CASE LAWS

2016-TII-75-HC-MUM-TP

CIT Vs PTC SOFTWARE INDIA PVT LTD: BOMBAY HIGH COURT (Dated: September 26, 2016)

Income tax - ALP - AE - IT enabled services - RPT filter - selection of comparables & TP adjustment.

Whether the related party transactions have to be considered in the context of total transactions and not by a conversion formula - YES: HC

Whether an entity engaged in selling of software products, can be selected as a comparable to an entity engaged in rendering of software service to its holding company - NO: HC

Whether the data to be used for comparability analysis should be of the same financial year in which the international transactions were entered into by the tested party - YES: HC

The assessee, a wholly owned subsidiary of an American Company M/s. Para Metric Technology Corporation USA, and engaged in providing IT services and IT enabled Services to its holding company, had filed its return declaring an income of Rs.11.25 crores. In pursuence of the same, the assessee had determined the ALP by adopting TNMM as the MAM in its TP study. It determined the PLI in respect of the IT Services segment at 14.02% while the arithmetic mean of the PLI of comparable companies at 10.70%. Similarly, in respect of its IT enabled Services, its PLI was determined at 14.23% while the arithmetic mean of the PLI of comparable cases was 10.51%. In the above view, as the PLI of the assessee was higher than that of the comparables, no TP adjustment was called for, as per the assessee. However the TPO was of the view that on comparison with appropriate comparables, the ALP in respect of its IT Services should be determined at Rs.105 crores and ALP in respect of IT enabled services should be determined at Rs.6.73 crores. This resulted in the TPO passing an order u/s 92CA(3) determining the upward adjustment of International Transaction at Rs.10.38 crores. Consequent to the TPO's order, the AO passed a draft assessment order u/s 143(3) r.w.s. 144C(13) determining the assessee's income at Rs.21.63/-. On appeal, the ITAT set aside the order to the extent it related to international transactions and restored the issue to the AO to determine the TP adjustment in terms of the directions contained in the impugned order of the Tribunal regarding the selection of comparables.

Having heard the parties, the High Court held that,

Selection of comparables

+ as far as M/s. FCS Software Solutions Ltd. and M/s. Compucom Software Ltd. are concerned, the ITAT has recorded the fact that the denominator in the formula adopted by the TPO is incorrect as it also includes the total expenses when the TPO on facts has held that there are no expenses in respect of the RPT. Therefore, the adoption of the denominator by considering total sales + total expenses when there are no RPT expenses would lead to misleading results. The denominator was restricted to only total sales and the result would be the RPT are at 28.10% i.e. in excess of 25% filter and, therefore, is excludable from the list of comparables. We find that this is a purely factual determination and the RPTs have to be considered in the context of total transactions and not by a conversion formula as adopted by the AO. In fact, as recorded in the impugned order of the Tribunal, the determination of percentage of RPT as adopted by it is similar to the method adopted by the TPO in the earlier assessment years. It may be noted that an identical method as directed in the case of M/s. FCS Software Ltd. was also done in case of M/s. Compucom Ltd. by the Tribunal. However, the Revenue has made no grievance in case of the impugned order to the extent of M/s. Compucom Ltd. No reason for the same is also forthcoming. In the above view, question as proposed being a factual, it does not give rise to any substantial question of law;

+ as far as M/s. KALS Information Solutions Ltd. and Helios & Matheson Information Technology Ltd. are concerned, it is seen that the Tribunal has recorded that for the preceding assessment year, the TPO had found that KALS Ltd. and Helios & Matheson Ltd. were functionally not comparable with the assessee. In the subject A.Y also, on the basis of Annual Report, it was noted that the KALS was engaged in selling of software products which is different from the activity undertaken by the assessee, namely, rendering of software service to its holding company. Further, the impugned order also records that no attempt was even made by the Revenue before it to bring on record any change in the nature of activities carried out by KALS Ltd. and Helios & Matheson Ltd. in the subject assessment year, making them functionally comparable to the assessee. In the aforesaid facts, the Tribunal rendered a finding of fact that KALS Ltd. and Helios & Matheson Ltd. are not comparable with the assessee. In the above view, as the findings of the Tribunal being one of the fact which has not been shown to be perverse, the question as proposed does not give rise to any substantial question of law;

