COGNIZANT GLOBAL SERVICES PVT. LTD.,,CHENNAI vs. ACIT, CIRCLE-1, LTU-2,, CHENNAI
What did the Tribunal hold?
The Tribunal held that the issue regarding the absence of a notice under Section 143(2) was not explicitly decided in the provided extract. Regarding the transfer pricing adjustment, the Tribunal directed the TPO to exclude Infosys Limited from the list of comparables, finding that its significantly higher turnover, diversified activities, and brand building expenditure made it incomparable to the assessee, which primarily provides back-end support services. However, the Tribunal upheld the exclusion of Maveric Systems Ltd., reasoning that its substantial R&D expenditure (7.8% of turnover) would impact operating margins, unlike the assessee, which does not incur significant R&D costs. The Tribunal also directed the AO to re-compute the tax liability after verifying the assessee's claim that a refund was erroneously adjusted against non-existent demands for earlier assessment years. The initiation of penalty proceedings was not explicitly addressed in the provided extract.
What were the facts?
The assessee, Cognizant Global Services Private Limited (now merged with Cognizant Technology Solutions India Private Limited), filed an appeal against the final assessment order for Assessment Year 2015-16. The order was passed by the Assistant Commissioner of Income Tax (AO) pursuant to directions from the Dispute Resolution Panel (DRP). The assessee is engaged in software development, support, and IT-enabled services. The case was selected for scrutiny, and a reference was made to the Transfer Pricing Officer (TPO) regarding international transactions with its Associated Enterprise (AE). The TPO rejected the assessee's transfer pricing study, which used the Transactional Net Margin Method (TNMM) with 11 comparables, and conducted a fresh analysis. This resulted in an upward adjustment of Rs. 2,76,65,239/- for software development services. The DRP upheld the TPO's findings. The assessee also raised objections regarding the computation of tax demand and initiation of penalty proceedings.
What were the issues?
1. Whether the order passed by the AO is null and void due to the absence of a notice under Section 143(2) of the Income-tax Act, 1961, within the prescribed timeline, making the assessment time-barred? - Assessee's contention: The assessment is time-barred due to non-receipt of a valid notice under Section 143(2). - Revenue's contention: Not recorded in the judgment. 2. Whether the TPO/DRP erred in rejecting the assessee's economic analysis and inappropriately applying filters for selecting comparable companies for transfer pricing adjustment? - Assessee's contention: The economic analysis was rejected without cogent reasons, and arbitrary filters were applied. Certain functionally comparable companies were excluded without valid grounds, and non-comparable companies were included. - Revenue's contention: The companies selected were functionally comparable, and turnover is not a criterion for exclusion. 3. Whether the TPO/DRP erred in rejecting the assessee's claim for working capital and risk adjustments? - Assessee's contention: Working capital and risk adjustments were wrongly rejected, leading to incorrect determination of operating margins. - Revenue's contention: Not recorded in the judgment. 4. Whether the TPO erred in computing operating margins by not excluding non-operating items of income and expense? - Assessee's contention: Operating margins were incorrectly computed without excluding non-operating items. - Revenue's contention: Not recorded in the judgment. 5. Whether the AO erred in computing the tax demand by erroneously adding back a refund already issued to the assessee? - Assessee's contention: The tax demand is erroneous as a refund was wrongly adjusted against non-existent demands of earlier years. - Revenue's contention: Fairly agreed that the AO should look into the issue.
Which sections of the Income-tax Act were involved?
Section 143(3),Section 144C(13),Section 144C(5),Section 92CA,Section 10B,Section 271(1)(c)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI MANJUNATHA. G, HON’BLE & SHRI MANOMOHAN DAS, HON’BLE
आदेश /O R D E R
PER MANJUNATHA. G, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against final assessment order passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) dated 18.11.2019, in pursuant to DRP
:-2-: IT(TP)A. No: 09/Chny/2020 directions dated 19.09.2019 issued u/s. 144C(5) of the Act, for assessment year 2015-16.
