TaxTMI 
TaxTMI 
2022 (6) TMI 1368
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....Appellant in respect of Software Development services (`SWD') & Information Technology enabled services (`ITeS') segments. 2. That the order passed by the learned Assessing Officer to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 3. That on the facts and circumstances of the case, the learned TPO along with the learned AO, pursuant to the directions issued by the ,learned panel, erred in rejecting the comparability analysis in the TP documentation undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962, (`the Rules') and also erred in rejecting companies functionally akin to the Appellant while performing the comparability analysis. 4. The learned TPO along with the learned AO in pursuance of the directions of the learned Panel erred in law and on facts in not providing the Working Capital Adjustment to the Appellant. 5. The learned TPO along with the learned AO in pursuance of the directions of the learned Panel erred in law and on facts in not providing Risk Adjustment and thus ignored the limited risk nature of the services provided by the Appe....
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....uance of the directions of the learned Panel erred in law and on facts in including Infobeans Technologies Ltd. as a comparable to the Appellant on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar etc. 13. The Learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Persistent Systems Ltd. as a comparable to the Appellant on the ground of functional similarity whereas this comparable should have been excluded for the reason being engaged in diversified activities and lack of segmental data, significant R&D expenditure, significant outsourcing charges, fails learned TPO fillet of Related Party Transactions, product company etc. 14. The Learned AO in pursuance of the directions of the learned Panel erred in law and on facts in including Nihilent Technologies Ltd. as a comparable to the Appellant on the ground of functional similarity whereas this comparable should have been excluded for the reason being functionally dissimilar etc. 15. The Learned AO in pursuance of the directions of the learned Panel erred in law and on facts in in....
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....ant on the ground of lack of Related Party Transaction information whereas this comparable should have been included by learned TPO by exercising his power under Sec 133(6). 22. The Learned AO/ TPO while passing the final AO order/ Order giving effect to DRP directions erred in including Cigniti Technolgies Ltd in ITeS comparable set whereas the same should have been included in SWD comparable set. 23. The Learned AO/ TPO while passing the final AO order/ Order giving effect to DRP directions erred in including Bhilwara Infotechnology Ltd, Nucleus Software Exports Ltd, Cybercom Datamatics Information Solutions Ltd and Consilient Technolgies Pvt Ltd in SWD comparable set whereas the same were not-part of TPO's comparable set in TPO order." 2. The assessee also raised following additional grounds:- 24. "On the facts & circumstances of the case and in law, the Final Order/OGE passed by the learned AO/TPO, is not in conformity with the directions issued by the Hon'ble Dispute Resolution Panel ("DRP"), covered in our averments in Ground No. 22, 24 & 28 and thus is bad in law as per provisions of section 144C(10) r.w.s. 144C(13) of the IT Act, 1961. ....
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....selected as comparables. He submitted that in view of the following judgements, the assessee is entitled for working capital adjustment and prayed that the same may be granted:- 1. Huawei Technologies India Pvt. Ltd. (AY 2012-13) IT(TP) No.1939/Bang/2017 2. IKA India (P) Ltd. vs. Deputy Commissioner of Incometax (AY 12-13) IT(TP)A No.2192/Bang/2017. 3. Deputy Commissioner of Income-tax V. Apotex Pharmachem India (P) Ltd. in IT(TP)A No.156/Bang/2014 & 2200/Bang/2016 (AY 09-10 & 11-12). 6.1. We have heard the rival submissions on this issue and perused the record. This issue was considered by the Tribunal in the case of Huawei Technologies India P. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018, wherein it was held as under: "10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submisSions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: ....
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....her or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets.in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs. of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 11. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of th....
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....f accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest sate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) of by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: * A company will need funding to cover the time gap between the time it invests money (i.e. pays m....
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....his different based on broad approximations, estimations and assumptions may not lead to reliable results. 16.The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No.2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable com....
