| 2017-TII-INSTANT-ALL-433 | 08 March 2017 |
 |
|
|
CASE LAWS DENSO INDIA PVT LTD Vs CIT: SUPREME COURT OF INDIA (Dated: March 2, 2017) Income Tax - The assessee preferred the present SLP challenging the decision of High Court, whereby it was held that it was open to the Revenue to segregate a portion of international transaction and subject it to entirely different method of benchmarking, in case the price shown to be paid by the assessee to its AE for such transaction is unconvincing. Before the Supreme Court, the counsel for the petitioner has filed a letter seeking withdrawal of the special leave petition. The Apex Court has granted permission to withdraw the SLP. Assessee's SLP dismissed DIT Vs INFORMATICA BUSINESS SOLUTIONS PVT LTD: KARNATAKA HIGH COURT (Dated: February 15, 2017) Income Tax - CBDT Circular No 21/2015 Keywords: minimum tax effect - interest component & review petition The assessee is a company. Revenue had filed a review petition before the High Court contending interalia that the tax effect in the main ITA was Rs.20,03,054/- and therefore would not be covered by the Circular No.21/2015 dated 10.12.2015 of CBDT. The counsel appearing for the assessee had brought to our notice the record of ITA No.180/2012 and in the said assessment order, the net tax effect was shown as of Rs.19,26,013/-, which in any case, was less than Rs.20,00,000/-. The other amount of interest was Rs.77,041/-, which in any case, was to be excluded for considering the net tax effect. On appeal, the High Court held that, Whether for the purpose of computing net tax effect, interest component has to be excluded from the amount of tax involved in a particular transaction - YES: HC + as the net tax effect of the subject assessment was Rs.19,26,013/-, it cannot be said that the subject was exceeding Rs.20,00,000/-, since the interest is to be excluded for considering the tax effect. Under the circumstances, we do not find any valid ground for review. Hence the review petition is dismissed. Revenue's appeal dismissed
PANGEA3 AND LEGAL DATABASE SYSTEMS PVT LTD Vs ITO: MUMBAI ITAT (Dated: March 6, 2017) Income Tax - Sections 92C, 143(3) & 144C Keywords: ITES support services - TNMM - loss making entity - mark up - foreign exchange loss - operating loss & merger transactions The assessee company is registered as STPI unit with Software Technology Parks of India. The functions performed by the assessee includes rendering of ITES services in the nature of legal support services, data processing, legal database and other administrative support services to its AE. Further, ITES services provided by the assessee mainly includes document review services (i.e. identifying the documents into responsive or non-responsive document based on the procedure manual provided by the client), abstraction services (i.e. punching the data from the contracts in predefined format like Excel or client provided template), drafting services (i.e. feeding of key contract data into contract template provided by the client) etc. In other words, the assessee company can be classified as mainly engaged in providing ITES to its AEs. As per the agreement with the AE the remuneration for providing ITES to AE was Cost plus 15% mark up. To benchmark the international transaction of ITES with AE as well as margin of 15%, the assessee selected TNMM as MAM and the PLI was based on operating profit /operating cost. In its TP Study Report, the assessee had selected five comparables. After claiming working capital adjustment of 5.23%, the adjusted arithmetic mean was arrived at 5.04% and hence, it was reported that the international transaction with the AE meets the arm's length price. TPO first of all held that, assessee's working of PLI was erroneous as it had wrongly considered foreign exchange loss as non-operating item of expenses. TPO therefore, re-casted the PLI. Thereafter, TPO rejected three of assessee's comparable companies, viz., i) Allsec Technologies Ltd., on the ground that it was consistently a loss making company; ii) Sundaram Business Services Ltd., on the ground of RPT Filter being less than 25%; and iii) R. Systems International Ltd., on the ground that the financial data was up to December, 2008. TPO then proceeded to carry out his own fresh search from comparables operating in ITES segment. TPO first selected nine comparable companies with an arithmetic mean arrived at 30.38%; and after inviting assessee's objection on various comparable and detailed discussion, he finally selected following comparables with an arithmetic mean of 29.57%. Accordingly, an adjustment of Rs.8,63,59,000/- was made on international transaction of ITS which was shown by the assessee at Rs.33,24,40,607/-. Having heard the matter, the Tribunal held that, Whether an adjustment to eliminate the material difference which could materially affect the net profit margin, could be made either in the case of the 'tested party' or comparables - YES: ITAT + from the harmonious reading of sub-clause (iii) of clause (e) of Rule 10B and sub-rule (3) of 10B, it is quite ostensible that under a comparability analysis of an international transaction with the uncontrolled transaction, reasonable and accurate adjustment is permitted to weed out any difference which materially affects the price or costs or the