1 ITA No. 507/Del/2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `I-1' NEW DELHI
BEFORE SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
I.T.A .No. 507/DEL/2017 (A.Y 2012-13)
Microsoft India (R &D) Pvt. Ltd. Vs DCIT
807, New Delhi House, Circle 16(2)
Barakhamba Road C. R. Building
New Delhi New Delhi
AABCM6358F (RESPONDENT)
(APPELLANT)
Appellant by Sh. Nageshwar Rao, Adv &
Ms. Sherry Goya, Adv
Respondent by Sh. Sanjay I Bara, CIT DR
Date of Hearing 24.10.2018
Date of Pronouncement 21.01.2019
ORDER
PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against the order dated 25/11/2016
passed by DCIT, Circle 16(2), New Delhi, u/s 143(3) read with 144C of the
Income Tax Act, 1961 for the Assessment Year 2012-13.
2. The grounds of appeal are as under:-
"1. The order passed by the Additional Commissioner of Income Tax, Transfer
Pricing- 2(2) (`Ld. TPO'), draft assessment order passed by Deputy
Commissioner of Income Tax, Circle -16(2), New Delhi (`Ld. AO') and the final
assessment order passed, on the directions of the Hon'ble Dispute Resolution
Panel (`DRP'), by the Ld. AO are bad in law.
2 ITA No. 507/Del/2017
2. The I I has erred on facts and in law in determining the total income of the
Appellant at Rs. 5,18,03,18,360 as against a returned income of Rs.
2,93,43,42,780.
Part I Transfer Pricing Matters
3. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO have
grossly erred by not appreciating the correct functional profile of the Appellant
and drawing an erroneous conclusion that the Appellant is engaged in
providing high-end software services.
4. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO has
vitiated the principles of natural justice by not giving due cognizance to the
detailed analysis and technical arguments in response to the show cause
issued by the Ld. TPO and objections filed with the Hon'ble DRP. The details
of these arguments and analysis will be elaborated during the course of
hearing before the Hon'ble ITAT.
5. The transfer pricing adjustment of Rs. 2,14,48,19,158 made by the Ld. AO
based on the order of Ld. TPO giving effect to the directions issued of the
Hon'ble DRP is bad in law inter-alia for the reason that:
a) the order of the Ld. TPO is bad in law in as much as based on an
invalid reference made by the Ld. AO without complying with the
statutory requirements;
b) the Appellant's AE being chargeable to tax at a higher rate in the US,
there was no question of shifting of any profit from a low tax paying
country to a high tax paying country.
6. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. A.O have
erred in making / upholding an upward adjustment of Rs. 2,14,48,19,158/-
in respect of the international transaction of the Appellant pertaining to
provision of contract software development services ("hereinafter referred to
as Impugned Transaction") to its associated enterprise (`A.E').
3 ITA No. 507/Del/2017
7. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO have
erred by not acdepting the economic analysis undertaken by the Appellant
in accordance with the provisions of the Act read with the Income Tax
Rules, 1962 (`IT Rules'), and conducting a fresh economic analysis for the
determination of the arm's length price ALP of the Impugned Transaction
and holding that the same are not at arm's length..
8. That on facts and in law, Hon'ble DRP and the Ld. TPO/A.O have erred
by:
8.1. Using single year data of companies to determine the arm's length
price of the impugned Transaction and disregarding the Appellant's claim
for use of multiple .ear data for computing the arm's length price; and
8.2 Rejecting the data used by the Appellant which was available to it
at the relevant time and proceeding to use the data which was available
only at the time of transfer pricing audit.
8.3. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO
erred in rejecting certain comparables identified by the Appellant and
performing a fresh comparability analysis by applying arbitrary filters
without any rationale:
a. Rejection of comparable companies having turnover less than Rs. 5
crore from the Impugned Transaction.
b. Rejection of companies having different financial year ending (i.e. not
31 March 2012) or if data of the company do not fall within 12 month
period i.e. 01-04-2011 to 31-03-2012. Without prejudice to the other
arguments, the Hon'ble DRP and the Ld. TPO/Ld. AO have also ignored
the fact that financial data for several companies for the year ended 31
March 2012 is available in public domain.
c. Rejection of companies having export sales less than 75% of the
sales.
4 ITA No. 507/Del/2017
d. Rejection of companies with a diminishing revenue trend.
e. Rejection of companies having employee cost less than 25 percent
of the operational cost as a comparability criterion for the Impugned
Transaction.
9. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO have
erred by wrongly rejecting certain companies and adding certain companies
to the final set of comparables for the Impugned Transaction, on an adhoc
basis. Thus, they have resorted to cherry picking of comparables to
determine the ALP for the Impugned Transaction.
