9911796707
TMI Blog2019 (11) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ("Act"). 4. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO and Ld. DRP erred in enhancing the income of the appellant by Rs. 2,17,04,89,288 as the compensation for its Advertisement Marketing and Promotion ('AMP') Services by holding that the appellant incurs 'excessive' AMP expenses in relation to its distribution activities thereby qualifying as 'services' as per the arm's length principle envisaged under the Act, and in doing so have grossly erred in: 4.1 disregarding that the AMP expenses incurred by the appellant represent purely domestic transaction(s) undertaken towards third parties, not covered under the purview of Section 92 of the Act and that the analysis of "domestic" transactions undertaken w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssive" AMP expenses, for determining the compensation/ service fee towards "alleged AMP service" by the appellant to its AHs: 4.9 That the Ld. AO and Ld. TPO, on the facts and circumstances of the case and in law have erred in not following the binding direction issued by the Ld. DRP regarding the inclusion of M/s Spice Mobility Ltd., M/s General Sales Ltd as comparables of the appellant for the purpose of computing the arm's length price of the alleged international transaction of "excessive" AMP expenses. 5. That on the facts and the circumstances of the case and in law, the Ld TPO/ Ld AO and Ld DRP erred in enhancing the income of the appellant by Rs. 1,01,18.80,848 while recomputing the arm's length price of the international transactions pertaining to its contract software development ('CSD') services and in doing so have grossly erred in: 5.1 disregarding the ALP as determined by the appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the appellant; 5.2 rejecting the TP documenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.6.7 exclusion of companies with onsite revenues greater than 75% of their export revenues for selecting comparables for contract software development services; and rejecting, in particular, the following filters applied by the appellant in its TP documentation/ fresh search: 5.6.8 companies having other operating income (ie income other than manufacturing and trading income) to sales greater than 50% were accepted; 5.6.9 Companies with net worth less than zero were rejected; 5.6.10 companies having research & development costs to sales less than 3% were accepted; and 5.6.11 Companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 5.7 ignoring the fact that the appellant receives payments for services within stipulated period of time and hence enjoys a favourable working capital position. Accordingly, a working capital adjustment vis-a-vis the comparables is essential in the instant case for the CSD services segment; 5.8 including high-profit making companies in the final comparables' set for benchmarking a low risk captive unit such as the appellant (disregarding judicial pronouncements on the issue), thus demonstra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... administrative and marketing support services segment; 6.1.1 companies having other operating income (ie income other than manufacturing and trading income) to sales greater than 75% were accepted 6.1.2 exclusion of companies having different financial year ending (ie not March 31, 2008); 6.1.3 exclusion of companies with related party transactions greater than 25% of their sales; and rejecting, in particular, the following filters applied by the appellant in its TP documentation/ fresh search: 6.1.4 companies having other operating income (ie income other than manufacturing and trading income) to sales greater than 50% were accepted; 6.1.5 Companies with net worth less than zero were rejected; and 6.1.6 companies having research & development costs to sales less than 3% were accepted; 6.1.7 Companies having advertising, marketing and distribution costs to sales less than 3% were accepted. 6.2. ignoring the fact that the appellant receives payments for services within stipulated period of time and hence enjoys a favourable working capital position. Accordingly, a working capital adjustment vis-a-vis the comparables is essential for the administrative and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was made in the TP order, thus violating the cardinal principle of natural justice; 7.2. in holding that neither the appellant has received any service and/ or benefit in lieu of the payment made by it for services availed and reimbursement of expenses nor was there was any need for such services/ payments; thereby challenging the commercial wisdom of the appellant in making such payments while passing the order in contrast with the recent judicial pronouncements in this regard; 7.3. by holding that the appellant has not furnished documentary evidence to demonstrate the benefits received from the AEs ignoring the fact that no opportunity of being heard was provided to the appellant on this issue during the assessment proceedings: 7.4. in holding that reimbursement of expenses paid b\ the appellant to its AEs on cost to cost basis are also in the nature of intra group service charges paid to its AEs: 7.5. in asserting that the appellant has not identified payment for each and every service and holding that identification of separate payment for each service is necessary to determine the arm's length nature; 7.6. in holding that the benchmarking done by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowing the claim of the appellant under sections 10A and 10B to the tune of Rs. 5,59,22,700/- and 4,56,88,686/-, respectively 12.1. The Ld. AO has erred in holding that the above deduction u/s 10A/10B claimed on account of suo-moto Transfer Pricing adjustments made by the appellant in return of income are not allowable 13. The Ld. AO has erred on the facts and the circumstances of the case and in law in arbitrarily initiating a penalty proceedings u/s 271(l)(c) against the appellant for furnishing inaccurate particulars of income. 