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TMI Blog2023 (11) TMI 1190X X X X Extracts X X X X X X X X Extracts X X X X ..... working in various branches situated outside India, are important because the man-hour spent by HR team, manhour Spend by Account Team to prepare the monthly payment sheet, etc depend on the actual number of employees working in these branches. The communication expenses which is part of G A depends on the number of employees of the Branches who availed these services. Also, the actual number of employees in the Branches are required to understand the utilisation of Communication Cost. We have already made it clear that all these details have nowhere been placed on records on behalf of the assessee. We have already mentioned that the Assessee has not categorically mentioned the basis of Common Cost Allocation in the Transfer Pricing Study Report, to that extent the Transfer Pricing report is unclear. Therefore, we agree with the TPO s calculation of allocation based on the direct cost as it is the best suitable basis for allocation of Common Cost of G A. Because the direct cost is easily available and verifiable. The onus is always on the assessee to file all necessary details before the TPO to prove the allocation. In this case the assessee failed to file all the essentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., from the list of comparable. Nihilent Ltd. as seen from the description of the services provided in the Annual Report that these services are functionally dis-similar to the services provided by assessee, hence, it is not functionally comparable. Hence, the TPO is directed to delete it. Cybage Software Pvt. Ltd is also into ITES, BPO Services. It is also mentioned that Cybage Software (P) Ltd., is also involved in branding creative production, content marketing, campaign management.Therefore, we are convinced that Cybage Software (P) Ltd., is functionally dis-similar and hence cannot be accepted as comparable. Accordingly, TPO is directed to delete Cybage Software (P) Ltd., from list of comparables. Ninestars Information Technologies Ltd. - We could not specifically observe that Ninestar Information Technologies Private Ltd., is in the business of Software Development Services. Therefore, based on the cryptic information available in the Audit Report, it is not possible to understand actual functions performed by Ninestar Information Technologies Pvt. Ltd. Hence, Ninestar Information Technologies Pvt. Ltd., is held to be functionally not comparable with the assessee. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the rejoinder to the remand report dated 15 March 2022 filed by the appellant on 25 March 2022 wherein the appellant has provided its detailed contentions on the comparability of certain companies rejected by the Ld. TPO in the first remand report dated 15 March 2022. Prayer The Appellant prays that the order passed by the AU be considered non est in accordance with the provisions of Section 144(7) of the Act. The appellant is aggrieved that the opportunity of being heard was not provided by the Ld. DRP with the reference to the remand report and the same is not in accordance with the provisions of Section 1440(11) and Section 144C(6)(C) of the Act. The grounds of appeal mentioned below are without prejudice to the above ground. Transfer Pricing related grounds Ground No. 2: General Ground On the facts and in the circumstances of the case, and in law, the AU pursuant to the directions of the Ld. DRP, erred in making a TP adjustment of INR 27,05,17,208 to the income of the Appellant, by holding that the Appellant s international transaction pertaining to Provision of Software Development Services is not at arm s length. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer The Appellant prays that the segmental profitability as provided in the TP Report should be accepted. Appellant also prays that, if at all, the reworking made by TPO is upheld, the average person month should be accepted as an allocation key for absorption of G A Costs in respect of software development services segment. The Appellant further prays that, if at all, the reworking made by Ld. TPO is upheld, the Ld. TPO be directed to ignore the adhoc/arbitrary allocation of depreciation expenses and adopt consistent allocation key for depreciation expenses after ignoring Depreciation expenses originally absorbed by the appellant in its Segmental P L as per TP Report. Ground 6: Non-acceptance/exclusion of overseas comparable companies On the facts and in the circumstances of the case and in law, the AU based on the directions of Ld. DRP has erred in not accepting/excluding the overseas comparable companies operating in the regions where the branches of the appellant operated during the year, thereby leading to the blatant inconsistency in the TP analysis for provision of services and availing of services. Prayer The Appellant prays that the reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,798 under section 14A of the Act by directly applying formula given in Rule 8D(2)(ii) of the Rules (being 1% of the annual average of monthly value, the income from which do not form part of total income). Prayer The Appellant prays that the AU be directed to not invoke provisions of Rule 8D(2)(ii) of the Rules and not to consider the disallowances of INR 4,50,70,798 u/s 14A of the Act r.w rule 8D(2)(ii), and therefore additional disallowance of INR 4,50,70,798 under u/s 14A of the Act r.w rule 8D(2)(ii) be deleted. Ground 