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TMI Blog2015 (5) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... statistical purposes. Non consideration of other receipts as part of operating revenue for computing the margin - In the objections raised before ld. DRP assessee claimed that the other income shown are also from the operations of the business, hence, should be treated as part of operating revenue. Ld. DRP after considering the submissions accepted assessee s claim and directed TPO to treat the other income shown by assessee as part of operating revenue. However, the directions of ld. DRP were not implemented by AO in the final assessment order. In our view, when ld. DRP has specifically directed TPO to treat the other income shown by assessee as part of operating revenue for computing PLI, AO/TPO are duty bound to comply to the directions of ld. DRP. That being the case, we direct AO/TPO to compute PLI by treating the other income as part of the operating revenue. Selection of certain companies as comparables by TPO - Acropetal Technologies Ltd. - We find merit in the submissions of ld. AR. On a perusal of the annual report of the company, it is found that during the year the company has made acquisitions which might have impacted the profit making of the company. - Cosmic G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut examining assessee s claim of deduction u/s 10A as per the revised return could not have proceeded to allow the claim as per the original return when he does not dispute the fact that the revised return is a valid return as per the provisions of section 139(5) of the Act. In course of hearing, ld. AR brought to our notice that assessee has also filed a petition u/s 154 of the Act raising the very same issue before AO, which is still pending. Considering the aforesaid facts, we are inclined to remit this issue back to the file of AO with a direction to consider assessee s claim as per revised return and in accordance with law after due opportunity of being heard to assessee. This ground is allowed for statistical purposes. Disallowance of expenses related to operating software and application software - We have considered the submissions of the parties and perused the materials on record. It is very much evident from record that the software licence fee has been paid towards operation as well as application software. That being the case, the rate of depreciation applicable is 60% (as applicable to computer) and not 25% as allowed by AO. Moreover, this issue is more or less cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asia pacific overhead allocation fee-Rs.1,76,22,000 Regional management allocation fee- ₹ 1,66,23,495 iv) Payment of trade mark license fee - ₹ 1,19,02,086 v) Payment of business solutions license fee - ₹ 93,96,576 vi) Reimbursement by AEs - ₹ 22,03,172 vii) Reimbursement to AEs - ₹ 42,943,052 2.1 For the purpose of benchmarking its international transactions with its AEs, assessee aggregated the revenue received from BPO services as well as market research services and conducted a TP analysis through an external consultant by choosing itself as the tested party. TNMM was adopted as the most appropriate method with operating profit to operating cost as the profit level indicator (PLI). A search in the data bases yielded 21 companies as comparables. As the weighted average margin of the comparables was found to be within the tolerance band of assessee s profit margin, the price charged by the assessee was found to be within arm s length. During the assessment proceeding, AO noticing that assessee has entered into international transactions with AEs, made a reference to the Transfer Pricing Officer (TPO) to determine the arm s len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Spanco Ltd. (seg) 42.27 8.94% 20 Wipro Ltd. 1158.80 30.23 Arithmetic Mean 29.16 2.2 After allowance of 0.43% towards working capital adjustment, the adjusted arithmetic mean PLI was worked out at 28.73% and the ALP of international transaction was determined at ₹ 144,94,01,963 and after excluding there from non AE sales of ₹ 56,58,92,732, the ALP of sales with AEs was determined at ₹ 88,35,09,231 as against price received by assessee from AEs of ₹ 56,75,46,826. The resultant short fall of ₹ 31,59,62,405 was treated as TP adjustment u/s 92CA. Further, the TPO also did not accept assessee s claim of payment towards intra group services (management fee and licence fee) amounting to ₹ 7,13,18,212 on the ground that the assessee has failed to furnish/substantiate with documentary evidence the need for such services and also whether such services were actually rendered by AEs. He further observed if at all any such services were rendered by AEs whether assessee derived any benefit there from. Thus, TPO being of the view that there is no necessity for making payment towards intra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot pressed. 