TaxTMI 
TaxTMI 
2023 (3) TMI 1412
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....pursuant to the directions of the Learned Dispute Resolution Panel-2, Bangalore (the `Ld. Panel') to the extent prejudicial to the Appellant, is bad in law and liable to be quashed; 1.2. The Ld. AO has erred in law in making a reference to the learned Deputy Commissioner of Income Tax (Transfer Pricing) - 2(2)(2) [Id. TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. 1.3. The Ld. AO has erred in passing the Order under section 143(3) read with section 144C of the Act without having the appropriate jurisdiction since the appropriate authority to pass the Order was National Faceless Assessment Authority, Delhi (`NFAC') under section 144B(1)Xxxx) of the Act. 1.4. The Ld. AO has passed the final order without providing any reference to the procedure prescribed under the provisions of section 144B(8) of the Act being followed by the Principal Chief Commissioner or the Principal Director General, as the case may be, in-charge of National Faceless Assessment Centre and therefore, the final order is bad in law and hence, liable to be quashed. A.....
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....he same; 3.3. The Ld.AO/Ld.TPO grossly erred on facts in benchmarking the transactions of the captive software services of the Appellant with companies operating as fullfledged entrepreneurs without considering the differences in the functions performed, assets employed, and risk undertaken by the Appellant vis-a-vis comparable companies; 3. 4. The Ld.AO/Ld.TPO erred in treating provision which was written back since it was longer required as nonoperating income which has the effect of reducing the margins of the Appellant. 3.5. The Ld.AO/Ld.TPO grossly erred in not applying an upper turnover filter to reject companies having high turnover. 4. Ground No. 4: Comparability analysis - SWD segment 4. 1. The Ld.AO/Ld. TPO erred in rejecting (i) Evoke Technologies Pvt Ltd (ii) Smartcloud Infoservices Pvt. Ltd (iii) E-Zest Solutions Ltd., despite these companies being functionally comparable to the Assessee. The Ld. Panel erred in upholding the same; 4.2. The Ld.AO/Ld. TPO erred in not including (i) Happiest Mind Technologies Limited (ii) Kals Information Systems Ltd. and (iii) Yudiz Solutions Pvt Ltd (iv) Sasken Technologies Ltd as co....
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.... the directions of the Ld. Panel, wherein the Ld. Panel directed the Ld.TPO to consider the segmental margins earned by the Appellant, the Ld.TPO erred in not following the said direction of the Ld.Panel, thereby enhancing the the adjustment to MSS segment; 6.2. Without prejudice to the above ground, the Ld.AO/Ld.TPO erred in rejecting the following companies (i) Honeycomb Relationship Management Services Pvt Ltd (ii)Spectrum Business Solutions Ltd (iii) Hansa Research Group Pvt. Ltd. (iv) Netlink Solutions (India) Ltd. (v) Kestone Integrated Marketing Services Pvt Ltd and (vi) TechnicomChemie (India) Ltd., despite these companies being functionally comparable to the Assessee. The Ld. Panel erred in upholding the same. 6.3. The Ld.AO/Ld.TPO erred in including (i) Axience Consulting Pvt.Ltd. (ii) Dun & Bradstreet Information Services India Pvt. Ltd. (iii) Pressman Advertising Ltd. (iv) Lintas India Pvt. Ltd. (v) Majestic Research Services & Solutions Ltd. and (vi) Cheil India Pvt. Ltd. despite these companies being functionally dissimilar to the Assessee. The Ld. Panel erred in upholding the same. 6. 4. Without prejudice to the above ground, the LD. TPO er....
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....t pertaining to interest on outstanding receivables, without taking into consideration that the weighted average collection period of the Assessee in respect of invoices raised during the assessment year was within the credit period agreed as per the inter-company agreement between the Assessee and its Associated Enterprises. 9.4. Without prejudice, the Ld.AO/Ld.TPO erred in determining an adjustment without applying any of the prescribed methods. 9.5. The Ld.Panel erred in upholding the same thereby erred in directing the Ld.AO/Ld.TPO to compute interest by applying SBI short term deposit rate. 9. 6. Without prejudice to ground numbers 9.1 to 9.3 above, the Ld.AO/Ld.TPO erred in ignoring that, if at all transfer pricing adjustment has to be sustained with respect to notional interest on outstanding receivables, it has to be restricted at an interest rate based on LIBOR as against SBI short term deposit rate. 10. Ground No.10: Levy of interest under section 234B and 234D 10. 1. That on the facts and in circumstances of the case, the Ld.AO has erred in levying interest under section 234B of the Act amounting to INR 2,54,39,804. 1....
