TaxTMI 
TaxTMI 
2021 (3) TMI 1393
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....ing an adjustment of Rs26,548,569 to the transfer price of the Appellant's international transactions in respect of software development services, Rs. 102,622,022 to the transfer price of the Appellant's international transactions in respect of marketing and sales support services and Rs. 113,123 in respect of notional interest on outstanding receivables. (Tax Effect: Rs. 43,943,534) 2. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services and marketing and sales support services, the learned DRP/ AO/TPO erred in: 2.1. Rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 2.2. Rejecting the comparability analysis carried out by the Assessee in the TP documentation and in conducting a fresh comparability analysis for the international transaction of software development services and marketing and sales support services based on the application of additional filters in determining the arm's length price. 2.3. Using data, which was not c....
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.... expenses such as provision for doubtful debts, provision for warranties, provision of doubtful deposits, and miscellaneous expenditure written off, as part of operating cost for the computation of Appellant's Profit Level Indicator ('PU'). 2.11. Not providing adjustment for the differences in working capital of the Appellant and the comparable companies. 2.12. Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a- vis the comparable companies. 2.13. Computing incorrect operating mark-up of certain comparable companies. (Tax Effect: Rs. 43,905,084) Grounds for imputation of notional interest on outstanding receivables 3. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in: 3.1. Considering overdue receivables from Associated Enterprises ('AEs') as a separate international transaction under the provisions of Section 92B of the Act. 3.2. Without prejudice to ground no 3.1, the learned DRP/AO/TPO erred in ignoring that, if at all transfer pricing adjustment to be sustained with respect to notional interest on overdue receivable....
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.... Cost reimbursements 9,67,50,260 4. The Ld.TPO noted that, assessee followed TNMM as most appropriate method with OP/OC as PLI. The Ld.TPO observed that, assessee computed its margin at 15.36% under software development segment and 10.91% under MSS segment. It has been submitted that, the assessee selected following 22 comparables under software development service segment with average margin of 13.08%: Sl. No Comparable Company Average Adjusted % Markup on Total Cost 1 Akshay Software Technologies Limit ed 5.97% 2 Bluestar Infotech Limited (Consolidated ) 4.43% 3 Caliber Point Business Solutions Limited(Segmental) 4.19% 4 Cat Technologies Limited -11.91% 5 CG-VAK Software & Exports Limited (Seg) 3.29% 6 Cigniti Technologies Limited 19.81% 7 Evoke Technologies Private Limited 11.60% 8 Goldstone Technologies Limited 11.01% 9 Helios & Matheson Information Technology Limited 18.45% 10 Kellton Tech Solutions Ltd 24.19% 11 Larsen & Toubro Infotech Limited 24.74% 12 Lucid Software Limited 7.08% 13 Maveric systems Limite....
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....s less than 75% of the total operating revenues were excluded. * Companies who more than 25% have related party transactions Of the sales were excluded. * Companies having different financial year ending (i.e. not March 31, 2013) or date of the company not available for the 12 month period i.e. 01-04-2013 to 31-03-2014, were rejected. / Companies whose employee cost to sales is less than 25% were excluded. * Companies whose export service income is less than 75% of the Sales were excluded. MSS Segment Companies whose data is not available for the FY 2013-14 were excluded. * Companies whose service income Rs.1 Crore were excluded. * Companies who more than 25% have related party transactions of the sales were excluded. * Companies having positive net worth. * Companies whose export service income is less than 75% of the Sales were excluded. * Companies having different financial year ending (i.e. not March 31, 2013) or date of the company not available for the 12 month period i.e. 01-04-2013 to 31-03-2014, were rejected. * Companies that experienced persistent operating losses were excluded.....