+ as far as M/s. Transworks Information Services Ltd. is concerned, it is found that the provisions of Section 10B(4) of the Rules are clear in as much as it obliges that the data to be used for comparability analysis should be of the same financial year in which the international transactions were entered into by the tested party. In fact, this principle / mandate was applied by the TPO while considering M/s. Power Soft Global Services Ltd. as a comparable because it had a financial year ending in September, 2006 and not 31st March, 2007 as in the case of assessee. The same yardstick ought to have been applied by the TPO while considering whether Transwork Ltd. was comparable. The submission on behalf of the Revenue that the mandate of Rule 10B of the Rules can be ignored as the difference is only of three months is without any basis. No such liberty is granted in terms of Rule 10B(4) of the Rules. The findings of the Tribunal being on the basis of the unambiguous mandate of Rule 10B(4) of the Rules, the question as proposed does not give rise to any substantial question of law.

Revenue's appeal dismissed

2016-TII-510-ITAT-HYD-TP

TRANSPORT CORPORATION OF INDIA LTD Vs ACIT: HYDERABAD ITAT (Dated: August 21, 2016)

Income tax - Sections 14A, 35D, 92CA, 115VJ, 143(3) & 144C.

Keywords - ALP - advances to AE - accomodation entries - amortisation of share expenses - ESOP scheme - interest expenditure & notional interest.

Whether where actual utilisation of the funds advaced by an assessee to its AE were outside India, the ALP of such kind has to be determined applying the international market condition - YES: ITAT

The assessee is engaged in the transportation of goods, logistics including shipping business and generation of energy. It had filed the return for the AY 2011-12 declaring a total income of Rs. 66,79,28,524/- after claiming Chapter VI-A deduction of Rs.77,21,200/-. The return was revised by the assessee, wherein the income has been revised to Rs. 66,11,39,219/- after claiming Chapter VI-A deduction of Rs. 1,45,00,505/-. Subsequently the case was selected for scrutiny under CASS, wherein it was noticed that the assessee had entered into International Transactions with AEs amounting to Rs. 19,39,92,795/- for the financial year 2010-11. Accordingly, the case was referred to the TPO, who proposed an adjustment of Arm Length Interest on Loan advanced to subsidiaries and JV at Rs. 1,49,61,212/-. Subsequently, an order u/s.92CA(5) r.w.s 154 was passed revising ALP on Loan advanced to subsidiaries and JV to Rs. 21,23,380/-. Therefore, the revised adjustment proposed of Rs. 21,23,380/- was added to the assessee's total income in draft assessment order.

Having heard the parties, the Tribunal held that,

+ it is seen that the transaction under consideration is international transaction as the assessee lent money to its AEs. The economic activities happening in the international market is important rather than economic impact if the loan is advanced in Indian rupees. It is fact that these transactions are compared with uncontrolled environment to determine ALP. The fact that advance was lent outside India the interest rate prevailing in the international market is relevant. The DRP/TPO argues that these loans were originated in Indian currency and recorded, as such, in the assessee's books. Hence, it has to be analysed in the Indian ALP is not acceptable. The money lent outside India is always converted into foreign currency and accordingly recorded. But, how the AE had recorded. Obviously not in Indian currency. Since, actual utilisation of the funds were outside India, obviously, the ALP of this kind also to be determined applying the international market condition. Hence, we follow the consistent view of the various Tribunals, in particular, the case of PMP Auto Components (P) Ltd. Vs. DCIT, wherein the coordinate bench has held that the assessee is a tested party and economic/commercial as well as geographical condition in which the assessee is doing business are relevant to be considered for the purpose of determining the arm's length price. Therefore, we direct the TPO to arrive at the ALP of these transactions applying LIBOR + 200 points.

Case remanded