TaxTMI 
TaxTMI 
2022 (6) TMI 1368
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....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 Appellant and in not providing an appropriate adjustment towards the risk....
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....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 including Aspire Systems (India) Pvt Ltd. as a comparable to the Appellant on the ground of functional similarity whereas this comparable....
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....). 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. 25. The learned Transfer Pricing Officer (`TPO') has erred in law and facts by excluding Infomile Technologies Limited, a Software development company, without citing any reason justif....
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.... (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: Determination of arm's length price under section 92C . 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determine....
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....ncluding 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 the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to 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. 12. Chapters I and III ....
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....e 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 money to supplier) and the time it collects the investment (i.e. collects money from customers) * This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said gu....
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.... 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 companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, t....
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....se 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 enterprises entering into such transactions are likely to materially affect the price or cost charged to 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." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore, in keepi....
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....ents: (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 essentially renders software development, system design and testing services for broadcast, consumer electronics, telecom & transportation industries and does not sell products. The VCL division renders animation services for the media and entertainment industry. Thus, this company can be characterized as a software development & design service provider and functionally comparable to the assessee's activities. Therefore, the plea that this company.is functionally different was rejected by the Ld DRP. 10.3 It was pleaded by the assessee before Ld....
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....cord. 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 India Pvt. Ltd. with the Tata Elxsi Ltd. It was held by the Tribunal in the case cited (supra) that the Global Logic India Pvt. Ltd. solely engaged in the provisions of software development concerns. Hence, where the concern was also product company, margin of such company cannot be excluded for bench-marking the ALP of international transaction undertaken by the assessee. In the present case, the TPO considered the software development & services segment of Tata Elxsi Ltd. to compare with the assessee company, wherein he found that, that company is functio....
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....hese 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 the form of consulting, maintenance, testing, management support services etc. clearly fall within the gamut of software development services, though it pertains to different verticals. That is the reason, the company has recognized a single business segment i.e., software development services, and which are categorized into five verticals. Besides, page 39, Annexure 4 of the annual report, the nature of the various services activities are given as under: SI.No Name and Description of main products / services NIC Code of the % total turnover of Product / service the 1 Writing, modifying, testing of company compu....
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....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 the intangibles has no material impact on the revenue growth or profitability of the company. Besides, the assessee has failed to establish that such differences 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. Hence, these pleas were rejected by Ld. DRP. 12.6 As to onsite expenses, it was noted that the assessee has assumed that the entire expe....
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....e 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 Infrastructure Management Services. The services offerings are focussed mainly towards four verticals namely manufacturing, utilities, financial services and telecom. For the period ended March 31, 2015, March 31, 2014 and March 31, 2013 100 percent of the operating revenues respectively were derived from software development services". However, without giving reasons, it has raised a plea that it is functionally different, when the TPO has selected this company as comparable. Further, Ld. DRP noted that this company has two business segments - services cluster and industrials cluster operating in software development services. The information in the annual report clearly show that the entire revenue is from provision of software services. As p....
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....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 brand, Ld. DRP noted that, there is no specific information in the financial statements to indicate that the brand has contributed to revenue growth of the company. On the other hand, the reference in the annual report mentions that the company's efforts to be cost-effective and agile in contributing value to clients have strengthened its brand. In other words, its operational efficiency has contributed to its revenue growth and brand name and not the other way. There is no information to indicate that the brand has impacted the revenue or profit of the company. The intangibles referred in the Asset Schedule represent the computer software, and business rights and as such does not refer to any IPR or license owned by the said company as argued. ....
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.... 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. On the issue of RPT filter, we notice that the TPO in pars 16 has accepted that the RPT filter should St be @ 25%. In th case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and the fore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between product and services segment, presence of onsite activity and the impact of extraordinary event of acquisition during the relevant previous year. Therefore; this company is, directed to be excluded from the list of comparable company. 38. As far as "L&T Infotech Ltd. is concerned, the Id. c....
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....ble. 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 the Id. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee. We find the decision relied, pertains to A.Y. 2015-16, and the comparable Persistent Systems Limited was excluded based on the RPT filter and the L & T InfoTech Limited was considered for exclusion because of trading in software and owned significant intangible assets, and further the Infosys Limited was excluded considering the brand presence and turnover criteria. We follow the judicial precedence and direct the TPO to exclude L & T InfoTech Limited, Persistent Systems Limited and....
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....n 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 from part of the application maintenance and testing services provided as software solution to electronic payment industry. There is no information in the annual report to take a view that these are different from software development services. 14.3 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, he did not find merit in the plea. Further, there cannot be any d....
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....ompany 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 in R&D activity cannot be considered comparable to captive service providers * Significant outsourcing activity * Information u/s 133(6) incomplete - Copy of the response provided to Assessee is not complete. 16.1 Ld. D.R. submitted that on perusal of the annual report, Ld. DRP noted that the company's core activity was rendering product development services i.e. providing services to business enterprise to develop software products. As per the information at page 211 of the annual report, it has reported income from software services of Rs.12,353.53/- million and software licenses of Rs.71.45/- million aggregating to Rs.12,424.98/- million. Thus, the income from software licenses constitute a meagre 0.58% of its operating revenue. It is also noted that this company in response to the notice Software product Category Revenue as per books of accounts (INR) eMee Internally developed 20....
