TaxTMI 
TaxTMI 
TaxTMI 
2023 (2) TMI 555
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....s 92C on the basis of the order of the TPO u/s 92CA(3) dated 30.10.2019 in the case of the appellant company. 2. The learned A.O. / DRP erred in computing the Arm's Length Price (ALP) of the software development services rendered by the assessee company to its AE by holding that the assessee should have earned operating margin of 21.74% as against 8.86% earned by the assessee company. 3. The learned A.O. / DRP erred in not appreciating that the transactions of software development services entered into by the assessee company with its AE were at Arm's Length Price (ALP) and thus, there was no reason to make any ad on in respect of the said transaction. 4. learned A.O. erred in considering Cybercom Datamatics Information Solutions Ltd and Fixstream India Pvt Ltd as comparable companies in the final set of companies by ignoring the directions of Hon'ble DRP to exclude such companies on account of having related party transactions of more than 25% of the Sales. 5. The learned A.O. / DRP erred in confirming Thirdware Solutions Ltd, Infobeans Systems India Ltd, E-Infochips Ltd, Dun and Brandstreet Technologies and Data Services Pvt Ltd, Aspire Systems India Private L....
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....sion of various comparables as sought for by the assessee. With this background, the ld. Counsel referred to the T.P study report of the assessee and the functional analysis at page 15 of the said report, at para 3.3.1, which is as follows: "A functional analysis facilitates understanding of the transactions between group companies after taking into account their functions, assets and risks and assists in establishing a degree of comparability with similar transactions in uncontrolled conditions for the purpose of transfer pricing study. Velocity India is a captive service provider for Velocity Inc. which is its parent company. Veloc outsources the work of software development to Velocit India. Velocity India acts a service to Velocity Inc. and velocity Inc. deals with the cu8stomers. Velocity India is engaged in provision of captive software development services to its parent company i.e. Velocity Inc. Velocity Inc. ultimately provides services to end customers in USA. During the, financial year 2015-16, Velocity Inc. is handling a work force of nearly 70 specialised people who monitor the services provided by Velocity India and accordingly provide further services to the fi....
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.... from the final list of comparable companies. 5. Nihilent Ltd. The ld. T.P.O has discussed this company at page 19 of his order. The D.R.P has dealt with this issue at page 9 para 3.2.1 onwards of their finding and had upheld the findings of the ld. A.O/T.P.O., as follows: "3.2.1 The assessee had applied a Turnover Filter of Rs. 1 Cr. To Rs. 209 Cr. However, the TPO modified this filter to Rs. 5.11 Cr. To Rs. 5.11.14 Cr. The minimum and upper turnover filters applied by the TPO works out to 1/10th and 0 times of the turnover of the assessee, respectively. 3.2.2 We have considered the facts of the case and the submissions of the assessee In this regard, we are of the view that although there may not be a linear relationship between the profitability and turnover in the case of a service company, the size of a company reflected in terms of its turnover is one of the relevant criteria for comparability. This is because a company's ability to bear risk increases with the size of the company. It is pertinent to mention that in the case of Pentair Water India Pvt Ltd (381 ITR 216), the Hon'ble Bombay High Court upheld the decision of the Tribunal that size and turnover of a....
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....d approximately at 1/10th of the turnover of the tested party. Accordingly, we uphold the action of the TPO in applying the minimum and maximum turnover filters at Rs. 5.11 cr. and Rs. 511.14 cr. Respectively. 3.2.5 The assessee has also raised the issue of change of stand by the TPO with regard to application of this filter. The assessee contends that the TPO had earlier proposed to apply a turnover filter of Rs. 1 Cr. to Rs.75 Cr., but later modified the same to Rs. 511 Cr. To Rs. 511.14 Cr., and assessee has objected to the said change in stand by the TPO. It is seen that in para 4.8 and para 7.3 of his order, the TPO has clearly stated that earlier (in the show cause notice), the turnover filter was inadvertently mentioned as Rs. 1 Cr. To Rs.75.6 cr and that the same was being revised to Rs. 5.11 cr. To Rs. 5.11 cr. We find that the turnover filter is invariably applied by the TPO at 1/10th and 10 times of the turnover of the tested party. In the present case, the turnover of the tested party(the assessee) is Rs. 51,11,37,020. Therefore, the correct turnover filter to be applied is Rs. 5.11 cr. To Rs. 511.14 cr. Only. We have, in the foregoing paragraphs upheld this filter. I....
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....a part of our global strategy, we are expanding our operations in other geographies such as United States, United Kingdom, Australia, Ireland, India, Nigeria and Tanzania. Towards this, we acquired GNet Group LLC a business intelligence and analytics company in USA and also acquired 51 percent shareholding of Intellect Bizware Services Private Limited (Mumbai, India) specializing in ERP and enterprise innovations based on SAP and HANA to develop and strengthen our presence in the ERP space. Our customer engagements comprise holistic analysis of problems which span across people, process, technology, as well as learning and innovation. Our service offerings include (a) Process and technology; (b) Digital transformation through which we help our clients formulate and execute their digital business stgrategy by providing services on digital channels using analytics, statistical modeling, machine learning. National language processing ('NLP') and social marketing tools and techniques; and (c) Enterprise IT services wherein we develop applications across wide range of hardware and software platforms, develop solutions to integrated various applications across platforms, provide ....
