Druva Software Pvt.Ltd, Pune V. Deputy Commissioner of Income-tax, Circle - 1(2), Pune

ITA 233/PUN/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 0292 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 24-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 271(1)(c); 139; 143(3); 92F; 2(A); 13

Judgement Text

आयकर अपीलीय अधिकरण “सी” न्यायपीठ पुणे में । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER आयकर अपील सं. / ITA No.233/PUN/2018 धििाारण वर्ा / Assessment Year : 2013-14 Druva Software Private Limited, 6 th Floor, Muttha Chambers II, Senapati Bapat Marg, Pune – 411016 PAN : AACCD5703E .......अपीलार्थी / Appellant बिाम / V/s. Deputy Commissioner of Income Tax, Circle – 1(2), Pune ......प्रत्यर्थी / Respondent Assessee by : Shri Nikhil Pathak Revenue by : Shri Mohit Jain सुिवाई की तारीख / Date of Hearing : 27-04-2022 घोर्णा की तारीख / Date of Pronouncement : 13-07-2022 आदेश / ORDER PER S.S. VISWANETHRA RAVI, JM : This appeal by the assessee against the final assessment order dated 20-11-2017 passed by the Dy. Commissioner of Income Tax, Circle-1(2), Pune u/s. 143(3) r.w.s. 144C(13) of the Act for assessment year 2013-14. 2. Ground Nos. 1 and 2 are general in nature, hence, require no adjudication. 2 ITA No.233/PUN/2018, A.Y. 2013-14 3. Ground Nos. 3 to 7 raised by the assessee challenging the action of TPO/DRP for disregarding the intercompany agreement entered between the assessee and its associated enterprises (AEs) pertaining to availing of marketing and sales support services (MSS services) in the facts and circumstances of the case. 4. We note that the assessee is a company conducts its business under the name and style as “M/s. Druva Software Pvt. Ltd.” (in short “Druva India”) hereafter. The assessee is engaged in the business of providing data protection to the enterprises. 5. The assessee filed return of income declaring a total loss at Rs.51,71,06,222/- on 30-11-2013. 6. Having noticing international transactions, the AO made reference u/s. 92CA(1) of the Act to the Transfer Pricing Officer (TPO) on 14-10- 2015. 7. The TPO passed order u/s. 92CA(3) of the Act on 27-10-2016 suggesting an adjustment of Rs.33,73,58,889/- to the value of international transaction with regard to Arm’s Length Price (ALP) pertaining to availing marketing and sales support services with Druva Inc. and Druva Europe. 8. The AO passed draft assessment order u/s. 143(3) r.w.s. 144C(1) of the Act making TP adjustment of Rs.33,73,58,889/- on 15-12-2016. 3 ITA No.233/PUN/2018, A.Y. 2013-14 9. The assessee, aggrieved by the draft assessment order filed objection before the Dispute Resolution Panel (DRP) and the said DRP passed its order u/s. 144C(5) of the Act directing the TPO to recompute the revised computation of margins as per the worked out by the assessee on 27-09- 2017. 10. In compliance with the same the TPO made upward adjustment towards international transactions pertaining to marketing and sales support services vide order dated 27-10-2016. 11. Following the same the AO passed final assessment order which is impugned before us by the assessee in respect of grounds mentioned here- in-above. 12. The ld. AR, Shri Nikhil Pathak submits that the TPO erred in making the addition in respect of MSS services paid to its AEs Druva Inc., USA and Druva Europe, UK. He referred to agreement entered into between Druva Inc., USA at Pages 418 to 427 and with Druva Europe to Pages 429 to 438 of the paper book. He argued both the AEs are to provide marketing the sale support services to the assessee in their respective regions and drew our attention to balance sheet of Druva Inc., USA at Pages 457 to 461 and Druva Europe at Pages 463 to 474 of the paper book. He vehemently argued that the TPO has considered only the marketing and sales expenses incurred by the Druva Inc. USA and Druva Europe, UK and allowed only the appropriated markup. He submits the action of TPO is not correct selecting only to cost items and disregarding other cost items for computing total cost. The TPO and DRP considered select cost items by 4 ITA No.233/PUN/2018, A.Y. 2013-14 adopting an ad-hoc approach and ignored the fact of AEs are required to incorrect various routine expenses while providing marketing and sale support services to the assessee. He referred to various routine expenses like office rent, salary expenses, communication charges, traveling cost, office establishment expenses, etc. and vehemently argued all these expenses are required to be incurred while providing marketing and sale support services. 