9911796707
TMI Blog2017 (12) TMI 1117X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is allowed for statistical purposes. Credit of tds - Held that:- We direct the AO to grant the amount of TDS as per the provision of law Surcharge on DDT - Held that:- On perusal of records, we find that the surcharge applicable for the AY 2011-12 is 7.5%. But it is undisputed fact that dividend was declared and distributed and paid in AY 2012-13 and therefore the surcharge as applicable to the AY 2012-13 i.e. @ 5% should be applied on the DDT. In view of above, we direct the AO to delete the extra surcharge levied on the DDT Addition on AMP expenses as international transaction - Held that:- AMP cannot be regarded as international transaction. In holding so we find the support & guidance from the judgment of Hon’ble Delhi High Court in the case of Maruti Suzuki India Limited Vs. CIT [2015 (12) TMI 634 - DELHI HIGH COURT] Addition on account of lease rental paid for the cars - AO was of the view that the expenditure incurred on lease rental are in the nature of capital expenditure - Held that:- We find that the issu9e under dispute is covered by the decision of the Hon'ble Supreme Court in the case of ICDS Ltd [2013 (1) TMI 344 - SUPREME COURT ] decided in favour of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59,953 to the Arm's Length Price (hereinafter referred as ALP') of the international transaction relating to Management Support Services received by the Appellant and in not accepting the ALP of the international transaction as recorded in the books of account of the Appellant: 2.2 Concluding the ALP for services provided by the Associated Enterprise AE') to the Appellant under the Management Support Services agreement to be Nil; 2.3 Concluding that the services received by PIL from the AE are in the nature of stewardship and shareholder services leading to direct benefit to the AE and no proximate benefit to the Appellant; 2.4 Completely disregarding the benefits received by the Appellant on receipt of such management services and not appreciating that such services have significantly assisted the Appellant in achieving its daily operational efficacy; 2.5 Completely ignoring the fact that the voluminous tangible evidences furnished during the assessment proceedings unambiguously demonstrate regular flow of services received by the Appellant and how such services significantly helped PIL's daily operations; 2.6 Not appreciating that the Appellant is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant in the year under appeal without appreciating that the same have been accepted to be at arm's length in the Appellant's own case in preceding years (i.e. for all the assessment years preceding to AY 2009-10) by the AO and the TPO. 4.2 The Learned TPO erred in not applying the rule of consistency to transfer pricing proceedings when the facts of the case including the underlying arguments have not altered. 5. Determination of arm's length price for Software Segment 5.1. The Learned AO, TPO and DRP erred in making an adjustment to the ALP of international transactions relating to software development services rendered by the Appellant and in not accepting the ALP of the international transaction as recorded in the books of account by the Appellant. 5.2. Without prejudice to the generality of the above, the Learned AO and the DRP erred in making a transfer pricing adjustment of ₹ 16,27,69,727 on the basis that the Appellant should have made operating profit/ total cost margin of 15.36 % with respect to its software development services. 5.3. The Learned AO and DRP erred in selecting some functionally noncomparable companies for determination of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 234A 9.1. The Learned AO erred in levying interest of ₹ 1,35,46,528 under section 234A of the Act. 10. Interest under section 234B 10.1 The Learned AO erred in levying interest of ₹ 39,96,22,576 under section 234B of the Act. 11. Interest under section 234D 11.1. The Learned AO erred in levying interest of ₹ 1,61,67,498 under section 234D of the Act. 12. Interest under section 244A 12.1. The Learned AO erred in recovering interest of ₹ 42,39,613 under section 244A of the Act. 13. Penalty u/s 271(1)(c) 13.1. The Learned AO erred in initiating penalty proceedings under section 271 (1)(c) of the Act. 14. Dividend Distribution Tax 14.1 The learned AO erred in wrongly computing additional tax and interest payable on distributed profit of ₹ 4,44,320 without assigning any reason thereto. The appellant submits that the above grounds are independent and without prejudice to one another. The appellant desires leave to add or to alter, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing of the appeal." 4. The facts in brief as have been broug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in-house software development and software services to KPNV Group based on specifications provided. In the benchmarking study of the software division the assessee characterized the division as in-house service provided with limited functions and limited risk and receiving remuneration for services rendered based on cost plus mark-u. Assessee selected TNMM as the most appropriate method. A search was conducted by using Prowess and Capitalines Plus databases for software services. 5. The assessee during the year under consideration entered into various transactions with it AE which were accepted by the TPO except the following:- 1. Payment on account of Management support services 2. Payment on account of IT Charges 3. AMP expenses 4. Rendering software development charges The Ground No. 1 raised by the assessee is general in nature and does not require any adjudication. 6. The second issue raised by the assessee is that the ld. DRP erred in making an adjustment of ₹ 202,71,59,953.00 to the ALP of the international transaction relating to Management Support Services. 