TaxTMI 
TaxTMI 
2023 (6) TMI 874
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.... as "TPO" for brevity) and the Honourable DRP-2, Bengaluru ("AO", "TPO" and 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 fi....
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....g 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) Incorrectly computing the operating margins of comparables; and iv) Adopting following companies as comparables 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 Marketi....
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....wing TP adjustments:- Name of the Segment Segmental Revenue of Appellant Average margin TP Adjustment Software development segment 2,54,23,46,120/- 20 comparables with median of 26.18%. 29,65,34,910/- Marketing support services segment 48,55,98,855/- 11 comparables with median of 19.53% 3,73,16,901/- Total 33,38,51,811/- 5. The AO passed the draft assessment order under section 143(3) r.w.s. 144C of the Act dated 26.03.2021 incorporating the TP adjustment of Rs. 33,38,51,811/- made by the TPO. Aggrieved, the assessee filed objections before ld. DRP. Pursuant 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. ....
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....authorities. 9.4 After hearing both the sides, perusing the entire material on record and the orders of the lower authorities, we notice that The coordinate Bench of the Tribunal in the case of JCIT, LTU (OSD) v. Circle-1, Bangalore vs M/s.Toyota Kirloskar Motors Private Limited (ITA No.2016/Bang/2018) dated 18.8.2021 has held that the RPT ratio has to be consistently calculated on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales. The relevant observations are as follows:- "7.4 We have heard rival submissions and perused the material on record. There is nothing on record to suggest how RPT ratio has been calculated 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 th....
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....e its written submissions filed which is placed on record. Since the ld. DRP has not decided on the basis of functional comparability and other filters, therefore, we think it fit to remand the issue to the file of ld. DRP for decision on functional comparability. Ground No.5(iii) is allowed for statistical purposes. 10. The ld. AR submitted that in ground No.5(iv) the following companies are requested to be included in the comparables. Sagarsoft India Limited 11. The ld. AR submitted that the TPO and DRP held that this company is functionally different as it is into support services which include system administration, Human resource and training and facilities which 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 Th....
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....t this issue to the TPO/AO for fresh verification and decision in accordance with law, after providing assessee opportunity of hearing. Evoke Technologies Private Limited 12. The TPO excluded this company for the reason that the company is functionally different. Before the DRP the assessee raised objection & the DRP upheld the same and observed that data provided in annual report with regard to export revenue is unreliable. 12.1 The ld. AR submitted that the company has single segment of Software Development Services and is therefore functionally similar. This company passes all filters applied by the TPO. He relied on the decision of Quicklogic Software (India) Pvt. Ltd. vs DCIT, Circle- 3(1)(1), Bengaluru (IT(TP)A No. 181/Bang/2022) for 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 i....
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.... TPO. Hence the rejection of the company by TPO is upheld." 12.5 From the above observation of the ld. DRP we also note from financial statement that the ld. DRP have rightly observed that the figures are wrongly reported. Considering the above findings, in the absence of the correct reporting of the financial data by the comparable company, even if it satisfies the FAR & filters applied by the TPO, this company cannot be considered as comparable company. Sasken Communication Technologies Limited 13. The TPO observed that the company is functionally different and fails export revenue filter. The DRP held that the company is not comparable because it is engaged in diversified activities, has R&D activities and owns patents. 13.1 The ld. AR submitted that the company is functionally similar 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 ....
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....ing income of Rs. 10.58 crores and as per Note No.36, which is placed at Pg. 1490 of PB, states as under:- "The company's operations primarily relate to providing information technology (IT services). Accordingly, the company operates in a single segment which represents the primary segment. Secondly, segmental reporting is performed on the basis of geographical location of the customers as under:- US Rs. 8.20 crores UK Rs. 0.63 crores India Rs. 1.62 crores Norway Rs. 0.13 crores Total Rs. 10.58 crores 15.3 Since the lower authorities have rejected this company only on the basis of negative net worth, which leads to intrinsically sick and non-performing companies, but FAR analysis has not been done by both the parties. If the company passes FAR applied by the ld. TPO, the company cannot be excluded 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 & ....
