both sides and perused the material available on record. We find that a similar issue came up for consideration before the coordinate bench of the Tribunal in assessee s own case in M/s. Emerson Electric Company (India) Private Ltd. v/s ACIT, in ITA No.6098 and 531/Mum./2018, for the assessment years 2014-15 and 2013-14. Vide its order dated 14/06/2019, the Co ordinate Bench upheld the benchmarking of international transaction pertaining to Provision of Engineering and related services by adopting an aggregate approach for all three divisions, i.e. FCEC, EEC, and EIC. The relevant findings of the coordinate bench, vide aforesaid order, are reproduced as under:- 6.1. We find that the primary argument of the Id. AR was that in the case of the assessee, the segmental data of each of the divisions i.e., EIC, EEEC, and FCEC were available, whereas the very same data is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red with the AES. Once customer finalises the quotation, the division is involved in analysing the Order vis a vis the quotation to verify consistency. The division then develops dimension-nal drawings and shares it with the AEs. Dimensional drawings and configuration frameworks are shared by AEs with customers for approvals. Post approvals from customers, the AEs manufacture and supply products to the customers Customer approaches AES for supply of products AES source the base rel and engineering ou product activities required to customise the product to meet the customer's requirement outsourced to the division The services rendered th by the division includes graphical designing and related engineering services. These ou services are carried out based on ba the specifications provided by th the AES. The designs developed by the division is shared with AEs for their approvals. The division carries out modifications if any based on inputs provided by the AEs. The AEs then shre the designs with customers for approval. Post customer approval, the AEs develops th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness divisions of the assessee were utilized by Emerson Process Management Valve Automation Inc. for designing, manufacturing and supplying products in the industrial automation product segment to the customers. Thus, the above clearly substantiates that the engineering and related services rendered by the business divisions are towards a common end use/ application. 6.4. Yet another important point which was pleaded before us by the Id. AR was that common pool of funds were used for all the three divisions and that the funds of all the three divisions under the engineering services segment were interlaced as they are drawn from a common pool of funds maintained by the assessee company. The evidences were also furnished by the Id. AR by specific reference to the bank statement of the assessee maintained with Citi Bank which are enclosed in pages 406 407 of the paper book indicating fund transfer from each of the divisions as above. 6.5. We find that in all the aforesaid three divisions, manufacturing activity were only done by the AE and assessee company merely provides engineering and related services to its AE thereon. Hence, the Indian company i.e., assessee assumes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that all the three divisions under the engineering services segment are engaged in rendering design and engineering services falling under the common administration and management control of the company and funds for the three divisions are interlaced as they are drawn from a common pool of funds maintained by the company. In these circumstances, adoption of aggregated approach for benchmarking the international transaction should be accepted. We also find that the co-ordinate bench of Delhi Tribunal had endorsed our view in the case of Birla Soft India Ltd., in ITA No.4001/Del/2009 and 4713/Del/2011 dated 06/05/2014 wherein it was held as under: The assessee was engaged in rendering software development and related services with operations in three STPI units in different locations. The assessee had aggregated the services rendered under all the three segments while determining ALP considering that the services rendered were identical and there were no significant functional differences. The TPO, while evaluating the transactions, chose to segregate and benchmark each of the units separately by assuming that the functions, assets and risks undertaken by each of the STPI unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e single method may be chosen as the most appropriate method covering all the above transactions as the same are closely linked. c) US TP Regulations In respect of the aggregation of transactions, reference is also invited to the US TP Regulations. The relevant extract from the US TP regulation is provided below: (i) Aggregation of transactions - (A) In general The combined effect of two or more separate transactions (whether before, during, or after the taxable year under review) may be considered, if such transactions, taken as a whole, are so interrelated that consideration of multiple transactions is the most reliable means of determining the arm's length consideration for the controlled transactions. Generally, transactions will be aggregated only when that involve related products or services, as defined in 1.603A-3(c)(7) (vii). 6.9. We hold that the transactions under all the three divisions pertain to same class falling under engineering and related services segment. In this regard, the relevant legal provisions are to be looked into which are as under:- Rule 10C (2) of the Rules reads as follows: (2) In selecting the most appropriate method as sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be rational to apply this aggregated approach of considering the three business divisions together for determining the ALP. 42. As noted above it is undisputed that this issue is recurring in nature and the ground raised is similar to that of earlier years. Further, the learned DR could not show us any material to deviate from the conclusion so reached by the coordinate bench in the preceding year. Thus respectfully following the judicial precedent in assessee s own case cited supra, we direct the TPO/AO to benchmark the international transaction pertaining to Provision of Engineering and related services by adopting an aggregate approach for all three divisions. As a result, ground no. 5 raised in assessee s appeal is allowed. 43. The issue arising in ground no. 6, raised in assessee s appeal, is pertaining to disallowance of expenditure under section 14A of the Act. 44. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the assessment proceedings, it was observed that the assessee has its investments in equities where returns from investments are in the nature of dividends, which is an exempt income. The AO vide draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etrospective in operation, Hon ble Delhi High Court in PCIT vs M/s Era infrastructure (India) Ltd, [2022] 288 Taxman 384 (Delhi) held that the amendment by Finance Act, 2022 in section 14A is prospective and will apply in relation to the assessment year 2022 23 and subsequent assessment years. Thus, even in view of the aforesaid amendment also, the disallowance under section 14A read with Rule 8D is not permissible in the present case. 47. Thus, in view of the above, the disallowance computed under section 14A read with Rule 8D is directed to be deleted. Accordingly, ground no. 6 raised in assessee s appeal is allowed. 48. The issue arising in ground No. 7, raised in assessee s appeal, is pertaining to disallowance on account of the alleged delay in payment of Provident Fund (P.F) under section 36(1)(va) r/w section 2(24) of the Act. 49. The learned AR, at the outset, agree that this issue is covered against the assessee by the decision of the Hon ble Supreme Court in Checkmate Services Pvt. Ltd. v/s CIT, [2022] 448 ITR 518 (SC). We find that in the aforesaid decision, the Hon ble Supreme Court held that payment towards employee s contribution to P.F. / E.S.I.C. after the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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