TaxTMI 
TaxTMI 
2022 (12) TMI 1412
X X X X Extracts X X X X
X X X X Extracts X X X X
....TPO for determining the arms length price of the international transaction. 2.3 On reference being made, the Ld.TPO called for economic details of the international transactions which are as under: Particulars Amount in Rs. Purchase of fixed assets Rs. 1,42,71,849/- Software development services Rs. 429,81,72,137/- Reimbursement of expenses Reimbursement of travel expenses Rs. 3,06,70,299/- Reimbursement of expat salary related expenses Rs. 5,24,18,236/- Reimbursement of expenses for employee stock purchase plan Rs. 1,80,66,453/- Reimbursement of software expenses Rs. 2,08,70,149/- Reimbursement of training expenses Rs. 1,15,98,967/- Reimbursement of employees' contribution to employee stock purchase plan Rs. 4,97,22,765/- Reimbursement of repairs and maintenance Rs. 12,41,012/- Recovery of expenses Recovery of expenses at cost Rs. 2,12,68,240/- Recovery of travel expenses Rs. 2,83,70,976/- Recovery of CSR expenses Rs. 37,63,400/- Reimbursement of training expenses Rs. 93,483/- Recovery of withholding taxes of employees on restricted stocks unit and ESOP granted and remitted to local tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
....us ought to be excluded from both the Assessee's operating revenue and cost base while determining its effective NCP margin for provision of the software development services. 2.7 However, the Ld.TPO was of the view that, the subcontracting charges formed a part of the operating cost of the assessee for provision of SWD services and thus cannot be excluded from either its cost base or operating revenue as it would not give a correct picture of the profit margin earned by it. The Ld.TPO thus computed assessee's margin at 10.02% as under: Operating Income Rs.429,81,72,137/- Operating Cost Rs. 390,68,94,345/- Operating Profit (Op. Income - Op. Cost) Rs. 39,12,77,792/- Operating/Net mark-up (OP/TC) 10.02% 2.8 Dissatisfied with the TP analysis by assessee, the Ld.TPO applied the following filters: Step Description 1. Companies whose data is not available for FY 2014-15 - excluded. 2. Companies having different financial year ending (i.e., not March 31, 2014) or data of the company does not fall within 12 month period i.e., 01-04-2013 to 31-03-2014 - rejected. 3. Companies whose software development service income < Rs. 1 Cr- excluded....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the inclusion of following companies on the basis that they are functionally comparable: (a) Tata Elxsi Ltd. (b) Rheal Software Private Limited (c) Mindtree Limited (d) R S Software (India) Limited (e) Larsen & Toubro Infotech Limited (f) Infobeans Technologies Limited (g) Persistent Systems Limited (h) Nihilent Technologies Limited (i) Aspire Systems (India) Pvt. Ltd. (j) Inteq Software Private Limited (k) Infosys Ltd. (l) Cybage Software Private Limited 2.14. In respect of Thirdware Solutions Ltd., and CG-VAK Software exports Ltd,, the DRP accepted contention of the Assessee and directed their exclusion from the final list of comparables. The DRP also accepted contention of the Assessee and directed inclusion of the software service segment of Sasken Technologies Ltd. However in respect of Akshay Software Technologies Ltd., Evoke Technologies Ltd., Infomile Technologies Ltd., and I2T2 India Ltd., the DRP rejected the contentions of the Assessee and upheld their exclusion. 2.15. The DRP rejected the contentions of the Assessee that the subcontracting charges incurred....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nds is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts. 3.1.4 Considering the submissions and respectfully following the decisions of Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly applications for admission of additional grounds stands allowed. We thus restrict adjudication of issues in respect of the grounds argued by the Ld.AR before this Tribunal in Ground no.4.1, 5.11,&5.11(a), Ground Nos. 5.10 and additional ground no. 5.13(a) and Ground no.10 to12. 4. Ground No. 4.1: is in respect of Exclusion of subcontracting charges: 4.1 It is submitted by the Ld.AR that the determination of net cost margin excluding the sub-contract charges is decided against the assessee by coordinate bench of this Tribunal in assessee's own case for the AY 2011-12 in IT(TP)A No. 17/Bang/2016 by order dated 21-....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ftware development services cannot be treated in this fashion as claimed by the assessee. Hence we do not find any merit in the contention raised by the assessee on this issue. 8. As regards the alternative plea raised by the ld. AR that the comparables should also have similar activity, we find that the TPO has applied a filter of cost of employee which subsumes the outsourcing activity of both assessee as well as the comparables. Accordingly, the issue is decided against the assessee." 