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....los noted the issue decided by Special bench in the case of DCIT V Quark Systems Limited in 2010-TII-02- ITAT-CHD-SB-TP where in the negative net worth company was considered and it was held that business organization with negative net worth cannot be treated at par with a normal business organization. However while considering that issue the comparable was also functionally not comparable in that case. Therefore there was no view expressed in that decision that though comparable has similar FAR still negative net worth company is required to be excluded without showing the impact of negative net worth on the profitability of the company. In view of this we direct the inclusion of this Company i.e. Muller & Phipp India Limited as comparable for the purpose of determining arms length price. 15.4 Accordingly, we remit this issue to the AO/TPO for fresh consideration as per above directions. 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 ....
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....he software development service business company cannot be compared with the ITeS company. Respectfully following the above judgment, we reject the contention of the assessee and uphold the orders of lower authorities. Isummation Technologies Private Limited 17. The TPO & DRP rejected this company as it functions overlap into both IT & ITeS but has no segmental information. The ld. AR submitted that the company is functionally similar as it is primarily engaged in rendering software development services having single segment and passes all filters applied by the TPO. Further, the DRP in Appellant's own case for AY 2018-19 has held this company to be functionally similar and included in the final list. 17.1 The ld. DR relied on the orders of lower authorities. 17.2 Considering the arguments from both the sides, we note that this company has been considered in the case of Xchanging Solutions Ltd. [2023] 147 TAXMANN.COM 404 (Bangalore Trib) that it is engaged in the business of software development services. 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....
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....eporting the business activity of the company falls within the single primary business segment viz. Software development. As it is functionally similar and satisfies the export turnover filter, the TPO is directed to consider the company as comparable for the determination of ALP in the software development services." 7.7 In view of the above, we do not find any reason to exclude this company viz.Isummation Technologies Ltd. from the list of comparables in the assessment year 2016-17. Directed accordingly.' 27. We notice that in the above decision, the Tribunal has allowed the inclusion of the company in the AY 2016-17 based on the fact that the DRP in AY 2017-18 has accepted the inclusion of the company. Accordingly, respectfully following the decision of the coordinate Bench, we hold that the company be included for AY 2017-18 in assessee's case. 17.3 Respectfully following the above judgment of the coordinate Bench of the Tribunal, we direct the AO/TPO to include this company in the list of comparables. Nitor Infotech Private Limited 18. This company was rejected since it did not appear in the search matrix of the TPO. The ld. AR submitted that....
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....nd marketing services in relation to metricstream products. Metricstream India is compensated on a cost plus basis on the services rendered. The total value of the sales and marketing services transaction undertaken during the year 2016-17 is Rs. 48.56 crores. The characterisation of entity is "given the functions, risks and intangible assets of each entity (both related and unrelated parties) how should group entities most accurately be characterised in relation to each controlled transaction." The assessee has applied TNMM method as the most appropriate method and OP/OC has been taken as PLI in its TP analysis. The TPO noticed that 10 companies were selected for MSS segment and accepted only one comparable viz., Majestic Research Service & Solutions Ltd. and rejected the other companies. The TPO applied certain filters and selected 11 companies including Majestic Research & Solutions Ltd. and calculated Median at 19.53%. The assessee filed objections which was not accepted by the TPO and finally the TPO calculated adjustment of Rs. 3,73,16,901. Before the TPO, the assessee also filed additional comparables of 5 companies but it was not accepted. Before the DRP, the assessee filed....
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....P. Considering the submissions from both the sides and going through the material on record, we deem it fit to remit the matter to the ld. DRP for fresh adjudication. The assessee is directed to produce the necessary documents in support of its claim for exclusion of the companies before the DRP and the DRP is directed to decide the issue afresh as per law. Ground No.9(v) is allowed for statistical purposes. 22. Ground Nos. 7(i) & (ii) and 9 (i) to (iii) was not argued by the assessee, therefore these are dismissed as not pressed. 23. Ground Nos. 7(iii) and 10(iii) by the assessee are with regard to grant of working capital adjustment in the SWD and MSS segments respectively which was rejected by the TPO and the DRP. The ld. AR submitted that that working capital adjustment is an accepted adjustment. The amount of working capital varies greatly, because of credit terms offered to buyer and credit terms available from creditors. Thus, the working capital materially affects the amount of net profit margin in the open market and same should be adjusted for. He relied on M/s. Yahoo Software Development India Pvt. Ltd. vs JCIT, Special Range - 7, Bengaluru IT(TP)A No. 178/Bang/202....