Income Tax Appellate Tribunal - Bangalore
Infeineon Technologies India Pvt. ... vs Asst.C.I.T., on 19 March, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : BANGALORE
BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No.656/Bang/2016
Assessment Year : 2011 - 12
Infineon Technologies India The Asst. Commissioner of
Pvt. Ltd., Income Tax,
9th Floor, Circle-3(1)(1),
Prestige Thirulakshmi, Vs. Bengaluru.
No.11, Mahatma Gandhi
Road,
Bengaluru-560 001.
PAN - AABCS 6967 N.
APPELLANT RESPONDENT
IT(TP)A No.633/Bang/2016
Assessment Year : 2011 - 12
The Asst. Commissioner of Infineon Technologies India
Income Tax, Pvt. Ltd.,
Circle-3(1)(1), 9th Floor,
Bengaluru. Vs. Prestige Thirulakshmi,
No.11, Mahatma Gandhi
Road,
Bengaluru-560 001.
PAN - AABCS 6967 N.
APPELLANT RESPONDENT
Assessee by : Shri Sharath Rao, C.A
Respondent by : Ms. Neera Malhotra, CIT (DR)
Date of Hearing : 04-01-2020
Date of Pronouncement : 19-03-2020
Page 2 of 40
IT(TP)A Nos.656 & 633/Bang/2016
A. Y : 2011 - 12
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present cross appeals has been filed by assessee as well as revenue against final assessment order dated 29/01/2016 passed by Ld.ACIT Circle-3 (1) (1), Bangalore, under section 143(3) read with section 144C of the Act on following grounds of appeal:
ITA No. 633/B/2016I) The directions of the Dispute Resolution Panel are opposed to law and facts of the case.
ii) In the facts and circumstances of the case, Whether the Hon'ble DRP is correct in holding that the, M/s RS Software Pvt. Ltd., M/s Acropetal Technologies Ltd and M/s L&T Infotech ltd. cannot be taken as comparable, when it satisfies all the qualitative and quantitative filters adopted by the TPO.
iii) Whether the Hon'ble DRP is right in applying "onsite revenue filter"
without appreciating the fact that the function carried out is "Software Development" irrespective of whether onsite or offshore.
iv) Whether the Hon'ble DRP in correct in excluding M/s RS Software Pvt. Ltd. and M/s Acropetal Technologies and M/s L&T Infotech ltd on the ground that they have significant onsite revenue without appreciating the fact that onsite development of software entails more cost and thereby results in lower profit margins.
v) Whether the Hon'ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies.
vi) Whether the Hon'ble DRP has erred on fact in deleting M/s E-
infochips as a comparable on the ground that it fails the filter of service income less than 75% of the sales, when the said company has service income being 100% of the sales.
vii) Whether Hon'ble DRP erred in fact in rejecting the company as a comparable on the ground that it is functionally different when the primary source of income of the comparable is from provision of software development services.
viii) Whether while seeking the exact comparability as mentioned above the DRP was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin.
Page 3 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12
ix) Whether the Hon'ble DRP is correct in fact and law in disregarding the position of law that there could be differences between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises?
(x)For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed.
xi) The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above.
ITA No. 656/B/2016I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another.
1. The learned Assessing Officer ("learned AO"), learned Transfer Pricing Officer ("learned TPO") and the Honourable Dispute Resolution Panel ("Hon'ble DRP") grossly erred in adjusting the transfer price by INR 27,19,37,099/- of the Appellant's international transactions with its Associated Enterprises ("AEs") u/s 92CA of the Income-tax Act, 1961.
2. The learned AO/learned TPO/Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92CA of the Act.
3. The learned AO/learned TPO/Hon'ble DRP erred in rejecting comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters in determining the ALP.
4. The learned AO/learned TPO/Hon'ble DRP erred in not considering the previous two years financial data of the comparable companies while determining the ALP.
5. The learned AO/learned TPO/Hon'ble DRP erred in using data available at the time of assessment proceedings, instead of the data available at the time of preparing the TP documentation for comparable companies.
6. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% instead of 25% of the total sales, leading to a narrow comparable set.
7. The learned AO/learned TPO/Hon'ble DRP erred in applying related party filter of 25% without giving any cogent reason for doing so.
8. The learned AO/learned TPO/Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies, even while applying the lower limit on turnover.
9. The learned AO/learned TPO/Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies.
10. The learned AO/learned TPO/Hon'ble DRP erred in not considering the provision for bad and doubtful debts as operating in nature.
11.The learned AO/learned TPO/Hon'ble DRP erred in applying onsite filter to reject the companies that are comparable to the Appellant.
12. Software Development Services Page 4 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 12.1. The learned AO/learned TPO/Hon'ble DRP erred in carrying out a fresh search to select comparables without appreciating the fact that the following comparable companies are not comparable to the Appellant:
• Persistent Systems & Solutions Ltd.
• Persistent Systems Ltd.
• Sasken Communication Technologies Ltd. 12.2. The learned AO/learned TPO/Hon'ble DRP has grossly erred in rejecting companies that ought to have been included as comparables:
• Akshay Software Technologies Ltd .
• Comp-U-Learn Tech India Ltd.
• Helios and Matheson Information Technology Ltd. • LGS Global Limited • Maveric Systems Ltd.
• Silverline Technologies Ltd.
• Thinksoft Global Servic s Ltd.
• Evoke Technologies Ltd.
• R S Software (India) Ltd.
13. Marketing Support Services 13.1. The learned AO/learned TPO/Hon'ble DRP has grossly erred in not rejecting Asian Business Exhibition & Conferences Ltd. as it is functionally dissimilar to the Appellant. 13.2. The learned AO/learned TPO/Hon'ble DRP has grossly erred in rejecting companies that ought to have been included as comparables:
• Concept Communications Ltd.
• Gradiente Infotainment Ltd.
• Quadrant Communications Ltd.
• Sporting & Outdoor Ad-Agency Pvt. Ltd.
• Cyber Media India Online Ltd.
14. The learned AO/learned TPO/Hon'ble DRP has erred in making the following errors in the computation of working capital adjustment:
a. by not considering the fact that the Appellant does not have any working capital risk, therefore, no negative working capital adjustment should be allowed.
b. in proposing a restriction to the working capital adjustment without giving any cogent reason.
c. in considering the wrong SBI PLR while computing the working capital adjustment.
The learned AO/learned TPO/Hon'ble DRP erred in not allowing appropriate adjustment towards the risk differential between the Appellant vis-à-vis comparable companies. Corporate Tax
15. Rejection of sale of wireless division as slump sale transaction and treating the gains arising from the same as Short Term Capital Gains A. Transfer of wireless division is not slump sale as all the assets and liabilities were not transferred 15.1. That on the facts and circumstances of the case and in law, the Learned Assessing Officer ('learned AO') and the Honourable Dispute Page 5 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Resolution Panel ('Hon'ble DRP') has erred in rejecting sale of 'wireless division' of the Appellant as slump sale.
