MEGA SOFT LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: This appeal filed by the assessee is directed against final Assessment

Order passed by the AO u/s.144C(13) of the Income Tax Act, 1961 dated

31.01.2017, in pursuant to directions of the Dispute Resolution Panel-2,

Bengaluru, u/s.144(5) of the Income Tax Act, 1961 dated 26.12.2016 and

pertains to assessment year 2012-13.

ITA No.733/Chny/2017 M/s.Mega Soft Ltd.

:: 2 ::

10.Whether the AO/DRP is right in arbitrarily rejecting the CUP method and chosing TNMM without justifying it as Most Appropriate Method randomly picking their choice comparables without disclosing the filters used for choosing such comparables?

11.Whether the AO/DRP is right in choosing companies such as Larsen & Toubro Infotech Ltd and Mindtree Ltd and Persistent Systems Ltd having turnover of Rs 2959.56 crores, 1915.2 crores and 810.36 crores respectively when the Appellant's turnover is less than 50 crore?

12.Whether the AO/DRP is right in not providing the Appellant the data of the Comparable Companies and further without any discussion on such data of the comparable companies?

13.Whether the AO/DRP is right in enhancing the adjustment without any basis and reasoning?

14.Whether the PLI adopted by the AO/DRP is respect of comparables is arbitrary or not. More so, when no data of the comparable is not provided to the Appellant.

ITA No.733/Chny/2017 M/s.Mega Soft Ltd. :: 3 ::

16.Whether the AO/DRP is right in not disclosing the most appropriate method for determining Arm’s Length Price on provision of corporate guarantee? 17.Whether the AO/DRP is right in fixing the arm’s length price for providing corporate guarantee @ 1% on the guarantee provided? 18.Whether the AO/DRP is right in ignoring the basic condition of section 92B, which describes that to attract the provisions of transfer pricing, it should have a bearing on the profits, income, losses or assets of such enterprises. 19.The AO/DRP failed to appreciate that the Appellant in providing the corporate guarantee without incurring any cost and that notional income cannot be imputed on the Appellant arbitrarily. In light of the above grounds and such other grounds that may raise at the time of hearing, it is prayed that the Hon'ble Tribunal may allow the appeal and delete the additions made by the AO/DRP and render justice. 3. The brief facts of the case are that the assessee company is engaged

in the business of providing IT consulting services to its AEs XIUS Corp,

USA, Megasoft Consultants Sudan Bhd and non-AEs like Tata

Communications, Canada. The return of income for the AY 2012-13 was

filed on 22.12.2012 declaring total income of Rs.1,00,18,450/-. During the

year under consideration, the assessee has entered into various

international transactions with its AEs. The assessee has selected CUP as

most appropriate method and bench marked transactions with its AE and

claimed to be a tested party. During the course of assessment proceedings,

the TPO rejected the CUP method adopted by the assessee and has adopted

TNMM as most appropriate method. The TPO, after conducting fresh TP

study, has selected certain comparables and then, compared with operating

margin of the assessee and suggested TP adjustment of Rs.4,40,89,432/-

towards AE sales and also made upward adjustment on corporate

guarantee of Rs.58,80,000/- @ 1% on total corporate guarantee given by

the assessee. Pursuant to TP adjustment as suggested by the TPO, the AO

ITA No.733/Chny/2017 M/s.Mega Soft Ltd. :: 4 ::

has passed draft assessment order u/s.144C of the Act, on 30.03.2016 and

made downward adjustment of Rs.4,99,69,432/-. The assessee has filed

objections before the DPR, Panel-2, Bengaluru, against draft assessment

order passed by the AO and challenged TP adjustment as suggested by the

TPO. The assessee has challenged rejection of CUP as most appropriate

method and selection of TNMM to bench mark international transactions.

