TaxTMI 
TaxTMI 
2022 (7) TMI 1391
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....1/2021. 2.1 The Ld.AR submitted that, due to Covid-19 pandemic, the consultant's office was closed, thereby causing the delay. It is submitted that, the last date of filing the appeal falls during the period covered by the provision of section 3(1)(b) of the Taxation and Other Laws (Relaxation and Amendment to certain provisions) Act, 2020, read with the order of Hon'ble Supreme Court dated 23/03/2020 was effective. 2.2 The Ld.DR, could not controvert the submissions and prayer by the Ld.AR. 2.3 We note that the last date of filing the present appeal falls during the Covid -19 Pandemic. During the relevant period, the limitation stood automatically extended by virtue of order passed by Hon'ble Supreme Court (supra). Therefore, the delay in filing the present appeal stands condoned. 2.4 The extension of limitation period due to COVID-19 second wave was withdrawn by Hon'ble Supreme Court vide order dated 23.03.2020, with effect from 15/03/2020 till further order. 2.5 Hon'ble Supreme Court vide order dated 23.03.2020 has excluded limitation period expiring on or after 15.03.2020. Therefore the actual delay in filing present appeal by assessee is 36 days. 2.6 No delay ca....
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....make a significant difference to their businesses. 124. I am of the view that while the TPO is justified in applying the turnover filter, he ought to apply the same objectively both for low and high turnover companies, as a one sided application of the turnover filter would render the analysis unreliable. In this context, I place reliance on the decision of the hon'ble jurisdictional Bench of ITAT in the case of Genisys Integrating Systems (India) CP.? Ltd. v. DCIT [20121 53 SOT 159 (Bang) where it has been held that when there is a limit for the lower end for identifying the comparables, there is no reason why there should not be an upper limit also, as size matters in business. 125. The hon'ble ITAT's observation in the above case is also true in the appellant's case. While a big company would be in a position to bargain the price, attract more customers and 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, companies which are loss making and the super profit making companies should Also be excluded. ....
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.... , 3.1 The Ld.AR submitted that, revenue preferred appeal before this Tribunal against the order of the Ld.CIT(A), wherein this comparable was not challenged for having excluded. The Ld.AR placed reliance on page 405 of the paper book wherein the relevant ground no. 6 raised by revenue challenging the exclusion of the comparables by the Ld.CIT(A) are alleged before this Tribunal in the 1st round. "1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to exclude the reimbursement of expenses incurred in foreign currency both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub-clause (4) of Explanation 2 below Subsection (8) of Section 10A and the total turnover has not been defined in this Section. 3. On the facts and in the circumstances of the case the learned CIT(A) erred in directing the AO to ....
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.... exclude companies which do not have the same or comparable financial cycle as the tested party. 10. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that foreign exchange loss/gain is operating in nature when, such loss/gain though linked to the operating activity is not derived from operating activity. 11. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that domestic transaction should be excluded from the TP adjustments, in view an aggregate approach is adopted by the TPO wherein the transactions are so inextricably intermixed that the segregation of revenue and appropriate costs are impossible and the approach of the assessee to allocate costs on a ration would provide only distorted results. 12. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 13. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above." 3.2 We note that this Tribunal in the 1st round....
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....d already excluded and the Ld.CIT(A) erred in considering this comparable again, which is not in accordance with the decision of this Tribunal in the first round passed on 06/04/2018. 3.7 Even otherwise, the Ld.AR submitted that this comparable is functionally not similar to that of the assessee, and further has employee cost, less than 25% of the turnover which is not a filter applied by the Ld.TPO. 3.8 Functions of Celestial Biolabs Ltd. for A.Y. 2008-09 as revealed in the annual report: It is submitted that even functionally this comparable is not comparable with the assessee. 3.9 The Ld.AR submitted that the information provided by this company u/s. 133(6) reveals that, it is providing customized services to Biopharma companies, medical centres by using the tools & package developed through in-house research and development efforts. The company has also specified that it is engaged in undertaking R&D activities for development of the tools. It is not akin to the services rendered by the assessee to its AE. 3.10 Referring to page 303, we observe that this company is also engaged in in-house development of products for which there is no separate segmental results. ....
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....port services 866776017 Payment towards software welfare, legal & professional and IT Support charges 81029605 6.3 Assessee computed its margin at 11.88% by using OP/OC as PLI and TNMM as the most appropriate method. The assessee used 12 comparables in respect of SWD segment, with an average margin of 15.24%. The assessee treated the foreign exchange loss or gain, is operating in nature following the view of this Tribunal in assessee's own case for preceding assessment years for computing the PLI. The Ld.TPO dissatisfied with the comparables considered by assessee conducted fresh search by applying various filters and it remained set of following 16 comparables with an average margin at 20.55% considering the preceding 3 assessment years. The details of the comparables are as under: 6.4 The Ld.TPO thus proposed adjustment of Rs. 11,99,81,486/- to be the shortfall. 6.5 On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order by incorporating the transfer pricing adjustment. 6.6 On receipt of the draft assessment order dated 10/12/2018, assessee filed objections before the DRP. 6.7 The DRP upheld the proposed adjustment by the Ld.T....
