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Facts
The assessee company, engaged in software development, filed its return for AY 2021-22. The assessment involved a reference to the TPO regarding the arm's length price of salary paid to global sales personnel. The TPO proposed a downward adjustment, which was upheld by the DRP. The AO passed the final assessment order based on this.
Held
The Tribunal held that the TPO was not justified in separately culling out the salary cross charge and making a separate TP adjustment when the TNMM method had already been accepted for the overall segment. The grounds related to the intimation under section 143(1) were rejected as they were appealable before the FAA.
Key Issues
Whether the TPO was justified in making a separate TP adjustment for salary cross charges when the TNMM method was already accepted? Whether the grounds relating to adjustments made in the intimation under section 143(1) are appealable before the Tribunal or the FAA?
Sections Cited
143(3), 144C(13), 143(2), 92CA, 143C(1), 144C(5), 143(1), 154, 246A
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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE KAND SHRI S.R. RAGHUNATHA
आदेश/ O R D E R PER GEORGE GEORGE K, VICE PRESIDENT:
This appeal filed by the assessee is directed against the final assessment order dated 29.10.2024 passed under section 143(3)
Brief facts of the case are as follows: The assessee is a private limited company engaged in software development services for banking and financial institutions. For the assessment year 2021-22, the return of income was filed on 15.03.2022 declaring total income of Rs.26,62,10,720/-. The assessment was selected for complete scrutiny under CASS and notice u/s.143(2) of the Act was issued on 28.06.2022. During the course of assessment proceedings, the case was referred to the Transfer Pricing Officer (TPO) to determine the arm’s length price of international transaction undertaken by the assessee with its AE. The TPO passed an order u/s.92CA of the Act on 23.10.2023 wherein, he proposed downward adjustment of Rs.1,42,01,590/- being the arm’s length price of the salary paid to global sales personnel. The reasoning of the TPO was that no evidence was produced by the assessee with regard to what are the actual services rendered by the global service personnel which demands salary paid separately. On receipt of the TPO’s order, the AO framed the draft assessment order u/s.143C(1) of the Act on 29.12.2023 incorporating the TP adjustment proposed 3 -: by the TPO. Against the draft assessment order, assessee filed objections before the DRP. The DRP rejected the objection vide its order dated 09.09.2024 passed u/s.144C(5) of the Act. The DRP reiterated the findings of the TPO that no reliable documentary evidence has been provided with regard to the actual services rendered by the global service personnel. In other words, the DRP was of the view that assessee has not been able to demonstrate how it had received any specific benefit on such salary payments made. Pursuant to the DRP’s directions dated 09.09.2024, the AO passed the impugned final assessment order dated 29.10.2024.
Aggrieved by the final assessment order dated 29.10.2024, assessee has filed the present appeal before the Tribunal. The assessee has raised seven grounds and various sub-grounds. Ground Nos.1 & 7 are general in nature and no specific adjudication is called for, hence same are dismissed. Ground Nos.2 & 3 and its sub-grounds are with regard to arm’s length price of salary paid to global sales personnel. Ground Nos.4 to 6 are with regard to issue raised by the assessee challenging the adjustment made in the intimation issued u/s.143(1) of the Act. We shall adjudicate the above issues as under.
The Ld.AR has filed a paper book comprising of 821 pages enclosing therein audited financial statement for the relevant assessment year, notices issued during the course of AO/TPO proceedings and its replies, notice issued during the course of DRP proceedings and the reply along with the details submitted before the DRP, etc. The Ld.AR submitted that assessee has given adequate documents before the AO to substantiate the cost allocation and demonstrate the evidence of services as well as the need-benefits such as sample debit note for the cross charges received, sample payslip of the employees, details of strategy win due to the efforts of global sales personnel, working allocation between various group entities, Board resolution approving the allocation of sharing of employee cost across all group entities. It was submitted that the TPO/DRP had failed to appreciate the submissions made on the evidence of benefit. It was further submitted by the Ld.AR that the salary forms part of the AE segment as the transaction is intrinsically and closely connected to the sale of products and services to AE and operating margin of SWD segment have been accepted at arm’s length (which includes the salary cross charge) under TNMM 5 -: method. Therefore, the TPO is not justified in separately culling out the salary cross charge and making a separate TP adjustment. In this regard, the Ld.AR relied on the following case laws:- i. Magneti Mereli Powertrain India Pvt Ltd., [2016] 75 Taxmann.com 213 (Delhi); SLP filed by Department dismissed by SC (15244 of 2017) ii. Bostik India (P.) Ltd. [2022] 140 taxmann.com 153 (Bangalore - Trib)
Alternatively, it was submitted that the TPO/DRP is not justified in determining the ALP of cross charge as nil. In support of the alternative submission, the Ld.AR relied on the following case laws: i. EKL Appliances Ltd., 209 Taxman 200/345 ITR 241(Delhi) ii. Fosroc Chemicals India (P.) Ltd [2016] 69 taxmann.com 43 (Karnataka) iii. Tudor India (P.) Ltd., [2019] 111 taxmann.com 450 (Gujarat)
The other alternative contention raised by the Ld.AR was that the TPO/DRP has considered the salary cross charge both paid as well as received by the assessee company without netting off and same is evident from the documents such as the financial statements at page 50 and TP study at page 235 of the paper- book.
