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TMI Blog2019 (1) TMI 1136X X X X Extracts X X X X X X X X Extracts X X X X ..... on the directions of the Hon ble Dispute Resolution Panel ( DRP ), by the Ld. AO are bad in law. 2. The I I has erred on facts and in law in determining the total income of the Appellant at ₹ 5,18,03,18,360 as against a returned income of ₹ 2,93,43,42,780. Part I Transfer Pricing Matters 3. That on facts and in law, the Hon ble DRP and the Ld. TPO/Ld. AO have grossly erred by not appreciating the correct functional profile of the Appellant and drawing an erroneous conclusion that the Appellant is engaged in providing high-end software services. 4. That on facts and in law, the Hon ble DRP and the Ld. TPO/Ld. AO has vitiated the principles of natural justice by not giving due cognizance to the detailed analysis and technical arguments in response to the show cause issued by the Ld. TPO and objections filed with the Hon ble DRP. The details of these arguments and analysis will be elaborated during the course of hearing before the Hon ble ITAT. 5. The transfer pricing adjustment of ₹ 2,14,48,19,158 made by the Ld. AO based on the order of Ld. TPO giving effect to the directions issued of the Hon ble DRP is bad in law inter-alia for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ublic domain. c. Rejection of companies having export sales less than 75% of the sales. d. Rejection of companies with a diminishing revenue trend. e. Rejection of companies having employee cost less than 25 percent of the operational cost as a comparability criterion for the Impugned Transaction. 9. That on facts and in law, the Hon ble DRP and the Ld. TPO/Ld. AO have erred by wrongly rejecting certain companies and adding certain companies to the final set of comparables for the Impugned Transaction, on an adhoc basis. Thus, they have resorted to cherry picking of comparables to determine the ALP for the Impugned Transaction. 10. That on facts and in law, the Hon ble DRP and the Ld. TPO/A.O have erred by treating foreign exchange fluctuations, bank charges, provision for doubtful debts and liabilities and provisions no longer required written back as non-operating items while computing the operating profitability of the Assessee as well as the comparables. 11. That on facts and in law, the Hon ble DRP and the Ld. TPO/Ld. AO have erred by not considering upkeep/ maintenance expenses incurred in connection with a property let out by Appellant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in not allowing depreciation on unrealized foreign exchange loss on capital creditors amounting to ₹ 5,76,10,382 in view of the position taken by the Ld. AO/ DRP in the earlier years. 17. That on the facts and in law, on disposal of this appeal material adjustment would be required in computing total income, tax, interest u/s 234B of the Act and refund added (along with Interest u/s 234D of the Act). Necessary directions may please be given to the Ld. AO in this regard. 18. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty under section 271 (1 )(c) of the Act. The above grounds of appeal are mutually exclusive and without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute, withdraw any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. 3. The assessee is a private limited company which is engaged in the business of Software Development and product support services. The assessee company was incorporated on 15.05.1998 under the Companies Act, 1956 and is a wholly owned subsidiary of M/s Microsoft Ireland C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: Description Amount (Rs.) INCOME FROM BUSINESS AND PROFESSION i. As per the computation of income : 2,74,13,78,159 (Revised) ii. Add : TP Adjustments : 2,54,75,79,744 (As discussed in para 3) 5,28,89,57,903 INCOME FROM HOUSE PROPERTY (As discussed in para 4) 3,53,70,085 INCOME FROM CAPITAL GAIN i. Long Term Capital Gain : NIL ii. Short Term Capital Gain : 2,91,118 2,91,118 INCOME FROM OTHER SOURCES (As per revised return of income minus Rental income claimed as other sources) 16,63,54,780 INCOME FROM OTHER SOURCES (As per revised return of income minus Rental income claimed as other sources) 16,63,54,780 GROSS TOTAL INCOME 5,59,09,73,886 LESS DEDUCTION UNDER CHAPTER VIA i. Deduction u/s 80G 78,94,941 TOTAL INCOME 5,58,30,78,945 The assessee filed objections befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s has been reached in Para 15 that AR refused to file details. Further, holistic and contextual view of APA statements (which were in fact relied on by Id. DR also though there is no mention of such fact in the order) could help in appreciation of patents (details of which were filed as per the direction of Hon'ble ITAT during course of hearing and no queries remained unanswered) and their rightful impact for TP in right perspective. These statements were recorded by authorities well-versed in transfer pricing in September 2013. Reference is invited Income Tax Rules 10L, which lays down the process and explain the sanctity of such recordings by Authorities after holding meetings. Such aspects remained out of consideration in said order. It is respectfully submitted that such statements cannot be discarded/lightly ignored as one side of the story -kindly refer paragraph 10 of said order of Tribunal. APA statements clearly and unequivocally explain that there is no 'research' involved and that the patent is registered in the normal course of 'software development and coding' under complete supervision of overseas AE, who fund the full cost. It is important to no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repeated in the interests of brevity. Activities carried out as part of software product lifecycle be it coding, testing or validation may at times result in patents. Any organization might get such patents registered as a defensive mechanism to ensure continuity of business and to be able to use the fruits of its efforts, but surely such patents by themselves do not provide any direct monetary benefit to organization owning them. Even casual reference to details of patents filed show that these are nothing more than routine processes in software development and in any case the entire cost for successful development or otherwise is borne by overseas AE. Especially so as it is not even denied that MIRPL role is miniscule part of total product development as it may be involved in a feature or a part of it as assigned by AE. Without prejudice to above position, Infosys (kindly refer pages 1452, 1459 of paper book IV) and Persistent cannot be comparable companies even applying above criteria as a reference to audited financials would show. Both the companies are engaged in software products as noted in Tribunal order for Ay 11-12 in Appellant's own case, which is true even f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 to 17 Appellant earns income from comprehensive rental of premises and desires that such income be taxed under the Income from other sources, whereas the authorities have taxed the same as income from house property. Though this is a recurring issue from earlier years, recent jurisdictional High Court decision in the case of Jay Metal Industries (P.) Ltd. v. CIT (396 ITR 194) is binding on this Hon'ble Tribunal. In view of principles laid down in Asit C Mehta Vs DCIT ( 2006) 10 SOT 36 , Appellant is entitled to seek decision on this issue unlike the remand directions in earlier years and accordingly prays for final and conclusive decision on this issue. It is respectfully submitted that though this case law was brought to notice of Hon'ble Tribunal, the same does not find consideration in order for Ay 11-12, hence this prayer. The other grounds of appeal are consequential and Appellant prays for suitable directions. 