10: Additional relief under section 90 On the facts and circumstances of the case, and in law, the AU based on the directions of Ld. DRP erred in disregarding Appellant s claim for additional relief under section of 90 of the Act of INR 48,97,620 over and above the relief under section 90 claimed by the Appellant in its Return of Income. Prayer The Appellant prays to allow additional relief under Section 90 of the Act to the extent of INR 48,97,620 over and above the relief under section 90 claimed by the Appellant in its Return of Income, the corresponding income has already been offered to tax in the year under consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RPM 4 Onsite software development services availed from AEs 1,719,812,996 TNMM 5 Commission received for Sales and Marketing Services 18,077,794 CUP 6 Commission paid for Sales and Marketing Services 604,009,635 TNMM 7 Offshore Software Development Revenue received by PSL from AE net of compensation for Sales Marketing services by AE 3,033,905,444 TNMM 8 Recovery of cos of assets from AEs 2,733,134 Other method 9 Outsources software development services availed from AEs 8,867,115 Other method 10 Receipt of interest on loan granted for working capital 30,864,339 Other method 11 Reimbursement of expenses 51,748,895 Other method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using the said allocation key in the ensuing paragraphs. 3.3 The Appellant submits that costs such as G A, which are not direct in nature but are of a common nature, may be allocated on a reasonable basis, having regard to the nature of expenses and applying a reasonable allocation key accordingly. 3.4 In the present case, the common costs to be allocated to segments are in the nature of G A staff cost (for HR/Finance/Admin departments), recurring cost of computers laptops, communication costs, etc. By the very nature of these expenses, it is evident that such costs are common in nature and can at best, have a correlation or. may change depending upon on the number of people/resources utilised by the assessee. 3.5 For example, HR and finance teams cater to various needs of employees working for different segments of the Appellant. The HR team looks after the People function, the finance team processes payroll for the employees, the admin team plans and controls overall administration and functioning of offices. Communications expenses such as mobile or landline or internet expenses are again expenses incurred by a company for its employees and depend upon number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is computed after determining the appropriate cost incurred. Therefore the determination of the cost incurred for the purpose of determining ALP is an important task. There may be direct and indirect cost involved in performing certain services. Where there are direct costs are involved they are required to be directly attributed to the particular profitability statement of that segment however when indirect costs are involved it is necessary that appropriate allocation keys which are rational and quantifiable are adopted for allocating them to the particular business segment to derive its correct profitability. This exercise can be carried out by the authorities as well as the appellant to fulfill the object of determination of the arm's length pricing of an international transaction. As the allocation keys for allocating indirect cost earlier adopted by the appellant was 'headcount' and now also the appellant for most of the indirect expenditure has retained the same allocation key and out of indirect expenses some of the direct expenses have been identified and are allocated to a particular business segment, further when neither the remand report nor before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses, evidently do not have any correlation to the common costs such as G A staff cost (for HR/Finance/Admin departments), recurring cost of computers laptops, communication costs, etc. Allocation as per Direct cost ratio would result in allocating higher costs to segments where the salary cost of employees is higher and vice versa. Here, the Appellant wishes to submit that while the number of employees is a relevant factor for incurrence of common costs, the salary of such employees have no relevance to such common costs. For example, communication costs such as telephone or internet or administrative expenses such cost of water bottles, refreshments, etc. would depend on number of users, irrespective of their salary or designation. 4.4 An allocation key for allocation of common costs cannot be a combination of other costs which have no correlation with the common costs whatsoever. Such a method would not lead to determination of correct profitability. Thus, the Appellant submits that the allocation key applied by the TPO is without any basis and is arbitrary in nature. 4.5 Further, the Appellant would also like to point out that the TPO himself has admitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te allocation key for allocating common costs in a service industry. It is reiterated that the main driver of the service industry is its people and hence it would not be unreasonable to use headcount as a basis for allocation of all common costs. 