Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, BANGALORE BENCH ‘ B ’
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
Per Shri Vijay Pal Rao, J.M. : These cross appeals are directed against the assessment order
dt.30/12/2014 passed under Section 143(3) r.w.s. 144C of the Income
Tax Act, 1961 (in short 'the Act') in pursuant to the directions of the
2 IT(TP)A Nos.279 & 202/Bang/2015 Dispute Resolution Panel (in short ‘DRP’) dt.24.11.2014 for the
Assessment Year 2010-11.
The assessee as well as revenue has raised the following grounds :
Assessee's Grounds of appeal
I. “ The Order of the learned authorities below in so far it is prejudicial to the interests of the appellant is bad and in-operative in law and against the facts and circumstances of the case. II. As regards the validity of reference made to the Learned TPO under section 92CA of the IT Act:
The Honourable DRP has failed to appreciate that the learned Assessing Officer erred in law and on facts in making reference to the TPO for computation of ALP in relation to international transactions in a mechanical manner without showing as to why it is necessary and expedient to do so. III. As regards rejection of TP study and other documentation maintained by the Appellant in accordance with the provisions of section 92D of the Act and carrying out of fresh TP study by the TPO: 1. The Hon’ble DRP is not justified in upholding the action of the learned TPO in invoking section 92C(3) and rejecting the TP study carried out by the appellant though none of the conditions specified u/s 92C(3) of the Act was satisfied. 2. The Hon’ble DRP failed to appreciate that the learned TPO erred in law and on facts in invoking section 92C(3)(c) to reject the TP study of the appellant on the ground that information as well as data used in computation of ALP are not reliable and correct.
The Hon’ble DRP has failed to appreciate that the learned TPO was not justified in rejecting the TP document maintained by the appellant on the ground that appellant adopted inappropriate filters when the TPO accepted the search process as well as all filters adopted by the appellant except adoption of upper limit in case of turnover filter which was in fact in principle accepted by the Hon. DRP. 4. The Hon’ble DRP failed to appreciate that the learned TPO is not justified in rejecting the TP document maintained and TNM Method adopted by the appellant by stating one set of reasons in the SCN and another set of reasons in his order. 5. The finding of the Hon’ble DRP that comparables selected by the appellant are functionally incomparable and hence, information or data used in the computation of ALP are not reliable and correct is perverse as most of the comparables are rejected
3 IT(TP)A Nos.279 & 202/Bang/2015 by the TPO either on the ground that they do not appear in the search carried out by the TPO or that the relevant data to apply RPT filter is not there in the annual report IV. As regards non-adoption of upper limit of turnover filter: 1. The Hon’ble DRP, having in principle, accepted application of upper limit of turnover filter at Rs. 200 crores as valid filter, is not justified in not applying the same merely on the ground that the number of comparables would ultimately get reduced to 1 after the adoption of this filter. 2. The Hon’ble DRP is not justified in choosing to rely on a non-juridictional Tribunal’s decision ignoring a plethora of decisions rendered by the jurisdictional Tribunal upholding the adoption of upper limit of turnover filter based on Dun & Bradstreet study. V. As regards fresh determination of ALP in case of software development services rendered to associated enterprises: 1. The Hon’ble DRP is not justified upholding the making of adjustment under section 92CA of the IT Act in respect of international transaction entered by the Assessee in the Software Segment. 2. Without prejudice to the above, the Hon’ble DRP failed to appreciate that the learned TPO is not justified in rejecting companies like Accelya Kale Solutions Ltd, Akshay Software Technologies Ltd, CTIL Ltd, Cat Technologies Ltd, Cressanda Solutions Ltd, Quintegra Solutions Ltd, Spry Resources India Pvt Ltd, Emergys Software Pvt Ltd, Evoke Technologies Pvt Ltd, E-Zest Solutions Ltd as not comparable although the same qualify all the filters as adopted by the learned TPO. 3. Without prejudice the above, the Hon’ble DRP failed to appreciate that the learned TPO is not justified in choosing companies like Larsen & Toubro Infotech Ltd, Mindtree Ltd, Persistent Systems Ltd, Sasken Communication Technologies without even examining whether at all the companies could be regarded as a comparables in the light of parameters laid down in Rule 10B (2) of IT Rules. 4. Without prejudice to the above, the Hon’ble DRP failed to appreciate that the learned TPO is not justified in choosing companies like Larsen & Toubro Infotech Ltd, Mindtree Ltd, Persistent Systems Ltd, Sasken Communication Technologies, without discussing the exact nature, business profile, background of the comparable companies and without demonstrating the comparability. 5. The Hon’ble DRP is not justified in upholding the rejection of Akshay Software Technologies Ltd and Quintegra Solutions Limited by applying onsite filter without issuing a notice proposing to do so when the TPO rejected these entities on different grounds.