19. Respectfully following the above decision of the coordinate bench of the Tribunal, we see no reason to interfere with the decision of the lower authorities and hence these grounds of the assessee are dismissed. Respectfully following the above decision of the coordinate bench of the Tribunal, we see no reason to interfere with the decision of the lower authorities and hence these grounds of the assessee are dismissed. Accordingly this ground raised by the assessee stands dismissed. 5. Ground No. 5.11 and 5.11(a) in the appeal: 5.1 In this ground, the assessee is seeking exclusion of the following list of comparables: * Tata Elxsi Ltd. * Rheal Soft....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... same to be comparable to the Assessee. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before us. A.4 We note that this comparable has been excluded in assessee's own case by observing as under: (6) Tata Elxsi Ltd. 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Tech....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, custom application development. The Ld.AR submitted that no segmental information is available in respect of revenue earned during the year. It is further submitted that this company recorded fluctuating margins and the same is reproduced below: Particulars AY 2013-14 AY 2014-15 % change Operating revenue 8,80,89,662 6,78,67,848 -26% Operating expenditure 6,44,67,606 6,31,24,010 Operating profit 2,36,22,056 14,73,838 OP/TC 36.64% 2.76% -92% B.2 Further, it is submitted that the financial details of the company are not available for the assessment year 2012-13. Detailed submissions are placed at pages 774-782 and 10281034. In view of the above, it is submitted that Rheal ought to be excluded from the final list of comparables. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submissions advanced by both sides in the light of records placed before us. B.3 The Ld.AR vehemently submitted that the comparability analysis could be conducted only if the details are available on public domain. It is submitted that the Ld.TPO in the instant....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s considering a situation wherein Sandisk India was a captive service provider like that of assessee and had excluded this comparable. Similar view was taken in case of HP PPS Services India Pvt.Ltd(supra) by this Tribunal. We refer to the observation in case of HP PPS Services India Pvt.Ltd(supra) as under: "4. In respect of Infobeans Technologies Ltd., the Ld.AR further submitted that this company is engaged in providing custom developed services to offshore clients. It was submitted that Infobeans is engaged in providing software engineering services primarily in Custom application development ('CAD'), Content Management Systems ('CMS'), Enterprise Mobility ('EM'), Big data analytics ('BDA'), and has incurred expenses towards the software licenses and subscription fees worth INR 46.44 lakhs. The Ld.AR referred to Pg 47 of the paper book in support. 5. The Ld.AR also submitted that the segmental information is not available for the company and the company is into diversified activities such as providing business IT services (comprising application development and maintenance, Big Data, UX & UI, Automation engineering services, including product engineering and l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....advanced by both sides in the light of records placed before us. 17.7 He placed reliance on the decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT (supra) wherein this Tribunal following its decision in case of LSI India research development (P.) Ltd. vs. DCIT reported in [2021] 124 taxmann.com 83, excluded Persistent Systems Ltd., L&T Infotech Ltd., Thirdware Solutions and Infosys Ltd. by observing as under: "3.2 This Tribunal in LSI India research development (P.) Ltd. v. DCIT (supra) observed in respect of persistent systems, L & T Infotech, Thirdware Solutions, Infosys Ltd. as under: 16. As far as the challenge by the assessee on exclusion of aforesaid 5 companies in ground No. 2(f), the ld. counsel for the assessee has brought to our notice a decision of Bangalore Bench of ITAT for the very same Assessment Year 2014-15 in the case of LG Soft India (P.) Ltd. v. DCIT [IT(TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019]. In this order rendered in a case of assessee rendering SWD services such as the assessee, the Tribunal excluded 3 out of 5 companies referred to in the earlier paragraph and remanded 1 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... & Toubro Infotech Ltd., is concerned, the Tribunal in the very same case of LG Soft (P.) Ltd. (supra) in another order dated 27-9-2019 in MP No. 95/Bang/2019 held that exclusion of Larsen & Toubro Infotech Ltd., was omitted to be adjudicated in the original order dated 28-5-2019 passed by the Tribunal referred in the earlier paragraph and held that Larsen & Toubro Infotech Ltd., is also not a comparable company because there were extraordinary events that occurred in the relevant previous year and that it possessed brand and intangibles and there was no segmental information of sub-contracting expenses". 