TaxTMI 
TaxTMI 
2023 (7) TMI 125
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....and is liable to be quashed. 2. On the facts and in circumstances of the case and in law, the Dispute Resolution Panel (learned DRP') erred in not appreciating that the order of the learned Assistant Commissioner of Income-tax (Transfer Pricing) - 1(3)(1), Bangalore (learned TPO') passed under Section 92CAA of the Income-tax Act, 1961 (`the Act') is contrary to law and thus liable to be quashed. 3. On facts and in the circumstances of the case and in law, the learned DRP/ AO/ TPO erred in making an upward adjustment of INR 1,774,850,318 to the transfer price of the Appellant's international transactions in respect of software development services. Grounds for software development services 4. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services, the learned DRP/ AO/ TPO erred in: 4.1. Rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 4.2. Rejecting the comparability analysis carried out by the Appellant in the TP docu....
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..../expenses and liabilities written back, as operating in nature on the premise that these are not the routine operating costs in determining the operating mark-up of the comparable companies. 4.11. Not providing an adjustment for the differences in working capital of the Appellant and the comparable companies. 4.12. Not providing suitable adjustment to account for differences in the risk profile of the Appellant 4.13 Computing incorrect operating mark-up of certain comparable companies: a) Kals Information Systems Ltd.; b) E-Zest Solutions Limited; c) CG-VAK Software & Exports Limited; and d) Tata Elxsi Limited (Seg) 4.14 Computing incorrect operating mark-up of the Appellant. Other than Transfer Pricing Related 5. That the learned AO erred in levying interest under section 234B of the Act of INR 321,000,259." 2. At the time of hearing, the assessee pressed only following grounds and not pressed other grounds for which the ld. A.R. made an endorsement. Accordingly, only the following grounds are adjudicated and other issues are dismissed as not pressed. Ground No.4.8: 3. The assessee s....
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....ing this information in the annual report, the ld. DRP observed that this company is predominantly (i.e., 98%) engaged in software development activity and is functionally comparable to the assessee. The different services activities, in the form of consulting, maintenance, testing, management support services etc. clearly fall within the gamut of software development services, though it pertains to different verticals. That is the reason, the company has recognised a single business segment i.e., software development services, and which are categorized into five verticals. Besides, page 39, Annexure 4 of the annual report, the nature of the various services activities are given as under: - SI. No Name and Description of main products / services NIC Code of the Product / service % total turnover of the company 1 Writing, modifying, testing of computer program to meet 62011 15.6- 2 Web-page designing 62012 0.0 3 Providing software support and maintenance to the clients 62013 21.1 4 Computer consultancy and computer facilities management activities 62020 4.0 5 Software installation 62091 5.6 6 Other informa....
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....rew over the previous year due to our efforts to drive higher operational efficiencies and aided by favourable currency movements'. Further at page 95 of the annual report, it was stated, 'our relentless focus on customer centricity has enabled us to become the partner of choice for our clients', and 'this reflects in our growth in high revenue clients'; 'our senior management comprises some of the seasoned global leaders from diverse backgrounds, geographies and with different arrears of specialization; and their leadership and governance helped us deliver consistent performance'. It is also pertinent to refer to the discussion on the risks faced by the company, wherein it is stated, 'we may face margin pressures due to customers having tough expectations on pricing or due to tactical movements on the part of our competitors to gain market shares. `Mindtree risks losing business to larger players in the industry, as our competitors may come up, with new offerings to challenge one market share and growth'. This information clearly indicates that brand has not leveraged business growth or sustenance in the market. Thus, the information in the annu....
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....leas were rejected by the ld. DRP. 4.8 As to onsite expenses, the ld. DRP observed that the assessee has assumed that the entire expenditure incurred in foreign currency would be onsite expenses, which is incorrect, as there may be requirement to incur expenditure in foreign currency for offshore transactions also like payment of professional charges, sales commission etc. onsite activity would not affect adversely comparability when the company is otherwise functionally comparable. Therefore, the ld DRP considered it appropriate to reject these pleas. 5. We have heard the rival submissions and perused the materials available on record. This comparable has been considered in the case of M/s. SAP Labs India Pvt. Ltd. Vs. JCIT in IT(TP)A No.2519/Bang/2019 in assessment year 2015-16 dated 21.7.2022, wherein they placed reliance on the earlier order of the Tribunal in the case of LG Soft India Pvt. Ltd. in IT(TP)A No.2412/Bang/2019 dated 31.5.2022 wherein held as under: "12.2 Further we note that Coordinate Bench of this Tribunal in case of LG Soft India Pvt. Ltd. vs. DCIT in IT(TP)A No. 2412/Bang/2019 dated 31/05/2022 observed as under: "I. Mind Tree Limited: ....
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....ration, significant R&D spend, ownership of intangibles. - Also engaged in business of rendering IP-Led revenue, infrastructure management, package implementation, consultancy services, etc. constituting 45% of overall revenue during FY 2014- 15. - Diversified operation i.e. engaged in infrastructure management services, business process management, technology consulting, product engineering and SAP services. Also lacks segmental data - Significant research & development activity. By incurring R&D expenses, it was able to deliver IP based video surveillance management, recording and analytic products and solutions. It has filed 4 patents in India and US so far in the area of Video analysis. - Ownership of intangibles in the form of intangible property. Significant onsite activity: - 46% of revenue earned under Onsite model. - Incurred overseas branch office expenses amounting to INR 1582 crores - Receives incentives from State of Florida in relation to the development center located overseas. Lack of segmental data - Does not maintain segmental information in respect of profitability reported from business activities in....