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.... as under by using OP/OC as the PLI and adopting TNMM as the most appropriate method. SWD segment Operating Income Rs. 113,02,97,729/- Operating Cost Rs. 100,34,34,406/- Operating Profit (Op. Income - Op. Cost) Rs. 12,68,63,323/- Operating/Net mark-up (OP/OC) 13% ITeS segment Operating Income Rs. 11,19,14,705/- Operating Cost Rs. 9,93,53,527/- Operating Profit (Op. Income - Op. Cost) Rs. 1,25,61,178/- Operating/Net mark-up (OP/OC) 13% MSS segment Operating Income Rs. 1,30,33,510/- Operating Cost Rs. 1,15,70,644/- Operating Profit (Op. Income - Op. Cost) Rs. 14,62,866/- Operating/Net mark-up (OP/OC) 13% SWD segment: 2.4 For SWD segment, assessee used following 10 comparables with margin of 9.78% and thereby treated its transactin to be at arms length. Sl. No. Name of the company Weighted average (in %) 1. Isummation Technologies Pvt. Ltd. 2.26 2. Smartcloud Infoservices Pvt. Ltd. 4.34 3. Evoke Technologies Pvt. Ltd. 4.36 4. Sasken Communication Technologies Ltd. 9.69 5. Infomile Technologies Ltd. 9.71 6. CG-VAK Software & Exports Lt....
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.... under SWD segment to be at Rs.10,99,47,197/-. ITeS: 2.6 The Ld.TPO noted that assessee used following 8 comparables with a median of 9.66% and thus held the transaction to be at arms length. Sl. No. Name of the company Weighted average (in %) 1. Informed Technologies India Ltd. -21.46 2. Cosmic Global Ltd. -3.00 3. Crystal Voxx Ltd. 6.35 4. R Systems International Ltd. 8.85 5. Bhilwara Infotechnology Ltd. 10.47 6. Jindal Intellicom Ltd. 14.17 7. Allsec Technologies Ltd. 14.37 8. A G S Health Pvt. Ltd. 35.19 35th Percentile 6.35 Median 9.66 65th Percentile 14.17 2.7 Dissatisfied with the comparability analysis carried out by the assessee, the Ld.TPO adopted following filters and shortlisted a set of 17 comparables with a median of 23.34%. the details of which are as under: Filters applied by the TPO: Step Description 1. Companies whose data is not available for FY 2017-18 - excluded. 2. Companies having different financial year ending (i.e., not March 31, 2018) or data of the company does not fall within 12 month period i.e.,....
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....analysis carried out by the assessee, the Ld.TPO adopted following filters and shortlisted a set of 13 comparables with a median of 19.94%, the details of which are as under: Filters applied by the TPO: Step Description 1. Companies whose data is not available for FY 2017-18 - excluded. 2. Companies having different financial year ending (i.e., not March 31, 2018) or data of the company does not fall within 12 month period i.e., 01-04-2017 to 31-03-2018 - excluded. 3. Companies whose income was less than Rs. 1 Crore - excluded. 4. Companies whose MSS income is less than 75% of the total operating revenues - excluded. 5. Companies which have more than 25% related party transactions of the sales - excluded. 6. Companies which have export service income less than 75% of the sales - excluded. 7. Companies with employee cost less than 25% of turnover - excluded. Comparables selected by the TPO Sl. No. Name of the Company Mark-up on Total Costs (WC-unadj) (in %) 1. Goldmine Advertising Ltd. 1.68 2. Scarecrow Communications Ltd. 10.80 3. Ugam Solutions Ltd. 15.59 4. C....
