2023 (4) TMI 224
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....ommissioner of Income-tax, Circle 6(1)(2)/ NFAC, erred in making a reference to the Ld. Deputy Commissioner of Income-tax, Transfer Pricing - 2(2)(1) (TP0') as the former has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The Hon'ble Dispute Resolution Panel ('DRP') erred in upholding the actions of the Ld. AO/ NFAC. 1.3. The Ld. Deputy Commissioner of Income-tax, Circle 6(1)(1) (the AO)/ NFAC/ Ld. TPO, erred in not providing an opportunity of being heard to the Appellant before rejection of the arm's length price computed in the Appellant's Transfer Pricing Study. The Hon'ble Dispute Resolution Panel ('DRP') erred in upholding the actions of the Ld. AO/ NFAC/ TPO. 1.4. The Ld. TPO/ NFAC erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in its international transactions, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. The Hon'ble DRP erred in upholding the actions of the Ld. NFAC/ TPO. 1.5. The Ld. TPO/ NFAC erred in not taking due ....
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....es, as Rule 10B(5) only provides for updating of current year data and not for conducting a fresh search identifying new comparables. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. 4.3. The Ld. TPO/ NFAC erred in conducting a fresh comparability/ benchmarking analysis using "non-contemporaneous" data and substituting the Appellant's analysis with the fresh benchmarking analysis on mere conjectures and surmises. The Hon'ble DRP erred in upholding the actions of the NFAC/ Ld. TPO. 5. Application of arbitrary filters to arrive at a fresh set of companies as comparables The Ld. TPO/NFAC in applying the following arbitrary filters to arrive at companies as comparables to the Appellant: 5.1 Application of software development services income to sales more than 75% as against qualitative filter of Companies engaged in software/ IT services applied by the Appellant. 5.2 Application of export services to sales more than 75% as against filter of insignificant foreign exchange applied by the Appellant. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. 6. Erroneous rejection of comparables selected in the Appellant's T....
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....rable 7.6. The Ld. TPO/ NFAC erred in selecting the following companies as functionally comparable to the Appellant. 7.6.1.Great Software Laboratory Private Limited 7.6.2.Mindtree Limited 7.6.3.R Systems International Limited 7.6.4.Persistent System Limited 7.6.5.1nfoBeans Technologies Limited 7.6.6.Aptus Software Labs Private Limited 7.6.7.Nihilent Limited 7.6.8.OFS Technologies Limited -..----- 7.6.9.Cygnet Infotech Private Limited 7.6.10. Infosys Limited 7.6.11. ThreeSixty Logica Testing Services Private Limited 7.6.12. Cybage Software Private Limited 7.6.13. Consilient Technologies Private Limited The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Extra-ordinary events 7.7. The Ld. TPO/ NFAC in selecting Persistent Systems Limited, Nihilent Limited and OFS Technolo ies Limited as comparables even though there were certain extra-ordinary events d ring the relevant year. The Hon'ble DRP erred in upholding the actions of the Ld. TPO/ NFAC. Brand profits 7.8. The Ld. TPO/ NFAC erred in selecting Mindtree Limited and Infosys Limited as a comparable even though they earn brand profits unlike the Appell....
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....anting Foreign Tax Credit. The Hon'ble DRP has erred in not adjudicating this ground of objection raised by the Appellant before it. 12. Erroneous short grant of interest under section 244A of the Act. The Ld. NFAC has erred in short grant of interest under section 244A of the Act. 13. Non-issuance of refund The Ld. NFAC/ AO, after having determined an income-tax refund due to the Appellant, has erred in not issuing the refund due to the Appellant. 14. Initiation of penalty proceedings under section 274 read with section 270A of the Act On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 274 read with section 270A of the Act. 15. Relief The Appellant prays that directions be given to grant all such relief arising from the preceding grounds as also all reliefs consequential thereto." 2. At the time of hearing, the assessee argued only ground No.7.1 and exclusion of 3 comparables in ground No.7.6 and ground No.7.9 only. Other grounds are not argued and prayed that the grounds which are not argued keep it as open. Accordingly, we adjudicate only grounds, which are argued before....
