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2021 (8) TMI 1360 - AT - Income TaxTP Adjustment - computation of assessee s own PLI - As submitted foreign-AE being least complex entity, should be taken as tested party for the purpose of benchmarking - HELD THAT - AEs were providing marketing services in overseas markets against lump-sum fees. Therefore, the selling and marketing expenses incurred in domestic segment were rightly allocated to non-AE sales by the assessee. There was no justification to allocate the same to AE segment. So far as the compensation for use of premises is concerned, we are of the opinion that this expenditure would mostly be fixed in nature and would bear no relation with the turnover. The same has to be incurred irrespective of quantum of turnover. On the other hand, if the number of employees were more, the assessee would require larger premises and the expenditure would be more. Thus, allocating the same on the basis of number of employees would be more scientific method of allocating these costs. Similar is with electricity cost. More the employees more would be such cost. Therefore, we do not concur with Ld. TPO s approach in allocating the same on the basis of sales. The method adopted by the assessee was more scientific and supported by guidance note issued by the Institute of Cost Accountants of India for allocating administrative overheads which provide for number of employees as one of valid allocation key. Therefore, the assessee s PLI of 21.36% 21.53% with respect to OTI-USA OTG-Germany was to be accepted. We order so. Comparable selection - Assessee is engaged in providing Engineering Design Services (EDC) to its various overseas customers through its marketing arm in the form of Associated Enterprises (AE) in USA and Germany. It is evident that the AEs are remunerated at lump sum marketing-fees which were in the range of 3% to 3.5% and rest of the revenue would accrue to the assessee, thus companies functinally dissimilar with that of assessee need to be deselected. Since the assessee s PLI is much better than average PLI of remaining comparable entities, the transactions under consideration are to be considered at Arm s Length Price. We order so. The impugned TP adjustments, as confirmed in the impugned order, stands deleted. Equity investments - re-characterizing the transactions as loans / advances and make TP adjustment based on notional interest computation - HELD THAT - Assessee was operating in USA markets through its AE i.e. OTI-USA. It has made investment in share capital in its subsidiary which is evident from foreign remittance certification, annual report and financial statement of the subsidiary. The shares have been subscribed at face value in accordance with RBI s guidelines. The subsidiary has issued share-certificate to the assessee within a period of 60 days as mandated by RBI. The investment was made to fund the expansion plan of USA subsidiary and to strengthen its Balance Sheet which had accumulated losses. This being so, the action of lower authorities to re-characterize these transactions, in our opinion, was based more on mere allegations rather than being based on any tangible evidence on record. The assessee was holding company of its AE and any adverse working of AE would directly impact assessee s interest. It was true that had the AE obtained the funds through loan / debt, it would have to meet interest expenses at regular interval which would have ultimately affected its profitability and would not have provided the requisite cash-flow to carry on its business swiftly. The assessee, as a holding company, had infused funds in its subsidiary with a long-term objective through equity mode so as to enable the AE to carry on its business smoothly and swiftly. The Ld. TPO failed to distinguish between loan and capital contribution by way of equity. Therefore, we do not concur with the approach / action of lower authorities in re-characterizing the transactions as loans / advances and make TP adjustment based on notional interest computation. - Therefore, considering the factual matrix, we direct Ld. AO to delete this adjustment. The ground, to that extent, stands allowed. TP adjustment arising out of reimbursement of software expenses to OTI-USA - HELD THAT - It could be seen that the services of M/s Orasoft has been availed by the assessee only. The AE has merely carried out the transactions on behalf of the assessee. The payment made by the assessee was in the nature of reimbursement of third-party payments. There is nothing on record which would show that AE has been paid extra remuneration, in any way, for the said purpose. To summarize, the transactions are duly evidenced by agreement, invoices raised by M/s Orasoft and consequent debit note raised by AE on the assessee. The only doubt raised by Ld. TPO is tangible evidence with respect to receipt of services. TPO has also doubted the genuineness of the invoices. However, there are no concrete findings or material which would justify rejection of assessee s explanation and documentary evidences. The Ld. CIT(A) also erred in rejecting these documentary evidences without any sound basis. Therefore, not concurring with the approach of lower authorities, we direct for deletion of this adjustment. TP adjustment on account of Share Application Money - As there was end-to-end billing by OTI-USA to assessee s customers vis- -vis amount billed by assessee to OTI-USA. The aforesaid fact remains uncontroverted before us also. This being the case, no benefit arose to assessee s AE and therefore, there would be no question of computing ALP of the same. Concurring with the conclusion of Ld. DRP, we dismiss Ground Nos. 1 2 of revenue s appeal. Margin of 5% as retained by OTG-Germany - We find that percentage of revenue earned from this entity is merely 1.71% of total revenue earned by the assessee. The margin retained by this entity was quite less than mean margin of 8.89% reflected by comparable entities as selected by the assessee in its TP study report (though we do not accept foreign AE as tested party as held in AY 2008-09). Nevertheless, the assessee s segmental PLI of 45.57% was much above the mean margin of comparable entities selected by Ld. TPO. Therefore, no fault could be found in the approach of Ld. DRP. Computation of notional interest on Share Application money - We find that factual matrix is similar as in AY 2008-09. Therefore, our adjudication as for AY 2008-09 would apply here also. Taking the same view, we would hold that re-characterization of these transactions as loans / advances was not justified and accordingly, we delete the adjustment as made by lower authorities. Ground No.3 of revenue s appeal stand dismissed whereas Ground No.1 of assessee s appeal stands allowed. Deduction of late payment of employees PF and ESIC - HELD THAT - We find that the assessee has deposited an amount of Rs.81.21 Lacs as employee s contribution to PF and ESIC of Rs.0.08 Lacs. The payment was made after due date as specified under the respective acts but before the due date of filing of return of income - this issue is covered in assessee s favor by the decision of this Tribunal in assessee s own case for AY 2006-07 2013 (6) TMI 209 - ITAT MUMBAI Therefore, respectfully following the same, we direct Ld.AO to allow the deduction of the same to the assessee. This ground stand allowed.