4.8 Further, the Ld. DR also relied on an extract of the OECD Guidelines which dealt with the issue of allocation in the context of intra group services. The Appellant would like to submit here that the OECD guidelines in fact support the case of the Appellant that the allocation of expenses should be carried out by having regard to the nature of expenses and headcount/no. of employees/no. of users is an acceptable key for the said purposes. Also, the OECD guidelines nowhere recommend that Direct cost could be an acceptable allocation key for the purpose of allocating common costs. The Appellant would also like to humbly submit that to the best of our knowledge, none of the case laws on the said issue of allocation key approve or discuss allocation of common costs on the basis of Direct Cost ratio. 4.9. In light of the above, the Appellant humbly submits that headcount allocation key is a more appropriate and rational method to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pricing proceedings the dispute arose regarding allocation of-Unallocated cost- amongst various segments. a) In TPSR. the Assessee used sales ratio b) When TPO showed disagreement with (a) above, the assessee revised its PLI computation by allocating such cost on man-hour basis c) However, in TP Order, the TPO disagreed with the method adopted by the assessee and PLI computation is made using Direct cost as the basis. 1.1 TPO's stand on allocation of cost: In the segmental accounts as prepared by the assessee in TPSR, the assessee has prepared segmental based on sales. Contention of the assessee is rejected on the basis that # para 7 of TPO order The assessee is having 3 different segments: Segment 1 POSS-Software Development Services The Revenue (receipt) is tainted (i.e.- controlled transaction). The receipts therefore are dependent on the cost incurred and receipts would be in proportion to agreed mark up between the AEs Segment 2 Distribution Segment The Cost is tainted (i.e.- controlled transaction). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances more sophisticated allocation keys might be used. However, a balance should be struck between theoretical sophistication and practical administration, bearing in mind that the costs involved are not generating high value for the group. In this context, there may be no need to use multiple allocation keys if the taxpayer can explain the reasons for concluding that a single key provides a reasonable reflection of the respective benefits. For reasons of consistency, the same allocation key or keys should be applied in determining the allocation to all recipients within the group of the same type of low value-adding intra-group services. (Source: Base Erosion and Profit Shifting (BEPS) - Comments Received on Public Discussion Draft - BEPS Action 8 - Implementation Guidance on Hard-to-Value Intangibles; 5th July 2017) 1.3 Assessee's reliance on various Judgements: During the hearing, before the Hon'ble bench, the DRs have distinguished the judgments as all the judgements, which are relied by the assessee are based on set of different facts/arbitrariness as pointed out by the Hon'ble ITATs 1.4.1 Further submission in this matter: 1.4.1 As al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Info beans Technologies Ltd. Held as product development company EIT Services India-IT(TP)A No. 2498/Bang/2019 SAP Labs India -IT(TP)A No. Bhilwaralnfotechnology Ltd. (Software IT related) Tata Elxsi Held as product development company 3DPLM Software - IT(TP)A No. 1303/Bang/2012 GXS India Technology Centre - IT(TP)A No. 1444/Bang/2012 2.2 In view of this specific observation by TPO, a query was raised in SCN to the assessee as under: 2.3 The relevant discussion in TP Order is as under 17. The issue of comparable: From the TPSR and benchmarking analysis and comparable selected by the assessee, it is noticed that the assessee has selected most of the comparable in product development category. Assessee therefore was asked a very specific query regarding selection of such comparable. A query raised by the TPO and the reply received by the assessee vide letter dated 07/07/2021 is reproduced below: FAR and comparable 2.1. Relevant extract from your good self s notice: 6. Rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same are tabulated as under: Comparable Name FY 2016-17 FY 2015-16 FY 2014-15 C G-V A K Software Exports Ltd. 11.97% 9% 10.07% Cigniti Technologies Ltd. 18.24% Zest Solutions Ltd. 8.48% 11.84% Nintec Systems Ltd. 19.00% Sagarsoft (India) Ltd. 3.22% Tata Elxsi Ltd. 25.16% Evoke Technologies Pvt Ltd 3.68% 5.47% 5.69% InfoBeans Technologies Ltd 27.00% Rheal Software Ltd 2.66% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sasken Technologies Ltd.(Software Services) 6.52 3 Harbinger Systems Pvt. Ltd. 7.91 4(*) CG-VAK Software Exports Ltd. 8.19 5(*) E-Zest Solutions Ltd. 13.73 6 Exilant Technologies Pvt. Ltd. 15.09 7 Apttus Software Pvt. Ltd. 17.03 8 Ninestars Information Technologies Ltd. 17.17 9 Sagarsoft (India) Ltd. 18.28 10 Gwynniebee India Pvt. Ltd. 19.81 11 Nihilent Ltd. 21.14 12 Cygnet Infotech Pvt. Ltd. 24 13 (*) R Systems International Ltd 24.17 14 (*) Info b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the PLI. However, TPO has observed that while calculating Operating Cost(OC), the assessee has allocated common cost on the basis Sales Ratio (page 6 of the TPO para 7.5). However, in the Transfer pricing Study Report the assessee has given following comment for the allocation of common cost, The Management has represented that the profitability is computed based on prudent basis of allocation(page 301 of the Paper book) In the Transfer Pricing Study Report there is no specific discussion regarding basis of allocation of Common