3. The assessee company is a subsidiary of Motorola International Capital LLC, USA and Motorola Inc., USA is the ultimate holding company. The assessee is in the business of sale, supply, marketing and distribution of telecommunications infrastructure equipment, products, handsets, radios, accessories, support and services for installation, optimization, operation and maintenance of the telecommunications infrastructure equipment and products and software development services. The assessee e-filed its Original Return declaring Income of Rs. 9,42,01,184/- on 30.09.2008. Thereafter, the Company e-filed its Revised Return of Income on 31.03.2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 374 ITR 118 held that the "Bright line test" was not a valid test of determining the ALP of the AMP transaction, as it was not statutorily mandated. The Hon'ble High Court further laid down numerous guidelines and principles to determine the ALP of AMP transaction. Subsequent to this, the Hon'ble Delhi High Court expanded the jurisprudence in this regard in cases of Maruti Suzuki [2016] 381 ITR 117, Whirlpool [2016] 381 ITR 154 and Bausch & Lomb [2016] 381 ITR 227 by holding that existence of an international transaction merely on the ground of excess AMP expenditure cannot be presumed. It has to be shown to be existing based on mutual understanding or arrangement between the assessee and its associated enterprise. The Hon'ble High Court further held AMP was a function and not a transaction. Sony Ericsson (supra) was a batch of appeals dealing with assessees who were distributors and the subsequent decisions of Maruti Suzuki and Whirlpool (supra) dealt with manufacturers and the two categories of assessee's stand on a different footing. The licensed manufacturers who operate as risk bearing entities cannot be examined under the so-called AMP framework as their investments in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods under an unknown brand name, products could not have stood in competition against other reputed brands in the market. The primary benefit is of the assessee who is selling the goods in India and the benefit obtained by the licensor is only incidental. After the decisions of Maruti Suzuki, Whirlpool and Bausch & Lomb (supra), there is no room for any confusion regarding the treatment of AMP expenditure as a separate international transaction. The Hon'ble Delhi High Court in these decisions has categorically held that for an international transaction to exist within the meaning of Section 92B, the Revenue has to show that there existed an agreement or understanding or arrangement, that the Indian entity would incur AMP expenditure for or on behalf of the AE which owns the brand. In the absence of such "action in concert", no international transaction can be said to exist. If the existence of international transaction cannot be established with any degree of certainty, the question of determining the ALP of the same would not arise. The Ld. AR relied upon the recent decision of Casio India Company Pvt. Ltd. vs. DCIT I.T.A. No.1764/DEL/2015 wherein the Tribunal deleted the entire A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumption of long-term rights in the license, practice/ custom followed in the relevant country, etc. This is the key aspect of "exit charge", which tax administrations across the worldwide for in the context of business restructuring transactions, on which the OECD and Australian Tax Office have brought out detailed guidelines. Any such consideration would arise only when one would need to cross the bridge, namely that if at any future stage, the rights of the licensee were impaired; and not at any time before that. The Ld. AR submitted that empirical and scholarly studies have shown that within a sector or industry there is huge variation of AMP expenditure among competitors. Various competitors place differing levels of importance on advertising and brand promotion depending upon their understanding and belief regarding the impact of advertising on sales. Empirical studies have shown that there is no positive correlation between advertising and increase in sales and no specific return on investment (ROI) can be inferred in respect of expenditure incurred on advertisement. To support this proposition reference is made to a scholarly article authored by Justin M. Rao of Microsoft a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee which is over and above the mean profit margin of the comparables. The Ld. AR relied upon the following decisions of the Tribunal where existence of an international transaction of AMP expenditure has been negated: * Yakult Danone India P Ltd. v. DCIT: ITA No. 996/Del/2016 (Delhi- Trib.) * PepsiCo India Holdings (P.) Ltd. v. ACIT: [2018] 100 taxmann.com 159 (Delhi - Trib.) * L.G. Electronics