The assessee has raised the following grounds of appeal: “The grounds of appeal listed below are independent and without prejudice to each other. Part A- General Ground Ground of Objection 1 - Order is prejudicial to the interest of the Appellant The order of the learned Assistant Commissioner of Income Tax, Circle 1, Large taxpayer unit, Chennai ('learned Assessing Officer' or 'Ld. AO') passed pursuant to the order of the learned Deputy Commissioner of Income Tax, Transfer Pricing Officer - 1 (1), Chennai ('learned Transfer Pricing Officer' or 'Ld. TPO') and the directions issued by the Hon'ble Dispute Resolution Panel ('the Hon'ble DRP'), to the extent prejudicial to the Appellant, is erroneous, bad in law, and contrary to the facts and circumstances of the case. Ground of Objection 2 - No receipt of notice under Section 143(2) The order passed by the learned AO is null and void in the absence of service of notice under Section 143(2) of the Income-tax Act, 1961 ('the Act') within the timeline prescribed under the Act (i.e. 30 September 2016 in the instant case) and hence time barred and liable to be quashed. Part B - Grounds with respect to transfer pricing adjustment on account of international transaction of provision of software services Ground of objection 3-- Rejection of economic analysis of the Appellant without any cogent reasons The learned AO/ TPO and the Hon'ble DRP have erred in law and in facts, by not accepting the economic analysis conducted by the Appellant in its transfer pricing ('TP') documentation for determination of arm's length price of the international transaction undertaken, which has been maintained in
:-3-: IT(TP)A. No: 09/Chny/2020 accordance with the provisions of the Act read with Income tax Rules, 1962 ('the Rules'). Ground of Objection 4 - Inappropriate application of filters The learned AO/TPO and the Hon'ble DRP have erred in law and in facts, by inappropriately applying certain quantitative and qualitative filters for the purpose of selection/rejection of comparable companies, which are arbitrary in nature. Ground of Objection 5 - Objection on comparable companies The learned AO/TPO and the Hon'ble DRP have erred in law and facts: by considering certain companies that do not satisfy the comparability parameters adopted (evidenced from the website, annual reports and information available in the public domain) for determining the company as comparable to the business of the Appellant; and by not considering certain functionally comparable companies without any cogent reasons. Ground of Objection 6- Non-grant of working capital adjustment The learned AO/TPO and the Hon'ble DRP have erred, in law and facts, by rejecting the working capital adjustment claimed by the Appellant, thereby have erred in determining the operating margins without factoring the differences in the working capital position of the Appellant vis-a-vis the comparable companies under sub-rule (3) of Rule 10B. Ground of Objection 7 - Non-grant of risk adjustment The learned AO/TPO and the Hon'ble DRP have erred, in law and facts, by not making suitable adjustments to account for differences in the level of risk of the Appellant vis-a-vis the comparable companies under sub-rule (3) of Rule 10B. Ground of Objection 8 - Incorrect computation of operating margins The learned AO/TPO have erred in computing the operating margins of the comparable companies by not excluding certain items of income and expense as non-operating and without providing any valid basis and reasons for the same.
:-4-: IT(TP)A. No: 09/Chny/2020 Part C- Other grounds Ground of objection 9- Erroneous computation of tax demand The learned AO has erred in law and facts, in arriving at a tax demand of INR 1,11,75,268 for the subject year, wherein the learned AO has erroneously added back an amount of INR 1,86,01,940 as refund already issued to the Appellant, which was infact erroneously adjusted by the learned AO against the non-existing demands of the earlier years (i.e. AY 2007-08 and AY 2008-09). Ground of objection 10 - Initiation of penalty proceedings The learned AO has erred in law and facts by initiating penalty proceedings under section 271 (1)(c) of the Act against the Appellant. The Appellant craves leave to add to/ alter/ amend/ substitute any of the above grounds of appeal, at the time, before or at the time of hearing of the appeal, so as to enable the Appellate authority to decide this appeal according to law.”