7. The assessee in pursuance to the agreement with its parent company dated 22nd October 2004 has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking methods used by it or receive advice on specific matters in the fields described above; and h. Any other similar matters which the company may reasonably refer to Philips or which Philips itself may deem appropriate. It has been agreed that the services mentioned above would be rendered by Philips to the company outside the country. Any services that would be required to be rendered by Philips in or within the country, whether by way of deputation of employees / representatives or otherwise, would be mutually agreed amongst the parties hereto and the same would not form part of this agreement. It was also agreed in the agreement that the assessee for the aforesaid services shall pay the remuneration to its parent company as detailed under:- Article-4 Remuneration In consideration of the concern services rendered by Philips under this Agreement the Company agrees to pay to Philips remuneration by aggregating amounts calculated as follows: a. That part of the concern services costs which corresponds to the ratio between the relevant local turnover and the relevant world turnover; and b. A surcharge of 10% on the amounts as calculated according to a above. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es; * The centralization of costs result in significant group cost savings which the assessee has also benefitted from; * It was difficult for the assessee to engage a third party for providing similar high level services; * The services rendered by the AE are of high quality; * The assessee did not have sufficient in house resources to provide services similar to those received from the AE; * Services received by the assessee enabled it to carry out its business operations more efficiently in an increasingly globalized and competitive scenario; * Access to such services enabled the assessee to keep up with customers' expectation. Also the assessee filed GSA TP documentation, wherein the mark-up of 10% was benchmarked and the same was also proved to be at arm's length. Further, it was also demonstrated that due to the continued support being received by the assessee, the turnover of the assessee (excluding software segment revenue) increased from 3% to 346% (considering year 2000-01 as the base year). The assessee also submitted that the AO in KPNV's order has classified and acknowledged that the services provided by KPNV to the assessee are complex and technical in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification of the relevant market is a factual question 1.58. In cases where similar controlled transactions are carried out by an MNE group in several countries and where the economic circumstances in these countries are in effect reasonably homogeneous, it may be appropriate for this MNE group to rely on a multiple country comparability analysis to support its transfer pricing policy towards this group of countries…." Further, it is important to note that worldwide the Tax au9thorities accept the same geography in which the company which is receiving the services is operating. Otherwise, they tend to question the rationale of availing services from outside the geography of the services recipient. Hence, the assessee used Pan Asian comparables to justify the cost plus markup being charged by the AE is within the range as being charged by a Pan Asian independent company and there is no loss of revenue for gong outside the local geography. Further, as regards the TPO's contention that no mark up should have been charged the assessee would like to highlight that TP refers to dealings between related parties in the same way how independent parties would have dealt with. In a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng at pages 1 to 56 of the volume 1 of part 3 (Exhibit 2 of DRP submission) were carefully considered and analysed by us to properly appreciate the merits of the claim. The discussion made by the TPO on pages 132 to 232 of his order under challenge was also carefully perused and analysed vis-a-vis the submissions made by the A' on pages 893 to 907 of the paper book volume 2. The relevant agreements enclosed in respect of the various services filed with the paper book were also studied in depth (pages 982 to 991 of the paper book). The bills raised in lieu of the services enclosed on sample basis on pages 992 to 1005 of the same paper book were also perused. Before delving into the merits or otherwise of the objections of the A' as above the Panel feels tempted to refer to the essential ingredients which result in "Stewardship activity": - 1) "The parent company seconds its employee on deputation to the country where subsidiary is incorporated. 2) The subsidiary does not undertake any revenue generating functions. 3) The subsidiary does not take any risks. 4) The client interaction is done by the staff of the parent company. 5) The subsidiary is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of from AEs have also been performed by the A' itself or from independent parties. 13. Details of such expenditure for each of the services. 14. Why a separate payment was made for the services to the AE. 15. Documentary evidence of cost incurred by the AE for rendering each type services purportedly received by the A' and the mark up applied, if any by the AE? 16. Whether the cost incurred by the AE was audited? 