9911796707
TMI Blog2019 (6) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... ense fee and management fees by ignoring to consider relevant and complete facts, hence the same deserves to modified and the additions made to returned income deserve to be deleted being contrary to law, unjustified and bad in law. 1.1 That, on facts and circumstances of the case and inlaw, while passing the assessment order, the learned AO has erred in assessing the total income of the Appellant at Rs. 14,91,21,844 as against returned income of Rs. 4,91,40,840/-. 2 Grounds relating to Corporate Tax Matters: That, on the facts and circumstances of the case and in law: 2.1. The Ld. AO/DRP erred in disallowing Rs. 1,49,65,459/- as capital expenditure.; 2.2. Ld. AO/DRP erred in holding that expenditure of Rs. 1,99,53,945/- was of nature and completely failed to appreciate the real and relevant facts. 2.3. Without prejudice to our contentions that the aforesaid expenditure is reverse nature, the Ld. AO has failed to provide us with the depreciation on capitalization of software license fees in earlier years. 2.4. Ld. AO/DRP erred in disallowing valid claim of Appellant on relevant and unjustified considerations without appreciating true and complete facts. 2.5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate adjustments to account for differences in risk profile of the Appellant and further erred in considering certain expenditure as operational/ nonoperational in nature without valid basis. 3.7. Ld.AO/DRP/TPO has erred in disregarding elaborate documentation and evidence submitted as part of assessment proceedings and assuming that 'no benefit' has conferred to the Appellant and that there was no need for international transaction pertaining to availing of intra-group services from its AE. 3.8. AO/DRP/TPO has erred in applying the Comparable Uncontrolled Price CUP") method and determining the ALP of the international transaction pertaining to availing of intra-group services as 'NIL' based on extraneous considerations and by not appreciating the material on record. 3.9. Without prejudice to our ground that payment for intra-group services should not be disallowed, the Ld. AO/DRP/TPO have erred in not excluding management fees while computing the operating margin of the assesse in respect of software development services and software deployment services, thereby adopting position contrary to previous assessment years. 3.10. Ld.AO/DRP/TPO has erred, in law and fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP has erred in holding that management fees of Rs. 9,79,877 incurred by Appellant towards advances and debts written off during the captioned year. 2.6. Without prejudice to the grounds above, the Ld. AO has failed to grant us the foreign tax credit of INR 1,24,96,695/- claimed by the appellant in the return of income. 3 Grounds relating to Transfer Pricing Matters: That, on the facts and circumstances of the case and in law: 3.1. Ld. A0/DRP/TPO has erred in making an addition of Rs. 4,91,32,078 under section 92CA of the Act to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") of the international transactions, pertaining to provision of software development services, provision of software deployment services and availing of intra-group services, entered into by the Appellant with its associated enterprises ("AEs"). 3.2. Ld.AO/DRP/TPO have erred in rejecting the economic analysis undertaken by the Appellant by conducting a fresh economic analysis for impugned international transaction pertaining to provision of software development services and provision of software deployment services. 3.3. Ld. AO/DRP/TPO have erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enalty proceedings under section 271(1)(c) of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal." It is observed from records that A.Ys under consideration have similar facts, and there is no change in functional profile of assessee. Further A.Y. 2013-14 is a stay granted matter and, therefore, we take up assessment year 3013-14 first. A.Y.2013-14 2. Brief facts of case are as under Assessee filed its return of income on 29/11/13 declaring total income of Rs. 8,87,27,609/-. The case was selected for scrutiny and subsequently, statutory notices were issued along with questionnaire to assessee to furnish relevant information. In response to statutory notices, representatives of assessee appeared before Ld.AO and filed requisite details as called for. Ld.AO observed that, assessee is engaged in business of software solutions and consultancy services in area of telecommunication. For year under consideration, Ld. AO observed that assessee declar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 92CA (5) wherein, adjustment was made as under: S. No. Description Amount - Rs. 1. Software Development Services 30,53,721 2. Interest on Receivables 4,60,78,357 Total Adjustment 4,91,32,078 Ld. AO thereafter issued notice to assessee regarding software license fees paid to AE amounting to Rs. 1,85,19,216/-. Upon going through details filed by assessee, Ld.AO rejected contentions of assessee and disallowed expenditure claimed. However, Ld.AO granted depreciation at 25%. 