Madras High Court
M/S.Virtusa Consulting Services vs The Deputy Commissioner Of Income ... on 4 February, 2021
T.C.A.No.996 of 2018
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 04.02.2021
CORAM
THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAM
and
THE HONOURABLE MS.JUSTICE R.N.MANJULA
Judgment Reserved On Judgment Pronounced On
18.01.2021 04.02.2021
T.C.A.No.996 of 2018
M/s.Virtusa Consulting Services
Private Limited,
No.34, IT Highway, Navallur,
Chennai – 600 130. .. Appellant
[cause title substituted vide order
dated 11.11.2020 in CMP.No.10142/2020]
-vs-
The Deputy Commissioner of Income Tax,
Company Circle 5 (2),
121, M.G. Road, Nungambakkam,
Chennai – 600 034. .. Respondent
Appeal under Section 260A of the Income Tax, 1961 against the
order dated 18.08.2017 made in I.T.A.No.615/Mds/2016 on the file of the
Income Tax Appellate Tribunal Bench 'D', Chennai for the assessment year
2011-12.
1/39
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
For Appellant : Mr.Kamal Sawhney
Senior Counsel
Mr.Prashan Mehar Chandani
M/s.Amritha Sathyajith
for Mr.Arun Karthick Mohan
For Respondent : M/s.R.Hemalatha
Senior Standing Counsel
JUDGMENT
This appeal filed by the assessee under Section 260A of the Income
Tax Act, 1961 (hereinafter referred to as “the Act”) is directed against the
order dated 18.08.2017 passed by the Income Tax Appellate Tribunal Bench
'D', Chennai (for brevity “the Tribunal”), in I.T.A.No.615/Mds/2016 for the
assessment year 2011-12.
2.The tax case appeal was admitted on 03.01.2019 on the following
substantial questions of law:-
i.Whether, under the facts and circumstances of the
case and in law, the Tribunal was justified in rejecting the
approach of considering foreign associated enterprises as
tested party based on the available supporting material
and evidences, which clearly demonstrate the least
complex nature of the appellant's overseas subsidiaries ?
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
ii.Whether, under the facts and circumstances of the
case and in law, the impugned order of the Tribunal is
improper and erroneous for not having dealt with the
grounds of appeal (transfer pricing as well as corporate
tax) raised, submissions made and arguments placed
during the hearing by the Senior Legal Counsel, thereby
resulting in violation of the principles of natural justice in
the absence of cogent reasons ?
iii.Whether, under the facts and circumstances of the
case and in law, the Transfer Pricing Officer was justified
in not resorting to internal TNMM (transactional net
margin method) over external TNMM for benchmarking
the international transactions with overseas subsidiaries ?
iv.Whether, under the facts and circumstances of the
case and in law, the Transfer Pricing Officer was justified
in not restricting the quantum of transfer pricing
adjustment in subsidiary segment to the actual profits
retained by overseas subsidiaries from the underlining
international transactions ?
v.Whether, under the facts and circumstances of the
case, the first respondent is right in recomputing the
deduction claimed under Section 10A of the Act based on
the overall profit margin of the appellant in the absence of
a proven arrangement to evidence that the assessee had
booked extraordinary profits in the 10A units ?
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
vi.Whether, under the facts and circumstances of the
case, the first respondent is right in recomputing the
deduction claimed under Section 10AA of the Act based on
the overall profit margin of the appellant in the absence of
a proven arrangement to evidence that the assessee had
good extraordinary profits in the 10AA units ? And
vii.Whether, under the facts and circumstances of the
case, the first respondent was right in not granting the
deduction under Sections 10A and 10AA of the Act on the
enhanced income, which has arisen due to disallowance
made under Section 14A of the Act ?”
3.The appellant/assessee is a Multinational Company based in India
engaged in the business of software development services globally. For the
assessment year under consideration [AY 2011-12], the assessee filed its
return of income declaring a taxable income of Rs.83,00,45,031/- under the
normal provisions after claiming deduction of Rs.84,42,86,994/- under
Section 10A of the Act and Rs.15,40,15,372/- under Section 10AA of the
Act. The assessee declared a book profit of Rs.183,86,58,684/- as computed
under Section 115JB of the Act. The case was selected for scrutiny and
notice was issued along with a questionnaire. The Assessing Officer on
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
scrutiny found that the assessee had undertaken international transactions
and accordingly made a reference to the Transfer Pricing Officer [TPO] for
determining the Arm's Length Price [ALP] of the international transactions.
