TaxTMI 
TaxTMI 
TaxTMI 
2021 (11) TMI 1090
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....g adjustment of Rs.19,49,67,216 under section 92CA(3) of the Income Tax Act, 1961 ('the Act'). 1.1 That the assessing officer erred on facts and in law in making an adjustment of Rs.14,18,95,876 to the arm's length price of the 'international transactions' of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ('TPO')/ Dispute Resolution Panel ('DRP'). 1.2 That the DRP/ TPO erred on facts and in law in considering the following companies as comparable companies not appreciating that such companies are not passing the test of comparability provided under Rule 10B(2) of the Income Tax Rules, 1962: (i) Infobeans Technologies Limited (ii) Larsen & Tubro Infotech Limited (iii) Mindtree Limited (segmental) (iv) Thirdware Solution Limited (v) Tata Elxsi Ltd. (segmental) (vi) Cybercom Datmatics Information Solutions Ltd. (vii) Inteq Software Private Limited (viii) Cigniti Technologies Limited (ix) Kelton Tech Solutions Limited 1.3 That the DRP/ TPO erred on facts and in law in rejecting the following companies from the final s....
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.... that working capital adjustment is more appropriate measure to benchmark the realisation of trade receivables of the appellant instead of application of an interest rate. 2.6 That the DRPI TPO erred on facts and in law in not appreciating that similar adjustment made in the preceding year, i.e. assessment year 2010-11 and 2012-13 has been deleted by the Hon'ble Income Tax Appellate Tribunal in their order dated 12.12.2017 passed in ITA No. 1104IDe1l2015 and 11151De1l2017 and subsequently followed in order passed for assessment year 2013-14 and 2015-16. 2.7 That the DRP/TPO erred on facts and in law in adding an adhoc mark-up of 400 points on the Libor rate of interest, arbitrarily on account of credit rating risk, security risk, transaction cost etc. 2.8 That the DRP/TPO erred on facts and in law in not appreciating that the in terms of Master Direction No.16/201516, Reserve Bank of India allows a period of 12 months to all companies for receiving repatriation of export sales proceeds, and therefore, interest if any, ought to be imputed on the period of delay beyond 12 months. 3. That the assessing officer erred in not granting credit of tax deducted at source aggr....
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....on of Rs.5,30,71,340/- on account of transfer pricing adjustment qua interest on delay against receipt of interest receivables from AEs and thereby made cumulative adjustment at Rs.19,49,67,216/- as under :- S.No. Nature of international transactions Adjustment u/s 92CA (Rs.) 1. Provision of software development services 141,894,876 2. Receivables 53,071,340 Total 194967216 7. The taxpayer carried the matter before the ld. DRP by way of filing the objections who has rejected all the objections. Consequently, in compliance to the order passed by the ld.TPO/ld. DRP, AO framed assessment u/s 143 (3) read with section 144C(13) of the Act as under :- Sl. No. Particulars Amount Amount 1 Total income shown by the assessee 48,14,53,110 Add : Upward adjustment on account of Arm's Length Price 19,49,67,216 Total income 67,64,20,326 Rounded off to 67,64,20,330 8. Feeling aggrieved by the order passed by the ld.DRP/TPO/AO, the taxpayer has come up before the Tribunal by way of filing the present appeal. 9. We have heard the ld. Authorized Representatives of the parties to the appe....
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...., namely, (i) Mindtree Ltd., (ii) Cigniti Technologies Ltd., (iii) Inteq Software Limited, (iv) Tata Elxsi Limited, (v) Larsen & Toubro Infotech Ltd., (vi) Infobeans Technologies Ltd., (vii) Kelton Tech Solutions Ltd., (viii) Thirdware Solutions Ltd. & (ix) Cybercom Datamatics Information Solutions Ltd. out of 13 companies chosen as comparables by the ld. TPO and sought to include 2 companies viz. E-Zest Solutions Ltd. & Evoke Technologies Ltd.. 13. Now, we would examine suitability of the aforesaid companies challenged by the taxpayer as comparable to benchmark its international transactions qua software development services rendered by the taxpayer to its AE during the year under assessment one by one. COMPARABLE COMPANIES SOUGHT TO BE EXCLUDED BY THE TAXPAYER LARSEN & TOUBRO INFOTECH LTD. (L&T) 14. The taxpayer sought to exclude L&T from the final set of comparables chosen by the ld. TPO for the purpose of benchmarking its international transactions qua SDS on the grounds inter alia that it is functionally dissimilar; that its segmental data is not available; that L&T is a huge brand with ownership of intangibles and on account of extra ordinary event; and on the ground....
