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TMI Blog2022 (8) TMI 1502X X X X Extracts X X X X X X X X Extracts X X X X ..... ational e-Assessment Centre, Delhi ('Ld. AO') are bad in law. 2. Ld. AO has erred on facts and in law in determining total income of the Appellant at INR 7,218,234,160 as against a returned income of INR 5,526,284,370. Part I - Transfer Pricing Matters 3. That on facts and in law, Hon'ble DRP and the Ld. TPO/Ld. AO erred in making an adjustment of INR 1,569,263,482 to returned income of the Appellant in respect of international transaction pertaining to contract software development services ('SWD' or 'Impugned Transaction') 4. Transfer pricing adjustments made to the Impugned Transaction by Ld. AO based on order of Ld. TPO giving effect to the directions issued by Hon'ble DRP is bad in law inter-alia as the Appellant's AE was being charged to tax at a higher rate in the US and there was no advantage of shifting of any profit from a low tax paying country to a high tax paying country. 5. That on facts, Ld. AO/Ld. TPO erred in providing full effect to the directions issued by Hon'ble DRP in relation to computation of operating margin of tested party and thus did not consider the revised operation margin of SWD segment while determini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies and adding certain non-functionally comparable companies to the final set of comparable, on ad-hoc basis. They have resorted to cherry picking of comparable companies to determine ALP for the Impugned Transaction. 11. Hon'ble DRP and the Ld. TPO/Ld. AO erred in law and in facts by selecting certain companies which are earning super normal profits, as being comparable to the Appellant. 12. That on facts and in law, Hon'ble DRP and Ld. TPO/Ld. AO have grossly erred in incorrectly treating foreign exchange fluctuation as non-operating while computing operating profit of comparable companies and tested party. 13. That on facts and in law, Hon'ble DRP and the Ld. TPO/Ld. AO have grossly erred by not appreciating the fact that Appellant operates as a risk free service provider and all the risks associated with the Impugned Transaction was borne by the foreign AE and not by the Appellant, thus, the Appellant is entitled to suitable adjustments to account for differences in its risk profile vis-a-vis the comparables and if for any reason such adjustments cannot be made, such companies cannot be considered eligible to be comparable in first place. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 271 (1)(c) of the Act." 3. The assessee is a Private Limited Company engaged in the business of software development and product support services. It filed its return for AY 2016-17 on 29.11.2016 declaring total income of Rs. 5,53,01,09.910/- which was subsequently revised to Rs. 5,52,62,84,370/- on 26.03.2018. The case was selected for scrutiny under CASS. The Ld. AO completed the assessment under section 143(3) r.w.s. 144C of the Act on 30.03.2021 on total income of Rs. 7,21,82,34,156/- including therein addition of Rs. 1,56,92,63,482/- on account of transfer pricing adjustments and Rs. 12,26,86,304/- on account of difference of rental income offered as other sources. 4. Aggrieved, the assessee filed appeal before the Tribunal and all the grounds of appeal relate to the above mentioned addition to the income returned. 5. We have heard the Ld. Representatives of the parties, considered their submission and perused the material available on record. 6. Ld. Counsel of the assessee submitted that identical issue was considered by this Tribunal in assessee's own case earlier in ITA No. 5027/Del/2017 for AY 2013-14 vide order dated 11.08.2022. Both the Ld. counsels agreed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court) are different from the facts in assessee's case on following points:- "6. Submission distinguishing Sultan Brothers P Ltd. and Jay Metals Industries P Ltd. being on different facts- 1) The provisions of the section 56(2) are also being reproduced as under- "56 (2) in particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely:- ................................................................................................................................... (iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head "Profits and gains of business or profession." 