TaxTMI 
TaxTMI 
2021 (12) TMI 1422
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.... technical support services and provision of sales and marketing support of the Appellant do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 ( "the Act"), thereby making a transfer pricing (TP) adjustment of INR 24,39,53,671, INR 5,01,93,449 and INR 33,95,51,306 respectively. The appellant prays that the TP analysis conducted by the Appellant be accepted and consequently the TP adjustment be deleted. 2. Ground No.2- Comparable Companies in relation to the provision of software Development Services 2.1 On the facts and in the circumstances of the case and in law, NeAC erred in excluding the following companies from the comparable set which are comparable to the provision of Software Development Service segment's functions, asset base and risk profile. i. Kals Information Systems. ii. Akshay Software Technologies Limited iii. Sagarsoft (India) Limited iv. Accel Frontline Ltd. (Segmental) v. Maveric Systems Limited vi. Mudunuru Limited vii. CG-VAK Software & Exports Limited viii. Infomile Technologies Limited ix. Cigniti Technologies Limited ....
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....uently, the TP adjustment in relation to the Provision of Technical Support Service Segment ought to be deleted. 3.2 On the facts and in the circumstances of the case and in law, NeAC erred in including the following companies from the comparable set which are not comparable to the provision of Technical support Service segment's functions, asset base and risk profile. i. Domex E-Data Private Limited ii. Manipal Digital Systems Private Limited iii. C E S Limited and iv. M P S Limited The Appellant prays that the TP analysis conducted by the Appellant ought to be accepted and aforementioned comparable companies ought to be rejected. Consequently, the TP adjustment in relation to the Provision of Technical Support Service Segment ought to be deleted. 4. Ground No.4- Comparable companies in relation to Provision of Sales and Marketing Support Services On the facts and circumstances of the case and in law, NeAC erred in excluding the following companies in the comparable set which are comparable to the Provision of Sales and Marketing Support Service segment's functions, asset base and risk profile: i. MCI....
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.... that the Ld. AO/NeAC be directed to drop the penalty proceedings. The above grounds are without prejudice to each other. The Appellant craves leave to add, amend, alter, withdraw, modify and/or substitute and to withdraw the above ground of appeal." 3. The brief facts of the case are as under:- The assessee is a company incorporated under the provisions of Indian Companies Act, 2013. It is engaged in the business of providing Software Development Services, Provision of Technical Support Services and Provision of Sales and Marketing support services to its Associate Enterprises (AEs). The return of income for the assessment year 2016-17 was filed on 30.11.2016 declaring total income of Rs.64,74,70,080/-. The said return of income was selected for scrutiny assessment. The Assessing Officer on noticing that the assessee company had reported international transactions in Form 3CEB, referred the matter to the TPO u/s.92CA(1) of the Act for the purpose of benchmarking the international transactions. The assessee company reported the following international transactions in Form 3CEB: No. Nature of Transaction Amount as per 3CEB Method 1. Provisio....
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....arables whose weighted average profit margin was computed at 8.73%. According to the assessee company, its PLI is within range and hence, it was claimed that transactions with its AEs are at arm's length price. However, the TPO had rejected the TP study report submitted by the assessee company and had proceeded with identifying different set of comparable entities for the purpose of determining arm's length price. 6. Now, we shall take segment-wise comparables for adjudication. A. Software Development Services Segment :- 7. In the TP study report, the assessee company had adopted the following comparable entities: Sr. No. Assessee's set of comparable Companies in the TPSR PLI (OP/TC) 1. Akshay Software Technologies Limited 1.08% 2. Sagar Soft India Limited 1.52% 3. Accel Frontline Ltd. (SS Segmental) 6.03% 4. Sasken Communication Technologies Limited 8.00% 5. Kals Information Systems 8.11% 6. Maveric Systems Limited 9.27% 7. Infomine Technologies Ltd. 10.87% 8. CG-VAK Software & Exports Limited 12.35% 9. Mudunuru Ltd. 13.18% 10. Cigniti Technologies Ltd. 19.82% 11. Kell....