The Profit and Loss Account of the assessee was segmented into three for
transfer pricing analysis, namely, (1) Subsidiary Segment, (2) Citi Segment
and (3) Others/Third Party Segment. The assessee during the previous year
relevant to the assessment year 2011-12 had entered into international
transactions with its Associated Enterprises [AEs] as tabulated hereunder:
S. Category International Amount Method adopted Conclusion
No transactions (in INR) by the appellant
in transfer
pricing
documentation
1. Subsidiary Provision of software 258,52,55,650 Transactional Net 38.68%
Segment development services to Margin Metthod (Tested Party)
overseas subsidiaries (TNMM) at vs
subsidiary segment 13.60%
Receipt of software 199,97,48,610
level (External
development services
comparables)
from overseas
subsidiaries
2. Citi Segment Provision of software 138,41,31,011 Comparable US$472.30
development services to Uncontrolled Price [Citibank]
Citibank and group [CUP] Method vs.
entities US$ 467.38
[third party]
3. Others Reimbursement of 34,62,76,975 At actuals
transactions expenses received and
paid
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
4.The assessee considered the Transactional Net Marginal Method
[TNMM] as the Most Appropriate Method [MAM] and for application of
TNMM, the assessee considered itself to be tested party and operating
profit/operating cost as the profit level indicator. The assessee selected 22
comparable companies in the transfer pricing documentation with weighted
average operating profit/operating cost of 13.60%. Subsequently, when the
transfer pricing assessment proceedings were being carried on, the assessee
revised its segmentation and provided profitability of all the three segments
as below:
S.No Particulars Subsidiary Citi Third Party Total
Segment Segment Segment
1 Revenue 2,64,58,84000 5,85,71,50,000 5,25,66,11,000 13,75,96,45,000
2 Foreign exchange 4,38,80,119 9,71,36,698 8,71,77,183 22,81,94,000
gain
3 Total Operating 2,66,97,64,119 5,95,42,86,698 5,34,37,88,183 13,98,78,39,000
revenue [1+2]
4 Software 1,82,18,39,413 4,35,45,25,929 3,89,00,65,659 10,06,64,31,000
development
expenses including
depreciation
5 Selling, 41,49,97,806 91,86,73,835 82,44,81,358 2,15,81,53,000
administration and [Refer Note 1]
other general
overheads
6 Total Operating 2,23,68,37,219 5,27,31,99,764 4,71,45,47,017 12,22,45,84,000
costs [4+5]
7 Net operating 45,29,26,900 68,10,86,934 62,92,41,166 1,76,32,55,000
profit [3-6]
8 Net Operating 20.25% 12.92% 13.35% 14.42%
Profit margin
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
S.No Particulars Subsidiary Citi Third Party Total
Segment Segment Segment
[7/6]
9 Percentage of 15.68% 15.68% 15.68%
selling, admin and
other overheads
to turnover
5.During the assessment year under consideration, the assessee had
incurred selling, administrative and general overheads amounting to
Rs.2,15,81,53,000/- at an entity level. Out of this total cost, a cost of
Rs.39,53,04,288/- was considered to be directly identified cost to subsidiary
segment. The assessee would state that if the entire overheads of
Rs.2,15,81,53,000/- were to be allocated based on turnover, the maximum
allocation of all the three segments would be as hereunder:
(i) Subsidiary Segment – Rs.41,49,97,806/-;
(ii)Citi Segment – Rs.91,86,73,385/-, and
(iii)Third Party Segment – Rs.82,44,81,358/-.
Therefore, the assessee additionally allocated Rs.1,96,93,518/- to the
subsidiary segment. The TPO rejected the benchmarking analysis carried
out by the assessee in the transfer pricing documentation by rejecting the
Comparable Uncontrolled Price Method [CUP Method] for international
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
transactions entered into with Citi Bank group entities. The TPO proceeded
with a TNMM analysis at segment level [Subsidiary Segment and Citi
Segment] for benchmarking the international transactions undertaken with
overseas subsidiaries and Citi bank entities. The TPO revised the segment
provided by the assessee. Further, the TPO rejected transfer pricing
analysis undertaken by the assessee and undertook a fresh search for
external comparables and arrived at a final list of 12 comparable companies
with average operating margin of 18.94%. The TPO compared the
operating margin of Subsidiary Segment, i.e. 3.51% with average operating
margin of external comparables, i.e. 18.94% and made adjustment of
Rs.39,43,73,743/-.
6.Aggrieved by such order, the assessee filed its objections before the
Dispute Resolution Panel [DRP]. By order dated 30.12.2015, the DRP
while issuing directions upheld the adjustment made by the TPO of
Rs.39,43,73,743/- with respect to international transactions undertaken with
overseas subsidiaries. Accordingly, final assessment order was passed by
the Assessing Officer dated 29.01.2016 under Section 143(3) r/w. 144C(13)
of the Act. Aggrieved by the same, the assessee preferred an appeal to the
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
Tribunal. In the appeal, the assessee approached the matter with two
different approaches. In the first approach, the assessee contended that
their overseas subsidiaries who are least complex entities to the
international transactions as tested party. The second approach to consider
the assessee as a tested party. The Tribunal rejected the selection of the
tested party as contended by the assessee stating that the assessee failed to
produce material evidences/documents to establish the functional profile
and risks assumed by the overseas AEs; the Indian transfer pricing
provisions do not allow to select foreign AE as tested party for
benchmarking the international transactions and it is the Indian Enterprise
which should be taken as the tested party. With regard to the other aspects,
the Tribunal did not adjudicate the same. In this appeal, the first issue
which is raised by the assessee is with regard to the selection of the tested
party.