India Pvt. Ltd. v. ACIT: ITA No. 6253/2012 (Delhi- Trib.) * BMW India Private Ltd. v DCIT ITA No. 1514/2016 (Delhi-Trib.) * M/s L'Oreal India Pvt. Ltd v. ACIT: ITA No. 1417/2017 (Mum- Trib.) * Nippon Paint India (P) Ltd v ACIT: [2017] 79 taxmann.com 8 (Chennai-Trib.) * Widex India (P)Ltd v ACIT: [2017] 78 taxman.com 348 (Chandigarh- Trib.) * MSD Pharmaceuticals(P) Ltd v ACIT: 2017] 88taxmann.com 54 (Del- Trib) * Philips India Ltd v ACIT: [2G18] 90 taxmann.com 357 (Kolkata- Trib.) * CIT v Johnson & Johnson Ltd: [2017] 80 taxmann.com 269 (Bombay HC) * ACIT v Colgate Palmolive (India) Ltd: ITA No. 6073/Mum/2014 (Mum-Trib.) The Ld. AR also submitted that the assessee has not paid any royalty to its foreign AE who owns the "Motorola" brand and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rketing customer support, technical and administrative support on behalf of its AEs in India bearing cost, investing huge sum and using its skilled manpower and time. These facts clearly prove that the assessee had developed marketing intangible for brand owned and goods manufactured by its foreign AEs by bearing significant cost and risk. Accordingly, the assessee was entitled to get reimbursement of the cost incurred by it and was entitled to retain intangible income in India. As no independent person would undertake such activities without being compensated for this kind of effort. The Assessing Officer/TPO further observed that since the assessee developed marketing intangible and is in the process of making the intangible more valuable by incurring huge AMP cost, bearing risk and using its both tangible and human assets intangibles (skilled and trained manpower), ownership of the marketing intangible lies with the assessee. However the AEs are deriving huge benefit from this intangible developed by the assessee by way of enhanced sale of their products in India which led to increased profitability of parent company and the assessee was left with only small and limited returns. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is the right forum to deal with the same. We therefore, approve the view of the AO in not examining any fresh contentions de hors the remit order by the Tribunal. 11. The Ld. AR submitted that the assessee did not pay any royalty to its AE. It was pointed out that the Tribunal in the first round noted this fact in paras 18.3 and 18.4 of its order and thereafter directed the TPO to consider the impact of this factor on the determination of transfer pricing adjustment towards AMP expenses in the light of decision of the Special Bench in the case of LG Electronics (supra). It is observed that albeit a specific direction was given by the Tribunal for considering the impact of non-payment of royalty on the question of determining the transfer pricing adjustment of AMP expenses, the TPO did not examine such issue. Under these circumstances, we are left with no option but to send matter back to the AO/TPO for considering the effect of non-payment of royalty on the transfer pricing adjustment in the light of the decision rendered by the Special Bench in the case of LG Electronics (supra). 12. To sum up, we set aside the impugned order on the transfer pricing addition on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dministrative support on behalf of its AEs in India bearing cost, investing huge sum and using its skilled manpower and time. These facts clearly prove that the assessee had developed marketing intangible for brand owned and goods manufactured by its foreign AEs by bearing significant cost and risk. Accordingly, the assessee was entitled to get reimbursement of the cost incurred by it and was entitled to retain intangible income in India. All these contentions of both the Ld. AR and Ld. DR has not been taken into account by the TPO/AO which needs to be verified by the Revenue. Therefore, it will be appropriate to remand back this entire issue to the file of the TPO/AO for adjudication on merit as well as in light of the decisions of the Hon'ble High Court and the Special Bench in case of L G Electronics (supra). Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 4 is partly allowed for statistical purpose. 9. As regards to Ground Nos. 5.6 to 5.15 relating to adjustment of Rs. 101.18 crores in respect of Software Development Services segment (SDS), the Ld. AR submitted that the assessee company performs activities r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment) and proposed a transfer pricing addition of INR 127,47,23,744. Pursuant to the objections filed by the assessee before the DRP, the DRP directed the TPO to exclude Celestial Biolabs from the list of the comparable companies and to recompute the margin of Softsol India Limited (after excluding rental income and rental expenses). Thus, the revised mean margin came to be 21.85% and transfer pricing addition was re-computed at Rs. 1,01,18,80,848. 10. The Ld. AR submitted that the filters were wrongly applied by the TPO/DRP. This aspect is already covered by the Tribunal's order in assessee's own case for A.Y. 2007-08 (ITA No. 5637/Del/2011). 