The assessee had also challenged computation of operating margins by

considering two extraordinary items of bad debts written off and forex

fluctuation loss. The assessee had also challenged TP adjustment on

corporate guarantee and argued that rate at which the TPO benchmarked

on corporate guarantee is higher side. The DRP after considering relevant

submissions of the assessee and also taken note of various facts, rejected

arguments of the assessee on the issue of most appropriate method and

upheld the findings of the TPO in selection of TNMM as most appropriate

method and then, upheld the computation of operating margin to make TP

adjustment towards AE sales. The DRP has also upheld the adjustment

proposed for corporate guarantee @1% of total guarantee given by the

assessee to its AE. The AO has passed final assessment order in pursuance

to the directions of the DRP and has made additions towards AE sales on

corporate guarantee as suggested by the TPO. Aggrieved by the final

assessment order, the assessee preferred an appeal before us.

ITA No.733/Chny/2017 M/s.Mega Soft Ltd. :: 5 ::

appeal is TP adjustment on AE sales amounting to Rs.4,40,89,432/-. The

facts with regard to the impugned dispute are that during the year under

consideration the assessee has entered into international transactions with

its AEs for providing software consultancy services. The assessee has

adopted CUP method to bench mark transactions with its AE. The assessee

has considered internal CUP on the basis of similar services rendered to

non-AE. The AO has rejected CUP method adopted by the assessee on the

ground that the assessee could not furnish necessary working details by

matching one to one price with quantity and quality of services with non-

AE transactions and also third parties and thus, rejected CUP method and

has adopted TNMM as most appropriate method. The TPO has selected 9

comparables with average margin of 18.27%. The TPO had also re-worked

PLI of the assessee after considering bad debts written off and forex

fluctuation loss as operating expenses and has worked out OP/OC @5.01%

and then, compared margin of the assessee with comparables and made

TP adjustment of Rs.4,40,89,432/- towards AE sales.

CUP as most appropriate method without appreciating the fact that for

earlier two assessment years, the assessee has adopted CUP as most

appropriate method and the TPO has accepted CUP method without any

adjustments towards international transactions with its AEs. The Ld.AR for

ITA No.733/Chny/2017 M/s.Mega Soft Ltd. :: 6 ::

the assessee referring to various documents and Paper Books filed by the

assessee submitted that the turnover of the assessee consisting of 74%

from AE transactions and 26% from non-AE transactions. The assessee

has earned margin on sales @18.81% and margin on cost of 24.61%. The

assessee has considered internal CUP on the basis of transactions with third

party customers and claimed margin earned on AE sales is higher than the

third party sales. Therefore, he submitted that when there is no change in

facts and circumstances of the case for the impugned assessment year

when compare to previous two assessment years, then there is no reason

for the TPO/DRP to reject the CUP method adopted by the assessee for

bench marking international transactions with its AEs. In this regard, he

relied upon the decision of the Hon’ble Supreme Court in the case of

Radhasoami Satsang v. CIT reported in [1992] 193 ITR 321 (SC).

submitted that in earlier assessment years the margin of the assessee was

23.64% for the AY 2011-12 and 21.88% for the AY 2010-11. Therefore,

under those facts, the TPO has accepted CUP method adopted by the

assessee for bench marking international transactions with its AEs.

However, for the impugned assessment year, the margin has been

drastically come down and therefore, the TPO has rejected CUP method

adopted by the assessee on the ground that non-furnishing of necessary

details and has adopted TNMM as most appropriate method. Therefore,

the Ld.DR further submitted that there is no error in the reasons given by

ITA No.733/Chny/2017 M/s.Mega Soft Ltd. :: 7 ::

the TPO/DRP to select TNMM as most appropriate method and their orders

should be upheld.

record and gone through orders of the authorities below. The assessee has

adopted CUP as most appropriate method to bench mark international

transactions with its AEs and considered internal CUP on the basis of third

party export sales to non-AE. The assessee has followed CUP method

consistently for last several years including immediately preceding AYs

2010-11 & 2011-12. It is an admitted fact that the TPO has accepted CUP

method for the AYs 2010-11 & 2011-12. However, disputed CUP method

for the impugned assessment year only on the ground that the assessee

could not file necessary details of working of quantity and quality of services

rendered to AE with the third party non-AE suppliers. Except this, the TPO

never given any credible reasons to reject CUP method selected by the

assessee. In fact, the TPO had accepted the fact that there is no change

in the facts and circumstances of the case for the impugned assessment

year when compared to previous two assessment years. It is also an

admitted fact that the assessee has followed internal CUP on the basis of

third party export sales to non-AE and further, margin earned from third

party non-AE sales is lesser than the margin earned from sales to AE.