10. That on facts and in law, the Hon'ble DRP and the Ld. TPO/A.O
have erred by treating foreign exchange fluctuations, bank charges,
`provision for doubtful debts and liabilities and provisions no longer required
written back' as non-operating items while computing the operating
profitability of the Assessee as well as the comparables.
11. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO
have erred by not considering upkeep/ maintenance expenses incurred in
connection with a property let out by Appellant as non-operating while
determining the operating profit or the tasted party.
12. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO
have grossly erred by selecting certain companies which are earning super
normal profits as comparable to the Appellant.
13. That on facts and in law, the Hon'ble DRP and the Ld. TPO/Ld. AO
have grossly erred by not appreciating the fact that the Appellant operates as
a risk free service provider and all the risks associated with the Impugned
Transaction were borne by the foreign AE and not by the Appellant, thus, the
Assessee is entitled to suitable adjustments to account for differences in its
risk profile vis-a-vis the comparables
5 ITA No. 507/Del/2017
14. That on facts and in law, the Hon'ble DRP has erred in confirming
that Ld. TPO has discharged his statutory onus by establishing that the
conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been
satisfied before disregarding the arm's length price determined by the
Appellant and proceeding to determine the arm's length price himself.
Part II - Corporate tax matters
15. That on the facts and in law, the Ld. AO and the DRP was not justified
and have erred by taxing gross composite rental income of Rs. 19,42,65,000
received from let out building space alongwith inbuilt infrastructure and other
amenities under the head `Income from House Property' instead of `Income
from Other Sources' completely disregarding the provisions of Section 56 of
the Act and Hon'ble Jurisdictional High Court Judgment in the case of Garq
Dyeing & Processing Industries vs. ACIT (2012) (ITA 319/2012) (Del)
(Departmental SLP has been dismissed by Supreme Court).
15.1 That on the facts and in law, the Ld. AO and DRP erred in not
allowing proportionate tax depreciation and expenses u/s 57 of the Act
amounting to Rs. 16,00,51,338.
15.2. That on the facts and in law, the Ld. AO and DRP erred in applying
res judicata which is not applicable in income tax proceedings and erred in
not correcting mistakes made in earlier years.
16. Without prejudice to our contention that unrealized foreign exchange
gain/ loss should not be adjusted from the WDV of the assets as observed by
the Supreme Co--: n the case of CIT vs Honda Siel Power Products Ltd. (312
ITR 024) and plain reading of provisions of Section 43A of the Act, the Ld. AO
and DRP have erred in not allowing depreciation on unrealized foreign
exchange loss on capital creditors amounting to Rs. 5,76,10,382 in view of the
position taken by the Ld. AO/ DRP in the earlier years.
6 ITA No. 507/Del/2017
17. That on the facts and in law, on disposal of this appeal material
adjustment would be required in computing total income, tax, interest u/s
234B of the Act and refund added (along with Interest u/s 234D of the Act).
Necessary directions may please be given to the Ld. AO in this regard.
18. That on the facts and in the circumstances of the case and in law, the Ld.
AO has erred in initiating penalty under section 271 (1 )(c) of the Act.
The above grounds of appeal are mutually exclusive and without prejudice to
each other. The Appellant craves leave to add, amend, vary, omit or
substitute, withdraw any of the aforesaid grounds of appeal at any time
before or at the time of hearing of the appeal."
3. The assessee is a private limited company which is engaged in the
business of Software Development and product support services. The assessee
company was incorporated on 15.05.1998 under the Companies Act, 1956 and
is a wholly owned subsidiary of M/s Microsoft Ireland Capital Limited
(99.99%), which is ultimately owned by Microsoft Corporation, U.S.A. The
company was incorporated in India to provide computer software development
services and support services to Microsoft Corporation. The company renders
the services in accordance with the instructions of Microsoft Corporation. The
assessee has two undertakings, one at Bangalore and another at Hyderabad.
