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TMI Blog2022 (2) TMI 1503X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrolled comparables having turnover more that Rs. 200 crores in the absence of turnover criterion prescribed in Rule 10B of Income Tax Rules and also there being no correlation between turnover and profit margin. 4. Whether the decision of Hon'ble DRP is within the purview of Sec. 144C of the IT Act. 5. For these and such other grounds that may be urged at the time of hearing." In assessee's appeal, the assessee has filed following grounds. "The grounds of appeal raised by the Appellant are without prejudice to one another. 1. That the order passed by the learned Deputy Commissioner of Income-tax, Circle 1, Bengaluru (`Assessing Officer' or `A0')/the learned Additional Commissioner of Income-tax (Transfer Pricing -2(2)), Bangalore (`Transfer Pricing Officer' or 'TP0') and the learned Dispute Resolution Panel (the `Panel'), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. Corporate Tax related Matters (Other than Transfer Pricing) 2. The Learned AO erred in not accepting the Appellant's contention that expenditure incurred in foreign currency need not be reduced from Export proceeds from export of Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant as against a sum of Rs 65,488,691 as granted by the AO. 12. The Learned AO has erred in charging interest under section 234B and 234D of the Act 13. The Learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act disregarding the fact that all the adjustments carried out by the Learned AO are on account of difference on opinion in interpretation of various provisions of the Act and none of the adjustments are as a result of any wrong claim made by the Appellant or due to inaccurate particulars furnished by the Appellant. 14. The Learned DRP erred in not adjudicating the Grounds 12 and 13. Transfer Pricing Related 15. That the learned AO/TPO failed to follow the directions provided by the learned Panel and erred in: a) Issuing notice for Rectification under section 154 to reject a comparable company, which is otherwise accepted by the learned Panel, on the ground that it does not clear the export turnover filter > 75% of total sales as applied by the learned TPO at the time of Assessment Proceedings b) Not considering corrected operating profit mark-up and working capital adjustment for computing the average operating profit m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware Development ("IT") and IT enabled services ("ITeS") segment of the Appellant. However, the Dispute Resolution Panel ("DRP" or "the learned Panel") did not accept the Appellant's submissions for some comparables and for the remaining comparables the learned DRP excluded the comparables on the basis of turnover filter. 3. The above issue is specifically dealt by the Transfer Pricing Officer in his order dated January 30, 2015 and the DRP Directions dated December 17, 2015. Other Corporate Tax Matters - A. Additional Foreign Tax Credit Claim: 4. The Appellant has been filing its return of income in India and in all the other counties where a Permanent Establishment ("PE) / Branch is established as per the applicable local laws. The taxes paid by the P Es / Branch in those countries are claimed by way of Foreign Tax Credit by the Appellant in its Indian income-tax return. In the Return of Income filed by the Appellant's German PE for the Calendar Years 2007 to 2011, the Appellant had followed Cost Plus Method for arriving at the taxable German PE profits. However, the German tax authorities completed the assessment by computing the taxable income based on actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Distribution Tax 8. The Appellant is engaged in the business of rendering Software Development Services to its Group companies and third parties. The Appellant is a wholly owned subsidiary of Robert Bosch GmbH, Germany (hereinafter referred to as "RB GmbH"). 9. During Assessment Year 2011-12, the Appellant declared final dividend of Rs 101,82,71,680 on 2 June 2010. The Appellant paid dividend distribution tax of Rs 16,91,22,198 on 9 June 2010 at the rate of 16.6088% by applying the provisions of section 115-0 of the Act. The rate of 16.6088% comprised of tax rate of 15% as per section 115-0 of the Act plus applicable surcharge at rate of 7.5% and education cess at the rate of 3%. The Appellant furnishes copy of Form 26AS for AY 2011-12 in Exhibit B evidencing payment of Dividend Distribution Tax amounting to Rs. 16,91,22,198. 10. The Appellant has furnished to the Assessing Officer, a copy of Audited Financial Statements for the year ended 31 March 2011 which contains the details of the dividend and dividend tax thereon, vide its letter dt. 30 August 2012 during the assessment proceedings. Copy of letter dt.30th August 2012 is enclosed herewith in Exhibit C. The Appellant e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO in the TP Order b) Upholding rejection of comparable companies which passes the TPO's own test of comparability c) Upholding companies as comparable that are functionally different from the Appellant, and rejecting companies that are otherwise functionally comparable to the Appellant." Further, the learned AO/TPO and the learned Panel has erred in accepting the companies that are functionally not akin to the Appellant while performing the comparability analysis of the IT and ITeS services. The Appellant would like to plead for the exclusion of the following companies that are not functionally comparable to the Appellant: IT Segment i. Acropetal Technologies Ltd (Seg- IT Tech services) ii. e - zest Solutions iii. E - infochips Ltd iv. ICRA Techno Analytics Ltd v. Infosys Ltd vi. Persistent Systems & Solutions Ltd. vii. Persistent Systems Ltd. viii. Sasken Communication Technologies Ltd ix. Tata Elxsi Ltd (seg) ITeS Segment i. Accentia Technologies Ltd. ii. Acropetal Technologies Ltd . (seg: engineering design) iii. Jeevan Scientific Technology Ltd.