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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
This appeal has been filed by the assessee against the Assessment Order dated NIL (received on 2nd February 2017) passed by Addl. CIT, Special Range, New Delhi u/s 143(3) r/w Section 144C of Income tax Act, 1961 in Assessment Year 2012-13.
The grounds of appeal are as under:
Transfer Pricing ("TP") Grounds
That, in framing the impugned assessment, the reference made by the Ld.
AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima-facie opinion, that it was 'necessary or expedient' to refer the matter to the Ld. Assistant Commissioner of Income Tax, Transfer Pricing Officer - I(l)(l), New Delhi (hereinafter referred to as "Ld. TPO") for computation of arm's length price ("ALP')
2. That on the fact of the case and in law, the Ld. TPO / Hon'ble Dispute Resolution Panel ("Hon'ble DRF') has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules'), and conducting a fresh comparability analysis for the determination of the ALP of the Appellant's international transaction pertaining to provision of contract software development ("CSD") services by the Appellant and holding that the said international transaction is not at arm's length.
That on the facts and circumstances of the case and in law, the order passed by Ld. AO/Ld. TPO in pursuance to the directions of the Hon'ble DRP under section 143(3) read with section 144C of the Act, is bad in law and void ab-initio as the same has been passed in contravention of specific direction of Hon'ble DRP to include Akshay Software Technologies Limited, Infomile Technologies Limited and SQS India BFSI Limited as comparable companies if these companies meet the filters approved by the Hon'ble DRP.
That on the facts of the case and in law, the Ld. TPO / Hon'ble DRP has erred in rejecting the Appellant's claim to use multiple year data for computing the arm's length price and, instead, has adhered to the use of single year updated data to conclude the ALP of the international transaction which was not available to the Appellant at the time of undertaking transfer pricing study required to be maintained u/s 92D of the Act.
5. That on the facts of the case and in law, the Ld. TPO / Hon'ble DRP has erred in application of inappropriate filters based on turnover, different financial year end, service income export sales and employee cost for identifying companies comparable to the Appellant.
That on the facts of the case and in law, the Ld. TPO / Hon'ble DRP has erred in selection of functionally non-comparable companies and rejection of comparable companies, as per provisions of Rule 10B(2), for the purpose of determination of ALP of the international transaction pertaining to provision of CSD services by the Appellant.
That on the facts of the case and in law, the Ld. TPO/ Hon'ble DRP has erred in cherry- picking of companies as comparable by selecting those companies as comparable which fail the quantitative filters applied by the Ld. TPO at the company wide level.
8. That on facts of the case and in law, the Ld. TPO/ Hon'ble DRP has erred in selecting certain companies which are earning super normal profits as compared to the Appellant.
That on the facts of the case and in law, the Ld. TPO / Hon'ble DRP has erred in committing certain computational errors while computing operating margin of comparable companies.
10. That on the fact of the case and in law, the Ld. TPO / Hon'ble DRP has erred in not allowing a risk adjustment to the Assessee on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, product/ service liability risk, credit risk, capacity utilization risk etc. as against comparable companies that are the full- fledged risk taking
entrepreneurs.
That on facts of the case and in law, the Ld. TPO/ Hon'ble DRP has grossly erred in making an entity level adjustment by re- computing the operating cost of the Appellant for provision of CSD services to associated enterprise and thereby has inadvertently applied the TP provisions on the cost base of third party segment of the Company.
Corporate Tax Grounds
12. 12. That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that liquidated damages of INR 55,35,88,892/- incurred by the Appellant pursuant to breach of its contractual arrangements are penal in nature and are thus, not allowable u/s 37(1) of the Act.
12.1 That the Ld. AO failed to follow the spirit and intent of the directions of the Hon'ble DRP as he failed to appreciate the correct facts and evidences brought on record for verification in accordance with the directions of Hon'ble DRP and further erred in making several allegations, observations and inferences in the assessment order which are both factually incorrect as well as legally untenable.
13. That on the facts and circumstances of the case and in law, the Ld. AO is not justified in making a disallowance of Rs. 12,81,270 by applying Rule 8D read with Section 14A of the Act, having regard to the accounts of the assesse, without recording his dissatisfaction with respect to correctness of claim made by the appellant that no expenditure has been incurred in relation to earning exempt income during the subject assessment year.