Return of income for A.Y. 2012-13 was electronically filed on 27.11.2012 at
total income of Rs. 3,03,54,99,200/- after claiming deduction u/s 80G
amounting to Rs. 78,94,941/-. A revised return was electronically filed on
31.03.2014 disclosing total income of Rs. 2,93,43,42,780/- after claiming
deduction u/s 80G of Rs. 78,94,941/-. The return was processed u/s 143(1) of
the Income Tax Act, 1961 and thereafter the case was selected for scrutiny
under CASS, notice u/s 143(2) dated 07.08.2013 was issued to the assessee
company and duly served upon the assessee. Fresh notice u/s 143(2) and
142(1) dated 05.10.2015 were issued and served upon the assessee. In
7 ITA No. 507/Del/2017
response to the said notices, Authorized Representatives of the assessee
appeared on various dates and filed the requisite details which have been
examined and placed on record. Books of accounts were produced which have
been examined on test check basis by the Assessing Officer. The reference to
the Transfer Pricing Officer was made u/s 92CA (1) of the Income Tax Act,
1961 after obtaining prior approval of the Commissioner of Income Tax-II, New
Delhi. The Transfer Pricing Officer passed the order u/s 92CA(3) of the Act on
30.01.2016 proposing an adjustment of Rs. 2,54,75,79,744/- on account of
difference in arm's length price determined by the Transfer Pricing Officer and
that adopted by the assessee, observing as under:
"Summary of adjustments
SEGMENT AMOUNT IN CRORES
Provision of IT enabled services 40,27,60,586/-
Software development services 2,14,48,19,158/-
TOTAL 2,54,75,79,744/-
The assessing officer shall enhance the income of the assessee by Rs.
2,54,75,79,744/-"
Vide Draft Assessment Order dated 11.03.2016, the Assessing Officer proposed
to make following additions and assessed the total income of the assessee as
under:
Description Amount (Rs.)
INCOME FROM BUSINESS AND PROFESSION 5,28,89,57,903
i. As per the computation of income :
2,74,13,78,159
(Revised)
ii. Add : TP Adjustments :
2,54,75,79,744
(As discussed in para 3)
INCOME FROM HOUSE PROPERTY 13,53,70,085
8 ITA No. 507/Del/2017
(As discussed in para 4)
INCOME FROM CAPITAL GAIN 2,91,118
i. Long Term Capital Gain : NIL
ii. Short Term Capital Gain : 2,91,118
INCOME FROM OTHER SOURCES 16,63,54,780
(As per revised return of income minus Rental
income claimed as other sources)
GROSS TOTAL INCOME 5,59,09,73,886
LESS DEDUCTION UNDER CHAPTER VIA 78,94,941
i. Deduction u/s 80G
TOTAL INCOME 5,58,30,78,945
The assessee filed objections before the Dispute Resolution Panel (DRP). The
DRP vide directions dated 29.09.2016 issued certain directions to the TPO. The
TPO vide his order dated 15.11.2016 revised the TP adjustment from Rs.
2,54,75,79,744/- (original) to Rs. 2,14,48,19,158/- . The Assessing Officer vide
Assessment Order dated 25.11.2016 assessed the income of the assessee
company u/s 143(3) r.w.s. 144C of the Act at Rs. 5,18,03,18,360/-.
4. Being aggrieved by the Assessment Order, the assessee has filed present
appeal before us.
5. During the hearing, the Ld. AR submitted that the identical issue in
respect of transfer pricing and the corporate issue are decided in Assessment
Year 2011-12 by this Tribunal being ITA Nos. 1479 & 691/Del/2016 order
dated 14.09.2018. The Ld. AR submitted written background of facts as
under:-
"Microsoft India (R&D) Private Limited (MIRPL/ Appellant) is engaged in
provision of Software Development Services (SDS) and IT enabled services
(ITES). In addition to corporate tax issues contested in Ground of Appeal 15
onwards, Transfer pricing adjustment (Ground of Appeals from 3 to 14) made in
9 ITA No. 507/Del/2017
SDS is the subject matter of present appeal.
Background facts:
This Hon'ble Tribunal had recently decided ITA no 1479 /Del/2016 relating to
Ay 11-12, by order dated 14th September 2018, copy is enclosed for ready
reference as the same also involved dispute around TP adjustment in SDS.
Appellant bona fide believes that some of the conclusions reached in Ay 11-12
order are not justified for reasons set out briefly herein below (Appellant is fully
conscious that for redressal of its grievance relating to Ay 11-12 it has to
approach a Higher forum - however, such issues are being pointed out in the
context of Ay 12-13 and submissions being made to enable this Hon'ble Court
decide issues on merits appropriately, especially as each year is separate and
there is no Res judicata in tax matters).