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....ree business segments. The first segment is service cluster which includes banking, financial services, insurance, media and entertainment, travel and logistics and healthcare. The second segment industry cluster which includes Hi Tech and consumer electronics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under: "TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was....
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....nary event under which Larsen & Toubro Infotech Ltd. initiated and completed transfer of its Product Engineering Services Business (PES) Unit to L&T Technology Services Ltd. w.e.f. January 1, 2014 as part of the business restructuring undertaken within the Larsen & Toubro group. Though the initiation started from 01.01.2014 but the whole effect of the transaction was during the year under consideration. Further, Larsen & Toubro Infotech Ltd. during the year under consideration acquired Information Systems Resource Centre Private limited ("ISRC") thereby making it wholly owned subsidiary and because of such extraordinary event of acquisition, the said concern cannot be held to be a valid comparable and thus has to be excluded from the final set of comparable. Accordingly, we hold so." 20. In view of the facts inter alia that L&T is into various segments having no segmental financials, having huge brand value and intangibles is not a suitable comparable vis-à-vis taxpayer which was working as a captive entity and that contention raised by the ld. DR that under TNMM minor dissimilarities do not affect the overall comparability is not sustainable because though it is a taxpaye....
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....n undisputedly taxpayer has not undergone any change in its business model vis-à-vis AYs, 2007-08, 2014-15 & 2015-16 in ITA Nos.5809/Del/2011, 4740/Del/2018 & 8726/Del/2019 respectively, Tata Elexi was held to be noncomparable by the Tribunal. 25. In view of the matter, we are of the considered view that on account of functional dissimilarity and having ownership of internally generated intangibles in the form of technical know-how for rendering services to its customers make Tata Elexi not a suitable comparable vis-à-vis the taxpayer who is a routine software development service provider working on cost plus markup model having no intangibles of its own, hence we direct to exclude Tata Elexi from the final set of comparables. CYBERCOM DATAMATICS INFORMATION SOLUTIONS TLD. (CYBERCOM DATAMATICS 26. The taxpayer sought exclusion of Cybercom Datamatics from the final set of comparables vis-à-vis taxpayer on grounds inter alia that it is functionally dissimilar and led us to its financials, available at page 836 of the annual reports paper book and pages 88 to 90 of the appeal memo highlighting specialization of Cybercom Datamatics; that it has been excluded ....
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....Cigniti generated intangibles and relied upon the decisions of M/s. FIS Solutions (India) Pvt. Ltd. vs. DCIT in ITA No.1695/Pun/2018, M/s. Microsoft Research Lab India Pvt. Ltd. vs. DCIT in ITA No.3131/Bang/2018, US Technology International Pvt. Ltd. vs. ACIT in ITA No.592/Coch/2018, M/s. Mercedes-Benz Research & Development India Pvt. Ltd. vs. DCIT in ITA No.1645/Bang/2016 & M/s. Advice America Software vs. ITO in ITA No.2531/Bang./2017. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable. 32. We have perused the profile of Cigniti and its financials, available at page 206 of annual reports paper book, claiming Cigniti as a market leader and expert in software testing. Cigniti has also evolved from testing traditional software to testing of cloud computing, big data analytics and mobile having world class testing infrastructure which is catering to diversified clientele across the world. 33. Perusal of financials of Cigniti, available at pages 227 of annual reports paper book, under the head 'Cigniti Transformation Framework' shows that it has designed and development its own gamut of IPs to deliver hi....
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....on is having goodwill amounting to Rs.973,687,128 along with software of Rs.29,742,247. 39. So we are of the considered view that as discussed in the preceding paras, Kelton is not a suitable comparable vis-à-vis the taxpayer being into diversified nature of services having no financial segmental to arrive at the proper margin, also being into development of various products and mobile apps and having own intangibles and softwares giving it edge over other players in the field as against the taxpayer who is a routine software development services provider working on cost plus mark-up, hence ordered to be excluded. THIRDWARE SOLUTION LTD. (THIRDWARE) 40. The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis-à-vis the taxpayer. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable. 41. Perusal of Notes - Additional Information and Profit & Loss account, available at page 570 of the annual reports paper book, shows that it has income earned from sale of licence and provision of training services also under the head 'software services from local unit'....
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....provider by the coordinate Bench of the Tribunal in case of PubMatic India (P) Ltd. vs. ACIT in ITA No.655/Pun/2017. So, in view of the matter, we order to exclude Infobeans from the final set of comparables. INTEQ SOFTWARE LTD. (INTEQ) 46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-à-vis the taxpayer which is a routine software development service provid....
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....tomatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the basis of the outstanding rece....