10.1 As regards to companies having onsite revenue more than 75% of the export revenues were excluded, the Ld. AR submitted that the issue is decided in favour of the Revenue in A.Y. 2007-08. The Ld. DR relied upon the order of the TPO and the directions of the DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 10.2 We have heard both the parties and perused all the relevant material available on record. The assessee did not dispute the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10.7 As regards to related party transactions (both income and expenditure) being more than 25% of sales were excluded as against the threshold of 10% chosen by the assessee. The Tribunal held this issue in favour of the assessee in assessee's own case for A.Y. 2007-08 wherein it has been held that the threshold limit of 15% ought to be applied instead of 25% applied by the TPO. The Ld. DR relied upon the order of the TPO and the directions of the DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 10.8 We have heard both the parties and perused all the relevant material available on record. The facts remain similar in the present assessment year, therefore, we direct the TPO to take into consideration only those comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables. 10.9 As regards to appropriate filters applied by the assessee in TP documentation but was rejected by the TPO/AO, firstly the Ld. AR submitted that filter relating to Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on R&D only for improving the processes in delivering the software development services then the said comparable cannot be rejected merely because it is incurring R&D expenditure more than 3% of its total sales revenue because sufficient number of comparables are to be found for determining ALP. An objective decision has to be taken in each case. Ld. TPO has clearly demonstrated that by applying this filter even functionally similar companies gets excluded. This will result in limiting the number of comparables to a very small number. Thus, this will entirely frustrate the object of determination of the arm's length price. The contention of assessee that companies incurring expenditure greater than 3% on R&D were necessarily creating IP products is devoid of any merit. Therefore, this filter is to applied subject to proper analysis as observed earlier. In the result this ground is partly allowed in terms of aforementioned observations." Therefore, in the present assessment year also the facts remains identical, hence this filter can be applied subject to proper analysis mentioned in order of the Tribunal in A.Y. 2007-08. 10.11 As regards to advertisement, marketing and distr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in SLP (Civil) Diary No. 6045/ 2019; Brocade Communication IT(TP)A No. 71/Bang/2014. Appeal against this decision was dismissed by Karnataka High Court in PCIT v. M/s Brocade Communications Pvt. Ltd. ITA 309/2017; * Indigra Exports (P.) Ltd. v. DCIT [2016] 176 TTJ 384 (Bangalore - Trib.). * Appeal against this decision was dismissed by Karnataka High Court in Indigra Exports (P.) Ltd. v. DCIT [2018] 407 ITR 396 (Karnataka); * Marubeni-ltochu Steel India (P.) Ltd. v. DCIT [2016] 177 TTJ 539 (Delhi - Trib.) - * DCIT v. Imsofer Manufacturing India (P.) Ltd. ITA 5155 & 5158 (Delhi) of 2015; * Federal Mogul Automotive Products (India) Ltd. v. DCIT ITA No. 5881 (Delhi) of 2012; * M/s. MetricStream Infotech (India) Pvt. Ltd. v, ACIT IT(TP)A No. 493 of 2016 * CIT Vs. Dalmia Promoters Developers (P) Ltd. 281 ITR 346 * Qualcomm India Pvt. Ltd. Vs. ACIT (ITA No. 5239/Del/2010) * Mentor Graphics (Noida) Pvt. Ltd. ITA 196/D/2006 * Philips Software Centre (P) Ltd ITA No. 218 (BNG)/08 13. The Ld. DR relied upon the order of the TPO as well as the Assessing Officer and further submitted that the findings and reasoning given by the revenue authorities be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the TPO is directed to exclude this company from the list of comparables. 15.4 Infosys Ltd.:- The Tribunal in assessee's own case rejected the comparable in A.Y. 2007-08. In this year also Infosys has a diversified business profile and owns various software products. The Company possesses brand value which tends to influence the pricing policy of the company and thereby directly impacting the margins earned by the company. Without prejudice to the above, if at all Infosys Technologies Ltd. is to be considered as a comparable it is necessary to eliminate the brand profits (calculated at Rs. 3,134 Crores by Infosys) in determining the profitability of the company for transfer pricing purposes. In doing so, the margin would be 11.43%. This company has tangible assets which is many times of that of the assessee. The risk levels for Infosys are quite high as against minimal for the assessee. The company has incurred significant expenditure on research and development activities. The company's expenditure on advertisement and marketing is 4.66% on sales, i.e. which exceeds 3% of sales filter applied by the assessee. Thus, the Ld. AR submitted that this is functionally different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO and DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 15.9 We have heard both the parties and perused all the relevant material available on record. This company is engaged in rendering product development services and high end technical services which falls under the category of KPO services and hence, not comparable. Besides this, there is contradiction in the information provided in the financial statements. Thus, this company does not satisfy the criteria to be held as comparable. Therefore, we direct the TPO to exclude this company form the list of comparables. 