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TMI Blog2022 (7) TMI 489X X X X Extracts X X X X X X X X Extracts X X X X ..... nment systems, where the assessee purchases professional loudspeakers, audio special effect equipment, audio mixing consolers, consumer electronics and microphones and headphones from its Associate Enterprises (AEs) to be sold to domestic third-party customers. 3. During the previous year relevant to Assessment Year 2014-15, the assessee, inter alia, provided SWD services to its AEs for a consideration of Rs. 102,38,70,343/- and earned a net cost-plus mark-up of 19.64%. The assessee also purchased goods from its AEs for a consideration of Rs. 64,41,74,821/- for trading segment. In the trading segment, the assessee earned a gross profit margin of Rs. 24.94%. 4. On a reference made by the Assessing Officer ('AO') to the TPO, the TPO passed an order dated 31.10.2017 under Section 92CA of the Income-tax Act, 1961 ('the Act') determining a TP adjustment of Rs. 8,34,81,655/- in respect of the SWD services segment and Rs. 11,36,10,183/- in the trading segment, aggregating to total TP adjustment of Rs. 19,70,91,838/-. 5. Initially, a draft assessment order dated 15.12.2017 came to be passed by the AO in which, inter alia, the aforesaid TP adjustment was incorporated. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mean 29.40 Computation of arm's length price by the TPO and the adjustment made: Arm's length mean Mark-up 29.40% Operating Cost Rs. 85,57,58,886/- Arm's Length Price @129.40% of cost Rs.1,10,73,51,998/- Price Received Rs.1,02,38,70,343/- Shortfall being adjustment u/s. 92CA of the Act Rs.8,34,81,655/- 11. The addition of Rs. 8,34,81,655/- suggested by the TPO as short fall in the ALP was added to the total income by the AO in the Draft Order of Assessment. The assessee filed objections before the Dispute Resolution Panel (DRP) against the Draft Order of Assessment under section 144C of the Act. 12. The DRP issued the following directions to the TPO: The following companies were directed by the DRP to be excluded from the list of comparables by accepting the contentions of the assessee: (i) Cigniti Technologies Ltd.; and (ii) SQS India Ltd. 13. The DRP, on holding that Sagarsoft India Ltd. is functionally comparable to the assessee, directed the TPO to verify if the company passes other filters applied by him, and if so, to include it in the final list of comparables. The other contentions of the assessee seeking the exclusion of incomparable compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any operates in diversified markets. Thus, the services rendered by the company are not functionally comparable to the routine SWD services rendered by the assessee. 16. We find that it is submitted that this company is consistently excluded from the final list of comparables in cases of other assessees who are placed similar to the assessee. Reliance in this regard is placed on the decisions of this Hon'ble Tribunal in the cases of LG Soft India Pvt. Ltd. v. DCIT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15), EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v. DCIT (Order dated 19.02.2020 passed by this Hon'ble Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the cases of the assessee which is similar to the assessee, the company was directed to be excluded from the final set of comparables. In view of the above, we direct exclusion of this company from the final list of comparables. (b) Larsen and Toubro Infotech Ltd. ('L&T')- This company deals with software products and render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusion of this company as a comparable company is concerned, it is submitted that this company is functionally dissimilar as it is engaged in rendering IT services and in the development of software products without there being separate segmental information disclosed in its Annual Report for such activities. In the absence of segmental data being made available as regards the IT services and products offered by it, it is not possible to determine whether the company passes the filters applied by the TPO. The operations of the company predominantly relate to providing software products, services and technology innovation covering full life cycle of product to its customers, which is completely different from the services rendered by the assessee. The company also made significant investment in intellectual property led solutions and also had a dedicated team for research and Intellectual Property ('IP') developments. The company also owns several IP solutions, and during the year under consideration, it acquired four products. Further, it is submitted that Persistent undertakes significant Research and Development ('R&D') activities and has an in-house R&D centre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. DCIT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15), EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v. DCIT (Order dated 19.02.2020 passed by this Hon'ble Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the cases of assessee which is placed similar to the assessee, the company was directed to be excluded. Therefore, this company is directed to be excluded from the final list of comparables. 