17. Whether AE was rendering services to any other AEs / independent parties also. If, so, the details thereof including the rates / amount Costs charged from such A Es along with mark up if any? 18. Whether the AE rendered services to any other AE / independent parties also. 19. Whether the AE rendered services to more than one entity including the company, then the basis of allocation amongst various entities and the basis choosing particular allocation key? As a concomitant of the above the A' was duty bound to adduce the following evidence:- 1) Emails containing propriety information 2) Process Manuals 3) Marketing Brochures 4) Timesheets 5) Minutes of meetings 6) Examples of increase in sales 7) Examples of decrease in costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the benefit were also not there. When and how the services referred to in the bills and the agreements were requisitioned by the A' from its AE's were also not clear. Similarly the cost benefit analysis undertaken by the A' and the expected benefits were also not available on record. Thus in a nutshell the 19 angles from which the case of the A' was examined did not go to establish that the services received by the A' from its AE were not in relation to day to day management of the business operations of the A', that the services were not aimed at monitoring the performance of the A' and that they enhanced the economic and commercial value of the A'. Accordingly the grounds 2 & 3 with its sub grounds are dismissed." Aggrieved, by this, the assessee has come up in appeal before us. 9. The ld. AR before us filed paper books in two volumes which are running from pages 1 to 940 and 1 to 55 and made the submissions which can be compiled as under : 1. The ld. DRP has treated the expenses booked by the assessee under management support service as income in the hands of AE i.e. KEPNV. Thus the amount of management services will result to double t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies In Transfer Pricing's context, it is essential to draw a line of distinction between a business activity and a service. Essentially the guiding principle that goes in determining the existence of an intra-group service is whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. An in-depth analysis, following the aforementioned conceptual difference between business activities and services, clears the air on many common business activities erroneously perceived to be in the nature of intra-group services. This includes: • Activities without any benefit: any activity which does not lead to an incremental commercial or economic value addition for the recipient cannot be regarded as a service. In the case of Gemplus India (P.) Ltd vs ACIT, [2010] 8 taxmann.com 170 the Bangalore Tribunal upheld the adjustment made by the TPO where the payments to be made to AE were not dependent on the nature and volume of service and even the appellant failed to prove any commensurate benefit against such payments. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construed as a service and therefore does not require any remuneration. Surmising the above, for an activity to qualify as a service, the fundamental factor that need to be considered is: • Whether an independent enterprise would have been willing to pay for the activity; or • Whether an independent enterprise would have performed the activity in-house itself. Evaluating the needs and benefits of Intra-group services It involves identifying the incremental economic or commercial value that has arisen to the services recipient. A direct nexus between the services received and the corresponding value created should be established. An intra-group service should be analysed to see how it helps the service recipient make gains through increased profitability be it by increasing sales or by reducing costs. In order to understand the value creation aspect of intra-group services, it is necessary to break the same into bits and pieces and analyse it further. The value of an Intra-group services can segregated into its reference value and its differential value. The reference value of an Intra-group service would necessarily constitute the price of the next best alternati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f entering into the agreement. Third party quotes for similar services if arranged for at the time of entering into the agreement, should also be made available * Functional analysis: The functional analysis should cover all basic questions like: * Who is doing what and for whom; * Where are they doing it; * Why are they doing it; * Who are they doing it; * What property is being used or transferred in connection therewith; * Benefit test documentation: Services may be received by way of conference calls, occasional visits and mails / presentations / tool kits exchanged from time to time. The actual evidence of receipt of services can be established with the help of the policies / e mails / guidelines / presentations used during the rendition of services. In addition to these, copies of time sheets of the service provider's personnel, cost centre reports and global Transfer Pricing documentation can also be helpful in substantiating and justifying Intra-group services. The table below gives an illustrative list of few generic services and the corresponding benefit test documents that may be submitted: Nature of services Examples of benefit test documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ider on behalf of recipient; Reports demonstrating benefits of a centralized human resource system like lowering of attrition rate, lesser personnel employed in the human function than required, people survey results. Before proceeding with determining the ALP, it is essential to establish the charge-out mechanism for the intra-group services rendered. For this, it is essential to distinguish between services that benefit a particular affiliate directly and services that benefit several affiliates or the group as a whole. There are two charge-out mechanisms: • The direct charge mechanism • The indirect charge mechanism The direct charge mechanism involves charging AEs directly for specific services. The DECD advocates the use of direct charge mechanism in cases where similar services are provided to AEs. Essentially, the cost pool for services rendered to associate concerns needs to be distinguishable and there should be a comparable open market transaction to facilitate pricing. Under the indirect charge method, the chargeable cost pool is identified, aggregated and allocated or apportioned amongst the