15.10 Wipro Ltd. (Seg):- The Tribunal in assessee's own case rejected the comparable in A.Y. 2007-08 as functionally different, following the ruling of Agnity India. This year also Wipro has undertaken R&D activities for development of IP and products. Further, company owns substantial patents, trademarks and rights in the form of intangible assets to the tune of Rs. 175 crore. Independent study done by Forrester Research where companies viz. Infosys, Tata Consultancy Services and Wipro Technologies have been identif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited with Wipro Limited. Thus, this comparable company is not only functionally different but also in the present assessment year it had merger which is an extra ordinary event. Therefore, we direct the TPO to exclude this comparable from the list of comparables. 15.13 Tata Elxsi Ltd. (seg):- The Tribunal in assessee's own case rejected the comparable in A.Y. 2007-08 as functionally different. This year also the company is in the business of "Hardware design". It is notable that the company employs a wide variety of personnel such as hardware engineers, styling and mechanical designers, graphic designers, animators and special effects artists. Thus is ample testimony to the fact that the company is not engaged in pure software development activity unlike the assessee. R&D activities undertaken by the Tata Elxsi resulted in the creation of the Intellectual properties (I). Further, the company's R&D expenses of 3.39% on sales fails the R&D filter of 3% applied by the assessee in the TP documentation. Net fixed assets to sales ratio in case of Tata Elxsi is 246% (approx.). The Ld. AR relied upon the Hon'ble Delhi High Court decision in case of Toluna India Pvt. Ltd. ITA No. 393 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 41 patent applications out of which 19 has been granted (4 have been granted during current year). This fact is not denied by the Ld. DR. Thus, the Sasken has a different profile which cannot be compared with the assessee company. Therefore, we direct the TPO to exclude this comparable from the list of the comparables. 15.19 Avani Cincom Technologies:- The Tribunal in assessee's own case rejected the comparable in A.Y. 2007-08 as functionally different. This year also the company is engaged in the business of software product development and owns products like Dxchange Travel Solutions, Insurance Solutions, Customer appreciation and relationship management application and content management system. The Ld. AR submitted that the assessee has not been provided with the information obtained by TPO using section 133(6) of the Act. The Ld. AR further submitted that the complete annual report is not available in public domain. The Ld. AR relied upon the decision in case of DCIT vs. Verifone India Technology Pvt. Ltd. (supra) as well as Mentor Graphics (India) Pvt. Ltd. vs. DCIT for A.Y. 2008-09 and 2009-10 (ITA No. 410/Del/2013 and ITA No. 1484/Del/2014). 15.20 The Ld. DR relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as comparable with such a huge increase in revenue. The Company is engaged in multifarious activities including an end to end service provider and offers variety of services. It is involved in product evaluation, design & development etc. of the products. Further, it also renders BPO services in the field of Human Resources, Life Sciences, Legal Services, Supply Chain Management, Sales and Customer Support etc. Further, the financial statements lacks in providing the segmental results as well. The Ld. AR relied upon the decision in case of M/s Nokia Siemens Networks India vs. ACIT (ITA No. 333/Del/2013 for A.Y. 2008-09), Navisite India Pvt. Ltd. (ITA No. 5329/Del/2012) and Sapient Corpn. (P.) Ltd. Vs. DCIT (ITA No. 5263/Del/2010). 15.26 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 15.27 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that this comparable company is engaged in various kinds of activities and does not have segmental results in its financials. Besides t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 15.33 We have heard both the parties and perused all the relevant material available on record. This company is a product development company. Its margin were incorrectly computed by the TPO. The TPO has also not taken into account that the ratio of related party transactions to sales is more than 15% which cannot be applied in the present assessee company's case. Therefore, we direct the TPO to exclude this comparable from final list of comparables. 15.34 Quintegra Solutions Ltd.:- This comparable is rejected by the Tribunal in assessee's own case for AY 2003-04 as well as recently decided on 27.04.2018 wherein it has been held that the company is functionally not comparable to assessee. This year the company acquired PA Corporation Inc. a US based IT company hence the results may be impacted by the said acquisition. The company owns intangibles in form of copyrights and software which is being used by the company for rendering of services unlike assessee. The company is engaged in Research and Development activities as well. The Ld. AR relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be taken into account as comparable. Therefore, we direct the TPO to exclude this comparable company from the final list of comparables. 