Appellant explained in writing before lower authorities as also in statements
recorded as part of APA process on how due to IPR issues and the very limited
role assigned to MIRPL in the overall scheme of things most of day to day
correspondence is encrypted etc., preventing filing of more details relating to day
to day activities. Ignoring these aspects and by selective reference to portions of
submissions and statements incorrect conclusions has been reached in Para 15
that AR refused to file details. Further, holistic and contextual view of APA
statements (which were in fact relied on by Id. DR also though there is no
mention of such fact in the order) could help in appreciation of patents (details
of which were filed as per the direction of Hon'ble ITAT during course of hearing
and no queries remained unanswered) and their rightful impact for TP in right
perspective. These statements were recorded by authorities well-versed in
transfer pricing in September 2013. Reference is invited Income Tax Rules 10L,
which lays down the process and explain the sanctity of such recordings by
Authorities after holding meetings. Such aspects remained out of consideration
in said order. It is respectfully submitted that such statements cannot be
discarded/lightly ignored as "one side of the story" -kindly refer paragraph 10 of
said order of Tribunal. APA statements clearly and unequivocally explain that
10 ITA No. 507/Del/2017
there is no 'research' involved and that the patent is registered in the normal
course of 'software development and coding' under complete supervision of
overseas AE, who fund the full cost. It is important to note that veracity of these
statements recorded by Authorities during field visits have not been doubted in
the last five years from 2013. Therefore, conclusions reached to the contrary,
merely based on vague suspicion, that MIRPL's activities involved something
more valuable than routine software development and coding, are unjustified.
Conclusion reached at paragraph 23 that Appellant's activities are not confined
to coding may require reconsideration. Appellant prays for appropriate
consideration of above facts in the context of present appeal.
Closer look at details of 113 patents registered over the period of five years (from
2008 to 2012 - refer para 24 of Hon'ble ITAT order) submitted on record and
some of which are extracted in paragraph 24 onwards would show that these
involved routine processes of steps in order in development of any software.
Again discarding submission (Kindly refer paragraph 29) that irrespective of
success or failure of work assigned total cost is paid for by AE, is unjustified.
Tribunal order notes that it signifies the degree of low-risk - but ignores this
extremely relevant factor for transfer pricing analysis.
With utmost respect conclusion at paragraph 23 by referring to clauses of
agreement from paragraph 18 onwards is incorrect. It cannot rightfully be denied
that in almost all agreements involving development of software one will find
such clause assigning consequential IPR to the party funding software
development and taking the risk for such development.
It is the bona fide belief of Appellant that consequent to above errors in
appreciation of relevant facts the conclusion reached in para 30 of the said order
requires reconsideration for Ay 12-13.
Without prejudice to above, assuming only for the purpose of argument that
approach adopted in Ay 11-12 of treating Appellant's activities as being of high
11 ITA No. 507/Del/2017
end (which term is neither defined anywhere nor has any reasonable basis) SDS
and contention that same can be compared only with other companies engaged
in R&D activities is required to be adopted for Ay 12-13, appellant respectfully
submits as follows:
Transfer pricing Grounds- nos. 3 to 14
Detailed FAR analysis is available on record as part of TP study (refer page
1125 in part III of paper book), wherein detailed analysis can be found at page
1147 -same is not being repeated in the interests of brevity. Activities carried out
as part of software product lifecycle be it coding, testing or validation may at
times result in patents. Any organization might get such patents registered as a
defensive mechanism to ensure continuity of business and to be able to use the
fruits of its efforts, but surely such patents by themselves do not provide any
direct monetary benefit to organization owning them. Even casual reference to
details of patents filed show that these are nothing more than routine processes
in software development and in any case the entire cost for successful
development or otherwise is borne by overseas AE. Especially so as it is not
even denied that MIRPL role is miniscule part of total product development as it
may be involved in a feature or a part of it as assigned by AE.
Without prejudice to above position, Infosys (kindly refer pages 1452, 1459 of
paper book IV) and Persistent cannot be comparable companies even applying
above criteria as a reference to audited financials would show. Both the
companies are engaged in software products as noted in Tribunal order for Ay
11-12 in Appellant's own case, which is true even for Ay 12-13. Further, during
Ay 12-13 there was a merger (extraordinary event) in case of Persistent (kindly
refer pages 1568,1716,1719 of paper book IV).