4 IT(TP)A Nos.279 & 202/Bang/2015 6. The Hon’ble DRP is not justified in holding that R S Software India Limited as not a comparable company by applying onsite filter without issuing a notice proposing to do so when in fact the TPO accepted it as comparable. 7. The Hon’ble DRP is not justified in rejecting Akshay Software Technologies Ltd, Quintegra Solutions Limited and R S Software India Ltd as comparables by applying onsite filter without considering the possibility of making appropriate adjustment to account for on site difference. 8. Without prejudice to the above, the Hon’ble DRP ought to have held that Thinksoft Global Services Limited cannot be treated as comparable as it also satisfies the onsite filter. 9. The Hon’ble DRP ought to have held that the TPO is not justified in holding that CTIL as not a comparable on the ground that RPT details are not reported though the comparable’s annual report did contain the details of RPT and the value of RPT is within the accepted norm of 25% adopted by the TPO 10. The Hon’ble DRP ought to have held that the TPO is not justified in rejecting Cat Technologies Ltd and Cressanda Solutions Ltd as comparable on the ground that RPT details are not reported, failing to appreciate that either the TPO or the DRP ought to have exercised the power vested u/s 92CA(7) read with sections 131(1)/ (6) and u/s 144C(7) respectively and obtained the relevant information. 11. The Hon’ble DRP is not justified in upholding the stand of the Learned TPO that Cressanda Solutions Ltd does not satisfy forex filter when on fact, the said filter stands satisfied. 12. The Hon’ble DRP is not justified in upholding rejection of Spry Resources Pvt Ltd, Evoke Technologies Pvt Ltd and E-Zest Solutions Ltd, by insisting that only those companies whose data is available in the public domain at the time of examination by TPO should be taken, failing to appreciate that the appellant faces similar difficulty as appellant's TP analysis would be carried out at much earlier point in time. 13. The Hon’ble DRP ought to have held that the TPO is not justified in holding that Spry Resources Pvt Ltd cannot be taken as comparable on the basis that the same did not figure in TPO’s master and the data is not available in public domain although the company is in fact found in TPO’s master and the annual report is available in the public domain. 14. The Hon’ble DRP erred in law and on facts in holding that Spry Resources Pvt Ltd cannot be taken as comparable as it is engaged in rendering software consultancy by merely relying on the accounting policy for revenue recognition ignoring the fact that Rs 1,47,08,428 [54% of the total expenditure] has been debited towards software development expenses.
5 IT(TP)A Nos.279 & 202/Bang/2015 15. The Hon’ble DRP ought to have held that the TPO is not justified in holding that Emergys Software Pvt Ltd, Evoke Technologies Pvt Ltd and E-Zest Solutions Ltd cannot be taken as comparable as the data is not available in public domain ignoring the fact that the relevant information is present in the transfer pricing database. 16. The Hon’ble DRP is not justified in cherry picking R S Software (India) Ltd and Persistent Systems and Solutions Ltd for re-verification [which have either been selected by appellant and accepted by TPO or have been chosen by the TPO] solely on the basis that they have low profit margin to determine whether they satisfy the criteria for being treated as comparable and not carrying out similar exercise in respect of companies with higher margin chosen as comparable by TPO. 17. The Hon’ble DRP ought to have held that the TPO ought not to have adopted the segment results of entities as comparables even though direct comparables are available. 18. The Hon’ble DRP ought to have held that the learned TPO ought not to have adopted results of service segment of entities as comparable though the break-up of segment expenses were not available and as a result FAR analysis cannot be made. VI. As regards fresh determination of ALP in case of ITES rendered to associated enterprises:
The Hon’ble DRP is not justified upholding the making of adjustment under section 92CA of the IT Act in respect of international transaction entered by the Assessee in the ITES Segment.