profit arising therefrom such transaction in the open market. Nowhere the rule suggests that the adjustment which materially affects the price or cost or profit should be made only to the uncontrolled transaction, that is, comparables and not to the 'tested party' whose transactions is being compared. This is apparently clear from the reading of sub clause (i) and (ii) which envisages that the net profit margin is to be computed and compared to in relation to or having regard to the same base, that is, of the 'tested party' or the comparables; and sub-rule (iii) provides that adjustment of net profit margin arising in comparable uncontrolled transaction, i.e., vis-à-vis the independent comparables is adjusted taking into account the difference both between the comparables or between the enterprises (related parties) entering into such international transaction. The adjustment can be made either in the case of the 'tested party', (i.e. controlled transaction) or the comparables (i.e. uncontrolled transactions) so that the difference which could materially affect the amount of net profit margin is removed. Further clause (iv) provides that the net profit realized by the enterprise as referred to in sub-clause (i) i.e., the 'tested party' or the enterprise entering into controlled international transaction is to be established at the same net profit margin which is determined under sub-clause (iii), that is, under the comparability analysis. Lastly, sub-clause (v) provides that the net profit arrived should be at ALP; Whether the PLI of assessee or the tested party can be adjusted so as to increase the profits earned from international transaction for comparability adjustments - YES: ITAT + we agree with the contention of the Ld. CIT, DR that hedging loss or gain arising in the normal course of business has to be generally given the same treatment as is given to the loss or gain in the underlined transactions. It is imperative to see, firstly, whether the forex gain or loss are of trading nature that is, exchange gain or loss is on a trade receivable or payable and whether or not the tested party is responsible for them, that is, the foreign currency risk is that of the tested party or not; and secondly, whether the hedging of the foreign currency exposure on the underlined trade receivable or payable needs to be considered and treated in the same way in determining the net profit. If foreign exchange risk is borne by the tested party, then it needs to be accounted for by the tested party. This is the explanation given by the OECD as referred to by CIT, DR. In all such cases, if forex is directly to be received on realization of debtors at a future date, hedging is done to sell or buy foreign currency at the future date. In the case of the assessee, it has been explained that the assessee had entered into forward contracts to minimize the risk on account of exchange rate fluctuation. So far as entering into forward contracts to minimize such risks is absolutely no abnormal conduct on part of the assessee, because if the trade receivables or payables are in foreign currency, the parties generally resort to entering into forward contract and hence, it is to be reckoned as normal business transaction and any gain or loss in the normal course of business is to be accounted for in the accounts. However, if there is some hedging abnormality or any extraordinary event has occurred qua the tested party (assessee) which materially affects the cost or profit in the relevant financial year, which is not across the industry or is either absent or is of less magnitude in the case of comparable independent parties, then definitely such an abnormality or extraordinary event has to be factored in while computing the cost base or PLI. Such a loss even due to untoward incident generally would have gone into the operating cost, had it been demonstrated that it was the phenomenon across the industry or in the cases of comparable uncontrolled transactions, that is, independent comparable entities this was also the peculiar feature. If such a peculiarity is absent or its magnitude is less in the case of the comparables, then ostensibly such peculiarity or abnormality has to be treated as factors materially affecting the cost and consequently, the PLI of the tested party for which the reasonable accurate adjustment should be made to eliminate this effect, because it has to be reckoned as a difference between the international transaction and the comparable uncontrolled transactions; Whether the loss or gain on cancellation of forward contract materially affects the cost/margin of the assessee to warrant adjustment - YES: ITAT + comparability factors as contained in Rule 10B (2) also envisages risks assumed by the respective parties to the transactions and risk on account of forex fluctuation arises when a transaction is entered into with another party resulting in contractual obligations being denominated in foreign currency as compared to the currency in which accounts are maintained. In such an event, any difference in the rate of exchange between the rate prevailing on the date of entering into the contract and the date of realization will result any gain or loss. Therefore, all the comparables that have been considered should also bear the Forex loss. We