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....8. R.S. Software (India) Ltd 21.01% 9. Nihilent Ltd. 25.68% 10. Persistent Systems Ltd. 27.69% 11. Aspire Systems (India) Pvt. Ltd. 33.40% 12. Infobeans Technologies Ltd. 33.41% 13. Thirdware Solution Ltd. 38.76% 14. Cybage Software Pvt. Ltd. 66.09% 15. Dun & Bradstreet Technologies & Data Services Pvt. Ltd. 68.14% 16. E-Infochips Ltd. 87.25% 10. In respect of the technical support services, the TPO applied following filters :- S. No. Criteria (i) Companies with income from services > 75% of the operating revenue or segmental revenue are selected (ii) Companies with less than 75% earnings from exports rejected (iii) Companies with related party transactions less than 25% are selected (iv) Persistent Loss making and negative net worth Companies are rejected (v) Companies with Peculiar and extra ordinary Economic Circumstances are rejected (vi) Companies that are functionally different from you were excluded. (vii) Companies having turnover of less than Rs. 5.21 Cr and More than Rs. 521 Cr. have been excluded (viii) Companies having different accounti....
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.... the TPO are extracted below :- "The assessee has contended that Nihilent is functionally different. However, the same is not acceptable. It is seen from the Profit & Loss account of the company that it is earning 100% revenue from sale of software related services. The main description of the company as per the Annual report is as below: "Name and Description of main products / services % to total turnover of the company IT Consultancy, Software Development & other related services 100%" Further, the below screenshot from the AR states that, the company is earning revenue from Software Development and Consultancy. The description of the main product of the company also mentions that it is engaged in IT consultancy, software development and related services. Further, on page 111 of the AR under Revenue Recognition, the company is deriving income primarily from rendering software service activities. Moreover, the background of the company from the Annual Report (page 112) also states that is engaged in the software development services as below: Background: Nihilent technologies Limited ('NTL' or the 'Company' or 'Nihilent' is....
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....ground that (i) Persistent Systems Ltd. has significant related party transactions of 32.12% of net sales during the year under consideration. (ii) Persistent Systems Ltd. is engaged in development of software products, services and technology innovation and also earns income from royalty. However, no segmental information is available for the same in the annual report. (iii) The financial year 2015-16 is an extra ordinary year of operations for the company and stand rejected for financial years 2014-15 and 2013-14 based on the third proviso to Rule 10CA(2) of the Rules. (B). The above contentions of the assessee company had been rejected by the TPO by holding that 93% revenue of the company is derived from software services and software consultancy services. Even the DRP also confirmed the findings of the TPO. (C). Before us, it is contended that it is engaged in development of software products, services and technology innovation and no segmental information is available in annual report, possessed the tangible and intangible assets etc. The assessee company have related party transaction exceeding 20% as applied by the TPO. (D). On the other h....
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....f this comparable on the ground that (i) The related party transactions are more than 25%. (ii) It is engaged into developing, innovative products through its onsite and offshore model. (iii) The TPO rejected the above contentions by holding that the company has derived entire revenue from software services and the related party transactions does not exceed 25%. (iv) Even before the DRP, the same submissions were reiterated. However, the DRP upheld the inclusion in the list of comparables by holding that the submissions made by the assessee are based on the website information which cannot be relied upon. (B) Being aggrieved, the appellant is challenging the inclusion of this company in the list of comparables by arguing that it is engaged in diversified activity such as product engineering, testing, IT infrastructure support, cloud computing, etc, exceptional year companies amalgamated with Aspire super normal profit-making company. (ii) The TPO had not considered the website information and it is super normal profit-making company and (iii) The business model of the company is different from that of the assessee company as it had rendered service of onsite an....
