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TMI Blog2023 (9) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that the ld.CIT(A) has not adjudicated the issue of comparability of these comparable on merits. Therefore, the said issue is set-aside to the file of ld.CIT(A) for denovo adjudication. The ld.CIT(A) shall give opportunity to the Assessee and Revenue. Accordingly, Ground No.4 is allowed for statistical purpose. - SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBERAND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER For the Appellant : Shri Govind Bhangdiya AR For the Respondent : Shri Suhas Kulkarni Addl. CIT ORDER PER BENCH : This appeal filed by the Revenue and cross appeal by the Assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-13, Pune dated 23.12.2021 emanating from order under section 143(3) r.w.s 144C(3) of the Income Tax Act, 1961 for the A.Y. 2016-17 dated 14.12.2019. The Revenue in ITA No. 376/PUN/2022 has raised the following grounds of appeal: 1. Whether on the facts and circumstances of the case the learned CIT(A) is correct to hold that assessee is engaged in distribution activity ignoring the FAR analysis as submitted by the assessee in TPSR? 2. Whether on the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A)]. The Respondent craves leave to add to or alter, by deletion, substitution, modification or otherwise or amend or withdraw the cross objections herein and to submit such statements, documents and papers as may be considered necessary' either before or during the hearing of the appeal. Brief facts of the case : 3. As per the assessment order the assessee had filed Return of Income for AY 2016-17 declaring total income of Rs. 3,24,08,070/- on 10/11/2016. The case of the assessee was selected for scrutiny assessment. The Assessing Officer (AO) referred the case to the Transfer pricing Officer (TPO) for determination of Arm s Length Price of the International transactions entered with the AEs. The Transfer Pricing Officer (TPO) vide order dated 25.10.2019 passed under section 92CA arrived at the Arms Length Price of the transaction. During the year, assessee has undertaken following transactions as under : 3.1 The assessee claimed in the Transfer Pricing Study Report that assessee is in the business of distribution of software. The assessee has applied TNMM Method to benchmark the transactions. Accordingly, assessee selected the companies comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue A 38,26,42,814 Operating Cost B 36,92,56,315 ALP Margin C 11.92% ALP D=B*(B+11.925)% 41,32,64,953 Adjustment E=D-A 3,06,22,139 Thus the arm s length price of international transaction of marketing support activity (distribution segment) of assessee is altered by Rs. 3,06,22,139/- thus enhancing the total income accordingly. 5. Thus, the TPO enhanced value of the international transaction by Rs. 3,06,22,139/-. The AO passed an order under section 143(3) r.w.s 144C(3) of the Act dated 14.12.2019 accepting the adjustments recommended by the TPO. Aggrieved by the order of the AO and TPO, assessee filed appeal before ld.CIT(A)-13, Pune. The ld.CIT(A) held in para 3.4 as under : 3.4 Finding on ground no. 2.1 I have decided the similar issue of re-characterisation of the software distribution function as market support services (MSS) in favour of the appellant in AY 2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Price: Reseller shall pay to Company monthly an aggregate amount such that Reseller earns cumulative year-to-date Operating Income of three and one-half percent (3.5) of Net Revenue ( Purchase Price ). For purposes of this section 6.1 Operating Income is determined according to the following formula; Net Revenues less Costs, general and administrative expenses, and all other costs not explicitly excluded from Costs. For purposes of calculating the Operating Income under this Agreement, Costs shall mean all direct and indirect costs incurred by Reseller in connection with marketing and selling the Products, maintenance contracts and support services to third parties in the Territory (excluding the Purchases Price specified in Section 6.1), computed under US GAAP. 6.2. Ownership - Reseller acknowledges Company's (or its licensor's) right, title and interest in, and to, any and all Intellectual Property Rights and that, except as specified in this Agreement, Reseller shall acquire no rights whatsoever in or to any Intellectual Property Rights. Without limiting the foregoing, except as provided herein, this Agreement does not constitute a license, sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaken to verify whether the functions performed by the assessee and the comparables selected were similar or not. In this regard, ld. TPO observed and held as follows: 6.4. ..... Integra Telecommunications: As per the Annual report, page 13, for FY 2014 15, main product of the company is computer hardware, for which of total turnover is 100. Further as per page 19 of the annual report, the company deals in various type/ make of computer, laptop, various other hardwares and softwares as per the requirements of its client. Thus as can be seen from the annual report , main business of the company is trading in computer hardware. As per the P L account, there is purchase of product , sale of product and mention of inventory. So it is functionally different than the activities of assessee. Dynacos Technologies Limited: As per page 46 of the Annual report, Dynacons Technologies Limited is an Information Technology Company engaged in providing a comprehensive range of products to customers. As per the website of the company Dynacons Enterprise Services offerings include a wide spectrum of Enterprise IT and Office Automation Services including Infrastructure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this agreement the very term the assessee is referred to as Reseller . In the recital part clause (B), it states Company wishes to appoint reseller to market and sell the products in the territory (as defined herein) and reseller desires to accept such appointment. Here, the reseller is MSC Software Corporation India Pvt. Ltd. i.e. the assessee and this clearly signifies that the assessee has to do the marketing activities and sell the products. The other relevant clauses in this agreement are as follows: Section 2 - Appointment of Reseller 2.1 Appointment . Subject to the terms and conditions set forth in this Agreement, Company hereby appoints Reseller, on a non- exclusive basis, to market and sell the Products in the Territory, and Reseller hereby accepts such appointment. Nothing in this Agreement shall be construed to limit Company's right to directly or indirectly market or sell the Products in the Territory or to appoint one or more additional resellers within the Territory. 