TaxTMI 
TaxTMI 
2023 (7) TMI 22
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.... Enterprises (AE). The services are provided on cost plus basis. A reference was made to the TPO for determining ALP of international transactions entered into by the assessee. IT(TP)A No.238/Bang/2021 3. The assessee has raised the following grounds of appeal:- "GENERAL GROUND 1. The Orders passed by learned Additional / Joint / Deputy / Assistant Commissioner of Income Tax / Income-tax Officer, National e-Assessment Centre (hereinafter referred as "AO" for brevity), learned Deputy Commissioner of Income Tax (Transfer Pricing) - 1(1)(1), Bangalore ("TPO") and the Honourable DRP-1, Bengaluru ("DRP") ("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 learned TPO without demonstrating as to why it was necessary and expedient to do so. 3. The lower authorities have erred in not appreciating that, the addition made to the income returned is bad in law as the charging or computatio....
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....re Pvt. Ltd 8. The lower authorities have erred in incorrectly computing the operating profit margin of following comparables: * Aspire Systems (India) Pvt. Ltd 9. The lower authorities have erred in treating provision for doubtful debt as non-operating in nature while computing operating margins of comparables. 10. The learned AO/TPO have erred in considering Fixed Assets written off as operating in nature despite directions of Honourable DRP. 11. The lower authorities have erred in: (i) Not adopting Cash PLI for computation of arm's length price; (ii) Not recognizing that the Appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account; and (iii) Not providing R&D adjustment and marketing adjustment while computing the Arm's length price. GROUNDS RELATING TO TP (SALES AND MARKETING SUPPORT SERVICES SEGMENT) 12. The learned AO has erred in making transfer pricing adjustment of Rs. 2,53,32,409/- towards Marketing Support Segment. 13. The lower authorities have erred in: (i) Rejec....
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.... (ii) Making adjustment for notional interest on extended payment terms given to AE without appreciating that there is no real income arising to the Appellant; (iii) Not appreciating that the receivable from the AE is not an international transaction within the meaning of section 92B of the Act; (iv) Not appreciating that the receivable from AE is not a separate transaction from the sale of goods or provision of services from which it is arising; (v) Not appreciating that the Appellant had adopted TNMM at segmental level, in which process, the receivables were considered as closely linked transaction and hence were subsumed and accordingly already considered; (vi) Without prejudice, adopting SBI retail term deposit rate at 5.50%. The rate determined is excessive; and (vii) Without prejudice, not adopting only LIBOR as the basis for benchmarking. GROUND RELATING TO CORPORATE TAX 19. The lower authorities have erred in (i) Making addition of Rs. 35,00,40,324/- by disallowing the depreciation claimed on Goodwill; (ii) Not appreciating that the difference between Purchase consideration and the value of n....
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....f the Segment Average margin TP Adjustment Software development segment 14 comparables with median of 27.28% Rs. 52,67,17,689/- Marketing support services segment 9 comparables with median of 12.99% Rs. 2,11,54,051/- Notional Interest on Trade Receivables Interest rate at 5.50% PA Rs. 1,65,48,223/- 6. Subsequently the AO passed the final assessment order dated 17.02.2021 incorporated the TP adjustment as per TP OGE to DRP directions and corporate tax addition of Rs. 35,00,40,324/-. Disallowance of Goodwill as made in draft assessment order was retained in the final assessment order. Aggrieved by the final assessment order, the assessee is in appeal before the Tribunal. 7. Ground Nos. 1 to 4 were not argued by the ld. AR of the assessee and hence it is dismissed as not pressed. Ground No.5 is general in nature. SOFTWARE DEVELOPMENT SEGMENT 8. The effective issue in ground No.6(i) & (ii) is with regard to rejection of Akshay Software Technologies, Evoke Technologies Ltd. & additional comparables selected by the appellant viz., Sagarsoft India Ltd. and Sasken Communication Technologies Ltd. by the revenue authorities, which the assessee has....
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..... Ltd. [223] 146 tamann.com 202 (Pune Trib) [ITA No.255(Pune) of 2021] for AY 2016-17 order dated 01.11.2022, the Tribunal examined the financial statements as well as the functional profile and activities of Akshay Software Technologies Ltd. in which it has been held as under:- "7. The TPO has excluded this comparable because as per TPO the comparable Akshay is providing professional services in the nature of Staffing Services by which the company employees IT Professionals and provides them to various clients in the IT Industry on contract staffing/permanent staffing basis. 7.1 The DRP has upheld the exclusion of Akshay Software on the ground mentioned by TPO. The DRP also held that Akshay is providing staffing services i.e. it is providing technical personnel to various clients. 7.2 The Ld.AR mainly stated that the company is engaged in rendering software development services and the same is evident from Note 18 'Revenue from operations' as it derives revenue from services. 7.3 We have heard both the parties and perused the records. In the Annual report of Akshay it is mentioned as under : "Akshay Software Technologies Limited....
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....gain on sale of investment in wholly owned subsidiary". 7.8 This disinvestment and net gain of Rs. 447 lacs is one time event, has affected profit. But as mentioned in the Annual report the disinvestment has affected export income also. Therefore, considering this onetime event, the Akshay Software Technologies Ltd is not comparable to the assessee. Hence for all the reasons discussed above, we hold that Akshay Software Technologies Ltd is not functionally comparable to the assessee. 7.9 The Ld.AR has relied on various ITAT decisions but none of the decision has brought on record the fact of one time Disinvestment leading to profit and reduction of export, the manpower supply activity of the Akshya Software Technologies Ltd, hence all the case law relied by the AR are distinguishable on facts. Following the above decision, we remit this issue to the TPO/AO for fresh decision in accordance with law after providing opportunity of being heard to the assessee." 8.5 We have gone through the financial statements placed at page No.1235 of PB. The corporate information of Akshay Software is as under:- "Akshay Software Technologies Ltd. ("the ....
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....er book at para No. 6.17 The assessee has submitted before the DRP as under " The assessee further submits that company provides software development, IT outsourcing and IT consulting services. Further the company provides Application development & Maintenance, Big Data Analytics, Block Chain solutions , Mobile App development and other services" The assessee has placed the financial statement at page No. 1284 to 1298 . Further we noted from the page No. 1296 at Note No. 2.26 the company has reported its turnover geographical-wise. As per this Note, the company has reported turnover in India Rs. 6127.95 and in US 1300.22 (Total Rs. 7428.17 in lakhs), whereas at Note No.2.16, the company has reported export turnover of Rs. 73.84 crores and domestic turnover of Rs. 0.44 crores. It appears that the figures are not matching with the profit & loss account. In this Note No.2.26 under the Segment Reporting, it has reported as under:- "The Company's operations predominantly relate to provide endto-end business solutions to enable clients to enhance business performance. Georgraphic Segmentation ss based on business sourced from that geographic region and delivered both on-site and....
