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TMI Blog2022 (8) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 3,43,98,78,300. Part I - Transfer Pricing Matters 3. That on facts and in law, the Hon'ble DRP and the Ld. TPO/ Ld.AO erred in making an adjustment of INR 1,890,534,850 and INR 213,288,571 to the returned income of the Appellant in respect of the international transactions pertaining to contract software development services ('SWD' or 'Impugned Transaction I') and provision of IT enabled services ('ITES' or 'Impugned Transaction II') respectively. 4. The transfer pricing adjustments made to the Impugned Transactions 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 the reason that: a) the order of the Ld. TPO is bad in law in as much as based on an invalid reference made by the Ld. AO without complying with the statutory requirements; b) the Appellant's AE being chargeable to tax at a higher rate in the US, there was no question of shifting of any profit from a low tax paying country to a high tax paying country. 5. That on facts and in law, the Hon'ble DRP and the Ld. TPO/ Ld. AO have erred by not appreciating the correct functional profile of the Appellant and drawing an errone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, they have resorted to cherry picking of comparables to determine ALP for the impugned transactions. 10. That on facts and in law, the Ld. TPO/ Ld. AO erred by not following direction of the Hon'ble DRP to include "Microland limited" in the final list of final comparables with respect to Impugned Transaction II since it is passing all the filters applied by the Ld. TPO. The said ground is submitted without prejudice to the arguments of the Appellant against erroneous approach of the Hon'ble DRP and the Ld. TPO/ Ld. AO. 11. That on facts and in law, the Hon'ble DRP and the Ld. TPO/ Ld. AO have grossly erred by computing the operating profitability of the comparable companies incorrectly. 12. The Hon'ble DRP and the Ld. TPO/ Ld. AO erred in law and in facts by selecting certain companies which are earning super normal profits, as being comparable to the Appellant. 13. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO have grossly erred by not appreciating the fact that the Appellant operates as a risk free service provider and all the risks associated with the Impugned Transactions were borne by the foreign AE and not by the Appellant, thus, the Appellant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Rs. 3,11,749. 19. 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. 20. That on the facts and in the circumstances of the case and n law, the Ld. AO has erred in initiating penalty under section 271(1)(c) of the Act." 3. The assessee is a Private Limited Company engaged in the business of software development and product support services. It filed its return for AY 2013-14 on 29.11.2013 declaring total income of Rs. 342,96,62,520/- which was subsequently revised to Rs. 3,43,98,78,300/- on 31.03.2015. The case was selected for scrutiny under CASS. The Ld. AO completed the assessment under section 143(3) r.w.s 144C of the Income Tax Act, 1961 (the "Act") on 29.08.2017 on total income of Rs. 567,14,80,070/- including therein addition of Rs. 210,38,23,421/- on account of transfer pricing adjustments and Rs. 12,77,04,481/- on account of difference of rental income offered as other source. 4. Aggrieved, the assessee filed appeal before the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciated enterprise ("AE") in the United States of America ("USA"), namely Microsoft Corporation had also filed an application under Mutual Agreement Procedure ("MAP") before USA Competent Authority to resolve the dispute relating to determination of arm's length price for the transfer pricing adjustment made in the assessment order dated 29 August 2017 under Article 27 of India-USA Double Tax Avoidance Agreement. The Appellant has received a copy of the communication issued by the Indian Competent Authority on 04 April 2022 informing the Appellant about the resolution under MAP Proceedings for the captioned year. The MAP resolution has specified relief to be granted on account of transfer pricing adjustments in relation to the Appellant's AE i.e., Microsoft Corporation. In view of Rule 44G(7) of the Income tax Rules, 1962 ("Rules"), the Appellant is required to communicate their acceptance or non-acceptance of the MAP resolution. In case of acceptance of such resolution, the Appellant is also required to withdraw the relevant grounds of appeal raised in relation to issues which were the subject matter of adjudication under MAP proceedings in accordance with Rule 44G(8) of the Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee had been claiming the taxability of similar income as 'income from other sources' during the assessment proceedings only which claim had been rejected by the Revenue but it is for the first time that the assessee has preferred the said claim by way of filing the revised return. Nonetheless, the Ld. AO proceeded with the observation that in the current year also the facts of the case are similar to that of the earlier years. 8.1 The Ld. AO distinguished the facts of the case of the assessee from the facts of Sultan Brothers Pvt. Ltd. vs CIT (1964) 51 ITR 353 (SC), the decision of Hon'ble Supreme Court relied upon by the assessee. After discussing the differential facts, the Ld. AO held that rental income earned by the assessee is assessable as 'income from house property' and not as 'income from other sources' claimed by the assessee in the revised return. Accordingly, the Ld. AO computed the income form house property at Rs. 13,51,23,771/- and reducing there from income from other sources declared by the assessee at Rs. 74,19,290/- made addition of Rs. 12,77,04,481/- to the income of the assessee. As the after effect, the assessee's claim of expenses made at Rs. 18,56,14,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Jay Metal Industries Pvt. Ltd. are different from Microsoft India (R&D) Pvt. Ltd. on following points:- Facts in the