4.1. Ld.AO also observed that assessee had shown amount of Rs. 9,79,877/- on account of advances and written off under the head 'other expenses' in P&L account. He accordingly called for assessee to provide details to prove income relating to transaction with concerned parties, during any of preceding years with documentary evidence. Ld.AO recorded that since assessee did not furnish any reply in respect of same, addition amounting to Rs. 9,79,877/- was made on account of advances and bad debts written off as disallowed. 5. Aggrieved by additions made by Ld.AO, assessee is in appeal before us now. 6. Ld.Counsel submitted that Ground No. 1 is general in nature and, therefore, d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by both parties that facts and circumstances of this issue are similar with that of Assessment Year 2007-08 relied upon by Ld.Counsel. 7.2. Ld.CIT DR placed reliance upon orders of authorities below. However, could not controvert aforestated observations by this Tribunal in immediately preceding assessment year in assessee's own case. 8. We have perused submissions advanced by both sides in light of records placed before us. 8.1. It is observed that assessee made payment of Rs. 1,85,19,216/- for software licenses purchased from parent entity. Ld.AO disallowed, considering it to be capital expenditure, and provided corresponding depreciation at 25%. On perusal of order for assessment year 2007-08, it is observed that similar disallowance was made by Ld.AO on license expenses, and factual matrices of this issue as submitted by both parties are similar with that of assessment year 2007-08. DRP has also recorded that this Tribunal in assessee's own case for assessment year 2007-08 and 2008-09 deleted such disallowance made by Ld.AO, against which revenue has not filed any appeal before Hon'ble High Court. Thus the issue has attained finality. 8.2. Respectfully following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.2. Ground No.3.1-3.8 are in respect of adjustment made to arm's length price of international transaction pertaining to provision of software development service segment. 11.3. Ld.Counsel submitted that Ground No. 3.1 is general in nature and therefore do not require any adjudication. 11.4. Ground Nos. 3.2-3.8 are in respect of rejecting economic analysis undertaken by assessee, rejecting comparables selected by assessee and including certain companies which were functionally dis-similar to that of assessee. He submitted that Ld.TPO for year under consideration disputed arm's length determination by assessee under software development service segment. 11.5. He submitted that in Ground No. 3.5 assessee raises certain computational errors in margins of comparable companies used for determining ALP of transaction under the segment. 12. Before dealing with these issues, it is necessary to understand functions performed, assets involved and risk assumed by assessee under software development service segment. The transfer Pricing study has been placed at page 179-274 of paper book volume 2. (A) Functions Ld. Counsel at the outset submitted that under software development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration. Ld.Counsel has also submitted that this company is not functionally comparable to assessee inasmuch as, it is also engaged in software development services and generate substantial revenue from the sale of its own products. Ld. counsel placed reliance upon the decision of CIT vs. Agnity India Technologies Pvt. Ltd in ITA No. 1204/Del/2011, wherein this Tribunal vide order dated 10/07/11 upheld exclusion of this company from list of comparables, after taking into consideration its operations as full-fledged risk taking enterprise in diversified field such as application design, development, re-engineering and maintenance integration etc cannot be equated with non-risk bearing companies. It has been submitted that this view of Agnity India technologies Pvt.Ltd., has been upheld by Hon'ble Delhi High Court in ITA No. 3856/2010. Ld. CIT DR placed reliance upon the order of Ld. TPO. We have considered various distinguishing features submitted by Ld.Counsel on the basis of records placed before us. Since all the distinguishing features exist even in the year under consideration, respectfullly following the order of this Tribunal in assessee's own case, we direct this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished by assessee. He placed reliance upon order dated 15/03/19 passed by this