Without prejudice to the above, the Hon’ble failed to appreciate that the learned TPO is not justified in rejecting companies Aditya Birla Minacs BPO Pvt Ltd and BNR Udyog Ltd as not comparable although the same qualify all the filters as adopted by the learned TPO.
Without prejudice the above, the Hon’ble failed to appreciate that the learned TPO is not justified in choosing companies Accenta Technologies Ltd, ICRA Online Ltd, Informed Technologies India Ltd, Sundaram Business Services Ltd, without even examining whether at all the companies could be regarded as a comparables in the light of parameters laid down in Rule 10B (2) of IT Rules.
Without prejudice to the above, the Hon’ble failed to appreciate that the learned TPO is not justified in choosing companies like Accenta Technologies Ltd, ICRA Online Ltd, Informed Technologies India Ltd, Sundaram Business Services Ltd, without discussing the exact nature, business profile, background of the comparable companies and without demonstrating the comparability.
The Hon’ble DRP is not justified in upholding the action of the TPO in rejecting BNR Udyog Ltd as comparable on the ground that the comparable has failed RPT filter
6 IT(TP)A Nos.279 & 202/Bang/2015 ignoring the fact that the RPT details disclosed in the annual report do not sync with the Balance Sheet and Profit & Loss Account and failing to appreciate that either the TPO or the DRP ought to have exercised the power vested u/s 92CA(7) read with sections 131(1)/ (6) and u/s 144C(7) respectively and obtained the relevant information.
The Hon’ble DRP in not justified in holding that Aditya Birla Minacs BPO cannot be taken as comparable as it has failed forex filter when in fact forex filter is satisfied.
The Hon’ble DRP ought to have held that the TPO ought not to have adopted the segment results of entities as comparables even though direct comparables are available.
The Hon’ble DRP ought to have held that the learned TPO ought not to have adopted results of service segment of entities as comparable though the break-up of segment expenses were not available and as a result FAR analysis cannot be made. VII. As regards the learned TPO failing to make adjustment in respect of differences found on FAR analysis: 1. Without prejudice to the above, the Hon’ble failed to appreciate that the learned TPO is not justified in failing to make suitable adjustment in respect of differences found on making FAR analysis. 2. The Hon’ble DRP erred in law and on facts in upholding the action of the learned TPO in not granting risk adjustment on the ground that it is qualitative difference and hence reasonably accurate adjustment cannot be made and on the ground that there is no difference in the level of risk borne by the appellant and that borne by the comparable entities is liable to be quashed as it is contrary to material on record and his own findings else where in the Order. 3. The Hon’ble DRP erred in law and on facts in upholding the action of the learned TPO in not granting risk adjustment on the ground that the appellant is bearing single customer risk which is contrary to the facts of the case and appears to be a copy & paste error committed by the TPO. 4. The Hon’ble DRP erred in law and on facts in upholding the rejection for risk adjustment on the ground that ‘when the arithmetic mean is taken of the comparable companies it takes care of the adjustments on account of such differences’ which is scientifically unsound and devoid of logic. The Hon’ble DRP failed to appreciate that where more than one price is determined by applying the most appropriate method, the arithmetic mean of all such prices would be ALP and in all such cases, if the reasoning of the Hon’ble DRP is considered as legally tenable no adjustment for differences found on account of FAR analysis would be permitted on the ground that the differences would get ironed out on averaging 5. The Hon’ble DRP ought to have held that the TPO is not justified in determining fresh ALP in respect of ITES without carrying out FAR analysis
7 IT(TP)A Nos.279 & 202/Bang/2015
VIII. As regards determination of correct margin and apportionment of administrative and other common expenses
The Hon’ble DRP is not justified upholding the action of the Learned TPO in taking incorrect margin of the appellant for the purpose of benchmarking.
The Hon’ble DRP erred in law and on facts in upholding the action of the Learned TPO in adopting administrative and other expenses of Rs.17,60,93,508/- for apportionment as against the actual of Rs.7,92,38,669/-, while determining the margin of the appellant.