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....ed from the list of comparables for the reason that Larsen & Toubro Infotech Limited was a software product company and segmental information on SWD services was not available. In the present case, Larsen & Toubro Infotech Limited engaged in development of software onsite and its overseas revenue for the financial year 20112012 was Rs. 27,838,752,995 and domestic revenue was Rs. 1,756,792,454. Further in the case of Huawei Technologies India Put. Ltd. in IT(TP)A No.1939/Bang/2017 for assessment year 2012-2013 - order dated 31.10.2018 has taken the same view that it cannot be a comparable with that of the assessee. Being so, we direct the TPO to exclude the same from the list of comparables." 6.3 In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude L&T Infrastructure Ltd. from the list of comparables. (f) Infobeans Technologies Ltd.: 7. According to the ld. A.R., this is not functionally comparable to the assessee's case and lack of segmental data. 7.1. The ld. D.R. relied on the order of ld. DRP in para 4.7.1 page 38 of ld. DRP order 7.2 We have heard the rival submissions and perused the materials available on record. As discus....
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.... 14.3.3. In our considered opinion this comparable cannot be considered to be functioning in 100% risk mitigated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee. Accordingly we direct this comparable to be excluded from finalist."" 7.3 In view of above order of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. (g) Persistent Systems Ltd. and Infosys Ltd. 8. The ld. A.R. raised following objections: * Fails RPT to sales filter of 25% * Functionally dissimilar * Engaged in research and development activities * Significant outsourcing activity 8.1 The ld. D.R. relied on the order of ld. DRP (h) Infosys Ltd.: 9. The ld. A.R. has raised following objections: * Diversified operations and Functionally not comparable * Presence of non-routine intangible * Significant onsite operations * Significant research and development activity 9.1 The ld. D.R. relied on the order of lower authorities. 9.2 We have heard the rival submissions and perused the materials available....
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.... Amount (INR Million) Sale of services 2,410.02 Commission received 10.26 Purchase of software 1.49 Cost of technical professional 1,339.1 Commission paid on sales 111.79 Traveling and conveyance 19.27 Total related party transactions (A) 3,891.93 Total Sales (B) 12,424.98 RPT % of Sales (A/B) 31.32% From the above computation, it is clear that the controlled transactions of Persistent constitutes 31.32% of sales. Based on the above, it can be seen that Persistent fails the `RPT to sales ratio' filter applied by the learned TPO and should therefore not be considered as a comparable." 34. This argument has been addressed by the DRP in its order as follows:- "4.4.9 We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that onsite expenses do not adversely affect c....
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....xt by the Assessee. 66. The next argument of the Assessee is that TPO has held that margins are lower in onsite software services and that margin is not a criteria to select or reject a comparable under Rule I0B(2) of the I.T. Rules. We are of the view that this argument again ignores the fact that the approach of the TPO has been to highlight the fact that there can be no functional comparability, if the assets employed and risks assumed are taken into consideration. It is in that context the TPO has referred to the margins. 67. The companies who generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshor....
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.... v. ACIT, ITA No.6148/Del/2015 for AY 2011-12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also trading in software and owned insignificant intangible assets. The company was excluded from the list of comparable companies with reference to SWD services provider such as the assessee. The ld. Counsel pointed out that though this decision was rendered with reference to AY 2011-12, the same reasoning would apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee's PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee's PB that this company as part of its operating profit in Schedule-O of profit & loss account contains expenditure for 'cost of bought out items for resale' and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit & loss account, there is no break-up of the revenue with regard to software services ....
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....ring in annual report. Referring to page 1015 Ld.ARsubmitted that this company is operating at CMMI Level 3 and-is a software service company specialising in business application development for web and mobile. In the company overview this company has been stated to be primarily engaged in providing custom developed services to offshore clients and it provides software engineering services primarily in custom application development, content management systems, enterprise mobility, Big Data analytics. Ld.AR thus submitted that this company is functionally not at all similar with a captive service provider like assessee that this providing Ltd services to its associated enterprises. 14.3.1.0n the contrary Ld. CIT DR, referring observations of DRP in para 3.6.1 submitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133 (6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to learnt AO/TPO for verification. 14.3.2. We have perused submissions advanced by both sides in light of records placed b....
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....A.Y. 2015-16 observed as under: "(c) I2T2 India Limited and Infomile Technologies Limited: (i) The companies came to be rejected by the TPO for the reason that information regarding its related party transactions was not available in the annual report. The DRP further upheld the exclusion. (ii) It was submitted that if there is no disclosure with respect to the RPT made in the annual report, the presumption out to be that there is no RPT transaction. Further, it was submitted that these companies render SWD services and are functionally comparable to the assessee. This company also passes all the filters applied by the TPO. It was submitted that in cases of similar placed companies, this company is included in the final list of comparables. Reliance in this regard was placed on the decision of this Hon'ble Tribunal in the case of LG Soft India Pvt. Ltd. v. DCIT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15). (iii) We have considered the submission. We find that on identical submissions, this Tribunal in the case cited by the learned Counsel for assessee directed inclusion of ....