Tribunal for assessment year 2011-12 in assessee's own case wherein it has been held as under: "8. From the aforementioned chart, it can be seen that the management fee amounting to Rs. 3,57,03,763/- has been apportioned proportionately amongst the segments. At this juncture, it would be pertinent to mention that the management fee apportioned to the segment software as margin shown under this segment has been accepted by the TPO, as no adjustment has been made in respect of this segment. This means that the margin of profit has been accepted in one of segments after absorption of proportionate management fee. In other words, if apportionment of Rs. 1,61,49,338/- is also accepted in the segment software development (product delivered), then, there is no question of making any adjustment in so far as intra group services is concerned." 13.1. Ld.Counsel submitted that assessee provided nature and details of evidence in support of IGS. He pointed out that for assessment year 2011-12, Ld.TPO disputed arm's length price determined for Software Deployment Services Segment, whereas for year under consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee from AE as described in the agreement submitted that, none of IGS received could be linked with any of the segment. He thus submitted that Ld.TPO was right in holding that, assessee failed to provide contemporaneous documentary evidence to establish kinds of services rendered by AE under each segment. He also submitted that IGS has been rendered by assessee under separate agreement and payment made by assessee is as per terms of agreement. He submitted that this itself categorises IGS to be an independent International Transaction which has been rightly bench marked by Ld.TPO separately. 14. We have perused submissions advanced by both sides in light of records placed before us. 14.1. Ld.Counsel has been immensely placed reliance upon order passed by this tribunal for assessment year 2011-12 in assessee's own case wherein identical issue has been determined. On perusal of order passed by this Tribunal in assessee's own case for assessment year 2011-12, it is observed that facts brought out by Ld.CIT DR before us has not been referred to therein. We are therefore of considered opinion that there is factual difference for the years under consideration vis-a-vis assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Legal 1 2,757 Turnover 6% 8. Insurance 11,091 Turnover 6% 9. Project Executive 23,264 Turnover 6% 10. Computer Licensing 155,129 IT Licences and products 27% Total 566,213 100% Thus, it can be inferred from above that Aircom UK (AE) allocated its remuneration on percentage basis in respect of each services rendered by it to all its group concerns. And based upon the above, Aircom(UK) entered into agreement with each group concerns. Thus, it is the duty cast upon assessee to establish basis of allocation of services received from AE under each segment and to show, how they are interlinked with each other. It is observed that assessee has not established any basis of apportioning management expenses under all four segments. 14.5. Ld.TPO upon verifying details filed by assessee was of opinion that: * Assessee could not establish whether such services were needed by assessee (i.e. Need Test) * Whether such services are rendered to assesse by AE ( i.e. Rendition test) * Whether assessee has derived any economic or commercial benefit from these services ( i.e. Benefit test) * Basis of allocation keys * These serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cility provided or to be provided to any one or more of such enterprise. The expectation of mutual benefit is important consideration for the acceptance of arrangement for pooling of resources by the enterprises. iv. The enterprises would require that each participant‟s proportionate share of the contribution is consistent with the proportionate share of overall benefits expected to be received from the arrangement. v. Transfer price of cost or expenses allocated or apportioned to such enterprise or contributed by such enterprise shall be determined having regard to Arm‟s length price of such benefit, service or facility received by the enterprise. In order to satisfy the arm‟s length price a participant‟s contributions must be consistent with what an independent enterprise would have agreed to contribute under comparable circumstances considering the benefits it expects to derive from the agreement. 