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....er), 15% RPT filter etc. in the process of selecting comparables. However, the issues regarding one sided turnover filter & persistent loss making filter was not argued by the assessee. 10.3 The ld. AR submitted Calculation of RPT Ratio has to be on aggregate basis taking ratio of RPT incomes plus RPT expenses by sales. If the RPT ratio is not applied on aggregate basis, the whole purpose of applying RPT filter would be lost because results may not be accurate. For example, related party purchases may be sold to third parties and thus profits from such transactions may be tainted. Similarly, purchases from third parties may be sold to related parties, and profits from such transactions may also be tainted. This would mean that approx. half of profit of such company may come from tainted transactions (Pages 988 to 992 of PB-I). He relied on the decision of the Coordinate Bench in the case of JCIT, LTU (OSD) Circle-1, Bangalore vs M/s.Toyota Kirloskar Motors Private Limited (ITA No.2016/Bang/2018) wherein the AO was directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses divided by operating income for all the comparable companies. Th....
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....lus RPT expenses by sales across the board for all the comparable companies (including Tata Motors Ltd. and Maruti Suzuki India Limited. 7.5 Therefore, ground No.2 is allowed for statistical purposes." 10.6 Following the above decision, we direct the AO to calculate RPT ratio on aggregate basis considering the RPT income plus RPT expenses by sales for all the comparable companies. 10.7 The issue regarding adoption of rate of RPT filter was considered by the Hon'ble High Court of Karnataka in PCIT v. Yodlee Infotech P. Ltd. in ITA NO.685/2017 dated 28.6.201. The AO/TPO is directed to follow the above judgment for applying the RPT filter rate. 11. The next issue vide ground No.7 (v) by the assessee is regarding exclusion of following companies :- (i) Larsen & Toubro Infotech Ltd. (ii) Nihilent Ltd. (iii) Inteq Software Pvt. Ltd. (iv) Persistent Systems Ltd. (v) Infobeans Technologies Ltd. (vi) Thirdware Solution Ltd. (vii) Infosys Ltd. (viii) Aspire Systems (India) Pvt. Ltd. (ix) Cybage Software Pvt. Ltd. Larsen & Toubro Ltd., Persistent Systems Ltd. & Infosys Ltd. 11.1 The assess....
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....parables held as under:- "8. The learned counsel for the brought to our notice a decision of the ITAT Bangalore Bench in the case of CGI Information Systems & Management Consultants (P.) Ltd. v. Asstt. CIT [2018] 94 taxmann.com 97 wherein 4 out of the aforesaid five comparable companies viz., (a) Genesys International Corpn. Ltd. (b) Infosys Ltd., (c) Larsen and Toubro Infotech Ltd. and ( d) Persistent Systems Ltd. were excluded by the ITAT. The functional profile of the Assessee in this appeal and that of the Assessee in the decision cited by the learned counsel for the Assessee is the same. The following were the relevant observations of the Tribunal:- "28. The learned counsel for the Assessee submitted before us that the comparability of the 3 companies out of the aforesaid 4 companies which the Assessee seeks to exclude from the list of comparable companies chosen by the TPO viz., Infosys Ltd., Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd., were considered by the ITAT Delhi Bench in the case of Agilis Information Technologies India (P) Ltd. v. ACIT (2018) 89 taxmann.com 440 (Delhi-Trib.) for the same AY 2012-13. In this regard it was submitted that....
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....e discussion is contained in paragraphs 4.8 to 4.10 of the Tribunal's order. The Tribunal held that L & T Infotech Ltd., was a software product company and segmental information on SWD services was not available. The Tribunal also noticed that the appeal filed by the revenue against the tribunal's order was dismissed by the Hon'ble Delhi High Court in ITA No.682/2016. (c) Persistent Systems Ltd., was excluded from the list of comparable companies on the ground that this company was a software product company and segmental information on SWD services was not available. The Tribunal in coming to the above conclusion referred to the decision rendered by ITAT Delhi Bench in the case of Cash Edge India (P.) Ltd. v. ITO ITA No.64/Del/2015 order dated 23.9.2015 and the decision of Hon'ble Delhi High Court in the case of Saxo India Pvt. Ltd. (supra). The findings in this regard are contained in Paragraphs 4.14 to 4.16 of its order. 30. Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies fo....
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....s held that M/s Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Persistent Systems Ltd. ***** 17. As far as exclusion of Larsen & Toubro Infotech Ltd., is concerned, the Tribunal in the very same case of....
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.... 12.2 He submitted that Infobeans Technologies is also functionally different as it is a global technology solutions provider of diversified services in the areas of Custom Application Development, Content Management Systems, Enterprise Mobility, Big Data Analytics. It is not a pure software development company. 12.3 Similarly, the ld. AR submitted that Thirdware Solutions Ltd. is functionally different as company has revenue from various sources like Product Sale, Software Implementation, Software Consolidation, Analytics etc. and it is not a pure software development company. The Company has substantial RPT transaction for all 3 years. (FY 15-16 - 24.87%; FY 2014-15 - 23.46% and FY 13-14 - 23.03%). Segmental information pertaining to software development services is not available for all 3 years. 12.4 He submitted that Aspire Systems (India) Private Limited also has substantial RPT transaction for all 3 years. (FY 15-16 - 37.58%; FY 2014-15 - 30.12% and FY 13-14 - 26.86%). Further, Applied Development Software (India) Pvt Ltd and PureApps Consulting Services Pvt Ltd have been amalgamated with the Company. 12.5 Thus, the ld. AR relied on the decision in the case of SanDi....
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....rdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra), where in it was held that M/s Thirdware solutions Ltd is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY ******** 17.8 Before us, the Ld.AR has not been able to place anything on record contrary to the above observation. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Persistent Systems Ltd., L& T Infotech Ltd., Thirdware Solutions and Infosys Ltd. from the final list. 17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: "Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment o....
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.... 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 Infobeans 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....
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.... Application Development, Application Migration, Application Maintenance, Oracle Application, Microsoft Dynamics, Data Warehousing, EI & EDI Services, Consulting Services, Healthcare BPO. These are evident from company's website which is reproduced below." 13.3 On going through the financial statements produced at PB pg. 1559, under the head revenue from operations, the assessee has shown revenue from operations under the accounting head, Software Development & Service Charges of Rs. 17.38 crores and at PB pg. 1557 in Form No.NGT-9 which is annual return, the assessee has shown software development services under NIC Code "620-Computer Programming, Consultancy and related activities". This company has been excluded in the case of Finastra Software Solutions (India) P. Ltd. v. DCIT, AY 2016-17 [2023] 147 taxmann.com 515 (Bengaluru Trib) by observing as under:- 18. The assessee sought for exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. on the basis that these companies are functionally dissimilar to the assessee. In this regard the learned A.R. submitted that Inteq Software Pvt. Ltd. ("Inteq") The company is functionally dissimilar ....