members of MNE group on the basis of some degree of estimat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal further held that when commensurate benefit against the payment of service is not derived, the TPO is justified in making an adjustment under ALP. The Tribunal had determined the ALP at nil keeping the factual position as to whether in a comparable case, similar payment would have been made or not in terms of the agreements Similarly, in the cases of M/s Knorr-Bremse India Pvt. Ltd vs ACIT and Gemplus India (P.) Ltd vs ACIT, discussed above, the payments made in congruence of intra-group service arrangement were disallowed by determining their as nil on the grounds that they failed the benefit test. Therefore, in this case the TPO in his order has exhaustively discussed with reasons 'as to why the services rendered amount to shareholder activities and in the absence of proper documentary evidence ,he arrived ALP at NIL and adjustment accordingly. Even the DRP has at length dealt the issue and further on the failure of assessee to prove conclusively with necessary evidences has upheld the order of TPO. In view of the factual position of the assessee and also the case laws discussed the order of TPO may kindly be upheld." Lastly, ld. DR vehemently supported the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advice and support with respect to the supply of requirements of the Company from other resources ; c. financial, accounting and auditing matters relating to such subjects as: i. accounting and auditing principles and methods; ii. budgeting methods; iii. capital structure, loans, exchange risks, financial research, warranties and guarantees, credit management, the establishment and management of finance and lease companies and all further banking activities, including longterm finance plans; iv. development of data processing d. fiscal and legal matters , including patents, trademarks and customs duties, particularly in international transactions ; e. personal matters particularly with respect to : i. the selection and training of personnel ; ii. an adequate personnel policy; f. insurances; g. admittance at the Company's specific request and at mutually agreed terms of a reasonable number of employees of the Company to its premise to the extent to which Philips has the free right to do so, so that they can acquaint themselves with commercial and other knowledge as specified above, familiarize themselves with the organization of the Philips Concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b. taxes which can be claimed back or credited against tax by Philips in accordance with the legal provisions, which shall be chargeable to Philips. The ld AR argued that the assessee had complied with the TDS obligations on the subject mentioned payments and the same has been accepted by the department. He also referred to the summary of emails from Pages 333 to 378 and further emails which are enclosed in Exhibit II from pages 800 to 854 of Paper Book. He also referred to the exclusion of 12000000 Euros towards the Shareholder function costs in the overall cost allocation to the assessee company which is enclosed in page 795 of the Paper Book. We find that the assessee had also furnished before the lower authorities , the details of specific benefits derived by it on each of the emails corresponded between the assessee and KPENV comprising of various services rendered by KPENV pursuant to the MSSA. In fact the benefits derived from each of the services is furnished in the separate column in the said reply dated 11.1.2013 before the ld TPO which is also enclosed as Exhibit II in the Paper Book filed by us. The ld TPO simply replied in his remand report filed before the ld DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial know-how or commercial experience). As both FTS and Royalty are taxable at the same rate under the DTAA, it does not matter that there is no clear cut separation or quantification in the MSSA of the service and the knowhow portions. The entire receipts would be chargeable to tax in India under the DTAA as well as the I.T.Act. 4.2.1. Hence based on the aforesaid order of ld DRP in the hands of KPENV for the Asst Year 2009-10, we find that the ld DRP had treated the receipts of Management Support Services Charges from assessee herein (i.e. Philips India Ltd) in the hands of KPENV as FTS or Royalty and made it taxable in India. So once the same is accepted as FTS or Royalty in the hands of KPENV, the nature of payment cannot be different in the hands of the assessee herein by simply placing reliance on the benefit test, even though the benefits derived by the assessee pursuant to MSSA has been elaborated in detail by the assessee by way of substantial cost reduction. We also find that the assessee had paid service tax of ₹ 14,87,24,134/- on payment of Management Support Service Charges of ₹ 125,27,30,863/-. 4.3. We find that the ld DR argued that assessee had not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied upon by the ld AR on the Hon'ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) (P) Ltd reported in (2014) 367 ITR 730 (Del) is well founded wherein it was held that :- "35. The Transfer Pricing Officer's report is, subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more important to clarify the extent of the Transfer Pricing Officer's authority in this case, which is to determining the arm's length price for international transactions referred to him or her by the Assessing Officer, rather than determining whether [such services exist or benefits have accrued. That exercise - of factual verification is retained by the Assessing Officer under Section 37 in this case.] Indeed, this is not to say that the Transfer Pricing Officer cannot - after a consideration of the facts - state that the arm's length price is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the Transfer Pricing Officer stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erforce be tested