(seg) iv. iGate Global Solutions Ltd. The Appellant would also like to plead for the incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds is necessary for computing the correct income in the hands of assessee. It is also noted that no new facts are required to be looked into for adjudicating the same. These grounds are purely legal in nature. Therefore respectfully the decision of Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in 229 ITR 383 and Jute Corporation of India reported in 187 ITR 688, we admit the above ground. Accordingly the application dated 18/11/2021 stands allowed. 3. Brief facts of the case are as under: The assessee is in the business of manufacture of development of software, dealing in automotive components, developing mechanical and electronic designs, translations, documentation etc. It filed its return of income for the Assessment Year 2011-12 on 25.11.2011 admitting an income of Rs. 62,89,17,687/-. The case was taken up for scrutiny under Cass selection. A notice u/s. 143(2) was issued to the assessee on 06.08.2012 and duly served. Notice u/s 142(1) were issued and duly served. As international transaction exceeded Rs. 15 crores the case was referred to the Ld.TPO to determine the Arm's length price vide this office letter dated 12.12.2013. 3.1. Upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntific Technology Ltd.(seg) 70.66% 73.55% 7. Infosys BPO Ltd. 17.89% 18.32% 8. Jindal Intellicom Ltd. 11.13% 14.03% 9. Mindtree Ltd. (seg) 10.76% 11.21% 10. iGate Global Solutions Ltd. 25.07% 26.83% Average 24.77% 26.20% 3.4. The Ld.TPO observed that assessee aggregated the receipt of services under the two segments, and the same was rejected being intra-group service. The Ld.TPO applied CUP to evaluate the transaction and computed the ALP at NIL. The total adjustment proposed by the Ld.TPO are as under: SI. no. Description Amount in Rs. a) Shortfall being adjustment made u/s 92CA in Software development Rs. 87,76,48,058/- b) Shortfall being adjustment made u/s 92CA in ITES segment Rs. 11,23,65,385 /- c) Adjustment in Intragroup service payment for Receipt of services Rs. 6,94,48,424/-. d) Total adjustment made u/s 92CA {c=(a+b+C} Rs. 105,94,61,867/ 3.5. The Ld.AO while passing the draft assessment order made further disallowance u/s. 80JJA of the Act as well as disallowed expenses while computing 10A deduction in respect of telecommunication charges. The Ld.AO also computed the 14A disallowance by computing the disallowance under Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under this category include accounts receivable, accounts payable, general ledger and fixed assets. Further, it also offers services in the area of designs and translation including web designing and documentation, mechanical and electronic design and shared services. Robert Bosch India undertakes distribution of certain testing equipments at a lower scale (both in terms of volume as well as in value). These testing equipments are usually procured from local independent third party vendors. The testing equipments are developed based on the specifications received from Bosch Group. These products are generally used for small applications and are meant for internal consumption within the Bosch Group. Software development services: The results of the analysis in the above Table show that Robert Bosch India is required to earn a total cost plus mark-up of 12% or more for providing software development services to confirm that its transactions with Group Companies comply with the arm's length standard prescribed by the Indian Regulations. The mark-up on total cost of 15% earned by Robert Bosch India (summarised in Appendix J) for the year 2010-11, for undertaking software deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware, quality standards etc. owned by the Bosch Group for its provision of services. Risks assumed: Robert Bosch India does not bear market risk as it renders these services to Bosch Group on a project basis Robert Bosch India does not have any risk on this count because it renders these services to Bosch Group on a project basis and has not direct interaction with customers Robert Bosch India operates in the IT Sector, which is highly sensitive to new technologies. Hence, Robert Bosch India bears limited risk of technology obsolescence on this count. However, its risk is mitigated as the technology is owned by the parent and its services are performed at the behest of the Bosch Group. Robert Bosch India being a service provider, renders its software development and application engineering services on a project basis, undertaking no R&D activities or incurring costs on such initiatives on its own accord. It does not bear this risk as its activities are based on the requirement analysis undertaken by Bosch Group. Robert Bosch India being generally paid as per the terms of the Software Projects Agreement, which inter-alia states the receipt of payment within thirty days f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L&T Infotech Ltd. Persistant Systems & Solutions Ltd. R S Software (India)Ltd. Under ITES segment, the revenue seeks inclusion of following comparables as it was rejected by the DRP on non fulfilment of turnover filter: Infosys BPO Mindtree Ltd. iGate Global Solutions Ltd 6.1. In assessee's own case for Assessment Year 2008-09(supra) this Tribunal held as under. "(c) In respect of application of turnover filter, we notice that the co-ordinate bench has followed the classification of companies on the basis of turnover criteria by the study of Dun 8, Brads Street, in its decision rendered in the case of Genisys Integrated System (India) P Ltd (supra). Following the same, we hold that the Ld CIT(A) was justified in applying turnover filter. Accordingly, the companies having turnover of below 200 crores and above 2000 crores are liable to be excluded......." The Ld.AR further submitted that the above comparables were excluded by coordinate bench of this Tribunal in following cases also on functional dissimilarities: AMD India (P.) Ltd. v. Asstt. in IT(TP)A no. 1487/Bang..2015, by order dated 06/042017 Applied Materials India (P.) Ltd. v. Asstt. CIT in IT(TP)A No.17/B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT, ITA no. 614/Mds/2016, this company was held to be engaged in Knowledge Process Outsourcing (KPO) and cannot be regarded as a SWD services company. 13. The Tribunal in the case of DCIT v. Ikanos Communication Pvt. Ltd. in ITA 137/Bang/2015 excluded the company, ICRA Techno Analytics Ltd., on the ground that it was engaged in engineering and consulting services, besides licensing and sub-licensing and no segmental information was available to compare the margins of SWD services segment. 14. The Mumbai Tribunal in the case of Ness Technologies (I) Pvt. Ltd. v. DCIT in ITA no. 696/Mum/2016 held Infosys Ltd. to be not comparable for the reason that this company was engaged in manufacturing of software products and was a giant company assuming various risks. As far as Larsen & Toubro Infotech Ltd., is concerned, vide paragraph-8 page-16 of the order in the case of Electronics for imaging India Pvt. Ltd., (supra) this tribunal excluded this company on the ground of presence of onsite revenue of more than 50% and that the related party transaction was more than 15% (18.66%)." Revenue has not been able to place on record any distinguishing feature in respect of these comparables. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee only in respect of expenses incurred in foreign currency in providing technical services outside India. We however do not have the break-up of the item of expenditure incurred in foreign currency outside India. A copy of the agreement between the Assessee and Robert Bosch, Germany titled software project agreement (SPA) has been filed before us. We do not know as to whether the entire export turnover is in relation to this client alone or there were other clients for whom the Assessee rendered computer software development services. A perusal of the SPA filed before us shows that the Assessee agreed to carry out software development work for Robert Bosch Germany at Germany also. The terms of the agreement for rendering services on-site at clauses-5.2 to 5.2.6 of the agreement does not involve rendering of any technical services. The question as to whether the entire expenditure incurred in foreign exchange outside India relates to providing technical services outside India cannot be decided in the absence of the required information as stated above. If the claim of the Assessee that the entire expenditure incurred in foreign exchange outside India does not relate to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable to assessee during the relevant Assessment Year. The Ld.AO observed that assessee had strength of 2783 at the beginning of the year and at the end of the year the strength increased to 3582. The Ld.AO noted that there was an increase in the strength by 799 workmen. The Ld.AO was therefore of the opinion that assessee was not eligible for deduction u/s.80JJAA of the Act, for following reasons: 1. that, 544 workmen left during the year; 2. that assessee did not fulfil the requirement of minimum 100 additional regular workmen The Ld.AR submitted that legislative intent behind the provisions of 80 JJAA of the Act is to grant incentive in respect of the new regular workmen during the year. On the contrary the Ld.Sr.DR relied on the orders passed by the authorities below: We have perused the submissions advanced by both sides in light of records placed before us. On bare reading of section 80JJ AA of the Act, following requirements emerges to be fulfilled in order to claim deduction under the section: 1. The Assessee should be an Indian Company and the gross total income of the Assessee should include profits and gains derived from any industrial undertaking engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fy the details and consider the claim of assessee in accordance with law. Accordingly, this ground raised by assessee stands remanded to the Ld.AO for due verification. 