15.43 iGate Global Solution Ltd.:- This comparable is functionally different. This company is engaged in diversified business including contract services, IT services and IT enabled services. As recognized by the Tribunal in Dialogic Networks (India) Pvt. Ltd. (supra), the company is engaged in application development, Application management, Business Process Management, IT Governance, Web Technology Solutions, Enterprise Integration, CIS and BPO, Infrastructure Management, Cloud Services. The Company also provides Business Intelligence and Data Warehousing Solutions. Thus, it is functionally different from the assessee company. 15.44 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 15.45 We have heard both the parties and perused all the relevant material available on record. This company is engaged in various activities and functionally different than the assessee company. Therefore, we dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin computation. The TPO while computing the adjustment amount in SDS segment has incorrectly taken margin of Assessee as 5 10% instead of 8.22%. In doing so, the TPO has erred by not considering the voluntary tax adjustment made by the Assessee in its return of income. A calculation of the same is provided below: Particulars Reference Amount of addition as computed by the Ld. TPO/AO Correct Computation of addition (page 29 of the AppealSet) Operating cost A 6,042,365,420 6,042,365,420 Arm's length margin B 21.85% 21.85% Arm's Length Price C=A*B+A 7,362,622,264 7,362,622,264 Price charged by the Assessee D 6,350,741,416 Price charged by the Assessee (After making voluntary adjustment of INR 188,124,307 in the return of income) D 6,538,865,723 Amount of adjustment E=C-D 1,011,880,848 823,756,541 20. The Ld. DR relied upon the order of the TPO as well as the Assessing Officer. 21. We have heard both the parties and perused all the relevant material available on record. From the perusal of the records it can be seen that there is error in the margin computation which needs to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 24. We have heard both the parties and perused all the relevant material available on record. The facts remain similar in the present assessment year, therefore, we direct the TPO to take into consideration only those comparables where related party transactions are to the extent of 15% because it is not the case of revenue that by applying the threshold limit of 15%, it will not get sufficient number of comparables. Thus, Ground No. 6.1 is partly allowed. 25. As regards to Ground No. 6.1.6 and 6.1.7 relating to appropriate filter of R&D <=3% applied by Assessee in TP documentation but wrongly rejected by the TPO/AO is covered by the decision of the Tribunal in assessee's own case for A.Y. 2007-08. The Ld. AR submitted that the Tribunal partly held in favour of the assessee in assessee's own case for A.Y. 2007-08. The Ld. DR could not controvert the submissions of the Ld. AR. 26. We have heard both the parties and perused all the relevant material available on record. The issue in the present assessment year is identical therefore, the findings recorded hereinabove in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment of India enterprise and has a turnover of 353.14Cr. There is no separate segmental information and all the receipts have been classified under the primary segment of 'Consultancy services'. Thus, this company cannot be taken as comparable as it is functionally different. Besides this, there is no separate segmental information available. Therefore, we direct the TPO to exclude this comparable from the final list of comparables. 28.4 IDC (India) Ltd.:- The Tribunal assessee's own case in A.Y. 2007-08 remanded back this comparable company to the file of the TPO. The TPO accepted the contention of the assessee and vide order dated 21.01.2016 rejected the said comparable as functionally different to that of the assessee company. This year also the company has same functional profile and is engaged in providing consulting services in Asia/Pacific region. It provides the most rigorous and exhaustive primary research. It also provides services like, CMO advisory research, Investment research services, IT advisory tools, etc. As per the revenue recognition schedule in Annual report of company, its operational income is classified as income from sale of service and product. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-09 (ITA No. 2154/Del/2014), Corning SAS-India Branch Office vs. DDIT for A.Y. 2008- 09 (ITA No. 5713/Del/2012), Fujitsu India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 6280/Del/2012) and Ciena India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 3324/Del/2013). 28.11 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 28.12 We have heard both the parties and perused all the relevant material available on record. The company operates in the diversified activities which includes Asset Reconstruction and Management Services, Project Related Services, Micro Enterprise Development, Infrastructure Planning and Development, research studies & Tourism, Skill Development, Environment. Further as held in the case of Fujitsu India Pvt. Ltd. (supra) for the same assessment year, the Tribunal held that "this company has also earned revenue from Research studies and tourism amounting to Rs. 1.26 crore. From a close look at the activities carried on by this company, it becomes clear that except for 'Research studies', which partly resembles w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company. Therefore, we direct the TPO to exclude this company from the list of final comparables. 