3.3 There is nothing on record brought by the Ld.CIT.DR in order to establish that these are comparable with assessee that is a captive service provider which functions at the strict supervision and instructions by the AE's. Further we note that turnover criteria has to be applied with an upper limit which is not been considered by the Ld. TPO. The TPO has applied less than 1 crore turnover limit to eliminate the comparables however it failed to apply upper limit considering the functions performed assets owned and risk assumed by assessee under this segment for the year ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded." "Infobeans Technologies Ltd. (Infobeans) 49. The assessee sought exclusion of Inf....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e company cannot be selected as a comparable. Apart from the functional dissimilarity that has been observed regarding this company by Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT in ITA No. 1379/M/2021 by order dated 25.02.2022 for A.Y. 2016-17 which is followed by Coordinate Bench of this Tribunal in case of M/s. SanDisk India Device Design Centre Pvt. Ltd. vs. JCIT (supra). We also note that this company is not a good comparable for following reasons: (i) Significant Intangible assets: During the FYs 2013-2015 to 2015-2016, the company owned intangible assets representing around 7% of the total fixed assets held by the company. (ii) Export of goods: The annual report of the company at Note 33 under the head earnings in foreign currency shows export of goods calculated on F.O.B. basis. In the absence of segmental details, the company cannot be selected as a comparable. (iii) Expenses in foreign currency: It also incurred significant expenditure in foreign currency, in the nature of onsite activities representing around 1.5% of the total sales. (iv) Abnormal increase in revenue and fluctuati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r AY 2014-15)- at para 15 (on account of functional dissimilarity as the company was engaged in providing custom development services to offshore customers and was engaged in software engineering services in different fields and segmental details were unavailable) (vii) Kony IT Services Private Limited v. DCIT (Order dated 20.11.2019 passed by the Hyderabad Bench of this Hon'ble Tribunal in ITA No. 2304/Hyd/2018 for AY 201415)- at para (iii) on page 15 (on account of functional dissimilarity as it has earning from export of goods and has deposited MODVAT and sales tax). (viii) Avaya India Pvt. Ltd. v. ACIT (Order dated 24.09.2019 passed by the Delhi Bench of this Hon'ble Tribunal in ITA No. 7290/Del/2018 for the A Y 2014-15)- at para 7.4 (on account of functional dissimilarity as the company has earnings from export of goods). (ix) Pubmatic India Pvt. Ltd. v. ACIT (Order dated 09.03.2018 passed by the Pune Bench of this Hon'ble Tribunal in ITA No. 655/Pun/2017 for the AY 2012-13)- at para 18 (on account of functional dissimilarity as the company has earnings from export of goods). 10. In the case law relied on by the Ld.DR, namely, BO....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpany was directed to be excluded as being functionally dissimilar. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. E. Aspire Systems (India) Pvt. Ltd.: E.1 It is submitted that the company is engaged in providing outsourced technology services and is focused in helping software companies create innovative products through onsite and offshore model. The company is also engaged in providing next generation integration platform services to its client. E.2 Further, no segmental details are available. The company has entered into a scheme of arrangement for demerger of windmill segment during the year. Thus, the peculiar economic circumstances would impact the financial statements. Also, the company owns significant intangibles. The company has also incurred significant onsite expenses constituting 16% of the total revenue. E.3 The Ld.AR also relied on the coordinate bench of this Tribunal in case of ARM Embedded Technologies Pvt. Ltd. v. DCIT by order dated 30.08.2022 passed in IT(TP)A No. 235/Bang/2021 for assessment year 2016-17, wherein the company was directed to be excluded as being functionally dissimilar. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Coordinate bench of this Tribunal in case of ARM Embedded Technologies (P.) Ltd. reported in (2021) 129 taxmann.com 263 Coordinate bench of this Tribunal in case of Yahoo Software Development India Pvt. Ltd. reported in TS-191-ITAT-2020(Bang) On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this company earns its revenue from power generation and it has nothing to do with the rendering of software development service. In fact, we note that this company is a full fledged entrepreneur in the business of power generation and therefore is not comparable functionally with a captive software service provider like assessee. Nothing is been placed by the Revenue contrary to the above observation. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Aspire System India Pvt. Ltd. from the final list. 23. Nihilent Technologies Limited It is submitted that, this company is functionally dissimilar to the assessee and therefore ought to be rejected from the final list of comparables.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No. A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable visà-vis assessee, who is a low risk entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A 412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book show....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s segments. We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held tobe functionally comparable with that of assessee which is a captive service provider that caters only to its AE." F.4 No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Respectfully following the above view we direct exclusion of Aspire Systems(India) Ltd., Nihilent Technologies Ltd., and Cybage Software Ltd, from the final list. G. Inteq Software Private Ltd: G.1 It is submitted that the company provides application services, software testing, data warehousing, EI & EDI, BPO and staffing services. The company is also involved in end to end product development with primary focus in healthcare industry and there is no segmental information. G.2 The Ld.AR also relied on the decision of * Coordinate Bench of this Tribunal in case of ARM Embedded Technologies Pvt. Ltd. v. DCIT by order dated 30.08.2022 pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ring and SAP services. For which segmental information are not available. H.2 She submitted that this company is also engaged in business of rendering IP-Led revenue, infrastructure management, package implementation, consultancy services, etc. constituting 45% of overall revenue during FY 2014-15. It was brought to our notice that this company, has significant research & development activity, due to which this company was able to deliver IP based video surveillance management, recording and analytic products and solutions. The Ld.AR also submitted that this company filed four patents in India and US so far in the area of Video analysis. Also, the company came to be excluded from the final list of comparables in the assessee's own case for the assessment year 2014-15. The Ld.AR relied on following decisions: * Decision of coordinate bench of this Tribunal in the cases of Yahoo Software Development India Pvt. Ltd. v. JCIT by order dated 28.02.2020 passed in IT(TP)A No. 2365/Bang/2019 On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch of this Tribunal in the cases of Yahoo Software Development India Pvt. Ltd. v. JCIT by order dated 28.02.2020 passed in IT(TP)A No. 2365/Bang/2019 and * decision of coordinate bench of this Tribunal in the cases of EIT Services India Pvt. Ltd. v. ACIT by order dated 03.09.2021 passed in IT(TP)A No. 2498/Bang/2019; wherein, this company was directed to be excluded from the final list of comparables. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. J. R S Software (India) Ltd: J.1 It is submitted that the company provides end to end solutions like custom application development, quality assurance and testing, application maintenance and support and strategic consulting. No segmental details are available. It is submitted that the company is also engaged in platform services and is rendering data analytics services which is different from routine SWD services rendered by the Assessee. J.2 It is submitted that company is also engaged in licensing activity. The company also does research and development activities and has incurred significant expenses in relation to onsite services of approximately 52% of its ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in assessee's own case for AY 2014-15 reported in (2022) 141 taxmann.com 142; * decision of coordinate bench of this Tribunal in the cases of Yahoo Software Development India Pvt. Ltd. v. JCIT by order dated 28.02.2020 passed in IT(TP)A No. 2365/Bang/2019 and * decision of coordinate bench of this Tribunal in the cases of EIT Services India Pvt. Ltd. v. ACIT by order dated 03.09.2021 passed in IT(TP)A No. 2498/Bang/2019; wherein the company was directed to be excluded from the final list of comparables. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. L. Infosys Ltd.: L.1 At the outset it is submitted that this company is functionally dissimilar to the Assessee on various counts and therefore it ought to be rejected from the final list of comparables. It is submitted that the TPO and DRP erred in not appreciating the contentions of the Assessee and consequently erred in upholding the inclusion of the company in the final list of comparables. L.2 It is submitted that Infosys renders services like infrastructure management, business process management, and other high end services like analytics and digital tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... case for the assessment year 2014-15. The Ld.AR relied on following decisions: * decision of coordinate bench of this Tribunal in assessee's own case for AY 2014-15 reported in (2022) 141 taxmann.com 142; * decision of coordinate bench of this Tribunal in the cases of Yahoo Software Development India Pvt. Ltd. v. JCIT by order dated 28.02.2020 passed in IT(TP)A No. 2365/Bang/2019 and * decision of coordinate bench of this Tribunal in the cases of EIT Services India Pvt. Ltd. v. ACIT by order dated 03.09.2021 passed in IT(TP)A No. 2498/Bang/2019; Wherein the company was directed to be excluded from the final list of comparables. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before us. L.4 We note that the above comparables have been considered by coordinate bench of this Tribunal in assessee's own case for AY 2014-15 by observing as under: 25. We have heard the rival submissions. The ld. AR did not press for the exclusion of R S Software (India) Ltd in the course of hearing. Accordingly this issue is dismiss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xpenditure for this account. For the concerned financial year the company has incurred research and development expenses of Rs. 873 crores. The company for the relevant financial year has earned abnormally high profit with margin of 36.13%, which makes it incomparable to the Assessee. The company has also incurred significant selling and marketing expenses. Further, during the year under consideration, the company merged with its wholly owned subsidiary Infosys Consulting India Ltd., for which no reasonably accurate adjustment can be made to eliminate the material effects thereof on the margin of the company. In any event, the turnover of the company is much higher when compared to the assessee, and hence it ought to be excluded from the list of comparables. (b) Regarding Larsen & Toubro Infotech Ltd., it is submitted that it is functionally incomparable to the Assessee on various counts. The company is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. Also, in addition to the above, the company owns proprietary software products like Unitrax (r), Accurusi and Scriptor TM....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... currency amounting to 13.14% of its total revenue which suggests that is engaged in provision of onsite services. The company also made significant investment in intellectual property led solutions and also had a dedicated team for research and IP developments. It also owns several IP solutions, and during the year under consideration it acquired four products. Also, Persistent Systems, Inc. which is a subsidiary of the company acquired CloudSquads, Inc during the year under consideration. The acquisition constitutes peculiar economic circumstances for which no adjustment can be made to this company's mark-up to eliminate the material effects thereof. (d) *********** (e) The exclusion of comparability of above companies were considered by the Tribunal in assessee's own case for AYs 201011 in Dy. CIT v. Applied Motors India (P.) Ltd. [2016] 73 taxmann.com 160 (Bang. - Trib.) by order dated 21-9-2016 (supra) and were directed to be excluded from the final list of comparables. Further reliance is placed on the decisions of this Tribunal in the cases of LG Soft India (P.) Ltd. v. Dy. CIT [IT(TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019], EMC Software ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables.' We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, following the decision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and therefore this company has to be retained as comparable. 63. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The ld. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, the ld. AR submitted this company is also in the software products and therefore cannot be considered as good comparable. He has further contended that in a series of decisions, the Tribunal has applied 15% RPT filter and since this company is having more than 15% RPT, the same cannot be considered as a good comparable. 64. On the other hand, the ld. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sion under SWD segment. 