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....7 by order dated 23/07/2021, Coordinate Bench of this Tribunal had excluded Infobeans Technologies Ltd., L&T Infotech Ltd. and Persistent Systems Ltd. by observing as under: "6.1 At the outset, the Ld.AR submitted that, above comparables have been considered by coordinate bench of this Tribunal in case of NXP India Pvt.ltd. vs DCIT in ITA No. 692/B/2017 by order dated 27/04/2020. It has been submitted that NXP India Pvt.Ltd., was also characterised to be a captive software service provider to its AE. 6.2 The Ld.CIT.DR though objected, could not controvert the observations of this Tribunal in case of NXP India Pvt. Ltd., (supra). 7. We have perused submissions advanced by both sides in light of records placed before us. We note that the functional profile of this assessee and the assessee in the decision cited by the Ld.AR are same. Above comparables have been dealt with by this Tribunal as under: PERSISTENT SYSTEMS LIMITED 6. The assessee objected for the exclusion of this company by the lower authorities in the tally of comparables by arguing that it is engaged in OPD and there is a difference in OPD and IT services and that the assesse....
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....gment - a segment which is fast growing. OPD and outsourced IT services: the difference. How is OPD different from outsourced IT services is an oft asked question. In IT services, projects start with well-defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for-the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined. Instead, most product developers are given ship-dates for the product that are typically determined by external factors. Once the ship-dates are identified, the budgets for the product are frozen. In product development projects, all requirements can never be completely fulfilled in a particular version. As a result, most product companies plan multiple product versions for their product. Every team member must contribute not only to building features for the .current release but must also contribute enhancements and provide feedback for future releases of the product." 6.2 Persystent Systems Limited having revenue of 8103.64 Million from software services and other income of 323.76 million from income fro....
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.... bench of the Tribunal in the case of Cisco Systems Services B.V., India Branch (supra). for Assessment Year 2009-10 had held that this company be excluded from the final set of comparables on the ground that it is functionally dissimilar and different from a purely software service provider and at Para 20 of the order has held as under :- "20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though the said company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Intbrmation Systems Ltd. and Tata Elxsi Ltd. to be not proper comparables. Relevant paras of the order dt.I4.8.2014 is reproduced hereunder :- 26.2 Infosys Technologies Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns signi....
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....) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this. the learned is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Custont....
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....t put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies." 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra). we direct the Assessing Officer/1110 to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a s....
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....d software activity and low-end activity so long as it falls within the purview of software development services. It was observed that under TNMM, such differences are tolerable and there is no requirement that services for activities performed are identical. It is informed that the services are similar and fall within the same domain of software development. Accordingly, Mind Tree Ltd. was included in the list of comparables while determining the ALP of international transactions with A.Es. Against this assessee is in appeal before us. 5.1. We have heard the rival submissions and perused the materials available on record. This company Mind Tree Ltd. was considered as not comparable in the case of Yahoo Software Development India Pvt. Ltd. in IT(TP)A No.2657/Bang/2018 & 2365/Bang/2019 dated 28.2.2020 by Bangalore Bench of Tribunal, wherein it was held as under:- "41. The next company sought to be excluded is Mindtree Ltd. The submissions made before us were as follows:- "Functionally dissimilar, diversified operation, significant R&D spend, ownership of intangibles. - Also engaged in business of rendering IP-Led revenue, infrastructure management, package....
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....at this company has to be excluded from the list of comparables on the following reasons:- * Infosys is functionally dissimilar and ought to be rejected. * No segmental details are available in the annual report and hence the company should be rejected. * The company also derives income from licensing of software products. * Infosys is engaged in R&D activities. * Infosys has presence of brand. * Infosys has invested in IP. * Infosys fails upper turnover filter. 7.1 Ld. DRP in his report observed that after having considered the submissions, and on perusal of the annual report of the company, this company is engaged in providing IT technology services comprising Application developing and maintenance Independent validation, testing services, Business service management, consulting and systems integration services. All these activities fall within the gamut of 'software services', though performed in five different business verticals. As per the P&L account, the company has revenue from 'software services' of Rs.45,658/- crores and from software products of Rs.1642/-crores (refer page 61 of the annual rep....