under the various methods prescribed under the Indian TP provisions. In the context of cost sharing arrangement, the Hon'ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion. In the present case however, the arrangement between the AE and the Assessee is not a cost sharing arrangement but a payment for specific services rendered. To this extent the above observations of the Hon'ble High Court may not be relevant to the present case. 28. The following aspects would require consideration in order to identify intragroup services requiring arm's length remuneration: - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, we hold that the determination of ALP for Management Support Services at Rs NIL is unwarranted and accordingly the upward adjustment made by the ld TPO in the sum of ₹ 125,27,30,863/- is deleted. Accordingly, the Grounds Nos. 2 & 3 raised by the assessee are allowed. In view of above we find that the assessee has actually received MSSA services from the AE and it cannot be categorized as stewardship services. Therefore respectfully following the order of this Hon'ble Tribunal in the own case of the assessee, we reverse the order of authorities below. Hence ground of appeal of the assessee is allowed. 11. The next issue raised by the assessee is that the Ld. DRP erred in making an adjustment of ₹ 3,55,26,652.00 to the ALP of the international transaction relating to IT Services. 12. During the year under consideration for AY 2011-12 the assessee received IT services from its AEs. The services were received by the assessee in pursuance to Service Level Agreements (SLA for short) entered into by the assessee with its AE. The assessee paid cost plus 5% to its AE for receipt of such services. The IT services provided by AE were integral to the business of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings claimed that * The services were actually received; * Services received were directly beneficial to PIL and not its AEs; * The services resulted in operational efficiency of PIL and * Services were not in the nature of shareholder/stewardship activity. The assessee in support of his claim produced voluminous evidences before the TPO such as sample invoices, agreements to justify the IT services. The assessee during the assessment proceedings also submitted that the 5% mark up is at arm's length based on the benchmarking carried out by the AE for the management support services. Since the comparables selected for management support services also consisted the comparables which provide IT services. The arithmetic mean of the mark up on total cost for the independent comparables selected for management support services was 8.27% with updated margin of 8.53% only. The assessee further submitted that the IT services received from the AE have resulted in significant benefit to it, without which the assessee would not have been able to function efficiently. Moreover, had the assessee not received these services from its AE, it would have procured the same from third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see would not have been able to function efficiently. However, the ld. DRP rejected the contentions of the assessee & confirmed the order of the TPO. The findings of the DRP observations has already been recorded in Para 8 of this order. Being aggrieved by the order of Ld. Dispute Resolution Panel (DRP), assessee has come up in appeal before us. 14. The ld. AR before us made the submissions which can be compiled as under:- 1. The ld. DRP has deleted the addition in respect of IT charges claimed by the assessee in respect of AYs 2009-10, 2010-11, 2012-13 and 2104. Therefore the IT expenses claimed by the assessee should be allowed as deduction in the year under consideration. 2. The ld. AR in support of his claim also relied on the judgment of Hon'ble Supreme Court in the case of Radhasaomi Satsang vs CIT reported in (1992) 193 ITR 321 (SC) . 3. The ld. AR drew our attention on pages 413 to 419 where details of IT services received by the assessee and its corresponding benefit to the assessee are placed. 4. The ld. AR reiterated the submissions as made before the lower authorities. On the other hand, Ld. DR submitted that no benefit test has been conducted during the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. DRP was pleased to delete the addition as made by the TPO. The subsequent order of the ld. DRP are placed on pages 727 & 766 of the paper book. Similarly we also note that there was no addition made by the ld. DRP for the AY 2012-13 & 2013-14 on account of IT services expenses incurred by the assessee. The copies of the orders are placed on pages 795 & 879 of the paper book. In view of above, we are inclined to reverse the order of authorities below. Thus the ground raised by assessee are allowed. 16. The next issue raised by the assessee is that the Ld. DRP erred in making an adjustment of ₹ 16,27,69,727.00 to the ALP of the international transaction relating to software development services rendered by it. 17. The assessee during year from its PSC division had provided software development services to its AE. The assessee provided services based on a SLA with KEPENV and charged a markup of 10% on costs for the services provided. The assessee based on the FAR analysis of PSC division selected the Transaction Net Margin Method (TNMM) as the most appropriate method for determining the ALP of software development services. The assessee selected operating margin on ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing for working capital and risk adjustments. The assessee also submitted that the Hon'ble DRP Kolkata in its own case for AY 2010-11 has allowed working capital and risk adjustments of 2% each, thus following rule of consistency the same should be allowed as the facts remain same and there has been no change in the business. However the TPO during assessment proceedings observed that assessee is engaged in cutting edge product without appreciating that the products are not conceptualized in India and hence the role of PSC is limited to only that of a routine captive service provider. Thus the TPO rejected the comparables selected by the assessee in its Transfer Pricing Study on the basis of functionality and selected new comparable companies. The TPO selected 10 companies, out of which one company (Persistent Systems Limited) was common with TP study and proposed an arithmetic mean margin OP/OC of 28.100%. The details of comparable companies selected by the Transfer Pricing Officer (TPO) are detailed as order. Company name 2009 2010 2011 Three years weighted average operating margin on operating costs Bells Softech Ltd 12.97% -16.32% -16.95% 1.11% CGVAK Softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation Technologies Ltd -7.60% NC 3.44% -1.52% Persistent Systems Ltd.