13. The ld. AR submits that the sales by both the foreign AEs were on back to back basis and did not retain any margin and referred to Pages 2652 to 2801 of the paper book. The TPO accepted that both the AEs provided MSS services to the assessee but without any basis allowed advertising and marketing expenses as a deduction. He argued that all the expenses incurred by the assessee are directly linked to the MSS services provided by the AEs. Further, he submits that both the AEs are not engaged in any software development activities and no verification conducted by the TPO/DRP. In this regard to show that both the AEs are engaged in software development activities. He referred to employee payroll details of the assessee along with both the AEs and argued both the AEs are not in software development activities. The Balance sheet of Druva Europe Ltd. clearly supports the selling of software product of assessee and referred to profit and loss account at Pages 469 of the paper book. 14. Regarding the most appropriate method, the ld. AR submits that the TPO has not carried out any proper exercise while adopting the cost plus method as most appropriate method and he vehemently argued that the TPO simply considered marketing and advertising expenses incurred by 5 ITA No.233/PUN/2018, A.Y. 2013-14 both the AEs by applying 7% as mark up. The TPO held the said cost are at ALP and disallowed all other expenses by holding are not required to be reimbursed. He vehemently argued in order to determine the ALP the TPO again considered the foreign AEs as tested parties. The assessee considered the foreign AEs are least complex entity to the present international transaction and selecting them as tested parties is valid. The ld. AR referred to Para 9 of the TPO’s order and submits the assessee submitted e-mail correspondence from Pages 2362 to 2651 of the paper book to show that the services were provided by the AEs. The ld. AR argued the finding of DRP in respect of holding that the assessee not able to prove the services rendered by the AEs is incorrect. 15. The ld. DR submits that the assessee did not provide any details either before the TPO or before the DRP and argued that both the foreign AEs are independently doing business. The ld. DR submits that the additional paper book No. 7 filed by the assessee were not before the TPO or DRP and it requires examination for the reason that documents came to the light for the first time before this Tribunal. He argued that the said documents in paper book No. 7 requires verification by the TPO in order to arrive ALP as well as the most appropriate method. He referred to Paras 6.1 and 8.3 of TPO and supported the order of CIT(A). 16. Heard both the parties and perused the material available on record. We note that during the year under consideration, the assessee entered into five international transactions. The TPO accepted three international transactions in respect of license fee for distribution of software products and related services on a back to back basis in respect of Druva USA and 6 ITA No.233/PUN/2018, A.Y. 2013-14 Druva Europe. Further, the TPO accepted CUP method as the most appropriate method for the international transactions entered thereto. For the transaction in respect of sale of investments (equity shares held in foreign entities) regarding Druva Technologies PTE Limited was also accepted along with the other method as adopted by the assessee. The TPO took objection to the international transactions in respect of availing marketing and sales support services with Druva Inc. USA and Druva Europe only on the ground that the TPO did not appreciate the payment regarding marketing and sales support services which up to Rs.54.42 crore as against the turnover of Rs.19.59 crore which is reproduced in the TPO’s order at Page No. 4. In order to find out the real character of the said payment under marketing and sales support services the TPO examined the financials as on 31-03-2013 of the assessee. He observed that the share capital of the assessee at Rs.6,28,620/- and accumulated loss at Rs.31,07,60,683/- and further he found the trade payables as on 31-03- 2016 at Rs.35,07,13,677/- in respect of Druva Inc. USA and Druva Europe and other employee related payables. On such circumstances, the TPO asked the details of services provided by both the AEs. We note that the copies of agreement between the assessee and its AEs are at Pages 418 to 427 and 429 to 438 of the paper book relating to Druva Inc. USA and Druva Europe Ltd., respectively. We note that the said agreement shows that the Druva USA and Druva Europe are to provide marketing and sales support services to the assessee in their respective regions. Balance sheet of Druva Inc. USA at Pages 457 to 461 and Balance sheet of Druva Europe is at Pages 463 to 474 of the paper book. The contention of ld. AR is that both the AEs sold the product of assessee without retaining any margin and the said sales are on back to back basis. We note that the said details 7 ITA No.233/PUN/2018, A.Y. 2013-14 of back to back invoicing as contended by the ld. AR were filed before us by way of a paper book No. 5. Admittedly, these invoices were not there before the TPO for its examination as we note that there was no certification by the assessee that these documents were before the TPO/DRP like the certificates given for paper book Nos. 1 to 3 and additional paper book containing pages 2362 to 2651. Further, the assessee filed additional paper book No. 7 containing pages 2948 to 2987 in respect of Income Tax return, updated financials statements and reconciliation income statement of Druva USA as on 31-03-2013 and Income Tax return of Druva Europe as on 31-03-2013. There is no dispute with regard to non-availability of paper book No. 5 and paper book No. 7 before the TPO/DRP as rightly pointed by the ld. DR but during the course of arguments the ld. AR fairly conceded since all these evidences were filed before the ITAT for the first time prayed to remit the same to the file TPO for its fresh