15.2. The Learned DRP has erred in concluding that provision of section 50B are not applicable to the Appellant without giving any reasons. 15.3. The learned AO and Hon'ble DRP has erred in contending that all assets and liabilities of the wireless division are not transferred to qualify as 'slump sale' including cash and cash equivalents, bank deposits etc. 15.4. The learned AO and the Hon'ble DRP ought to have appreciated that there is no separate cash ledger and bank accounts maintained for wireless division and the same are maintained at entity level. 15.5. The learned AO and the Hon'ble DRP has failed to appreciate that there are no intangible assets nor any secured/unsecured loans. 15.6. The Learned AO and the Hon'ble DRP has failed to appreciate that the law does not require that all assets are required to be transferred and only a collection of assets and liabilities which constitute a separate business activity and allows the buyer to carry out business independently would suffice. 15.7. The learned AO and the Hon'ble DRP has further erred in not observing that not only depreciable assets are transferred but also infrastructure, computers, employees and contracts (customer contracts, lease agreements and technical employees) together constitutes the business entity and the same has been transferred as a going concern.
15.8. The learned AO and the Hon'ble DRP has erred in placing reliance on the ruling of the Mumbai Tribunal in the case of Premier Automobiles which has been subsequently reversed by the Bombay High Court (264 ITR 193).
B. Net worth Computation 15.9. The learned AO and the Hon'ble DRP has erred in not applying the provisions of section 50B of the Act for computing net worth of the undertaking.
15.10. The learned AO and the Hon'ble DRP has erred in holding that the value of assets transferred cannot be identified since the list of assets as per Business Transfer Agreement ('BTA') entered into by the Assessee with Intel Mobile Communications Private Ltd ('Buyer') does not match with the valuation report obtained by the Buyer. 15.11. The learned AO and the Hon'ble DRP has further erred in holding that the Appellant has not been able to explain the difference between BTA and valuation report without even providing a copy of the valuation report to the Appellant.
15.12. The learned AO and the Hon'ble DRP has erred in placing reliance on the valuation report submitted by the Buyer without appreciating the fact that certain assets have not been considered as a part of valuation report.
15.13. The learned AO and the Hon'ble DRP has not appreciated the facts that the difference in the assets transferred as per BTA and valuation report was explained by the Buyer.
Page 6 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 15.14. The learned AO and the Hon'ble DRP himself accepted that the information relating to cost of acquisition and date of acquisition is available only with the Appellant but erred in adopting the values as per valuation report provided by the Buyer. 15.15. The learned AO and the Hon'ble DRP has erred in not appreciating the fact that the valuation report obtained by the Buyer was only for the purpose of capitalization of assets in the books of the Buyer and is not with regard to net worth computation of the wireless division.
15.16. The learned AO and the Hon'ble DRP has erred in computing net worth of the undertaking, i.e., wireless division as per the valuation report furnished by the Buyer and not based on documents, Form 3CEA submitted by the Appellant.
15.17. The learned DRP erred in holding that the case laws relied by the Appellant as regard to the issue of slump sale is distinguishable on the reason that Form 3CEA does not certify the correctness of the net worth and that the difference between the BTA and valuation report obtained by the buyer has not been explained by the Appellant. 15.18. The learned AO and the Hon'ble DRP has erred in holding that the leasehold improvements and computers older than 2 years would not have any value as on date of the transfer. 15.19. The learned AO and the Hon'ble DRP has further erred in holding that the valuation report is on 'as-is-where-is' basis. 15.20. The learned AO and the Hon'ble DRP has erred in not including the values of excluded assets (which are not part of valuation report) for the purposes of net worth computation.
15.21. The learned AO and the Hon'ble DRP has erred in holding that the agreement is made in terms of tax planning without appreciating the fact that the transaction was entered into between two independent and unrelated parties.
C. Treatment of gains as short term capital gains 15.22. The learned AO and the Hon'ble DRP has erred in treating the transfer of wireless division as short term capital gains as most of the assets are held for less than 2 years.
15.23. The learned AO and the Hon'ble DRP has erred in treating the capital gains as short term as the assets held are depreciable assets whereas the Assessee has transferred assets, employees, customer contracts etc. 15.24. The learned AO and the Hon'ble DRP has erred in concluding that the capital gains arising from sale of wireless division as short term capital gain when the division was in existence for more than 36 months.
D. Filing of Form 3CEA 15.25. The learned AO and Hon'ble DRP has erred in holding that the form 3CEA obtained from the Chartered Accountant is not in the correct format as prescribed by the Act and Income Tax Rules, 1962 ('Rules'). 15.26. The learned DRP has erred in holding that Form 3CEA was not found to be certified by the Chartered Accountant in regard to Page 7 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 correctness of net worth of the undertaking without stating any reasons why Form 3CEA is not correct.
15.27. The learned AO and Hon'ble DRP has failed to appreciate that the additional statement made by the Chartered Accountant in Form 3CEA is only a generic disclosure as a part of the certification process. 15.28. The learned AO and the Hon'ble DRP has erred in not relying on the decision of the Mumbai Tribunal in the case of Meco Instruments Pvt. Ltd. (2010-TIOL-563-ITAT-MUM) wherein the Tribunal held that relief cannot be denied on the ground of technicalities of procedure.
16. Disallowance of software expenses amounting to Rs. 2,413,306 under section 40(a)(ia) 16.1. The learned AO and the Hon'ble DRP has erred in disallowing software expense amounting to Rs. 1,251,596 on the basis that no tax is deducted at source.
16.2. With respect to the balance amount of Rs. 1,161,710, the learned AO has failed to appreciate that on the said amount, taxes have been withheld at source and the Form 1 SCB evidencing the same has been submitted to the learned AO pursuant to the DRP directions. 16.3. The learned AO and the Honle DRP has failed to appreciate that with respect to the other transactions, which are towards equipment purchased with inbuilt software; bifurcation of which is not possible and software received in media that amounts to goods, cannot be subject to withholding of taxes.
17. Interest under section 234B of the Act 17.1. The learned AO erred in levying interest under section 234B of the Act which is consequential in nature.
18. Interest under section 234C of the Act 18.1. The learned AO erred in levying interest under section 234C of the Act on the assessed income, where such interest is to be computed on the returned income and not on the assessed income. The Appellant craves to leave to add, to alter, to amend, to rescind or to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal. For the above and any other grounds which may be raised at the time of earning, it is prayed that necessary relief may be provided.
Brief facts of the case are as under:
2. Assessee is a company engaged in the business of software development activities relating to electronic integrated circuits and form where development circuits and marketing support services. For year under consideration assessee filed its return of income on 29/11/2011 declaring total income of Rs.1,03,26,22,425/-. The return was processed under section Page 8 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 143(1) of the Act, and subsequently, case was selected for scrutiny. Notice under section 143 (2) was issued to assessee in response to which representative of assessee appeared before Ld.AO and filed requisite details as called for.