20. Ground Nos. 1(l), and (n) in the appeal: Vide these grounds, the assessee is seeking inclusion of Akshay Software Technologies Ltd., and Maveric Systems Ltd. (a) Akshay Software Technologies Ltd. ('Akshay'): This company was selected by the assessee as a comparable company in its TP study but came to be rejected by the TPO for the reason that the company is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services, and that the company incurred expenditure to the tune of 85% on foreign branches, which s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies with R&D expenditure of less than 3% alone were considered. In this regard, it is submitted that the action of the DRP is wholly erroneous in as much as the TPO did not apply a filter to exclude companies incurring R&D expenses. In the absence of application of a filter, rejecting a company on an arbitrary basis, more so when it is otherwise functionally comparable, is erroneous. Therefore, this company ought to be included in the final list of comparables. 24. We find that this Tribunal in the cases of EMC Software and Services India Pvt. Ltd. v. JCIT (Order dated 18.12.2019 passed in IT(TP)A No. 3375/Bang/2018) and Brocade Communications Systems Pvt. Ltd. v. DCIT (Order dated 19.02.2020 passed by this Hon'ble Tribunal in IT(TP)A No. 79/Bang/2019), wherein in the case of an assessee which is placed similar to the assessee, the company was remanded to the TPO. We therefore remand the question of comparability of this company to the TPO/AO for consideration afresh. 25. Ground No. 1(e) projects the grievance of the assessee regarding non-granting of working capital adjustment. The assessee submits that Rule 10B(3) of the Income-tax Rules, 1962, itself categorically prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AM for the reason that data for comparability under RPM required many details that may not be available in public domain. Apart from the above, the TPO also held that the assessee performs more functions than a normal distributor and therefore RPM is not MAM. The TPO thereafter chose the following comparable companies under TNMM. Sl. No. Name of the Company OP/Sales (in %) 1 Hi-Tech Systems & Services Ltd. 22.75 2 Sagittarians International Ltd. 9.73 3 Yamato Scale India Pvt. Ltd. 14.50 4 Shiv Pad Engineers Pvt. Ltd. 12.89 5 Adtech Systems Ltd. 11.82 6 Airox Technologies Pvt. Ltd. 12.57 7 Ankit Air Systems Pvt. Ltd. 11.28 8 United Telelinks (Bangalore) Pvt. Ltd. 9.30 9 Asian Feb Tec Ltd. 10.35 10 Intec Infonet Pvt. Ltd. 8.61 11 B N A Technology Consulting Ltd. 9.19 12 Micromax Informatics Ltd. 5.38 13 Keith Electronics Pvt. Ltd. 7.87 14 Usart Technologies India Pvt. Ltd. 7.08 15 I B D Electronics Pvt. Ltd. 6.27 AVERAGE MARK-UP 10.82 30. The TPO computed ALP as follows: Arm's Length Mean Mark-up 10.82% Operating revenue Rs. 2,68,32,64,288/- Arm's Length Price @89.18% of revenue Rs.2,39,29,35,092/- Price paid Rs.2,50,65,45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d No. 2(o)) (v) The lower authorities erred in determining the TP adjustment on the entire trading segment including transactions undertaken with unrelated enterprises (Ground No. 2(p)). 34. We shall take up for consideration ground No. 2(a) in the appeal re. characterization and Ground No. 7 re. application of MAM. In this regard, we find the following are the functions performed, assets employed and risks assumed by the assessee (as available in the TP study at page 586 of the paperbook): (a) Functions performed: During the year, the assessee carried on trading activities for its Professional and Lifestyle verticals. A brief background of the trading activities is as under: Professional vertical- The segment is engaged in trading of large infotainment systems and devices, which are meant for professional usage for example in cricket stadiums, movie theatres, arenas, airports etc. Examples of products sold under the PRO vertical include amplifiers. Loudspeakers, mixers, microphones, etc. Lifestyle- The segment mostly caters to needs of small consumers involved in trading in audio system, home infotainment and multimedia devices. The assessee is engaged in trading of consu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Foreign Exchange Risk: The assessee is invoiced in foreign currency for import of finished goods. The assessee bears the foreign exchange fluctuation risk in respect of import of finished goods due to fluctuation in the foreign exchange currency rates. Inventory Risk: The assessee bears inventory risk in relation to the products imported from AEs. Credit Risk: The assessee bears the credit risk in respect of its sales to third party customers as it enters into contracts in its own name. The AEs are not exposed to this risk. 35. From a reading of the above, it is clear that the assessee undertakes routine distributor functions. However, the