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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI. B. R. BASKARAN & SMT. BEENA PILLAI
ORDER PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal has been filed by assessee against the final assessment order dated 31/01/2017 passed by Ld. DCIT circle 6 (1) (1), Bangalore for assessment year 2012-13 on following grounds of appeal:
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Page 4 of 25 IT(TP)A No.684/Bang/2017 Brief facts of the case are as under: 2. The Assessee filed his return of income on 23/11/2012 declaring total income of Rs.64,48,31,500/-. The return was processed under section 143 (1) of the Act. The case was selected for scrutiny and notices under section 143 (2) was issued to assessee, in response to which, representative of assessee appeared before the Ld.AO and filed requisite details as called for. 2.1 During the year under consideration, the Ld.AO observed that, assessee had international transaction with its associated enterprises that exceeded Rs. 15 crores. Accordingly, reference was made under section 92C of the Act, to the Ld.TPO. The Ld. TPO on receipt of reference called upon assessee to file economic details of the international transaction entered into by assessee with its AE. 2.2 From the details filed by assessee, Ld.TPO observed that assessee had following international transaction with its associated enterprises:
2.3 The Ld.TPO observed that assessee considered following 12 comparables having average margin of 10.01%:
Page 5 of 25 IT(TP)A No.684/Bang/2017 2.4 The assessee computed its margin at 4.83% by using OP/TC as PLI and TNMM as most appropriate method. As margin was within the permissible range it held its transaction to be at arms length. 2.5 Dissatisfied with the selection of comparables by assessee, the Ld.TPO carried out fresh search, thereby shortlisted 14 comparables with average margin of 13%. The assessee further filed additional comparables from which the Ld.TPO accepted 2
Page 6 of 25 IT(TP)A No.684/Bang/2017 comparables. The final list of comparables selected by the Ld. TPO consisted of following 10 companies with average margin of 23.63% 2.6 The Ld.TPO granted the working capital adjustment and computed the shortfall as proposed adjustment at Rs.144,21,30,393/- in the hands of assessee. The Ld.TPO also included certain domestic transaction to be forming part of the international transaction. 2.7 On receipt of the Transfer Pricing order from the Ld.TPO, the Ld.AO passed draft assessment order wherein following disallowances were computed: Disallowance of depreciation - Rs.3,52,663/- Disallowance of provision under section 36(1)(va)-Rs.14,97, 807/- On receipt of the draft assessment order, assessee filed objections before the DRP. 2.8 The DRP accepted the objections filed by assessee in respect of 3 comparables being Detamatics Global Services Ltd., ICRA Techno Analytics Ltd., RS Software (India) Ltd. In respect of the objection raised regarding the domestic transaction forming part
Page 7 of 25 IT(TP)A No.684/Bang/2017 of international transaction, the DRP upheld the observations of the Ld.TPO. On depreciation on computer peripherals, DRP directed the Ld.AO to consider depreciation at 60%, and in respect of disallowance under section 36(1)(va) of the act in respect of employees contribution to provident fund and ESIC, the Ld.AO was directed to allow the deduction claimed by assessee provided the same was filed before the due date of return of income.
On receipt of the DRP directions, Ld.AO to excluded comparables directed by the DRP, however included the domestic transaction as a part of adjustment under section 144C of the Act, instead of restricting it only to the international transaction as provided under section 92CA of the act. 3.1 The Ld.AO thus made addition amounting to Rs.228,60,42,170/-in the hands of assessee.
Aggrieved by the order passed by the Ld.AO, assessee is in appeal before us now. 4.1 At the outset, Ld.AR submitted that Ground No.1 is general and therefore need not be adjudicated. 4.2 Ld.AR submitted that assessee do not wish to argue Ground No.2- 2.5, in Ground 2.6 assessee do not wish to press Sasken Communications Technologies Ltd., in Ground 2.7, assessee do not wish to press Akshay software Technologies Ltd. Assessee also do not wish to argue Ground No.3 and Ground No.4. Accordingly these grounds are dismissed as not pressed.
Before we undertake the comparability analysis it is sine qua non to understand the functions performed, assets owned and risks assumed by assessee under the software development
Page 8 of 25 IT(TP)A No.684/Bang/2017 service segment. The Ld. TPO in the Transfer Pricing order has analysed functions performed by assessee which are as under:
Assets owned: 5.1 In the transfer prising study report at page 91 of paper book, it has been submitted that assessee does not own any intangibles and neither does it undertake any research and Page 9 of 25 IT(TP)A No.684/Bang/2017 development on its own account that leads to the development of nonroutine intangibles. It has been mentioned that assessee uses the trademark, processes, know-how, technical Tata software, operating/quality standards etc their blend/owned by the AE. It has been submitted that this assessee does not own any nonroutine intangibles. Other assets owned by assessee are in respect of land, buildings, computer equipments, office equipment furniture fixtures etc which are used to carry out day to day business activities. 5.2 Risk assumed: in the TP study report reveals that assessee is a risk insulated company for SWD services to its AE and their affiliates. Except for foreign exchange risk, assessee do not undertake any other risk as compared to its AE. 5.3 Characterisation: based on the above assessee has been characterised as a risk insulated company providing services only to the AE and its affiliate.
