Income Tax Appellate Tribunal - Delhi
M/S. Saic India Private Limited, ... vs Dcit, New Delhi on 11 April, 2018
1 ITA No. 1594/Del/2014
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I(1)' NEW DELHI
SH. R. S. SYAL, VICE PRESIDENT
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No. 1594/DEL/2014 ( A.Y 2009-10)
Wipro Limited C/o Wipro Energy IT Vs DCIT
Services India Private Limited Central Circle-7(1)
(Formerly known as, SAIC India New Delhi
Private Limited),
now merged with Wipro Limited.
AAACI6192A
(APPELLANT) (RESPONDENT)
Appellant by Sh. S. D. Kapila, Adv, Sh. R.
R. Maurya, Adv.
Respondent by Sh. Sanjay I. Bara, CIT DR
Date of Hearing 12.03.2018
Date of Pronouncement 11.04.2018
ORDER
PER SUCHITRA KAMBLE, JM
This appeal has been filed by the assessee against the Assessment Order dated 31/03/2009 passed by Assessing Officer u/s 143(3) r/w Section 144C of Income tax Act, 1961 in Assessment Year 2009-10.
2. The grounds of appeal are as under:-
1. "That on the facts and in the circumstances of the case and in law, the order passed by Ld. AO is bad in law and void ab-initio.
2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the 2 ITA No. 1594/Del/2014 conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("TPO") for computation of the arm's length price as is required under section 92CA(1)of the Income Tax .Act.1 961 "(Act").
3. That on facts and circumstances of the case and in law, the Ld. AO/TPO/and DRP erred in making an addition of Rs. 8,72,16,303/- by re-
computing the arm's length price of the international transactions under section 92CA (3) by:
3.1 Re-computing the net margin of Appellant as the tested party under TNMM by considering Retention bonus of Rs. 3,32,24,931/- as an 'operating expense' even though 4/5 of said expenditure has been disallowed as 'capital expenditure' under section 37of the Act.
3.2 Wrongly computing the margin of comparable companies selected by him.
3.3. Rejecting the comparables selected by the Appellant on the basis of additional/modified quantitative filters on surmises which lack valid and reasonable basis;
3.4 The Ld.DRP erred in setting an arbitrary norms for fixing the filter on account of filter of related party transactions (RPT) for the purpose of selecting comparable entities.
3.5 The Ld.TPO/AO/DRP have erred in arbitrarily applying lower filter of turnover of Rs 5 crorcs and also in not applying any filter for upper limit of remover for the purpose of selecting the comparables.
3.6. The Ld. DRP erred in including Thirdware Solutions Ltd..as a comparable entity solely for the reason that the assessee had itself originally included and refused to consider new information brought on record by the appellant.
3.7. The Ld. A.O./ DRP erred in including several entities even though they are materially not comparable to the Appellant in terms of Functions, Assets and Risk profile.
3.8. The DRP have erred in not considering the specific objection raised by the assessee that the Ld. AO/TPO have erred in making adjustment in respect of all the transactions entered into by the Appellant despite the fact that a significant portion of the transactions entered into by the Appellant were with unrelated independent entities, which are not subject to transfer pricing regulations.
3.9. The Ld. AO/TPO erred in not adjustment the profit margin of the comparables for the differences in the working capital profile, and risk profile of the Appellant vis comparable companies.
3.10. The Ld.DRP has accepted a number of entities as comparable 3 ITA No. 1594/Del/2014 peremptorily and laconically without considering detailed objections of the assessee.
II Corporate Tax Grounds
4. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in holding that the expenditure incurred in relation to Recruitment and Training employees for upgrading their skills is enduring in nature and needs to amortized over five years thereby Allowing deduction of only 1/5th of the total expenditure, of Rs 62,22,296/- and adding the balance amount of Rs. 49, 77,837/ to income.
5. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in treating the payment of Rs 3,32,24,931 towards Retention Bonus key employees as capital expenditure to be spread over five years and thereby allowing deduction of Rs 83,06,233, being only 1 /5th of the total expenditure.
6. That on the facts and circumstances of the case, the Ld. AO erred in not giving the benefit on account of timing difference in following manner:
6.1. That on the facts and circumstances of the case and in law, the Ld. AO erred, in not giving the allowance of Rs 10,78,032 i.e. 1 /5th of the disallowance made on account of Recruitment & Training expenditure in A.Y. 2008-09, being expenses to be amortized over period of five years. 6.2. That on the facts and circumstances of the case and in law, the Ld. AO erred in not giving the allowance of Rs 42,03,697 i.e. 1 /5th of the addition made on account of Retention Bonus in A.Y. 2008-09, being expenses to be amortized over period of five years.