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.... indication available. That apart, this contention was not raised before the lower authorities. Therefore, we are no option but remit the matter to the file of the AO/TPO to examine the business model of this company with that of the assessee company and adjudicate the issue of comparability. 15. THIRDWARE SOLUTIONS LTD. : The assessee sought the exclusion of this company from list of comparables on the ground that (i) The company is engaged in consulting, design, implementing and support of enterprise applications for Fortune 500 firms. Also in transaction systems, analytics and cloud applications. Two decades of experience in transaction, analytics and cloud layers of enterprise applications - a global leader in enterprise applications. (ii) No segmental information for sale of licenses and sale of services is available. (iii) However, the TPO rejected the exclusion on the ground that 99% of the revenue is derived from the provision of software services. (B) Even before the DRP, the DRP confirmed the action of the TPO by holding that 99% of the revenue is derived from the provisions of software services and the contentions that it is engaged into diversified servic....
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.... product engineering services and wide range of services such as support services, cloud, mobility, data analytics and social collaboration. (ii) However, the TPO rejected the contentions of the appellant on the ground that the submission of the assessee is based on the website information. The TPO further held that from the information contained in the annual report, it is clear that it is engaged in the development of software services. Even, the DRP confirmed the inclusion of Cybage Software Private Ltd. from the list of comparables. (B). Being aggrieved, the appellant is in the present appeal before us seeking exclusion of the said company from the list of comparables reiterating the contentions as made before the TPO/DRP. (C). On the other hand, ld. CIT-DR contends that from the information contained in the annual report at page no.149, it is clear that entire revenue is derived only from the software development services which make it clear that the company is engaged in the software development services. The submissions made by the assessee based on the website information which cannot be relied upon. (D). We heard the rival submissions and perused the material o....
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....the rival submissions and perused the material on record. The assessee company is seeking exclusion of this company from the list of the comparables on the ground that the company is engaged in diversified activities. We have carefully perused the annual report of this company, though it was stated that the company was incorporated with the object of providing predictive analytics but the information given in the annual accounts clearly shows that entire revenue is derived from the provisions of IT and software development services as contained in page no.138 of the annual report. The entire revenue is derived from the sale of software services as evident from the information contained in the profit and loss account at page no.135 and 136 of the annual report. However, we find merit in the contention of the appellant that a comparison can be made with only uncontrolled transactions. It is evident from the information contained in annual report that the company, as mentioned in the annual report at page no.2347 of the paper book, renders services to its parent company as well as some other affiliates companies only. However, this contention was made for the first time before us and ....
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....s, 2014 and other relevant provisions of the Act. Information about Secondary Segments Sales by market. . . . . ." (E). On the other hand, the ld. CIT-DR placing reliance on the page 11 of the annual report of this company wherein name of the main product/service has been described as Computer Programming, Consultancy & related activities submitted that it is only a Software Development service. He further submitted that out of the total revenue of Rs.269,04,44,983/-, sale of services is Rs.255,82,06,799/- and revenue from sale of products is Rs.13,22,38,184/-. He submitted that revenue from Software Consultancy charges should be treated as part of Software Development services which means the revenue from Software Development services works out to 95.08%, therefore, this company cannot be excluded. It is further submitted that a supernormal profit making company cannot be ipso facto be excluded from the list of comparables. (F). We heard the rival submissions and perused the material on record. From the perusal of the annual report of this company, it would show that company derives income from Software Development as well as provision of technical know-how and revenue from ....
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....ferent from that of the appellant company as it provides on-site software services. The ld. AR placing reliance on the judgment of Hon'ble Delhi High Court in the case of PCIT Vs. Open Solutions Software Services (P) Ltd. (2020)116 taxmann.com 708 (Delhi), PCIT Vs. Aptara Technology (P) Ltd. (2019) 40 TR 100 (Bombay) and Rampgreen Solutions (P) Ltd. Vs. CIT (2015) 377 ITR 533 submitted that the companies having different business models are not comparable with the appellant company and therefore, urged for exclusion of this company from the list of comparables. (E). The ld. CIT-DR submitted that since 98.39% of the revenue is derived from the software development this company is comparable with that of the appellant company. (F). We heard the rival submissions and perused the material on record. We have also perused the annual report of the company which is placed at pages 3594 to 3716 of the paper book. From the information contained in the Director's report at page 3599, it is seen that the entire revenue of this company is derived from the activities of Software services and products and Software licences. Activities of the company are described as Information Technology S....