# 11.76% 24.69% 20.46% 18.93% Spry Resources India Pvt. Ltd 17.19% 33.22% 18.40% 21.09% VMF Softech Lt -53.72% 23.41% -8406% -63.68% Arithmetical Mean (average) (-) 0.52% # - Common comparable 18.1. Notwithstanding the arguments provided above, the assessee submits that the computation of the margins provided by the TPO is erroneous. Notwithstanding the arguments provide above, the assessee submits that the computation of margins for 3 companies provided by the TPO in the final order is erroneous. The correct margins as submitted before the TPO are given hereinbelow: Name of the Company Operating Margin on cost computed by your goodself Operating Margin on cost computed by the assessee. Accropetal Technologies Ltd (Segmental) 31.98% 22.06% Tata Elxsi Ltd(segmental) 20.91% 9.04% Persistent systems & Solutions Ltd 22.12% 16.00% The details working of the margin calculation are provided in Exhibit 6 to this submission. It was submitted that the Ld. TPO disregarded the comparable set of the assessee without providing any cogent reasons. Out of the above 9 companies, the Ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services * products. Also the company is engaged in manufacturing & trading of PCB. (b) Segmental information not available - as per the AR, it is proclaimed that it is engaged in Software development and it enabled services and products. However, segmental information in relation to such activities is not provided in the AR (c) Engaged in R&D activities - Further the company is also involved in R&D activities. (d) Exceptional year of operation - the company had an abnormal increase in turnover year on year far exceeding the industry average and thus had an exceptional year of operation as e- Infochip has grown by 96 percent this year which is five times the industry average. 2. Infosys limited. (a) Rejected by DRP in AY 12-13 - Infosys has been rejected by the DRP in the assessee's own case for AY 2012-13 on account of different FAR. (b) Functionally different - The company provides a wide range of services encompassing technical design, engineering design etc and in addition offers software products for the banking industry. The company earns income from both software services and software products including licensing of software products. (c) Segmental information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etained. The ld. DR vehemently supported the order of ld. DRP. Now we take up Revenue appeal ITA No. 863/Kol/2016 19. The ld. DR submitted that the companies selected by the TPO during the assessment proceedings were showing similar functions and profitability to the assessee. Therefore the same should be retained for the purpose of the comparables to determine the ALP. The Ld. DR also submitted that fresh list of companies has been admitted by the ld. DRP without providing opportunity to the TPO. The ld. DR vehemently supported the order of TPO. On the other hand the learned AR reiterated the submission as made before the learned DRP. The ld. AR also submitted that the following companies were correctly rejected by the ld. DRP for the purpose of comparable. 1. Acropetal Technologies Ltd. (Seg) (Acropetal):- The Hon'ble DRP in their Directions had rightly rejected Acropetal by stating that it is functionally not comparable to the assessee. Accordingly, the contentions of the assessee against Acropetal is reproduced as under: (i) Functionally not comparable - Acropetal Technologies is not functionally comparable as its IT services segment also consists of ITeS services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rections had rightly rejected Sasken by stating that the company is also engaged in ITeS which had outsourced its services unlike the assessee. Accordingly, the contentions of the assessee against Sasken is reproduced as under:- (a) Rejected by DRP in AY 2012-13 - The company was also rejected by DRP in Assessment Year 2010-11 and AY 2012-13. (b) Functionally not comparable - Sasken Communication Technologies is not functionally comparable as the company provides telecommunication software services and solutions to provides telecommunication software services and solutions to network equipment manufacturers, mobile terminal vendors ad semiconductor companies. It also derives revnue from products business. (c) Segmental information not available - The company does not have segmental information in their AR. (d) Engaged in R&D activity - The company incurs expenditure on R&D and is also setting up a R&D centre in Chennai. Separate charts to be seen for detailed arguments & case laws. 5. Tata Elxsi Ltd. (Seg) (Tata) - The Hon'ble DRP in their directions had rightly rejected Tata Elxsi by stating that the company has intangible. Accordingly, the contentions of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cepted Evoke by stating that the comparable is engaged mainly into software development. TNMM is a more tolerant method. Enterprises may have a wide range of GP margins but still earn broadly similar level of profits, hence accepted. (a) Functionally comparable:- Evoke is functionally comparable as it is derives its revenue from software development services. (b) Accepted by TPO in subsequent Assessment Years:- The TPO has accepted it as a comparable in AY 2012-13, AY 2013-14 and AY 2014- 15. 