The brief facts of the case are that, the appellant company is engaged in the business of software development and support services and also Information Technology Enabled Services/Business Process Outsourcing (BPO) services. The assessee has filed its return of income for the assessment year 2015-16 on 29.11.2015, by declaring a total income of Rs. 31,25,11,870/-. The case was selected for scrutiny and during the course of assessment proceedings, a reference was made to the Transfer Pricing Officer (TPO) to determine Arm’s Length Price (ALP) on international transactions of the
:-5-: IT(TP)A. No: 09/Chny/2020 assessee with its AE. During the course of TP proceedings, the TPO noticed that, in the year under consideration, the appellant had entered into various international transactions including provision for software development service to its AE, Cognizant Technologies Solutions, USA. It was further noted that as per Form 3CEB, the assessee company has adopted Transactional Net Margin Method (TNMM) as the most appropriate method for provision for software development services. The appellant has identified 11 comparables with three year weighted average PLI of 8.52% to 16.58%. The assessee has computed PLI (OP/OC) at 11.92% and claimed that its international transactions with AE are at ALP. During the course of TP study, the TPO noticed that the assessee has not applied relevant filters viz., export turnover and companies having different financial year ending. Therefore, rejected TP study conducted by the assessee and has conducted fresh TP analysis after applying various filters including employee cost, operating cost filter, companies having different financial year filter and export turnover filter and finally selected 9 comparable companies with an arithmetic mean of 14.94%. The assessee has raised objections for inclusion of certain comparables like Mindtree Limited, Larsen & Turbo Infotech
:-6-: IT(TP)A. No: 09/Chny/2020 Ltd., Infosys Ltd and also for exclusion of Maveric Systems Ltd. The TPO rejected objections filed by the assessee and has considered 9 comparables with an arithmetic mean of 14.94% and then compared with PLI computed by the appellant by 11.92% and finally suggested upward adjustment of Rs. 2,76,65,239/-, in respect of provision for software development services to its AE.
In pursuant to TP adjustment as suggested by the TPO, vide their order u/s. 92CA of the Act dated 30.10.2018, the Assessing Officer has passed draft assessment order u/s. 144C r.w.s. 143(3) of the Act, dated 24.12.2018 and proposed TP adjustment as suggested by the TPO. Against draft assessment order, the assessee has filed objections before the DRP and raised various contentions including exclusion of Mindtree Limited, Larsen & Turbo Infotech Ltd., and Infosys Ltd. The appellant has also argued for inclusion of Maveric Systems Ltd. The DRP vide their directions dated 19.09.2019, rejected arguments of the assessee and upheld reasons given by the TPO to include Mindtree Limited, Larsen & Turbo Infotech Ltd., and Infosys Ltd., in the list of comparables. The DRP, had also rejected arguments of the assessee for inclusion
:-7-: IT(TP)A. No: 09/Chny/2020 of Maveric Systems Ltd., by holding that the company has incurred substantial expenses to the tune of 7.8% of turnover towards R&D, which is beyond generally acceptable tolerable limit of 3% of revenue. In pursuant to DRP directions, the Assessing Officer has passed final assessment order u/s. 143(3) r.w.s. 144C(13) of the Act, and made additions of Rs. 2,76,65,239/-, towards TP adjustment with reference to provision for software development services to AE. Aggrieved by the final assessment order, the assessee is in appeal before us.
The Ld. Counsel for the assessee, at the time of hearing submitted that, although the appellant has raised various grounds of appeal on rejection of economic analysis of the appellant, inappropriate application of filters, non-grant of working capital adjustment and non-grant of risk adjustment, but, the appellant primarily want to argue on exclusion/inclusion of certain comparable companies selected by the TPO. Therefore, we restrict our adjudication with reference to arguments of the Ld. Counsel for the assessee, on exclusion/inclusion of certain comparable companies.
:-8-: IT(TP)A. No: 09/Chny/2020 6. The Ld. Counsel for the assessee, submitted that the ld. TPO/DRP erroneously included Mindtree Ltd in the list of comparables even though the said company fails in functionality test and also fails in turnover filter test. The Ld. Counsel for the assessee, further submitted that if you go through annual report of MindTree Ltd, for the impugned assessment year, it is noticed that the company is providing high-end software service including cloud computing, infrastructure management services and other end-to-end implementation services. The company has significant acquisition during the year. It has spent huge amount for R&D activities. Further, the company involved in product sales and the turnover of the company is more than 10 times of the turnover of the assessee. Therefore, the same cannot be compared with appellant company, which is basically engaged in providing back-end support service to its AE.
