2020 (8) TMI 918

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....itio. 2. The Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition of Rs. 3,24,37,885/- to the income of the Appellant proposed by the Transfer Pricing Officer ('Ld. TPO') by holding that its international transactions pertaining to provision of software development services do not satisfy the arm's length principle envisaged under the Incometax Act, 1961 ('the Act') and in doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action of: 2.1 not appreciating that none of the conditions set out in section 920(3) of the Act are satisfied in the present case; 2.2 ignoring the fact that the appellant is entitled to tax holiday under section 10B of the Act on its profits and therefore would not have any untoward motive of deriving a tax advantage by manipulating transfer prices of its international transactions; 2.3 disregarding the arm's length price ('ALP'), as determined by the Appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') as we....

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....ithout prejudice basis to the other grounds, the Ld. AO / DRP has erred in facts and in law, in ignoring the alternative benchmarking analysis conducted by the Appellant considering Internal Comparable Uncontrolled Price ('CUP') method to determine the arm's length price of the software development services provided by the Appellant; 4. On a without prejudice basis to the other grounds, the Appellant craves to submit alternative benchmarking analysis considering Internal Transactional Net Margin Method ('TNMM') to determine the arm's length price of the software development services provided by the Appellant; 5. The Ld. DRP erred in disregarding the detailed arguments/ submissions put forth by the Appellant during the course of the DRP/ assessment proceedings while passing its direction under section 144C of the Act; 6. The Ld. AO has grossly erred by proposing to compute interest under section 234A, 234B, 234C and 234D of the Act; 7. The Ld. AO has grossly erred in initiating penalty under section 27l(l)(c) of the Act mechanically and without recording any satisfaction for its initiation. The above grounds are without prejudice to each ....

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....ssed by the revenue authorities below in the light of the facts and circumstances of the case. 8. Undisputedly, TNMM with OP/TC as the Profit Level Indicator (PLI) as Most Appropriated Method (MAM) used by the taxpayer to benchmark its international transaction qua Software Development Services has been accepted by the Ld. TPO / DRP. Ld. TPO / DRP proposed / confirmed the adjustment of Rs. 3,24,37,885/- after applying TNMM with OP/TC as the most appropriated method chosen 19 comparables with average of 24.40%. Final comparables are as under :- Sl. No. Name of the Company OP/TC 1. Akshay Software Technologies Ltd. -1.07% 2. CTIL Ltd. 18.11% 3. E-infochips 71.38% 4. Evoke Tech 18.56% 5. E-zest Solutions 18.66% 6. Infinite Data System Private Limited 88.25% 7.  Infosys Limited 45.47% 8. Larsen & Toubro Infotech Ltd. 19.06% 9. Mindtree Ltd. (segment) 13.92% 10. Persistent System Limited 29.02% 11. Persistent Systems & Solutions Ltd. 11.37% 12. Quintegra Solutions Ltd. -8.20% 13. R S Software (India) Ltd. 10.18% 14. Sasken Communication Technologies....

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....sidered view that E-infochips is not a suitable comparables visà- vis taxpayer, hence, order to be excluded. E-Zest Solutions Ltd. 15. Taxpayer sought exclusion of E-zest Solutions from the final set of comparable for benchmarking international transaction on grounds of functional dissimilarity as E-zest is a product Engineering and software development company and has been excluded by the Tribunal in taxpayer's own case in AY 2007-08 and 2011-12. 16. Undisputedly there is no change in the business model and FAR of the taxpayer during the year under assessment since 2007- 08. Perusal of annual report available at page 452 and 453 of annual Compendium report (ARC) shows that E-zest is a product engineering and software development company whereas taxpayer is a captive software development service provider to its AE. 17. Ld. DR for the revenue relied upon the order passed by the TPO and drew our attention towards para 10.6 and contended that TPO has examined FAR of the company and found it a suitable comparable. But, we are of the considered view that when functional dissimilarity are apparent between E-zest Solutions vis-à-vis taxpayer as discussed in the p....

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....rmal profit by 1496% as compared to preceding years makes Infinite as invalid comparable. So, we direct the AO/TPO to exclude Infinite from the final set of comparables." 21. So, in view of what has been discussed above, we are of the considered view that Infinite is not a suitable comparable vis-à-vis taxpayer, hence, order to be excluded from the final set of comparables. Infosys Limited (Infosys) 22. Taxpayer sought exclusion of Infosys as a comparable on the ground that Infosys deals in both product and services and that Infosys incurred huge research and development expenses and having huge brand value. It is brought on record by the ld. AR that Infosys has been excluded as a comparable by the Tribunal in Taxpayer's own case in AY 2007-08 and 2011-12. In AY 2011-12 Infosys was also excluded by Ld. DRP in assessee's own case. 23. Ld. DR for the revenue relied on order passed by TPO and drew our attention towards para 10.2 wherein he has discussed all the objections raised by the taxpayer regarding brand profits, significant intangibles, product development sales and marketing expenses and significant R and D expenses. 24. We are of the considered view that....

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....tional profile of Sasken is different vis-à-vis taxpayer and has went into business restructuring affecting profitability. It is not a suitable comparable. 30. In assessee's own case for AY 2007-08 and 2011-12, Sasken was order to be excluded as a comparable. In A.Y. 2011-12, Sasken has been ordered to be excluded by the Coordinate Bench of Tribunal in taxpayer's own case by returning following findings :- "21. On hearing the rival contentions, we are of the view that first step which has to be seen is functional comparability. The concerns are providing variety of services and application of service filter of 75% would come in the next rung of comparability. M/s Sasken Communication Technologies Limited was developing mobile enterprise applications and solutions across various mobile platforms including iOS, Android, Blackberry, RIM and Symbiam platform; which are clearly mentioned in the annual report of the said concern. The assessee on the other hand was only providing Software Development Services to its AE. Hence the concern Sasken Communication Technologies Limited is not functionally comparables to the assessee and same needs to be excluded from the final....