agree with this contention of the CIT, DR that once a comparability factor of forex gain or loss is established to be similar then the transaction becomes comparable on account of Forex risk. However, here, in this case as stated earlier it has not been brought on record that such kind of an exposure of hedging loss on cancellation of forward contracts is there in every comparable uncontrolled transaction, that is, in the case of the other comparables. Risk assumed by the assessee as well as by the comparable entity may be similar but quantum and scale of a risk factor if undermines the computation of PLI of the assessee vis-à-vis the comparables, then our rules under the Indian TP provisions also enshrines that any material difference affecting the cost or profitability between the international transaction and comparable uncontrolled transaction needs to be eliminated by making suitable adjustments. Here in this case, a material difference has arisen in the case of the assessee due to abnormal feature which is qua the assessee in this particular year, (which is abnormal loss on cancellation of forward contract) which admittedly is absent in the cases of comparables with whom the assessee's transaction is being bench marked, therefore, a suitable adjustment has to be made to factor in the material difference in the PLI. Thus, in our opinion, the loss amounting to Rs.2,22,52,786/- on account of cancellation of forward contracts out of total forex loss of Rs.3,41,44,774/- needs to be eliminated from the operating cost and this adjustment is proposed to be made in the case of the assessee which is the tested party. We accordingly direct the TPO/AO to make the adjustment of this amount in the operating cost and rework the PLI. In view of our this finding, we do not feel necessary to go into the other arguments of Counsel that if adjustment is made in the case of the comparables then the assessee's margin would be arrived at 11.97% as the Forex loss to the total cost in the case of comparables is only 2.71% which will work out to Rs. 78 lakhs and, therefore, only Rs.78 lakhs should be as operating cost to make it comparable and at par with the comparables and balance should be removed as non-operating. This argument has become purely academic; hence no opinion is expressed on this point; Selection of Comparables - Acropetal Technologies Ltd. Whether a computer software development company can be said to be functionally similar with a company rendering purely ITES services - NO: ITAT + we find that assessee is mostly into ITES relating to data processing of legal data base and other administrative support services. It has not been disputed that under the segment of 'Engineering Design Services', this company is providing broad spectrum of services which is mainly in the nature of software development. Its entire 'Engineering Design Services' is providing software services to its client and has portfolio of services which included concept design, product design and development and other reliable engineering services which is given through development of computer software. A computer software development company cannot be said to be functionally similar with a company which is rendering purely ITES services, as it has a different FAR analysis. One other distinct factor which has been pointed out before us is that, there was an extraordinary event of acquisition in this year and such an acquisition definitely has an impact on the PLI. Moreover, in various decisions as cited by Ld. Counsel this company has been held to be incomparable with the company rendering purely ITES services. Thus, we agree with the contention of the Ld. Counsel that Acropetal Technologies Ltd. should be excluded from the list of the comparables; eClerx Services Ltd. Whether in an outsourcing model, assets deployed in the form of human resource and other intangibles differ from an entity which operates on its own resources - YES: ITAT + we agree with the contention of the CIT, DR that assessee company cannot be regarded as low end ITES service provider because engagement of qualified and professional lawyers for providing legal outsourcing services is definitely high end services. We cannot reject this comparable simply on the ground that the comparable company is providing high end KPO services, because as held in the foregoing paragraph the assessee too is into providing high end legal outsourcing services through qualified lawyers, hence this factor of distinction is unacceptable on the facts of the present case. So far as the issue of outsourcing the substantial work to third party during the year to indicate that eClerx operates in a different business model, we find that this contention be quite acceptable, because in outsourcing model, assets deployed in the form of human resource and other intangibles differ from an entity which operates on its own resources. However, there is no data regarding the assessee as to how much the assessee is outsourcing its activities or whether all its activities are in house. Therefore, we remit this issue to the file of the TPO/AO to examine the outsourcing activity of this comparable and analyse vis-à-vis the assessee. If TPO founds that there is a major difference in the outsourcing activity in the case of eClerx as compared