6.3 On similar situation, we have remanded the comparable to the Ld.AO/TPO for fresh consideration herein above following the decision of coordinate bench of this Hon'ble Tribunal in the case of Prism Networks Pvt. Ltd. reported in (2022) 141 taxmann.com 163. Accordingly, we allow these grounds raised by assessee. 7. Ground No.7: Interest on receivables 7.1 The Ld.AR submitted that the Ld.TPO proposed transfer pricing adjustment in respect of outstanding receivables in respect of trade creditors being the AEs by using 6 months LIBOR + 450 basis points and CUP as the most appropriate method. 7.2 The Assessee wishes to submit that the delayed/ outstanding receivables should not be considered as a separate international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of intercompany transactions of provision of services has been already determined and no separate adjustment is necessary in this regard. 7.3 The Ld.AR placed reliance on decision of Hon'ble Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case referred to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 108, which dealt with question of law: (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises wit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) in W.P. No. 3619/2021(T-IT) by order dated 24.06.2022 * Decision of Hon'ble Pune Tribunal in case of M/s. Faurecia Automotive Holding vs. DCIT (IT) in ITA No. 784/PUN/2015 by order dated 08.07.2019 * Coordinate Bench of this Tribunal in case of M/s. Toyota Boshoku Automotive India Pvt. Ltd. vs. DCIT in IT(TP)A No. 1646/Bang/2017 by order dated 13.04.2022 and * Coordinate Bench of this Tribunal in the case of Goldman Sachs Services Pvt. Ltd. vs. DCIT in IT(IT)A Nos. 362 to 369 & 338 to 345/Bang/2020 by order dated 29.04.2022. 8.1.4 It is submitted that identical issue has been considered at length and in detail in the above decisions. The Ld.AR referred to the recent decision of Hon'ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) (supra) wherein Hon'ble Court observed as under: "(viii) The Revenue has relied upon the judgment of the Apex Court in C.C., C.E. & S.T.-Bangalore (Adjudication) etc. v. M/s.Northern Operating Systems Pvt. Ltd. 12 where the Apex Court has interpreted the concept of a secondment agreement taking note of the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. On verification once it is ascertained that the assessee has deducted tax on the entire salary payable to the seconded employee under section 192 of the act, no disallowance is warranted under section 40(a) (i) of the act. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 8.2 Ground no. 11 - Denial of depreciation claimed on leasehold improvements. 8.2.1 In the assessment year under consideration, the Assessee undertook various civil and interior work in the nature of putting up of modular furniture, lab design and installation activities, electrical and cable networking, fire safety systems, etc. Accordingly, during the year an addition of Rs. 6,85,95,212/- was made towards leasehold improvements, falling within the block of 'Furniture and Fixtures' and consequent depreciation on the same was claimed. 8.2.2 The Assessing officer disallowed the claim of depreciation amounting to Rs. 65,65,463 on leasehold improvements pertaining to additions during the year, on the basis that the Assessee failed to submit documentary proof/ ev....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ready to be put to use. The ld AR brought to our attention that the date of put to use have been certified by the tax auditor in the tax audit report. The ld AR alternatively submitted that, in the event of depreciation claim is disallowed, the disallowance need to be re- worked considering the date in which the relevant new premises started to function as the date of assets being put to use. The ld AR also contended that the depreciation disallowance should be restricted to the additions made during the year under consideration and not on the opening written down value (WDV) on which depreciation is allowed in the earlier years. 56. We have heard the ld. DR and perused the material on record. The AO has denied the depreciation on leasehold improvement since, according to AO, the assessee had not furnished the invoices & bills supporting the expenditure and that the assessee had not provided evidence for completion of the work. The break-up of disallowance of depreciation of Rs.25,31,31,220/- is as under which is worked out as per date put to use as certified in the tax audit report (page 1523 of paper book):- i. Depreciation of Rs.2,11,89,432/- claimed on openin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ials India Private Limited ('the Appellant or 'the Company'), a show cause notice as per proviso to section 92C(3) of the Act The Ld. AO has erred in law in making a reference to the Deputy Commissioner of Income Tax Transfer Pricing - 1(1)(1) [Ld. TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act were satisfied in the instant case. Accordingly, the