28.16 Choksi Laboratories Ltd.:- The company is a commercial testing house engaged in testing of various products, offers services in the field of pollution control as allied activity and produces effluent treatment plants. Further, from the fixed assets schedule of the company, it is evident that major assets are instruments. Thus, the company is providing testing services with the help of these instruments. The Ld. AR relied upon the decisions in case of Brown Forman Worldwide LLC India vs. DDIT for A.Y. 2007-08 and 2008-09 (ITA No. 433 & 6139/Del/2012), Corning SAS-India Branch Office vs. DDIT for A.Y. 2008-09 (ITA No. 5713/Del/2012) and Ciena India Pvt. Ltd. vs. DCIT for A.Y. 2008-09 (ITA No. 3324/Del/2013). 28.17 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 28.18 We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the company is a commercial testing house ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices, project selection & project implementation services, energy & power services, etc. and manufacturing of TMT Bars. Its commission expense constitutes Approx 30% of its sales. Furthermore, this company has a very small asset base of just 44.58 lakhs and its turnover is 1.13 crores. 28.23 The Ld. DR relied upon the order of the TPO/AO/DRP and further submitted that the findings and reasoning given by the revenue authorities be taken as the submissions of the revenue before us. 28.24 We have heard both the parties and perused all the relevant material available on record. This company is engaged in providing highend technical services in the areas of environment & pollution control, technology management, financial services, administrative & legal services, project selection & project implementation services, energy & power services, etc. and manufacturing of TMT Bars. Thus, this company is functionally different from the assessee company. Besides that commission expenses and approximately 30% of its sales which impacted the large portion of the revenue. Therefore, this company cannot be taken as comparable. We direct the TPO to exclude this comparable from the list of fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of economic adjustment for difference in Risk profile, the same is covered by the order of the Tribunal in assessee's own case for A.Y. 2007-8 (ITA No. 5637/DEL/2011). The Ld. DR could not controvert this aspect. Therefore we find that this issue to be restored to the file of the AO/TPO to consider the computation of risk adjustment as per CAPM model by availing the services of technical experts. The experts of the field are to be appointed by both the sides to come to an acceptable conclusion. Thus, Ground No. 6.8 is partly allowed for statistical purpose. 30. As regards to Ground No. 7.1 to 7.8 relating to addition made by the TPO on account of corporate recharges (Rs. 622,140,262/-) and reimbursements paid (Rs. 290,000,000/-) in the nature of "Intra Group services", during FY 2007-08, the Assessee received services amounting to Rs. 62.21 crores from its AEs in the nature of training, IT infrastructure and support, etc and majority of such amounts have been charged to the Assessee based on actual cost incurred by such overseas group companies (allocable to India). Further, in some cases, the AEs have charged a mark-up of 5% on their costs for these services. Also, reimbursement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this is because reduction of such cost leads to a reduction in income. The TPO has not challenged the applicability of TNMM for both segments. The Ld. AR further submitted that the TPO has disregarded an important fact i.e. under the Global TP Policy, the Assessee is assured adequate profit margins in India by value of adjustment/ credit notes in distribution segment. Part of this cost has been benchmarked under TNMM (distribution and manufacturing segments). The Ld. AR submitted that the issue involved is that MSIPL has availed certain support services from its AEs including MINC. The Assessing Officer, year on year, holds that such services do not add any benefit to MSIPL and therefore effectively no services have been rendered by MINC to MSIPL. However, in the case of MINC, the Assessing Officer of MINC held that these services are technical services in which technology is made available and are taxed as Fees for Technical Services ("FTS") under the Double Taxation Avoidance Agreement ("DTAA") and Income Tax Act, 1961. Thus, the Ld. AR submitted that there is a clear dichotomy that on one side, in case of MINC, the Indian tax department alleged that services rendered are highly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s issue. The TPO did not have these documentary evidences at the time of deciding, therefore, it will be appropriate to remand back this issue to the file of the TPO/AO for verifying these evidences and taking cognizance in respect of the claim made by the assessee on merit. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground No. 7.1 to 7.8 are partly allowed for statistical purpose. 