to assessee's outsourcing activity whether negligible or there is no outsourcing at all, then eClerx should be rejected for being considered as a comparable company. Because, as observed above the outsourcing activity indicates a different business model and assets employed, therefore, it has an impact on the cost and consequently profit margin. With this direction this comparable is too set aside to the file of the TPO; R-Systems International Ltd. Whether a company following different financial year can be excluded from the list of comparables, even if the financials of relevant period is available for comparison - NO: ITAT + this comparable company has been rejected not on the ground of functionality but on the ground that it is following the financial year from January to December (i.e., calendar year). Though a comparable company following a different financial year may not be generally taken for comparability analysis, however, if financial data is available for all the quarters including January to March and it is otherwise possible to determine the value of the transaction as well as the profitability during the corresponding period, then it suffices the comparability criteria. Because, ultimately the core point in comparability analysis is to benchmark the margin of a given period of a comparable uncontrolled transaction with controlled transaction. If the financials of the corresponding period is available then it cannot be rejected simply on the ground that it has a different financial year. As brought out on record by the Counsel before us that the audited accounts of R-Systems for the year ending 31.12.2008 and for the quarter starting from 31.01.2008 to 31.03.2009 is available and once such an audited statement is available, then the proportionate working for 31.03 2009 can easily be deduced. If there are no major incidents of factors disturbing the profit margin in that quarter, whose results are being worked out and the transactions of the Company are carried out in the normal course of business, then we do not find any reason to reject the comparable out rightly on the aforesaid ground. The working of PLI based on audited accounts as incorporated above clearly clinches the point. So far as the decision of Bombay HC as relied upon by CIT DR is concerned, in that case the revenue was contesting that difference between two financial years was only of three months, therefore, same should be ignored. It was not brought before HC or anything was on record that the data for relevant two months was available or can be worked out on the proportionate basis based on audited accounts; then in that case whether it can be ignored or not. Nothing is borne out that, whether the assessee has provided the audited accounts of the intervening period and the proportionate working of two consecutive calendars years in which the said quarter results fell, like in the present case. Here in this case, once the audited data is available for the quarter 01.01.2009 to 31.03.2009 then same is liable to be accepted. Accordingly, we hold that this company is to be accepted as comparable company for the purpose of benchmarking the assessee's margin; Allsec Technoligies Ltd. Whether merger and acquisition occurring in case of a company would impact its financial results for being considered as a comparable - YES: ITAT + one of the arguments placed by the CIT DR is that, the foreign exchange earnings of this comparable during the year was 74% which has reduced to 50% in the subsequent year, therefore, it is below the threshold (filter) applied by the parties. However, we are unable to accept this contention, because, if the export is quite approximate to 75% in this year, then same cannot be held to be a very relevant factor for rejecting such minor difference in export turnover filter. This has been held so by the P&H HC in the case of Mercer Consulting India Pvt. Ltd. CIT DR has also pointed out that this company had been going through merger and acquisition and right from the year 2008 to 2011 this company has been incurring loss. The merger and acquisition undertaken by this company has impacted the profitability over a period of three years upto March, 2011. If the loss is on account of merger and acquisition in this year, then definitely we agree with the proposition of CIT, DR that this would definitely impact the PLI and consequently the comparability analysis. However, if the loss is during the normal course of business and has nothing to do with merger and acquisition in this year, therefore, such a margin even if it is a loss, has to be accepted and it would be a fit comparable for benchmarking the assessee's margin. Accordingly, only for this exercise, that is, to examine the impact of merger and acquisition in this year, we are remitting the matter back to file of TPO. The assessee will also provide the relevant details in support of its case. Thus, this comparable is also set aside to the file of the TPO, for limited purpose; Microland Ltd. Whether a company can be rejected as comparable merely on the ground of normal business losses when no peculiar factors have been pointed out for such losses - NO: ITAT + this company has been rejected by the TPO for the reason that firstly, it was not selected by the assessee in its original TP Study