order passed by the Ld. TPO is without jurisdiction. The order passed by the Ld. AO is without jurisdiction, inter alia, in so far as it purports to give effect to invalid directions of the Dispute Resolution Panel ('Ld. Panel') The directions issued by the Ld. Panel and the order passed by the Ld. AO is without jurisdiction, inter alia, in so far as it purports to give effect to an invalid order of the Ld. TPO. The Ld. Panel and Ld. AO/ Ld. TPO has erred in justifying the motive of shifting of profits On the facts and in the circumstances of the case and in law, the Ld. Panel and Ld. AO/Ld. TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in confirming the benchmarking of transactions of software development services of the Appellant with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed, and risk undertaken by the Appellant vis-à -vis the companies selected as being comparable. The Ld. AO/ Ld. TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability and the Ld. Panel also erred in confirming the same. The Ld. AO/ Ld. TPO erred on facts in arbitrarily accepting companies without Document 3 5.3.1 5.3.2 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.И considering the turnover and size of the Appellant and comparables. The Ld. Panel also erred in confirming the same. The Ld. AO /Ld. TPO erred in not applying the turnover filter at the upper limit so as to reject high turnover companies. The Ld. AO/ Ld. TPO, while applying the said turnover filter at the lower limit so as to reject companies having turnovers less than INR 1 crore in FY 2014-15, erred in not applying the said....
X X X X Extracts X X X X
X X X X Extracts X X X X
....being functionally dissimilar to the Appellant. The Ld. Panel erred in confirming the same. The Ld. AO/ Ld. TPO erred in arbitrarily rejecting certain companies from the Ld. TPO's own search matrix, which are otherwise functionally comparable and pass all the filters applied by the Ld. TPO, viz. 12T2 India Limited and InfoMile Technologies Limited. The Ld. AO/ Ld. TPO erred in not considering the Appellant's submission that Infosys Limited, Tata Elxsi Limited, Larsen & Toubro Infotech Limited and Persistent Systems Limited were held as functionally not comparable by the Hon'ble Bangalore Tribunal in the Appellant's own cases of AY 2010-11 and AY 2011-12. The Ld. AO/Ld. TPO erred in considering Provision for Doubtful Debts as non- operating while computing the margins of the comparable companies. The Ld. Panel erred in upholding the actions of the Ld. AO /Ld. TPO. The Ld. AO/ Ld. TPO erred in not giving cognizance to the judicial precedents for previous years, quoted by the Appellant in support of the contentions placed by the Company stating dynamics of business and economic factors. The Ld. Panel erred in upholding the actions of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e companies. NA 9 Variation of 3% from the arithmetic mean NA 9.1 The Ld. AO/Ld. TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 10 Erroneous disallowance of Rs. 52,418,236 under section 40(a)(ia) of the Act for salary cost reimbursed to Applied Materials Inc. on an 'at cost' basis 17,816,958 10.1 10.2 10.3 The Ld. Panel and Ld. AO erred in law and on facts in disallowing reimbursement of salary costs amounting to Rs. 52,418,236 paid by the Appellant to Applied Inc., by alleging non-deduction of tax at source u/s 195 of the Income-tax Act, 1961 ['the Act'] The Ld. Panel and Ld. AO erred in not appreciating the fact that the amounts reimbursed by the Appellant to Applied Materials Inc. was on an 'at-cost' basis and that in the absence of 'income' the same is not liable to income tax in India and therefore TDS Liability u/s 195 did not arise. The Ld. Panel and Ld. AO erred in concluding that reimbursement of salary cost was taxable as Fees for Technical Service ['FTS'] under Section 9(1)(vii) of the Act, without appreciating that the Appellant h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,215,443 Document 7 For the reasons stated in the accompanying affidavit, it is most humbly prayed that this Hon'ble Tribunal be pleased to permit the Appellant to raise the following additional ground to be read in continuation of the existing grounds of appeal as Ground No. 13, in the interests of justice and equity: "That an amount of Rs. 44,35,557/- being education cess paid by the Appellant during the year under consideration ought to be allowed as a deduction" Document 8 For the reasons stated in the accompanying affidavit, it is most humbly prayed that this Hon'ble Tribunal be pleased to permit the Appellant to raise the following additional grounds to be read in continuation of the existing grounds of appeal as Ground Nos. 5.11(a) and 5.13(a) in the interests of justice and equity: "5.11(a) That the AO erred in including CG-Vak Software Export Limited in the final list of the