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....g companies, after verification by the TPO: - Informed Technologies Ltd. - Crystal Voxx Ltd.; - ISN Global Solutions Ltd.; - I Services India Pvt. Ltd.; and - Suprawin Technologies Ltd. (iv) The DRP directed exclusion of AGS Health Pvt. Ltd., Ultramarine and Pigment Ltd., Access Healthcare Pvt. Ltd. (v) The remaining contentions with respect to inclusion and exclusions of comparables were rejected. 4.3. MSS Segment (i) The DRP directed the Ld.TPO to consider the segmental financial results as furnished by the Assessee; (ii) The DRP directed exclusion of Focus Suites Solutions & Services Ltd., Egon Zehnder International Pvt. Ltd. and Adfactors P R Pvt. Ltd. (iii) The remaining contentions with respect to inclusion and exclusion of companies were rejected. 4.4. The DRP upheld the interest computed by the TPO on delayed receivables. 5. On receipt of the DRP directions, the Ld.AO passed the final assessment order by making addition in the hands of the assessee of Rs. 14,62,45,788/-. Aggrieved by the final assessment order, the assessee has filed the present appeal before this Tribunal. 5.1. At the outset, the Ld.AR....
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.... Infosys Ltd. 10. Cybage Software Pvt. Ltd. ITeS segment S.No. Name of the comparables Turnover (in crores) 1. Microland Ltd., 2. Datamatics Business Solutions Ltd., 3. Tech Mahindra Business Services Ltd., 4. Infosys B P M Services Pvt. Ltd. 5. Motif India Infotech Pvt. Ltd., 6. Eclerx Services Limited 7. MPS Ltd. We have perused the submissions advanced by both sides in the light of records placed before us. 5.3. On the contrary, the Ld.DR relied on the orders of the authorities below. 5.4. The assessee seeks exclusion of above listed comparable companies on failing the turnover filter. It is submitted that the Ld.TPO in selecting comparables applied filter of companies with turnover of more that one Crore however failed to apply the upper turnover limit. This Tribunal has been consistently applying the turnover filter for the purpose of choosing comparable companies. 5.5. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above is....
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....re excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 42. The Assessee's turnover was around Rs. 110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs. 200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and....
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.... 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the....
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....y the assessee and hence he has recasted the financials on the basis of revenue. On perusal of the segmental financials of the assessee we are of the opinion that the assessee allocated the expenditure on the basis of actual costs . Hence we are hereby directing the TPO to accept the segmental financials of the assessee. However items like provisions, interest which were being treated as non -operating will be held so as we have consistently upheld these items as non operating in nature." It is submitted that the above directions has not been followed by the Ld.AO/TPO while computing assessee's margin. We direct the Ld.AO/TPO to follow the directions of the DRP as indicated in para 4.2. Accordingly, ground nos. 5.1 and 6.1 raised by assessee stands allowed for statistical purposes. 8. Ground no.6.2: The assessee is seeking inclusion of only two comparables being Honeycomb Relationship Management Services Pvt. Ltd. and Kestone Integrated Marketing Services Pvt. Ltd. 8.1. She submitted that these comparables were rejected as they did not fall under the search matrix by the Ld.TPO. In this regard, it is submitted that the companies cannot be rejected solely on the gr....
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....ding at page 4540 without giving any segmental details. The only bifurcation of revenue in schedule 20 at page 4546 gives is service charges (local) and service charge (export). From the above it is clear that all the revenue earned by this company from consultancy and advisory charges in the field of market research, business administration and finance are clubbed together. The assessee before us is only providing marketing services to its AEs in respect of the presales activities as per the functions reproduced hereinabove which has not been disputed by the Ld.TPO as observed from para 10 of the 92CA order. The DRP included this comparable by observing that assessee also undertakes similar services in advertising, marketing, consulting in creating awareness of the product and therefore is functionally similar with the company. This observation of the DRP is contrary to the functions described at page 761 of the paper book carried out by assessee under the marketing support service segment. We therefore hold this comparable to be not functionally similar with that of assessee. Accordingly, this comparable is directed to be excluded from the final list. (ii) Dun & Bradstreet ....