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....o defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of 1ule 10B(1)( e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is, not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the....
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.... Delhi Bench in the case of Global Logic India Ltd. in ITA No.8726/Del/2019 dated 29.6.2020 for the assessment year 2015-16. 10.2 The Ld. D.R. submitted that on perusal of the annual report of this comparable, it was that the software development and services segment of this company is functionally comparable to the assessee and passes the filters of the TPO. Further, the revenue streams from this segment is on account of rendition of services and not on account of product sales. The company's business is primarily classified into two segments: (i) software development and services and (ii) systems integration and support. The software development and services segment comprises three divisions (a) Embedded product design (ii) Industrial design (iii) visual computing lab. As per information in the annual report, in the software development and services segment, this company helps its customers to create new products & experience to drive their growth. It was also seen that as per information in the annual report, the company provides consulting, product development and testing services to its customers and help customers to develop brands and products. Thus, this company esse....
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....by Ld. DRP. 10.5 On the plea of onsite expenses, it was noted that the expenditure incurred in foreign currency have been assumed to represent onsite expenses which is totally incorrect. It was seen that, the assessee has not given any reasons or justification as to how these affect comparability. Ld. DRP also stated that onsite expenses do not adversely affect comparability. Hence, Ld DRP rejected the plea for exclusion of this company on account of onsite expenses. 10.6 We have heard the rival submissions and perused the materials available on record. We have carefully gone through the order cited by the Ld. A.R. in the case of Global Logic India Ltd. (supra) and also submissions of Ld. D.R. along with order of lower authorities. In the case of Global Logic India Ltd. (supra), the assessee was engaged in provision of software development services to Global Logic India Ltd. (supra), an unrelated customer. The company operates through export- oriented units registered with the STPI. Its total turnover for that assessment year was Rs.41.05 crores and in that case, the AO included Tata Elxsi Ltd. as a comparable while determining ALP, comparing the functions of Global Logic Ind....
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....pment is structured into five verticals. As per page 108 of annual report, it is stated, 'that the company derives its revenue primarily from software services'. Again, as per page 122 of annual report 'the company is engaged in software development services'. Further, as per Note 3.1.2 of the annual report, the company's earnings in foreign currency from software development services was Rs.34.45 millions. As per the Note on Revenue Recognition, it has stated the principles adopted in recognizing revenue from software development services and there is no reference to product sales. 12.2 All these information clearly indicate that this company is engaged in software development. Besides, it is also relevant to note that the IP led revenue constituted meagre 2% of the consolidated revenue of the company for the F.Y. 2014-15 & 1% for F.Y. 2013-14 as per page 90 of the annual report. Considering these information in the annual report, Ld. DRP observed that this company is predominantly (i.e., 98%) engaged in software development activity and is functionally comparable to the assessee. The different services activities (referred in page 90 of annual report), in t....
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....kes R & D activity. On careful perusal of the information in the annual report, Ld. DRP noted that the R&D activities are mainly towards remaining abreast with the technological development so as to remain competitive in the business and improve delivery excellence. Further, there is no specific debit in the P&L a/c towards R&D activity, which only indicates that the R&D activities are routine and carried in the normal course of business. Besides, as per the information in the Asset Schedule (at page 11 of Annual report), the intangible assets comprised of Intellectual Property and computer software. The value of Intellectual Property as on 31.03.2013 was Rs.67 million, as on 31.03.2014 Rs.15 million and as on 31.03.2015 Rs.2 Trillion which is insignificant and meagre in regard to its Asset Portfolio of Rs.6407 million; Rs.3436 million & Rs.4626 million in the corresponding period. The computer software refer to routine computer licenses & not Intellectual Property generated by the company. Besides, Ld. DRP also noted that as per information in the annual report at page 90, the IP led revenue was only 2% during the year and meagre 1% in the earlier year. Thus, it is evident that th....