Therefore, we are of the considered view that under these facts and

circumstances, there is no reason for the TPO to reject CUP method selected

by the assessee to bench mark international transactions with its AEs when

ITA No.733/Chny/2017 M/s.Mega Soft Ltd. :: 8 ::

the assessee was consistently following said CUP method. Further, the

assessee has filed comparable transactions of third party sales and proved

that margin earned from AE transactions is higher than the margin earned

from non-AE transactions. It is a well settled principle of law by the decision

of the Hon’ble Supreme Court in the case of Radhasaomi Satsang (supra)

that although, res judicata is not applicable to Income Tax proceedings,

but rule of consistency needs to be followed unless there is a change in

facts and circumstances which requires to be considered a different

approach or method for considering any issue. In this case, as pointed out

by the Ld.AR for the assessee, there is no change in the facts and

circumstances of the case for the impugned assessment year when

compared to previous two years and thus, we are of the considered view

that the TPO ought to have followed CUP method selected by the assessee

for benchmarking international transactions with its AEs. The DRP without

appreciating the above facts, has simply upheld TNMM as most appropriate

method and upheld the TP adjustment as suggested by the TPO. Hence,

we reverse the findings of the DRP and direct the TPO to consider CUP as

most appropriate method to bench mark international transactions with its

AEs. Accordingly, we direct the TPO to delete the addition made towards

TP adjustment made towards AE sales.

appeal is TP adjustment towards corporate guarantee given by the assessee

ITA No.733/Chny/2017 M/s.Mega Soft Ltd. :: 9 ::

to its AE. The assessee company has given a corporate guarantee for the

foreign currency loan of US from Axis Bank, Hong Kong to its AE XIUS

holdings USA. The AO has computed guarantee commission @1% on total

corporate guarantee given by the assessee to its AE and has made

adjustment of Rs.58,80,000/-.

arguments of the Ld.AR for the assessee that corporate guarantee per se

itself is not an international transaction, we find that after amendment of

definition of international transaction, corporate guarantee given by any

entity to its AE falls under the definition of international transactions in

terms of sec.92B of the Act and thus, any corporate guarantee given by the

assessee to its AE is an international transaction, which needs to be bench

marked. Further, when it comes to rate, at which, such guarantee

commission needs to be benchmarked, then bank guarantee given by the

commercial banks cannot be a yardstick to apply to corporate guarantees

given by an entity. Further, the guarantee commission rate is depending

upon the facts of each case and the risk involved in the transactions

between the assessee and its AE. The Hon’ble Madras High Court in the

case of PCIT v. Redington (India) Ltd., reported in [2021] 430 ITR 298

(Mad) had considered the issue of corporate guarantee given by an entity

to AEs and after considering relevant facts held that rate adopted by the

TPO on the basis of internal comparable uncontrolled price charged by the

bank @ 0.85% is reasonable for benchmarking corporate guarantee. The

ITA No.733/Chny/2017 M/s.Mega Soft Ltd. :: 10 ::

Hon’ble Bombay High Court in the case of CIT v. Everest Kanto Cylinder

Ltd. reported in (2015) 378 ITR 57 (Bom.) had considered an identical

transaction and held that 0.5% is appropriate rate for bench marking

corporate guarantee given by the assessee to its AE. Therefore,

considering the facts and circumstances of the case and also by following

the decision of the Hon’ble Bombay High Court in the case of Everest Kanto

Cylinder Ltd. (supra), we direct the TPO to benchmark corporate guarantee

fees @ 0.5% on total corporate guarantee given by the assessee to its AE.

Order pronounced on the 21st day of September, 2022, in Chennai. Sd/- Sd/- (वी. दुगा� राव) (जी. मंजूनाथा) (V. DURGA RAO) (G. MANJUNATHA) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�ई/Chennai, �दनांक/Dated: 21st September, 2022. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 4. आयकर आयु�/CIT 2. ��यथ�/Respondent 5. िवभागीय �ितिनिध/DR 3. आयकर आयु� (अपील)/CIT(A) 6. गाड� फाईल/GF