TaxTMI 
TaxTMI 
2020 (8) TMI 918
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 well as fresh search; and in particular modifying/ rejecting the filters appli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cted 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 other. The Appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....k 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 Ltd. 17.54% 15. Sonata Software 35.87% 16. Tata Elxsi (Segment) 20.29% 17. Thinksoft Global Services Ltd. 17.35% 18. Zylog Systems Limited 25.07% 19. LGS Global Limited 12.78% AVERAGE 24.40% 9. Consequently Ld. TPO computed the arm's length price of the International Transactions as under :- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xcluded 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 preceding para comprehensive exercise carried out by the Ld. TPO is a futile exercise. 18. Coordinate Bench of Tribunal in taxpayer's own case for AY 2011-12 excluded E-zest Solutions ltd. vide order dated 30.10.2019 passed in ITA No. 5801/Del/2011 on ground of its diversified activities without having any segmental information on record. In view of the matter, we order to exclude E-zest Solu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ys) 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 Infosys as a comparable has been found to be not a suitable comparable having huge brand value and significant expenses on R & D vis-à-vis captive software development service provider in number of judgement. Coordinate Bench of Tribunal in assessee's own case in A.Y. 2007-08 and 2011-12 excluded Infosys by relying upon decision rendered by Hon'ble Delhi High Court in case of Agnity India Technologies Pvt.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 list of comparable. Accordingly, we hold so." 31. So, in view of the discussion made in preceding para, we are of the considered view that Sasken is not a suitable comparable on ground of functional dissimilarity and business restructuring. Zylog Systems Ltd. 32. Taxpayer sought to exclude Zylog on ground of functional dissimilarity as well as on ground of business restructuring. Perusal of annual report at page 433 shows that Zylog h....