Issues Involved:
1. Adjustment in Arm's Length Price (ALP) of international transactions. 2. Equity investment in AE re-characterized as debt. 3. Reimbursement of advance paid by AE for software purchase. 4. Deduction of expenditure towards Employee Stock Option Plan (ESOP). 5. Deduction of late payment of employees' PF and ESIC. Detailed Analysis: 1. Adjustment in Arm's Length Price (ALP) of International Transactions: The assessee contested the adjustment in ALP of Rs. 7,33,02,289 to the value of international transactions. The primary issues were: - Transaction towards IT Enabled Services (ITES) of Rs. 2,01,51,590: The CIT(A) confirmed ITES companies as comparable instead of EDS companies and upheld the allocation of indirect overheads based on sales ratio. The assessee argued that being a section 10A unit, there was no intention to shift profits. - Investment in Equity Share Capital of AE in USA of Rs. 93,83,554: The CIT(A) confirmed the re-characterization of equity to debt and imputed interest on this transaction. The assessee contended that capital contribution is different from loans and advances and that LIBOR should be the appropriate rate of interest. - Reimbursement of Advance Paid by AE in USA for Software Purchased of Rs. 4,37,67,145: The CIT(A) held that certain documents amounted to additional evidence and could not be considered. The assessee argued that in the absence of any claim for expenses, the question of disallowing it or making any addition does not arise. The Tribunal found that the allocation method adopted by the assessee for indirect costs was more scientific and supported by guidance notes issued by the Institute of Cost Accountants of India. The Tribunal directed the AO to accept the assessee's PLI of 21.36% and 21.53% for transactions with OTI-USA and OTG-Germany, respectively. The Tribunal also directed for the exclusion of certain comparable entities based on various Tribunal decisions, resulting in the deletion of the TP adjustments. 2. Equity Investment in AE Re-characterized as Debt: The assessee made an equity investment of Rs. 781.96 Lacs in its AE, which the TPO re-characterized as unsecured loans, leading to a TP adjustment of Rs. 93.83 Lacs. The Tribunal found that the investment was made to fund the expansion plan of the USA subsidiary and to strengthen its Balance Sheet. The Tribunal held that the re-characterization was based on mere allegations without tangible evidence and directed the AO to delete the adjustment. 3. Reimbursement of Advance Paid by AE for Software Purchase: The assessee reimbursed Rs. 4,37,67,145 to its AE for software purchased from Orasoft. The TPO doubted the genuineness of the invoices and proposed an adjustment. The Tribunal found that the transactions were duly evidenced by agreements and invoices, and there was no concrete finding to justify the rejection of the assessee's explanation. The Tribunal directed for the deletion of this adjustment. 4. Deduction of Expenditure towards Employee Stock Option Plan (ESOP): The assessee sought deduction of Rs. 13,35,125 towards ESOP. The Tribunal admitted this ground based on a consistent approach and directed the AO to allow the expenditure after due verification. 5. Deduction of Late Payment of Employees' PF and ESIC: The assessee sought deduction of late payment of employees' PF and ESIC amounting to Rs. 81,30,617. The Tribunal found that the issue was covered in favor of the assessee by the decision in AY 2006-07 and directed the AO to allow the deduction. Conclusion: The assessee's appeals for both years were partly allowed, and the revenue's appeal was dismissed. The Tribunal directed the AO to delete the TP adjustments, accept the assessee's PLI, and allow the deductions for ESOP and late payment of PF and ESIC.
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