7.Mr.Kamal Sawhney, learned senior counsel appearing for Mr.Arun
Karthick Mohan, learned counsel for the assessee submitted that the tested
party is usually the participant in a transaction having least complex
functions, for which profitability can be ascertained most reliably and
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
reliable data on comparables can be found and the tested party will also be
the party with the least intangibles. It is submitted that the assessee has
overseas subsidiaries across the Globe in Countries such as United
Kingdom, German, Japan, Australia, Singapore, Switzerland, etc. The
overseas subsidiaries predominantly provide on-site software support and
related services in the local geography under the instructions and
supervision of the assessee, namely, Polaris India presently known as
Virtusa Consulting Private Limited. After referring to the revenue
generated by the assessee from overseas subsidiaries during the assessment
year under consideration submitted that the majority of the revenue earned
by the assessee from overseas subsidiaries situate in Australia, UK,
Germany and Japan which constitutes approximately 91% of the total
revenue from overseas subsidiaries. It is submitted that these overseas
subsidiaries in the four Countries operate as captive service providers and
typically the entire revenue earned by the overseas is pulled back in the
assessee's books thereby retaining only a Arm's length mark up on their
costs at overseas level. The assessee being the principal entity of the group
undertakes critical functions and bears all risks as compared to the overseas
AEs predominantly provide on-site software support and related services in
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
the local geography under the instruction and supervision of the assessee
and given the least complex nature, the overseas subsidiaries should be
considered as tested party for benchmarking the international transactions
with overseas subsidiaries.
8.The learned counsel referred to various documents to demonstrate
the substantial least complex nature of the overseas subsidiaries. The
learned counsel contended that the Tribunal committed a serious error in
rejecting the ground canvassed by the assessee to consider foreign AEs as
tested party to determine the ALP despite their least complex nature in the
supply chain by ignoring the various evidences/documents furnished by the
assessee to the said effect. Further, the Tribunal did not consider that the
TPO in the assessee's own case for the subsequent assessment years, i.e. AY
2012-13, AY 2013-14 and AY 2014-15 accepted the assessee's approach on
considering the foreign AEs as tested party under similar facts and
circumstances. Further, it is submitted that the Tribunal did not adjudicate
the other contentions despite very detailed submissions made by the
assessee duly represented by the learned senior counsel. In this regard, the
learned counsel submitted that the Tribunal erred in concluding that the
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
assessee has confined its arguments only to the selection of tested party and
committed a serious error in observing that other transfer pricing grounds
relating to segmentation, internal TNMM vs. external TNMM, selection of
comparable companies, restriction of quantum of transfer pricing adjustment
to the actual profits retained by overseas subsidiaries from underlying
international transactions and claim of economic adjustments as not present
despite the fact detailed submissions were made on behalf of the assessee.
Further the Tribunal erred in concluding that the assessee did not press on
the corporate tax matters despite detailed submissions were made on behalf
of the assessee on various dates before the Tribunal. Therefore it is
submitted that this appeal has been admitted to consider sever substantial
questions of law of which the issues raised in ground Nos.4 to 6 were never
adjudicated by the Tribunal and therefore, it is submitted that it is the
endeavour of the assessee to convince this Court to direct the TPO to
reconsider the matter so far as the issues which have been raised in
substantial questions of law Nos.1 to 3 by remanding the matter for a fresh
consideration and the other issues to be considered by the Tribunal.
9.It is further submitted that after the impugned order was passed by
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
the Tribunal, the assessee filed a miscellaneous application before the
Tribunal on 28.09.2017 stating about the grounds which were raised before
the Tribunal and the Tribunal did not the consider the evidences/documents
submitted by the assessee to demonstrate the least complex nature by the
overseas AEs and therefore the observation of the Tribunal that sufficient
evidence was not furnished is incorrect. Further, it was submitted that the
Tribunal referred to the decision of the Mumbai Tribunal in the case of
Aurionpro Solutions Limited vs. Additional Commissioner of Income Tax
[2013 (33) Taxman.com 187] which decision would not be applicable to
the assessee's case. The assessee in the miscellaneous application pointed
out the factual difference between the case of Aurionpro Solutions Limited
and that of the assessee. Further, the assessee contended under the CUP
method only the transaction has to be seen and not who is the tested party.
The concept of tested party will apply only when Cost Plus Method [CPM]
or Re-sale Price Method [RPM] or TNMM is applied. In this regard, the
assessee referred to Rule 10B(1) of the Income Tax Rules, 1962 ['the Rules'
for brevity]. Further, it was submitted that the decision relied on by the
assessee in the case of General Motors India Private Limited vs.
DCIT/ACIT [2013 (27) ITR(T) 373 (Ahm-Trib.)] and Ranbaxy
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
Laboratories Limited vs ACIT [2016 (68) Taxman.com 322 (Delhi-Trib.)]
were relied on by the assessee which were not properly construed by the
Tribunal.
10.It is submitted that the Tribunal though referred to the decision in
Ranbaxy Laboratories Limited held that the decision is on the basis of
OECD guidelines only and does not taken income tax provisions into
consideration. It is submitted that the Indian Regulations do not laid down
any specific procedure or guidelines for the choice of tested party.