The ld. DR, Shri. A. Sasikumar, CIT, supporting the order of the TPO/DRP submitted that, the authorities clearly stated that the companies are functionally comparable to the appellant company. Further, it has spent miniscule R&D expenditure and development of intangibles, which does not
:-9-: IT(TP)A. No: 09/Chny/2020 affect profitability but improve the efficiency. Turnover is not a criteria to determine operating margin of any company. Therefore, just because the company is having high turnover, it cannot be excluded.
We have heard both the parties and considered relevant reasons given by the TPO/DRP, in light of arguments of the Ld. Counsel for the assessee and we find that although, one segment of revenue of Mindtree Limited comes from provision for software development services, but if you go through the profile of the said company, we find that it has engaged in providing high-end software service including cloud computing, infrastructure management service and end-to-end implementation services and thus, it cannot be said that the company is functionally comparable to appellant company, which is primarily engaged in providing back-end support service to its AE. Further, Mindtree Limited is having high turnover which is more than 10 times of the turnover of the assessee company. The company has extraordinary events of various acquisitions during the year. It has spent huge amount for R&D activities. From the above, it is clear that the Mindtree Limited cannot be a comparable to appellant
:-10-: IT(TP)A. No: 09/Chny/2020 company. Therefore, we direct the Assessing Officer to exclude Mindtree Limited from the list of comparables.
The Ld. Counsel for the assessee, had also argued for exclusion of Larsen & Toubro Infotech Limited, on two counts. The first argument of the Ld. Counsel for the assessee is on sale turnover. He further submitted that, the company is engaged in diversified operations including product engineering and sale of software products. It has spent significant amount for R&D purpose. The company has acquired the business unit of Information Systems Resource Center Private Limited, which is an extraordinary event having a bearing on profitability of the current year. The company is having significant on-site activities. Therefore, it cannot be compared with appellant company.
The ld. DR, Shri. A. Sasikumar, CIT, supporting the order of the TPO/DRP submitted that, the authorities clearly stated that the companies are functionally comparable to the appellant company. Further, it has spent miniscule R&D expenditure and development of intangibles, which does not affect profitability but improve the efficiency. Turnover is not
:-11-: IT(TP)A. No: 09/Chny/2020 a criteria to determine operating margin of any company. Therefore, just because the company is having high turnover, it cannot be excluded.
We have heard both the parties and considered relevant reasons given by the TPO/DRP, to include Larsen & Turbo Infotech Ltd., in the list of comparables. On perusal of annual report of said company, we find that the company is involved in high-end and diversified operations including product engineering and sale of software products. There is an extraordinary event of acquisition, which is having a bearing on the margin of appellant company. Further, the company has spent huge amount for R&D purposes. The turnover of the company is more than 10 times of appellant company and it fails turnover filter test. Therefore, we are of the considered view that Larsen & Turbo Infotech Ltd., is not a comparable to appellant company, which is primarily engaged in providing back-end support service to its AE and thus, we direct the TPO to exclude Larsen & Turbo Infotech Ltd., from the list of the comparables.
:-12-: IT(TP)A. No: 09/Chny/2020 12. The Ld. Counsel for the assessee, submitted that Infosys Ltd., is a giant company in software development services, which is engaged in providing high-end software services including digital services such as cloud computing and solutions pertaining to emerging technologies. The company earns revenue from sale of software products and no segmental information is available in the annual report. The brand value and significant brand building activities make margin of any company different. The company has spent hug amount on R&D expenses. The turnover of the company is very high, which is more than 100 times of turnover of the appellant company. Therefore, Infosys Limited cannot be compared with appellant company.
The ld. DR, Shri. A. Sasikumar, CIT, supporting the order of the TPO/DRP submitted that, the authorities clearly stated that the companies are functionally comparable to the appellant company. Further, it has spent miniscule R&D expenditure and development of intangibles, which does not affect profitability but improve the efficiency. Turnover is not a criteria to determine operating margin of any company.