Without prejudice to Appellant's contention that TPO and DRP (refer comparable
companies discussed at pages 41 to 58 of appeal set) incorrectly rejected
inclusion of all such companies mentioned in the detailed chart submitted at the
time of hearing also and respectfully requests for appropriate consideration for
12 ITA No. 507/Del/2017
inclusion of all these companies (Appellants prays leave to not repeat the
submissions in support of inclusion of each of such comparable companies as
elaborated in submissions before lower authorities which are part of appeal
record - in the interest of brevity), as these are involved in software development
services, even if only for argument, basis as applied by TPO/DRP and Hon'ble
Tribunal order for Ay 11-12 is to be applied, reference is kindly invited to
financials of Mindtree (kindly refer pages 385,386,387,403,404,405 and 413 of '
Annual reports bunch no 1 handed over at hearing), R S software (kindly refer
pages 518,520,521,525,528,536,537,538,539,548,550 and 557 of Annual
reports bunch no 1 handed over at hearing), Cigniti (kindly refer pages
1355,1356,1357,1358,1360,1362,1374,1375 and 1403 of Annual reports bunch
2 filed at the hearing) and Sasken (kindly refer
778,779,784,824,827,841,856,857 of annual reports bunch 2 handed over at
hearing) with humble prayer to atleast include them as comparable, as these
companies satisfy all the above conditions (like R&D etc., though Appellant does
not agree that to be correct basis) also. It will kindly be accepted that
testing/verification/validation is an important essential part of software
development activities undertaken by MIRPL also (admittedly under strict and
complete supervision of overseas AE) and contributes a significant part
economically also to software development activities. Cigniti though engaged in
testing/ verification/ validation (in this context it may be useful to refer to Rule
10 TA, wherein software testing is not part of ITES and gets covered under
"Software development services") has admittedly undertaken research and
development activities resulting in valuable IPR, therefore, deserves to be
considered as comparable to MRIPL applying the same criteria.
Corporate Tax Grounds:
Ground nos. 15 to 17
Appellant earns income from comprehensive rental of premises and desires that
such income be taxed under the Income from other sources, whereas the
authorities have taxed the same as income from house property. Though this is a
recurring issue from earlier years, recent jurisdictional High Court decision in the
13 ITA No. 507/Del/2017
case of Jay Metal Industries (P.) Ltd. v. CIT (396 ITR 194) is binding on this
Hon'ble Tribunal. In view of principles laid down in Asit C Mehta Vs DCIT ( 2006)
10 SOT 36 , Appellant is entitled to seek decision on this issue unlike the
remand directions in earlier years and accordingly prays for final and conclusive
decision on this issue. It is respectfully submitted that though this case law was
brought to notice of Hon'ble Tribunal, the same does not find consideration in
order for Ay 11-12, hence this prayer.
The other grounds of appeal are consequential and Appellant prays for suitable
directions."
6. The Ld. AR submitted that the assessee in the present year also
challenging two comparables to be excluded and four comparables to be
included. The Ld. AR furthers submitted that in-fact the assessee has
submitted 19 comparables to be included but at this juncture only, requesting
four comparables to be included. The Ld. AR submitted that for exclusion of
two comparables i.e. Infosys & Persistent are not comparable companies and
also was excluded in Assessment Year 2011-12. The Ld. AR submitted that the
factual position has not been changed from the earlier years of Assessment
Year 2011-12. Therefore, these two comparables has to be excluded. The Ld.
AR further submitted that during Assessment Year 2012-13, there was a
merger which amounts to extraordinary event in case of Persistent. Therefore,
both these comparables should be excluded. As regards inclusion of four
comparables, the Ld. AR submitted that the assessee has given four
comparables which are as under:-
(i) Mind tree
(ii) R.S Software
(iii) Cigniti
(iv) Sasken
As regards Mindtree, R. S. Software, Cigniti & Sasken, the Ld. AR submitted
annual reports of the said comparable companies. The Ld. AR further
14 ITA No. 507/Del/2017
submitted that functions of these companies are identical to the assessee's
company.
7. As regards corporate grounds, the Ld. AR submitted that though for
Assessment Year 2011-12, the Tribunal has remanded back this issue to the
file of the TPO/A.O in view of principals laid down in the assessee Mehta Vs.
DCIT 2006 10 SOT 36 seek to contest this issue. The Ld. AR submitted that
this is a recurring issue from earlier years and recent jurisdictional High Court
decision in case of Jay Metal Industries Pvt. Ltd. Vs. CIT 396 ITR 194 has
considered as the assessee income's from rent from the premises has to be
taxed under the income from other sources where as the revenue authorities
taxed the same as income from house property. Thus, the Ld. AR submitted
that this re-characterization is not permissible as per the decision of the
Jurisdictional High Court.
8. The Ld. DR contested the TP issues regarding exclusion and inclusion of
the comparables. The Ld. DR further submitted that the Transfer Pricing
Officer i.e. TPO has elaborately discussed all the factors to exclude certain
comparables and to include certain comparables. There is a proper reasoning
given by the TPO in Transfer Pricing Order. As regards, Ground No. 15 & 17,
relating to corporate tax, the Ld. DR submitted that the assessee at this
juncture cannot contest these issues, as in earlier Assessment Year these
issues have been remanded back to the file of the Assessing Officer.
9. We have heard both the parties and perused all the relevant material
available on record. As regards Ground No. 1 and 2, the same are general in
nature, hence dismissed. Now, we are taking up the issue of Transfer Pricing in
respect of the comparables. The Ld. AR contested two comparables to be
excluded i.e. Infosys Technology Ltd. and Persistent Systems Ltd. The Tribunal
in assessee's own case for A.Y. 2011-12 held as under:
"(ii) Infosys Technology Ltd.