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.... Alia Creative Consultants Pvt Ltd. 15.2 In Ground No. 2.9 under software development service segment assessee do not wish to argue for inclusion of the Sasken Communication Technologies Ltd, Akshay Software Technologies Ltd., E-zest Solutions Ltd., Sankhya Infotech Ltd. and Daffodils Software Ltd. 15.3 Under MSS service segment assessee do not wish to argue for inclusion of ICRA management and Keystone Integrated. Assessee also do not press Ground 2.10-2.13 raised in the grounds of appeal. Accordingly, these comparables and issues raised in the respective grounds are dismissed as not argued. 16. We restrict our decision only in respect of the comparables sought for exclusion/inclusion by assessee in Ground No.2.8, - 2.9, along with Ground No. 3-3.2 and 4-4.3 as under. 17. Before we undertake the comparability analysis it is (sine qua non) to understand the functions performed, assets owned and risks assumed by assessee under both these segments.: Functions performed: 17.1 SWD Segment: The assessee has entered into an intercompany agreement with its AE according to which it shall perform contract SWD services for its AE and is compensated on a cost +15% mark....
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....ee is seeking exclusion of following comparables under respective segments: SWD segment: Infosys Ltd. Persistent Systems Ltd. Thirdware Solutions Ltd. Mindtree Ltd. Larsen and Toubro Infotech Ltd. Cignity Technologies Ltd. MSS Segment I media Corp Ltd. Irunway India Pvt.Ltd Killick Agencies and Marketing Ltd. 1. Infosys Limited : 20.1 It is submitted that, this company is functionally dissimilar and provides end to end business solutions like business consulting technology engineering and outsourcing services and no segmental details in respect of services are available. It is also submitted that this comparable made investments in products to establish as a tradable IPO owner. The Ld.AR submitted that this comparable owns significant brand value products and focus on brand building and incurred expenditure on R & D and that the company owns 7 Edge products / platforms, and six other product based solutions. The company leverages on its premium banking solution and during the year the company merged with its wholly owned subsidiary Infosys Consulting India Limited. 20.2 It is....
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....hat entire revenue of the comparable company is from outsourced product development and has presence of intangibles, brand ownership and provision of applied solutions and further holds proprietary products. A new business unit was established in the said year exclusively for the product business engaged in R & D and also has onsite activities and no segmental information is available. During the year there are extraordinary events of acquisitions of cloud squads and fails the turnover filter of more than Rs. 200 Crores. The Ld.AR relied on decision of co-ordinate Bench of this Tribunal in case of LG Soft India(P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019. 20.7 On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. 20.8 We have perused submissions advanced by both sides in light of records placed before us. 20.9 We support the view taken by this Tribunal in case of LG Soft India Pvt. Ltd., where this Tribunal observed as under : "7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd. also by following the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra),....
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....company deserves to be excluded from the finalist list as it is functionally not similar with that of assessee. He submitted that, this company owns 19 patents and has huge scale of operation with turnover of Rs.3031 crores. It has been submitted that this comparable is engaged in sale of products like 'VmUnify' which is cloud management and ought orchestration platform etc. It is submitted that it also engages in IT consulting for high-end services and is rendering into an digital transformation and technology services to its clients the Ld.AR thus submitted that this comparable is functionally not similar with that of assessee and is a giant company with huge turnover thereby not fulfilling turnover criteria. 20.15 On the contrary Ld.CIT DR placed reliance on orders passed by authorities below. 20.16 We have perused submissions advanced by both sides in light of records placed before us. 20.17 The decision rendered in the case of Genisys Integrating (supra) by coordinat bench of this Tribunal had analysed the application of upper turnover filter in order to exclude companies whose turnover is more than that of assessee. On this issue, the first aspect which we notice is ....