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....nctional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-avis the taxpayer which is a routine software development service provider working on costplus mark up model, hence ordered to be excluded from the final set of comparables." 21.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables.' 22. Respectfully following the decision of the coordina....
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....he following decisions:- * ADP Pvt. Ltd., Hyderabad vs DCIT-1(1), Hyderabad (TS-63-ITAT-2022 Hyd) (Pg 2447 of PB-II) * Techbooks International (P.) Ltd. vs DCIT, Circle-3, Noida [2015] 63 taxmann.com 114 (Delhi - Trib.) (Pg 2546 of PB-II) 15.1 The ld. DR relied on the orders of the lower authorities. He also relied on the decision of the Tribunal in the case of Marvell India Pvt. Ltd., ITA No.2173/Bang/2017 for AY 2013-14 dated 6.4.2018 where it was held as under:- "6. From the above Para of this Tribunal order, it comes out that in that case, the issue involved was regarding writing back of the provision by the assessee in the present year. The Tribunal order in this case is on this basis that certain liabilities are provided on estimate basis because exact quantification is not possible in the same year for some expenses and when in future year, the actual amount of liability is known then any excess provision made in the earlier year has to be written back and the same has to be considered as operating income for the purpose of computing ALP also. In our considered opinion, this Tribunal order is not applicable in the present case because in the pre....
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.... the tested party/comparable by its turnover. If the provision for doubtful debts is reduced from profit, the numerator is reduced but the denominator is not reduced because the turnover has been considered in earlier year and cannot be considered in the present year. Hence such provision for doubtful debts has to be ignored and added back in the profit of the tested party or of the comparable as the case may be while making the TP analysis. Hence on this issue, we find no reason to interfere in the order of AO and DRP and we hold that this Tribunal order is not applicable in the present case but we will also examine the applicability of the second tribunal order cited before us by the learned AR of the assessee." 15.2 After hearing the rival contentions, during the course of hearing, a query was raised to the ld. AR whether the provision for doubtful debts relate to the present assessment year or other year, but the ld. AR was unable to reply. Therefore, the case law relied by the ld. AR is not applicable. We remit this issue to the AO/TPO for verification of this issue afresh after providing opportunity to the assessee. If the doubtful debts is relating to the current assessme....
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....o discussion on this aspect in the TP order. Before the DRP, the Appellant made detailed submissions on why cash PLI should be adopted (Pg 1082 to 1091 of Paper Book I for Software Segment & Pg 1144 to Pg 1146 of Paper Book I for Marketing Segment). The DRP upheld the action of TPO. 17.3 In this regard, the ld. AR submitted that the rate of depreciation charged by the assessee is substantially more than the comparable companies/sector industry norms. The assessee's depreciation cost to the total cost is around 5.91%, which is higher than the weighted average for 3 years of final comparables, which is at 3.51% and invited attention to the computation at Pg 1938 of Paper Book I and also, the detailed margin computation at Pg 397 & 398 of Paper Book I. It was contended that Cash PLI should be adopted for PLI computation and relied on the following decisions:- * PCIT v Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka) wherein the Karnataka HC directed to exclude depreciation from operating cost. * Assessee's own case for AY 2010-11 wherein the ITAT in has upheld the direction of DRP to grant depreciation adjustment - [Para 9.3 to 9.5 ....
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....) of rule 10B(l)(e), the net profit margin is realized by an unrelated enterprise/comparable company is computed having regard to the same relevant base as was selected in subclause (i). Sub-clause (iii) of said Rule specifies that before a comparison of net margins realized under sub-clauses (1) and (ii) is done, the net margin realized under sub-clause (ii) must be adjusted to take into account the differences which could materially affect the net profit margin in the open market. So also, in terms of Rule 10B(3), an uncontrolled transaction shall be considered comparable if none of the differences between the comparable companies and the controlled transaction are likely to materially affect the profit arising from such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effect of such differences. Since the respondent has a policy of charging a higher rate of depreciation as compared to the companies selected by the TPO, there is a definite impact on the net margins of the respondent as compared to the comparable companies. Thus, there is a need for making an adjustment to eliminate the differences in the accounting policies ....
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.... of the IT Rules provides that an adjustment ought to be provided for any differences in the economic factors between the tested party and the comparables. A risk adjustment is one such adjustment which is to be applied in order to adjust for the differences between the risk undertaken by the tested party vis-a-vis the comparable companies. Being a low risk service provider, the Assessee is devoid of any significant risks relating to its business operations whereas the comparable companies operate under uncontrolled conditions bearing risks, as a result of which the companies earn a risk premium which is not earned by a contract service provider like the assessee. Therefore, the profits of a contract service provider would be lesser than the companies selected as comparables, and in that view of the matter, it is humbly submitted that an adjustment to minimise the risk differential would be warranted. Reliance in this regard was placed on this Hon'ble Tribunal's decisions in Analog Devices India P. Ltd. v. DCIT [TS-816- ITAT-2016-Bang] and Intellinet Technologies India P. Ltd. v. /TO [TS-228-ITAT-2012(Bang)] where, in the cases of similar placed assessees, this Hon'ble ....
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....passes all filters applied by the TPO. He also submitted that if upper turnover filter of Rs. 200 crores is applied, this company needs to be excluded. 19.5 The ld. DR relied on the orders of the lower authorities. 19.6 We have heard both the parties and perused the material on record. The assessee sought inclusion of the above company as a comparable in the MSS segment for computation of PLI. However, the ld. DRP has upheld the order of the ld. TPO by observing that it was not in the search matrix of the TPO. During the course of hearing the ld. AR produced the financial report and submitted that the financial data are available in the public domain and passes all the filters applied by the TPO. Therefore, this company can be considered as a comparable with the assessee company. Considering the rival submissions, the lower authorities have not examined the FAR analysis, therefore this issue is remitted back to the AO/TPO for FAR analysis and fresh decision in accordance with law. 20. Vide ground No.14(iii), the assessee has sought exclusion of Ugam Solutions Pvt. Ltd., Majestic Research Services & Solutions Ltd., Scarecrow Communications Limited from the comparables which....
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....earch services. In addition, the company offers various qualitative, quantitative and online market research and market tracking services. It is also engaged in planning, execution and proactive field management for multi-phased and multi-location projects." 20.5 As per the corporate information placed at pg. 2243 of PB, the company is engaged in providing market research services. The company offers a wide range of qualitative and quantitative research services which is in line with assessee's functions. As per revenue recognition placed at pg. 2244 of PB, the company's revenue is primarily derived from market research and related services. We are unable to understand once the above company passes all the filters applied by the assessee and considered as comparable, but before the DRP and before us the assessee has sought for exclusion on the above note 3 points. The ld. DRP has dealt the issue in detail which is as under:- "2.9.11 Majestic Research Services & Solutions Limited • Functionally Different • Peculiar economic circumstances or exceptional year of operations • Margin Computation 2.9.11.1 Having considered the s....
