TaxTMI 
TaxTMI 
TaxTMI 
2023 (4) TMI 23
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....d the return of income for the assessment 2016-17 on 29.11.2016 declaring an income of Rs.8,72,45,650. The case was selected for scrutiny and accordingly a notice u/s.143(2) was duly served on the assessee. Since the assessee had international transactions, a reference was made to the Transfer Pricing Officer (TPO) for verify the Arms Length Price (ALP) of the international transactions the assessee is having with its Associated Enterprises (AEs). The TPO passed an order dated 29.10.2019, determining a TP adjustment of Rs. 6,76,79,662/- in respect of the SWD services segment. The Assessing Officer passed a draft assessment order dated 22.11.2019 by incorporating the above adjustment. Aggrieved, the Assessee filed its objections before the Dispute Resolution Panel ('DRP'). The DRP vide its directions dated 01.03.2021 rejected the objections of the Assessee. The Assessing Officer passed the final assessment order dated 07.04.2021 in which the TP adjustment originally made was sustained. Aggrieved, the Assessee has preferred the present appeal before this Hon'ble Tribunal. 3. The assessee has chosen Transaction Net Margin Method (TNMM) as the most appropriate method for determining t....
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....of hearing the ld AR presented arguments with regard to the following ground - a) The TPO erred in selecting companies like R S Software (India) Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd., Inteq Software Pvt. Ltd., Persistent Systems Ltd., Infobeans Technologies Ltd., Thirdware Solution Ltd., Infosys Ltd., Aspire Systems (India) Pvt. Ltd. and Cybage Software Pvt. Ltd. which ought to be excluded on account of the companies being functionally dissimilar to the Assessee. (Ground No. 4.6); b) The TPO erred in rejecting Akshay Software Technologies Ltd., Evoke Technologies Private Limited and Sagarsoft (India) Ltd. despite the companies being functionally similar to the Assessee and satisfying all the filters applied by the TPO and the DRP erred in upholding the same (Ground No. 4.7); Additional grounds c) The TPO while applying the turnover filter at the lower limit erred in not applying the said filter at the upper end so as to reject high turnover companies. The DRP further erred in confirming the same. (Additional ground No. 4.5(c)) d) That the TPO erred in upholding the inclusion the RS Software Ltd. though the same was functionally not comparable to the Asses....
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....Systems Ltd. (d) Aspire Systems (India) Pvt Ltd. (e) Thirdware Solution Ltd. (f) Cybage Software Pvt Ltd. (g) Nihilent Ltd. 11. Reliance is also placed on the decisions of this Hon'ble Tribunal in the case of Razorpay Software Pvt. Ltd. (order dated 27.12.2021 passed in IT(TP)A No. 190/Bang/2021) and NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) wherein the said companies were excluded on application of the upper turnover filter. On other hand the ld. DR relied on the order of the lower authorities. 12. We heard the rival submissions and perused the material on record. The coordinate bench of the Tribunal in the case of Autodesk India Pvt.Ltd (supra), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chrys....
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....Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Ac....
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....d hereunder: *figures in crores FY 2015-16 FY 2014-15 FY 2013-14 Operating revenue 171.41 345.50 351.89 Operating cost 175.07 260.26 283.47 Operating profit -3.66 85.24 68.42 OP/OC -2.09% 32.75% 24.14% 20. The reason for decline in margin is attributable to the strategic shift made by the company as it is making substantial investments in a) developing tools and platforms and b) sales and marketing to enhance its customer base. Further, there is a significant drop in revenue (51 percent) vis-à-vis the previous year. Further, the company recognizes that this shift has impact on the margin of the company. In view of the same, the company ought to be excluded. Presence of intangibles. 21. It is submitted that the company owns significant intangible assets. The company is also developing further intangible assets. The total value of intangible assets as a percentage of fixed assets is 17.3%, which is significantly higher than the intangible assets owned by the Assessee, which is 0.04% of its fixed assets. Further, the company also owns stock in trade, unlike the Assessee. Significant foreign branch expenses 22. I....
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....ated party transactions (sales) for the FY 2013-14 stand at 79.49% of sales, and therefore the company ought to be excluded. 28. Wide fluctuation in the margin: The ld. AR submitted that the company's margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company's margin stood at 47.21%, for the FY 2014-15 32.14% and for the FY 2015-16 7.56%. 29. It is submitted that the TPO has relied on the information received under Section 133(6) of the Income tax Act, 1961 ("the Act") for the assessment year 2015-16 on the ground that no response was received from the company to the notice issued under Section 133(6) of the Act for AY 2016-17. It is submitted that in the absence of response to notice by the Company for AY 2016-17, the TPO erred in considering the information received for AY 2015-16 and holding that the company is functional comparable for the assessment year in question when the details available in the public domain illustrate otherwise. 30. It is submitted that in the case of Barracuda Networks India Pvt. Ltd., the Tribunal upheld the inclusion of the aforesaid company on the ground that the Company cannot be exclu....
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....efore the company cannot be selected as a comparable. 33. Significant intangible assets: It was submitted that during the FYs 2013-14 to 2015-16, the company owned intangible assets representing around 7% of the total fixed assets held by the company. 34. Expenses in foreign currency: The ld. AR stated that the annual report of the company at Note 33 under the head earnings in foreign currency shows export of goods/services calculated on F.O.B basis, which indicate that the Company has product sales as well. In the absence of segmental details, the company cannot be selected as a comparable. 35. Abnormal increase in revenue and fluctuation in margin: It was submitted that the revenue increased from Rs. 35 crores (FY 2014-15) to Rs. 62 crores (FY 2015-16) in a period of 1 year (76%). Also, the company's profitability increased by 147%. Also, the company's margin fluctuates widely (34.98%- FY 2015-16, 20.78%- FY 2014-15, 41.95%-FY 2013-14) which demonstrates that there exists some factor having an impact on the margin, and therefore the company cannot be selected as a comparable. 36. Further, the website of the company shows that the company is engaged in diverse dissimilar servi....
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....s considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- 7. "Infobeans Technologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons: 1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year 3. Leading provider of consulting technology & next generation service. 4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore. 5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. 7.3 We have considered the rival s....
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....ted in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgement, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Inteq Software Pvt. Ltd 21. We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. Vs. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:- 46. "The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service ch....
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....of the Tribunal, we hold that this comparable to be excluded from the list of comparables as it is functionally not comparable with the assessee and directed accordingly. Since we allowed the ground taken by the assessee on the basis of functionality itself, other arguments of the assessee has been not considered. 39. Respectfully following the decision of the coordinate bench we direct AO/TPO to exclude R S Software (India) Ltd., Inteq Software Pvt. Ltd., and Infobeans Technologies Ltd. 40. Vide Ground No. 4.7, the Assessee is seeking the inclusion of Akshay Software Technologies Ltd. ('Akshay'), Evoke Technologies Private Limited ('Evoke') and Sagarsoft (India) Ltd ('Sagarsoft'). In this regard the ld AR presented the following arguments - Akshay Software Technologies Ltd. ('Akshay') 41. As regards Akshay, it is submitted that the TPO rejected this company on the ground that it is functionally different from the Assessee. The DRP upheld its rejection on the ground that the company did not feature in the search matrix of the TPO which is incorrect. 42. In this regard, it is submitted that a perusal of the functions of the company listed in its annual report shows that the c....
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.... the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No. 7 is treated as allowed for statistical purposes. Respectfully following the above view, we rem....