case of Sultan Brothers Pvt. Ltd. (SC) 'Annexure B' Facts in M/s Microsoft India (R&D) Pvt. Ltd. Facts in the case of Metal Industries Pvt. Ltd. (Delhi HC) 'Annexure C' * At page 9, the Hon'ble Supreme Court has referred to lease deed as- * "We will now refer to the provisions in the lease to see whether the parties intended that the furniture, fixtures and t h e building shall all be enjoyed tighter. Clause 1 of The lessee's covenant, in our opinion, puts the matter beyond doubt and it is as follows:- * (a) To use the demised premises and the said furniture and fixtures for the purpose of running hotel, barding and the lodging house, restaurant, confectionary and such other ancillary business in the said premises such as providing show-cases show windows, newspapers stall, dancing and other exhibition of arts, meeting rooms etc., and not for any other purpose without the previous permission in writing of the Lessors. * It is clear from this clause that the building and the fixtures and furniture were to be used for one purpose, namely, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up from third parties, the without any extra LESSEE shall be entitled to terminate this Lease Deed." * The Hon'ble High Court has stated at page 2 para 3- * Certain other clauses of the lease deed relevant to the present case read thus: * "2(c) The Lessor shall provide a sanctioned load of 210 KVA electricity connection through an independent transformer installed at the premises. The Lessee agrees to pay directly to the concerned department all charges for electricity and water consumed by the lessee in the premises. The electricity charges will be based on the consumption shown by the meter on the basis of the bill received from Haryana Electricity Board. The water charges will be paid by the Lessee on the basis of the bill received from Haryana Water Authority. Both Electricity and water charges will be paid by the lessee directly to the departments on the basis of Bills received from time to time." * "2(d) The Lessor shall hand over the office with furniture & fixture 200 KVA diesel generator and adequate air conditioners to the Lessee in good working condition. The Lessee agrees to pay directly all charges towards maintenance of the premises including comprehensive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Rent is permitted in lease deed, which clearly shows that the rent is not composite as envisaged in the section 56(2) of the Act. The assessee company Microsoft India (R&D) Pvt. Ltd has leased out 'Building' along with infrastructure for providing certain services which can also be sourced by lessee in case of inadequacy. Thereby, the condition of the section 56(2) of the Income Tax Act is not satisfied. In the case of Sultan Brothers and Jay Metals Industries Ltd, the furniture and fixtures was composite with building rent as inseparable component. To that extent the facts of Sultan Brothers (P) Ltd and Jay Metal Industries P Ltd are different and ratio is inapplicable to Microsoft India (R&D) Ltd in the A.Y. 2013-14." The emphasis of the Ld. DR is that the rent is not composite as envisaged in section 56(2) of the Act. 10. We have carefully considered the rival submissions of the parties and perused the material available in the records. It is not in dispute that in preceding years the assessee has been claiming that the rental income earned by it from let out building space along with inbuilt infrastructure and other amenities is taxable as income from other source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... air and maintenance of common and open areas and facilities provided at the building like compounds, gardens, passage, elevators, lifts, terrace, DG sets etc and also 100% power backup and centralised air conditioning. 18. In our considered opinion, for similar set of amenities/facilities, the Hon'ble Supreme Court in the case of Sultan Brothers [supra] has laid down certain tests which have been followed by the Hon'ble High Court of Delhi in the case of Garg Dyeing & Processing Industries [supra] and later on in the case of Jay Metals [supra]. We are of the considered view that in light of the facts discussed hereinabove, there can be no doubt that lease deed was composite one and rental receipt thereunder answered the description u/s 56(2)(iii) of the Income tax Act, 1961. 19. We find that the main thrust in rejecting the claim of the assessee by the Assessing Officer is that it is a related party transaction. The undisputed fact is that the assessment was subject to transfer pricing assessment for determination of ALP with AE and no such determination has been done by the TPO. We further find that though the Assessing Officer has discarded the claim of the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Tribunal in para 18 has observed that for similar set of amenities/facilities, the Hon'ble Supreme Court in Sultan Brothers Pvt. Ltd. (supra) has laid down certain tests which have been followed by the Hon'ble Delhi High Court in Garg Dyeing & Processing Industries vs. ACIT (2012) (ITA 319/2012) (Del) and later in Jay Metals (supra). Testing the facts of the assessee's case on the touchstone of the decisions (supra) the Tribunal recorded its unequivocal finding that the lease deed under consideration was composite one and that it answered the description under section 56(2)(iii) of the Act. Another objection of the Revenue that it is related party transaction has also been rejected by the Tribunal by saying that no adverse view has been taken in determination of ALP with AE by the Ld. TPO nor provisions of Section 40A(2) have ever been invoked. 13. In subsequent AYs 2014-15 and 2015-16 also the same issue has been decided by the Tribunal in favour of the assessee in its order dated 24.09.2021 in ITA No. 8229/Del/2018 and 8143/Del/2019 wherein the Tribunal followed its decision dated 14.06.2021 for AY 2011-12 and AY 2012-13. 14. The AY under our consideration falls in between. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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