consideration. Rule 10D explains that every person who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document as mentioned in sub-rule 1 (a) to (m). Sub-rule 4 of Rule 10D explains that the information and document specified under sub-rule 1, 2 and 2(a) are as far as possible be contemporaneous and should exist latest by the specified date referred to in Clause (iv) of section 92F. Clause (iv) of section 92F explains the specified date means the date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139 for the relevant assessment year. We note that admittedly during the course of TP proceedings the assessee submitted unaudited financials of Druva USA and Druva Europe and the TPO did not consider the same. Thus, in our opinion, issue requires fresh adjudication in view of the additional 8 ITA No.233/PUN/2018, A.Y. 2013-14 evidences filed in the form of paper book Nos. 5 & 7. Therefore, taking into consideration the submissions of ld. AR and ld. DR and in the interest of justice, we deem it proper to remand the matter to the file of TPO for its fresh consideration. The TPO shall look into the additional paper book Nos. 5 and 7 filed on 06-04-2022 and 27-04-2022 before the Tribunal and pass order, in accordance with law. Thus, the ground Nos. 3 to 7 raised by the assessee are allowed for statistical purpose. 17. Ground Nos. 8 and 9 regarding the selection and application of the most appropriate method. The assessee adopted TNMM as the most appropriate method but however the TPO rejected the same in view of his in adopting 7% mark up to the sales. Thus, in view of our decision in ground Nos. 3 to 7 in remanding the matter to the file of TPO, we leave it open to the TPO regarding the most appropriate method. 18. Regarding ground No. 10, in view of our decision in ground Nos. 3 to 7 and 11 to 13 the issue raised in ground No. 10 attains no significance. Accordingly, the same is dismissed as infructuous. 19. Ground Nos. 11 to 13 raised by the assessee challenging the disallowance on account of ESOP expenditure. The ld. AR submits that the AO disallowed the said expenditure on ad-hoc basis and the DRP without going into the details confirmed the order of AO and referred to Paras 7.6 to 7.77 of the order of DRP. He submits that the assessee debited ESOP expenditure to the profit and loss account and the said expenditure has been claimed on the basis of the Employees Staff Option Plan in accordance with the guidelines issued by the SEBI. Accordingly, 9 ITA No.233/PUN/2018, A.Y. 2013-14 the assessee debited the difference of market value of shares and the value at which allotted to the employees. He placed reliance on the decision of Hon’ble High Court of Karnataka in the case of Biocon Ltd. reported in 430 ITR 151 (Kar.). The ld. DR argued that no details in this regard also submitted before the AO and supported the order of AO. We note that as rightly pointed by the ld. AR that the AO disallowed expenditure on account of ESOP by holding such expenditure is in notional in nature and no reasons were recorded in this regard. The ld. AR submits that the assessee is having all details and may be remanded the issue to the file of AO for its fresh consideration. Therefore, taking into consideration the submissions of ld. AR and ld. DR, in the interest of justice, we deem it proper to remand the issue to the file of AO. The assessee is liberty to file evidences, if any, in support of its claim. Thus, ground Nos. 11 to 13 raised by the assessee are allowed for statistical purpose. 20. Ground Nos. 14 to 16 raised by the assessee on account of disallowance of PF expenditure to an extent of Rs.5,74,585/-. We note that the AO made disallowance only on the ground that the payment was made after the due date prescribed under the PF Act vide Para 7 to 7.3 of the final assessment order. The facts remains admitted that the PF contribution was paid before due date of filing of return of income and it is not disputed by the ld. DR. Since, the assessment year under consideration is prior to amendment, no disallowance is maintainable if the PF contribution paid before due date of filing of return of income. Thus, disallowance made on account of PF contribution is deleted. 10 ITA No.233/PUN/2018, A.Y. 2013-14 21. The ld. AR submits that the assessee is not interested to prosecute ground Nos. 17 to 19. Accordingly, the same are dismissed as not pressed. 22. In ground No. 20 of the appeal the assessee has assailed the initiation of penalty levied u/s. 271(1)(c) of the Act and the same is pre- mature at this stage. Accordingly, the same is dismissed as such. 23. In the result, the appeal of assessee is allowed for statistical purpose. Order pronounced in the open court on 13 th July, 2022. Sd/- Sd/- (Inturi Rama Rao) (S.S. Viswanethra Ravi) ACCOUNTANT MEMBER JUDICIAL MEMBER पुणे / Pune; ददिांक / Dated : 13 th July, 2022. रधव आदेश की प्रधतधलधप अग्रेधर्त / Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant. 2. प्रत्यर्थी / The Respondent. 3. The Dispute Resolution Panel-3, Mumbai 4. The CIT(IT/TP), Pune 5. धवभागीय प्रधतधिधि, आयकर अपीलीय अधिकरण, “सी” बेंच, पुणे / DR, ITAT, “C” Bench, Pune. 6. गार्ा फ़ाइल / Guard File. //सत्याधपत प्रधत// True Copy// आदेशािुसार / BY ORDER, वररष्ठ धिजी सधचव / Sr. Private Secretary आयकर अपीलीय अधिकरण ,पुणे / ITAT, Pune