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....gone through the said Annual Report and it is evident that there is an amalgamation which has taken place and in view of this extra ordinary event of amalgamation this particular company has to be held as not comparable with that of the assessee. Accordingly, the ld. A.O/T.P.O is directed to exclude the same from the final list of compaables. 7. E-Infochips Ltd. 7.1 In respect of this company, the ld. Counsel for the assessee demonstrated from the Annual Report of this company that there has been an extra ordinary event of merger where two of the wholly owned subsidiary companies of E-Infochips Ltd. were merged with the company in terms of order of Hon'ble Gujarat High Court dated 29-03-2016. The merger took effect from the appointed date i.e. 01-04-2016. The ld. D.R. conceded to these facts on record. 7.2 We have already held in respect of the earlier comparables where there has been acquisition and where there has been an amalgamation such companies cannot be held to be comparables in the event of extra ordinary events. Similarly, in this case as evident there has been a merger as per the directions of the Hon'ble Gujarat High Court and therefore, because of this extra ord....
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....that this company is engaged in activities of providing IT Software Development Services of various types and earns entire revenue from such activity. Therefore, the contention of the assessee that this company is doing varied activities is not relevant and acceptable and therefore, the first contention of the assessee was rejected. The second contention of the assessee was that this company had earned abnormally high profits from its business operations during the year. However, this contention was rejected by the ld. D.RP. based on various judicial decisions as placed in their findings vide para 13.2.4 where it is held that the Indian Law does not permit exclusion of super profit-making companies from the list of comparable companies. The ld. D.R.P further opined that the assessee has not brought on record any evidence to demonstrate that this earning of super profits was due to some abnormal condition or difference in functions which could have been considered as sufficient reason to exclude this company from the comparable. Accordingly, the ld. D.RP upheld the findings of the ld. A.O/T.P.O and retained this company to the final list of compaables. 9.2 The ld. Counsel placed on....
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....le to the assessee." 15.4 We find that this decision pertains to the same assessment year viz. 2016-17 and respectfully following the aforesaid decision on the same parity of reasoning, we direct the A.O/T.P.O to exclude this company from the list of comparables." 9.3 The aforesaid decision pertains to A.Y. 2016-17 and it has been held that Infobeans Technologies Ltd. has to be excluded as comparable as it is performing varied types of services and that also as per the financials of the company, its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. Following the same parity of reasoning, we direct the ld. A.O/T.P.O to exclude this company from the final list of comparables. 10. Dun and Bradstreet Technologies & Data Services Pvt. Ltd. 10.1 Regarding this company also before the Revenue authorities it has been submitted by the assessee that the company should be excluded on the ground of functional dis-similarities. However, the revenue authorities have not accepted the submissions of the assessee and the ld. T.P.O at para 9.4 onwards and the D.R.P at para 10.2.1 onwards in their respective finding....
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....lly high margin of 58.19% during the relevant year. This objection was raised by the assessee both before the Ld. TPO as well as Ld. DRP but they have rejected the contention of the assessee by simply recording that "the company is engaged in technology based solution and analytic sales, hence it is functionally similar and as such assessee‟s contention is rejected." 48. We have perused a transfer pricing study of the assessee available at page A305, A412 & A413 of the paper book supported with relevant financials. Dun & Bradstreet is into providing vide area of sources such as D&B analytic services, risk management solutions, sales and marketing solution services, supply management solution etc. It has also come on record that the assessee has earned abnormally high margin of 58.19% as is evident from the annual report of Dun & Bradstreet and as such is not a valid comparable vis-à-vis assessee who is a routine software development service provider to its AE working on cost + mark-up model, hence order to be excluded. 11.3 Respectfully following the aforesaid decision on the same parity of reasoning, we direct the A.O/T.P.O to exclude this company from final set o....
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..... (as 17.10% instread of 17.01%). 12.1 The D.R.P thereafter at para 7.2.2 gave their finding as follows: "7.2.2. Since this is a factual issue regarding the correct computation of margins of the comparable companies, the TPO is directed to verify the quantum of margin computations submitted by the assessee and adopt the correct Operating margins of the comparable companies mentioned in the above grounds and rework the adjustment accordingly." 12.2 It is the contention of the ld. Counsel that this direction has not been followed. The ld. D.R fairly conceded to the submissions. Having heard the parties in the interest of justice, we direct the A.O/T.P.O to follow the directions of the ld. D.R.P complying with the principles of natural justice. 13. In ground No. 7, the assessee wants inclusion of two comparable companies viz. (i) Smartcloud Infoservices Pvt. Ltd. and (ii) Synerzip Softech India Pvt. Ltd. 13.1 The ld. Counsel submitted that they are not pressing the inclusion of Smartcloud Infoservices Pvt. Ltd.. Having heard his submissions, this part of the ground is dismissed as not pressed. 13.2 Regarding Synerzip Softech India Pvt. Ltd., the ld. A.O/T.P.O has discussed at p....