TPO, erroneously held that the assessee cannot be ascribed as a routine trader who merely purchases and sells goods. The TPO arrived at this erroneous conclusion by referring to so called page 13 of the TP study, wherein it is stated that the company is also responsible for installation, training services to independent third party customer and also renders additional services like after sales support and warranty services. However, it is pertinent to note that page 13 of the assessee's TP study nowhere lists out the above contents, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complete information as regards comparable distribution is unavailable in public domain is also baseless and all information required for application of RPM is available in the public domain. Therefore, we hold that the assessee is a mere distributor and the method applied by it ought to be adopted. Pertinently, in the assessee's own case for assessment years 2015-16 and 2016-17, the TPO accepted the method applied by the assessee in the trading segment. Since the facts and circumstances involved in the year under consideration remain the same in the assessment years 2015-16 and 2016-17, the assessee's method ought to be accepted and is directed to be accepted. We remand the question of determination of ALP to the TPO/AO for fresh consideration and opting RPM as MAM. In view of the above conclusion the other issues raised by the assessee on determination of ALP under TNMM becomes academic and hence not decided. 40. Corporate tax issues arising in the appeal: Ground No. 11 re. restriction of depreciation claimed on computer software: In this ground, the assessee is challenging the action of the Revenue in restricting the depreciation claimed on computer software at 25% inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as acquired were only software license which enabled the assessee to use the applications. According to him, by virtue of definition of software given in New Appendix I of Income Tax Rules, computers including computer software were eligible for 60% depreciation. 19. Per contra, ld. Departmental Representative submitted that what were acquired by the assessee was only a licence and could at the best be considered as an intangible asset. Thus, according to him, lower authorities were justified in restricting the depreciation claim to 25%. 20. We have considered the rival contentions and perused the orders of the authorities below. Nature of items on which assessee had claimed depreciation @60% are listed hereunder:- Sl. No Description of the Asset 1. Sco Unix 6.0 Enterprise User License 2. Server Licenses and customization charges for insurance process. 3. Server Licenses and customization charges for insurance process. 4. PI Sql Developer/Single User license 5. PI Sql Developer/Single User license 6. Vfox Pro 9.0 Office Std 2010 licence 7. Dynamics Nav Final Milestone license 8. Server licenses and customization charges for insurance process 9. Server licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les Covered Sales % increase as compared to previous year 303% 50% 12% Details of Warranty Provisions Opening as on April 1 Additions during the year Utilization during the year Reversals during the year - 5,475,988 (430,259) - 5,045,729 21,640,265 (7,430,802) - 19,255,192 32,362,936 (12,404,786) - 39,213,342 47,191,482 (25,231,299) - Closing as on March 31 5,045,729 19,255,192 39,213,342 61,173,525 As per financials Under short-term provisions Under long-term provisions - 5,045,729 12,677,212 6,577,980 17,696,144 21,517,198 29,487,216 31,686,309 Total 5,045,729 19,255,192 39,213,342 61,173,525 Breakup of Warranty Utilization made during the year Year Pertaining to sales for FY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 4,30,259 was compared with the provision created for the year Rs. 54,75,988 to conclude that the% of utilization is at 7.8% which does not justify the amount of provision created as a% of sales. In this regard the learned counsel submitted that the warranty provision is created for the entire period of warranty which would depend on the nature of product. Drawing reference from the letter submitted before the DRP, the learned counsel demonstrated for example that Amplifier has warrant of 5 years and 3 years whereas Studer has a warranty of 1 year only. Therefore the utilization of warranty for 1 year cannot be compared with provision for warranty which is created for the entire period of 6 years warranty period. The annexures to the letter submitted to the DRP give a complete break up for all the items sold by the assessee like loudspeaker, microphones etc. 48. The learned counsel submitted that provision of Rs. 54,75,988/- for Assessment Year 2013-14 is for sales made in Assessment Year 2013-14 and that cannot be compared with actual utilization in Assessment Year 2013-14. In the table above the assessee had shown utilization against the year to which the same pertains to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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