13.1. That on the facts and circumstances of the case and in law, the Ld. AO has grossly erred on facts in concluding that the proposed disallowance be made under section 14A of the Act where own funds have been used by the appellant for making strategic investments in group companies. That the Ld. AO has failed to appreciate that the investments were driven by business rationale and not with an intent of earning dividend income.
13.2. That on the facts and circumstances of the case and in law, the Ld. AO grossly erred in proposing to make addition under section 14A of the Act without considering the fact that no exempt income has been earned by the appellant during the relevant assessment year.
14. That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing to disallow an amount of Rs. 58,95,130 under Section 37(1) of the Act on account of prior period expenditure.
14.1 That on the facts and circumstances of the case and in law the Ld. AO has erred in summarily rejecting the appellant's contentions and not considering the binding judicial precedents which squarely applies to the facts of the appellant's case.
15. That the Ld. AO has erred on the facts and in law in rejecting the claim of the assessee for taxation of consideration arising from a slump sale transaction undertaken during the year under consideration at lower rate of 20% as prescribed under Section 50B of the Act.
16. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not allowing set off of brought forward business losses of previous assessment years from the current year's income.
That on the facts and circumstances of the case and in law, the Hon'ble DRP exceeded its jurisdiction in exercising the powers of enhancement vested under section 144C(8) of the Act which powers can be exercised only to the variations proposed in the draft assessment order.
17.1 Without prejudice, on the facts and circumstances of the case and in law, the Hon'ble DRP / Ld. AO has erred in holding that the reimbursements amounting to Rs. 29,23,40,542/- made in respect of the seconded employees to the overseas entities, are in the nature of fees for technical services amounting to sums chargeable u/ s 9(l)(vii) and under the relevant clause of the tax treaty of the country from where the employees are seconded and thereby liable to TDS u/s 195 of the Act.
17.2. Without prejudice, on the facts and circumstances of the case and in law the Hon'ble DRP / Ld. AO has erred in summarily rejecting the contentions of the appellant and the detailed argument made for differentiating the facts of the appellant's case from the ruling of Hon'ble Delhi High Court in the case of M/s Centrica India Offshore Pvt. Ltd.
That on facts in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act mechanically and without recording any adequate satisfaction for its initiation.
3. The assessee company is engaged in the business of digital switching equipment and related software, cellular exchange / transmission equipment and provides related services, intelligent network and broadband solutions, equipment and related services. Software development services comprising of the wireless network group, project management service for the telecommunication equipment. During the year under consideration, gross turnover of Rs.135,016 (in lacs) with a net profit (before tax) of Rs. 7,448 (in lacs) has been shown. After making statutory disallowances / adjustment, net taxable income of Rs. Nil has been shown as income from business. The assessee company filed its return of income for Assessment Year 2012-13 on 29/11/2012 showing nil income after setting off brought forward losses to the tune of Rs.111,90,54,913/-. The case was selected for scrutiny through CASS.
Notice u/s 143(2) of the Income Tax Act, 1961 was issued on 04/09/2013 which was duly served upon the assessee. Later on, the jurisdiction over the case was reallocated to Special Range 1, New Delhi in view of the notification no. CIT-l/Juris/2014-15 dated 15.11.2014 of the Commissioner of Income-tax, Delhi-1, New Delhi and subsequent order no. Addl. CIT/Range-2/Juris/2014- 15 dated 15.11.2014 of the Addl. CIT, Range-2, New Delhi issued U/s 120 of the Income tax Act, 1961. In pursuant to the change of jurisdiction, a fresh notice U/s 142(1) of the Income tax Act, 1961 was also issued in the case. Subsequently, notice U/s 142(1) of the Income Tax Act, 1961 and questionnaire was also issued. In compliance thereto, CAs & ARs of the assessee company attended the assessment proceedings from time to time and filed necessary details as called for which are examined and placed on record. During the course of assessment proceedings assessee filed reply alongwith Copy of Form 3CEB. As per Form 3CEB, during the year, assessee had undertaken international transactions with its associated enterprises. Therefore, in accordance with the provision of Section 92CA of the IT Act 1961, the international transaction entered into by the assessee with the Associated Enterprises were referred to the Transfer Pricing Officer for determining the Arm's Length Price with the previous approval of the CIT, New Delhi.
