TaxTMI 
TaxTMI 
TaxTMI 
2023 (6) TMI 874
X X X X Extracts X X X X
X X X X Extracts X X X X
....DRP collectively referred as "lower authorities" for brevity) are bad in law and liable to be quashed. GROUNDS RELATING TO TRANSFER PRICING - LEGAL ISSUES 2. The learned AO has erred in making a reference for the determination of the Arm's Length Price of '' the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do so. 3. The lower authorities have erred in passing the Order without demonstrating that the Appellant had any motive of tax evasion. GROUNDS RELATING TO TP ADJUSTMENT IN SOFTWARE DEVELOPMENT SEGMENT 4. The learned AO has erred in making transfer pricing adjustment of Rs. 26,54,86,758/- towards international transactions in software development segment. 5. The lower authorities have erred in: (i) Conducting a fresh TP analysis despite absence of any defects in the transfer pricing analysis submitted by the Appellant; (ii) Adopting inappropriate filters like one sided turnover filter, 25% RPT filter, etc. in the process of selecting comparables and not adopting appropriate filters like onsite revenue filter, etc; (iii) Selecting inappropriate comparables and selecting companies as comparables ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les even though they are not comparable in respect of functions performed, risks assumed, assets utilized, size, turnover, despite having unusual business circumstances or high margins, substantial RPT, etc. Focus Suites Solutions & Services Ltd Axience Consulting Pvt. Ltd. Pressman Advertising Limited Scarecrow Communications Limited Red Baron Integrated Services Pvt Ltd Lintas India Pvt. Ltd. Majestic Research Services And Solutions Limited Platinum Advertising Pvt. Ltd Cheil India Pvt. Ltd. v) Rejecting the following comparables selected/proposed by the Appellant for unjustified reasons: ICRA Management Consulting Services Limited MCI Management (India) Private Limited Kestone integrated Marketing Services Pvt Ltd (Seg) Killick Agencies & Marketing Limited Cyber Media Research & Services Limited Priya International Limited (Segmental) Chaman Lal Lakhmi Dass Plastics Private Limited BNR Udyog Limited (Seg) Fusion Events Limited 10. The lower authorities have erred in: i) Not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies. ii) Not recognizing that the A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....suant to the directions of the DRP, an order giving effect to DRP directions was passed by TPO dated 22.01.2022 making total TP adjustment of Rs. 30,28,03,659/- as under:- Name of the Segment Average margin TP Adjustment Software development segment 22 comparables with median of 24.80% 26,54,86,758/- Marketing support services segment 11 comparables with median of 19.53% 3,73,16,901/- 6. Consequently the AO passed the final assessment order dated 28.01.2022 and assessed income at Rs. 68,51,84,719/-, against which the assessee is in appeal before the Tribunal. 7. Ground No.1, 4 & 5(i) are general in nature, hence does not require adjudication. In ground No.2 & 3, the assessee raised legal issue, which was not argued by the assessee. Therefore, it is dismissed as not pressed. RPT Filter - Ground No.5(ii) 8. The ld. AR did not argue on the turnover filter and onsite revenue filter. He submitted that RPT ratio has to be calculated on aggregate basis taking ratio of RPT incomes plus RPT expenses by sales in the case of Cygnet Infotech Pvt. Ltd. and Three Sixty Logica Testing Services Pvt. Ltd. If the RPT ratio is not applied on aggregate basis, the whole purpose of applyi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lated for all the comparable companies. The learned AR has argued that the TPO in order to retain Tata Motors Ltd. and Maruti Suzuki India Limited has deviated and adopted a new mechanism for computing RPT ratio. On a query from the Bench how RPT ratio has been calculated for other comparables, the learned AR has unable to point out the same. The RPT ratio has to be consistently calculated on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales. The said position was adopted by the Revenue in the past years. In this regard, the TPOs order in assessee's own case for assessment year 20072008 has been placed on record. A perusal of the same it is clear that RPT ratio has been calculated taking both RPT income transactions plus RPT expenses transactions on aggregate basis. On the facts of this case, it is not clear how RPT ratio has been calculated for Tata Motors Limited vis-à-vis other comparable companies. Therefore, this issue is restored to the files of the A.O. The A.O. is directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales across the board for all the comparable companies (including Tata M....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... fall under category of information security management system. He further submitted that the company has single segment of Software Development Services and is therefore functionally similar and it passes all filters applied by the TPO. The DRP in Appellant's own case for AY 2018-19 has held Sagarsoft to be functionally similar. He also relied on this Tribunal decision in the case of Quicklogic Software (India) Pvt. Ltd. vs DCIT, Circle-3(1)(1), Bengaluru (IT(TP)A No. 181/Bang/2022) for AY 2017-18. 