2.2 Relationship Between the Parties . Company and Reseller agree that, in the performance of their respective obligations hereunder, they are and shall remain independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er shall occupy and maintain facilities adequate to market and sell the Products in the Territory. Reseller shall retain and have at its disposal at all times an adequate staff of trained and qualified personnel to perform its obligations under this Agreement. 3.6 Representations and Warranties . Reseller shall not make representations or warranties with respect to the Products greater in scope or duration than those generally made by Company in the Territory, except where required by local law or as specifically agreed between Reseller and Company. Company shall indemnify and hold Reseller harmless against any damages and losses resulting from (a) the non-conformance of the Products with Company's standard warranty for the Territory, (b) such other warranty as Reseller may be unable to disclaim as a matter of local law, and (c) product liability or other claims howsoever arising out of Reseller's exercise of its rights and performance of its obligations under this Agreement, other than those caused by Reseller's gross negligence. 3.7 Training. Consulting and Maintenance Services . Reseller may offer to provide training, consulting and maintenance services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts submitted by Reseller to Company shall specify the type and quantity of the Products, the name and email address of the customer requesting the Products and the requested delivery date. Each order submitted by Reseller shall be governed by and deemed to incorporate ail the terms and conditions of this Agreement. Company shall, at its discretion, accept or reject the order without undue delay, Company shall use commercially reasonable efforts to ensure that the Products are delivered electronically to the customer by the delivery date requested by Reseller or its customer and shall indemnify and hold Reseller harmless for any damages incurred by Reseller as a result of delays in delivery that are caused by Company. 5.2 Delivery . All deliveries hereunder shall be made in accordance with those terms agreed to between Company and Reseller from time to time. Except as otherwise agreed by the Parties, Company agrees to deliver downloadable Products directly to the end- user's computer or device. Company will provide to Reseller notification of such delivery for Reseller's records. Company's obligation to deliver the Products to end-users shall be complete at s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent necessary, Company shall pay to Reseller (or Reseller shall refund to Company) an amount such that Reseller recognizes an Operating income of three and one-half percent (3.5), based on Net Revenue, for the cumulative year-to-date period ending with such month. 10. From the analysis of these provisions, it is absolutely clear that the assessee being the reseller is doing only marketing support services. That MSC India is actually performing routine marketing activities in India attracting customers of software products in the Indian market. The marketing material is provided by company to the assessee at no cost and even when assessee prepares localized products, the copyrights are always with the company. The routine marketing activity primarily includes attending conferences, exhibitions, seminars to showcase the product to the targeted customers. When an order is received from the customer by MSC India that would be submitted to AE with specific type quantity of the product name and e- mail address of the customer and the requisite delivery date. However, the AE has the discretion either to accept or reject that order. If accepted, the delivery of the product is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come- tax (Appeals)-13, Pune ['Ld, CIT(A)'] has erred in partially upholding/ confirming the actions of the Ld. AO in this regard. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not adjudicating certain grounds of appeal raised before the CIT(A) by the respondent considering them pre-mature [i.e.. Ground 3 raised before the Ld. CIT(A)]. The Respondent craves leave to add to or alter, by deletion, substitution, modification or otherwise or amend or withdraw the cross objections herein and to submit such statements, documents and papers as may be considered necessary either before or during the hearing of the appeal. 12. With regard to ground of objection No.2, the assessee is aggrieved with the findings of ld. CIT(A) which is at para 3.6 of his order as follows: 3.6 Findings on ground no.2.6 The similar issue was dealt by my predecessor in AY 2013-14 wherein he found no error in the Ld. TPO s decision to treat foreign exchange gain as non-operating in nature for the purpose of computation of the PLI of the appellant as well as that of the comparable companies. Therefore following the same, this ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-16 and current year are not same. In these facts and circumstances of the case, we are of the opinion that it is our duty to follow the ITAT order in AY 2015-16 (supra) specially when the Hon ble JM was party to that order. Ground No.4 : 11. The Ground No. 4 is regarding ld.CIT(A) s decision that Dynacons Technologies, Integra Telecommunications and JMD Telefilms are comparables to assessee. It is observed that the ld.CIT(A) has not adjudicated the issue of comparability of these comparable on merits. Therefore, the said issue is set-aside to the file of ld.CIT(A) for denovo adjudication. The ld.CIT(A) shall give opportunity to the Assessee and Revenue. Accordingly, Ground No.4 is allowed for statistical purpose. 12. In the result, appeal of the Revenue is Partly Allowed. Cross Objection No.53/PUN/2022 (Assessee) : 13. We have already held in Revenue s appeal in ITA No.376/PUN/2022 that assessee s is in the marketing activity. It is observed that the ld.CIT(A) has not adjudicated the grounds raised by the assessee. However, it is observed that assessee had benchmarked its international transactions in TPSR as distribution activity. The assessee treated it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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