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....yderabad in the case of Deloitte Consulting Pvt, Ltd. confirmed selection of Vishal Information Technology Ltd having margin of 48.84%. The ITAT, Mumbai in the case of Mis. BP India Services Private Limited (ITA No,4425/Mum/2010) did not reject companies having margin of 75.6% (Datamatics Technologies Limited) and 68.7% (Hinduja TMT Ltd), and in the case of Exxon Mobil, upheld selection of Alpha Geo India Ltd having margin of 47 79% and Vimta Lab having margin of 57,68%.The Hon'ble Delhi High Court (TS173HC-2015(Delhi)-TP1), in its verdict in the case of Chryscapital Investment Advisors (India) Private Limited (the appellant), emphasised functional analysis as the key comparability criterion. and inter al a held that: mere earning of high profits/ losses could not be a reason to exclude a company as a comparable. 2.9.11.5 In view of the above, we do not find merit in the plea for exclusion of this comparable on the ground of its high profit margin. The assessee also objected to margin computation error. In this regard, we direct the AO/TPO to verify and recomputed the margin." 20.6 We do not find any infirmity in the order of the ld. DRP. Therefore this company is to be....
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....bles. The TPO observed that the assessee had not charged interest to its AEs in respect of unrealised amounts and made an adjustment of Rs. 2,53,25,332/- by computing arm's length interest rate at 4.985% under CUP method and charged the notional interest on trade receivables. However, the DRP directed the TPO to recompute the interest adjustment by adopting SBI short term deposit interest rate after granting 30 days credit period and to restrict the interest till 31.03.2017. Thereafter, incorporating the directions of the DRP, the TPO in its OGE recomputed interest adjustment at Rs. 16,548,223/- and the same was considered in the final assessment order. 23.1 In this regard, the ld. AR submits that there can be no separate international transaction of `interest' in the international transaction of `provision of service'. Early or late realization of sale proceeds is only incidental to the transaction of sale, but not a separate transaction in itself. Further, TNMM has been adopted at segmental level to benchmark the transaction of Software development & Marketing support services, in which process the receivables were considered as closely linked transaction and hence wer....
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....earing, it was brought to the notice of both the parties that while calculating the notional interest on receivables, 6 months LIBOR + 300 basis points beyond the credit period shall be considered by the TPO for giving effect on this issue. 24. Ground No.19 relates to corporate tax adjustment towards depreciation on goodwill. AMD Research & Development Centre India Pvt Ltd (Transferee Company) had acquired M/s AMD India Private Limited (Transferor Company). The scheme of amalgamation was approved by the Hon'ble High Court of Karnataka on 24.04.2017 and the appointed date was 01.04.2015. The purchase consideration for such acquisition was Rs. 24,01,01,11,194/-. As per the books, the value of net asset taken over was at Rs. 1,00,08,49,898/- of the Transferor Company. Therefore, the difference between the two was considered as goodwill and depreciation on same was accordingly claimed. 24.1 In the Draft assessment order, the AO has incorporated disallowance of depreciation on goodwill amounting to Rs. 35,00,40,324/- by placing reliance on the sixth proviso to section 32(1)(ii) of the Act. The DRP upheld that the Order of the AO observing that claim is not in accordance with the p....
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....ed that all the facts related to the Amalgamation were provided to the AO at the time of Amalgamation itself. If AO had any objections, same should have provided at the time, when opportunity was provided to him. But once the consent has been provided by the AO, it cannot be objected unless there has been concealment or misrepresentation of facts, which are absent in the present case. In this regard, the ld. AR relied on the decision of DCIT Circle 4(1)(1) vs. Urmin Marketing (P.) Ltd [2020] 122 taxmann.com 40 (Ahmedabad - Trib.). 24.6 With respect to objections raised by the AO on valuation of goodwill, it is submitted as follows: Objections by the AO Response of the Appellant 1. Scope of amalgamation was nothing but consolidation of group companies to take tax advantages. The objectives of amalgamation have been extensively listed in para 2.3 of Preamble of the scheme. (submissions at Pg 2332-2333 of PB-I). 2. Consideration is in form of exchange of shares which is mere restructuring to reduce taxes. Consideration can be in any form whether monetary or not. The law laid down in section 47(vii) also mandates issue of shares in lieu of purchase consideration to....
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.... at Pg 2336-2337 & 2367-2368 of PB-I). • Step 2: Discount Rate- This rate is aggregate of risk-free rate and risk premium. The valuer has adopted 13.5%, which is similar to discount rate of 13% provided by EY cost of capital survey (Refer submissions at Pg 2337- 2338 & 2369 of PB-I). • Step 3: Terminal Value- Terminal value is determined by dividing the perpetuity cash flows with the discount rate as reduced by the stable growth rate, which is generally the inflation rate to reflect the value of the cash flows arising after the forecast period. The valuer has adopted 3% as terminal value which is reasonable when compared to growth rate of that period and lower than India's inflation rate (Refer submissions at Pg 2338-2339 of PB-I). 24.8 Based on all of the above, the Appellant submits that there is no manipulation in share valuation as per DCF method. In case, the AO was dissatisfied, he had all the liberty to seek for information by issuing notice u/s 133(6) of the Act. The valuation adopted is fair and reasonable and cannot be questioned. Same basis of valuation is adopted for amalgamating and resulting company. 24.9 Therefore, the ld. AR submits t....
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....sult of transfer under section 47(vi) rws [Section 49(1)(iii)(e)] Cost of shares of amalgamated company in the hands of shareholders, received as consideration for transfer of shares of amalgamating company, 30.1 The ld. DR submitted that a bare reading of all the above provisions makes it abundantly clear that it was always the intention of the Legislature to make amalgamation a tax neutral scheme for companies as well as for the shareholders and not to provide an opportunity to anyone to make it a tool to avoid the legitimate tax which it is otherwise is expected to pay. The legislature has taken pain to cover all possibilities as is evident with the number of sections which have been enacted to deal with amalgamation. According to the ld. DR, these are special provisions of the Act dealing with amalgamation and therefore, must get precedence over a general provision. 30.2 The ld. DR submitted that provisions of section 32 of the Act requires allowing depreciation to the amalgamated company in the same manner which would have been allowed to the amalgamating company in the event had there not been any amalgamation. It is clear from the proviso to section 32 which is as u....