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....n cite our industry expertise, comprehensive end-to-end solutions, ability to scale, superior quality and process execution, global delivery model, experienced management team, talented professionals, track record and competitive pricing as reasons for awarding contracts'. Thus, the growth in revenue is not on account of its brand or any exceptional event, and hence cannot be a reason for rejecting this company, which is otherwise found to be functionally comparable. 7.4The perusal of the details in the annual report by Ld. DRP showed that the company has incurred R & D expenditure to the tune of Rs.605 crores, which constitute meagre 1.3% of its total operating revenue, and which is much less than the generally acceptable tolerable limit of 3% of the total revenue. It was also noted that out of this, only Rs.15 crore was capital in nature and the remaining Rs.590 crore represented revenue expenditure, which go to show that the R&D initiative are substantially routine for immediate business purposes for developing expertise and improved process execution. It was also pleaded that the company has significant intangibles. However, on perusal of the information at page 86....
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.... 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 product based solutions. Extra-ordinary event of merger 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 the ld. 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." 7.9 In view o....
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....offshore clients comprising. Entire revenue received by this comparable ease under one single segment of sale of software. This company also owns software licenses. 14.3.3. In our considered opinion this comparable cannot be considered to be functioning in 100% risk mitigated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee. Accordingly we direct this comparable to be excluded from finalist."" 12.4 The Ld.DR has not brought any distinguishing facts or any contrary decision in order to take a different view. Therefore respectfully following the above view, we direct the Ld.AO/TPO to exclude the following comparables. a) Mindtree Ltd. b) Persistent Systems Ltd. c) Infobeans Technologies Ltd. d) Larsen & Tubro Infotech Ltd. e) Infosys Ltd. Accordingly ground no. 4.8 raised by assessee stands partly allowed. 13. In Ground no. 4.9, assessee is seeking inclusion of only two comparables viz., I2T2 India Ltd. and Infomile Technologies Ltd. 13.1 We note that these comparables have been remanded by Coordinate Bench of this Tribunal in c....
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....20. Following the said decision, we direct inclusion of this company in the list of comparable companies. As far as Infomile is concerned, the company was rejected for the reason that the RPT details were not available. The reasoning contained in the decision rendered in the case of LG Soft (I) Pvt. Ltd., (supra) will apply and therefore this company should be included as a comparable company as otherwise this company is comparable. We hold and direct accordingly." 13.2 The Ld.DR has not brought any contrary decision or facts in order to take a different view in respect of the above comparables. Respectfully following the same, we direct the Ld.TPO to include I2T2 India Ltd. Infomile Technologies Ltd. Accordingly this ground raised by assessee stands partly allowed. 14. Except for the above comparables, no other comparables have been argued by the Ld.AR. It is has been submitted that assessee same has been not argued at the instruction of the assessee. 15. Ground nos. 4.11 & 4.13 assessee is seeking appropriate Working Capital Adjustment in respect of the comparables. We direct the Ld.AO to consider the claim of assessee by granting the Working Capital Adjustment on act....
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.... or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. Document 2 The grounds mentioned herein by the Appellant are without prejudice to one another. 1. On the facts and in circumstances of the case and in law, the order of the Joint Commissioner of Income-Tax Special Range-6, Bengaluru (learned AO") to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed. 2. On the facts and in circumstances of the case and in law, the Dispute Resolution Panel (learned DRP') erred in not appreciating that the order of the learned Assistant Commissioner of Income-tax (Transfer Pricing)-1(3)(1), Bangalore (learned TPO') passed under Section 92CA of the Income-tax Act, 1961 (the Act') is contrary to law and thus liable to be quashed. 3. That on facts and in the circumstances of the case, the learned DRP/AO/ TPO erred in making an upward adjustment of INR 95,500,417 to the transfer price of the Appellant's international transactions of INR in respect of software development se....
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....ted; k) Infosys Limited; and 1) Cybage Software Private Limited. 4.9. Excluding the following companies even though they are functionally comparable to the Appellant and passes all the filters applied by the learned TPO in its order: a) Akshay Software Technologies Limited; b) Celstream Technologies Limited; c) 12T2 India Limited; and d) Infomile Technologies Limited. 4.10.Not considering certain expenses such as provision for doubtful debts/bad debts/expenses and liabilities written back, as operating in nature on the premise that these are not the routine operating costs in determining the operating mark-up of the comparable companies. 4.11. Not providing an adjustment for the differences in working capital of the Appellant and the comparable companies. 4.12. Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 4.13.Computing incorrect operating mark-up of certain comparable companies: a) Kals Information Systems Limited; b) E-Zest Solutions Limited; c) CG-VAK Software & Exports Limited; and d) Tata Elxsi Limited (Seg). Document 4 That the....