7. That on facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/Ld. DRP erred in selecting the current year (i.e. financial year 2008-09) data for comparability despite the fact that at the time of preparation of Transfer Pricing Documentation by the Appellant, the complete data for financial year 2008-09 was not available within the public domain
8. The Ld. AO erred in determining interest u/s 234B and 234C of the Income Tax Act. The Appellant craves leave to add, to alter, rescind and modify all or any of the afore-stated grounds of appeal or produce further documents, facts and evidence before or at the time of hearing of this appeal.
For the above and any other grounds which may be raised at the time of hearing, it is prayed that the order of the learned AO be set aside and the necessary relief be provided."
Additional Ground No. 1That on the facts and in circumstances of the case the authorities below 4 ITA No. 1594/Del/2014 should have excluded following comparables:
1. Mindtree Ltd.
2. Thirdware Solution Ltd.Additional Ground No. 2
"The Ld. AO/TPO/DRP erred in not treating foreign exchange fluctuation gain/loss incurred in the revenue account as operative item for the purpose of computing the operating margin of the assessee as well as of the comparable."
3. The assessee company is a subsidiary of Science Applications International Corporation [SAIC US]. The Company, formerly known as Scicom Technologies Private Limited, was acquired by SAIC US in September 2007. Consequently, the branch office of SAIC based in Bangalore was merged with Scicom Technologies Pvt. Ltd. with effect from December 2007. The erstwhile Scicom Technologies Private Limited had set up subsidiaries, Scicom Technologies Inc. in USA and Scicom Technologies Limited in UK in 2000 and 2007 with the objective of carrying out marketing and promotion activities in their respective countries for the software development services rendered by the Company. SAIC India is engaged in the provision of software development services more specifically in the design, development and maintenance of software for its group companies, which essentially includes software architecture, coding, software testing, digital integration, software maintenance etc. SAIC India has also provided some software development activity to Indian customers under independent domestic contracts. During the Financial Year 2008-09, in conduct of its business, the assessee had the following international transactions with its Associated Enterprises (AE):
Sl. No. Nature of International Transactions Amount in Rs.
1 Software development services 846,086,170 5 ITA No. 1594/Del/2014 2 Reimbursements paid 66,547,377 The said international transactions were duly reported in the Form 3CEB along with the Return of the income. During the course of the assessment proceedings, the Assessing Officer made a reference under Section 92CA(3) to the TPO. The TPO issued a notice u/s 92CA(2) to the Assessee, in response to which the Assessee provided information and documents, as prescribed under Section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962. The TPO vide order dated 30.01.2013 proposed to make an adjustment of Rs.
11,48,86,737/- to the taxable income of the assessee. A draft Assessment order u/s 144C dated 20.03.2013 was passed. The assessee preferred objections before the Dispute Resolution Panel (DRP). The DRP issued certain directions and final Assessment Order was passed on 09.01.2014 after incorporating the directions of the DRP. The Assessing Officer made addition of Rs.8,72,16,303 towards the Transfer Pricing Adjustment. The Assessing Officer made further addition on account of Recruitment & training for Rs.49,77,837/- and Retention bonus for Rs.3,32,24,931/-.
4. Being aggrieved by the Assessment Order u/s 143(3) read with Section 144C of the Income Tax Act, the assessee filed the present appeal.
5. The Ld. AR submitted that ground No. 3.1 has to be dismissed as the same has been taken elaborately in Ground No. 5. Thereafter, Ld. AR submitted that Ground No. 3.9 regarding working capital profile, the assessee is only contesting working capital profile and not that of risk profile. Therefore, Ground No. 3.9 will be contested in respect of working capital profile only. The submissions of the assessee are accepted. The Ld. AR submitted that there are two consolidated additional Grounds in the present appeal and the same should be taken.
6. As regards to Additional Ground No. 1, the Ld. AR submitted that the 6 ITA No. 1594/Del/2014 comparable Mindtree Ltd. is not contested by the Ld. AR during the time of hearing. The Ld. AR submitted that the assessee is only contesting the exclusion of Thirdware Solutions Ltd. which is set out in Additional Ground No. 1. The Ld. AR further submitted that the same should have been taken into account by the TPO as well as DRP. The said company is not a proper comparable as it is the functionally different company. To support his contention, the Ld. AR submitted that the company i.e. Thirdware Solutions Ltd. is engaged in diverse activities and assets. From the annual report of the said company it can be seen that the sales and operating income show sale of license, software services, export of SEZ unit, export from STPI unit and revenue from subscription. However, segmental results are not provided in the Annual Report. Thus, the Ld. AR submitted that this company's system of recognizing revenue is vague and apparently not based on cost matching principle. The Ld. AR submitted that this company has to be excluded and also relied upon the Tribunal decision in case of Fiserv India P. Ltd. Vs. ITO (2015) 60 Taxmann.com 48.