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....ion, these functions cannot be compared with the limited services rendered by assessee to its AEs. We accordingly direct this comparable to be excluded. (iii) Pressman Advertising Ltd. It is submitted that the primary business activity of Pressman is providing advertising services, selling of space for advertisement in print media. It has earned revenue solely from advertising services (such as corporate advertising, brand advertising, financial advertising, social advertising, government advertising, media buying). This being the case, the company cannot be comparable to marketing support functions provided by the Assessee. Reliance in this regard is placed on the decisions of coordinate bench of this Tribunal in case of Radisys India Ltd. v. DCIT reported in (2022) 145 taxmann.com 294 for the AY 2017-18. The assessee therein was engaged in providing similar service as the assessee before us. This Tribunal directed exclusion of this company from the final list of comparables. It is submitted that since the profile for the assessment year 2018-19 is same, the company ought to be excluded from the final list of comparables. The Ld.DR relied on the orders passed by the....
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....in the annual report to be advertising and marketing communications. The revenue recognition by this company has been mentioned to be an advertising agency catering services to much number of clientele. We therefore do not find this comparable to be functionally similar with that of assessee who is a captive service provider. Accordingly, this comparable is directed to be excluded from the final list. (v) Majestic Research Services & Solutions Ltd. It is submitted that Majestic is engaged in market research services. It offers customer service evaluation, mobile analytics, eye tracking, agricultural research etc. It offers a suite of customized solutions that cater to business at various stages of product development or launch across the product life cycle. It offers a wide range of qualitative and quantitative research services. It is involved in high-end services like research services, data analytics, product development and testing, etc. market scoping etc. It also focuses on market research, advertising research, and brand research and to deliver powerful insights into the effectiveness of branding, advertising and consumer choices relies on high level technologies su....
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....h as attracting clients who are advertisers, developing an advertising strategy, creation of advertisements by a creative team consisting of writers, designers and copy writers. They also undertake research activities to understand a client's market situation, competition, customers in the process of planning an advertisement campaign etc. Therefore, the aforementioned activities are not similar to the functions performed by the Assessee in the nature of product marketing, targeted campaign creation and management, public relations, customer and associate lead generation and distribution, etc. Further, it also uses a separate charging mechanism for services rendered by it to its customers, and revenue is recognised based on such charging mechanism (outsourcing in nature). The company has also entered into an agreement with its customers under which it procures advertising services on behalf of the customers and bills the customers on cost-to-cost basis without charging any mark-up. The company earns revenue from commission income, fee from production job, transaction processing job, etc. which is different from the services rendered by the assessee. The Ld.DR relied on the or....
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....7/2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefi....
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.... and acts as a communication channel. Veveo India does not play any role in negotiating and is not involved in the conclusion of contracts. The primary activity of Veveo India is to co-ordinate between AEs and the customers. The process flow with respect to market support services rendered by Veveo India is depicted as below: Marketing support services Identifying new customers & acting as a communication channel AEs Veveo India Vaveo India is not Involved in the negotiation process Negotiation and conclusion of contract Obtains specific requirements of customer Communicaten technical specifications of AEs' products Functions performed by Veveo India Functions performed by AEs Figure 20: Process flow of marketing support services Customers in India Document 2 5.6 5.6.1 5.6.2 5.6.3 5.6.4 5.6.5 Risks With respect to all the services, IT, ITeS, TSS and MSS, the risks assumed by Veveo India and its AEs are provided as below: Market Risk Market risk arises when a firm faces adverse sales conditions resulting from either increased competition in the marketplace, declines in demand w....
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....case there are delays or cancellation of projects, or a drop-in demand for services from customers, it may result in underutilization of capacity. Veveo India does not bear risk related to underutilization of man power capacity as it is compensated based on cost plus mark-up for the services rendered, irrespective of the utilization rate. The table below summarises the risks assumed by Veveo India vis-Ã -vis the AEs in relation to the services rendered by Veveo India. Table 4: Summary of Risk Analysis Risk Veveo India AEs Market Risk No Yes Price Risk No Yes Credit Risk No Yes Foreign exchange fluctuation Risk Yes No Service liability Risk No Yes Capacity utilization Risk No Yes 5.7 Assets Any business requires assets (tangible or intangible), without which, it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by Veveo India provides an insight into the resources deployed by it and the contribution of those assets to the business processes/e....