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....and in the case of Core Objects India Pvt Ltd. vs. ITO, in IT (TP)A No. 1229 (Hang)/2011, upheld exclusion of the companies by application of the above filter. A similar view is taken by the Hon'ble Bombay High Court, in the case of CIT-11 Pune v/s PTC Software (India) Pvt. Ltd., in IT appeal No 732/2014. Accordingly, we do not find any infirmity in application of the above filter and rejection of the above company, the same is accordingly upheld. Ground rejected." 3.2 Further, it was observed by the Ld. DRP in page 16 with regard to R. Systems International Ld. as follows:- R. Systems International Limited (in ground No.7.1): 3.3 The Ld. DRP in his order observed that this company failed the different financial year filter adopted by the TPO. The assessee has not disputed this fact before the Ld. DRP. After detailed discussion with the assessee, the Ld. DRP upheld the applicability of the different financial yar filter. Accordingly, Ld DRP did not find merit in the objection and hence he rejected the same. 3.4 According to the Ld. A.R., the above findings of the Ld. DRP is contrary to its earlier findings in para 3.1.7 reproduced above and prayed that R. Systems Internat....
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....hings, Product engineering and professional services to ISVs and enterprises, IP products. Further segmental data for Persistent is not available. Therefore, he prayed that this company Persistent Systems Ltd. should be excluded as comparable. (Page 55 of Annual Report - FY 2016-17) In this regard, the assessee relied on the following rulings: - SAP Labs India Pvt Ltd [TS-506-ITAT-2022(Bang)-TP]/ IT(TP)A No.606/Bang/2021 and IT(TP)A No.2510/Bang/2019 dated 21.7.2022 - SanDisk India Device Design Centre Pvt. Ltd., vs. JCIT IT(TP)A No. 288/Bang/2021 dated 30.06.2022. 8. The Ld. D.R. submitted that on perusal of the annual report, by the Ld. DRP, he 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 265 of the annual report, it has reported income from software services of Rs.17201.52million and software licenses of Rs.128.12 million aggregating to Rs.17329.64 million. Thus, the income from software licenses constitutes a meagre 0.73% of its operating revenue. 8.1 The Ld. D.R. further submitted that the company during the previous ye....
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....to the assessee. 8.3 In this regard it is the ld DRP noted that as per the consolidated annual report the revenue from software licence was Rs.688.99million for the entire group whereas, such revenue in the case of M/s Persistent Systems Ltd was only Rs.128.12 million (Ref. page 201 and page 265 of the annual report). It was also seen by the Ld. DRP that in the P&L account of the consolidated financial statement expenses were debited towards Royalty expenses of Rs.127.48 million (Referred page 202) and there is no such debit in the stand-alone P&L account of the company M/s. Persistent Systems Limited. 8.4 Further, the ld. DR submitted that 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 page115 as under: - (Intangible assets of Group 2012-13) 8.5 The ld DR stated that all these clearly show that the IP related and product revenue pertain to ether....
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....mparability or profitability as required in clause (i) of sub-rule (3) of Rule 10B of the Act. 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 it was seen that they are not in the nature of inbuilt IPR generating revenue for the company. Hence, the intangible assets as such have not affected the profitability. Taking into account all these aspects, the ld DRP did not find any material difference so as to affect comparability. Hence, these pleas were rejected by the ld DRP. 8.7 A plea was raised before the ld DRP that this company fails the RPT filter of 25% and hence has to be excluded. On verification of the information in the annual report by the ld DRP, (pages 277- 279 of the annual report), he noted that this company does not fail the RPT filter adopted by the TPO. He further noted that the assessee has computed by aggregating the transactions, on the revenue and expense side, without taking corresponding parity in the denominator. Such a computation is totally skewed. The RPT if the revenue is considered on both numerator and denominator the percentage comes to 22....