15 ITA No. 507/Del/2017
39. The second company under challenge is Infosys Technology Ltd.,
which was included by the TPO in the final tally of comparables. The
assessee objected to such inclusion by contending, inter alia, that it is
engaged in noteworthy R&D activities apart from having significant intangible
assets and exceptionally high turnover. The assessee also submitted that this
company is functionally not comparable as it is also having revenues from
software products. The assessee's objections have been recorded on pages
80-82 of the TPO's order. Not convinced, the TPO held this company to be
comparable, which has been assailed in the impugned order.
40. Having heard both the sides and perused the relevant material on
record, we find from the Annual report of this company, a copy of which is
available on pages 1653 onwards of the paper book, that this company is
also engaged in earning revenue from Licensing of software products. This
fact has also been recorded in the TPO's order noting that the revenue from
software products stands at Rs.1,285/- crore. This revenue has been
generated from its product "Finacle", reference to which has been made on
page 8 of the Director's Report. The extent of profit from software products,
cannot be separated because of the merged expenses. In view of the fact that
the total profit of this company includes profit from software development
services as well as software products and there is no separate profit available
of the software development services, we are unable to countenance the
comparability of this company as the assessee is not engaged in licensing of
any software products. We, therefore, order to exclude Infosys Technologies
Ltd. from the list of comparables.
(iii) Persistent Systems Ltd.
41. Though this company was included by the assessee in its list of
comparables, the same has still been challenged before us. The ld. AR
contended that this company was erroneously included in the list of
comparables as it is also a product company which is apparent from the
16 ITA No. 507/Del/2017
Annual report of this company.
42. The ld. DR raised a preliminary objection to the effect that once a
company has been considered by the assessee as comparable in its TP
documentation and the same has been accepted by the TPO, the same cannot
be challenged in the further appellate proceedings. He relied on the impugned
order to contend that this company was rightly offered by the assessee in the
list of comparables and, hence, the same should not be excluded.
43. We are disinclined to sustain the preliminary objection taken by the
ld. DR that the assessee should be stopped from taking a stand contrary to
the one which was taken at the stage of the TP study or during the course of
proceedings before the TPO. It goes without saying that the object of
assessment is to determine the income in respect of which an assessee is
rightly chargeable to tax. As an income nor originally offered for taxation, if
otherwise chargeable, is required to be included in the total income, in the
same breath, any income wrongly included in the total income, which is
otherwise not chargeable, should be excluded. There can be no estoppels
against the provisions of the Act. Extending this proposition further in the
context of the transfer pricing, it transpires that if an assessee fails to report
an otherwise comparables, and in the same manner, if the assessee wrongly
reported an incomparable company as comparable in its TP study and then
later on realizes and claims that it should be excluded, there should be
nothing to prohibit it from claiming so, provided the company so originally
reported as comparable is, in fact, not comparable. Simply because a
company was wrongly chosen by the assessee as comparable, cannot tie its
hands from contending before the Tribunal that such a company was wrongly
considered as comparable which is, in fact, not. There is no qualitative
difference between a situation where an assessee claims that a wrong
company inadvertently included for the purpose of comparison should be
excluded and the situation in which the Revenue does not accept a particular
17 ITA No. 507/Del/2017
company chosen by the assessee as comparable. The underlying object of the
entire exercise is to determine the arm's length price of an international
transaction. Simply because a company was wrongly considered by the
assessee as comparable, cannot, act as a deterrent from challenging before
the Tribunal the fact that this company is, in fact, not comparable. The Special
Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ
(Chd) (SB) 1 has held that a company which was included by the assessee
and also by the TPO in the list of comparables at the time of computing ALP,
can be excluded by the Tribunal, if the assessee proves that the same was
wrongly included. Similar view has been upheld by the Hon'ble Delhi High
Court in Xchanging Technology Services India Pvt. Ltd. [TS-446-HC-
2016(DEL)-TP]. The Hon'ble Bombay High Court in Tata Power Solar Systems
Ltd. [TS-1007-HC-2016(BOM)-TP] and the Hon'ble Punjab & Haryana High
Court in CIT vs. Mercer Consulting (India) P. Ltd. (2017) 390 ITR 615 (P&H)
have also approved similar view. In view of the foregoing discussion, we do
not find any substance in the preliminary objection taken by the ld. DR.
