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2020 (9) TMI 1093
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.... 2. The DRP erred in directing the AO/TPO to exclude M/s. Acropetal Technologies Ltd., M/s. Mindtree Ltd., and M/s. R.S. Software (India) Ltd., from the list of comparables, holding them to be functionally dissimilar as they are having significant onsite revenues, thereby 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. Also, the nature of activity, ie., software development remains the same, irrespective of the company engaged in providing onsite or offshore services. 3. The DRP erred in directing exclusion of M/s. R.S. Software Pvt. Ltd., M/s. Mindtree Ltd., and M/s. Acropetal Technologies 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. 4. The DRP erred in directing the AO to exclude M/s. Acropetal Technologies Ltd., from the list of final comparables also for the reason that clear segmental information of the employee cost and export earning filter was not av....
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....rability, whereas requirement of law is to acknowledge only those differences that are likely to materially affect the margin. 10. The DRP erred in disregarding the position of law that there could be differences between the enterprises compared under TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises. 11. The DRP erred in directing the AO/TPO to exclude M/s. Evoke Technologies Ltd., from the list of comparables, holding it to be functionally uncomparable due to the peculiar economic circumstances without appreciating that the expenditure incurred is a normal phenomenon and a company cannot be excluded merely on abnormal profit margins. 12. The DRP erred in directing the AO/TPO to exclude M/s. R.S. Software (India) Ltd., from the list of comparables merely to maintain consistency, even in the absence of objection with respect to inclusion of the said comparables in the list. 13. The DRP erred in directing the AO/TPO to consider the foreign exchange fluctuation to be operating in nature, without appreciating that the Rule 10B(2)(d) stipulates that the net profit margin realize....
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.... 19. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal." 3. The assessee in its appeal has raised several grounds, but at the time of hearing, the ld. counsel for the assessee prayed that ground No.4(a)(b)(d)(e) & (i) in the main grounds of appeal and ground No.4(j) and 7.1 raised in the form of additional grounds alone need to be adjudicated. The relevant grounds of ground No.4 and the additional grounds 4(j) and 7.1 read as follows:- "4. Determination of arm's length price of the Appellant's international transaction of provision of software development services: (a) That, in view of the high turnovers of L&T Infotech Ltd., Persistent Systems Ltd., Sasken Communications Technologies Ltd., and Tata Elxsi Ltd., indicating, inter alia, high ownership of intangibles and significantly high brand value, they ought to stand excluded from the final list of comparable companies in respect of the Appellant's international transaction of provision of software development services. (b) That, without prejudice to the above, Tata Elxsi Ltd. ought to stand ex....
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....g capital adjustment." 4. As far as the question of admission of additional grounds is concerned, it is seen that these grounds arise out of the order of DRP and related to grounds of appeal already raised by the Assessee in its appeal but omitted to be specifically and precisely raised in the original grounds of appeal and are therefore admitted for adjudication. 5. We shall first identify the issues to be decided in these cross appeals. The issues that arise in these cross appeals are with regard to determination of Arm's Length Price (ALP) in respect of two international transactions between the Assessee and its Associated Enterprise (AE) under the provisions of Sec.92 of the Income Tax Act, 1961 (Act) viz., (i) International Transaction of rendering of Software Development Services (SWD services) by the Assessee to its AE and (ii) rendering of Information technology enabled services (ITeS) by the Assessee to its AE. As far as the appeal of the Revenue is concerned, Gr.No.1, 18 & 19 are general grounds and need no specific adjudication. As far as Grounds 2 to 12 raised by the revenue are concerned, they relate to correctness of exclusion of comparable companies selected by....
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.... Section 10A of the Act claimed by the Assessee, it was sought to be restricted upon disallowing an amount of Rs. 13,70,475/- being telecommunication expenses and an amount of Rs. 8,35,695/- being travel expenses incurred in foreign currency only from the Assessee's export turnover without making a corresponding reduction of the said amounts from its total turnover. 10. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 05.11.2015, partly allowed the objections raised by the Assessee. 11. Pursuant to the directions of the DRP, the AO passed the final assessment order dated 16.12.2015 in which the total TP adjustment was reworked to Rs. 1,38,55,462/ for the two segments put together. Also, the DRP having accepted the contention of the Assessee that the amounts if any reduced from the export turnover in computing the deduction under Section 10A should also be correspondingly reduced from the total turnover, there was no reduction in the deduction claimed under Section 10A. 12. To the extent the TP adjustment survives post the DRP's directions, the Assessee has filed the above appeal and to the extent the Revenue is aggrieved by the D....
