TaxTMI 
TaxTMI 
2023 (7) TMI 125
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....ute 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 documentation and in conducting a fresh comparability analysis for the software development services based on the application of additional filter....
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.... 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 sought the exclusion of following comparables: (c) Mind Tree Ltd. (d) L&T Infotech Ltd. (f) Infobeans Technologies Ltd. (g) Persistent Systems Ltd. (k) Infosys Ltd. (c) Mind Tree Ltd.: 4. The assessee has following objections:- * Diversified operation and lack of segmental data * Significant R&D activity * Presence of intangibles * Significant onsite activity 4.1 The ld. D.R. s....
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....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 information technology and computer service activities n.e.c 62099 53.7 Total 100 4.4 The ld. D.R. submitted that the above information clearly show that this company is engaged only in software development and related services. Therefore, the pleas that the company performs different and diverse activities and hence functionally different was rejected by the ld. D.R.P. The ld. DRP also rejected that plea that this company is product based company. A plea was raised that this company also provides da....
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....eir 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 annual report, clearly indicate that the company's customer centricity approach, technology, capability, skilled employees, delivery excellence have contributed to its revenue growth. Therefore, the ld. DRP did not find merit in the plea that brand has contributed to the revenue growth. 4.7 It was also argued that this company has significant intangibles and undertakes R & D activity. On careful perusal of the information in the annual report, the ld. DRP observed that the R&D activities are mainly towards remaining abreast with the ....
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....ject 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: 5. The Ld. A.R. submitted that this company is not functionally comparable as it is engaged in providing service in diverse areas such as analytics, information management, application development business process management, business technology consulting, infrastructure management services, product engineering & SAP services. It was also contended that this company is engaged in sale of product and also engaged in outsourcing IT services in banking and financial services and insurance sector and also as R&D operations and patents and hence not functio....
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....ing 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 the nature of infrastructure management services, technology consulting and SAP services. - Acquisition of subsidiary - Discoverture Solutions LLC 42. The DRP while dealing with the aforesaid objections has merely taken the view that the presence of IPR revenue was insignificant and so also expenses of brand value, R&D & intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Ba....
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.....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 discussed earlier, this issue came for consideration before this Tribunal in the case of EIT Services India Pvt. Ltd. Vs. ACIT in IT(TP)A No.2498/Bang/2019 dated 3.9.2021 for the assessment year 2015-16, wherein held as under: "8. We notice that M/s. Infobeans Technologies Ltd. have been directed to be excluded by the coordinate bench in the case of Metric Stream Infotech (India) Pvt. Ltd. with the following observations: "14.3. Infobeans Technologies Ltd., Ld.AR submitted that this comparable was selected by authorities below as it passes all filters, based upon response received from this company under section 133 (6) of the act. He submitted that this observation is contrary to the facts and figures app....
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..... 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 on record. This comparables has been considered in the case of EIT Services India Pvt. Ltd. in IT(TP)A No.2498/Bang/2019 for the assessment year 2015-16 wherein held as under: 7. We notice that the coordinate bench in the case of Yahoo Software Development India Pvt. Ltd. (supra) has excluded following 3 companies holding them as not good comparable companies. (A) Persistent Systems Ltd:- 33. We have considered the rival submissions. We find that on the question of application of RPT filter, the assessee had made the following submission before the DRP:- 4. Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show-cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevan....
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....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 comparability and hence, such plea is rejected." 35. Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this company should not be regarded as a comparable company with a company which does not have any onsite revenue. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No.1054/Bang/2011 for AY 2007-08 dated 23.11.2012 wherein this Tribunal took the following view:- "64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is ....
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....ominantly 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 offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies ....
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....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 and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon'ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon'ble Delhi High Court (C) INFOSYS LTD. 39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- "Functionally dissimilar - owns intellectual properties, incurs significant R&D costs & onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Info....
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....submissions advanced by both sides in light of records placed before us. It is observed that the annual report of this company categorises the diversify services provided by this company under software development segment. We also note that this company is basically into application development for web and mobile and provides customised services to its offshore clients comprising. Entire revenue received by this comparable ease under one single segment of sale of software. This company also owns software licenses. 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." 9. Following the above said decisions rendered by co-ordinate benches, we direct exclusion of Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Infosys Ltd. & Infobeans Technologies Ltd. from the final list of comparables." 9.3 In view of the above order of the Tribunal, we direct the AO/TPO to exclude Persistent Systems Ltd. & Infosys Ltd. from the....
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....f comparable companies with the following observations: "12. We find force in the contentions of Ld A.R. If the Annual report of this company does not mention about Related Party transactions, then the assessee cannot be held responsible to prove a fact relating to a third party, which may or may not exist. We notice from the Auditors Report of M/s T2T2 India Ltd that the auditor in para 5(b) of Annexure to the Auditors' report has mentioned as under:- "There are no transactions that are made at prices exceeding Rs. 5 lakhs in respect of any party who is covered under section 301 of the Act during the financial year." Hence, in the absence of any specific information, there is merit in the contentions of the assessee that the above said company might not have had related party transactions during the year under consideration. Accordingly we do not agree with the reasoning given by Ld DRP for excluding this company as a comparable. Accordingly we direct the AO/TPO to include this company." 20. Following the said decision, we direct inclusion of this company in the list of comparable companies. As far as Infomile is concerned, the company was rejected for the reason that ....