14.8. It is pertinent to note that requirement of services should be judged from viewpoint of assessee as a businessman. Therefore in this regard we are of view that assessee has to substantiate that these services are required by it. Since assessee, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956/Del/2012 15.1. Brief facts of the case are as under: Assessee filed its return of income of Rs. 4,91,40,840/-, on 30/11/12. Case was selected for scrutiny, and notice under section 143 (2) along with questionnaire, and notice under section 142 (1) was issued to assessee. In response to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details as called for. As we have already discussed hereinabove while dealing with Assessment Year 2013-14, assessee is engaged in business of software solution and consultancy services in area of telecommunication. As it entered into international transactions with its Associated Enterprises, Ld.AO referred case of assessee to Transfer Pricing officer. Transfer Pricing Officer upon receipt of reference issued notice under section 92C of the Act, read with Rule 10 B of Income Tax Rules, and directed assessee to file economic analysis in respect of international transaction entered into by it with its AE for year under consideration. 15.2. Ld.TPO from TP study, filed by assessee observed that assessee has entered into following international transaction: Sl. No. International Transaction Amount (in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are Technologies Ltd. 7.77 3. R.S.Software (India) Ltd. 15.43 4. Cigniti Technologies Ltd. (formerly known as Cigniti) 8.28 5. Mindtree Ltd. (segmental) 19.19 6. Evoke Technology 11.57 7. E-Zest Solution 17.51 8. Infosys Ltd. 42.15 9. Larsen & Toubro Infotech Ltd. (seg.) 27.16 10. Lucid Software Ltd. 11.10 11. Persistent Systems Ltd. 26.92 12. Sankhya Infotech Ltd. 5.68 13. Sasken Communication Technolgoies Ltd. 14.58 14. Spry Resources Pvt.Ltd. 33.59 15. Tata Elxsi 14.32 16. Thirdware Solution Ltd. (Overseas segment) 11.10 17. Zylog Systems Ltd. 33.01 Average 21.49 Ld.TPO accordingly proposed adjustment of Rs. 50,03,220/-. 16. Software deployment services: Ld.TPO observed that assessee used TNMM as most appropriate method and OP/OC as PLI for computing arm's length price of international transaction. It was observed that margin computed in case of 8 comparables selected by assessee was at 9.84% vis-a-vis 6.27% of assessee. A fresh search was again carried out and margin of comparables then selected was at 11.74%. Thus, assessee held transaction to be at arm's length price. Follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reed with view expressed by Ld.TPO. 18.1. On receipt of directions from DRP, Ld.AO passed final assessment order, giving effect to DRP directions. Ld.AO made addition in hands of assessee, on account of license fee paid to its AE. 18.2. In the meanwhile, assessee preferred application before Ld.TPO, under section 154 of Act, post-DRP direction, in respect of Software Development Service Segment, for rectification of mistake, that crept in, while computing margin. Ld.TPO vide order dated 08/11/2017 considered said application and provided benefit of +/- 5% margin to transaction, thereby deleting proposed adjustment made under Software Development Service Segment. 18.3. Thus, adjustments disputed by assessee before us is only in respect of Software Deployment Service segment and IGS. 19. Aggrieved by order passed by Ld.AO, assessee is in appeal before us now. 20. Ld.Counsel submitted, that facts and circumstances for year under consideration are similar with that of assessment year 2013- 14 which has already been decided in foregoing paragraphs of this order. 21. Ld.Counsel submitted that Ground No. 2.1-2.3 is in respect of disallowance made on account of license fees pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct support request through calls, e-mails or UTS based upon which it provides product support services to any AE or to any customer of AE. It has also been submitted that assessee has specialised team consisting of internal and external product team dedicated to product support activities. The external team deals with AEs or other customers in providing product support services while internal team provides assistance to external team. Assessee in TP study has also submitted that it provides personnel to other AEs on requisition made by Aircom UK and such personnel provided by assessee continue to remain the employees of assessee. It has been submitted that it is the sole discretion of assessee to provide personnel and where assessee is of the opinion that provision of personnel is not profitable, it can decline the same. It has been submitted that assessee employs personnel who have qualities requisite skills essential for deployment of software and all functions necessary for recruitment are performed by assessee itself. TP study also expresses that under the deployment of software products services assessee charges on its AE is a markup. The cost for this purpose is the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on orders of authorities below. 