Report; and secondly, it has incurred loss during the year. CIT, DR has also pointed out that the ITES segment was into loss in earlier year also. As regard the contention that the assessee has not selected the company in the T.P. Study Report, therefore, it is precluded from being considered as comparable by assessee at a later stage, we are unable to subscribe to the views of the TPO, because once the TPO has rejected most of the comparables and asked the assessee to furnish fresh comparables, then TPO is bound to consider the comparables as submitted by the assessee. Apart from that, once the separate segment of ITES services are available in public domain or made available, then such segment needs to be benchmarked with the assessee. Further, we are unable to subscribe to the view that, since this comparable company had incurred loss in this year as well as in the earlier year, the same should be excluded, because the loss making and profit is in the normal course of business and unless certain peculiar factors have not been pointed out for loss, a comparable company cannot be rejected simply on the ground that it is loss making company. Once a separate segment is available and the profitability of such a segment is determinable, then the same should be adopted for the comparability analysis. Hence, we uphold the order of the DRP for accepting the said comparable in the final list of comparables. Accordingly, the revenue's ground on this comparable is treated as dismissed; Omega Healthcare Management Services Pvt. Ltd. Whether companies can be considered as comparable when their annual reports are available along with functional profile capable of FAR analysis - YES: ITAT + this comparable was rejected by the TPO for the reason that its P&L Account was not available in the public domain. However, before the DRP the assessee pointed out that the Balance Sheet and Profit & Loss account was available in the public domain and copy of the same was furnished. Accordingly, DRP directed the TPO to verify the financials and include the same in the list of the comparables. We do not find any reason to interfere on such a direction of the DRP, because if financials are available and profit margins are determinable along with functional profile, then the TPO should consider this comparable for comparability analysis. Accordingly, we direct that Omega Healthcare should be accepted subject to the availability of financial data; + once the annual report of the companies are available along with the functional profile and are capable of being analysed on FAR analysis then, we do not see any reason as to why these comparable companies should not be considered for comparability analysis. The TPO cannot preclude the assessee from proposing inclusion or exclusion of comparables even it has been brought at later stage either by assessee or by TPO himself, if all material facts for comparative analysis are made available. The paramount aim of transfer pricing mechanism is determination of ALP of a transaction and any inclusion or exclusion of comparables should be based on proper FAR analysis as provided under the law. Accordingly, we direct the TPO to examine these two comparables and assessee will provide all the necessary data for considering the same. Thus, these two comparables are set aside to the file of the TPO for proper comparability analysis and if they are found to be comparable then same should be included in the comparable list for the purpose of benchmarking the profit margin. In the result, the appeal of the assessee is partly allowed for statistical purposes, whereas the appeal of the Revenue is dismissed. Assessee's appeal partly allowed
DCIT Vs GOOGLE INDIA PVT LTD: BANGALORE ITAT (Dated: March 3, 2017) Income Tax - Sections 10A, 92B, 92CA & 133(6) Keywords: export turnover - total turnover - enduring benefit - comparability analysis - operating margin - FEF & commercial expediency The assessee is a company. It had made the payment for club membership fee of Rs.68,875/- and claimed to be the revenue expenditure but the AO treated it to capital expenditure and disallowed the claim. When the appeal was preferred to the CIT(A), he treated it to be the revenue expenditure and deleted the addition. The counsel for the assessee has contended that by making the payment towards club membership fees, the assessee did not acquire any enduring benefit as it was obtained on account of commercial expediency. During the course of assessment proceedings, it was observed by AO that assessee had international transactions as per section 92B. Accordingly, the case was referred to TPO in order to determine the ALP. The order u/s 92CA was passed by TPO which was received by the AO and consequently, the adjustment at ALP to the extent of Rs.3,48,72,821/- was made under section 92CA. Against this adjustment to ALP, the assessee preferred an appeal before the CIT(A), who had partly accepted the contentions of the assessee and directed the AO/TPO to recompute the ALP in terms indicated in his order. Assessee argued that assessee provides information technology services and IT enabled services to its AE. During the year, it had entered into various international transactions with its AEs. It was also contended that ALP adjustment was made in both the