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.... exports Ltd. 0.31 7. Evoke Technologies Pvt. Ltd 20.05 8. Goldstone Technologies Ltd. 4.37 9. Helios and Matheson Information Technology 17.22 10. KPIT Cummins Infosystems Ltd. 12.53 11. Larsen and Toubro Infotech Ltd. 18.12 12. LGS Global Ltd. 14.15 13. Maveric Systems Ltd. 14.50 14. Mindtree Ltd. 12.08 15. Persistent Systems Ltd. 23.91 16. RS Software (India) Ltd. 11.99 17. R Systems International Ltd. 12.10 18. Sasken Communication Technologies Ltd. 22.79 19. Saven Technologies Ltd. 17.43 20. Thinksoft Global Services Ltd. 11.54 21. Thirdware Solutions Ltd. 21.75 22. Zylog Systems Ltd. 20.23 Arithmetical Mean 13.60 NOTE: Out of the 22 comparables selected by the Assessee, the TPO accepted the 6 highlighted above, viz. Larsen and Toubro Infotech Ltd., Evoke Technologies Pvt. Ltd., Persistent Systems Ltd., RS Software (India) Ltd., Mindtree Ltd. (at segment level) and Sasken Communication Technologies Ltd., and rejected the other 16. Comparables selected by TPO and their arithmetic mean: Sl. No. Name o....
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....essee's contentions for inclusion of its TP study comparables, the DRP rejected the same and thereby upheld their exclusion by the TPO. (ii) Onsite Software Development activities: In addition to the above, the DRP rejected the following companies selected by the TPO on the basis that they were predominantly engaged in onsite activities, although no onsite revenues filter had been applied by the TPO: (a) Acropetal Technologies Ltd. (rejected by DRP on other grounds also) (b) RS Software (India) Ltd. (rejected by DRP suo moto only on this ground) (c) Mindtree Ltd. (rejected by DRP suo moto on other grounds also) 15. On giving effect to the above directions issued by the DRP, the final list of comparables is as follows:- SI. No. Name of the Company 1 e-Zest Solutions Limited 2 Persistent Systems & Solutions Ltd. 3 Persistent Systems Ltd. 4 Sasken Communication Technologies Ltd. 5 Tata Elxsi Ltd. 6 L & T Infotech Limited 16. Pursuant to the directions of the DRP, the TP adjustment as regards the international transaction of provision of SWD services was reworked to Rs. 1,38,55,462/-. 17. Ag....
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....l revenue. (Ground No. 4(d)) (iv) That e-Zest Solutions Ltd., Larsen and Toubro Ltd., Persistent Systems & Solutions Ltd., Persistent Systems Ltd. and Sasken Communication Technologies Ltd. ought to be excluded from the final list of comparables (Ground No. 4(j)-[additional ground]) (v) That Tata Elxsi Ltd. ought to be excluded from the final list of comparables (Ground No. 4(b)) (vi) That the AO/ TPO erred in law and on facts in determining a negative working capital adjustment. (Ground No. 7.1-[additional ground]) 19. As far as Revenue's appeal is concerned, in ground Nos. 2 to 5, the Revenue has challenged the action of the DRP in suo moto rejecting companies selected by the TPO, viz. Acropetal Technologies Ltd., Mindtree Ltd. and RS Software (India) Ltd., on the basis that they were predominantly engaged in the onsite development of software in FY 2010-11. It was rightly contended that the exclusion of these companies from the final list of comparable companies chosen by the TPO, by the DRP was arbitrary because the TPO did not apply any filter as regards onsite revenues nor did the Assessee seek to apply these filters either before TPO or DRP. ....
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....opetal from the list of comparable companies, we find that exclusion of this company from the list of comparable companies should be upheld because this company fails the employee cost filter of employee cost being equal to at least 25% of the total operating revenue. From the annual report of the company it can be seen that the employee costs incurred by the company is 11.51% of the total operating revenue. Apart from the above, the Company also fails the TPO's filter of service revenue is excess of 75% as the income from software development activity is Rs. 81.40 Crores out of total operating revenue of Rs. 141 Crores. As it is clear that the company fails TPO's own filters of employee cost in excess of 25% and service revenue is excess of 75%, the company ought to remain excluded from the final list of comparables. We also find that this Tribunal in Applied Materials India Pvt. Ltd. v. ACIT [IT(TP)A Nos. 17 & 39/Bang/2016 ] at paras 16.1 to 16.4 at pages 1606-1607]; Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 15 at page 1744]; Electronic Imaging India P. Ltd v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib) para ....