4. Hereinafter we will deal with the surviving grounds on TP issues. In Ground No. 3, assessee has challenged the determination of ALP of management fee and licence fee paid to AE as Nil. 5. Briefly the facts relating to the issue are, during the assessment year under consideration, assessee claimed payment of management fee and licence fee of ₹ 7,13,18,212 towards various services provided by AEs. TPO however rejected assessee s claim and determined ALP of such services at Nil by observing that assessee has failed to substantiate the need for services and further assessee failed to prove whether services were actually rendered and assessee derived any benefit from such services. Of course, the TPO did not make any separate adjustment while determining the ALP of such services at Nil. Ld. DRP though upheld the determination of ALP at Nil, a direction was given to exclude such expenditure incurred by assessee from operating cost. 6. We have considered the submissions of the parties and perused the materials on record. Ld. Counsels of both the parties agreed before us that the issue is squarely covered in favour of the assessee by the orders of ITAT in asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Unless the Assessing Officer steps into assessee s business premises and observes the role of these companies/ assessee s business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evidence satisfies the AO is also not specified. Assessee has already placed lot of evidence in support of claims. Therefore, on that count, we are not in agreement with the Assessing Officer and TPO that services were not rendered by the group companies to assessee. 16.1. Even otherwise, the role of Transfer pricing Officer is to determine the arms length price of a transaction. He cannot reject the entire payment under the provisions of sec. 92CA as held by the Hon ble Delhi High Court in the case of EKL Appliances ltd (supra) wherein the Hon ble Delhi High Court, on similar facts where the TPO also determined the ALP at Nil, has held as under : 21. The position emerging from the above decisions is that it is not necessary for assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for assessee to show that any ITA.No.944/H/07, 194 74/H/08, 793/H/09, 654,65 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee l royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of assessee and against the Revenue. The appeals are accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties. Therefore, while allowing the ground on the question of claim of management fees as such, the quantification thereof is restored to the Assessing Officer to examine with reference to the agreement between the parties. Accordingly, grounds 2 to 5 are considered allowed for statistical purposes. Similar view was also expressed by ITAT in assessee s own case for AY 2009-10 in ITA No. 604/Hyd/2014 dt. 13/02/2015. As the issue in dispute is materially same, respectfully following the aforesaid decisions of coordinate bench in assessee s own case, we remit the issue back to the file of the AO/TPO to determine the quantum of management fee and licence fee with reference to agreement between the parties. This ground is allowed for statistical purposes. 7. In ground No. 4, assessee has raised the issue of non consideration of other receipts of ₹ 28,69,633 as part of operating revenue for computing the margin. 8. We have heard the parties and perused the materials on record. As can be seen from the financial statements of the assessee, during the year assessee earned certain income which was shown as other income, the details of which are as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices Inc. and Accentia FZE. In support of such submission, ld. AR referred to the annual report of the company as submitted in the paper book. Ld. AR submitted, the increase in the turnover and profit margin of the company is due to merger and acquisition. Thus, it was submitted the company cannot be treated as comparable. In support of such contention, assessee relied upon the decision of ITAT, Hyderabad Bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT, ITA NO. 1647/Hyd/12 dated 24/10/14. He also submitted that in assessee s own case for AY 2009-10, the Tribunal has excluded this company from the list of comparables. 9.2 The ld. DR though agreed that the company has been held to be not a comparable with a ITES company in case of HSBC but she nevertheless supported the reasoning of TPO and DRP on the issue of selection of the aforesaid comparable. 9.3 We have considered the submissions of the parties and perused the materials on record. The main thrust of argument of ld. AR for rejecting the aforesaid comparable is on account of extraordinary event arising out of merger and acquisition during the year which could have impacted the profit margin of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es cannot be treated as comparable to ITES (BPO) service providers. Considering these aspects the coordinate bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra) held the aforesaid company as not comparable to a BPO service provider. Respectfully following the view expressed by the coordinate bench as aforesaid, we also direct AO/TPO to exclude this company. 11. Cosmic Global Ltd.: Ld. AR submitted before us, the company is functionally different as it is predominantly into translation services. Further, he submitted that the company fails the employee cost filter as employee cost is only 17.32% of the total expenditure. Ld. AR submitted, such low employee cost is suggestive of the fact that the company does not provide BPO services by itself but outsources the work. He further submitted, the segmental details as available from the financials of the company reveal that the revenue earned from BPO services is only ₹ 19.63 lakhs. Hence, it cannot be considered as a comparable to assessee. 11.1 Ld. DR, however, supported the reasoning of the TPO on the selection of this company. 11.2 We have considered the submissions of the parties and perus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to assessee not only due to the fact that it is involved in high end (KPO) services but it also earned super normal profits due to extraordinary event. For the aforestated reasons, the coordinate bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra) following the decisions in some other cases excluded this company. Respectfully following the view expressed by coordinate bench we direct AO/TPO to exclude this company from the list of comparables. 