3. Ld.AO observed that assessee has entered into international transaction exceeding Rs.15 crores and accordingly, case was referred to Transfer Pricing officer for determining arms length price of international transactions entered into by assessee with its associated enterprise.
4. Upon receipt of reference under section 92CA of the Act, Ld.TPO called upon assessee to file economic details in Form 3 CEB. In response to the notice, assessee filed requisite details from which Ld.AO observed that assessee had following international transactions:
S.No International transaction Amount(INR) 1 Provision of software development services 1,858,350,560 2 Provision of marketing support services 46,468,176 3 Purchase of fixed assets 351,596 4 Reimbursement of Expenses 11,510,092
5. Ld.TPO observed that assessee selected TNMM as most appropriate method and OP/OC as PLI for computing its margin at 10.27% for software development service segment and 9% for marketing support service segment.
6. Ld.TPO observed that assessee used following comparables under both segments:Page 9 of 40
IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Software Development Service Segment S.No Company Name Margin 1 Akshay Software Technologies Limited 3.62% 2 Bodhtreee Consulting Limited 45.11% 3 Cat Technologies Limited 20.79% 4 Comp-U-Learn Tech India Limited 21.40% 5 Helios & Matheson Information 16.11% Technology Limited 6 Maveric Software Limited 7.98% 7 Silverline Technologies Limited -10.44% 8 R S Software (India) Limited 12.44% 9 LGSGlobal Limited 14.21% 10 Thinksoft Global Services Limited 16.27% 11 Quintegra Solutions Limited 0.22% 12 Compulink Systems Limited (Seg) 5.82% 13 Acropetal Technologies Limited (Seg) 24.72% Average 13.71% Marketing support service segment S.No Company name Margins 1 Concept Comiminication Limited 2.81% 2 Cyber Media India Online Limited (merged) 19.98% 3 Gradiente Infotainment Limited 4.16% 4 Marketing Consultants & Agencies Limited 8.58% 5 Quadrant Communications Limited 10.99% 6 Sporting & Outdoor Aad-Agency Private Limited 2.80 Average 8.22%
7. Ld.AO was of the opinion that, comparables used by assessee do not pass its own filters and that data used in computing arm's length price is not reliable and correct. Ld.TPO Page 10 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 thus proceeded to determine arm's length price by conducting independent search for comparables, considering new set of filters.
Ld.TPO selected following comparables under both segments Software Development Service Segment S.No Name PLI 1 Acropetal Technologies 31.98% Ltd.(seg) 2 e zest solutions 21.03% 3 E-infochips Ltd 56.44% 4 Evoke 8.11% 5 ICRA Techno Analytics Ltd. 24.83% 6 Infosys Ltd 43.39% Marketing support service segment S.No Name of the Company OP/Cost(%) 1 Aasian Business Exhibition & 19.51 Conferences 2 Cyber Media Research Ltd 10.59 3 ICC International 24.66 Average 18.25%
8. Average margin computed by assessee of 13 comparables under software support service segment was 24.82% and 3 comparables under marketing support service segment was 18.25%. Ld.AO thus computed proposed adjustment as under:
S.No Particulars Amount
1 Software Development services 25,97,51,615
2 Marketing Services 39,43,401
Page 11 of 40
IT(TP)A Nos.656 & 633/Bang/2016
A. Y : 2011 - 12
Total Adjustment 26,36,95,016
9. Ld.AO while passing draft assessment order, Ld.AO treated consideration received by assessee on transfer of its wireless division to M/s.Intel Mobile Communications Pvt.Ltd., as a going concern as short term capital gain amounting to Rs.90,65,90,180/- as against long-term capital gain considered by assessee.
10. Ld.AO also disallowed software expenses under section 40(A) amounting to Rs.24,13,306/- as assessee failed to deduct TDS.
Aggrieved by draft assessment order, assessee raised objections before DRP.
11. DRP while passing its order, rejected M/s.R.S.Software Pvt.Ltd., M/s. Acropetal Technologies Ltd., and M/s.L&T Infotech Ltd., for not satisfying qualitative and quantitative filters adopted Ld.TPO. DRP also excluded these comparables as they have significant on-site revenue. DRP further rejected M/s/E Infochips Ltd., as comparable, since it fails filter of service income less than 75% of sales. As regards balance comparables, DRP upheld their inclusion. DRP also upheld negative working capital computed by Ld.AO/TPO.
12. Ld.AO upon receipt of DRP directions passed final assessment order by making addition in the hands of assessee amounting to Rs.1,43,18,48,300/-.
Aggrieved by order passed by Ld.AO, revenue as well as assessee are in appeal before us now.
Page 12 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12
13. At the outset, Ld.AR submitted that issue alleged by revenue in their appeal has been considered by this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT reported in (2019) 109 Taxmann.com 335 for same assessment year. Both sides submitted that issues raised and comparables alleged for inclusion by revenue in their appeal are identical and similar.
14. In cross appeal filed by assessee, it seeks exclusion of certain comparables under software development service segment mentioned in Ground 12.1 and 12.2. Assessee also seeks inclusion of RS software (India) Ltd.
15. For Marketing Support Services, assessee seeks exclusion of Asian Business Exhibition & Conferences Ltd., under ground 13.1 and, inclusion of concept communication Ltd., and Cyber Media India online Ltd., in Ground No. 13.2.
14. Before we undertake comparability analysis, it is sine qua non to understand functions performed, assets employed and risks assumed by assessee under both these segments. A. Software development service segment:
Functions:
In TP study at page 724 of paper book, assessee has been stated to be involved in business of software research and development services, that involves designing software to configure hardware, testing of products designed, validation of products tested, debugging operations if required.
It has been stated that assessee entered into agreement for providing software services for research, development and testing of various operations and programs. Assessee performs following Page 13 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 functions under service agreement and research and development agreement executed with Infeneon Singapore: • Perform research and development and services • Perform additional tasks as specified by associated enterprises • Provides all requisite services to facilitate Logestic for software development services.
• Provides such other ancillary or related services as may be reasonably be required and requested by associated enterprises • to ensure that it has the requisite expertise, infrastructure and personnel to provide the services and to perform its obligation.
Assessee has thus been set to be involved in identification of resources, recruitment of manpower, assignment to go of qualified personals, development of software in accordance with design para meters laid out by associated enterprise and delivery of software.
Assets employed:
Assessee primarily owns employees, property, plant and equipment for purposes of carrying out its activities and rendering of services to its associated enterprises. Risks assumed:
On perusal of page 726-727 of paper book it has been stated that assessee undertakes certain risks like service level quality risk, technology risk, Attrition risk and foreign currency risk due to earnings received by assessee in foreign currency.Page 14 of 40
IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 It has been stated that assessee is acting as software research and development centre to its associated enterprise and it bears none of the business risks relating to sale of developed products. Assessee is reimbursed on cost plus basis and is a risk-free captive service provider in India.