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.... can be claimed by the amalgamated company would not be logical and will give absurd result. 30.7 The ld. DR also referred to Explanation 2 to section 43(6)(c) of the Act which reads as under: (6) "written down value" means- ** ** ** [Explanation 2.-Where in any previous year, any block of assets is transferred,- (a) ** ** ** (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.]". 30.8 He submitted that as per the above provisions, the WDV of the assets acquired in the scheme of amalgamation in the hands of the amalgamated company will continue to be the same as it would have been in the hands of the ....
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....n paid by assessee in excess of its value of tangible assets was rightly classified as goodwill. In the facts of the present case, the Tribunal has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The agreement itself indicates that slump sale included sale of goodwill and the balance sheet specifically recorded goodwill at Rs. 40.58 crore. Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above the value of net tangible assets is an acceptable accounting practice. Thus, a further exercise to value the goodwill is not warranted. [Para 20] 1. The honorable HC relied heavily on the fact that the Tribunal has rejected....
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....; Gujarat HC Supreme Court Depreciation on goodwill arising on amalgamation claimed by assessee-company during course of assessment proceedings vide a revised computation of income without filing revised return of income was allowable. It was upheld by honorable Gujarat High Court in [2019] 112 taxmann.com 400 and also by honorable SC in [2020] 113 taxmann.com 154 1. The issue before the Tribunal was whether Depreciation on goodwill arising on amalgamation can be claimed during course of assessment proceedings vide a revised computation of income without filing revised return. 2. Reliance was placed on Smifs Securities Ltd to hold that depreciation on goodwill is allowable. Even Gujarat HC and SC upheld the same relying on the same. 3. There is no discussion in the order about the various provisions of the Income Tax Act such as 5th provision to section 32(1), section 49(1)(iii)(e), Explanation 7 to section 43(1) and/or Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii). Areva T & D India Ltd [2012] 20 taxmann.com 29 (Delhi) HIGH COURT OF DELHI Specified intangible asse....
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.... to para 10 to 12 of the judgement. They agreed that the intent of the Legislature was to make amalgamation a tax neutral scheme for companies as well as for the shareholders and not to provide a tax planning mechanism to either of them. They further mention that there was no entry in the books of the transferor company for the intangible assets/goodwill being self generated assets. They state that we are of the view that impugned transaction for claiming the deduction on account of the depreciation is an Arrangement for claiming the higher depreciation which is unwanted under the provisions of law. After discussing all this, They allow the claim stating that it is the second year of claim & the assessee was allowed depreciation in respect of such goodwill in the 1st year of amalgamation i.e. AY 2006-07. There was no action either under section 263 or 147 of the Act by the revenue. Therefore we can safely presume that the claim of the depreciation of the assessee in the 1st year has attained finality. Admittedly the 1st year is the base assessment year from where the issue of depreciation is emanating. 2. In this case, this is the first year of claim of depreciation and....
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.... Tribunal/ Court Decision Chowgule & Co (P) Ltd [2011] 10 taxmann.com 224 (Panaji) ITAT Panaji Assessee, post amalgamation, had claimed to have acquired goodwill of 'MPL' on payment of a sum and, accordingly claimed depreciation on such goodwill. Revenue disallowed claim of depreciation. The ITAT held that on appointed date 'MPL' did not have any asset and property as goodwill or such intangible asset in its accounts which could become a subject matter of transfer or vesting of asset to assessee. It further stated that while giving direction for amalgamation, High Court was not shown to have ordered to pay any specific amount for such goodwill, it could not be accepted that assessee incurred any additional cost on account of goodwill. Therefore, claim made by assessee with regard to goodwill, which was only a fictitious asset in hands of assessee, and also claim of depreciation were neither bona fide nor tenable. ITAT Panaji held that 'goodwill' arising pursuant to the scheme of amalgamation is not eligible for depreciation by placing reliance on Explanation 7 to section 43 (1) of the IT Act. United Breweries Ltd. ITAT Bangalore ITAT Ba....
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....s actually paid on account of goodwill. This is a factual finding. The Commissioner (Appeals) has come to the conclusion that the assessee had filed copies of the orders of the High Court ordering amalgamation of the above two companies; that the assets and liabilities of 'Y' Ltd. were transferred to the assessee for a consideration; that the difference between the cost of an asset and the amount paid constituted goodwill and that the assessee-company in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee-company stood increased. This finding has also been upheld by Tribunal. There is no reason to interfere with the factual finding. (Para 6) One more aspect which needs to be mentioned is that, against the decision of Tribunal, the revenue had preferred an appeal to the High Court in which it had raised only the question as to whether goodwill is an asset under section 32. In the circumstances, before the High Court, the revenue did not file an appeal on the finding of fact referred to hereinabove. (Para 7) In view of the above, it has to be held that goodwill is an asset within ....
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.... amalgamation was goodwill, eligible for depreciation. The Supreme Court on an earlier occasion has held that an issue which gets implicitly decided without it being raised is an inadvertent error on the part of the Court. Reference in this regard may be made to the following observations, "It would be straining logic to an absurd limit to say that, though this contention was not raised, not argued, not discussed and not decided, yet it must be held to have been implicitly decided because, through an inadvertent error committed by this Court, an answer was given in favour of the Revenue in ignorance of the true position." 30.15 The ld. DR submitted that the issue of depreciation on goodwill reached Hon'ble Supreme Court in another case, namely, Zydus Wellness Ltd [2020] 113 taxmann.com 154 where the exact wordings of the order was as under:- "Learned Additional Solicitor General submitted that the issues involved in the present matter are completely covered by the decision of this Court in Commissioner of Income Tax, Kolkata v. SMIFS Securities Limited, (2012) 13 SCC 488." 30.16 Once again there was no discussion on the crucial issue that the difference betw....
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.... for companies. In other words, Accounting Standard, which is continuously adopted by an assessee, can be superseded or modified by legislative intervention. However, but for such intervention or in cases falling under section 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the instant case, there was no finding given by the Assessing Officer on the correctness or completeness of the accounts of the assessee. Equally, there was no finding given by the Assessing Officer stating that the assessee had not complied with the Accounting Standards." (emphasis supplied) 30.19 In other words, it can be said that accounting treatment of any transaction is relevant only to the extent they are not in conflict with the express provisions of the IT Act. In case of merger and acquisition, the IT Act expressly requires recording of capital assets at the price appearing in the books of target company. Accordingly, the ld. DR submitted that the recognition of goodwill in accordance with Accounting Standard-14 and amortisation of the same in accordance with Accounting Standard-26 may not be of any help in claiming depreciation under the IT Act in vi....