34. As regards to Ground No. 10 relating to addition of Rs. 43,306,463/- on account of disallowance of provision of liquidated damages, the Ld. AR submitted that the same is covered by the order of the Tribunal in assessee's own case for A.Y. 2007-08 (ITA No. 5637/DEL/2011). The Tribunal in Assessee's own case for AY 2007-08 held that provision for liquidated damages is allowable as revenue expenditure. The Tribunal also held that even if liability is reduced as a result of negotiation that does not absolve the liability for liquidated damages which crystallized upon delay in execution of contracts. Facts involved in AY 2007-08 are similar to the facts of the captioned year and are produced below: * The agreements of the Assessee wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord of the case. Admittedly the contract entered into by the assessee with its customer contained a specific clause on liquidated damages which define terms and conditions of liquidated damages including the method of calculation as noted earlier. It is not disputed that assessee has created the provision only in those cases where the delay had actually occurred and on the basis of terms and conditions of contract. The terms of contract contemplated that the moment delay occurs in the execution of contract then assessee will become liable for payment of liquidated damages. The liability, thus, crystallized with the occurrence of event of delay in the execution of contract. The assessee might, after entering into negotiation with the party, get a waiver or partial deduction in its liability but that does not absolve the assessee from being liable to liquidated damages on occurrence of the event of delay in execution of the contract. 170. Ld. DR has relied on the decision of Hon'ble Kerala High Court in the case of N. Sundareswaran (supra). In this case the assessee had entered into contract with foreign buyers for the supply of cashew kernels. However, the assessee could not ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er initiated proceedings u/s 263 and set aside the assessment with the direction to the AO to redo the assessment fresh. The AO, accordingly, made the addition which was deleted by CIT(A) on the ground that the liability on account of damages on breach of contract accrued on 28th May, 1987 when the award of arbitration was passed. The Tribunal upheld the revenue's contention, inter-alia, observing as under: .............................................................................................. 170.2 Thus, in this case also the provision was not made on the basis of some contractual obligations but on account of Arbitrator's Award which had not become final. 171. From the analysis of the two decisions relied upon by ld. DR, it is evident that both are not applicable to the facts of the case. 172. On the other hand, we find that the case laws relied upon by ld. Counsel for the assessee clearly support the assessee's case particularly because terms and conditions of agreement with customers contained delayed delivery clause whereunder specified penalty was to be paid by assessee for delay in delivery. We find that Hyderabad ITAT Spl. Bench in the case of KCP Ltd. (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of the anticipated liquidated damages in so far as the same is related to the period of delay falling within the year under consideration." 174.1 It has also allowed the assessee's claim of liquidated damages following the decision of Hon'ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and Bharat Earth Movers (supra). 175. In view of above discussion, this ground is allowed for statistical purposes." Thus, in present year as well the facts are identical. In the contracts entered into by the Assessee, the clause on liquidated damages clearly fixes amount of liquidated damages in delay and therefore liability of the Assessee to pay accrues immediately upon delay and such liability is fully ascertainable. Thus, provisions made in that respect is allowable. Ground No. 10 is allowed. 38. As regards to Ground No. 11 relating to addition of Rs. 10,520,867 on account of disallowance of capitalization of software purchases, the same is covered by the order of the Tribunal in assessee's own case for A.Y. 2007-08 (ITA No. 5637/DEL/2011) wherein the matter was restored to the file of Assessing Officer to decide it in light of guidelines laid down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in Income Tax 4,56,88,686 10,16,11,387 5,59,22,700 Revised claim u/s 10A/10B made before the AO 12,20,30,195 14,20,42,614 26,40,72,809 The Ld. AR submitted that the assessee claimed deduction u/s 10A/10B of INR 16.25 crores on the basis of the CA certificate. However, in the return of income, the Assessee had also made suo-moto adjustment of Rs. 18.81 Crores on account of ALP for the software segment being lower than TP margin required as per law. Out of the said adjustment of INR 18.81 Crores, INR 10.16 Crores pertain to the 10A/10B units allocate in proportion to the turnover. The powers of the Assessing Officer envisaged in the circular should include the power to give higher deduction than the amount as per the CA certificate. What section 10A states is that a CA certificate to this effect should be produced. However, it does not say that the Assessing Officer cannot allow any higher deduction than what is permissible as per law and which is rightfully due to the Assessee. Section 292B of the Income Tax Act provides that if the assesse has made substantial compliance with the law then technical defects if any cannot render the assessee's compliance as defective ..... X X X X Extracts X X X X X X X X Extracts X X X X
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