6. The Ld. AR submitted that the assessee in the present year also challenging two comparables to be excluded and four comparables to be included. The Ld. AR furthers submitted that in-fact the assessee has submitted 19 comparables to be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer. 9. We have heard both the parties and perused all the relevant material available on record. As regards Ground No. 1 and 2, the same are general in nature, hence dismissed. Now, we are taking up the issue of Transfer Pricing in respect of the comparables. The Ld. AR contested two comparables to be excluded i.e. Infosys Technology Ltd. and Persistent Systems Ltd. The Tribunal in assessee s own case for A.Y. 2011-12 held as under: ( ii) Infosys Technology Ltd. 39. The second company under challenge is Infosys Technology Ltd., which was included by the TPO in the final tally of comparables. The assessee objected to such inclusion by contending, inter alia, that it is engaged in noteworthy R D activities apart from having significant intangible assets and exceptionally high turnover. The assessee also submitted that this company is functionally not comparable as it is also having revenues from software products. The assessee s objections have been recorded on pages 80-82 of the TPO s order. Not convinced, the TPO held this company to be comparable, which has been assailed in the impugned order. 40. Having heard both the sides and perused the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income, which is otherwise not chargeable, should be excluded. There can be no estoppels against the provisions of the Act. Extending this proposition further in the context of the transfer pricing, it transpires that if an assessee fails to report an otherwise comparables, and in the same manner, if the assessee wrongly reported an incomparable company as comparable in its TP study and then later on realizes and claims that it should be excluded, there should be nothing to prohibit it from claiming so, provided the company so originally reported as comparable is, in fact, not comparable. Simply because a company was wrongly chosen by the assessee as comparable, cannot tie its hands from contending before the Tribunal that such a company was wrongly considered as comparable which is, in fact, not. There is no qualitative difference between a situation where an assessee claims that a wrong company inadvertently included for the purpose of comparison should be excluded and the situation in which the Revenue does not accept a particular company chosen by the assessee as comparable. The underlying object of the entire exercise is to determine the arm s length price of an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well. 10. As regards to inclusion of four comparables i.e. Mindtree, R. S. Software, Cigniti Sasken, the Tribunal held as under: ( ix) Mindtree Ltd. (IT Service Segment) 65. The TPO held this company to be not comparable by observing on page 58 of his order that it was not involved in rendering any high-end software services. 66. We have examined the Annual report of this company, a copy of which has been placed on record. Annexure to the Directors Report provides under the head Research and Development that this: Company has a dedicated business unit for research and development which offers innovative solutions to clients and also fosters R D within all business units to create intellectual property in the form of re-usable components, frameworks, etc., which help drive correct productivity. On next page of the Annexure to the Directors Report, a list of patents registered either in India or the USA has been appended, which are 19 in number. Profit Loss of this company shows Income from software development at ₹ 15,090 million. This company has three sub-segments which are covered within the overall Income from software development. Deta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osen by the assessee, the onus is on it to show the comparability. The same being not involved in rendering any R D software development services becomes functionally different and hence cannot be considered as comparable. It is therefore, held to have been rightly excluded. This comparable company is involved in R D activities for software development services in the present Assessment Year whereas the assessee company is not involved in R D activities which can be seen from the TP study of the assessee company. Therefore, we are following the directions of the A.Y. 2011-12 passed by the Tribunal. Thus, we held that TPO has rightly excluded this comparable company. As regards, Cignity Technologies Ltd. and Sasken Communication Technologies Limited (Software services segment) both of the comparables involved in R D activities for software development services in the present Assessment Year whereas the assessee company is not involved in R D activities which can be seen from the TP study of the assessee company. Therefore, we held that TPO has rightly excluded these comparable companies. 11. Thus, Ground Nos. 3 to 14 are partly allowed for statistical purpose. 12. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional evidence to bring home its point about the availability of benefit u/s 10A in respect of interest income. Since this issue has not been examined by the authorities below and the assessee has filed additional evidence, we are of the considered opinion that it would be in the fitness of things if the Assessing Officer is directed to decide this issue afresh as per law, after allowing an opportunity of being heard to the assessee. The assessee will be at liberty to file any fresh evidence before the AO in support of its claim on this issue. 110. Ground no. 21 is against not allowing MAT tax credit. The Assessing Officer is directed to verify the assessee s contention and allow the necessary MAT credit as per law, if available. 111. Ground no. 23 about not granting credit for TDS to the extent of ₹ 1,71,729/- was not pressed by the ld. AR. The same is, therefore, dismissed as not pressed. 112. Ground nos. 23 and 24 about charging of interest are consequential and are disposed off accordingly. 113. In the result, the appeal of the Revenue is dismissed and that of the assessee is partly allowed for statistical purposes. The issues contested in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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