6. The Ld. DR submitted that the TPO has rightly included this comparable. The Ld. DR submitted that the details of purchase given by the assessee company was analyzed with the Thirdware Solutions Ltd. It was seen that majority of expenses are in the form of software service charges and salaries. Thus, the same establishes that the exports are software service export. Annual report of the said company has given detailed unit wise break of income and expenses. Thus, the said company is comparable with the assessee company.
7. We have heard both the parties and perused the material available on record. It can be seen that the assessee company is engaged in the design, development and maintenance of software for its group companies which essentially includes software architecture, coding, software testing, digital integration, software maintenance etc. It also provides some software activity 7 ITA No. 1594/Del/2014 to Indian Customers under independent domestic contracts. However, in Assessment Year 2008-09, the share of this activity in the total turnover was only 1.54%. As regards Thirdware Solutions Ltd. the same deals with sale of licenses Software, Services Export and Revenue from subscription. Thus, the Thirdware Solutions is not exclusively dealing with the Software Services. In- fact, the TPO himself stated that majority of expenses are in the form of Software Service Charges and Salaries, but he has not considered exact expenses for the Software Charges and Salaries. This has not come up from the annual report to deal with the assessee company as a comparable as there is no segmental results provided by the said company. Thus, we direct the TPO/A.O to exclude this comparable as it is not having similar functions to that of the assessee company and also there is no segmental record given in the annual report of that company. Thus, we partly allowed Additional Ground No. 1.
8. As regards Additional Ground No. 2 read with Original Ground No. 3.2 regarding operating foreign exchange fluctuation, the Ld. AR submitted that in the Assessment Year 2008-09, the same issue has been dealt by the Tribunal in assessee's own case being ITA No. 6464/Del/2012 order dated 27.06.2016 in para 59. The Ld. AR submitted that this issue is in favour of the assessee.
9. The Ld. DR relied upon the Assessment Order as well as the orders of the TPO and DRP.
10. We have heard both the parties and perused all the records. It is pertinent to note that this issue come up in A.Y. 2008-09 before the Tribunal and Tribunal (order dated 27.06.2016) held as under:
"59. When, undisputedly, the ld. DRP has directed to treat the forex fluctuation gains/loss on support sale as an export item while comparing the assessee company with comparable companies and no appeal has been filed 8 ITA No. 1594/Del/2014 against the said directions, TPO is under legal obligation u/s 144C (10) & (13) to implement the DRP's direction. So ground No. 12 is determined in favour of the assessee."
Besides, this the Hon'ble Delhi High Court in case of Pr. CIT vs. Rampgreen Solutions Pvt. Ltd. (order dated 27.05.2016 ITA No. 340/2016) held as under:
"4. As regards the other issue concerning foreign exchange fluctuation loss being considered as part of the operative expenses, the issue stands covered against the Revenue and in favour of the Assessee by the decision of the Supreme Court in Commissioner of Income Tax v. Woodword Governor India (P) Ltd. (2009) 312 ITR 254 (SC). ...."
Thus, this issue is squarely covered by the assessee's own case as well as by the Hon'ble Delhi High Court in favour of the assessee. The AO/TPO is directed to compute ALP of the international transaction by treating foreign exchange fluctuation as an item of operating nature both for the assessee company and comparable companies. Therefore, Additional Ground No. 2 read with Original Ground No. 3.2 is allowed for statistical purpose.
11. As regards Ground No. 3.9 in respect of non adjustment of Working capital requirement, the Ld. AR submitted that the said issue is again covered by the decision of the Tribunal in assessee's own case for A.Y. 2008-09. The Ld. DR relied upon the Assessment Order as well as the orders of the TPO and DRP.
12. We have heard both the parties and perused all the relevant records. For A.Y. 2008-09, the Tribunal held as under:
"56. Keeping in view the fact that the issue in question has been settled in the cases cited as Qualcom India Pvt. Ltd. and M/s. Nokia India Pvt. Ltd. (supra) and the fact that assessee in this case is engaged in providing 9 ITA No. 1594/Del/2014 software development services to its group companies and to arrive at ALP of the international transactions, the ld. TPO/DRP resorted to comparability by selecting different sets of comparable companies and after applying the various filters, the ld. TPO selected 10 comparable companies as mentioned in para 8.7 of his order, the appropriate transfer pricing adjustment can only to be made qua the international transaction undertaken by the assessee company during the year under assessment on the basis of its comparability vis-à-vis comparable companies, by providing working capital adjustment to the assessee in view of the provisions contained under Rule 10B(1)(e) also.