However, it would be relevant to refer Section 92 and Rule 10B(1)(e) of the
Rules which uses the term 'enterprise' for application of TNMM. It was
further submitted that Section 92F of the Act defines the term 'enterprise' as
“a person (including a permanent establishment of such person) who is, or
has been, or is proposed to be engaged in any activity......”. Section 2(31)
defines a person to include a company and in terms of Section 2(17)
'company' means any Indian Company or any body corporate incorporated
by or under the laws of country outside India. Therefore, it was submitted
that a tested party can either be a Indian entity or foreign entity depending
upon the function profile of the transacting entities. Further, the approach
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
of considering least complex entities as tested party has been principaly
approved in Advanced Pricing Agreements [APA] signed with Central
Board of Direct Taxes [CBDT]. Further, the assessee also pointed out the
various contentions which were raised before the Tribunal in relation to
comparability analysis. Further with regard to the corporate tax matters, it
was pointed out that the first issue pertain to re-working of deduction under
Sections 10A and 10AA of the Act.
11.The second issue was pertaining to disallowance under Section
14A of the Act r/w. Rule 8D of the Rules. The third issue pertain to tax at
distributed dividends under Section 115O of the Act. Therefore, the
assessee prayed that the order may be rectified and the grounds which have
been raised may be adjudicated on merits. The Tribunal by order dated
02.08.2016 dismissed the miscellaneous application on the ground that what
is permissible is only the rectification of error which is prima facie apparent
on record and the assessee already having filed this appeal before this Court,
the Tribunal cannot canvass such issues in the miscellaneous application.
The learned counsel for the assessee submitted that the Tribunal ought to
have considered that for the subsequent assessment years, namely, AY
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
2012-13, AY 2013-14 and AY 2014-15, the TPO has accepted the assessee's
approach of considering foreign Associated Enterprise as tested party under
similar facts and circumstances and there was no reason to take a different
view for the assessment year under consideration. The learned senior
counsel submitted that the following issues were not adjudicated by the
Tribunal.
“4.The Learned TPO/AO and the Hon’ble DRP have
erred in law and in facts by disproportionately allocating
the overheads costs [being offshore costs] to the subsidiary
segment. The revised allocation procedure adopted by the
Ld. TPO resulted in 27.75% of the selling, administrative
and other general overheads getting allocated to the AE
segment vis-a-vis 12.81% to the Citi and third party
segment thereby leading to a clear anomaly in the
allocation mechanism.
5.The Learned TPO/AO and the Hon’ble DRP have
erred, in law and in facts by rejecting the detailed transfer
pricing analysis prepared by the Appellant in accordance
with the provisions of the Income-tax Act, 1961 (the Act)
without appreciating the fact that the margins earned by the
Appellant in the subsidiary segment [20.25 percent] were
higher than those even earned by the third party
comparables [18.94 percent] chosen by the Ld. TPO.
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
6.The learned TPO / AO and the Hon’ble DRP failed
to appreciate the business model adopted by the Appellant
with its subsidiaries wherein the entire revenue and cost of
the overseas subsidiaries were pulled back into the books
of the Appellant by way of a back-to-back arrangement
after leaving only an arm’s length profit for the onsite
support services provided by the overseas subsidiaries in
majority of the cases.
26.The learned AO and the Hon’ble DRP have erred
in restricting the exemption as claimed by the Assessee to
INR 48,47,11,120 (as against the claim INR 84,42,86,994
in the return of income) for 10A Units and to INR
6,40,45,234 (as against the claim INR 15,40,15,372 in the
return of income) in respect of the 10AA Unit.
27.The learned AO and the Hon'ble DRP have failed
to understand the profitability computation of 10A and
non10A units.
28.The learned AO and the Hon’ble DRP failed to
appreciate the fact that the 10A units and non 10A units are
operating at a consistent profitability for the past two years.
29.The learned AO and the Hon’ble DRP failed to
appreciate that the SEZ is in the second year of operation
and was in operation for only 3 months in the previous AY.
30.The learned AO and the Hon’ble DRP failed to
appreciate the fact that separate statement of Profit & Loss
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
for each of its units are maintained and also that it is not
mandatory to maintain separate books of accounts for
expenses incurred in the different units for the purpose of
claiming deduction under section 10A and section 10AA.
33.The learned AO and the Hon’ble DRP have failed
to appreciate that no expenditure has been incurred
towards earning the dividend income and therefore, the
learned AO and Hon'ble DRP have erred in disallowing an
amount of INR 1,99,85,908.
34.Without prejudice to the above, having made the
disallowance, the learned AO ought to have granted
deduction under section 10A on the enhanced income on
account of the aforesaid disallowance.”
12.Therefore, it is submitted that the matter may be remanded to the
Tribunal to decide the above issues which were not considered while
passing the final order dated 18.08.2017. It is further submitted that it is not
in dispute that the assessee did not include the foreign AEs as tested parties
in their TP study. However, the matter was raised before the TPO. The
assessee has raised such a contention which have been noted by the TPO in
its order dated 29.01.2015. However, the TPO would state that the assessee
did not include the foreign AEs as tested parties in their TP documentation
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
and such plea cannot be permitted to be raised. The assessee in their
objections before the DRP had specifically contended that the TPO erred in
not considering the fact that international transactions entered into by the
assessee with its subsidiaries is at arm's length by taking the overseas
subsidiaries as tested parties. The DRP while issuing directions observed
that it is not known as to why the subsidiaries were not taken as tested
parties in the TP documentation, therefore, the stand of the assessee cannot
be accepted. It is submitted that this finding of the DRP is erroneous and
therefore the assessee would pray for a remand to the TPO for considering
afresh the issue relating to tested party.
