TaxTMI 
TaxTMI 
2023 (3) TMI 598
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....ee cost filter (ratio of employee cost to total operating cost >25%) even though learned TPO himself has not applied the said filter. Ground No. 3: The learned TPO erred in rejecting the search conducted by the Assessee and conducting independent search, interalia, on the ground that some of the filters applied by the Assessee are not appropriate (such as export f ilter, salary to sales f ilter) even though learned TPO himself has applied same set of filters as summarized below and also the Hon'ble Dispute Resolution Panel ("DRP") has erred in confirming the same. Ground No. 4: The learned TPO grossly erred in conducting independent search by wrongly applying the proviso below Rule 10E3(5) and the Hon'ble DRP has erred in confirming the same. Ground No. 5: The learned TPO has grossly erred in applying related party filter of 25% in his search process instead of 15% as applied by the Assessee relying on various precedents and the Hon'ble DRP has erred in conf irming the same. Ground No. 6: The learned TPO and Hon'ble DRP has erred by rejecting the following 7 comparable companies in the software development segment selected/accepted by the Ass....
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....even though they are functionally comparable to the' Assessee: i) Cyber Media Research Et Services Ltd ii) Confluence Integrated Services Pvt Ltd iii) Paradigm Plus Marketing Communications Pvt.Ltd iv) Hindustan Field Services Pvt Ltd v) Retail Scan Management Services Pvt Ltd vi) Mudra Online Technologies Pvt Ltd vii) Concept Public Relations India Ltd Ground No. 12: The learned TPO and Hon'ble DRP has erred on facts and law by comparing the Assessee with the following 2 companies in the marketing and support segment, which have an entirely different functional and risk profile and the Hon'ble DRP has grossly erred in confirming the same. i) Pressman Advertising Ltd ii) Majestic Research Services and Solutions Ltd Ground No. 13: The learned TPO has erred in law and in facts, by not following the directions of the Hon'ble DRP and keeping the NCP of Marketing and support segment of the Assessee unchanged at 8.67% instead of 13.85%. Ground No. 14: The Learned TPO grossly erred in law and facts by treating ESPP cost as operating cost of the assessee even when the stock pertains to the associated enterprise and it was never c....
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....ssessee to file the economic details of the international transactions entered with A.E. in form No.3CEB. The Ld. TPO from the details filed by the assessee observed that following was the international transactions:- International Transactions Nature of Transaction Amount (in Rs.) Method Income from software development services 1,59,43,94,173 TNMM Income from marketing support services 2,56,61,965 TNMM Reimbursement of expenses 1,35,13,207 Other method Withholding from employees and payment on their behalf for purchase of stock under ESPP scheme 61,55,757 Other method 2.2 The Ld.TPO observed that, the assessee used TNMM as the most appropriate method for determining the arm's length price for both the services and OP/OC as the PLI. It computed its margin at 13.31% for SWD segment and 8.67% for marketing support services segment. 2.3 The Ld.TPO observed that, the assessee used 16 comparables with an average margin of 8.69% under the software development service segment. It thus, held the transaction to be at arm's length. In respect of marketing support service segment, the Ld.TPO noted that the assessee did not benchmark this transaction separately. ....
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....tents, etc. are the exclusive property of its Associated Enterprise. 10: RISKS ASSESSMENT 10.1: Foreign Exchange Risk: Exchange rate risk relates to the. potential variability of profits that can arise because o'f changes in foreign exchange rates. The Associated Enterprise makes payment to Radisys India in foreign exchange and thus Radisys India bears the risk of foreign exchange fluctuation. 10.2: Legal and Statutory Risk: This risk primarily arises on non-compliance with any legal/ contractual / statutory provisions. Radisys India bears this risk to the extent of the legal / statutory provisions of India. 10.3: Man Power Risk: This risk primarily arises due to the fact that the success of a company depends upon' the quality of personnel deployed with requisite technical knowledge required for carrying out the work of such company. The entire services of Radisys India are driven based on the specifications received from its Associated Enterprise. For these types of services, it is essential to have highly trained and efficient staff with Radisys India. Since, Radisys India has to hire and retain good personnel and the responsibility of providing deliv....