B. Marketing support services:
Functions Assessee stated to provide information to customers, price information to customers, recruitment and training of support staff and maintenance of office facilities in India under this segment.
Assets employed:
Assessee primarily owns employees, property, plant and equipment for purposes of carrying out its activities and rendering of services to its associated enterprises. Risks assumed:
Except for human capital risk and foreign exchange risk, assessee does not undertake any other business related rest under this segment.
Assessee is reimbursed by its associated enterprises on cost plus basis. The associated enterprise also funds assessee by means of providing interest-free loans and advances for mitigating the financial risk under this segment.
Characterisation:
Thus, based on FAR analysis under both these segments, assessee is identified to be a low risk captive service provider providing software research development and market support services only to its associated enterprises.Page 15 of 40
IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 We shall first take up Revenue's appeal.
Ground no. (i) - (v) Ld.CIT.DR submitted that DRP applied on-site revenue filter selectively, instead of applying in respect of all comparables. It has been argued that application of a filter determines what set of comparables would be displayed on database, on which search is carried out. Application of filter to shortlist companies under a particular segment is 1st step to conduct transfer pricing analysis. She vehemently argued that, once comparables are shortlisted by Ld.TPO, DRP cannot suo moto apply "on-site revenue filter" subsequently and exclude comparables, which is not as per procedures laid down under law. Ld.CIT.DR submitted that "on-site revenue filter" applied by DRP is, neither applied by assessee in transfer prising study, nor considered by Ld.TPO, while conducting analysis under section 92CA of the Act. Placing reliance upon decision of this Tribunal in case of ACIT vs Broadcom Communication Technologies Pvt. Ltd., reported in (2017) 88 Taxmann.com 309, he submitted that new filter suo moto cannot be applied by DRP selectively, but should be applied to all comparables. He also submitted that RS Software India Ltd., rejected by DRP was acceptable to assessee as well as Ld.TPO.
In support of aforestated view reliance was also placed on decisions of Delhi Tribunal in case of DCIT vs Vertex Customer Services in ITA No.5228/Del/2018 vide order dated 06/11/17 and Aircom International India Pvt. Ltd., in ITA No. 04/04/03/del/2012 vide order dated 19/05/17. It has thus been contended that entire analysis needs to be revisited based upon Page 16 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 new filter, applied by DRP and therefore needs to be set-aside to Ld.TPO.
On the contrary, Ld.AR submitted that issue of suo moto application of "on-site revenue" filter by DRP has been addressed by coordinate bench of this Tribunal in case of Autodesk India Pvt.Ltd vs ACIT in ITA(TP)A No.156/Bang/2016 for assessment year 2011-12 vide order dated 21/12/18. He further submitted that, assessee do not have any objection for RS Software India Pvt. Ltd., to be included.
We have perused submissions advanced by both sides in light of records placed before us.
Main grievance of revenue is in respect of cherry picking "on-site revenue filter" by DRP suo moto, and selectively applying on certain comparables, thereby excluding them. We have referred to the decision of this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT (supra) relied upon by both sides. It is noted that DRP has decided identical issue in case of present assessee and Hewlett Packard India Software Operations (P) Ltd vs DCIT(supra) in identical manner. 36. We note that DRP while excluding alledged comparables by applying onsite revenue filter, has considered functional dissimilarities too. We reproduce the observation of this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT(supra) on the issue as under:
"8.5...............
We agree with contention raised by Ld.CIT DR that no new filter can be applied subsequent to Ld.TPO completing TP analysis. However, on perusal of observations by DRP to exclude Acropetal Technologies Ltd., L&T Infotech Ltd., primarily on functional dissimilarities and absence of segmental information. DRP also observed that these comparables are not a contract service provider like assessee( para8,18 of DRP order). Therefore, in our considered opinion, these grounds raised by revenue becomes academic Page 17 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 8.6. Decisions relied upon by Ld.CIT DR of Delhi Tribunal in case of DCIT vs Vertex customer services in ITA No.5228/Del/2018 (supra) and Aircom International India Pvt. Ltd., (supra) does not deal with on-site revenue filter as has been submitted by Ld.CIT DR.
8.7. On merits, Ld.CIT DR relied upon decision of coordinate bench of this Tribunal in case of Mercedes-Benz Research and Development India Pvt Ltd., vs ACIT reported in (2018) 90 Taxmann.com 300 and submitted that these comparables were sent back to Ld.TPO for re-examination. She thus submitted that, view taken by coordinate bench of this Tribunal in Mercedes-Benz Research and Development India Pvt. Ltd., vs ACIT (supra) may be followed. 8.8. We have perused view of coordinate bench of this Tribunal in case of Mercedes-Benz Research and Development India Pvt. Ltd., (supra) in respect of Accropatel Technologies Ltd and L&T Infotech Ltd. It is observed that these comparables were sent back to Ld.TPO by observing as under:
Acropetal Technologies Ltd. ('Acropetal') ........
13.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the DRP has observed that this company, 'Acropetal', operates in three segments and the segmental results are available; while on the contrary the assessee contends that 'Acropetal' operates in four segments. Further, it is seen that even though the assessee has raised the other issues before the DRP, as laid out in para 13.1 of this order, the DRP has not rendered any finding thereon. We find that the co-ordinate bench of this Tribunal in the case of AMD India (P.) Ltd. (supra) relied on by the assessee has excluded 'Acropetal' on the ground that it fails the service income filter of 75%; a ground apparently not put forth by the assessee before the authorities below.
13.3.2 Considering the facts and circumstances of the case, as discussed above; that the DRP has not rendered findings on some of the issues raised by the assessee before it and there is a contradiction in the number of segments that this company 'Acropetal' operates in, we are of the opinion that it is necessary to remand the issue of comparability of this company back to the file of the DRP for examining and adjudication of the issues raised by the assessee, after affording the assessee adequate opportunity of being heard in the matter and to file details /submissions in this regard, which shall be duly considered. We hold and direct accordingly. .........................
16.2 During proceedings before us, the learned Authorised Representative for the assessee stated that the assessee does not wish to press the ground related to exclusion of Sasken Communication Technologies Limited; therefore this ground is dismissed as not pressed and consequently Sasken Communication Technologies Ltd. is retained in the final list of comparables.
16.3 According to the learned Authorised Representative, the other two companies were chosen as comparables by the assessee in its TP Study itself. The learned Authorised Representative however submits that the Page 18 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 assessee seeks exclusion of L & T Infotech Limited and Persistent Systems Limited, due to more details being now available in the public domain which render these two companies as not comparable to the assessee and therefore prays that they be excluded from the list of comparable companies.