44. Coming to the comparability or otherwise of this company, we find
from its Profit & Loss Account that its income from `Sale of software services
and products' stands at Rs. 6,101.27 millions. Product revenue is 7.2% of the
total revenue. Thus, it is established that this company is engaged in
rendering software development services as well as sale of software
products. Even though the percentage of software products in the total
revenue is less, yet, the same ceases to be comparable as there is no precise
information about the contribution made by the income from sale of software
to the total income of the company. In the absence of any segmental
information provided by the company in respect of software services, we
cannot approve the inclusion of this company in the list of comparables. The
same is directed to be excluded."
From the perusal of the records it can be seen that the functional profile of the
18 ITA No. 507/Del/2017
assessee has not changed in the present Assessment Year. The comparable
companies which needs to excluded also has the similar functional aspect as
discussed in the Tribunal's decision for A.Y. 2011-12. Therefore, we are
following the same directions of the Tribunal in assessee's own case for A.Y.
2011-12 as the facts emerges from the TP study report and the order of the
TPO are identical in the present Assessment year as well.
10. As regards to inclusion of four comparables i.e. Mindtree, R. S. Software,
Cigniti & Sasken, the Tribunal held as under:
"(ix) Mindtree Ltd. (IT Service Segment)
65. The TPO held this company to be not comparable by observing on
page 58 of his order that it was not involved in rendering any high-end
software services.
66. We have examined the Annual report of this company, a copy of
which has been placed on record. Annexure to the Directors' Report provides
under the head `Research and Development' that this: "Company has a
dedicated business unit for research and development which offers innovative
solutions to clients and also fosters R&D within all business units to create
intellectual property in the form of re-usable components, frameworks, etc.,
which help drive correct productivity." On next page of the Annexure to the
Directors' Report, a list of patents registered either in India or the USA has
been appended, which are 19 in number. Profit & Loss of this company shows
`Income from software development' at Rs.15,090 million. This company has
three sub-segments which are covered within the overall `Income from
software development.' Details of such sub-segments are given on page 32 of
the Annual report, which mainly comprise revenue from IT services at
Rs.8,783 million; from Product engineering services at Rs5653 million; and
from Wireless services at Rs. 654 million. Obviously, `Wireless services'
cannot be considered as a part of Research and development software
19 ITA No. 507/Del/2017
services provided by this company. The assessee has also considered only IT
services segment of this company as comparable with the exclusion of
`Wireless services'. All the parameters, namely, rendering of research and
development software services and also Product engineering services to its
customers leading to the creation of patents, make this company fully
comparable to the extent it earned revenues from IT services and Product
engineering services, for which segmental information is available. We,
therefore, direct the TPO to examine the PLI of this company from the IT
services and Product engineering services and then treat the same as
comparables with the segment of the assessee under consideration for the
purpose of benchmarking. The impugned order is overturned to this extent."
From the perusal of records it can be seen that the functional profile of
Mindtree remains the same in this Assessment Year as well which is similar to
the assessee's company and the segmental information is available in the
present assessment year as well. Therefore, we are following the directions of
the Tribunal for A.Y. 2011-12. Thus, we direct the TPO to examine the PLI of
this company from the IT services and Product engineering services and then
treat the same as comparables with the segment of the assessee under
consideration for the purpose of benchmarking.
As regards the R. S. Software (India) Ltd. the Tribunal held as under
"(x) R. S. Software (India) Ltd.
67. The TPO excluded this company by noting on page 58 of his order
that it was not involved in any high-end software services and, further, on
page 76 that it was not into any research and development.
68. We have examined the Annual report of this company. Income from
software development has been shown in the Profit & Loss Account, whose
copy is available on page 823 of the paper book. The ld. AR could not point
out anywhere from the Annual report that this company is engaged in
20 ITA No. 507/Del/2017
rendering R&D software services. Since it was a comparable chosen by the
assessee, the onus is on it to show the comparability. The same being not
involved in rendering any R&D software development services becomes
functionally different and hence cannot be considered as comparable. It is
therefore, held to have been rightly excluded."
This comparable company is involved in R&D activities for software
development services in the present Assessment Year whereas the assessee
company is not involved in R&D activities which can be seen from the TP study
of the assessee company. Therefore, we are following the directions of the A.Y.
2011-12 passed by the Tribunal. Thus, we held that TPO has rightly excluded
this comparable company.
As regards, Cignity Technologies Ltd. and Sasken Communication
Technologies Limited (Software services segment) both of the comparables
involved in R&D activities for software development services in the present
Assessment Year whereas the assessee company is not involved in R&D
activities which can be seen from the TP study of the assessee company.
Therefore, we held that TPO has rightly excluded these comparable companies.
11. Thus, Ground Nos. 3 to 14 are partly allowed for statistical purpose.
12. As regards corporate tax grounds raised by the assessee, the Tribunal for
A.Y. 2011-12 held as under:
"103. Now, we take up corporate tax grounds raised by the assessee.