Cost. Transfer Pricing Study report should have contained all these details but it does not contain the details of basis of allocation of common cost. 6.1 The turnover of the three segments of the assessee as tabulated by TPO as under : S.No. Nature of Transaction Turnover % of total TO 1 POSS 1,59,13,00,720 9.18 2 Distribution Segment 21,18,10,988 1.22 3 Other sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Legal, Internal Audit, Corporate Planning, Corporate Finance etc., to various AEs situated outside India, from India. Common Cost also consist of recurring cost of computers, laptops, Communications Cost, Internet Cost, Mobile cost etc. The Ld.DR has pleaded that Direct cost percentage shall be the appropriate parameter for allocation of the Common Cost of G A expenses. However, as seen from the letter of Mr.Praveen Joshi, Head-Corporate Planning, dated 18/10/2021, which is at page 673 of the paper book, it has been explained by the Head of Corporate Planning that even the Direct cost is worked based on the Allocated Person Months(APM).The exact words of the said letter are reproduced here as under : Generally, the direct costs for the projects are based on APMs which are base for identification of the direct costs. Further, in respect of inter-company projects, these APMs are taken as the basis for charging indirect costs (such as General admin costs) to the respective Associated Enterprises (AEs). Based on a specific request from the corporate tax team of PSL, I have reviewed the internal records and confirm that during FY 17- 18, total number of APMs in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 603,782,763 1,306,397,717 158,858,241 7,322,286,032 Gross Profit 52,952,747 Gross Profit/Sales 25% B.2 Indirect Expenses B.2.1 Total S M Expenses 1,072,751,144 6,038,790 1,066,712,354 B 2.2 Total G A Expenses originally absorbed 0 0 0 0 0 0 0 0 B 2.2A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.85% 10.17% 5.55% 8.60% 19.13% 20.46% OP/TC 24.00% 15.71% 6.21% 11.32% 5.88% 9.41% 23.65% 25.73% Allocation keys 1 Manmonth 93,342 483 24 663 5,282 6,451 279 86,612 Person Month Ratio 0.52% 0.03% 0.71% 5.66% 6.91% 0.30% 92.79% 7.1 No where the assessee has provided how they have arrived at the Manmonths. 7.2 However, the Assessee while working out the allocation has considered the number of manhours spent on Direct cost as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e direct cost is easily available and verifiable. The onus is always on the assessee to file all necessary details before the TPO to prove the allocation. In this case the assessee failed to file all the essential details even before us. Therefore, the allocation made by the TPO is sustained. Accordingly, the Ground Number 5 of the assessee is dismissed. The case laws relied by the assessee are factually distinguishable. 7.4 Accordingly, the Ground Number 5 of the Assessee is dismissed. Ground Number 3: Entity Level PLI : 8 In Ground Number 3, the assessee has pleaded that the entity level PLI should be accepted. 8.1 It is an accepted fact that there are independent different Segments. The assessee during Transfer Pricing Proceedings had submitted Segmental PLI working. This explains that there are different segments. In this case the transactions with the Non-AE are 89.59%, it means the transactions with the Non-AE independent entities are almost 90%. It means the entity level profit is mainly influenced by the 90% transactions which are with the Non-AE. Therefore, considering the Entity Level PLI will give distorted results as it is affected by 90% transactions wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scussed the case laws relied by assessee. 11. The assessee had also made elaborate submissions before the Dispute Resolution Panel(DRP) on this issue. 12. We will discuss each comparable here onwards. Exilant Technologies Pvt. Ltd. : 12.1 Assessee had submitted before the DRP and TPO that Exilant Technologies Pvt. Ltd., is functionally not comparable as it is also in the business of Sale of Products . The assessee had also submitted that during the year there was a unique event that 99.99% of the shares of Exilant Technologies Pvt. Ltd., have been acquired by Quest Global Engineering w.e.f. 14.02.2018 as is evident from page no.5623 of the paper book. The financial statements of Exilant Technologies Pvt. Ltd., have only been prepared up to 14.02.2018. The assessee has also relied on following case laws : PCIT vs. Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240 (Bom HC) (AY 2008-09). PCIT vs. J.P.Morgan India (P.) Ltd. [2019] 102 taxmann.com 335 (Bom HC) (AY 2006-07). 12.2 On perusal of the Annual Report of the Exilant Technologies Pvt. Ltd., it is observed that the Annual Report is only for the period 01.04.2017 to 14.02.2018. It is also observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available in the Annual Report. We are searching comparable for the Software Development Activity of the assessee. However, in the case E-Infochips Pvt. Ltd., there is Revenue from Sale of Products. It is also having the activity of ITES as mentioned in note 42 of the Annual Report which is at page 5441 of the Paper Book filed by the assessee. However, the assessee is not into any trading activity. Therefore, assessee s segment of software development cannot be compared with E-Infochips Pvt. Ltd., as it also has trading activity and ITES, in the absence of segmental accounts. The TPO and DRP has not discussed these issues. However, on the facts and