:-13-: IT(TP)A. No: 09/Chny/2020 Therefore, just because the company is having high turnover, it cannot be excluded.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We have also carefully considered reasons given by the TPO/DRP to include Infosys Limited and we find that although the ld. DRP specifically stated that high turnover is not a criteria to exclude any company from the list of comparable, but in our considered view turnover makes significant difference in operating margin of any company. Further, the Infosys Limited is having huge turnover, which is more than 100 times of turnover of appellant company. The company is into diversified activities including cloud computing and software products sales. It has huge brand value and spents huge amount for brand building activities. Therefore, we are of the considered view that, Infosys Limited cannot be compared with appellant company, which is primarily engaged in providing back-end support services to its AE. Thus, we direct the TPO to exclude Infosys Limited from the list of the comparables.
:-14-: IT(TP)A. No: 09/Chny/2020 15. The Ld. Counsel for the assessee, argued for inclusion of Maveric Systems Limited, on the ground that it is primarily engaged in rendering services and hence is functionally comparable to the appellant company. Further, it has satisfied all filters applied by the TPO. He further submitted that, although it has spent expenditure for R&D purpose, but the TPO has not applied R&D filter. Therefore, he submitted that when the company is functionally comparable, it needs to be included in the list of comparables.
The ld. DR, Shri. A. Sasikumar, CIT, on the other hand supporting the order of the TPO/DRP submitted that, when the appellant all along argued that significant expenditure for R&D impacts operating margin, it cannot be argued that R&D expenditure does not matter when it comes to inclusion of any company. Therefore, he submitted that there is no error in the reasons given by the DRP to exclude Maveric Systems Ltd., from the list of comparables.
We have heard both the parties and considered relevant reasons given by the TPO/DRP to exclude Maveric Systems Ltd from the list of comparables. From the details furnished by
:-15-: IT(TP)A. No: 09/Chny/2020 the appellant, we find that the company has incurred substantial expenses to the tune of 7.8% of turnover towards R&D expenditure, which is beyond generally acceptable tolerable limit of 3% of revenue. Therefore, we are of the considered view that Maveric Systems Ltd., cannot be comparable with appellant company, which is not spending any significant amount for R&D expenditure. Although, the line of business of appellant and comparable is more or less similar, but fact remains that its R&D activities is definitely going to impact operating margin. Therefore, we are of the considered view that there is no error in the reasons given by the TPO/DRP, to exclude Maveric Systems Ltd., from the list of comparable. Thus, we are inclined to uphold the findings of the ld. DRP and reject arguments of the assessee.
The next issue that came up for our consideration from ground of appeals is erroneous computation of tax demand. The Ld. Counsel for the assessee, submitted that ld. Assessing Officer, in arriving at a tax demand of Rs. 1,11,75,268/- for the subject year, has erroneously added back an amount of Rs. 1,86,01,940/- as refund already issued to the appellant, which was in fact erroneously adjusted by the ld. Assessing
:-16-: IT(TP)A. No: 09/Chny/2020 Officer against non-existing demands for earlier assessment years. Therefore, a suitable direction may be given to the Assessing Officer to re-compute the tax liability after considering relevant demands and refund due to the assessee. The ld. DR, fairly agreed that directions may be given to the Assessing Officer to look into the issue.
We have heard both the sides and considered relevant material available on record. We find that the assessee claims that, the Assessing Officer erroneously added back refund already issued to the appellant and adjusted against non- existing demand for earlier assessment years. If the claim of the assessee is correct, then the Assessing Officer needs to re- compute the tax liability after considering demands, if any raised for earlier assessment years and refund adjusted to said demand. In case there is no demand for earlier assessment years as claimed by the assessee, then the question of adjustment of refund to non-existing demand does not arise. Therefore, we direct the Assessing Officer to verify the claim of the assessee and re-compute tax liability in accordance with law.
:-17-: IT(TP)A. No: 09/Chny/2020 20. In the result, appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the court on 15th September, 2023 at Chennai. Sd/- Sd/- (मंजुनाथ. जी) (मनोमोहन दास) (MANJUNATHA. G) (MANOMOHAN DAS) लेखासद�य/Accountant Member �ाियक सद�/Judicial Member चे�ई/Chennai, �दनांक/Dated: 15th September, 2023 JPV आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�/CIT 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF
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