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....essment order on 28.2.2022, which is beyond the period of limitation. On a query being raised asking for the date of receipt of DRP directions by the National Faceless Assessment Centre, the assessee did not have any evidence to place in order to substantiate its plea of a belated order passed by the Ld.AO. We are therefore, are not inclined to decide this issue and hence, the same is dismissed. 5. Ground Nos.2 to 5 raised by the assessee are general in nature and therefore, do not require to be adjudicated separately. 6. Ground No.6 is raised by assessee seeking inclusion of following comparables under SWD segment: (i) Akshay Software Technologies Ltd (ii) Batchmaster Software Private Ltd (iii) DCIS DOT COM Solutions India Pvt Ltd (iv) Evoke Technologies Private Ltd (v) Sagarsoft (India) td (vi) Sasken Technologies Limited (vii) E-Zest Solutions Limited 6.1 The Ld.AR submitted that, the assessee do not wish to argue for inclusion of M/s. Sasken Technologies Ltd. and M/s. E-Zest Solutions Ltd. Accrdingy, the same are dismissed as not pressed. It is submitted that the remaining 5 comparables sought for inclusion, were not considered by the Ld.TPO/AO. We t....
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....59 Cr. 6) Nihilent Technologies Ltd. - Rs.259 Cr. 7.4. It is also an admitted position that coordinate bench of this Tribunal in assessee's own case in IT(TP)A No.2482/Bang/2019 dated 22.2.2022 excluded comparables with high turnover and have been consistently following the turnover range of Rs.1 to 200 Crores and Rs.200 to Rs.2000 crores, so on and so forth. The coordinate bench of this Tribunal in assessee's own case cited (supra) has dealt with the applicability of turnover filter by observing as under: 11. As far as comparability of companies listed as (a) to (g) in Grd.No.4 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the Assessee's turnover is only Rs.1,21,34,35,876/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover wa....
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....ng on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making a....
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....bmitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Asses....
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....old that 7 companies listed in Sl.No.1,2,4,6,7, 10 and 11 of Grd.No.1 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies." 7.5. In view of the above decision in assessee's own case as well as the consistent approach followed by this Tribunal, we direct the Ld. AO/TPO to exclude the comparables with high Turnover, mentioned herein above. 8. Amongst the remaining comparables, the Ld.AR submitted that the assessee do not wish to press the following comparables being, Great Software Laboratory Pvt. Ltd., Aptus Software Lab Pvt. Ltd., OFS Technologies Ltd., Threesixty Logica Testing Services Pvt. Ltd. and Concilient Technologies Pvt. Ltd. Accordingly, these comparables are dismissed as not pressed. 8.1. The two comparables that assessee seeks to exclude on functional dissimilarities are: (i) Infobeans Technologies Ltd. and (ii) Cygnet Infotech Pvt. Ltd. (i) Infobeans Technologies Ltd. 8.2 The Ld.AR submitted that, this company is engaged in Automation Engineering, Customized Software, Custom Application Development (CAD), Content Management Systems, Enterprise Mobility and Big data A....
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.... same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee". 22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the co-ordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the co-ordinate bench did not consider this company as comparable in assessee's own case for AYs 2014-15 & 2015- 16. Respectfully following the decision of the co-ordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables." 5.8. In view of the above decision of the Tribunal, we are inclined to hold that Infobeans Technologies Ltd. cannot be considered as a comparable and to be excluded from the list of comparables." 8.3. On verification of the financials of this company for AY 2017-18, we note that in the Annual Report at page 2343 placed in paper book Volumes 4 of 6, this has been stated to be catering into vide range of segmen....
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....ies below. We have perused the submissions by both sides in light of records placed before us. 8.7. In the annual report it is mentioned that this company derives revenue various services by providing Enterprise Solutions, Application content, Management services etc. It is also mentioned that the revenue recognition is by providing man power support to its customers. AT page 2033 of the paper book, we note that this company bares all the risks attributable to a full fledged entrepreneur. In our view this company cannot be considered as a good comparable. Accordingly, this comparable is directed to be excluded. 9. Ground No.8 has been raised by the assessee for not following the DRP's directions in respect of excluding R. Systems International Ltd., by the Ld.AO while passing the impugned order. 9.1. On perusal of DRP's directions at page 26, we note that in para 7.3, the DRP excluded R.Systems International Ltd. The revenue is not in appeal against this and therefore, we direct the Ld.AO/TPO to pass an order in consonance with the DRP's directions in respect of this comparable. Accordingly, this ground raised by the assessee stands allowed. 10.Ground No.9 is in respect of ....