4. The TPO passed order u/s 92CA(3) dated 29.01.2016 and suggested an upward adjustment of Rs. 114.29 CR to the income of the assessee, being the difference between Arm’s Length Price and the price charged by the assessee. The cumulative adjustment made in this case by the TPO is tabulated hereunder:-
Operating Cost 1194.76 Arm’s Length Margin(%) 21.59 Arm’s Length Price (ALP) 1452.70 Price Received 1338.41
Shortfall being adjustment u/s 92CA 114.29
The AO passed the draft assessment order u/s 144C(1) r.w.s 143(3} of Income Tax Act 1961on 30.03.2016 at an income of Rs. 225,65,85,440/- after making various additions and addition made by TPO amounting to Rs. 114,29,00,000/-. Against the draft order, the assessee company filed objection before Hon’ble DRP-I, New Delhi. The DRP passed the order dated 22.12.2016 u/s 144C(5) of the IT Act. Thereafter, fresh notice u/s 142(1} of the IT Act was issued on 28.12.2016 by the Assessing Officer. Pursuant to the directions of the DRP, a letter dated 28.12.2016 was sent to Transfer Pricing Officer for re- computation of the Arm’s Length Price in this case. The response from DCIT, TPO was received by the Assessing Officer on 23.01.2017 with the following observations:-
“8 The cumulative adjustment made in this case is as under:-
International Transaction Adjustment (INR) On account of ALP of the comparables 130.10 On account of Receivables Nil Total Adjustment 130.10 The Assessing Officer will enhance the income of the taxpayer by Rs 130.10 cr u/s 92CA(5) after giving effect to the directions of Hon’ble DRP”.
Accordingly, in view of the detailed reasons given by the TPO, an upward adjustment of Rs. 130,10,00,000/- was made on account of arm's length price and the total income of the assessee company was enhanced with that amount.
6. The Ld. AR submits that additional evidence was brought on record but the AO/TPO has not given time to the assessee at the time of Assessment proceedings for taking on record the additional evidence. The DRP also ignored the same. The Ld. AR further submitted that the additional evidence was for corporate tax ground. Therefore, the same should have been considered by the TPO/DRP. The Additional evidence is to show that due to inadvertent mistake of the assessee, the assessee applied wrong rate of tax and after coming to the knowledge of the same has filed additional evidence to that effect but the TPO has not granted time to take the same on record and DRP also refused to take cognizance of the said additional evidence. Therefore, the Ld. AR requested that the additional evidence should be taken into account by the TPO and for that matter corporate tax issues may be sent back to the TPO.
7. The Ld. DR on the other hand submitted that additional evidence may be considered by the Assessing Officer.
We have heard both the parties and perused the material available on record. Since, the additional evidence was not considered the matter in that respect is remanded back to the Assessing Officer relating to the Corporate Tax issue. Thus, Ground No. 12 to 18 are remanded back to the AO/TPO for fresh adjudication after taking into account the additional evidence. Needless to say, the assessee be given due opportunity of being heard as per law.
9. In result, Ground No. 12 to 18 are allowed for statistical purpose.
The Ld. AR further submits that as relates to transfer pricing issues, there is a contract in respect of Software Development Segment and in the TPO’s show cause notice, there was no mention of entity Level Segmental Bifurcation and thus the same was not considered by the TPO. There were 15 comparables which was finalized by the TPO. The Ld. AR is seeking exclusion of the following comparables:
(i) Infosys (ii)Zylog (iii) Persistent Systems and Solutions Ltd. (iv) L & T (v) E-Zest (vi) Arcopetal 10.1. Infosys The Ld. AR submits that this comparable was rejected by the ITAT in assessee’s own case for AY 2011-12 and confirmed by the Hon’ble Delhi High Court vide order dated 18.07.2017 for A.Y. 2003-04, 2004-05 and 2006-07. The Ld. AR submits that Infosys offers software products, platforms, diversified services like software consulting and systems integration, design development, re-engineering and maintenance, integration etc. Infosys Turnover is 31,254 Crore which is 54 times of assessee company (573.54 Crore). Infosys also owns its software products such as Finacle/Infosys active desk/Infosys Iprowe/Infosys mConnect. Infosys is engaged in research and development in relation to software engineering, enterprise technology, patenting new technologies. The company is having ownership of intangibles and also have presence of brands. There is extra-ordinary events occurred during the year as Infosys Consulting Inc. was merged with the Infosys Ltd. Thus, this company has to be excluded as per the submissions of the Ld. AR. The Ld. AR relied upon the various decisions of this Tribunal wherein this company was excluded from the comparables.