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....well settled that when there are in an enactment two provisions which cannot be reconciled with each other, they should be so interpreted that, if possible, effect should be given to both. This is what is known as the rule of harmonious construction". That, the effect should be given to both, is the very essence of the rule. Thus, a construction that reduces one of the provisions to a "useless lumber" or "dead letter" "is not harmonious construction. To harmonise is not to destroy. ...... 30.22 The ld. DR also cited case laws dealing with interpretation of statutes which must be kept in mind while deciding the issue at hand which are as under:- * M.H. Daryani [1993] 202 ITR 731 (Bom) * International Airport Authority of India [2001] 119 Taxman 702 (Delhi) * Hotel & Allied Trades (P) Ltd. [2002] 83 ITD 85 (Cochin) * Jhabarmal Agarwalla [1992] 65 Taxman 176 (Gauhati) * C.K. Choksi & Co. [2003] 127 Taxman 109. 30.23 In view of the above, the ld. DR submitted that a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable const....
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....in the scheme of amalgamation under the provisions of section 47(vi) of the Act. * The cost of stock-in -trade in the hands of amalgamated company shall remain the same as in the hands of amalgamating company either as capital asset or stock in trade as provided under section 43C of the Act. * Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in amalgamation or demerger, etc under the provisions of section 72A of the Act. * Exemption of capital gains in the hands of shareholders of amalgamating company on transfer of shares of amalgamating company in the scheme of amalgamation under the provisions of section 47 (vii) of the Act. * Cost of capital assets to be the same as in the hands of previous owner where capital assets became the assets of the successor as a result of transfer under section 47(vi) r.w.s. 49(1)(iii)(e) of the Act. * Cost of shares of amalgamated company in the hands of shareholders, received as consideration for transfer of shares of amalgamating company, to be same as the cost of shares of amalgamating company under section 49(2) of the Act. 30.27 Therefore, ....
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....'ble High Court and the approval of the scheme of amalgamation must be limited to that extent as such. 30.30 The ld. DR submitted that the cash flow projections of the assessee is estimated projection which may or may not happen eventually. It is based on various factors which admittedly are the best estimates of the management after taking into account various factors affecting the business. During the course of hearing, it was submitted that there are increase in revenue as well, in the succeeding years. The fact remains that it is based on an estimate by the management and its reliability has been questioned by the Assessing officer as well. Further, looking into the financials of both the companies involved in amalgamation for the last 5 years, then also there would have been increase in the revenue. Therefore, to say that increase in revenue was because of the amalgamation cannot be a logical conclusion. In the scheme of amalgamation between the related parties, there are lot of grey areas. The assessee can prepare a report according to which it can give shares in the ratio of 1:1 or 1: 2 or 1:3 or any other ratio as it deems fit. The fact of the matter is that a tool is be....
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....esponse, the Income Tax department raised objection on the sole issue of TDS/TCS. The AO had not raised any objections in the impugned scheme of amalgamation at the time when opportunity was provided to him, all details about scheme of amalgamation and treatment of goodwill was before him. Therefore, the Department implicitly accepted that depreciation is admissible on the goodwill. Thus, Department cannot now turn around and state that depreciation is not admissible on the goodwill. 31.2 The contentions raised by the learned DR have been raised before the Tribunal and High Court many times and always, the Tribunal and High Court have rejected this contention. The judicial view on these arguments is long settled in favour of the assessee. These cases are discussed below. 31.3 After elaborately discussing the relevant provisions, the Tribunal in the case of Aricent Technologies (Holdings) Ltd. [2019] 109 taxmann.com 47 (Delhi - Trib.). held that the consideration paid by the amalgamated company over and above the net assets of the amalgamating company should be considered as goodwill arising on amalgamation and the depreciation claimed by the assessee on goodwill acquired dese....
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....e Tribunal allowed the depreciation claimed on goodwill. 31.7 Based on the above, it was submitted that the interpretation of the relevant provisions by the learned DR is not correct. In the instant case, the goodwill on which depreciation is claimed is arising out of the amalgamation. As per Scheme approved by NCLT, various intangibles like licences, registrations, copyrights, patents, trade names, trademarks, other rights, domain/website, all staff, workmen, trained employees, documentation, information, computer programs, manual data, catalogs, quotation, sales advertising material, list of present and former customers, suppliers, customer pricing information, and other records etc are transferred. These intangibles are collectively reflected as goodwill. The assessee has economically suffered in acquiring the goodwill and has paid consideration (discharged in form of issue of shares) over and above the net asset value of the amalgamating companies and same is recognized as goodwill as per order of NCLT. 31.8 The ld. AR submitted that the contention of the ld. DR that there is no discussion about various provisions dealing with amalgamation in judicial precedents relied up....
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....ct done on conservative basis. Thus, the arguments of learned DR for rejecting the reliance placed on various case laws is without basis and bad in law. 31.11 The ld. AR submits that submits that the judicial precedents relied by the learned DR are distinguishable on the following points and are not applicable to the present case: - SL No: Name of the Case Point of differences 1. Chowgule & Co. (P.) Ltd v ACIT Circle -2, Margao [2011] 10 taxmann.com 224 (Panaji) a) In this case, the assessee had written off an amount of Rs. 4605.90 lakhs as Exceptional "goodwill" arising out of amalgamation written off in its audited profit and loss account whereas in the instant case, excess consideration was recorded as goodwill as mentioned in the order of NCLT. b) In this case, the amalgamating company has substantial losses in its books (which was carried forward and set off post amalgamation) and the business was carried on with intermittent stoppages. Therefore, there could not be any goodwill attached to the business whereas in the instant case, the amalgamating company had no losses in its books, but had substantial reserves. c) Further, this decision is before S....
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.... by purchase, the consideration paid in excess of the net value of assets and liabilities of the amalgamating company is to be treated as goodwill. In the books, the Appellant has rightly followed accounting treatment prescribed by the AS. The Appellant has recorded consideration paid in excess of net assets taken over as goodwill. The Appellant has given due regard to accounting standards for the preparation of books of accounts and tax computation. The Appellant has followed the mandate of section 145 of the Act. 31.14 Further, the learned DR has made reference to another rule of interpretation "Generalia specialibus non derogant" which means general laws do not prevail over special laws. According to the learned DR, there are special provisions in the Act such as sections 47(vi), 43C, 72A, 47(vii), 49(1) and 49(2) of the Act which need to be given priority over the general provisions dealing with depreciation of goodwill. In this regard, the ld. AR submitted that the argument of learned DR is self-conflicting. It is not clear on what basis the learned DR is contending that section 32 dealing with depreciation is a general provision. Section 32 is a specific provision dealing ....
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....iled by the ld. AR that at para No.13, it is stated as under:- "As per Scheme approved by NCLT, various intangibles like licences, registrations, copyrights, patents, trade names, trademarks, other rights, domain/website, all staff, workmen, trained employees, documentation, information, computer programs, manual data, catalogs, quotation, sales advertising material, list of present and former customers, suppliers, customer pricing information, and other records etc are transferred. These intangibles are collectively reflected as goodwill. " 32.1 We note that the assessee has stated that goodwill is recorded in the books of accounts on the difference between the net assets (total assets - liabilities) taken over by the assessee and consideration paid to the amalgamating company on the one hand, and on the other, it is stated that the intangibles are collectively reflected as goodwill. This aspect requires verification at the end of the AO. We also note that no separate value has been assigned to these intangibles as per para 13 of the rejoinder extracted above. It is also not clear whether the amalgamating company has claimed revenue expenditure or depreciation on these....