2) In the present case which is before Hon'ble Bench, in the lease deed of the assessee company i.e. Microsoft India Pvt. Ltd. with its associated enterprises i.e. M/s. Global Service Centre India Pvt. Ltd., it is stated that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its commercial operations smoothly without any hindrance from the LEASED PREMISES. The LESSOR has agreed to provide at the LEASED PREMISES electricity and power load of not less than 1 KW/SFT for the exclusive use of the LESSEE. The LESSOR shall provide to the le LESSEE additional/new electricity and power load in future as may be required by the LESSEE. Any payment which may be required to be made to the electricity board or authorities or any other agency for the additional/new electricity and power load to bring it to the LESSEE'S desired requirements shall be paid by the LESSOR." * At page 6 para 3- * "3.7.4 In the event the services mentioned in this clause 3.7 are not provided by the LESSOR to the satisfaction of the LESSEE, the LESSEE shall be entitled to avail the same from other sources and deduct the amount from the Rent payable by it to the LESSOR. Rent Additionally, in the event the LESSSEE is not satisfied from the 100% power back provided by the LESSOR, the LESSEE shall be entitled to install such Diesel Generator Sets and of such capacity as it may require in the BUILDING for exclusive use of the LESSEE. It is clarified that the LESSOR shall, without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the judgment of the Hon'ble Supreme Court in the case of Sultan Brothers and the judgment of Hon'ble High Court in the case of Jay metals Industries Ltd. cannot be relied upon in the present case as the facts in this case i.e. M/s. Microsoft India Pvt. Ltd. are different. Moreover, from the conjoint reading of Para 3.4 (Pg. 5) and Para 3.7.4 of lease deed in M/s. Microsoft India (R & D) Pvt. Ltd. (Pg 6 it is apparent that the lessor is required to provide the Services in form of (electricity, Air Conditioning, Power Backup etc.) to the lessee for which the infrastructure such as (Central Air Conditioning with ducting, DG Power Supply, Network equipments, Occupancy Sensors, VAV's & Controllers, Smoke Detectors, Access Control Equipment, Electrical Equipments) are setup. It is the providing of services which is agreed upon as per lease deed. This inference flows out from Para 3.7.4 explicitly which mentions that if lessee is not satisfied with the services provided, then lessee is entitled to bring in his own infrastructure and lessee is entitled to deduct the cost and expenses from the rent payable. Moreover, at Para 7.7 of lease deed in M/s. Microsoft India (R & D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance which is confirmed by the Hon'ble DRP. 11. We observe that this issue came up for consideration before the Tribunal pursuant to the directions of the Hon'ble Delhi High Court for AY 2011-12 and 2012-13. The Tribunal in its order in ITA No. 1479/Del/2016 and ITA No. 507/Del/2017 dated 14.06.2021 proceeded with considering the decision of Hon'ble High Court in Jay Metals Industries Pvt. Ltd. 84 taxmann.com 11 wherein similar issue was considered and decided. In para 9 the Tribunal set out the question of law before the Hon'ble Delhi High Court and in para 10 extracted the observations of the Hon'ble Delhi High Court and analysed the facts of the assessee's case and the findings of the Ld. AO viz. a viz. the findings and the observations of the Hon'ble Delhi High Court in paras 11 to 15 thereof. The Tribunal, thereafter recorded its findings in paras 16-25 of its order (supra) which is extracted below:- "16. We have given thoughtful consideration to the findings of the Assessing Officer but we do not concur with the findings. There is no dispute that the lease agreement is a composite lease agreement which included the inbuilt infrastructural fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer to treat the income from letting out of the building as income under the head "Income from other sources". 22. The other ground which relates to the claim of expenses and depreciation u/s. 57 of the Act has already been answered by the Hon'ble High Court of Delhi in the case of Jay Metals [supra] as under: 26. However, the last plea made by the Assessee is that in that event the entire income from the letting is treated as 'income from source sources', it cannot be deprived of the corresponding deduction in terms of Section 57(iii) of the Act. The Revenue too has not disputed the fact that the Assessee has not claimed depreciation. 27. Accordingly, it is directed that while giving the appeal effect, the AO will grant the Assessee the benefit of Section 57(iii) of the Act. 23. Respectfully following the findings of the Hon'ble High Court, we direct accordingly. 24. As mentioned elsewhere, facts of A.Y. 2012-13 being identical to A.Y. 2011-12, we decide accordingly. 25. In the result, the grounds restored to the file of the Tribunal by the Hon'ble High Court are decided in favour of the assessee and against the Revenue." 12. We appr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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