10.2. The Ld. DR submitted that the TPO has rightly selected this comparable and relied upon the order of the TPO.
10.3. We heard both the parties and perused the records. This company has set up a network of research labs and granted patents which are intangible assets on which revenue is generated. Infosys is a giant risk taking company. Besides that, it is engaged in development & sale of Software Products and also owns intangible assets. The assessee company is engaged in the business of digital switching equipment and related software, cellular exchange / transmission equipment and provides related services, intelligent network and broadband solutions, equipment and related services. Thus, the functions of both the companies are different. There is no segmental bifurcation available of Infosys Limited. Besides, there was extra ordinary event occurred during the present Assessment Year. In fact in earlier Assessment Year the ITAT already excluded this company as comparable in assessee’s own case in respect of functional difference which was confirmed by the jurisdictional High Court. We, therefore, direct TPO to exclude this company from comparable.
10.4 Zylog Systems Limited The Ld. AR submits that this comparable was rejected by the ITAT in assessee’s own case for AY 2011-12 for functional difference i.e. revenue from consultancy services, license fee, projects and e-Governance and also for having in-house intangible difference in business model. The same has been confirmed by the Hon’ble Delhi High Court vide order dated 18.07.2017. This company is engaged in providing onsite services, specializes in providing software products and solutions and there is revenue from consulting, licensing fee, as well as from software products and solutions. There are diverse business activities such big data analytics, cloud computing etc. which requires owning large computing infrastructure. This company deals in software products therefore, it incurred high end product development cost. Besides this company also owns intangibles from which revenue is generated. The scale of operations is drastically high as can be seen from the operating income which is of Rs. 1219 crore.
10.5 The Ld. DR submitted that the TPO has rightly selected this comparable and relied upon the order of the TPO.
10.6. We heard both the parties and perused the records. This company is engaged in providing onsite services, specializes in providing software products and solutions and there is revenue from consulting, licensing fee, as well as from software products and solutions. But, the assessee company is engaged in the business of digital switching equipment and related software, cellular exchange / transmission equipment and provides related services, intelligent network and broadband solutions, equipment and related services. Thus, the functions of both the companies are different. In fact in earlier Assessment Year the ITAT already excluded this company as comparable in assessee’s own case on account of functional difference which was confirmed by the Hon’ble High Court. We, therefore, direct TPO to exclude this company from comparable.
10.7 Persistent Systems & Solutions Ltd. The Ld. AR submits that this comparable was rejected by the ITAT in assessee’s own case for AY 2011-12 on account of functional difference and the same has been confirmed by the Hon’ble Delhi High Court vide order dated 18.07.2017. The Ld. AR submits that financials for the relevant Assessment Year is not available as the company has merged with its parent company Persistent Solutions Limited and both of these companies were adjudicated to be functionally non comparable by the ITAT in assessee’s own case for A.Y. 2011-12. Besides, the Ld. AR submits that the TPO has not given any specific reason about the inclusion of this company.
10.8 The Ld. DR submitted that the TPO has rightly selected this comparable and relied upon the order of the TPO.
10.9 We heard both the parties and perused the records. This company is engaged in software product and is dealing in outsourcing of Software Product Development. But, the assessee company is engaged in the business of digital switching equipment and related software, cellular exchange / transmission equipment and provides related services, intelligent network and broadband solutions, equipment and related services. Thus, the functions of both the companies are different. In fact in earlier Assessment Year the ITAT already excluded this company as comparable in assessee’s own case on account of functional difference which was confirmed by the Hon’ble High Court. This company was merged with its parent company Persistent Solutions Limited in this year which was an extra ordinary event. Therefore, this company has to be excluded. We, therefore, direct TPO to exclude this company from comparable.