16.4 Per contra, the learned Departmental Representative for revenue objected to the admission of this additional ground stating that when the assessee itself has selected these two companies, the authorities below had no occasion to consider the objections now raised by the assessee before the Tribunal.
16.5 After having heard both parties and perused and considered the material on record, we find that the functional comparability of these two companies i.e. (i) L & T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by the ld.AR. By way of this additional ground, the assessee is raising objections to the inclusion of these companies on the issue of functional dissimilarity and other grounds. In our considered view, the assessee cannot be precluded from raising an objection against inclusion of a company even if the said company was selected by the assessee in its TP Study. This view was taken by the Special Bench of ITAT, Chandigarh in the case of Dy. CIT v. Quark Systems (P.) Ltd.[2010] 38 SOT 307. As per the principles laid down in the aforesaid decision of the Special Bench (supra), we admit this additional ground raised by the assessee seeking exclusion of these two companies (i) L&T Infotech Limited (ii) Sasken Communication Technologies Limited without commenting on the merits of the case and remit the matter of their comparability analysis to the file of the TPO/A.O. for examination of the assessee's claim and to adjudicate thereon after providing the assessee adequate opportunity of being heard, which shall be duly considered. We hold and direct accordingly."
8.9. On perusal of aforestated observations by coordinate bench of this Tribunal, it is clear that, comparables were remanded for the reason that in case of Accropatel, DRP rendered finding that segmental details being available was contrary to materials, placed on record. And in case of L&T, coordinate bench sent back comparable for reason that financial details which were unavailable on public domain was subsequently available for consideration.
8.10. But, in the facts of present case, there is no such dispute between parties, and findings of DRP are concurrent with annual reports placed in paper book filed before us. Thus, in our considered opinion, these comparables are not functionally similar with that of assessee, who is a contract service provider, working on a cost plus business model. 8.11. It is observed that RS software (India) Ltd, was excluded by DRP by applying 'on-site revenue filter'.
Both parties do not have objection for inclusion of this company. We are therefore of the view that, this company should be included in the list of comparables.
Accordingly, Ld.TPO is directed to consider this comparable in the list."
Page 19 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Admittedly, manner in which DRP passed directions in respect of alledged comparables in these grounds are similar and identical to decision of this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT (supra) relied upon by both sides. It is also noted that both assessee as well as Hewlett Packard India Software Operations (P) Ltd were captive service provider for assessment year 2011-12. We, therefore do not find any reason to deviate from aforestated view. Thus, in our considered opinion, Acropetal Technologies Ltd., L&T Infotech Ltd., are not functionally similar with that of assessee, who is a contract service provider, working on a cost plus business model. Ld.TPO is directed to consider RS Software Ltd. in final list Accordingly, Ground no. (i) - (v) stands partly allowed. Ground No. (vi) is in respect of excluding M/s.E-Infochips, by DRP as comparable on the ground that it fails service income filter.
Ld.CIT DR submitted that TPO while analysing comparables observed that this company has revenue from software development up to 88% and therefore included, whereas DRP observes that revenue earned by this company is less than 75% and thus excluded. She submitted that, basis of determining revenue by DRP being less than 75% has not been demonstrated and therefore needs to be reconsidered.
Ld.AR, on the other hand placed reliance upon decision of coordinate bench of this Tribunal in case of Autodesk India Pvt Page 20 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Ltd. vs ACIT (supra) wherein, E- Infochips Ltd was excluded for failing service income filter.
We have perused submissions advanced by both sides in light of records placed before us.
We have referred to the decision of this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT (supra) relied upon by both sides. It is noted that DRP has decided identical issue in case of present assessee and Hewlett Packard India Software Operations (P) Ltd vs DCIT(supra) in identical manner. We note that DRP while excluding alledged comparables by applying onsite revenue filter, has considered functional dissimilarities too. We reproduce the observation of this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT(supra) on the issue as under:
9.2..............
It is observed that, this Tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) excluded E- Infochips Ltd., by following view taken by this Tribunal in case of Comscop Network (India) Pvt. Ltd., vs ITO in IT (TP) A/Bang/2016 dated 22/02/17 wherein, this company was excluded for reason that there is no segmental information regarding diverse functions performed by this company, and that there was major fluctuation in its profits, which influenced turnover of this company. Further it is observed that in case of DCIT vs M/s CGI Information Systems and Management Consultations Pvt.Ltd., in ITA No.502/Bang/2016 for assessment year 2011-12 vide order dated 06/04/18 dealt with identical objection raised by Ld. CIT DR before as under:
"24. As far as ground No. 4 raised by revenue is concerned, the said ground of appeal is weak and any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the act and rules. As far as ground No. 5 in revenue's appeal is concerned, the revenue seeks to challenge the exclusion of AE Infotech Ltd. On the ground that it failed direct software service income filter at 75%. At the outset, the assessee submits that E Infotech Ltd was excluded by the DRP on the ground that: (i) no segmental information is regarding its diverse functions is available; (ii) it failed the software service income filter and 75%; (iii) there were major fluctuations in profit and turnover every years which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is a presence of inventory (page 10 and 11 of the DRP's directions). The revenue, in its Page 21 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 appeal has challenged its exclusion only on the 2nd ground. In other words, the revenue has not challenged its exclusion on the other grounds stated hereinabove and thus its exclusion on these grounds have attained finality and cannot be disturbed by this Hon'ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that companies software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for the year. Thus the above action of the DRP in rejecting the above companies correct."
9.3. In the facts before us, revenue is challenging exclusion of this comparable as DRP recorded finding in respect of service income being less than 75%. Other issues considered by DRP in respect of extraordinary event and no segmental information is available has not been challenged before us (page 11 of DRP order).
Respectfully following the view taken by coordinate bench of this Tribunal in DCIT vs M/s.CGI Information Systems and Management Consultations Pvt.Ltd (supra), we direct Ld.TPO to exclude this company."
Admittedly, manner in which DRP passed directions in respect of alledged comparables in these grounds are similar and identical to decision of this Tribunal in case of Hewlett Packard India Software Operations (P) Ltd vs DCIT (supra) relied upon by both sides. It is also noted that both assessee as well as Hewlett Packard India Software Operations (P) Ltd were captive service provider for assessment year 2011-12. We, therefore do not find any reason to deviate from aforestated view. Thus, in our considered opinion, E-Infochips Ltd., is not functionally similar with that of assessee, who is a contract service provider, working on a cost plus business model. Accordingly, Ground no.(vi) stands dismissed. Ground No. (vii) -(xi) has been submitted to be general in nature hence do not require adjudication.
In the result appeal filed by revenue stands partly allowed.