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....% RPT filter, etc. in the process of selecting comparables and not adopting appropriate filters like onsite revenue filter, etc; (iv) Selecting inappropriate comparables and selecting companies as comparables even though they are not comparable in terms of functions performed, assets utilized, risks assumed, size, one sided turnover, unusual business circumstances, high margin, etc. The lower income tax authorities have erred in adopting the following companies as comparables: * Aptus Software Labs Private Limited * Consilient Technologies Pvt. Ltd. * Cybage Software Pvt. Ltd * Cygnet Infotech Pvt. Ltd * Infobeans Technologies Limited * Infosys Ltd * Larsen & Toubro Infotech Ltd * Mindtree Ltd * Nihilent Ltd * OFS Technologies Limited * Persistent Systems Ltd * Tata Elxsi Ltd * Threesixty Logica Testing Services Pvt. Ltd. (v) Rejecting the following comparables selected/proposed by the Appellant for unjustified reasons: * Akshay Software Technologies Limited * Athena Global Technologies Limited * Evoke Technologies Private....
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..... 26,25,30,243/- by disallowing the depreciation claimed on Goodwill; (ii) Not appreciating that the difference between Purchase consideration and the value of net assets acquired constitute an intangible asset; (iii) Not appreciating that Goodwill is a business asset and falls within the meaning of "other business or commercial right of similar nature" Explanation 3(b) to section 32 of the Act and is eligible for depreciation; and (iv) Not following the binding judicial precedents of Hon'ble Supreme Court. OTHER GROUND 11. The lower authorities have erred in levying interest of interest u/s 234B of Rs. 17,26,48,455/-. On the facts and circumstances of the case, interest u/s 234B of the Act is not leviable. The Appellant submits that each of the above grounds/ subgrounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. The Appellant prays accordingly." ....
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....d. iii. Cybage Software Pvt. Ltd. iv. Cygnet Infotech Pvt Ltd. v. Infobeans Technologies Ltd. vi. Infosys Ltd. vii. Larsen & Toubro Ltd. viii. Mindtree Ltd. ix. Nihilent Ltd. x. OFS Technologies Ltd. xi. Persistent Systems Ltd. xii. Tata Elxsi Ltd. xiii. Threesixty Logica Testing Services Pvt. Ltd. 40.1 During the course of hearing, the ld. AR has not pressed the companies at Sl.No. (i), (iii), (ix) & (x), which are dismissed as not pressed. We now take up for consideration the following companies. Consilient Technologies Pvt. Ltd. 40.2 The ld. AR submitted that the Company is functionally different as it provides licensable software products for speech, video, fax and analog modem communications market. Relevant extract of website and submissions are placed at Pg 966-969 of PB I. He relied on the decision of ITAT Hyderabad in the case of Conexant Systems (P.) Ltd. v. DCIT [2018] 91 taxmann.com 308 for AY 11-12, wherein Consilient Technologies Pvt Ltd is rejected on functionality basis and submitted that this company is to be excluded. 40.3 The ld. DR relied on the orders of lower authoriti....
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.... issue for AY 2016-17 in ground No. 7(iii) is remitted back to the AO/TPO, following the same, we remit this issue to the AO/TPO with similar directions. Cygnet Infotech Pvt Ltd. 40.7 The ld. AR submitted that the Company has substantial RPT for FY2016-17 (19.85%) & FY 2015-16 (17.49%). Computation of RPT for FY 2016-17 is placed on record. It is is functionally different as it is is engaged in the provision of various services such as enterprise solutions, Application, Content Management services and IT enabled services. Therefore this company has to be excluded. 40.8 The ld. DR relied on the orders of lower authorities. 40.9 We have considered the rival submissions and perused the material on record. The ld. AR has submitted that the company is functionally dissimilar and fails RPT filter. However, the ld. DRP held that this company is functionally comparable and in regard to RPT filter, it is within the range of 25%. We note that the coordinate Bench of the ITAT in the case of Radisys India Ltd. for AY 2017-18 [2022] 145 taxmann.com 294 (Bangalore - Trib.) decided the issue of functional comparability and held as under:- "8.1 The two comparables that assesse....
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....r AY 2016-17 - M/s.Airlinq Technology Pvt. Ltd vs DCIT, Circle 3(1)(1) Bangalore IT(TP)A No.231/Bang/2021 for AY 2016-17 40.12 The ld. DR relied on the orders of lower authorities. 40.13 We have considered the rival submissions and perused the material on record. This company has been excluded in assessee's own case for AY 2016-17 hereinabove. We also note from the PB pg. 613 the company is engaged in diversified activities and there is no change in facts from the previous AY. It is engaged in the development of platforms and technologies using custom scrips, AI technologies, robotic process automation, chatbox, integration tools and frameworks like jenkiins, Selelium, CAD, content management system (CMS), enterprises mobility and big data analytics, etc. Since there is no change in functional profile of this company for the present year, in view of this, the AO/TPO is directed to follow the decision for AY 2016-17. Infosys Ltd 40.14 The ld. AR submitted that the company is functionally different as it is much larger company engaged in diversified activities and not a pure software development company. It has global brand image and owns intangible assets worth ....
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....r like Appellant. The Company has substantial onsite revenue. Thus, has different business model when compared to Appellant. The company, during the FY 2016-17 has entered into various high value acquisition and merger transaction. Such extraordinary events have an effect on the profitability. Hence this company has to be excluded. Reliance is placed on M/s. Yahoo Software Development India Pvt. Ltd. vs JCIT, Special Range - 7, Bengaluru IT(TP)A No. 178/Bang/2022 for AY 2017-18. 40.21 The ld. DR relied on the orders of lower authorities. 40.22 We have considered the rival submissions and perused the material on record. We note from the order of the DRP that this company is engaged in rendering of software development services in different verticals and comparable to assessee. The company is earning foreign currency from software development services of Rs. 42.73 million. As per Note from the Annual Report, the principal business is software development services and 99% revenue is generated from the principal business activity. As per annual report at pg. 93 the different service activities in the form of consulting, maintenance, testing, management support services, etc. clea....