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....aded before the TPO for exclusion of this company from the list of comparables on the ground that (i) It is engaged is providing digital solutions, graphic solutions, packaging brand management services, packaging prepress, digital publishing and content solutions. (ii) It also renders web development and e-book distribution services. The activities of this company should be classified as KPO services and hence cannot be compared with that of the appellant company which is purely into IT enabled services. (B). The TPO rejected the appellant's contention by holding that the appellant is engaged in provision of ITeS and the characterization of the activities cannot be done on the basis of website information. (C) The DRP also confirmed the findings of the TPO by holding that the revenue from ITeS is 85.27% of the total revenue. The revenue from web development and other services and e-book distribution is only 9.2% and 2.66%. (D) Even before us the same arguments were reiterated. The ld. AR pleaded that the activities of the company such as web development and ebook distribution can be classified as KPO services and therefore, cannot be compared with that of the appell....
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.... segmental details, this company cannot be compared with that of the appellant company which is purely an ITeS company. In support of his contention, he placed reliance on the decision of Coordinate Bench in the case of Credence Resource Management Private Limited Vs. ACIT (ITA No.133/PUN/2021, dt. 18-06-2021) as well as on the judgment of Hon'ble Delhi High Court in the case of Rampgreen Solutions (P) Ltd. Vs. CIT (2015) 60 taxmann.com 355. (D). On the other hand, the ld. CIT-DR submitted that the appellant company mainly earns revenue from provision of IT enabled services. The same is borne out from the annual report of CES Limited. It is further submitted that the contention of the appellant company that it earns revenue from sale of software services, products and sale of user licenses and KPO services is not borne out of the material on record. (E). We heard the rival submissions and perused the material on record. The annual report of the company is placed at pages 2759 to 2864 of the paper book. On page 2797 of the paper book, it is seen that the principal business activities of the company is described as BPO/KPO. On page 2837, para No. 24 which is note to consolidate....
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....d technology services are value added services which can be characterized as KPO services. Therefore, this company cannot be considered as comparable with the appellant company. (B). However, the TPO rejected the above contentions by holding that it is purely an ITeS company. The DRP also upheld the inclusion of this company. (C). Aggrieved by the inclusion of this company in the list of comparables, the appellant is before us. The ld. AR placed reliance in the case of Credence Resource Management Private Limited Vs. ACIT (supra). (D). On the other hand, the ld. CIT-DR submitted that the appellant company operates on a single business segment of providing publishing services such as typesetting and data digitalization services and it has earned entire revenue from operations from the said activity MPS Ltd. is functionally comparable to the appellant company which is into ITeS segment. (E). We heard the rival submissions and perused the material on record. Page No.2868 shows the business of the company. Which is reproduced as under : "Content Creation and Development. The content creation and development teams at MPS North America partner with publishers to crea....
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....rgin of provisions of sales and marketing. It is the contention of the appellant before DRP that amortization of goodwill is treated as operating cost depreciation on the same should be allowed as a deduction u/s 32 of the I.T. Act. The DRP rejected the claim by returning finding that the amortization of goodwill debited to P&L account was allowed as a deduction and no claim u/s 32 was made in the return of income. We do not find fallacy in the findings of the Hon'ble DRP as the claim for deduction of depreciation only on AO being satisfied with the fulfillment of the condition laid down u/s 32 of the I.T. Act. Thus, we do not find any merit in the ground of appeal no.5 and 6. Accordingly, the ground of appeal no.5 and 6 stands dismissed. 27. The ground of appeal no.7 challenges the decision of the DRP denying the grant of risk adjustments based on the decision of the Tribunal in the case of Philips Software. The DRP had denied the risk adjustments by holding as under :- "The assessee has not demonstrated as to how the difference in risk undertaken by a bank in advancing a loan to a borrower as compared to the risk involved in a loan advanced by RBI to a bank or by a ba....