26.3. We have heard both sides on basis of records placed before us. 26.4. From the annual report it is observed that this company is engaged in development and sale of software product and owns patents being intangible assets. In present case of assessee under segment of software deployment, it is more of an outsourcing of employees to the customers being its AEs or customers off AEs. Assessee does not own any patents. Ld. Counsel placed reliance upon decision of : * Agilis information technologies international private Ltd reported in TS-995-ITAT-2017 (del)-TP * Merry prise India private limited, decision of orderable Delhi High Court in ITA No. 461/2016 It has also been submitted that during year this company has acquired 100% equity shares of Mind Tree Wireless Pvt. Ltd. Hon'ble Delhi High Court in case of Ameriprise India Pvt. Ltd., (supra) has held that comparable having extraordinary event during year should be excluded. 26.5. Respectfully following the same we direct this comparable to be excluded from the finalist. 27. E-Zest solutions Ltd Ld. Counsel submitted that annual report placed at page 932 of paper book reveals tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1620/2015, 477 and 6420/2016, Bangalore Tribunal in case of CGI Information Systems in ITA No. 586/BAG/2015. 28.1. On the contrary Ld. CIT DR placed reliance upon observations of authorities below. 28.2. We have perused submissions advanced by both sides in light of records placed before us. 28.3. It is observed that this company is functionally dissimilar with that of assessee and is engaged in R&D activities owning significant intangibles. Under software deployment service segment, assessee is rendering deployment services of its skilled employees to the AE, is or their customers, which is remunerated on cost plus basis. It is also peculiar to note that the cost is determined to be salary earned by such employee who is put on the project. The working module of assessee is quite dissimilar with that of this company and the functions performed by this company is entirely different with that of assessee. Accordingly, in our considered opinion this is not to be included in the final list of comparables. 29. Larsen and Toubro Infotech Ltd The Ld.Counsel submitted that segmental data is not available. As per the annual report, the company is IT BPO service provider. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... final list of comparables. 22. Moreover, in assessee's own case for A.Y 2008-09 in ITA No. 6402/DEL/2012, the Tribunal has directed for exclusion of this company from the list of comparables. (iv) ZYLOG SYSTEMS LIMITED 23. The Annual Account of this company at page 1159 of the paper book shows that under the head 'Income', the software development services and products is shown at Rs. 9,18,24,45,549/- and in the schedule of fixed assets at pages 1163, product development cost has been shown as eligible for depreciation because intangible assets have been amortized as is evident from page 1170 of the paper book and in the schedule of Notes to accounts at clause X, it is mentioned that since the company operates in I.T. services there are no other business segments. 24. A perusal of the Annual Accounts shows that no specific dat is available to consider this company as a good comparable. 25. In the case of Agilis Information Technologies International Pvt Ltd 1063/DEL/2016 for A.Y 2011-12, this comparable was excluded from the list of comparables. The relevant findings of the co-ordinate bench read as under: "4.6. We have heard both the parties and perused the recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d asked for annual report of this company which was not given to assessee. 31.3. We fail to understand the reason, why Ld.TPO even used this comparable, without there being financial reports of this comparable. In our view at the out set this comparable deserves to be eliminated as FAR analysis has not been carried out by Ld. TPO in regards to this comparable with that of assessee. Accordingly we direct Ld.TPO to exclude this comparable from the finalist. 32. Accordingly, these grounds raised by assessee stands allowed. 33. Ground No. 3.7-3.10 has been raised in respect of addition made on account of intra-group services received by assessee from its AE. 33.1. We have already dealt with this issue at length for assessment year 2013-14 in foregoing paragraphs. It is observed that agreement under which assessee has received such services for year under consideration are identical to that considered for assessment year 2013-14. Under such circumstances we do not find any reason to differ with our view expressed therein. The issue therefore being mutatis mutandis, referring to and relying upon our observations expressed hereinabove in respect of the same, we are inclined to s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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