13.Further the learned counsel referred to the affidavit filed before the
Tribunal in support of the miscellaneous application which contains a
tabulated statement pointing out the issues which were not considered by
the Tribunal and therefore, those issues may be remanded to the Tribunal for
fresh consideration. It is further submitted that the definition of 'Enterprise'
and 'Associated Enterprise' in the Act nowhere indicates that the Enterprise
shall mean the assessee and the Associated Enterprise will mean other than
the assessee and that these words have been used interchangeably and the
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
finding of the Tribunal that the Enterprise will mean the assessee and
Associated Enterprise will mean the other party to whom the assessee has
sold or purchased the goods is incorrect. In support of such contention,
reliance was palced on the decision in the case of Yamaha Motor India
Limited vs. ACIT [2014 (50) Taxman.com 444 (Delhi-Trib.)]. It is
submitted that the tax case appeal filed before the High Court of Delhi
against the said judgment in Commissioner of Income Tax vs. Yamaha
Motor India Limited in I.T.Nos.737 and 754/2015 was dismissed by
judgment dated 14.03.2016. Further, it is submitted that the decision of the
Mumbai Tribunal in Aurionpro Solutions Limited does not laid down the
correct legal position which was noted in several decisions even by the
Tribunal subsequently and in this regard referred to the decision in the case
of General Motors India Private Limited. For the same proposition, reliance
was placed on the decision in the case of WNS Global Services Private
Limited vs. Income Tax Officer, Ward 10(1), Mumbai in
I.T.A.No.7378/Mum/2012, Income Tax Appellate Tribunal, 'K' Bench,
Mumbai. For the same proposition, reliance was also placed on the
decision in the case of Tata Consultancy Services Limited vs. ACIT,
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
Mumbai in I.T.A.NO.5713/Mum/2013, Income Tax Appellate Tribunal,
'J' Bench, Mumbai. It is submitted that there are several decisions which
have been rendered after the decision in Aurionpro Solutions Limited and
in the assessee's own case for the subsequent three years, the Transfer
Pricing Officer agreed with the assessee who had selected the foreign
Associated Enterprise as tested party in similar facts and circumstances.
14.Further, with regard to the argument that there is no reference to
tested party under CUP Method, reliance was placed on the decision in the
case of India Debt Management Private Limited vs. DCIT, Mumbai in
I.T.(TP).A.No.7518/Mum/2014, Income Tax Appellate Tribunal, 'K'
Bench, Mumbai. Further, it is submitted that the TPO, DRP as well as the
Tribunal erred in holding that the assessee had resorted to change its method
of assessment by taking a different stand that what was taken in their TP
documentation. It is submitted that there is no bar for the assessee to take
a different stand before the TPO/DRP/Tribunal and merely because the
assessee did not select the foreign AEs as tested parties in the TP
documentation, it does not preclude the assessee from subsequently
requesting the foreign AEs to be taken as tested parties. In this regard,
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
reliance was placed on the decision in Mattel Toys India Private Limited
vs. DCT [MANU/IU/0886/2013 (ITAT, Mumbai Bench)]. For the same
proposition, reliance was placed on the decision of the Income Tax
Appellate Tribunal, 'C' Bench, Kolkata in the case of Almatis Alumina
Private Limited vs. DCIT in I.T.A.No.726 & 2361/Kol/2017 dated
16.04.2019.
15.M/s.R.Hemalatha, learned senior standing counsel for the revenue
elaborately referred to the order passed by the Tribunal and in particular the
arguments which were advanced by the learned senior counsel for the
assessee before the Tribunal which has been recorded by the Tribunal in
paragraph Nos.20, 21 and 22. Further, it is submitted that in terms of Rule
10D, the information and documents are to be kept and marked and the
assessee in their return of income had stated that they treated themselves as
the tested party and without filing a revised return, there cannot be a change
of stand. In this regard, the learned counsel referred to Rule 10E and the
report of the auditor which is required to be submitted in Form No.3CED.
Therefore, it is submitted that when the assessee in their TP documentation
has not stated that their foreign AEs are to be treated as tested party, they
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
cannot now change their stand and if permitted, it would amount to
changing the “Goal post”. Referring to the order dated 29.01.2015 passed
by the TPO, it was pointed out that the assessee was attempting to change
the entire transaction and bring material which was not part of their TP
documentation. Further, the learned senior standing counsel referred to the
finding rendered by the DRP in paragraph 3.1, wherein the DRP rejected the
stand taken by the assessee that the foreign AEs are to be treated as tested
parties and the said finding is legal and proper. Further the learned counsel
pointed out that based on the information furnished by the assessee in their
return of income and the certificate of the auditor submitted in Form
No.3CED, show cause notice was issued by the TPO and the present stand
taken by the assessee is a new plea which cannot be permitted to be raised.
Therefore, it is submitted that the Tribunal rightly rejected the case of the
assessee.