circumstances of the case, we hold that E-Infochips Pvt. Ltd., is not comparable to Software Development Segment of the assessee. Accordingly, TPO is directed to delete the E-Infochips Pvt. Ltd., from the list of comparable. Nihilent Ltd., : 14. The DRP has upheld the selection Nihilent Ltd., as comparable in para 7.2(c) as under: On perusal of the annual report of this comparable for the relevant financial year and as per the annual report this company is into Software development, IT consultancy and related activities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices are functionally dis-similar to the services provided by assessee, hence, it is not functionally comparable. Hence, the TPO is directed to delete it. Cybage Software Pvt. Ltd. : 15. The DRP has upheld the selection of Cybage Software (P) Ltd., as comparable in para 7.2(b) as under: As regards judicial decision cited by the assessee, we have already pointed out in paragraphs above that the decisions have been rendered in the specific fact patterns of the given case and the assessee has to prove that the facts of its case are similar so as to seek application of the said decisions. We find that the assessee has made general claims. The assessee is also engaged in providing technology consulting and is engaged indiversifies activities and also has overseas branches like Cybage Software ()P Ltd. The claim of high turnover is also not correct since the judicial decisions have laid down the broad range of turnover minimum and upper turnover filters applied by the TPO works out to 1/10th and 10 times of the turnover of the assessee, respectively. In a recent decision dated 17/05/2017 in the case of Jacobs Engineering (I) Pvt. Ltd. (ITA No.7194/Mum/2012) for A.Y. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les are providing services which fall under the same category (software development services, in the present case), and it is not material whether the companies selected are catering to the same industry/segment(s) as the assessee. Since the company is found to be engaged in provision of software development services, the contentions of the assessee regarding functional non-comparability are rejected. Also the assessee is also engaged in product development and related activities and hence we find that this comparable has been rightly selected as functionally comparable to the assessee under TNMM method, which enables broad comparability. Hence we approve the selection of this company as a valid comparable and accordingly reject this ground of objection raised by the assessee. 16.1 The ld.AR submitted that it is functionally dis-similar. Ninestar Information Technologies Ltd., is involved in provision of content services, analytical services, Tech Services, Software Consultancy etc., therefore, the ld.AR pleaded that it is not functionally comparable. 16.2 We have studied the Annual Report of Ninestar Information Technologies Ltd. There is only one finding in the Annual R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - less Rs. 3157552/- which has already been debited towards expenditure to earn exempt income i.e Rs. 4,50,70,798/- is disallowed u/s. 14A of the Act and added back to the total income of the assessee. 17.1 Thus, it can be seen that the AO has not specified the subrule of Rule 8D under which the disallowance has been made. 17.2 The ld.AR relied on the order of ITAT Pune in assessee s own case in ITA No.1232/PUN/2017. The ITAT has held as under : The spirit of the judgment of the Hon'ble Supreme Court on the issue is that the Assessing Officer ought to record his satisfaction to the effect that assessee‟s claim of expenditure of lesser amount having regard to its account is incorrect. In this case, the Assessing Officer without discussing the issue has merely stated in the assessment Order that appropriate disallowance should be made u/s. 14A of the Act and accordingly, disallowed the additional amount of Rs 1,26,64,970/- u/s 14A of the Act which was deleted by the Ld. CIT(Appeals). 17.2 We have reproduced in earlier para the observations of the Assessing Officer, thus, no satisfaction has been recorded by the Assessing Officer that the AO is not satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Annexure # 8a and 8b of the submission dated November 23, 2020) for which it received additional certificates in support of the same, however no claim was made by the Assessee in its return of income filed for the year under assessment. As the income corresponding to this additional income taxes paid overseas has already been offered to tax by the Assessee in the year under assessment, the Assessee prays Hon ble Panel that an additional relief of INR 48,97,620 should be granted to the assessee under section 90 of the Act. The details of such additional relief claimed under section 90 was provided as Annexure 8a to the submission dated 23 November 2020 (Page 1883 of the Paperbook) and the corresponding withholding tax certificate as received from the deductor/overseas customers was provided as Annexure 8b to submission dated 23 November 2020. The Assessee would also like to highlight that corresponding income in respect of which tax was deducted by the overseas deductors and claimed by the assessee was received in India. The supporting bank advices were submitted as Annexure 8c to submission dated 23 November 2020. 18.2 We set-aside the issue to the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X
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