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2018 (7) TMI 1903 - AT - Income TaxTP adjustment - Foreign exchange and provision of doubtful debts are operating items for the purpose of computing the operating margin of the assessee as well as comparables - HELD THAT - As relying on assessee s own case 2017 (3) TMI 1316 - ITAT DELHI we direct the ld. TPO to treat foreign exchange gain/loss and provision of doubtful debt as operating in nature in calculating the operating margin of the assessee as well as final comparable companies. So, ground is determined in favour of the assessee. Treating amortization of goodwill as not extra ordinary in nature - It is the case of the assessee that goodwill is on account of acquisition of units through slump sale under Business Transfer Agreement and in these circumstances, amortization of goodwill is an extra ordinary item and is not pertaining to the regular operation of the taxpayer, hence non-operating in nature - HELD THAT - Amortization of goodwill is an extra ordinary item and is not pertaining to the regular operation of the assessee, and hence non-operating in nature. So, in these circumstances, we direct the TPO to verify the facts and treat the amortization of the goodwill as non-operating expenditure in order to compute the operating margin of the assessee - Decided in favour of the assessee. Risk adjustment on account of differences between the assessee and comparable companies - claim denied by TPO/DRP on the ground that the assessee has only a single customer risk - Assessee claimed risk adjustment of 13.89% to be applied to the margin of the comparable companies for benchmarking the international transaction computed - HELD THAT - The assessee is entitled for risk adjustment to the net margin of the comparables for bringing them at par with the taxpayer on supplying the complete data by the assessee. So, ground is determined in favour of the assessee for statistical purposes. Comparable selection - E-Infochip is engaged into software development as well as ITES and segmental information is not available, the same cannot be a valid comparable vis- -vis the taxpayer which is a routine software development service provider, hence we order to exclude E-Infochip from the final set of comparables Comparable chosen by ld TPO i.e Infinite Data Systems Pvt Ltd (Merged) is functionally not comparable with the assessee company Wipro - when the entire Revenue is received by the taxpayer by virtue of MSA entered into with Citi Group services which is also its subsidiary, the benefit accruing to this company on the basis of brand name of Wipro cannot be denied. So, in these circumstances, we find Wipro as unsuitable comparable for benchmarking the international transactions and exclude the same from the final set of comparables. TATA ELXSI LTD. (TATA ELXSI) - Keeping in view the functional dis-similarity and nonavailability of segmental data, coordinate Bench of the Tribunal in taxpayer s own case for AY 2009-10 (supra), ordered to exclude Tata Elxsi from the final set of comparables Thirdware is having substantial revenue from sales and operating sales of licence; software services; export from SEZ Unit; export from STPI Unit; and revenue from subscription and its segmental results are not available, it is functionally incomparable, so it cannot be taken as a valid comparable. Hence, we order to exclude the same. Persistent having a different business model with no segmental data available and having huge intangibles is not a valid comparables vis- -vis the taxpayer which is a routine captive software development service providers, hence ordered to be excluded. E-Zest cannot be a valid comparable on ground of functional dissimilarity being into three segments with no segmental information available. So, we ordered to exclude E-Zest from the final set of comparables. L&T and Mindtree taken as comparables for benchmarking the international transactions have not been analyzed for benchmarking the international transactions having been challenged now by way of additional grounds, we are of the considered view that the issue is required to be sent back to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer. R. SYSTEMS INTERNATIONAL LTD. (R. SYSTESM), CALIBER POINT BUSINESS, SOLUTIONS LTD. (CALIBRE) - at when data for the financial year is available, the comparable cannot be rejected merely on the ground that financial year followed is different. So, this issue is remitted back to the TPO to decide afresh in the light of the judgment in CIT vs. M/s. Mercer Consulting (India) Pvt. Ltd. 2016 (8) TMI 1163 - PUNJAB AND HARYANA HIGH COURT by providing an opportunity of being heard to the taxpayer. SIP TECHNOLOGIES & EXPORTS LTD. (SIP) - Undisputedly, there is no difference in the business model of the taxpayer since AY 2009-10. Coordinate Bench of the Tribunal in taxpayer s own case found SIP as a valid comparable - we order to include SIP in the final set of comparables for benchmarking the international transactions. Computation of operating margin of comparables and working capital adjustment margin of the alleged comparable companies - HELD THAT - DRP who has directed the AO/TPO to verify the correctness of the computation of operating margin of comparables and working capital adjustment margin of the alleged comparable companies for determining the ALP of the international transactions of the taxpayer in accordance with the provisions of the Act. AO/TPO has failed to comply with the directions. So, they are directed to comply with the directions issued by ld. DRP. Consequently ground no.8 is determined in favour of the taxpayer for statistical purposes. Allowability of software expenses - revenue or capital expenditure - HELD THAT - The amount on account of software expenses capitalized by the AO/DRP is ordered to be treated as Revenue in nature. Expenditure on training of employees as capitalized in nature being of enduring benefit to the taxpayer - revenue or capital expenditure - HELD THAT - Since, undisputedly, the taxpayer has not undergone any change in its business model and the issue is identical, the expenses are ordered to be treated as revenue in nature by following the decision of the coordinate Bench of the Tribunal rendered in taxpayer s own case in AY 2009-10 2017 (3) TMI 1316 - ITAT DELHI Depreciation on goodwill - HELD THAT - Following the findings returned by the coordinate Bench of the Tribunal in AY 2009-10 2017 (3) TMI 1316 - ITAT DELHI this issue is ordered to be remanded back to the AO to decide afresh after providing an opportunity of being heard to the taxpayer in the light of the directions issued in AY 2009-10. Exclusion of Infosys from the final set of comparables - HELD THAT - As decided in AGNITY INDIA TECHNOLOGIES PVT. LTD. 2013 (7) TMI 696 - DELHI HIGH COURT Taxpayer is a captive service provider/slave of Globe ST Ericsson, which does not have its own branch cannot be a valid comparable. Infosys was ordered to be excluded in taxpayer s own case for AY 2009-10. However, it is brought to our notice that the Revenue has went in appeal against the order of the Tribunal passed in taxpayer s own case for AY 2009-10 (2017 (3) TMI 1316 - ITAT DELHI) in which question of law has been framed. Also in case of Pr. CIT vs. Fiserv India P. Ltd. 2016 (10) TMI 1035 - DELHI HIGH COURT also ordered to exclude Infosys as a comparable vis- -vis Fiserv India P. Ltd. which was into software development on the ground that Infosys is having its own brand intangibles, an advantage which the taxpayer does not possess. Thus we are of the considered view that ld. DRP has rightly excluded Infosys from the final set of comparables.