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....ce the margin. No material has also been placed before us to show that the margin in case of on-site work is higher. Basing on the same, Ld. TPO rejected Mindtree Ltd., as comparable. Ld. TPO also observed that the assessee has not stated as to how the approach of the assessee to the operating margin and that would there be a possibility of any comparables left, which are not controlled. It was also observed by the Ld. TPO that the assessee did not demonstrate as to how the R&D expenditure being incurred by this company is the reason for the higher profit margins, earned. Although the company may be incurring expenditure on R&D. It does not change the fact that the core business is SWD. Ld. DRP after going through the annual report, judicial precedents and considering the contentions of the assessee, observed that the company is engaged in international information technology consulting and implementation delivering business solutions through global software development and further observed that the company's earnings in foreign currency from software development services was Rs. 42.73 millions. As per the Note on Revenue Recognition, it has stated the principles adopted in rec....
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.... Limited on the ground that such entities were considered to be un-fit for comparison with the assessee in assessee's own case for the assessment years 2013-14 and 2014-15 and there was no change in the factual matrix of the case. 40.26 A perusal of the orders in Infor (India) (P.) Ltd. Case (supra), Infor (India) (P.) Ltd. case (supra) and Infor (India) (P.) Ltd.'s case (supra) therefore, makes it clear that all these seven comparables were found to be not comparable with the assessee consistently for the assessment years 2014-15, 2015-16 and 2016-17 on the ground of either functional dissimilarity or scales of turnover and profits or non-availability of segmental information, where it is necessary. All these entities are excluded from the list of comparables from the assessment years 2013-14 to 2016-17 consistently. Learned DR does not plead any change in the factual position for this assessment year from any of the earlier assessment years. Considering the similarly of the facts and circumstances, and respectfully following the consistent view taken by the Co-ordinate Benches in the assessee's own case, we direct the exclusion of Infosys Limited, Larsen & Toubro I....
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....al brand image and has paid brand fees of Rs. 344.98 lakhs to Tata Sons Limited for AY 2017-18. There is vast difference between the profile of Tata Elxsi and the Appellant. Reliance is placed on the following decisions:- * ADP Pvt. Ltd., Hyderabad vs DCIT-1(1), Hyderabad for AY 2016-17 (TS-63-ITAT-2022 Hyd) 40.33 The ld. DR relied on the orders of lower authorities. 40.34 We have considered the rival submissions and perused the material on record. The ld. DRP has discussed the issue in detail. We hold that his company is functionally dissimilar following the decision of the coordinate Bench of the ITAT Hyderabad in the case of Infor (India) Pvt. Ltd. [2022] 143 taxmann.com 68 (Hyderabad - Trib.) noted supra. The AO/TPO is directed to exclude this company. 41. By ground No.5(v), the assessee seeks inclusion of certain companies as comparables. In this regard, the orders of lower authorities and the submissions of the assessee are as follows:- Companies Findings of lower authorities Contentions of Appellant Akshay Software Technologies Limited TPO & DRP 1. The company is functionally different as it is engaged in providing professional services, p....
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....d in databases & financial data is available on public domain and databases for analysis. 2. The company is functionally similar as it provides solutions and services in product engineering and software development. (Submission at Pg 880-881 of PB I). 3. This company passes all filters applied by the TPO (Submission at Pg 882 of PB I). Nitor Infotech Private Limited DRP 1. This company does not appear in the search matrix of the TPO (Pg 90 of Appeal Papers). 1. The financial data relating to this company is available in public domain. 2. The company is functionally similar as it provides consultancy and technology services in the area of Business intelligence, collaboration, portals and performance management domain (Submission at Pg 894-895 of PB I). 3. This company passes all filters applied by the TPO (Submission at Pg 895 of PB I). Sasken Communication Technologies Limited DRP 1. The company is not comparable because it is engaged in diversified activities, has R&D activities and owns patents (Pg 90-91 of Appeal Papers) 1. The company is functionally similar as it is primarily engaged in software consulting and development. (submission at Pg ....
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....nancial, and distribution. It is used to integrate core business processes which are required for various functions concerning the SAP module. In this regard, it is relevant to note that ERP is a multi-layered software that integrates all the different functions within an organization. The ERP implementation requires professionals who have expertise in: - 1) Functional domain (i.e. domain knowledge of the business, its operations & management). 2) Software domain (i.e. technology expertise in software development) 2.6.11.3 Thus, ERP implementation & support involves personnel from professional domain and technology or software domain. Therefore, such services cannot be strictly said to be software services as non-software personnel may play a dominant role in the implementation. The very fact that this company has described that it had rendered professional services in Dubai, indicate that it pertained to the non-software services; or it is also possible it may be a mix of software services and professional services. As segmental information is not available for the same, we consider it appropriate to hold that this company is not functionally comparable ....
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....ions 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, Batchmaster Software Pvt. Ltd., DCIS DOT COM Solutions India Pvt. Ltd. and Evoke Technologies Ltd. for denovo consideration to Ld.AO/TPO." 12.4 We further observed that the ld. DRP have observed that the figures are wrongly reported in the schedule NO. 2.29 & 2.16 & 2.26 in the financial statement in regard to the Export Turnover but this aspects were not discussed in the above said order as relied by the ld. AR, therefore this decision is not applicable. For the sake of convenience we are reproducing the findings of the ld. DRP as under:- "Having considered the submissions, and on perusal of the annual report, we note that in the statutory auditor's report, it is stated in note 2.29 that the financial statements include branch revenue of Rs. 1605 lakh and branch net-profit of Rs. 2.19 lakh based ....
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....nally 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 consideration. 25. Athena Global Technologies Limited 15. The TPO & DRP rejected the company on the ground that it fails networth filter. The ld. DRP further noted that the negative net worth filter eliminates the intrinsically sick and nonperforming companies owing to various internal reasons. The ld. AR submitted that the company is functionally similar as it is primarily engaged in software development. This company passes all filters applied by the TPO. He submitted that Companies having similar FAR cannot be excluded on the basis of negative net worth filter and relied on decision of Gillette Diversified Operations Pvt Ltd [TS-218-ITAT-2016(DEL)-TP]. 151/DEL/2013 AY 2005-06, Order dated 01.04.2016 15.1 The ld. DR re....
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....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 cannot be excluded as comparable if the functions performed, Assets deployed and risk assumed are comparable with the business of the company. Against this the ld AR relied on the order of the lower authorities 25. We have carefully considered the rival contentions. According to rule 10(B)(a) of the Income Tax Rules the comparability of international transactions with an uncontrolled transaction shall be judged with respect to the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions. According to the Rule 10B(3) a uncontrolled transact....
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....ns (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 201718 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 pressed. Bhilwara Infotechnology Limited & R Systems International Limited: 13.3 ......... 13.4 ...... ISN Global Limited: 13.5 ............ 13.6 ......... 13.7 .......... E-ZestSolutions Limited: 13.8 Now coming to E-ZestSolutions Limited, the ld. DRP observed that on perusal of the annual report it was noted that the company has income from sale of services amounting to Rs. 81.46 crores as per the information statement of profit and loss account given at page nos. 123-1....