10.10 Larsen & Tubro Infotech (Seg.)
The Ld. AR submitted that this company is engaged in development of software products like Unitrax, Accurust. There are three business segments which are not comparable to the contract software development. However, segmental data with respect to business segment is not available in the annual report of the company. There is significant intangibles of Rs. 51,15,38,227/- and also present of brands. The Ld. AR further submitted that the TPO has not given any reason for including this company as comparable.
10.11 The Ld. DR submitted that the TPO has rightly selected this comparable and relied upon the order of the TPO.
10.12 We heard both the parties and perused the records. This company is engaged in software product. The functions of both the companies are different. There are three business segments which are not comparable to the computer software development. However, segmental data with respect to business segment is not available in the annual report of the company. In fact in earlier Assessment Year the ITAT already excluded this company as comparable in assessee’s own case on account of functional difference which was confirmed by the Hon’ble High Court. Therefore, this company has to be excluded. We, therefore, direct TPO to exclude this company from comparable.
10.13 e-Zest Solutions The Ld. AR submits that this company fails the service income filter applied by the TPO i.e. Service Income / Total Income < 75%. This company is engaged in providing diverse services like BPO, product engineering, software product development and KPO. The segmental data is also not available. The inventory ratio to total revenue is 19.90% , whereas the assessee company does not hold any inventory. Besides this, E-zest is into professional services and full risk bearing entrepreneur, whereas the assessee company is limited risk capital company dealing in software development and is performing limited functions like coding, testing.
10.14 The Ld. DR submitted that the TPO has rightly selected this comparable and relied upon the order of the TPO.
10.15 We heard both the parties and perused the records. The functions of both the companies are different. There is no segmental data available in the annual report of the company. The service income filter which was applied by the TPO clearly has not been followed by the TPO in this company while selecting as comparable. Therefore, this company has to be excluded. We, therefore, direct TPO to exclude this company from comparable.
10.16 Acropetal Technologies Ltd. (seg.)
The Ld. AR submits that there is acquisition of US based companies in this Assessment Year which has impacted the profitability of the company. This company is engaged in IP led product development, engineering design services, healthcare services while assessee company deals in software development service. Thus, this company is functionally different from assessee company. This company heavily invests in Research & Development activities. There is presence of intellectual property rights and product development activities in the company profile. Therefore, the Ld. AR submits that this company be excluded.
10.17 The Ld. DR submitted that the TPO has rightly selected this comparable and relied upon the order of the TPO.
10.18 We heard both the parties and perused the records. This company is engaged in IP led product development, engineering design services, healthcare services whereas the assessee company deals in software development service. Thus, the functions of both the companies are different. There is extra ordinary events in this Assessment year as there was acquisition of US based companies which has affected the profitability of the company. Therefore, this company has to be excluded. We, therefore, direct TPO to exclude this company from comparable.
11. The Ld. AR further submitted about the three companies which has to be included in the final set of comparable. They are:
The Ld. AR submitted that these comparables were submitted first time before the DRP. The DRP has directed the TPO to include these comparable if it meets filter approved by TPO.
The Ld. DR relied upon the order of the DRP and submitted that these comparables were not before the TPO.
We have heard both the parties and perused the records. Since these comparables were not before the TPO it will be appropriate that these three comparable be verified by the TPO as to whether these will qualify the filters given by the TPO or not. Needless to say, the assessee will be given full opportunity of being heard as per law.
We have heard both the parties and perused the material available on record. Ground No. 1 and 2 are general therefore, the same are not adjudicated. Ground No. 3, 4, 5, 6, 7, 8, 9 and 10 are relating to exclusion and inclusions of the comparables by the TPO. The reasons for each comparables are given hereinabove paras. Thus, Ground No. 3, 4, 5, 6, 7, 8, 9 and 10 are partly allowed for statistical purpose.
In result, appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on 08th November , 2017.