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....ew of the above findings of the Tribunal, we are inclined to direct the TPO/AO to exclude this company from the list of comparables. 13. Ground No.10 is with regard to exclusion of Larsen & Toubro Infotech Ltd. from the list of comparable companies. In this regard, the Ld. A.R. submitted as follows:- • Engaged in functionally dissimilar activities. No segmental information. • Brand Value - Presence of such brand value commands premium price. • Significant Onsite activity - Overseas office expenses constitute 47.925 of the operating cost during FY 2014-15. • Company acquired Information Systems Resource Centre Private Limited ("ISRC") on October 16, 2014 - Extraordinary event during the year under consideration. 13.1 Ld. D.R. submitted that at the outset, the assessee had selected this company as functionally comparable in its TP study giving the following reasons, "Larsen & Toubro Infotech Limited is an IT service company. The company is engaged in providing Application maintenance and Development, Enterprise Resource Planning and specialized services like Data Warehousing and Business Intelligence, Testing Services and Infr....
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....ftware service undertaken by this company. Therefore, Ld. DRP rejected the pleas raised. 13.3 A plea was raised that this company also provides data analytic services which is high end and hence, cannot be compared to the assessee. Ld. DRP did not find merit in the plea, as undoubtedly, provision of data analytic services is not functionally different from software development activity. The data analytic services also use only certain software and tools, write codes to perform certain tasks. Like any other software application, these tools also facilitate and enables business enterprises for informed management and decision. Therefore, Ld. DRP did not find merit in the plea. Further, there cannot be any distinction between high end software activity and low-end activity, so long as it falls within the purview of software development services. Besides, under the TNMM, such differences are tolerable and there is no requirement that the services / activities performed are identical. It is enough that the services are similar and fail within the same domain of software development. Accordingly, the pleas raised were rejected by the Ld. DRP. 13.4 On the pleas as to presence of bra....
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....o need to reject a functionally comparable company on account of onsite expenditure. 13.6 Further, it was seen that this company was upheld to be functionally comparable to a software service provider company, by this Tribunal in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, Ld. DRP upheld the selection of this comparable. 13.7 We have heard the rival submissions and perused the materials available on record. This company as not considered as comparable in the case of Global Logic India Ltd. in ITA No.8726/Del/2019 vide order dated 29.6.2020 and in the case of Goldman Sachs Services Pvt. Ltd. in IT(TP)A No.2355/Bang/2019 dated 15.6.2020 "9. But The learned Authorized Representative supported his arguments with the decision of the co-ordinate bench of this Tribunal for the A.Y. 2015-16 Yahoo Software India Pvt. Ltd. v. JCT (115 Taxman.com 60) and the three comparables discussed for exclusion in the above paragraphs are dealt by the co-ordinate bench of the Tribunal at page 13, Para 37 to 40 of the order which is read as under : " 37.....
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.... 39. The next company which the assessee seeks to exclude is 14Lom.Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- "Functionally dissimilar - owns intellectual properties, incurs significant R&D costs & onsite activity. - Engaged in diversified business_, * activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other Extra-ordinary event of merger product based solutions with Infosys Consulting India Ltd Segmental profit & loss account not available. Commands substantial brand value. 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R&D have all been brushed aside. In our view, the difference pointed out by t....
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....payment industry. As per information given at page 113 of the annual report, 'the company has focussed exclusively on providing software solution to electronic payment industries since its inception. The company is engaged in development, testing and maintenance of software for its clients based in different Geographies'. Thus, it is very apparent, it has a single business activity and the argument that it has diversified activities is primafacie untenable. As it operates in a single business segment, it has reported segmental information based on geography. Further, at page 131, it is categorically stated, 'the company is primarily engaged in rendering services related to maintenance and testing of computer software'. Therefore, Ld. DRP found that this company is functionally comparable to the assessee. 14.2 Referring to information at page 4 of the annual report, it was argued that this company performs diversified activities such as custom application development quality assurance and testing, application maintenance and support, strategic consulting and hence not comparable. However, Ld. DRP noted that these are not separate and different activities. They fro....