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....these pleas were rejected by the ld DRP. 8.11 The ld DR further stated that with regard to the peculiar circumstances, at the outset, the ld DRP noted that there was no acquisition by this company, which is being compared. As per the information, both the acquisitions of PRM Cloud Solutions and Genwi are by its subsidiaries. Such acquisition by the subsidiary will not have any direct impact on the revenue or profit margins of this company. Besides, the assessee also did not point to any information in the annual report to indicate that the acquisition by the subsidiary had impacted the profit margin or revenue of the company being compared. These acquisitions would not make it functionally different. Hence, these pleas were rejected by the ld DRP. 9. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable fails the functionality test and this company Persistent Systems Ltd. is not functionally similar to assessee's case as held by the coordinate bench of the Tribunal in the case of M/s. SAP Labs India Pvt. Ltd. in IT(TP)A No.606/Bang/2021 dated 21.7.2022,wherein held as under: 12.1 In assessee's own case for A.Y. 2012-1....
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....e is less, as has been noted by the TPO, and also there is no precise information about the contribution made by such small sale of software products to the total profits of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, it was directed to exclude Persystent Systems Limited from the list of comparables. In the present case also, it is noticed that Persystent Systems Limited is engaged in software products development. There is a difference between the outsourced software product development and IT services, which is evident from page nos. 973 and 974 of the paper book, as under:- "Outsourced Software Product Development (OPD) is different from IT services. Unlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment - a segment which is fa....
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....for assessment year 2012-2013 - order dated 31.10.2018 has taken the same view that it cannot be a comparable with that of the assessee. Being so, we direct the TPO to exclude the same from the list of comparables. INFOSYS LIMITED 8. The argument of the learned AR is that Infosys Limited is functionally different from the assessee. It owns intangible and undertakes research and development. The learned AR also submitted that it has high brand value and turnover. On the contrary, the learned DR submitted that the nature of services remains the same irrespective of whether it is engaged in providing onsite / offsite services. 8.1 We have heard the rival submissions and perused the material on record. Similar issue came up for consideration before the Tribunal in the case of NXP Semi Conductors India Put. Ltd. u. DCIT in IT(TP)A No.1634/Bang/2014 - order dated 27.07.2015, wherein it was held as under:- "10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B. V., India Branch (supra).....
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....ble 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 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot he compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/201() at pars i2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) th....
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....is 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 Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy EBusiness Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument 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 t....
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....hat this company is engaged in sale of product and also engaged in outsourcing IT services in banking and financial services and insurance sector and also as R&D operations and patents and hence not functionally comparable. However, Ld. Dispute Resolution Panel ("DRP") observed that this company is only engaged in software development and related services as seen from its financials. Therefore, the plea of the assessee that company performs different and diverse activities and hence functionally different was rejected by Ld. DRP. Further, it was observed by Ld. DRP that provision of data analytic services is not functionally different from software development activity. Data analytic services also used only in certain software and tools, writes codes task. Like in other software application, these tools also facilitate and enable business of enterprises for enough management and decisions. Therefore, the Ld. DRP observed that there cannot be any distinction between high end software activity and lowend 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 ser....
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....te 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 the admitted factual position regarding presence of onsite revenue over and above the threshold limit of 25% 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." 5.2. In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Directed accordingly." Respectfully following the same, we direct the Ld.AO to exclude this comparable. "III. Infosys Ltd.:- 7.The Ld. A.R. submitted that 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 lic....
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....leas raised were rejected by the Ld. DRP. 7.3 It was pleaded by assessee that this company has a huge brand which has contributed to its growth in revenue and hence not comparable. A perusal of the annual report show that the growth in revenue was on account of various business initiatives taken to accelerate growth such as - internal re-organization, implementing cost effectiveness through reducing cost of operation, improving utilization percentage of employee, restricting the organization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, reducing attrition rate, increasing the offshore mix, improving delivery expertise etc., As per information in page 14 of annual report, 97.8% ' of revenues was from repeat business. At page 67 of the annual report, it is discussed, "-Clients often 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 exceptiona....
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.... of the above, Ld. DRP upheld this company as comparable to the assessee. 7.7 Against this assessee is in appeal before us. 7.8 We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. This comparable is considered as no 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 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 product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit & loss account n....