The finding of the Hon’ble DRP that there is no working to support the claim of the appellant that actual administrative and other expenses are only Rs.7,92,38,669/- is perverse as the appellant had given the break-up of actual administrative and other expenses at Annexure - 16 to the DRP objections IX. As regards the inappropriate manner in which the learned TPO carried out working capital adjustment:
The Hon’ble DRP failed to appreciate that the learned TPO erred in law and on facts in adopting the formula prescribed in the OECD commentary for carrying out the working capital adjustment although the said formula does not account for difference in efficiency in usage of working capital by the appellant and the comparables.
X. The learned Assessing Officer / TPO erred in law and on facts in not giving a copy of the revised order passed u/s 92CA of the Act giving effect to the directions issued by the Hon’ble DRP as the appellant is denied of opportunity to see if the directions of the Hon. DRP have been duly complied with. XI. The Hon’ble DRP erred in law and on facts in giving directions to the Assessing Officer to make further enquiry in the case of determination of margin of Thinksoft Global Services Ltd, Fortune Infotech Ltd, Informed Technologies India Ltd and credit for TDS instead of deciding the issue as it is prohibited to do so u/s 144C(8) of the Act XII. As regards not giving full credit to TDS:
The learned AO is not justified in giving effect to the TDS only to the extent of Rs. 2,84,85,412/-, as against Rs. 2,94,81,237/- (i.e. as reflected in Form 26AS) actually allowable to the Assessee. 2. The learned AO is not justified in giving effect to the TDS only to the extent of Rs. 2,84,85,412/-, as against Rs. 2,94,81,237/- (i.e. as reflected in Form 26AS) actually allowable to the Assessee without verifying the same as directed by the Hon’ble DRP.
8 IT(TP)A Nos.279 & 202/Bang/2015 XIII. The Learned Assessing officer is not justified in levying interest under section 234D when the condition for levy of interest did not exist.
Each of the above grounds is without prejudice to one another. The appellant craves leave of the Hon’ble Tribunal to add, delete, amend or otherwise modify each of the above grounds either before or at the time of hearing of this appeal.”
Revenue’s Grounds of appeal
9 IT(TP)A Nos.279 & 202/Bang/2015
The assessee is engaged in the business of sale of software products
and software development services as well as allied services. During the
year under consideration the assessee has reported the following
international transactions in para 4 as under :
10 IT(TP)A Nos.279 & 202/Bang/2015
The only dispute in this appeal is regarding the adjustment made by
the TPO in respect of the provision of software development services.
The learned Authorised Representative of the assessee has
submitted that the assessee has raised an issue of allocation of
administrative costs by the TPO for computing the margins of the
assessee in Ground No.8. Therefore the issue raised by the assessee in
Ground No.8 goes to the root of the matter and if the claim of the
assessee is accepted then even if the comparable companies selected by
the TPO are accepted there would be no adjustment.
In view of the submissions of the ld. AR, we first take up the Ground
No.VIII of the assessee's appeal. The ld. AR has pointed out that the TPO
while recomputing the margins of the assessee has taken the
administrative and other expenses of Rs.17,60,93,508 for apportionment
11 IT(TP)A Nos.279 & 202/Bang/2015 against the amount of Rs.7,92,38,669 which was actually allocated by the
assessee while determining the margins. He has submitted that the TPO
has recomputed the margin in the software development segment at
11.55% as against the margin of 31.61% claimed by the assessee. The
learned Authorised Representative has submitted that the assessee has
furnished all the relevant details and expenditure before the TPO. As
regards the amount of Rs.10 Crores of difference between Rs.17.60
Crores and Rs.7.92 Crores the same is the expenditure incurred for
special purpose and cannot be allocated to software development
segment. He has referred a letter dt.25.11.2013 at page 262 of the paper
book and submitted that the assessee has clearly brought out this fact
before the TPO as well as before the DRP that the correct amount of
expenditure is Rs.7,92,38,669 and not Rs.17.60 Crores as adopted by the
TPO. He has referred to para 8.6 of the TPO order and submitted that
the TPO has mentioned this fact in the reply to the show cause notice
vide letter dt.25.11.2013 however the said objection raised by the
assessee has not been adjudicated by the TPO. Further the DRP has also
not considered the details furnished by the assessee while deciding this
issue and simply rejected the objection on the ground that the assessee
12 IT(TP)A Nos.279 & 202/Bang/2015 has not furnished the relevant details. Thus the ld. AR has submitted
that this issue requires a fresh verification and adjudication.