13. Genesys International Corporation Ltd.: Objecting to selection of this company, ld. AR submitted, the company cannot be treated as a comparable to assessee as it is functionally different. It was submitted the company is engaged in the niche business of geographical information services comprising photogrammetry, data conversion, data migration, data maintenance, application development, outsourcing services and other related services. In this context, he referred to the annual report of the company as submitted in the paper book. He further submitted that the company is working closely with Microsoft, Nokia, Digital Globe and Google Earth, which provide geo data. In fact it was submitted, the company is ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted, audited segmental data of the company was not available and manually corrected and unaudited data from its TP report has been considered, which cannot be said to be authentic. That besides, it was submitted the company has significantly high turnover of ₹ 1158 crores during the relevant PY. Thus, ld. AR relying upon a decision of the Hyderabad Bench in case of Hyundai Motors India Engg. P. Ltd. Vs. ITO, ITA No. 1850/Hyd/12 dated 21/02/14, sought removal of these two companies. 14.1 Ld. DR, submitted that as the TPO has selected these two companies on valid reasoning, there is no need to exclude them. 14.2 We have considered the submissions of the parties and perused the materials on record. As can be seen, in case of Hyundai Motors India Engg. P. Ltd. Vs. ITO (supra) these two companies were excluded by applying the turnover filter considering the fact that assessee s turnover was only ₹ 15 crores. However, in the present case, assessee s turnover is also quite high i.e. 113 crores. While HCL Comnet s turnover is about four times higher than assessee, that of the Wipro is about ten times more. Whereas, TPO has selected some companies which have consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the list of comparables. Ground No. 9 is accordingly disposed of. 16. In Ground No. 10, assessee has objected to rejection of certain companies by TPO. Though in the ground raised, assessee has challenged the rejection of 10 comparables, but, at the time of hearing before us Ld. AR confined his argument to only two of the companies, namely, Accurate Data Convertors Pvt. Ltd. and Informed Technologies Ltd. In view of the above, we propose to restrict our finding to these two companies only. 16.1 Accurate Data Convertors Pvt. Ltd.: Challenging the rejection of this company, ld. AR submitted before us, the company is engaged in the data processing activity like assessee. He submitted, as per information submitted in response to notice issued u/s 133(6), the company s entire revenue is from export of BPO services. He submitted, the company was not selected by assessee in its TP study. The TPO himself called for information from the said company. Though, as per the information submitted by the said company, it satisfies all the filters applied by TPO but the company has not been included in the list of comparables without assigning any reasons. In support of his contention, ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BPO services alone. Hence, rental income cannot be treated as part of operational income. Further, there is also substance in the submissions of ld. AR that the company satisfies more than 25% revenue earned from export filter applied by TPO. As neither TPO nor DRP have examined the aforesaid aspects while rejecting the aforesaid company as comparable, we think it appropriate to restore the issue of comparability of this company to AO/TPO for considering afresh after due opportunity of being heard to assessee. We make it clear, if on examining the information available on record TPO finds that this company satisfies all the filters applied by him, then, he may consider this company as a comparable. 17.3 We direct the AO/TPO to compute the ALP of the international transaction entered into by assessee with its AEs keeping in view the observations made by us in the preceding paragraphs. Further, while doing so AO/TPO is directed to consider assessee s claim with regard to any allowance with reference to function, assets and risks in accordance with law. Corporate tax issues 18. In ground No.16, assessee has raised the issue of nonconsideration of its claim of deduction u/s 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted by assessee, it was noticed by AO that assessee has claimed an amount of ₹ 1,00,99,916 on account of licence fee. AO asked assessee to explain why the expenditure claimed should not be disallowed as it is in the nature of capital expenditure. Though assessee objected to such view of AO, but, AO rejecting the objections of assessee disallowed the expenditure claimed and added the amount of ₹ 1,00,99,916 by treating it as capital expenditure. Assessee objected to the addition made before DRP. Ld. DRP, though, upheld AO s decision that the expenditure incurred is capital in nature, but, directed AO to allow depreciation at appropriate rate. The AO while completing final assessment in pursuance to the directions of ld. DRP, allowed depreciation @ 25% on the software licence fee by mentioning that it falls in the block of intangible assets. 23. We have considered the submissions of the parties and perused the materials on record. It is very much evident from record that the software licence fee has been paid towards operation as well as application software. That being the case, the rate of depreciation applicable is 60% (as applicable to computer) and not 25% as al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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