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....om 124 (Bangalore-Trib) para 9 at pages 1726-1727]; Saxo India Pvt. Ltd. v. ACIT [2016] 67 taxmann.com 155 (Delhi - Trib.) (paras 10.1 and 10.2 at pages 1656-1657)] (which came to be upheld by the Hon'ble Delhi High Court); Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 at page 1744]; Cypress Semi-conductor Technology India Pvt. Ltd. v. DCIT [IT(TP)A No.356/Bang/2016 at paras 19-20 at pages 1773-1775]; and Commscope Networks (I) Pvt. Ltd. v. ITO [TS-161-ITAT-2017(Bang)-TP at para 9 on pages 1639-1640] held that this company ought to be excluded from list of comparable companies in the case of companies rendering SWD services similar to that of the Assessee. Consequently, for the above reasons, the action of the DRP in directing the exclusion of EInfochips Ltd. is upheld and the ground is dismissed. 22. As far as Gr.No.7 raised by the revenue is concerned, the revenue in this ground has challenged the action of the DRP in excluding ICRA Techno Analytics Ltd. This company was rejected by the DRP for the reason that the entire revenue of the company has been reported under one segment, and in the absence of segmental ....
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....r which no adjustments can be made to eliminate the said differences between it and the Assessee. This company has been consistently rejected by this Hon'ble Tribunal as being functionally dissimilar to captive software development service providers such as the Assessee for every assessment year which has been heard and disposed of so far. In the case of Applied Materials India Pvt. Ltd. v. ACIT [IT(TP)A Nos. 17 & 39/Bang/2016] at para 18 at page 1609]; Finastra Software Solutions (India) (P.) Ltd. v. ACIT [[2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 at page 1744]; Commscope Networks (India) Pvt. Ltd. v. ITO [IT(TP)A Nos. 166 and 181/Bang/2016] at para 9 at pages 1639-1640]; and Electronics Imaging India P. Ltd v. DCIT [(2017) 85 taxmann.com 124 (Bangalore-Trib) para 10 at pages 1727] this company was rejected as not comparable company in the case of pure SWD service provided such as the Assessee. Grd.No.9 is accordingly dismissed. 25. As far as Gr.No.10 is concerned, it is a general ground without reference to any instance where there was no material difference on price or cost charged or profits and hence rejected. 26. As far as Ground Nos. 11 and 12 raised by ....
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.... DRP, had submitted that the foreign exchange earnings ought to be treated as non-operating in nature (page No. 102 of the objections filed before the DRP). However, the DRP directed the same to be treated as being operating in nature (page Nos. 24-25 of the DRP's directions). The Revenue, vide the above ground is challenging the action of the DRP in directing the foreign exchange gains to be treated as being operating in nature while computing the margins of the Assessee and the comparable companies. As the Revenue is in support of the Assessee's contention that the gains must be treated as being non-operating in nature, to this extent, the Assessee submitted that the Revenue's ground may be allowed with the foreign exchange earnings being treated as non-operating in nature. In view of the above concession of the learned counsel for the Assessee, we allow Gr.No.13 raised by the revenue. 28. Now we shall take up for consideration the grounds of appeal of the Assessee in its appeal with regard to the SWD services segment. Ground No. 4(a) of the Assessee's appeal the Assessee, is seeking the exclusion of Sasken Communication Technologies Ltd. from the list of comparables. 29....
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....e) and 4(i) of the appeal of the assessee is concerned, in these grounds, the Assessee seeks the inclusion of Evoke Technologies Pvt. Ltd. and RS Software Ltd. in the list of comparables. These companies have already been directed to be included in the list of comparables while deciding similar grievance of the revenue in its appeal and that decision will hold for these grounds also. 31. In Ground No. 4(d) the Assessee inclusion of CG Vak Software and Export Ltd. ('CG Vak' for short), which was part of its TP study, in the final list of comparables as the company is functionally comparable to the assessee. The TPO rejected the company on the ground that it fails the employee cost filter. The DRP then proceeded to uphold its rejection on the ground that it was not possible to ascertain whether the company passes the employee cost filter in the absence of details regarding the same being made available, and also for the reason that in the absence of details regarding the expenses 'cost to services' being made available, it was not possible to ascertain if the company was engaged in sub-contracting its software development services. After hearing the rival submissions we find th....
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....law and that non-comparable companies even if selected by the assessee in TP study can be sought to be excluded by the assessee based on functional comparability or other valid reasons. We therefore admit the relevant ground of appeal seeking exclusion of these two companies. Since the TPO/AO did not have opportunity to decide the issue, we are of the view that it would be just and appropriate to remand the issue to the TPO for deciding the correctness of choosing this company as a comparable company. The TPO/AO shall afford opportunity of being heard to the Assessee. 34. As far as Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd. are concerned, these were Comparable companies chosen by the Assessee in its TP Study. The Assessee did not object to inclusion of these two companies before the before the DRP. The Assessee now wants to contend that these two companies are functionally different and based on judicial decisions in which these two companies were excluded as functionally not comparable with a company rendering SWD services such as the Assessee. The Assessee seeks to rely on the decision of the Special Bench ITAT Chandigarh in the case of DCIT Vs. Quarks Syste....