16.In reply, Mr.Kamal Sawhney, learned senior counsel for the
assessee submitted that Form No.3CED is only regarding the transaction
claim and it does not relate to a tested party. Further it is submitted that no
new or fresh claim has been made by the assessee and in fact the TPO had
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
rejected the TP analysis done by the assessee and had done his own analysis
and selected 12 comparables and the assessee had furnished all material
before the TPO along with their submissions dated 18.01.2015 submitted to
the TPO on 20.01.2015. It is reiterated that the Indian company, namely,
the assessee bears the entire risks and hence, it is more complex and the
least complex is required to be taken into consideration. In this regard, the
learned senior counsel referred to the TP study done by the assessee and in
particular to the risks assumed as mentioned in paragraph 4.03.3 and with
regard to the intangible assets as pointed out in paragraph 4.06. Therefore,
it is submitted that the TPO ought to have selected the foreign AE of the
assessee as the tested party.
17.We have elaborately heard the learned counsels for the parties and
carefully perused the materials placed on record.
18.First we take up for consideration the submission of the learned
senior counsel for the assessee that the grounds which have been listed out
supra have not been adjudicated by the Tribunal and therefore, it is prayed
that the matter may be remanded to the Tribunal to adjudicate the issues
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
which have been specifically raised by the assessee. The arguments of the
learned senior standing counsel stems from the finding recorded by the
Tribunal in the impugned order, more particularly, the observation in
paragraph 24 of the impugned order, wherein the Tribunal observes that the
only issue that arises for consideration is whether the assessee Company has
to be taken as tested party for the purpose of determination of Arm's Length
Price or by applying the least complex theory, the AE outside the Country
has to be taken as the tested party. The Tribunal further observes in
paragraph 18 of the impugned order that even though the assessee has raised
many issues before the Tribunal, the learned senior counsel for the assessee
confined himself only to the selection of tested parties. The assessee filed
miscellaneous application before the Tribunal on 28.09.2017 after the
impugned order was passed in which a specific plea has been raised, duly
supported by an affidavit of the Senior Manager, Direct Tax of the assessee,
wherein they have stated that during the hearing of the appeal by the
Tribunal, the learned senior counsel for the assessee argued and presented
the following grounds of appeal:
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
Transfer pricing grounds of grounds of appeal
S.No. Particulars Ground No.
1 Approach 1 – Considering the overseas subsidiaries of 6, 7, 8 and 9
Petitioner Company as tested party
2 Approach 2 – Considering the Petitioner Company as
tested party
Part a) – Contentions in relation to segmentation 4, 5, 20 and 21
adopted by Ld. Transfer Pricing Officer (TPO) 15, 16, 17, 18 and 19
Part b) – Contentions in relation to comparability
analysis adopted by Ld. TPO
Corporate tax grounds of appeal
S.No. Particulars Ground No.
1 Re-computation of deduction claimed under section 26 to 30
10A and 10AA of the Income Tax Act, 1961 (the Act)
2 Disallowance made under section 14A of the Act 33 and 34
3 Tax on dividends distributed under section 115O of the 36
Act
19.The above stand has been further elaborated in the miscellaneous
application, in our opinion, in a very detailed manner. The question would
be as to whether the Tribunal could have confined itself to the issue with
regard to the selection of tested parties alone by referring to the submission
made on behalf of the appellant/assessee. We find that there is nothing on
record to show that the assessee had given up the other issues rather the
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
assessee has in an elaborate manner set out all the issues which they seek to
canvass before the Tribunal and prayed for adjudication. Even assuming a
submission was made on behalf of the assessee, the submission having not
been supported by a sworn statement cannot be taken as if the assessee has
given up the other submissions which they have raised in the appeal.
Furthermore, we find that there is no reason as to why the assessee should
forego the other issues which they have raised before the Tribunal
especially when the matter was hotly contested at all levels. Therefore, we
are of the opinion that the Tribunal should and shall adjudicate all such
issues which have been raised before it by the assessee in the grounds and
more specifically pointed out in the miscellaneous application. Therefore,
we accept the arguments made on behalf of the assessee that the Tribunal
should consider the issues which were raised before it rather foreclosing the
assessee from canvassing those points based upon the alleged concession
which would not bind the assessee.
20.Now, we move on to consider the issue as to whether the assessee
has to be taken as tested party for the purpose of determination of ALP or by
applying the least complex theory, the AE outside the Country has to be
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
taken as tested party. The Tribunal while considering the said question
proceeded to examine the scheme of transfer pricing as provided under the
Act. It referred to section 92B which defines 'International transaction',
section 92A which defines 'Associated Enterprise', Rule 10D which deals
with the most appropriated method for determination of ALP and Rule
10B(1)(e) which provides the method for determination of ALP by adopting
TNMM. After referring to these statutory provisions, the Tribunal would
observe that the main object is to compute the net profit margin realised by
the enterprise from the international transaction; the comparison shall be
with regard to the transaction of unrelated enterprise from comparable
uncontrolled transaction. Thus the Tribunal opined that the net profit
margin of the enterprise shall be computed in the international transaction
by comparing comparable uncontrolled transaction. The Tribunal noted the
definition of Enterprise as defined in section 92F(iii) and reading the said
provision along with Rule 10B(1)(e) of the Rules, the Tribunal held that the
net profit margin of the Enterprise which is in India, has to be determined
by applying the Transfer Pricing Regulations. The Tribunal was largely
guided by the decision of the Mumbai Tribunal in Aurionpro Solutions
Limited, wherein it was held that the tested party for the purpose of
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
determination of ALP is always the assessee and not the AE.