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....mitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133 (6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to learnt AO/TPO for verification. 14.3.2. We have perused submissions advanced by both sides in light of records placed before us. It is observed that the annual report of this company categorises the diversify services provided by this company under software development segment. We also note that this company is basically into application development for web and mobile and provides customised services to its 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 fullfledged 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.D....
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....and related services. Further at page 82 & 83 of the consolidated annual report, it is stated that "The group'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. Accordingly, software services comprise the primary basis of segmental information as set out in these financial statements, which therefore reflect the information required by AS 17 - Segment". Thus, the ld DRP opined that it is functionally comparable to the assessee which renders software development services and other allied services. Thus, the contentions of the assessee that it is engaged in diverse 'activities and not functionally comparable is without merit. 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. The ld DRP also noted at page 73 of the annual report, the independent auditor has certified, 'the company does not have any purchase of inventories or sales of goods si....
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.... routine business activity. The company does not own intangibles except for computer software licenses. Therefore, the ld DRP was of the view that this company is comparable to the assessee company. The ld DRP also noted that the assessee has failed to establish that such differences, if any, on account of R & D / intangibles, 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 the ld DRP. In view of the above, the ld DRP upheld the selection of this comparable. 12. We have heard the rival submissions and perused the materials available on record. This comparable fails the functionality test and this company Nihilent Ltd. is not functionally similar to assessee's case as held by the coordinate bench of the Tribunal in the case of M/s. SanDisk India Device Design Centre Pvt. Ltd. in IT(TP)A No.288/Bang/2021 dat....
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....fobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee." 17.10 Perusal of the annual report, filed before us in respect of the above two comparables, we note that the segmental financials are not available in respect of Nihilent and Infobeans and the RPT in respect of Aspire Systems India Pvt. Ltd. is more than 25% being the threshold limit considere....
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....t filter, the company passes the employment cost filter. On perusal of the profit and loss account of the company an amount of Rs.3,81,28,529/- is debited towards employment cost as against total sales of Rs.9,37,54,000/- which comes to 40.66%. The assessee argued that it fails the employment cost filter for the F.Y. 2014-15. The assessee also argued before the ld DRP that if the OFS included in the final list of comparable the margin pertaining to only F.Y. 2015-16 and 2016-17 ought to be considered. 14.1 The ld D.R stated that at the outset, the company is functionally comparable to the assessee and also passes the employment cost filter. Therefore, the company has to be included in the list of comparables and the Panel upholds the inclusion of this comparable. However, considering the plea of the assessee that the company fails the employment cost filter for the F.Y. 2014-15, the ld DRP directed the TPO to verify the plea of the assessee. If it fails the employment cost filter for the above year, the TPO was directed to consider the margin only for the F.Ys. 2015-16 and 2016-17. 14.2 The ld. DR further stated that the assessee argued before the ld DRP that the company fails ex....
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....gies Ltd. 16.2 As we have already decided Infosys Ltd. to be functionally not comparable with assessee and has directed to eliminate the same, we do not find it necessary to consider this comparable on the criteria of abnormally high margin. Accordingly, we are only considering following 3 comparables for having high margins: 1) Threesixty Logic Testing Services Pvt. Ltd. 2) Cybage Software Ltd. 3) Consilient Technologies Ltd. Threesixty Logic Testing Services Pvt. Ltd. 17. The Ld. A.R. submitted that this company earns abnormally high margins and the margin as per TPO's order is 41.94%. The company is engaged in the business of providing software testing and QA services. The annual report for FY 2016-17 was not available in the public domain. Therefore, the ld. AR relied on the annual report for FY 2017-18, FY 2015-16 and FY 2014-15. 18. The Ld. D.R. relied on the observations of Ld. TPO/DRP. Cybage Software Pvt. Ltd. 19. The Ld. A.R. submitted that this company earns abnormally high margins and the margin as per TPO's order is 57.82%. This company is functionally not comparable as this company is engaged in IT consulting and support services. Annual report does ....