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....he company passes the filters applied by the TPO. Therefore, the company ought to be excluded. Further, the company is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. Also, in addition to the above, the company owns proprietary software products which are developed in-house. Accordingly, the Appellant submits that L&T is a product company having significant intangibles and is thus not comparable to captive software development service providers such as the Appellant who does not own any significant or nonroutine intangibles. Further, L&T enjoys significant brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market. Based on the above observation we direct Ld.AO/TPO to exclude this comparable from final list. 2. Cignity Technologies Ltd. 20.23 The Ld.AR submitted that turnover of this company is Rs. 54.63 Crores and margin is 27.62%. It is also submitted that this company is functionally dissimilar and offers publication network services and solutions and has expanded the business operations in Australia and UK .This Co....
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....ry event of amalgamation that has effectuated by the order of the Jurisdictional High Court which cannot be ignored of having an impact. Under such circumstances we do not find this comparable to be fit to be included in the finalist. Accordingly Ld. AO/TPO is directed to exclude this comparable from the finalist. IRunway India Pvt.Ltd 21.4 The Ld.AR has submitted that this comparable is functionally dissimilar as it provides technology analysis and research services to corporations, law firms and other leading technology investment and licensing firms worldwide. It is also submitted that related party transaction of this comparable for the year under consideration is 30.89%. It has been submitted that these services rendered by this comparable are not discernible from the annual report however from the website of the company the details have been ascertained. It is also submitted that from the balance sheet it is clear that this comparable owns huge intangibles and is into some kind of research and development as every year there is an addition to the intangible asset which is clear from page 3954 of paper book. On the contrary, the Ld.CIT.DR placed reliance on orders pas....
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....hnologies Ltd. Exiliant Technologies Pvt.Ltd Celstream Technologies Ltd. Evoke Technologies Ltd. MSS Segment Concept Public Relation India Ltd. MCI management India Ltd. 1. I2T2 India Ltd. 22.1 The Ld.AR submitted that this company is functionally similar as it is engaged in software development services. It is also submitted that this comparable satisfies all the filters applied by the Ld.TPO. However the Ld.TPO rejected this comparable as it does not have related party transaction details in the annual report. 22.2 The Ld.CIT.DR placed reliance on orders passed by authorities below. 22.3 We have perused submissions advanced by both sides in regards records placed before us. 22.4 The Ld.AR had submitted that, this comparable has been considered to be a good comparable by coordinate bench of this Tribunal in case of LG Soft India Pvt.Lltd. (supra) On the contrary, Ld.CIT.DR placed reliance upon orders of authorities below. 22.5 We have perused submissions advanced by both sides in the light of the records placed before us. 22.6 The only reason for excluding this comparable by the authorities below is for the reason that RPT transactions hav....
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....e reason that financial result of this company is not available in public domain. Celstream Technologies Ltd. 22.10 The Ld.AR submitted that this company is also engaged in software development service segment and is providing services in the field of data and analytics, cloud and mobile computing. He submitted that the company was rejected by the Ld. TPO as annual accounts were not available on the public domain. Evoke Technologies Ltd. 22.11 Ld.AR submitted that the assessee prayed for inclusion of this company before DRP. However, DRP rejected the prayer of the assessee for the reason that financial results incorporated branch revenue and profit, which was based on unaudited financial statements of bralnch outside India. It was also observed by the DRP that export revenue constituted only 20.34% which did not fulfill filter applied by the Ld.TPO. The Ld.AR placed reliance upon annual reports of this company placed at page 3439 of paper book wherein income from software services and products by this company has been shown to be at Rs.3621.72 lakhs. 22.12 In respect of above, comparables being Kireeti, Exliant, Ulstream and Evoke the Ld.CIT DR submitted that these c....
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.... Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. 24.4 24.4 Alternatively, he submitted that under TNMM, working capital subsumes sundry creditors and therefore separate addition is not called for. 24.5 This Bench referred to decision of Special Bench of this Tribunal in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in [IT Appeal No. 1548 and 1549 (Kol.) of 2009, dated 15- 7-2016], held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. It has been argued that, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lone and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT reported in [2018] 91 taxmann.com 286 has observed that: "There may be a delay in collection of monies for supplies made, ev....