21.The assessee had referred to the decision of the Delhi Tribunal in
Ranbaxy Laboratories Limited which was distinguished by observing that
the said decision had proceeded on the basis of OECD guidelines. The
Tribunal further went on to observe that the determination of least complex
party and functions performed by the AE outside the Country are not
available on record and it is not known the amount of risk assumed by AE
and its capital employed and the complexity of the functions performed by
it. It is further observed that in the absence of any such documentation with
regard to assumption of risk, complex functions, the capital employed, etc.,
the decision in Ranbaxy Laboratories Limited cannot be applied in the case
of the assessee unless it is established with material evidence that the AE
outside the Country performed least complex operation with a minimum
risk. The Tribunal further has observed that the assessee miserably failed to
establish functional risk assumed by the AE and in the absence of any
material on record with regard to the risk assumed by the AE, the assessee
has to be taken as tested party for the purpose of transfer pricing adjustment.
Thus, the assessee was non-suited on the ground that they have failed to
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
establish functional risk assumed by the AE outside the Country. This
finding appears to be factually incorrect as could be seen from the grounds
raised before the Tribunal as well as the grounds which were canvassed
before the TPO and specifically raised in the objections filed before the
DRP.
22.The Tribunal had distinguished the decision in Ranbaxy
Laboratories Limited on the ground that the Delhi Bench of the Tribunal
has proceeded on the basis of the OECD guidelines. However, we find in
paragraph 25 of the judgment of the Tribunal the principles that emerge in
selection of tested party has been culled out wherein it has been held that
the tested party normally should be the least complex party to the controlled
transaction and that there is no bar for selection of tested party either local
or foreign party and neither the Act nor the guidelines on transfer pricing
provides so and the selection of tested party is to further the object of
comparability analysis by making it less complex and requiring fewer
adjustment. Therefore, we do not agree with the reasons given by the
Tribunal for not considering the decision in Ranbaxy Laboratories Limited.
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
23.Furthermore from the grounds canvassed in the miscellaneous
application filed before the Tribunal on 28.09.2017, after the impugned
order was passed by the Tribunal, would clearly show that all materials were
available on file. Therefore, to non-suit the assessee stating that they
miserably failed to establish functional risk is incorrect. If such is the
conclusion which we have to arrive at, we have no hesitation to set aside the
order of the Tribunal and we shall do so.
24.Before doing so, we may point out the following. The assessee in
ground Nos.6 to 8 before the Tribunal had contested the issue relating to
consideration of the foreign AE as tested party. The assessee has submitted
evidences and documents relating to the assessee's transfer pricing
documentation, global transfer pricing reports of the foreign AE at United
Kingdom, Australia and German; extracts of inter-company service
agreement, reconciliation of operating credits earned by the overseas
subsidiaries, etc. So far as the risks assumed by the assessee, the same has
been elaborately brought out in the TP documentation as could be seen from
paragraph 4.03.3 under the sub heading Risks Assumed and paragraph 4.06
under the sub heading Associates Employed. This vital material has not
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
been considered by the TPO but the assessee has been precluded from
canvassing the said issue on the ground that the stand taken during the
course of TP proceedings was not what was the subject matter of the TP
documentation/TP study of the assessee. The question would be whether
this could be the reason for rejecting the assessee's plea. This issue has
been considered by the Tribunal in several decisions.
25.In Yamaha Motor Private Limited, the question arose as to
whether the word 'Associated Enterprise' can be given a restrictive meaning
to mean the other party to whom the assesee has sold or purchased goods. It
was held that under the Act and the Rules, the words 'Enterprise' and
'Associated Enterprise' have been used interchangeably and the arguments
that the Enterprise will mean the assessee and the Associated Enterprise will
mean the other party to whom the assessee has sold or purchased goods is
incorrect. As could be seen from the definition of Enterprise given in
section 92F(iii) and Associated Enterprise as defined in Section 92A of the
Act, it is evidently clear that the statute does not indicate that 'Enterprise'
shall mean the assessee and the 'Associated Enterprise' will mean the other
party. As pointed out earlier, the words 'Enterprise' and 'Associated
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
Enterprise' have been used interchangeably. Therefore, the conclusion of
the Tribunal in this regard is not sustainable.
26.The Tribunal was largely guided by the decision in Aurionpro
Solutions Limited. The learned senior counsel for the assessee has referred
to various decisions of the Tribunal which were rendered subsequently,
more particularly, the decision of the Ahemdabad Tribunal in the case of
General Motors India Private Limited, which had taken note of the
decision of the Mumbai Tribunal in Aurionpro Solutions Limited and noted
the facts of the said case and held that the said decision cannot be applied as
the main issue in Aurionpro Solutions Limited was the percentage of
interest to be calculated on the loan advanced by the assessee to its AE.