Issues Involved:
1. Validity of the order passed by the AO under section 144C read with section 143(3) of the Income-tax Act, 1961. 2. Determination of total income and upward adjustment. 3. Transfer Pricing adjustments including selection and rejection of comparable companies, treatment of foreign exchange gain/loss, amortization of goodwill, and risk adjustment. 4. Treatment of software expenses and training expenses as capital or revenue in nature. 5. Depreciation on goodwill. 6. Levy of interest under section 234B and 234D. 7. Initiation of penalty proceedings under section 271(1)(c). Detailed Analysis: Issue 1: Validity of the Order The taxpayer argued that the order passed by the AO, pursuant to the directions of the DRP/TPO, is "bad in law and void ab-initio." This issue was not specifically adjudicated as it was general in nature. Issue 2: Determination of Total Income and Upward Adjustment The AO determined the total income at ?479,668,511 against the returned income of ?197,866,765, making an upward adjustment of ?281,801,746. This adjustment was contested by the taxpayer on various grounds, primarily related to transfer pricing. Issue 3: Transfer Pricing Adjustments - Comparable Companies: The taxpayer contested the inclusion and exclusion of certain companies in the final set of comparables. The Tribunal analyzed each comparable in detail: - E-Infochip Bangalore Ltd.: Excluded due to insufficient segmental information. - Infinite Data Systems Pvt. Ltd.: Excluded due to its unique business model and significant single customer risk. - Wipro Technology Services Ltd.: Excluded due to controlled transactions with its sole customer, Citi Group, under a Master Service Agreement. - Tata Elxsi Ltd.: Excluded due to functional dissimilarity and lack of segmental data. - Thirdware Solutions Ltd.: Excluded due to significant revenue from sales and operating sales of licenses, with no segmental results available. - Persistent Systems Ltd.: Excluded due to its involvement in software products and monetization of IPs. - E-Zest Solutions Ltd.: Excluded due to diversified services with no segmental reporting. - Foreign Exchange Gain/Loss: The Tribunal directed the TPO to treat foreign exchange gain/loss as operating in nature, following the decision in the taxpayer's own case for AY 2009-10. - Amortization of Goodwill: The Tribunal directed the TPO to treat amortization of goodwill as non-operating expenditure, consistent with the treatment in subsequent assessment years. - Risk Adjustment: The Tribunal allowed the taxpayer's claim for risk adjustment, directing the TPO to apply the adjustment after verifying the data. Issue 4: Treatment of Software and Training Expenses - Software Expenses: The Tribunal ordered the software expenses of ?12,27,686 to be treated as revenue in nature, following the decision in the taxpayer's own case for AY 2009-10. - Training Expenses: The Tribunal ordered the training expenses of ?13,84,084 to be treated as revenue in nature, consistent with the decision in the taxpayer's own case for AY 2009-10. Issue 5: Depreciation on Goodwill The Tribunal remanded the issue of depreciation on goodwill amounting to ?2,64,53,670 back to the AO for fresh consideration, following the decision in the taxpayer's own case for AY 2009-10. Issue 6: Levy of Interest The Tribunal did not provide specific findings on the levy of interest under sections 234B and 234D, as these were consequential in nature. Issue 7: Penalty Proceedings The Tribunal did not specifically adjudicate the initiation of penalty proceedings under section 271(1)(c), as it was consequential in nature. Revenue's Appeal: The Revenue challenged the exclusion of Infosys Technologies Ltd. as a comparable. The Tribunal upheld the exclusion, following the decision of the Hon'ble Delhi High Court in CIT vs. Agnity India Technologies Pvt. Ltd., noting significant differences in risk profile, revenue, and business operations between Infosys and the taxpayer. Conclusion: The taxpayer's appeal was partly allowed for statistical purposes, and the Revenue's appeal was dismissed. The Tribunal directed the TPO/AO to proceed in accordance with the findings and decisions mentioned, subject to the outcome of the pending appeal before the Hon'ble High Court in the taxpayer's own case for AY 2009-10.
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