11.1 The ld. DR relied on the orders of lower authorities. 11.2 We have heard both the parties and perused the material on record. This issue was considered by the coordinate Bench of the Tribunal in the case of Quicklogic Software (India) Pvt. Ltd. (supra) where it was held as under:- "13.4 In respect of Sagarsoft (India) Ltd., the company has been rejected by the Ld.TPO as he found to be engaged in providing system administration, human resources and training and facilities. The Ld.AR submitted that, the company is engaged in the business of software development service segment along with system administration and that this fact has been not considered by the Ld.TPO. 13.5 In res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r AY 2017-18 to submit that this company has to be included in the comparables list. 12.2 The ld. DR relied on the orders of lower authorities. 12.3 We have heard the rival submissions and perused the material on record. In the case of Quicklogic Software (India) Pvt. Ltd. (supra), this Tribunal held as under:- "13.1 It is submitted by Ld.AR that Batchmaster Software Pvt. Ltd. and DCIS DOT COM Solutions India Pvt. Ltd. was ignored by the Ld.TPO as it was reflecting in the search matrix carried out by him. Evoke Technologies Ltd. was rejected by the Ld.TPO for the reason that it supplies end to end services. The Ld.TPO also noted that it may be included in the services other than IT services. 13.2 It is thus submitted by the Ld.AR that in respect of the above three comparables, the Ld.TPO has not considered the functions performed and has cherry picked the comparables without going through the actual functions and annual reports. We are therefore directing these comparables to be reconsidered by the Ld.AO/TPO based on the annual reports. 13.3 The Ld.TPO shall consider these comparables after verifying the FAR of these comparables with that of assessee. Accordingly, Batchma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....milar as it is primarily engaged in software consulting and development. The company passes all filters including export revenue filter as applied by the TPO. He referred to pg. 1440, 1446-1450 of PB-II and submission at pg. 711 of PB-I. The DRP in Appellant's own case for AY 2018-19 has held Sasken to be functionally similar. Considering the arguments advanced from both the sides, we remit the issue to the AO/TPO for verification of the facts in AY 2018-19 and present year and for fresh decision in accordance with law. Sankhya Infotech Limited 14. The TPO & DRP held that the company is functionally different as it is engaged in diversified activities and segmental data is not available. The ld. AR submitted that the company is functionally similar as it provides solutions and services in relation to software development and it passes all filters applied by the TPO. The ld. AR also referred to pg. 1452-1456 of PB-II and submission at pg. 707-708 of PB-I and also referred to pg.1469-1470 of PB-II and submission at pg. 708-709 of PB-I. Considering the arguments from both the sides and findings recorded by the lower authorities, we remit this issue to the AO/TPO for fresh considerat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uded only because of the negative net worth. This view is supported in the judgment relied by the AR in the case of Gillette Diversified Operations Pvt Ltd (supra) in which it has been held as under:- 24. Ld. TPO rejected two comparables which are discussed as under:- a. Argus Cosmetic Ltd. ............ b. Muller & Phipps India Ltd. i. The ld TPO has excluded this comparable stating that it has a negative net worth for the year 2005 hence it is not fit comparable to be taken. On appeal before the ld CIT(A) the assessee submitted that the TP regulation and OECD guidelines do not suggest that loss making company should not be taken as comparable. The ld CIT (A) has hold that this company is not simply the loss making company but is also a company having negative net worth and according to him when a company suffers from erosion of its wealth because of continuous loss, same cannot be taken as comparable. The case laws relied upon by the appellant were also rejected as according to him those were relied upon high loss making company and not for a negative net worth comparables. ii. Before us the ld AR submitted that merely because a company is having negative net worth it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions. E-Zest Solutions Limited 16. The TPO & DRP excluded this company on the ground of functionality as it is engaged in ITeS. The ld. AR submitted that it is functionally similar as it provides software development services and passes all filters applied by the TPO. 16.1 The ld. DR relied on the orders of lower authorities. 