9. I Power Solutions India Ltd. ("I Power") :- The Hon'ble DRP in their directions had rightly accepted I-Power by stating that the comparable is engaged mainly into software development. TNMM is a more tolerant method. Enterprises may have a wide range of GP margins but still earn broadly similar level of profits, hence accepted. (a) Functionally comparable:- I Power Solutions is functionally comparable as it is provides web/e-commerce solutions, software application development, information processing. Further the company derives income only from software development. 10. Kaashyap Technologies Ltd.("Kaashyap"):- The Hon'ble DRP in their directions had rightly accepted Kaashya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... around us is only on the selection of comparables. We find that the ld. AR had duly made out a case for exclusion of comparables after bringing out the functional differences, non availability of segmental reporting, R & D Activities in respect of E-Infochips Limited, Infosys Limited Page and Persistent Systems Limited. For the above discussion of three companies we also observe that the segmental report is not available, therefore we are of the view that these companies should be excluded from the list of comparable companies. We also note that the ld. AR in support of his claim has cited various cases of Hon'ble Tribunals which are placed on record and the operative portions are not produced here for the sake of brevity. 21. We also find that the Infosys Ltd was excluded by the ld. DRP in the AY 2012-13 from the list of comparables on the basis of different FAR. The Revenue did not prefer any appeal against the order of ld. DRP. Similarly we find that the AR has relied on various case laws in the case of comparables rejected by the ld. DRP which are placed on record. 21.1 We also note that the ld. DR has not brought anything on record suggesting that the fresh evidences were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Table of rtes at which depreciation is admissible moulds are eligible for depreciation at the rate of 30% in the cases of factories involved in rubber & plastic goods production. In the case at hand, the businesses were Consumer Lifestyle products distribution, Healthcare, Lightings and Software developments and not production of plastic or rubber goods…." 26. Aggrieved by this, the assessee has come up in appeal before us on the following:- (a) As per section 32 of the Act read with Rule 5 of the Rules, depreciation @ 30% would be available if the following conditions are satisfied: i) Moulds are owned by the assessee; ii) Moulds re used for the purpose of assessee's business; and iii) Moulds are exclusively used in the rubber / plastic factory (b) In the instant case, moulds were owned by the assessee and used for the purpose of its business. Further, the moulds were exclusively used in the plastic factory by the job workers / co-makes to whom moulds were given by the assessee to be used in the plastic factory, under its control and supervision. As all the above mentioned conditions are satisfied with, the assessee would be eligible for depreciation @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89,927/-. In view of above facts, we direct the AO to grant the amount of TDS as per the provision of law. Hence, this ground of assessee's appeal is allowed. 30. Next issue is with regard to interest u/s 234A/234B/234D r.w.s. 244A of the Act which is consequential. The AO is directed to grant consequential relief to assessee. 31. Next issue raised by assessee in ground No.13 and 13.1 is that AO erred in initiating penalty proceedings u/s 271(1)(c) of the Act. 32. At the outset, it was observed that impugned appeal before us filed by assessee is against the quantum addition made by the AO. Therefore, the issue of penalty proceedings is not arising from the order of Authorities Below. Thus, the ground raised by assessee becomes infructuous. Hence, same is dismissed as infructuous. 33. Next issue raised by assessee in ground No.14 is that AO is erred in charging sub-charge on the Dividend Distribution Tax (DDT for short) at 7.5% against 5%. 34. At the outset, Ld. AR for the assessee brought to our notice that AO has charged the DDT along with surcharge @ 7.5% whereas surcharge applicable is @ 5% only. Ld. AR further submitted that the dividend was declared, distributed and paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecting inclusion of certain companies, which are not only functionally dissimilar to Philips Software Center and also reported extremely low revenue. 6. Whether on the facts and in the circumstances of the instant case, on the issue of software services, the Ld. DRP has erred in accepting a fresh list of low profit making and loss making companies selected by the assessee and presented as additional evidence without allowing the TPO to examine those comparables or submit his rebuttal. 7. On the facts and circumstances of the case and in law, the Hon'ble DRP has erred by allowing relief to the assessee on the issue of disallowance of lease rental paid for motor cars by treating the same as revenue expenditure instead of capital expenditure and hence, not allowable. 8. On the facts and circumstances of the case and in law, the Hon'ble DRP has erred by not considering that the waiver of loan constitutes the benefit arising from the business carried out by the assessee and as such, it would squarely attracts the provisions of Clause (iv) of Sec.28 of the IT Act, 1961." 