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....s not comparable with the assessee company as held by Tribunal in the case of Yahoo Software Development India Pvt. Ltd. Cited (supra), wherein the overseas staff and office expenses constitutes significant portion of operating cost of the company i.e. 68.82% which is very exorbitant and hence as held by Tribunal in the case of Yahoo Software Development India Pvt. Ltd. cited (supra), we are inclined to direct the AO to exclude this company from the list of comparables. 15. Ground No.12 is with regard to Infobeans Technologies Ltd. This comparable is not pressed. Accordingly, this ground is dismissed as not pressed. 16. Ground No.13 is with regard to the exclusion of Persistent Systems Ltd. from the list of comparable companies. In this regard, the Ld. A.R. submitted as follows:- • Functionally dissimilar - Offers complete product life cycle services. The company has generated revenue from sale of software licenses. • Fails RPT to Sales filter applied by the learned TPO - The company has RPT in excess of 25% of the sales I.e. 31.32% of sales. • R&D - Persistent owns software products which have been developed in house - Company engaged i....
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....n each of these industries. The essential activity across all business segments can be considered to be software product development services". 16.3 Further, it is seen that the assessee based on certain information discussed in the consolidated annual report (which included discussion of financial results of Persistent Systems Ltd and its six subsidiaries associates) argued that this company is into product development and IP led revenue. Ld. DRP was of the view that it would be totally incorrect to consider the information pertaining to the entire group as such, when the comparability is to be seen with reference to the stand-alone financials of Persistent Systems Ltd, which was considered for comparable analysis by the TPO. 16.4 In this regard it is pertinent to note as per the consolidated annual report the revenue from software license was Rs.535.59 million for the entire group whereas, such revenue in the case of M/s Persistent Systems Ltd was only Rs.71.45 million (Ref page 168 and page 211 of the annual report). It is also seen that in the P&L account of the consolidated financial statement expenses were debited towards Royalty expenses of Rs.176,73 million (refer pag....
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....bility of the project enable to use or sell the software, they are not capitalized. Such a development is not reflected in the Asset schedule. Thus, it can be inferred that the R&D and intangible assets do not have impact on the revenue and profitability of the company. Ld. DRP also noted that, the assessee has failed to establish that such differences, if any, on account of R&D, brand and IRPs have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. The said company also clarified u/s 133(6) that its intangible assets are in the nature of software licenses acquired for use in the operation of the company and are not in the nature of inbuilt software product generating revenue for the company. Hence, these pleas were rejected by the Ld. DRP. 16.8 Further, it was seen that this company was held to be engaged in software development and not a product....
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....) is as follows: "33. We have considered the rival submissions. We find that on the question of application of RPT filter, the assessee had made the following submission before the DRP:-, 4. Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show-cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevant extract from the show-cause notice is reproduced below for ease of reference: (e) Companies whIl.bave more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not r....
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....of Goldman Sachs Services Ltd. in IT(TP)A No.2355/Bang/2019 dated 5.6.2020. In view of the above, we remit this issue to the file of AO to consider the comparability of the company in the light of above observation of the Tribunal. The issue is remitted back to the AO/TPO for fresh consideration. 17. Ground No.14 is with regard to exclusion of Nihilent Technologies Ltd. from the list of comparables. 17.1 The Ld. A.R. submitted that the company earns onsite revenue of about 90.26% from its office in South Africa and also this company is engaged in high end services in the nature of technology analytics and segmental information is also not available. Hence, he requested to exclude this company from the list of comparables. 17.2 The Ld. D.R. submitted that on perusal of the annual report by the Ld. DRP it was noted that this company is engaged in rendering software services and other related IT services. As per information at page 13 of the annual report, "the company derives its revenue primarily from rendering software service activities'. Further at page 32 of the annual report, it is stated, 'the company's activities involve predominantly providing software r....