16.2 We have heard both the parties and perused the material on record. On going through the order of the lower authorities they have excluded this company by holding that the company is engaged in ITeS. We note that in the case of Global E- Business Operations (P. ) Ltd. v. Deputy Commissioner of Income Tax in IT (TP ) A No. 174/BANG/2022 order dated 16.11.2022 reported in [2023] 147 taxmann.com174 ( Bangalore- Trib) for AY 2017-18 it has been held that the company is engaged in ITeS. The relevant part of the order is as under:- 13.1 At the time of hearing, the ld. A.R. pressed only following 4 comparables for inclusion: a. Bhilwara Infotechnology Limited; b. R Systems International Limited; c. ISN Global Solutions Private Limited; and d. E-ZestSolutions Limited; 13.2 The other comparables are not pressed. Accordingly, dismissed as not presse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces. The relevant part of the order is as under:- "We have heard both the parties and perused the material on record. 20. The next prayer of the ld. AR is for the inclusion of the following comparables. 1. Akshay Software Technologies Ltd. 2. Evoke Technologies Ltd. 3. Insummation Technologies Pvt. Ltd. Akshay Software Technologies Ltd. Evoke Technologies 22. ..... 23. ..... 24. ...... Insummation Technologies Ltd. 25. The DRP did not accept the inclusion of this company on the ground that the company do not appear in the TPO's search matrix and accordingly held that the assessee is cherry picking to reject the inclusion. The ld. AR submitted that the company is not appearing in search matrix of the TPO cannot be the only ground of rejection. At the time of preparation of TP study, the data was not available and therefore the assessee prayed for inclusion of the company during the proceedings since the company is functionally comparable. The company is engaged in the provision of software development services and 100% of its revenue is from rendering of such services [pg 5332 and 5342 of PB]. In this regard, the ld. AR relied on the decision of the coord....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch matrix of the TPO. The ld. AR submitted that the financial data relating to this company is available in public domain. It is functionally similar as it provides consultancy and technology services in the area of Business intelligence, collaboration, portals and performance management domain and passes all filters applied by the TPO. 18.1 The ld. DR relied on the orders of lower authorities. 18.2 We have heard both the parties and perused the material on record. During the course of hearing, the ld. AR submitted that the data is available in public domain and it is functionally comparable, but during the course of search process by the ld. TPO, it was not appearing in the search process. The ld. AR of the assessee has filed paperbook in which the financial statement of this company is placed at page No.1561 to 1575. We remit this issue to the AO/TPO for examination whether this company passes the FAR and decide the issue afresh as per law. 19. Ground No.6 is regarding incorrect computation of margin of Harbinger Systems Pvt Ltd. The ld. AR submitted that the TPO has taken margin at 11.16% whereas the correct margin of this company comes to 8.12%. The variation is due to incor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d. Before the DRP, the assessee filed objections which were also rejected. Accordingly, the AO passed final assessment order. 20.1 The assessee seeks exclusion of certain companies selected by the TPO on the ground of non-comparability in terms of functions performed, assets utilized, risks assumed, etc. as per ground No.9(iv). As per ground No.9(iv), the assessee sought exclusion for the following companies:- (i) Focus Suites Solutions & Services Limited (ii) Axience Consulting Private Limited (iii) Pressman Advertising Limited (iv) Scarecrow Communications Limited (v) Red Baron Integrated Services Private Limited (vi) Lintas India Private Limited (vii) Majestic Research Services & Solutions Limited (viii) Platinum Advertising Private Limited (ix) Cheil India Private Limited 20.2 On going through the order of the ld. DRP, the above named companies sought for exclusion by the assessee has not been dealt by the ld. DRP company wise on FAR basis. Therefore this issue is remitted back to the file of the ld. DRP. The assessee has filed written synopsis before us in which it has challenged on different aspects for exclusion of the abovenamed companies which is placed....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../Bang/2021 for AY 2016-17. 23.1 The ld. DR relied on the orders of lower authorities. 23.2 We have heard both the parties and perused the material on record. The coordinate Bench of the Tribunal in the case of Yahoo Software Development India Pvt. Ltd. (supra) considered this issue and held as under:- "7. It is submitted that assessee had given working capital adjustment computation before the authorities below, however, the same were ignored by the Ld.AO and DRP. He placed reliance on the decision of the Coordinate Bench of this Tribunal in case of Mobis India Ltd. reported in (2013) 38 taxmann.com 231. In Mobis India Ltd. (supra), it was held that, it is necessary to eliminate the difference which is possible only by computing the working capital adjustment in the hands of the comparables. Coordinate Bench relied on the decision of Hon'ble Chennai Tribunal observed that, the OECD guidelines are very clear and advocates adopting the rates of interest applicable to commercial enterprise operating in the same market as that of a tested party. 8. We are therefore of the opinion that the revenue was not justified in denying the working capital adjustment in order to bring the co....