On the other hand, the Ld.DR supported the finding of TPO/DRP that assessee has not been able to provide any
We have heard rival submissions and perused the material on record. During the year, salary cost of 3 global sales personnel [Amit Dua (employed by Suntec UAE), Moses Mathuram (employed by Suntec USA) and Mathur Jain (employed by Suntec India)] was allocated to the group entities without any mark-up in proportion to revenues of the entities since their services were utilized by all the group entities. The details of allocation of sales personnel salary cost for assessee and its subsidiaries are placed on record at page 431 of the paper-book filed by the assessee. The assessee company had submitted the following documents before the TPO/DRP to substantiate the cost allocation and demonstrate the evidence of service as well as the need-benefit: a. Sample Debit note for the cross charge received from Suntec UAE- page 429 of PB b. Sample Pay slip of employee, portion of which is cross charged to Suntec India - page 430 of PB C. Details of strategic win due to the efforts of global sales personnel - page 432-433 of PB d. Working of allocation between various group entities - page 431 of PB e. Board Resolution approving the allocation of sharing of employee cost across all Suntec group entities-- page 804 of PB 7 -: 9. The salary paid to global sales personnel was treated as nil by the TPO/DRP since according to them, no evidence was provided by the assessee with regard to what are the actual services rendered by global service personnel which demanded a salary payment separately. Accordingly, the TPO adopted the “other method” as the most appropriate method (MAM) and ALP of salary paid to global service personnel was treated as nil. Be it as the case may be, it is an admitted fact that said salary cost forms part of the AE segment as the transaction is intrinsically and closely connected to the "sale of software products and services to AE". The salary cross-charge is part of the operating cost base of the SWD segment which has been benchmarked to be at Arm's Length by application of the TNMM method (refer page 265 of PB, the TP Study), which has also been accepted by the TPO. After having accepted the net margin for the SWD segment (which includes the salary cross charge), the TPO is not justified in separately culling out the salary cross charge and making a separate adjustment. The assessee before the DRP had raised objections (objection 2.5 & 2.6 at page 5 of the DRP directions dated 09.09.2024) wherein it was specifically submitted that assessee had an operating margin from provision for software products sales and services which was held to be at 8 -: arm’s length price by the TPO even after including this salary cost allocation. Therefore, adjustment on the amount inclusive of the cost sharing invoice raised by the assessee is bad in law. The DRP in its directions has not specifically dealt with the above objections raised by the assessee. The Hon’ble Delhi High Court in the case of Magneti Marelli Powertrain India (P) Ltd., vs. DCIT reported in 368 ITR 469 (Delhi) had held that when assessee had used TNMM method to benchmark all its international transaction, it is not open to TPO to select only one element therein to an entirely different method namely CUP method in that case. The relevant findings of the Hon’ble Delhi High Court read as follows:- “17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of ` 38,58,80,000 only for which Comparable Uncontrolled Price (“CUP”) method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee 9 -: and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too.”
As against the above judgment of the Hon’ble Delhi High Court, the Revenue had filed an SLP before the Supreme Court. The SLP was dismissed by the Hon’ble Supreme Court in 15244/2017. Similar view has been held by the Bangalore Bench of the Tribunal in the case of Bostik India (P) Ltd.,vs. DCIT in reported in [2022] 140 taxmann.com 153, wherein it was held that when payment towards technology license fee and management fee by the assessee was interdependent and interlinked with main activity of manufacture and sale of adhesive products then these payments should not be benchmarked separately from other transactions for which TNMM was accepted as Most Appropriate Method (MAM).
In the instant case as mentioned earlier, the salary paid to global sales personnel was intrinsically and closely connected to the sale of software products and services to AE which has been benchmarked using TNMM method and accepted by the TPO. Therefore, we hold that the TPO was not justified in separately culling out the salary cross charge and making a separate Ground Nos.4 to 6 : Adjustment / Disallowance made in intimation u/s.143(1) of the Act.