segments i.e., Software Development Services and IT enabled services. Having heard the matter, the Tribunal held that, Whether expenditure incurred on club membership for commercial expediency can be allowed as business expenditure - YES: ITAT + we find force in the contention of the assessee that since the assessee has obtained the club membership for commercial expediency; the same is to be allowed as business expenditure. We therefore find no infirmity in the order of the CIT(A). Accordingly, we confirm the same; Whether in case two companies are having similar functional profile, out of which one of them has ceased to be a valid comparable, can the other still holds good as a genuine comparable - NO: ITAT + having carefully examined the functional profile of Bodhtree Consulting Limited and its related party transactions, in the light of judgment of ACIT Vs. McAfree Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., we find that the Tribunal has categorically held in the case of McAfree Software (India) Pvt. Ltd., whose profile is similar to the assessee's profile, that Bodhtree Consulting Limited is functionally different and also fails on RPT filter as it is more than 25%. Since the profile of the Bodhtree Consulting Ltd., was examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd., in AY 2005-06 2016-TII-141-ITAT-BANG-TP, we find no justification to take a contrary view in the instant case. Accordingly following the same, we hold that Bodhtree Consulting Ltd., is not a good comparable. Therefore, we uphold the order of the CIT(A) who has rightly excluded this comparable from the list of comparables; Whether a functionally dissimilar company whose segmental data are not available in public domain, can be held as a valid comparable for benchmarking purposes - NO: ITAT + with regard to Sankhya Infotech Ltd., it was contended that this comparable is functionally dissimilar from the profile of the assessee and more so the segmental data are not available and these aspects were examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd. Similarly, the profile of Four Soft Ltd., Geometric Software Solutions Limited and Tata Elxsi Ltd., was also examined by the Tribunal in the case of McAfee Software (India) Pvt. Ltd. and Kodiak Networks India Ltd., in which the Tribunal has held that Four Soft Ltd., is functionally dissimilar and RPT is at 19%. With regard to Geometric Software Solutions Limited, it was also held that this comparable is functionally dissimilar. Similar is the position with regard to Tata Elxsi. Since the Tribunal has examined the profile of these comparables in the case of McAfee Software (India) Pvt. Ltd., in the light of other orders of the Tribunal and has categorically held that these comparables are not good comparables for determining the ALP in the case of McAfee Software (India) Pvt. Ltd., and Kodiak Networks India Ltd., whose profile is similar to assessee's profile, we find no justification to re-examine the profile of these comparables again. We therefore hold that Sankhya Infotech Ltd., Four Soft Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd., are not good comparables. Therefore they have to be excluded from the final list of comparables. We accordingly confirm the order of CIT(A) with respect to exclusion of Bodhtree Consulting Ltd., Geometric Software Solutions Ltd., and Tata Elxsi Ltd. Since CIT(A) has taken Sankhya and Foursoft Ltd., in the list of comparables, we set aside the order of CIT(A) and direct AO to exclude these comparables from the final list of comparables. After the exclusion of these comparables, left out comparables, Lanco Global Systems Ltd., Sasken Networks, R. S. Software (India) Ltd., Visualsoft Technologies and Sasken Communications Ltd., be taken in the final list of comparables for determination of the ALP for the software development services provided by the assessee to its AE; Whether a company can be excluded from the list of comparables even if sufficient reasons for its rejection have not been given by the TPO - NO: ITAT + out of these 9 comparables, CIT(A) has rejected Vishal Information Tech Ltd., Wipro BPO and Nucleus Netsoft & GIS Ltd. The assessee is against the inclusion of Allsec Technologies Ltd. But during the course of hearing, he could not establish sufficient reasons for its rejections. With regard to Vishal Information and Nucleus Netsoft & GIS Ltd., of which exclusion was challenged by the revenue, it was submitted that these comparables were examined by the Tribunal in the case of Pr. CIT Vs. IHG IT Services (India) Pvt. Ltd., 2016-TII-96-HC-CHD-TP and DCIT Vs. Genesis Integrating Systems India Pvt. Ltd., 2016-TII-03-ITAT-BANG-TP. Copy of the order is placed on record. It was also contended that profile of these comparables are similar to the assessee's profile as they are also engaged in IT enabled services. On perusal of the orders of the Tribunal, we find that Vishal Information Tech Ltd., and Nuclues Netsoft & GIS Ltd., were examined by Punjab and Haryana High Courts and their exclusion was approved. Accordingly, the appeal of th e revenue and the C.O. of the assessee are partly allowed for statistical purposes. Revenue's appeal partly allowed |
Thanking you for your support and cooperation. Regards, TIOL HOUSE, 490, Udyog Vihar, Phase - V |