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....as such it is held in the case of Yahoo Software Development India Pvt. Ltd. Cited (supra) para 42 of its order as follows:- "42. The DRP while dealing with the aforesaid objections has merely taken the view that the presence of IPR revenue was insignificant and so also expenses of brand value, R&D & intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Bangalore bench in the case of Trilogy e-business Software India (P) Ltd. (supra) and in the light of this decision and admitted the factual position regarding presence of onsite revenue over and above the threshold limit of 255 of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly." 17.4 In view of the high percentage of on site revenue compared to the assessee company, Nihilent Technologies Ltd. cannot be compared to the assessee and cannot be considered as a comparable. However, ....
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....ut 16.38% of total operating cost of the company during the year. The annual report mentions that these activities are used for operational activities. This is a common practice in almost all the companies to give a small portion of the work to some other vendors for a variety of reasons. This may allow the company to focus on its core activities. Sometimes it may be to meet the mismatch in certain skill-sets that are required in various projects. These expenses are incurred in the routine course of business. This cannot be held to be a criteria to affect the functional comparability of a company. This objection was accordingly rejected by Ld DRP. 18.5 We have heard the rival submissions and perused the materials available on record. The Ld. A.R. placed reliance on the order of Yahoo Software Development India Pvt. Ltd. in ITA No.2657/Bang/2017 (supra) in paras 33, 34 & 37 for the proposition that on site revenue is very high to the total sales and to be excluded. However, we find that these facts are not examined by AO/TPO at their end. Hence, it is remitted to the file of AO/TPO for fresh consideration after giving opportunity of hearing to the assessee. 19. Ground No.16 is....
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.... onsite revenue." 20.4 In view of the above, we direct the AO/TPO to exclude this company from the list of comparables. 21. Ground No.18 is with regard to exclusion of Cybage Software Pvt. Ltd. From the list of comparable companies. This ground is not pressed and hence, dismissed as not pressed. 22. Ground No.19 is with regard to inclusion of Akshay Software Technologies Ltd. in the list of comparables. This ground of appeal is not pressed and hence, dismissed as not pressed. 23. Ground No.20 is with regard to inclusion Sasken Communication Technologies Ltd. in the list of comparables. 23.1 The Ld. A.R. submitted that inspite of direction of Ld. DRP, the TPO has inadvertently missed out the inclusion of this comparable. 23.2 Ld. D.R. relied on the order of Ld DRP. 23.3 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we direct the AO/TPO to pass the final order in conformity with the Ld. DRP's directions. Directed accordingly. 24. Ground No.21 is with regard to inclusion of I2T2 India Pvt. Ltd. in the list of comparables. 24.1 The Ld. A.R. submitted as follows:- • Functionally ....
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....ter hearing both the parties, we direct the AO/TPO to pass the consequent orders in conformity with the direction to the Ld. DRP order. Ordered accordingly. 27. Next ground no.24 is with regard to exclusion of BNR Udyog Ltd. from the list of comparables. 27.1. Ld. A.R. submitted that inspite of directions by Ld.DRP to exclude this company from the list of comparables, AO/TPO did not follow it. 27.2. We have heard the rival submissions and perused the materials available on record. We direct the AO/TPO to pass consequential order in conformity with the Ld. DRP's order. Directed accordingly. 28. Ground No.25 read with additional ground. The first additional ground is not pressed and accordingly dismissed as not pressed. 29. The next additional ground No.26 is with regard to excluding Infomile Technologies Ltd. from the list of comparables. 29.1 The Ld. A.R. submitted that the TPO/AO has erred in law and facts by failing to pass a speaking order on exclusion of the above comparable in its TP order dated 30/Oct/2018. The assessee has furnished to the TPO, workings and justification as to why this comparable is fit for comparability. The same may be evidenced from page....