On the other hand, the learned Departmental Representative has
relied upon the finding of the DRP and submitted that the DRP has
categorically stated that in support of the objection raised by the
assessee, no evidence was furnished and therefore the TPO was justified
in taking the total amount of expenses to be allocated on the basis of
turnover ratio.
We have considered the rival submissions as well as the relevant
material on record. We find that while recomputing the margins of the
assessee, the TPO has considered the administrative and other expenses
of Rs.17,60,93,508 whereas the assessee has claimed that allocable
expenditure is only Rs.7,92,38,669 and due to this difference of allocable
expenses, the TPO has arrived to the operating profit of the assessee at
11.91% as against 31.69% claimed by the assessee. We find that the
assessee has raised this objection in its reply vide letter dt.25.11.2013.
The TPO has mentioned about the reply filed by the assessee in para
8.6.1 as under :
13 IT(TP)A Nos.279 & 202/Bang/2015 “ 8.6.1 The taxpayer furnished its response to the show cause notice vide its letter dt.25.11.2013. In substance, it is seen that, the taxpayer has objected to the filters used by the TPO and the comparables selected by the TPO. The taxpayer has also objected to the segmental financials drawn up by the TPO in respect of the SWD and ITES segment of the taxpayer as at Para 3 above.”
Despite the letter dt.25.11.2013 wherein the assessee has claimed tha
the correct amount of the administrative and other expenses to be
apportioned between the different segments is Rs.7,92,38,669 instead of
Rs.17,60,93,508, the TPO has not dealt with this objection of the
assessee while passing the impugned order. We further note that the
DRP has dealt with this issue in para 2.2 of the directions. However the
objections of the assessee was rejected on the ground that the claim of
the assessee has not been supported by the details and workings. The
learned Authorised Representative has pointed out that the assessee has
filed the details as per Annexure 16 before the DRP. However the DRP
has referred only the letter of the assessee without considering the
details furnished in the Annexure 16 at page No.350 of the paper book.
We find that the working of the amount has been given by the assessee
in Annexure 16 to the objections filed before DRP which have been
placed at page Nos.350 to 352 of the paper book. Thus in view of the
14 IT(TP)A Nos.279 & 202/Bang/2015 facts and circumstances of the case, we are of the considered opinion
that this issue of allocation of the administrative and other expenses
requires a proper verification and examination. Since the authorities
below have not properly adjudicated the objections of the assessee
therefore, this issue is set aside to the record of the A.O./TPO for
readjudication.
The other issues raised by the assessee as well as revenue are
consequential in view of the fact that the assessee has claimed the
margin of 31.69% and if the same is found to be correct then no
adjustment can be made in the case of the assessee. However in case
the adjustment is required to be made by the TPO then the objections
raised by the revenue in its appeal regarding the filters applied by the
CIT (Appeals) towards ‘on site’ expenditure, export revenue and
employees cost are to be considered by the TPO in the light of the
various decisions of this Tribunal on this issue. We make it clear that
when the TPO has not applied the filter of ‘on site’ activity. then there is
no need of applying this filter as it subsumes in the filter of export
revenue. Accordingly we direct the TPO to apply the turnover filter of 10
times of the assessee's turnover on both sides.
15 IT(TP)A Nos.279 & 202/Bang/2015 10. As regards the employee cost filter of 25% adopted by the TPO we
find it a proper employee cost filter. The export revenue filter is applied
by the DRP is found to be proper and therefore there is no need for
disturbing the same. Needless to say that the assessee is at liberty to
raise the objections of the functional comparability if need arises before
the TPO. Accordingly, the issue raised by the department as well as
assessee are consequential in nature and therefore, set aside to the
record of the TPO.
In the result, the assessee's appeal as well as revenue’s appeal are
partly allowed for statistical purpose.
Order pronounced in the open court on the 22nd day of Feb., 2017.
Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member
Bangalore, Dt.22.02.2017.
*Reddy gp