comparables though the DRP directed exclusion of the same. 5.13(a) That the following companies ought to be included in the final list of comparables in view of functions performed, assets employed and risk undertaken being similar to that of the Appe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... cost centre does not have a manager then the same is sent to Applied Inc. for seeking their approval. Once approved, the third party service provider raises invoice on Applied Materials India on 'time & material' and fixed delivery amount basis. Applied Materials India, in turn, invoices Applied Inc. on a cost-plus basis. The cost base in this case includes the charges paid to these third party services providers and the overheads incurred by these third party service providers as well as Applied Materials India. The work flow of the software development is explained in Figure 6. Figure 6: Work flow of the software development SOW Final Export High-level designing QA Devel- opment Bug-fixing Engin- eering Testing The provision of software development and support services by Applied Materials India can be broadly split into eight steps, which are explained as under: • Step 1: SOW • The process is initiated with the Statement of Work ('SOW') being issued by Applied Inc. to Applied Materials India, which specifies the activities to be carried out and the deliverable which is expected by Appli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is the responsibility of the Applied Materials India's team to take corrective actions if there is any deviation from the quality standards of Applied Materials India. Step 8: Final Export After the Applied Materials India's team is satisfied that the final product which has been developed and created by Applied Materials India and the sub-contractors meets all quality. standards, the same is exported to Applied Inc. for their usage. Should Applied Inc. accept the project developed in India, the project is considered as closed; else the same is returned to Indial with instructions of further corrections. Document 12 A summary of role of Applied Materials India and the sub-contractors in the development cycle is summarized in Table 3. Table 3: Role of Applied Materials India and the sub-contractors in the development cycle Process in Software Development Life Cycle SOW High Level Designing Development (Coding) Engineering Testing Bug-fixing Quality Assurance Applied Materials India ✓ ✓ ✓ Sub-contractors ✓ ✓ 5.2.2 5.2.2.1 Export ✓ In view of the above summ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....borne by Applied Materials India vis- Ã -vis its AEs involved in the period under review: Risk Category and Description Table 5: Risk Profile Market Risk: The market risk comprises the risk caused by a shortfall in demand for the products and services offered by the company, which could lead either to a loss of market shares or a decrease in the company's profit margin. In this regard, it is distinguished between short-term effects resulting in a certain level of market. volatility as well as long-term effects requiring an adjustment of the market strategy including, e.g., product types and features as well as the scope of services. Capacity Utilization Risk: Provision of services may require substantial investment manpower and related infrastructure. The risk of sub-optimal utilization of such capacity may lead to non-recovery of fixed costs related to such resources. Credit Risk: A counter party risk occurs when a customer is not able to settle an invoice for delivered goods or rendered services. The payment default could be caused either by illiquidity or insolvency of a customer as well as a limi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....racts. service to AES based on contracts. The software development services rendered by Applied Materials India are based on the specifications received from AES. Applied Materials India does not assume any risk with respect to the ultimate success or failure of the activities. In the event that AES determine that the services provided by Applied Materials India do not meet the specifications prescribed and rework is required, the entire costs related to such rework are marked up by Applied Materials India and invoiced to AEs. AES are responsible for the contract risk since they contract with the clients in their own name. As Applied. Materials India merely acts as a provider of services, it bears a limited contract risk vis-Ã -vis Applied Inc. in relation to the performance of the project. As AEs deal with and cater to the needs of third party clients, they bear the contract risk with respect to the contracts entered into with third parties Price Risk: Price risk is the risk that future | Since AEs negotiate the price with their customers, they income streams are sensitive to market bear significant price risk. Applied ....