In Ground 2.6 assessee challenges inclusion of following comparables: • Infosys Ltd. • Larsen and Toubro Infotech Ltd. • persistent systems Ltd. • Genesis international Corp Ltd. 6.1 At the outset, the Ld.AR submitted that, above comparables have been considered by coordinate bench of this Tribunal in case of NXP India Pvt.ltd. vs DCIT in by order dated 27/04/2020. It has been submitted that NXP India
Page 10 of 25 IT(TP)A No.684/Bang/2017 Pvt.Ltd., was also characterised to be a captive software service provider to its AE. 6.2 The Ld.CIT.DR though objected, could not controvert the observations of this Tribunal in case of NXP India Pvt. Ltd., (supra). 7. We have perused submissions advanced by both sides in light of records placed before us. We note that the functional profile of this assessee and the assessee in the decision cited by the Ld.AR are same. Above comparables have been dealt with by this Tribunal as under:
-- Space left intentionally ---- Page 11 of 25 IT(TP)A No.684/Bang/2017 PERSISTENT SYSEMS LIMITED Page 12 of 25 IT(TP)A No.684/Bang/2017 Page 13 of 25 IT(TP)A No.684/Bang/2017 Page 14 of 25 IT(TP)A No.684/Bang/2017 Page 15 of 25 IT(TP)A No.684/Bang/2017 Page 16 of 25 IT(TP)A No.684/Bang/2017 Page 17 of 25 IT(TP)A No.684/Bang/2017 Page 18 of 25 IT(TP)A No.684/Bang/2017 Page 19 of 25 IT(TP)A No.684/Bang/2017 Page 20 of 25 IT(TP)A No.684/Bang/2017
Page 21 of 25 IT(TP)A No.684/Bang/2017 7.1 Above views has been consistently followed by coordinate benches of this Tribunal in various case more particularly in case of CGI Information Systems and Management Consultants Pvt. Ltd., vs ACIT reported in (2018) 94 Taxmann.com 97 for assessment year 2012-13. Respectfully following the view taken by this tribunal we hold that the aforesaid for companies are to be excluded from the final list of comparables for the purpose of determining the arm’s length margin. Accordingly this ground raised by assessee stands allowed in respect of the comparables considered hereinabove.
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In Ground No. 2.7 assessee seeks inclusion of Sankhya Infotech ltd.
We note that this comparable has not been analysed by the Ld.TPO, and therefore we direct this comparable to Ld. TPO to be considered based on FAR with that of assessee. Accordingly this ground raised
by assessee stands allowed for statistical purposes.
10. Ground No.5 has been raised by assessee as the Ld. AO included the value of domestic transaction for making adjustment instead of restricting the adjustment to the international transaction. 10.1 It has been submitted by the Ld. ar that the margin has been applied in respect of its domestic sales instead of restricting it to the international transaction. Statutory provisions under chapter X of the Act mandates ALP to be determined only in respect of transactions with associated enterprises. Any adjustment which is in close of domestic transactions is uncalled for under this chapter. We accordingly direct the Ld. AO/TPO to restrict the adjustment if any that may be computed are wildly or giving effect to the order only in respect of the transactions that assessee had with its associated enterprises. Accordingly this ground raised by assessee stands allowed for statistical purposes.
11. Ground No. 6 is in respect of the depreciation disallowed on computer peripherals at 60%.
12. The Ld.AR submitted that DRP had directed the Ld.AO to grant depreciation at 60% on computer peripherals which has not been followed while passing the final assessment order. We
Page 23 of 25 IT(TP)A No.684/Bang/2017 thus direct the Ld. AO to comply with the directions of DRP in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes.
13. Assessee vide application dated 25/11/2020 has raised following additional ground No. 8:
13.1 The above additional ground is a part of the grounds relating to the determination of assessed income in the hands of assessee. It is not dispute that assessee has claimed the expenses under section 37(1) towards the education cess and secondary and higher education cess paid during the year under consideration. This as they’d being statutory nature needs to be considered while computing the tax payable in the hands of assessee It is therefore necessary for the ground to be admitted. The additional ground therefore raised by assessee is admitted. 13.2 The Ld.A.R. at the outset submitted that the issue stands squarely covered by the decision of Hon’ble Rajasthan High Court
Page 24 of 25 IT(TP)A No.684/Bang/2017 in case of Chambal Fertilisers and Chemicals Ltd. vs JCIT in by order dated 31/07/2017.
Ld.CIT.DR could not controvert the above submissions of assessee.
We have perused submissions advanced by both sides in light of records placed before us. 15.1 Hon’ble Rajasthan High Court in the above referred case has held cess to be an allowable expenditure in the hands of assessee. Respectfully following the same we direct the Ld.AO to consider the claim of assessee in accordance with law. Accordingly the ground raised by assessee stands allowed. In the result appeal filed by assessee stands allowed only in respect of the issue contested before this Tribunal as indicated hereinabove. Order pronounced in the open court on 23rd July, 2021