TaxTMI 
TaxTMI 
2021 (9) TMI 1445
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.... the exclusion of four comparable companies and inclusion of three comparable companies, which were urged in the grounds of appeal. The learned AR also pressed ground No. 6.a. with regard to the grant of working capital adjustment. The assessee has also filed an additional ground contending that the transfer pricing adjustment should be restricted to the value of international transactions only. 3. Brief facts of the case are as follow: The assessee is a company engaged in the business of rendering software development services, software maintenance and technical call centre services primarily to its Associate Enterprises (AEs). The assessee had undertaken several international transactions with its AEs. As regards the software development segment, the final list of comparable considered by the TPO are as follows:- Sr.No. Name of the company 1. Kals Information Systems Limited 2. E-Zest Solutions Limited 3. CG-VAK Software & Exports Limited 4. Tata Elxsi Limited (Seg.) 5. Rheal Software Private Limited 6. Mindtree Limited 7. Larsen & Toubro Infotech Limited 8. R S Software (India) Limited 9. I....
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....:- 33. We have considered the rival submissions. We find that on the question of application of RPT filter, the assessee had made the following submission before the DRP:- 4. Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show-cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevant extract from the show-cause notice is reproduced below for ease of reference: e) Companies who have more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise, if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrol....
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....ance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No. 1054/Bang/2011 for AY 2007-08 dated 23.11.2012 wherein this Tribunal took the following view:- "64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore....
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.... their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly." 36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO's order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 2....
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....seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- "Functionally dissimilar - owns intellectual properties, incurs significant R & D costs & onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit & loss account not available. Commands substantial brand value. 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R & D have all been brushed aside. In our view, the difference po....
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.... received by this comparable ease under one singlesegment of sale of software. This company also owns softwarelicenses. 14.3.3. In our considered opinion this comparable cannot be considered to be functioning in 100% risk mitigated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee. Accordingly we direct this comparable to be excluded from finalist." 9. Following the above said decisions rendered by coordinate benches, we direct exclusion of Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd. & Infobeans Technologies Ltd. from the final list of comparables. 10. With regard to the prayer of the assessee to include 3 comparable companies, we notice that the coordinate bench in the case of Goldman Sachs Services Pvt. Ltd. (IT(TP)A No. 2355/Bang/2019 dated 15.6.2020) has restored all the 3 companies to the file of the A.O./TPO for examining the claim of assessee with the following directions. 10. The learned Authorized Representative argued for inclusion of three comparables (i) I2T2 India Limited, (ii) Evoke Technologies Limited and (iii) Melstar Informati....
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....uous three years has to be verified/tested by the Assessing Officer. Accordingly we remit this matter to the file of TPO/A.O. for examination. 11. Following above decision, we restore I2T2 India Limited, Evoke Technologies Limited and Melstar Information Technologies Limited to the file of AO/TPO for examining it afresh. 12. The assessee has submitted that the claim of working capital adjustment was rejected by TPO and Ld. DRP. He submitted that the Tribunal is consistently holding that the working capital adjustment is permissible and in many cases; the TPO has also allowed the same. Accordingly, he submitted that the assessee may be granted working capital adjustment. 13. We find merit in the submissions made by Ld. A.R. Accordingly, we restore this issue to the file of AO/TPO with the direction to grant working capital adjustment. 14. In the additional ground, the assessee is contending that the transfer pricing adjustment should be restricted to the value of international transactions only. There is merit in the said contention as the whole purpose of transfer pricing exercise is to determine the Arms length price of international transactions. Accordingly we direct....