11. Ground nos. 7 to 10 are in respect of the disallowance computed by the Ld.AO u/s. 14A. The Ld.Counsel submitted that assessee had disallowed Rs. 2,23,20,919/- against exempt income earned being Rs. 3,63,96,471/- u/s. 14A of the Act. He submitted that during the year under consideration, the investments made by assessee were only fixed. He submitted that assessee is not into buying and selling of shares / investments but is carrying on software development businesses. The Ld.Counsel submitted that assessee has computed disallowance at Rs. 36,01,783/- as under: The disallowance as per Rule 8D(iii) is worked out as below: Average value of investments Rs 103,45,40,304 Disallowance of other Expenses= One half percent of average value of investments =0.5 % x Rs 103,45,40,304 = Rs 51,72,702 Disallowance u/s 14A = Rs 51,72,702 This amount, Rs 51,72,702 is telescoped into the amount of Rs 15,70,919 already admitted as allocation of common costs and a balance amount of Rs 36,01,783 is therefore added b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment schemes. Going by the above principle and also observing the fact that the Ld.AO has not expressly mentioned any dissatisfaction in the suomoto disallowance computed by assessee we hold that the disallowance computed by the assessee is appropriate. Accordingly, this ground raised by assessee stands allowed. Additional Grounds A. Foreign Tax Credit: Additional ground raised by assessee is in respect of foreign tax credit not granted to assessee against the tax paid by assessee in Germany. The Ld.AR submitted that the foreign tax credit may be granted to assessee as per the provisions of section 90 of the Act on the taxes that are paid by assessee. Assessee is directed to file relevant document in support of the claim. The Ld.AO shall verify the evidences / documents in respect of FTC and consider the claim of assessee in accordance with law. B. Dividend distribution Tax: We have already admitted this issue. First time this ground has been raised before us and Ld.AO had no occasion to examine this issue. In the interest of justice, we remit this issue to be decided in accordance with law. C. Educational Cess: The assessee has raised additional ground seeking d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersistent Systems Ltd. Exclusion of these 3 companies was considered by the Tribunal in the case of Electronics for Imaging (I) Pvt. Ltd. (supra). In para 8 of the order, this Tribunal held that Persistent Systems & Solutions Ltd. was a company engaged in SWD services and products with no segmental details and excluded it. Similarly, Persistent Systems Ltd. was also excluded on the ground that it was engaged in diverse activities with no segmental break-up. As far as Sasken Communication Technologies Ltd. is concerned, this Tribunal in the case of Symantech Software & Services (I) Pvt. Ltd. (supra) has excluded this company on the ground of functional IT(TP)A Nos.52 & 97/Bang/2016 dissimilarity viz., dealing with multimedia products and R&D activities with no break-up of segmental information. 17. Following the aforesaid decisions, we direct exclusion of the aforesaid 3 comparable companies. The TPO is directed to compute the ALP of the international transaction in accordance with the directions given above in this order, after affording Assessee opportunity of being heard. Revenue has not been able to place on record any distinguishing feature in respect of these comparables. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy Ltd., Accentia Technologies Ltd., iGate Global Solutions Ltd. and ICRA Online Ltd. We find that the above companies were rightly rejected by the DRP and the same requires no interference from this Hon'ble Tribunal. We find that Acropetal Technologies Ltd., is engaged in the business of software development and services, contract centre service and IT enabled services and the same are reported together as one segment. In the absence of segmental details made available, the company could not be treated as a comparable. The TPO, while choosing the company as a comparable, has selected its Engineering Design Segment ('EDS' for short) which is in the nature of high end IT enabled services which are in the nature of Knowledge Process outsourcing ("KPO"). The high end services provided by the company cannot be compared with the routine services provided by the Assessee. This Is a settled position and reliance can be placed on the decision of this Hon'ble Tribunal's in the case of Symphony Marketing Solutions India Pvt. Ltd.(ITA no. 1316/Bang/2012) where it was held that Acropetal cannot be considered as a comparable to assessees performing routine low end IT enable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... routine low end information technology enabled services. Further, the said company not only does medical transcriptions, but has also ventured into healthcare receivables cycle management and high end consultancy to start-ups requiring field experts. As can be seen from the annual report, coding income is contributing 15% of the total income which activities are akin to software development activity while the assessee is a mere provider of IT enabled services. The company has invested huge sums in the development of EMR software. Segmental details of its various activities are unavailable. The company further owns significant intangibles. This Tribunal in the case of Swiss Re Shared India Pvt. Ltd. v. ACIT [TS-598- ITAT-2016(Bang)-TP at paras 9-20 on pages 7-21] where, in similar circumstances and for the same assessment year, this Hon'ble Tribunal directed the exclusion of this company from the list of comparables. Accentia Technologies Ltd. is, therefore, not comparable to the Assessee and was rightly rejected as a comparable. As far as iGate Global Solutions Ltd., is concerned, DRP rejected this company as comparable company for the reason that the details regarding its dive ..... 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