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....ation, design and digital. As there is no segmental details available, it is difficult to analyse the revenue generated by this company from the advertising segment. Therefore, in our view, cannot be considered to be functionally comparable with that of assessee. (ii) Majestic Research Services & Solutions Limited 13. The Ld.AR submitted that this comparable is functionally not similar to the assessee as it is involved in numerous services like Eye Tracking, Mobile Analytics, Video analysis, Facial recognition, Digital tracking, Online communities, Neuro Science, Emotional analysis, Automated audience measurement, Sensory sciences, etc. Under the marketing research services, which can be verified at page Nos. 4125 to 4126 of the paper book. At the outset, the Ld.AR submitted that these activities carried by this company is not akin to the marketing support service segment and the services rendered by assessee under this segment. 13.1. On the contrary, the Ld. DR relied on the order of the DRP. 13.2. We have perused the submissions advanced by both sides in the light of records placed before us. We note that this comparable is into various activities like Digital Network Serv....
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....enue as well. This is submitted on the presumption that the AE has cross charged the cost to the assessee. 15.4. On the contrary the Ld.DR relied on the directions of the DRP. 15.5. From the records placed before us, the Ld.AR has filed 1998 Stock Incentive Plan, at the time of hearing. The relevant clauses of the plan are reproduced as under: "6 . PURCHASE PRICE The purchase price of each share covered by the Plan shall be determined by the Committee subject to the following: (a) 'The purchase price of each share covered by each Incentive Option shall not be less than 100% of the Fair Market Value of the Common Stock of the Company on the date the Incentive Option is granted; provided, however, that if at the time an Incentive Option is granted the Optionee owns or would be considered to own by reason of Section 424(d) of the Code more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or Parent of the Company, the purchase price of the shares covered by such Incentive Option shall-not be less than 110% of the Fair Market Value of the Common Stock on the date the Incentive Option is granted. (b) The purchase price ....
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....be their Fair Market Value on the date of the Optionee's exercise. (c) Notwithstanding the foregoing, the Company shall have the right to postpone the time of delivery of the shares for such period as may be required for it to comply, with reasonable diligence, with any applicable listing requirements of any national securities exchange or any federal, state or local law. If an Optionee, or other person entitled to exercise an Option, fails to accept delivery of or fails to pay for all or any portion of the shares requested in the notice of exercise, upon tender of delivery thereof, the Committee shall have the right to terminate his or her Option with respect to such shares. (d) The Company may make loans to Optionees as the Committee, in its discretion, may determine in connection with the exercise of outstanding Options granted under the Plan. Such loans shall (i) be evidenced by promissory notes entered into by the holders in favor of the Company; (ii) be subject to the terms and conditions set forth in this subsection (d) and such other terms and conditions, not inconsistent with the Plan, as the Committee shall determine; and (iii) bear interest at such rate as the ....
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....n the instant cases, the foreign affiliate was directly issuing ESOPs to the employees of the Israeli company. The Israeli company did not route the ESOPs cost through P&L account due to which these expenses did not appear in the cost base." 15.9 We fail to understand the inference drawn by the Ld.AO/TPO by referring to the above example. The Ld.TPO has not drawn the complete facts of the case and has also not provided complete details of the decision by the Supreme Court of Iserael. The Ld.TPO has recorded that the Israeli company is remunerated at cost plus mark up by foreign affiliate for services. In the present facts, the re is no mark up paid by the AE to the assessee. Such abstract reference by the revenue authorities is least expected. 15.10. In our view the Ld.TPO failed to consider the basic fact that, purchase cost of the shares of foreign AE is charged from the employees of the assessee directly and the assessee deducts TDS on the 15% discount received by such employees, who have opted for the scheme. In our view, based on the option scheme and the "Employee Information Supplement India", the 15% discount received by such employees of the assessee cannot be treated a....
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....tions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f).......... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transacti....
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....fferences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or * Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraph 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying h....
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.... case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliabl....
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....ng absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and nontrade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1....
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....ervices (P.) Ltd. Vs CIT-1, reported in (2022) 143 taxmann.com 178, against the assessee. 18.1. We notice that, Hon'ble Supreme Court in the case of Checkmate Services (supra) considered the issue of whether the employees contribution paid before due date for filing the return of income u/s.139(1) whether otherwise allowable u/s.43B, putting to rest the contradicting decisions of various High Court. The relevant extract of the decision is as given below - 52. When Parliament introduced Section 43B, what was on the statute book, was only employer's contribution (Section 34(1)(iv)). At that point in time, there was no question of employee's contribution being considered as part of the employer's earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions - especially second proviso to Sec....
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....ess the conditions spelt by Explanation to Section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts - the employer's liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees' income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B. 54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer's obligation to deposit the amounts retained by it or deducted by it from the employee's income, unless the condition that it is deposited on or before the due date, is correct and justified. The nonobstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and ot....