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....pressed or argued. The TPO is directed to compute ALP in the SWD services segment, as per the directions contained in this order and after affording opportunity of being heard to the Assessee. INFORMATION TECHNOLOGY ENABLED SERVICES SEGMENT: 38. It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee's profit with that of comparable companies was Operating Profit/Total Cost (OP/TC). The OP/TC of the Assessee was 14.67%. The Assessee in its TP study selected 12 comparable companies whose arithmetic mean of OP/TC was arrived at 12.68%. Since the profit margin of the Assessee was more than the arithmetic mean of OP/TC of the 12 comparables selected by the Assessee, it was claimed by the Assessee that the price charged by it in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred by the AO, accepted 4 out of the 12 comparable companies suggested in the TP study by the Assessee as comparable with the Assessee. The ....
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....djusted mean mark-up of the comparables 27.16% Operating Cost ('OC') Rs. 6,07,56,385/- Arm's Length Price ('ALP') = 127.16% of OC Rs. 7,72,57,819/- Price Received Rs. 6,96,70,912/- Shortfall being adjustment u/S. 92CA Rs. 75,86,907/- 39. The AO incorporated the addition to the total income by way of shortfall being adjustment u/s.92CA of the Act, in his draft order of Assessment. Against the said addition in the draft assessment order, the Assessee filed objections u/s.144C of the Act before the DRP. Briefly, the directions issued by the DRP were as follows: The following companies were directed to be excluded by accepting the contentions of the Assessee: (a) Accentia Technologies Ltd. (b) Acropetal Technologies Ltd. (c) ICRA Online Ltd. (seg.) (d) Jeevan Scientific Technology Ltd. (e) iGate Global Solutions Ltd. The DRP suo moto directed the exclusion of Cosmic Global Ltd. on the ground that it had incurred sub-contracting expenses to the extent of 41% thereby suggesting a different working model which may have significant impact on its margin. As regards the Assessee's contentions for inclusion of it....
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....by the Assessee. This Is a settled position and reliance can be placed on the decision of this Hon'ble Tribunal's in the case of Symphony Marketing Solutions India Pvt. Ltd.(ITA No. 1316/Bang/2012) where it was held that Acropetal cannot be considered as a comparable to assessees performing routine low end IT enabled services function. As far as exclusion of company Jeevan Scientific Technology Ltd., we find that this company was rejected by the DRP for the reason that it was engaged in diverse functions and the same were reported under one segment without segmental details regarding the same being made available. The DRP is right in excluding the company as without segmental details, the comparability of the company cannot be determined. In any event, the ERP segment of the company is not comparable to the assessee, the BPO segment of the company fails the filter of service income being greater than 75% of total revenue, and the company suffers from huge fluctuations which indicate that certain peculiar circumstances influencing the profit margin of the company exist, for which appropriate adjustments cannot be made to balance the effect. It is submitted that the ERP implementatio....
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....y from the list of comparables. Accentia Technologies Ltd. is, therefore, not comparable to the Assessee and was rightly rejected as a comparable. As far as iGate Global Solutions Ltd., is concerned, DRP rejected this company as comparable company for the reason that the details regarding its diverse functions are reported under one segment without segmental details regarding the same being made available. Therefore, the comparability of the company cannot be determined. It is seen that iGate is engaged in provision of varied services and no segmental breakup of the same is available in its Annual Report. Further, the company's' software services segment is clubbed with its ITES segment and there is no breakup between the revenues generated from the two segments. During the year under consideration, the company has acquired majority equity interest in Patni Computer Systems Ltd. rendering it incomparable due to it failing the TPO's own filter of having peculiar economic circumstances. In addition, the company owns significant intangibles in its name, which is evident from the balance sheet of the company for the Financial Year 2010-11. For the reasons above, the company is not c....
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....negative working capital adjustment in both the SWD services Segment and ITeS segment. In this regard, it is submitted that working capital adjustment is made for the time value of money lost when credit time is given to the customers. The Assessee however is not an entrepreneur but a captive service provider which is entirely funded by the AEs. This being so, the Assessee does not stand to lose anything as it is compensated on a total cost plus basis. The Assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise. In this regard, we find that in the case of Lam Research India Pvt Ltd, ITA No. 1473 & 1385/2014 (order dated 30.04.2015) and Software AG Bangalore Technologies Pvt. Ltd. in ITA No. 1628/2014 (order dated 31.03.2016) passed by this Tribunal, it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. Consequently, Gr.No.7.1. raised by the Assessee is allowed. 46. The other grounds that remain for adjudication in revenue's appeal....