So, we are of the considered view that the matter is required to be restored to the TPO to provide the assessee company the benefit of working capital adjustment for transfer pricing adjustment."
Thus, the issue is squarely covered by the order of the Tribunal. We therefore, restored the issue to file of the TPO/AO, after providing reasonable opportunity to the assessee by following principle of natural justice and decide the issue on merit. Therefore, Ground No. 3.9 is partly allowed for statistical purpose.
13. As regards Ground No. 4 relating to Recruitment and Training employees for upgrading their skills, the Ld. AR submitted that the said issue is covered in favour of the assessee by Tribunal's order in assessee's own case 2008-09. The Ld. DR relied upon the orders of the Assessing Officer, TPO and DRP directions.
14. We have heard both the parties and perused all the relevant records. The Tribunal in para 20 held as under:
"20. Now, adverting to the case at hand, when the assessee has come up with specific pleas that he has made payment of Rs.37,89,007/- to the third party recruitment agency, access fee to various job sites like naukari.com etc. 10 ITA No. 1594/Del/2014 and Rs.16,01,153/- for imparting raining to the new employees who have recently joined and on job training to existing employees, which have otherwise been not disputed by the AO/DRP, recruitment of employees for efficient profit earning through a recruitment agency is recurring process and such expenditure cannot be avoided /deferred. At the same time, in the globalised set up, sudden upgradation of knowledge and skill of the IT engineers / technicians for providing IT Software Development Services particularly to foreign AE is also necessary for earning profit by a company. Moreover, when undisputedly there is no memorandum of understanding between the assessee company and its employees that the employee will work for specific period, as the attribution rate in software industry is highest, recruitment of employees and imparting of training to them cannot be considered as of enduring benefit. So, by following the law laid down by the Hon'ble Calcutta High Court Hindustan Aluminium Corporation Ltd. vs. CIT (supra) and Hon'ble jurisdictional High Court in CIT vs. Munjal Showa Ltd. we hereby decide ground no. 1 in favour of the assessee."
Thus, the issue is squarely covered by the order of the Tribunal as there is no change in this Assessment Year as well. We therefore, allow Ground No. 4 of the appeal.
15. As regards Ground No. 5 which is a corporate tax. The said ground is raised by the Ld. AR in respect of treatment of retention of bonus as operative expenditure. The Ld. AR submitted that this issue is covered in favour of the assessee by Tribunal's order in assessee's own case 2008-09 wherein it has been treated as revenue expenditure to be allowed u/s 37 of the Act and accordingly to be treated as operative expenditure for the purpose of TP adjustment. The main claim for deduction of Retention of bonus paid to key employees is under Ground No. 5.
16. The Ld. DR relied upon the Assessment Order as well as the orders of 11 ITA No. 1594/Del/2014 the TPO and DRP.
17. We have heard both the parties and perused all the relevant records. For A.Y. 2008-09, the Tribunal held as under:
"42. ....... So, we are of the considered view that payment of retention bonus made by the assessee company partakes character of salary payable to its employee for the business purposes and has to be treated as revenue expenditure. Had the employees of erstwhile company not been retained by the assessee company its business would have adversely affected and this fact goes to prove that the retention bonus was paid as an incentive to the employee, which is salary as per Explanation 2 to section 15 of the Act, and is a business expenditure not creating any enduring benefit. Since assessee company had undisputedly paid the retention bonus before filing the return of income of the relevant assessment year these expenditure are entitled to be allowed u/s 37 of the Act. So, we hereby determine ground no. 4 in favour of the assessee company."
Thus, the issue is squarely covered by the order of the Tribunal in favour of the assessee in the present Assessment Year as well. Therefore, Ground No. 5 is allowed.
18. We further held that the rest of the ground are either repetitive or consequential which are considered hereinabove.
19. In result, appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on 11th April, 2018.
Sd/- Sd/-
(R. S. SYAL) (SUCHITRA KAMBLE)
VICE PRESIDENT JUDICIAL MEMBER
Dated: 11/04/2018
12 ITA No. 1594/Del/2014
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Date
1. Draft dictated on 08/03/2018 PS
2. Draft placed before author 09/03/2018 PS
3. Draft proposed & placed before .2018 JM/AM
the second member
4. Draft discussed/approved by JM/AM
Second Member.
5. Approved Draft comes to the PS/PS
Sr.PS/PS 11.04.2018
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk 11.04.2018 PS
8. Date on which file goes to the AR
9. Date on which file goes to the
Head Clerk.
10. Date of dispatch of Order.