Following adjustment / disallowance has been made in the intimation issued u/s.143(1) of the Act:- a) Non grant of tax credit of the amalgamating company available to the appellant upon merger – Rs.6,34,72,859 b) Additional Tax Credit to the current PAN – Rs.5,53,960 c) Disallowance u/s 43B in relation to Leave encashment – Rs.56,65,000 d) Professional tax collected and paid – Rs.11,78,360 e) GST – Rs.1,99,69,850 f) Kerala Food Cess – Rs.20,000 g) Disallowance u/s 41 – Rs.52,06,712
The Ld.AR submitted that assessee had filed a detailed rectification application dated 12.01.2022 against intimation issued u/s.143(1) of the Act and the same is yet to be disposed off. It was submitted that non-consideration of returned income in determining the assessed income ought to have been adjudicated by the DRP. In support of his contention, the Ld.AR relied on the following case laws:- i. Aditya Birla Housing Finance Limited, ITA No.4609.4610/Bang/2024 ii. Weir Minerals India Private Limited, IT(TP)A No.1786/Bang/2024
The Ld.AR stated that assessee has also filed an appeal before the First Appellate Authority on 28.12.2022. pursuant to the DRP’s direction as against the intimation issued u/s.143(1) of the Act and same is pending disposal. The Ld.AR submitted since the relevant details are available on record, the adjustment made in the intimation issued u/s.143(1) of the Act ought to be deleted.
The Ld.DR on the other hand, relied on the order of the Bangalore Bench of the Tribunal in the case of M/s. Areca Trust vs. CIT(A) in (order dated 26.07.2023) and submitted the cause of action with regard to the above mentioned adjustments arise from the intimation issued u/s.143(1) of the Act and not out of the present proceedings which arise out of the final assessment order passed u/s.143(3) r.w.s. 144C of the Act. Therefore, the Ld.DR submitted ground Nos. 4 to 6 raised by the assessee may be rejected.
We have heard rival submissions and perused the material on record. The adjustment / disallowances referred supra at 12 -: para 12 of our order has been made admittedly in the intimation issued u/s.143(1) of the Act. In the final assessment order dated 29.10.2024, the aforementioned adjustment / disallowances were not subject matter of discussion or adjudication by the AO. The AO in the final assessment order has merely incorporated computation made in the intimation issued u/s.143(1) of the Act. Intimation issued u/s.143(1) of the Act is an appealable order before the First Appellate Authority u/s.246A of the Act. The Bangalore Bench of the Tribunal on identical issue has discussed and has categorically held that since the cause of action arises from the intimation issued u/s.143(1) of the Act and not from assessment completed u/s.143(3) of the Act, assessee in the said case was directed to pursue the appeal before the FAA as against the intimation issued u/s. 143(1) of the Act. The relevant findings of the Bangalore Bench of the Tribunal in the case of M/s. Areca Trust vs. CIT(A) in (order dated 26.07.2023) reads as under:- “7. We have heard the rival submissions and perused the material on record. On perusal of the impugned Assessment Order passed under section 143(3) (order dated 12.02.2021), it is clear that AO has assessed the total income at Rs.23,29,62,420/- solely relying on the adjustment made by the AO/CPC in the intimation made under section 143(1) of the Act. In the impugned Assessment Order passed under section 143(3) of the Act, there is no independent discussion as regards the income assessed at Rs.23,29,62,420/-. The relevant portion of the “4. In response to the notice, the assessee responded via e- proceedings and submitted the details called for. Details filed are examined and the income is assessed at Rs. 23,29,62,420/ as per 143(1)(a) of the Act.”
8. Section 246A specifically provides for an appeal as against intimation issued under section 143(1) of the Act. In the instant case, total income has been assessed at Rs.23,29,62,420/- as per the intimation passed under section 143(1) of the Act. Therefore, the cause of action for the assessee arises from the intimation issued under section 143(1) of the Act and appeal ought to have been filed as against the same. The assessment completed under section 143(3) of the Act merely adopts the assessed figures in the intimation order passed under section 143(3) of the Act. Therefore, no cause of action arises from the order passed under section 143(3) of the Act.
Section 143(4) of the Act only mentions that on completion of regular assessment under section 143(3) or 144 of the Act, the tax paid by assessee under section 143(1) of the Act shall be deemed to have been paid toward such regular assessment. That by itself does not mean there is merger of intimation under section 143(1) with that of regular assessment under section 143(3) / 144 (unless issue has been discussed and adjudicated in regular assessment under section 143(3) / 144 of the Act). Assessee, against the intimation under section 143(1) of the Act, has filed a rectification application under section 154 of the Act (vide application dated 16.06.2020) and the same is pending disposal. The CIT(A) in the impugned order has directed the AO to dispose off the said rectification application dated 16.06.2020. Moreover, if assessee is advised to file an appeal as against the intimation under section 143(1) of the Act, a liberal approach may be taken for condonation of delay since assessee’s application for rectification of the intimation under section 143(1) of the Act has been filed within time and same is pending disposal. With the above said observation, the grounds of the assessee are rejected.”
14 -: 17. In the instant case, we find that assessee has filed rectification application dated 12.01.2022 and the same has not been disposed off yet. We also find that assessee has filed an appeal as against the intimation issued u/s.143(1) of the Act and the same is also not adjudicated. In light of the above facts, we direct the AO and the FAA to dispose off the rectification application and the appeal expeditiously. Therefore, the Ground Nos.4 to 6 are rejected.
In the result, the appeal filed by the assessee is partly-allowed.
Order pronounced in the open court on 15th July, 2025 at Chennai.