38. The first issue raised by the Revenue in ground No. 1 ,2 & 3 is that ld. DRP erred in deleting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived reimbursement of such alleged excess AMP expenses from the AE. 40. Aggrieved, assessee preferred an appeal to ld. DRP wherein it was submitted that AMP expense does not constituted an international transaction. These AMP expenses represent purely payments made to third party vendors and are not covered under the purview of Section 92 of the Act. The relevant extract of Section 92F(V) which governs the definition of transaction is produced below: "transaction include an arrangement, understanding or action in concert,- (A) Whether or not such arrangement, understanding or action is formal or in writing; or (B) Whether or not such arrangement, understating or action is intended to be enforceable by legal proceedings." Hence, as can be read from the above, it is evident that the incurring of the excessive AMP expenses is not covered under the definition of transaction as there is no arrangement between the assessee and its AEs to incur a particular amount of AMP expense. Mere, presumption just because of the assessee being a subsidiary which is owned by AE, an arrangement between AE and the assessee exists. The assessee is a separate legal entity with its own manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , entered into by the assessee with unrelated domestic vendors, for which no transfer pricing reference was made. The TPO has held that the AMP expenditure incurred by the assessee has benefited its AEs. However in this regard it is submitted that the ITAT and High Courts in India have consistently held that the AMP expenditure incurred in India is wholly and exclusively for the purpose of Indian taxpayer's business and any benefit derived thereof to the foreign AE owning the brand is merely incidental. Here, reliance is placed on the order dated 30 April 2007 of Hon'ble ITAT Delhi Bench in the case of Nestle India Ltd [111 TTJ 498 A.Y 1999-00]. In the said case, Nestle (India) Ltd (Nestle India) had entered into an agreement with Nestle Switzerland Co. which were owners of Nestle Trademark, Nestle India Ltd had right to use the said "Trademark" in its operations and incurred Advertisement / Marketing expense of ₹ 104.86 crores in India to promote sale of its products in India. The AO disallowed fifty percent of the said marketing expenses holding that the same was not for the Nestle India's Page 60 business but for the benefit of Nestle Switzerland who owned Nestle brand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are closely linked and meet specified common portfolio or packaged parameters and as such cannot be evaluated adequately on separate basis. The Hon'ble High Court further held that once the TPO accepts TNMM as the most appropriate method for determining arm's length price of bundled transactions, then it is impermissible to separately determine the arm's length price of a particular expenditure like AMP, since, such expense is already factored in the net profit of the interlinked transactions. In the light of decision of Hon'ble High Court in this regard, the assessee wishes to reiterate that the AMP expenses are already factored in TNMM analysis carried out by the assessee and also accepted by the TPO and hence the same are not required to be evaluated separately. Accordingly the ld. DRP after considering the submission of the assessee deleted the addition made by the TPO. 42. Aggrieved by the order of ld. DRP, assessee is in second appeal before us. The ld. DR before us submitted that The Delhi bench of the Income Tax Appellate Tribunal in a recent ruling in the case of Luxottica India Eyewear Pvt Ltd (ITA No. 3441De1/2017) has given a new dimension to the issue of exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponse to the appeal filed by the taxpayer against the computation of transfer pricing adjustment, the Delhi Tribunal has decided the appeal principally in favour of Revenue. The key observations of the Tribunal's ruling are as below: While the taxpayer did not challenge the 'AMP intensity adjustment' made by the TPO before the Tribunal, the Tribunal in its order reaffirmed the approach adopted by the TPO of treating AMP as a function in view of similar observations by the Delhi High Court in the cases of Bausch & Lomb Eyecare India Pvt Ltd. and Ors vs Addl CIT and Ors and Sony Ericson Mobile Communications (India) Pvt Ltd. vs CIT. In response to the taxpayer's contention that the TPO had rejected RPM and applied TNMM as the most appropriate method, the Tribunal, in the light of the facts presented, observed that the TPO had not considered the excessive AMP expenditure as a 'separate international transaction and adopted an alternative approach of considering the AMP expenses to be embedded in the primary international transaction i.e. import of finished goods. The Tribunal acknowledged the fact that "If, however, it turns out that such an adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are non functional to the business of the assessee. The Revenue also claimed that the additional evidences have been admitted by the ld. DRP. 45. We have already dealt this issue elaborately while adjudicating the grounds of appeal of assessee No. 5 & in ITA No.539/Kol/2016 and allowed the issue in favour of assessee. Consequently, the ground of appeal filed by the Revenue is dismissed. 46. Next issue raised by Revenue in ground No.7 is that Ld. DRP erred in deleting the addition made by the AO on account of lease rental paid for the cars. 47. The assessee has claimed an expense of ₹5,75,02,965/- on account of least rental paid for the motor cars taken on finance lease. The AO was of the view that the expenditure incurred on lease rental are in the nature of capital expenditure. Accordingly, the same was disallowed and added to the total income of assessee. 48. Aggrieved, assessee preferred an appeal before Ld. DRP who deleted the addition made by AO. The Revenue, being aggrieved is in appeal before us. 49. Before us both parties relied on the order of Authorities Below as favourable to them. 50. At the outset, we find that the Co-ordinate Bench of this Tribunal h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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