Page 22 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 ITA No. 656/B/2016 (assessee's appeal) It has been submitted that Ground No. 1-11 are general in nature and therefore do not require any adjudication. Software Development Service Segment Ground No.12 contains certain comparables which has been alleged by assessee for exclusion for are as under:
• Persistent Systems and solutions Ltd • Persistent Systems Ltd • Sasken Communication Technologies Ltd
a) Persistent Systems and Solutions Ltd This comparable has been included by Ld.TPO though it has been objected by assessee on functional dissimilarities. It has been submitted that segmental information is in respect of this company is not available in the annual report.
Ld.CIT.DR placed reliance upon the orders of authorities below. We have perused submissions advanced by both sides in light of the records placed before us.
Annual report of this company is placed at page 725 - 776 of paper book pertaining to Annual Reports. We find that this company earned income from sale of software services and products and no segmental details are available in respect of Singh. It is also observed that income generated under both these segments cumulatively amounts to tune of 6.67 crores and in schedule 11, entire revenue has been shown under one segment. Therefore in our considered opinion, in the absence of segmental details we cannot appreciate the view taken by authorities below.
Page 23 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Accordingly we direct Ld. TPO to exclude this company from the final list.
b) Persistent systems Ltd This company has been included by Ld.TPO and assessee objects to the same as this company is engaged in rendering outsourced product development, as against software development services. It has been submitted that this is not functionally similar with that of assessee.
Ld.CIT DR on the contrary supported view of authorities below and opposed exclusion.
We have perused submissions advanced by both sides in light of the records placed before us.
It is observed that annual report of this company is placed at - page 777- 972 of paperbook pertaining to Annual Reports wherein, Schedule 15 forming part of profit and loss account shows income from sale of software services and products, however there is no separate segmental information in respect of these 2 segments. Thus it is clear that this company is earning revenue from activities which includes licensing of products, royalty on sale of products as well as income from maintenance contracts etc which could not be considered functionally similar with that of assessee holders only carrying out software development service at the behest of its AE's on a captive basis. Similar view has been taken by this Tribunal in case of DCIT vs Electronics for Imaging India Pvt.Ltd (supra). Respectfully following the same we direct Ld.AO/TPO to exclude this company from the final list.
Page 24 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12
c) Sasken Communication Technologies Ltd Assessee seek exclusion of this comparable for the reason that it is engaged in development of software products and has inventory is an intangible assets. It has been submitted by Ld.AR that this company is also having huge expenditures on our and the. He further submitted that during the year under consideration revenue from software products is more and it launched a new product called VYAPAR SEVA. Ld.AR submitted that this company has significant intangibles and inventory is and therefore should be rejected to be compared with a captive service provider like assessee. In support of his contentions, he placed reliance upon decision of this Tribunal in case of Comscope Networks (I) Pvt.Ltd. vs ITO in IT(TP)A No.166 & 181/B/2016, vide order dated 22/02/2017. He also placed reliance upon decision of this Tribunal in case of M/s.Electronic Imaging India Pvt.Ltd vs DCIT in IT(TP)ANo. 1506/B/2015 and IT(TP)A No.16/B/2016 by order dated 14/07/2017, wherein this comparable has been excluded.
On the contrary, Ld.CIT DR placed reliance upon orders passed by authorities below. She submitted that though there is revenue from 3 separate segments however the segmental information are a available. It was submitted that product launched is for a future period and has not generated any revenue during the year under consideration. There is no impact of this launch on the financials of this company for the year under consideration. In all fairness she submitted that the issue may be set aside to Ld.AO/TPO for verification of the same.
Page 25 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 We have perused submissions advanced by both sides in light of records placed before.
Primarily, Ld.AR has objected for its functional similarity with assessee because of revenue being generated from products by this company. At page 1159 of annual report placed in paper book, it is observed that segmental details has been provided. From the annual reports placed in the paper book services rendered by this comparable under software development segment is not verifiable. However, segmental details relevant for computing margin of this comparable are available at page 1157- 1161 of paper book. We are therefore unable to appreciate arguments advanced by Ld.AR regarding segmental details not available. Further it is observed that Ld.TPO considered the consolidated figure appearing in profit and loss account, instead of considering segmental profits from software services of this company. We therefore set aside this comparable to Ld.AO/TPO to verify whether this comparable is functionally similar to assessee in the service segment. In the event it is found to be functionally similar to assessee Ld.AO/TPO is directed to recompute segmental margins of this comparable in accordance with law for considering it in the final list. Needless to say that proper opportunity of being represented shall be granted to assessee.
Accordingly this comparable is set aside to Ld.AO/TPO.
Market Support Service Segment Page 26 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Ground No.13.1 is for exclusion of Asian Business Exhibition & Conferences Ltd.
Ld.AR raised objection regarding functional comparability of this comparable with assessee. It has been submitted that this company derives revenue from sale of stall space in exhibition and events, commission due to advertisement insertions in external publications, sponsorship, delegate fees and income from entry charges vis-à-vis, assessee, which is engaged in provision of marketing support services to its associated enterprises. Ld.AR submitted that learnt TPO wrongly re- characterised assessee's functions to be in building awareness about the product by conducting exhibition, road shows, conference, customary events etc which is contrary to functional profile enumerated in transfer prising study. Ld.CIT DR placed reliance upon orders passed by authorities below.
We have perused submissions advanced by both sides in light of records placed before us.
From annual report placed in paper book, it is observed that this company recognises revenue from sale of stall space in exhibition and events. It is also noted that this company owns intangibles in the nature of trade Mark and copyright which makes it functionally different with assessee as it does not own any of such intangible rights. This comparable is basically into event management which is clear from the revenue recognition policy. In our opinion, the activities carried on by this company is not similar with that of assessee that is engaged in providing sales and marketing services of the software developed by its AE's.
Page 27 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Accordingly, we direct exclusion of this comparable from final list.
Ground No. 13.2 is for inclusion of Concept Communications Ltd., and Cyber Media India Online Ltd.
Cyber Media India Online Ltd.:
Ld.AR submitted that Ld.TPO erred in excluding this comparable though Ld.TPO accepted that this comparable satisfies all filters. It has been submitted that Ld.TPO and DRP upheld exclusion of this comparable by stating that annual report has not been furnished. Ld.AR submitted that the paper book filed before authorities below contains all relevant details regarding the comparable.
Both sides agreed to set aside this issue to Ld.AO/TPO for considering functional similarities based upon audited details of this comparable.
Accordingly, this comparable is set aside to Ld.AO/TPO for verifying FAR analysis.
Concept Communications Ltd.
Ld.AR submitted that Ld.TPO erred in excluding this comparable though Ld.TPO accepted that this comparable satisfies all filters. The Ld.AR further submitted that Ld.TPO has rendered this as a comparable under this segment for assessment year 2013-14. On the contrary, Ld.CIT.DR submitted that, this company is providing printed communication services and online communication services as an advertising agency. He supported the orders passed by authorities below as this company is functionally different with assessee.Page 28 of 40
IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 We have perused submissions advanced by both sides in light of records placed before us.