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....ge 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 page 169) and such a debit is not to be noted in the P&L account of M/s. Persistent Systems Limited. 16.5 Further, as per information at page 88 of the annual report for FY 2012-13 it was stated in the notes to the consolidated results that the increase of intangible block of assets during the year (2012-13), of Rs.262.84 million, was mainly on account of acquisition of various IPs during the year and the same is shown in the intangible Asset Schedule of the consolidated financial statement at page 115 as under:- 16.6 All these clearly show that the IP related and product revenue pertain to other group entities and does not pertain to M/s Persistent Systems Ltd, which is being compared. It is also relevant to note that this company has clarified in its reply given u/s 133(6), that M/s Persistent Systems Ltd is predominantly engaged in the business of rendering software development services; the revenue reported is primarily on account of rendering of software development services only. The relevant....
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.... 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 company and hence functionally comparable to a software service provider company, Bangalore bench of Tribunal in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2.918 relating to A.Y. 2013-14). In view of the above, Ld. DRP upheld the selection of this comparable. 16.9 On the plea of the RPT, Ld. DRP noted that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. He also noted that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, Ld. DRP did not find any infirmity in the approach. Hence, he rejected the assessee's plea. 16.10 The company has reported outsourcing activity constituting about 14.51% 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 alm....
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....ther hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon'ble ITAT has upheld the application of this filter by the TPO in its order in the case of M/s. Supporisoft India Pvt. Ltd for AY 2005-G6 in IT (TP)A 1372/B/11 & 20/2012 dated 28-3-2013 following its own decision in the case of M/s. Actis Advertisers Pvt. Ltd. vide ITA No.5277/Del/2011 dated 12.10.2012. On perusal of the Annual Report of Persistent observe that the company has RPT in excess of 25% of the sales. The calculation of the same has been provided below for your ease of reference: RPT to Sales ratio for FY 2014-15 particulars Amount (INR Million) Sale of services 2,410.02 Commission received 10.26 Purchase of software 1.49 Cost of technical professional 1,339.1 Commission paid on sales 111.79 Traveling and conveyance 19.27 Total related party transactions (A) 3,891.93....
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....s activities involve predominantly providing software related services, which is considered to be a single business segment, since these are subject to similar risks and returns'. Thus, it is functionally comparable to the assessee which renders software development -services and other allied services. Further, in response to the information gathered u/s 133(6), this company has clarified that it is engaged in software development and IT consulting services and it is not engaged in product development. Thus, the contentions of the assessee that it is engaged in diverse activities and not functionally comparable is without merits. Besides, there is no information in the annual report to indicate that this company is engaged in product development or to indicate that it has revenue stream from product sales. The assessee also could not point to any such information in the annual report. We also note at page 6 of the annual report, the independent auditor has certified, 'the company does not have any purchase of inventories or sales of goods since it is a service company'. In view of these, Ld. DRP upheld that this company is functionally comparable to the assessee and the....
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....ot be considered as a comparable. However, these facts were not verified or the assessee not raised these arguments before lower authorities. Hence, this issue is remitted back to the file of AO/TPO for fresh consideration to examine this issue afresh. 18. Ground No.15 is with regard Aspire Systems (India) (P) Ltd. for exclusion of this company from the list of comparable companies. The Ld. A.R. submitted as follows:- * Onsite revenue - It is observed that the company earns about 90.26% of its revenue from its office in South Africa. * Functionally dissimilar - The company is engaged in high end services in the nature of technology analytics * Segmental information is not provided. 18.1. Ld. D.R. submitted that on perusal of the annual report, Ld. DRP noted that this company is engaged in provision of software development services and satisfies all the filters adopted by the TPO. This company is engaged in providing outsourced technology services. The pleas raised as to platforms are nothing but software bases on which coding is carried out. Every software company has to use such software platforms to develop the software. The activities of the company fall within the ambit....
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....h regard to exclusion of Inteq Software Pvt. Ltd. This ground is not pressed and hence, dismissed as not pressed. 20. Ground No.17 is with regard to exclusion of Infosys Ltd. as comparable in the list of comparables. 20.1 Ld. A.R. submitted as follows:- * Infosys is involved in development of software products. No segment data is available in respect of the same. * Presence of significant brand values, Intangibles & scale respectively * Company engaged in R&D activity cannot be considered comparable to captive service providers * Significant onsite activity (viz. 50.4% of revenue is generated from onsite model) 20.2 Ld. D.R. relied on the order of Ld DRP. 20.3 We have heard the rival submissions and perused the materials available on record. This company is considered as not comparable in the case of Yahoo Software Development India Pvt Ltd. Cited (supra). wherein it was held as under: 39. "The next company which the assessee seeks to exclude is Infosys 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 co....
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....vices. * The Company satisfies all the filters applied by the learned TPO. * The contention of the TPO that the company fails the export services revenue filter is misplaced, as the same is observed to be 97.55% 24.2 Ld. D.R. relied on the order of Ld. DRP 24.3 We have heard the rival submissions and perused the materials available on record. It was considered in the case of Goldman Sachs Pvt. Ltd. in IT(TP)A No.2355/Bang/2019 dated 15.6.2020 in which it was held as under: "10.(i) I2T2 India Limited - The Ld AR submitted that the comparable company margin is 3.67%. The comparable has to be included as the RPT details are available in the Annual Report and referred to page No.2385 of the Paper book. We are of the opinion that the Assessing Officer could have called for the information under section 133(6) of the Act to confirm the details in the proceedings. Accordingly, we restore this comparable to the file of the TPO/AO for examination and verification of facts." 24.4 In view of the above, we direct the AO/TPO to include this company as comparable in the list of comparables. 25. Ground No.22 is with regard to inclusion of Cigniti Technologies Ltd. in the list of compa....