Thus, on facts the decision in Aurionpro Solutions Limited could not have
been applied to the facts of the assessee's case before us. As already pointed
out, it is not a case where there were no material produced by the assessee to
establish the functional risk assumed by the foreign AEs. The material was
available before the TPO but the TPO non-suited the assessee on the ground
that such contention by referring to the foreign AEs as tested party was not
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
part of TP documentation. This finding is incorrect. Interestingly in the
case of in the case on hand the TPO rejected the data placed by the assessee
in their TP documentation and undertook a fresh search for external
comparables and arrived at a final list of 12 comparables. Therefore, when
the TPO himself has not attached any sanctity to the TP documentation as
submitted by the assessee, could not have foreclosed the assessee from
canvassing the issue that the subsidiaries are least complex entities which
should be taken note of.
27.The revenue seeks to pin the assessee based upon the auditor's
certification as filed in Form 3CED. As could be seen from the statutory
form, it pertains only to the transactional claims and has got nothing to do
with a tested party. The revenue cannot compare the case of the assessee
with that of the assessee who fails to claim in his return of income a
deduction or a benefit which he would be otherwise entitled to. In fact the
TPO was rightly aware of his role when he has made an observation in
paragraph 17.2 of the order dated 29.01.2015, wherein he would state that
his office is responsible to ensure sufficiency of information/data and
accordingly cannot be precluded to conduct a fresh search. However, when
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
such is the legal position, as rightly understood by the TPO, the assessee
should not have been foreclosed. Therefore, we are of the clear view that
the findings rendered by the TPO, DRP and the Tribunal foreclosing the
assessee's claim to refer to the foreign AEs as tested party is legally not
sustainable.
28.For all the above reasons, the tax case appeal is allowed, the orders
passed by the Tribunal, DRP and the TPO are set aside. Accordingly, the
matter stands remanded to the Tribunal to decide the following grounds
which were raised before it in the Appeal Petition:
(i) The Learned TPO/AO and the Hon’ble DRP have
erred in law and in facts by disproportionately allocating
the overheads costs [being offshore costs] to the subsidiary
segment. The revised allocation procedure adopted by the
Ld. TPO resulted in 27.75% of the selling, administrative
and other general overheads getting allocated to the AE
segment vis-a-vis 12.81% to the Citi and third party
segment thereby leading to a clear anomaly in the
allocation mechanism.
(ii) The Learned TPO/AO and the Hon’ble DRP
have erred, in law and in facts by rejecting the detailed
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
transfer pricing analysis prepared by the Appellant in
accordance with the provisions of the Income-tax Act,
1961 (the Act) without appreciating the fact that the
margins earned by the Appellant in the subsidiary segment
[20.25 percent] were higher than those even earned by the
third party comparables [18.94 percent] chosen by the Ld.
TPO.
(iii) The learned TPO / AO and the Hon’ble DRP
failed to appreciate the business model adopted by the
Appellant with its subsidiaries wherein the entire revenue
and cost of the overseas subsidiaries were pulled back into
the books of the Appellant by way of a back-to-back
arrangement after leaving only an arm’s length profit for
the onsite support services provided by the overseas
subsidiaries in majority of the cases.
(iv) The learned AO and the Hon’ble DRP have
erred in restricting the exemption as claimed by the
Assessee to INR 48,47,11,120 (as against the claim INR
84,42,86,994 in the return of income) for 10A Units and to
INR 6,40,45,234 (as against the claim INR 15,40,15,372 in
the return of income) in respect of the 10AA Unit.
(v) The learned AO and the Hon'ble DRP have failed
to understand the profitability computation of 10A and
non10A units.
(vi) The learned AO and the Hon’ble DRP failed to
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
appreciate the fact that the 10A units and non 10A units are
operating at a consistent profitability for the past two years.
(vii) The learned AO and the Hon’ble DRP failed to
appreciate that the SEZ is in the second year of operation
and was in operation for only 3 months in the previous AY.
(viii) The learned AO and the Hon’ble DRP failed to
appreciate the fact that separate statement of Profit & Loss
for each of its units are maintained and also that it is not
mandatory to maintain separate books of accounts for
expenses incurred in the different units for the purpose of
claiming deduction under section 10A and section 10AA.
(ix) The learned AO and the Hon’ble DRP have
failed to appreciate that no expenditure has been incurred
towards earning the dividend income and therefore, the
learned AO and Hon'ble DRP have erred in disallowing an
amount of INR 1,99,85,908.
(x) Without prejudice to the above, having made the
disallowance, the learned AO ought to have granted
deduction under section 10A on the enhanced income on
account of the aforesaid disallowance.”
29.The issue regarding the assessee's plea to consider foreign AE as
tested party to determine the Arm's Length nature of the underlying
international transaction stands remanded to the Transfer Pricing Officer
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
for a fresh decision on merits and in accordance with law having due regard
to the orders passed by the Transfer Pricing Officer in the assessee's own
case for the subsequent assessment years.
(T.S.S., J.) (R.N.M., J.)
04.02.2021
Index: Yes/ No
Speaking Order : Yes/ No
cse
To
1.The Deputy Commissioner of Income Tax,
Company Circle 5 (2),
121, M.G. Road, Nungambakkam,
Chennai – 600 034.
2.The Income Tax Appellate Tribunal Bench 'D', Chennai.
https://www.mhc.tn.gov.in/judis/
T.C.A.No.996 of 2018
T.S.Sivagnanam, J.
and
R.N.Manjula, J.
cse
Pre-delivery judgment made in
T.C.A.No.996 of 2018
04.02.2021
https://www.mhc.tn.gov.in/judis/