It is noted that authorities below have not analyse similarities/dissimilarities in FAR of this comparable with assessee. We accordingly set aside this comparable back to Ld.AO/TPO verify the same. Needless to say that proper opportunity of being represented shall be granted to assessee. Accordingly this comparable is set aside to Ld.AO/TPO. Accordingly this ground raised by assessee stands allowed for statistical purposes.
Ground No.14 A-B: Working capital adjustment Ld.AR submitted that Ld.TPO erred in restricting working capital adjustment to 1.63% which is average cost of capital of comparable companies selected by Ld.TPO. It has been submitted that no basis has been provided by Ld.TPO in determining working capital adjustment at 1.63%. Ld.AR also submitted that upholding working capital adjustment being restricted at 1.63% is against view taken by various decisions of this Tribunal. He submitted that Ld.TPO is duty bound to give adjustment based on difference in economic, geographical condition, compared with that of assessee in actual is without any. He placed reliance on various decisions of coordinate bench of this Tribunal where, Ld.TPO is directed to provide working capital adjustment by taking actual data, without putting any upper limit. On the contrary, Ld.CIT.DR placed reliance upon orders passed by authorities below. It has been submitted that assessee has not provided the differences in working capital between the Page 29 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 comparables and assessee and therefore Ld.TPO was right in granting working capital at 1.63%.
We have perused orders passed by authorities below on the basis of records placed before us.
It is noted that working capital adjustment has been restricted by Ld.TPO and upheld by DRP at 1.63% which is contrary to provisions of transfer pricing rules. As held by various decisions of coordinate benches of this Tribunal, we direct Ld.TPO to recompute working capital adjustment in actual, and to consider the same for purposes of computing arm's length margin as per the view expressed by this Tribunal in case of Huawei Technologies India Pvt. Ltd vs JCIT reported in (2019) 101 taxman.com 313.
It is necessary to analyse the working capital of comparables for earning revenue under SWD segment. Assessee is directed to provide for necessary details in respect of comparables that remains in final list. If that information is insufficient, it is beyond the power of Assessee to produce correct information about comparable companies, does not ipso facto meant that such adjustment should be denied. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defence to say that assessee has not furnished required details to deny any adjustment on account of working capital differences. Ld.AO/TPO shall then compute working capital adjustment in accordance with law.
Accordingly, Ground No. 14 A-B for statistical purposes.Page 30 of 40
IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Ground No.15: Ld.AR submitted that Ld.AO rejected the sale of wireless division of assessee as slump sale and treated the gains arising as short term capital gains.
Ld.AR submitted that assessee is 100% export oriented unit engaged in business of software research and development services as well as marketing support services is submitted that the research and development Centre comprises of automated solutions, chip card solutions, wireless solutions and electronic technology solutions. Ld.AR submitted that from above units the wireless solution units carries out research development design and validation and certification of the product specific information which was sold to Intel mobile communications private limited for a lump sum consideration of Rs.98,57,41,680/- as a going concern basis. Assessee treated the resultant gain arising on slump sale as long term capital gain as undertaking was held for a period of more than 36 months and consequently offered the same to tax under section 50 B of the act for year under consideration.
Ld. AO while passing assessment order rejected the gain on sale of wireless division as slump sale for following reasons:
• according to Ld.AO transfer of wireless division was not slumped sale as all assets and liabilities were not transfer. • Ld.AO observed that assets such as cash, bank deposits, proprietary information, tangible assets, work in progress, semifinished goods, inventory etc and liabilities such as loan, creditors, employee liabilities etc were not transferred to the buyer. Ld.AO placed reliance on the decision of Page 31 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Mumbai Tribunal in case of Premier Auto Mobiles reported in 34 DTC 279 .
• Ld.AO observed that assessee did not file Form 3CEB along with the return of income and has therefore not complied with the requirements of section 50 B of the Act. • Ld.AO also observed that assessee had not furnished the certification of net worth and therefore value of assets cannot be treated to be correct.
Ld.AO computed value of assets based upon valuation report provided by the buyer by making following observations:
• value of assets detailed in the business transfer agreement entered into by assessee and the buyer was not in consonance with the details provided by buyer; • that the assessee could not explain the difference between the value adopted by the buyer and the value determined in the agreement;
• that the agreement is made in terms of tax planning and the valuation report contains date of acquisition and cost of all assets acquired by the buyer.
DRP simply upheld the observations of Ld.AO in the draft assessment order without appreciating the material is filed by assessee.
Ld.AR submitted that the transfer of wireless division by assessee is on as is where is basis. It has been submitted that following assets have been transferred to the buyer that pertained to wireless division:Page 32 of 40
IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 • all assets including computers, leasehold improvement and office equipments;
• lease agreement of facility; all business employees and customer contracts.
It has been submitted that the entire undertaking of wireless division has been transferred for a lump sum consideration without assigning any value to individual assets or liabilities. He placed reliance upon decision of Hon'ble Supreme Court in case of CIT vs Equinox solutions Pvt.Ltd., reported in (2017) 180 Taxmann.com 277, and decision of Hon'ble Karnataka High Court in case of CICB; Pvt. Ltd., vs CIT reported in (2015) 59 Taxmann.com 26.
Placing reliance on page 2233, Ld.AR submitted that all assets directly connected to wireless business have been transferred in accordance to business transfer agreement entered into between assessee and the buyer. Copy of the said agreement is placed at page 2222.
It has been submitted that what is not transferred does not pertain to the wireless unit and there are other units which are working. Placing reliance on page 2186-2221 of paper book, Ld.AR submitted that total block wise and itemise details of assets tallies with page 2184.
As regards the requirement to file Form 3CEB, Ld.AR submitted that during the relevant year there was no requirement to file such form electronically. He also submitted that a certification was issued by accountant which is placed at page 2182 however the same has been held to be not correct by authorities below.Page 33 of 40
IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Ld.AR has further argued that assessing officer erred in considering the value in accordance with the valuation report filed by the buyer. He submitted that the manner in which buyer assigns value to the assets in its books of account cannot be the basis to determined the value of assets in the hands of assessee. It has been submitted by Ld.AR that the buyer has submitted list of assets that has been excluded with Ld.AO which shows that all the assets transferred by assessee has not been considered in the valuation report. He submitted that the valuation adopted by the buyer is not in accordance with the mechanism provided under the Act, to determined the net worth of undertaking. He thus submitted that the mismatch in the valuation adopted by the buyer and the assessee cannot be a reason to hold assessee liable.
On the contrary, Ld.CIT.DR submitted that assessee has failed to filed requisite details in support of its claim and substantiating the value adopted for computing short term capital gains. He submitted that major part of the assets transferred have not been used for more than 3 years. He thus where mentally supported the orders passed by authorities below.