104. Ground no. 16 is against the addition towards realized foreign
exchange fluctuation gain/loss and ground no. 17 is against the adjustment
of Rs.13,40,482/- against the opening written down value of computers
towards unrealized foreign exchange fluctuation gain arising out of re-
statement of liability u/s 43A of the Act. Ground no. 18 is against denial of
deduction u/s 10A of the Act in respect of specific additions amounting to
21 ITA No. 507/Del/2017
Rs.8,73,11,096/-. Ground no. 20 is against the taxability of rental income
under the head `Income from house property'.
105. The Assessing Officer decided the above issues against the
assessee. The ld. DRP also upheld the view taken by the Assessing Officer in
the draft order by noticing that similar view was taken by it on the above
issues in the immediately preceding year.
106. Having heard both the sides, it is observed that the immediately
preceding year came up for consideration before the Tribunal. Vide order
dated 28.06.2016, the Tribunal in ITA no. 2058/Del/2015, has restored the
above issues to the Assessing Officer for a fresh decision. Since the issues in
the instant appeal are admittedly of the similar nature as in the preceding
year, respectfully following the precedent, we set aside the impugned order
on the above scores and remit the matter to the file of Assessing Officer for
deciding them afresh in accordance with the view taken in such immediately
preceding year, after allowing a reasonable opportunity of being heard to the
assessee.
107. Ground no. 19 is against not treating interest income of Rs.
3,13,60627/- earned on fixed deposits by the Bangalore undertaking as
eligible for benefit u/s 10A of the Act. The ld. AR candidly admitted that this
issue was neither raised before the Assessing Officer or DRP and the same
being a legal issue, should be admitted by the Tribunal. The ld. DR objected to
the admission of this ground.
108. Having gone through the nature of issue raised through this ground,
we find that this is a legal issue and can be raised before the Tribunal for the
first time. We, ergo, admit this issue for consideration.
109. In support of its contention, the assessee has filed additional
evidence to bring home its point about the availability of benefit u/s 10A in
respect of interest income. Since this issue has not been examined by the
22 ITA No. 507/Del/2017
authorities below and the assessee has filed additional evidence, we are of
the considered opinion that it would be in the fitness of things if the Assessing
Officer is directed to decide this issue afresh as per law, after allowing an
opportunity of being heard to the assessee. The assessee will be at liberty to
file any fresh evidence before the AO in support of its claim on this issue.
110. Ground no. 21 is against not allowing MAT tax credit. The Assessing
Officer is directed to verify the assessee's contention and allow the necessary
MAT credit as per law, if available.
111. Ground no. 23 about not granting credit for TDS to the extent of
Rs.1,71,729/- was not pressed by the ld. AR. The same is, therefore,
dismissed as not pressed.
112. Ground nos. 23 and 24 about charging of interest are consequential
and are disposed off accordingly.
113. In the result, the appeal of the Revenue is dismissed and that of the
assessee is partly allowed for statistical purposes."
The issues contested in the present Assessment year by the assessee company
regarding the corporate tax are identical to the issue arising in A.Y. 2011-12
wherein the Tribunal has remanded back the issue to the Assessing Officer.
The Ld. AR relied upon the decision of Jay Metal Industries (supra) and Asit C
Mehta (supra), both these judgments were not taken into account by the
Assessing Officer. Therefore, we remand back these corporate issues to the file
of the Assessing Officer with direction to consider these two decisions passed
by the jurisdictional High Court after verifying the facts of the assessee
company. Needless to say, the assessee be given opportunity of hearing by
following principles of natural justice. Thus, Ground Nos. 15 to 17 are partly
allowed for statistical purpose.
13. As regards Ground No. 18 the same is consequential, hence does not
23 ITA No. 507/Del/2017
require to be adjudicated at this juncture.
14. In result, appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on 21st January, 2019.
Sd/- Sd/-
(N. K. BILLAIYA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 21/01/2019
R. Naheed *
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
24 ITA No. 507/Del/2017
Date of dictation 25 .10.2018
Date on which the typed draft is placed before the 25 .10.2018
dictating Member
Date on which the typed draft is placed before the
Other Member
Date on which the approved draft comes to the Sr.
PS/PS
Date on which the fair order is placed before the
Dictating Member for pronouncement
Date on which the fair order comes back to the Sr. 21 .01.2019
PS/PS
Date on which the final order is uploaded on the 21 .01.2019
website of ITAT
Date on which the file goes to the Bench Clerk 21 .01.2019
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant
Registrar for signature on the order
Date of dispatch of the Order
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