We have perused submissions advanced by both sides in light of records placed before us Section 2 (42C) of the act defines the term, "slumped sale" to mean the transfer of one or more undertaking for a lump sum without assigning value to individual assets and liabilities in such sale.
The term "undertaking" has been defined in section 2 (19AA) of the act to mean any part of an undertaking or unit or division of Page 34 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 an undertaking or business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity. A co-joint reading of both these sections makes it clear that for sale to be treated as slump sale 3 conditions have to be satisfied:
• the business transferred should qualify as an undertaking; • the business should be transferred as going concern basis; and • the transfer should be for a lump sum consideration without assigning value to individual assets and liabilities. In the present facts of the case, we have perused the business transfer agreement wherein it is noted that as per clause 2.3 (a) of the agreement, assessee has transferred all technical employees including liabilities relating to employees to the buyer. In the written submissions filed before authorities below we note that assessee has specifically mentioned regarding certain assets which are common to both wireless and other division that has not been transferred as a part of slump sale. On reading of Section 50 B it is abundantly clear that it is a code in itself for determining cost of acquisition and cost of improvement of undertaking but not for computation of capital gains in case of slump sale. The object of section 50 B is to determined the cost of acquisition and cost of improvement which is vital for computing capital gains under section 45 of the Act. Thus the full value of consideration in the slum sales needs to be determined by reducing the value of liabilities of an undertaking from their great value of all assets of the undertaking, provided that there is no itemised sale of assets and Page 35 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 liabilities between the party and instead there is one lump sum value of undertaking.
The methodology for determining net worth has been given in Explanation 1 read with Explanation 2 of section 50 B. According to these provisions, aggregate value of total asset is reduced by value of liability of such undertaking. The aggregate value of asset and the value of liability as per Explanation 2, is the written down value of depreciable assets, book value of other assets and the book value of all the liabilities. Thus while computing capital gains from transfer of undertaking it has to be all the assets and all the liabilities.
In the details of block wise and itemise assets placed at page 2186-2220 of paper book, we note that assessee has given all details regarding the date of acquisition the cost of acquisition the depreciable value as on the date and the written down value as on the date of slump sale in regards to the assets. Further at page 13 64 of paper book we note that scheduled 10 to Profit and Loss Account being other income, mentions Gain on Sale of assets of wireless division to Intel amounting to Rs.87,73,82,424/-. Note 18 to scheduled 14 at page 1377 being "Notes to the Accounts" records as under:
18. Sale of Wireless division During the current year, the company has entered into a slump sale agreement ('the agreement') with Intel Mobile Communications India Private Limited. The effective date of the agreement is 31/01/2011. As per the agreement, all assets pertaining to the wireless division of the company have been transferred to IMC for a lump sum consideration of Rs.985,741,680.Page 36 of 40
IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 The table below details the gain on transfer of the division:
Particulars Amount (in Rs.) Anount (in Rs.) Amount received from IMC 985,741,680 Less: Net Book Value of Assets Transferred Leasehold Improvements 5,671,884 Computer Systems 34,804,879 Office Equipments 68,380,199 108,856,962 Gain on debonding of assets for (497,706) the transaction Net Gain on sale of wireless 877,382,424 division Further, the buyer did not intend to purchase the assets individually and that they intended to buy the wireless unit for a lump sum price. Even though the transaction has components of itemised sale it has to be characterised as slum sale under Income tax Act in substance based upon structuring of agreements. In support, we place reliance upon and decision of Hon'ble Bombay High Court in case of Narakeshari Prakashan Ltd reported in 196 ITR 438.
In our opinion to conclude that a transaction is a slum sale or not is not only based on interpretation of terms and conditions of the entire agreement but it is also based on the manner in which the gains has been accounted by assessee in its books of accounts. From the extracts of the accounts of assessee it is clear that it has not accounted for profits on itemised assets. In the instant case there is a sale of an entire undertaking as a going Page 37 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 concern and assessing officer should have computed the capital gains under section 45 to 50 of Income tax Act. Ld.AO has also not identified the items that have been sold independently but has considered the lump sum valuation made by the buyer in the hands of assessee which is not in accordance with the provisions of the act.
We therefore direct Ld.AO to compute the quantum of capital gains in accordance with law as a slum sale. Ld.AO is directed to decide the cost of undertaking for purpose of computing capital gains that is arisen on transfer of asset as a going concern and is directed to value it as per section 55 of the act Ld.AO is also directed to grant indexation while computing capital gains. Ld.AO is also directed to decide the depreciation on block of assets and the capital gains has to be computed in accordance with section 45 to 50 of the Act. Accordingly, we allow this ground raised by assessee.
Ground No. 16: It has been submitted that Ld.AO disallowed software expenses under section 40(a)(ia) of the Act amounting to Rs.24,13,306/- on the basis that no tax has been deducted at source.
Ld.AR submitted that payments of purchase of computer software will not fall under definition of royalty and therefore provisions for with holding taxes will not be applicable. On the contrary, Ld.CIT.DR placed reliance upon decision of Hon'ble Karnataka High Court in case of CIT vs Samsung Electronics Ltd reported in (2010)320 ITR 209, wherein Hon'ble High Court has held purchase of software to fall within the ambit of royalty.
Page 38 of 40IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 We have perused submissions advanced by both sides in light of records placed before us.
As the issue is against assessee by decision of Hon'ble Karnataka High Court in case of CIT vs Samsung Electronics Ltd (supra), we do not find any infirmity in the action of Ld.AO. Accordingly we dismiss this ground raised by assessee. Ground no 17: Ld.AR submitted that assessing officer computed interest under section 234C as per assessed income as against returned income. Both sides agree that interest has to be computed on the basis of returned income. Anyway the stage assess consequential in nature. We direct Ld.AO to compute interest under section 234C in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes.
In the result appeal filed by assessee stands partly allowed as indicated hereinabove.
Order pronounced in the open court on19th March, 2020.
Sd/- Sd/- (B. R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 19th March, 2020. /Vms/* Page 39 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order Assistant Registrar, Income-Tax Appellate Tribunal. Bangalore. Page 40 of 40 IT(TP)A Nos.656 & 633/Bang/2016 A. Y : 2011 - 12 Date Initial 1. Draft dictated on On Dragon Sr.PS 2. Draft placed before 10-03-2020 Sr.PS author 3. Draft proposed & placed 10-03-2020 JM/AM before the second member 4. Draft discussed/approved 10-03-2020 JM/AM by Second Member. 5. Approved Draft comes to 20-03-2020 Sr.PS/PS the Sr.PS/PS 6. Kept for pronouncement -03-2020 Sr.PS on 7. Date of uploading the -03-2020 Sr.PS order on Website 8. If not uploaded, furnish -- Sr.PS the reason 9. File sent to the Bench -03-2020 Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order. 13. Draft dictation sheets are No Sr.PS attached