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2023 (3) TMI 1487

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....61 ("the Act") in pursuance of the directions issued by Dispute Resolution Panel ("DRP"), Bangalore dated 16 June 2022 under section 144C(5) of the Act ("impugned order"). inter-alia on the following grounds. which are without prejudice to each other: GENERAL GROUNDS: That on the facts and circumstances of the case and in law: 1. Impugned order of Ld. AO/ Transfer Pricing Officer ("TPO") and directions of Ld. DRP are based on incorrect appreciation of facts and incorrect interpretation of law and therefore, are bad in law. 2. The Ld. AO/ DRP erred in assessing total income of the Appellant at Rs. 13.11,54.630/- under the normal provision of the Act as against the returned income of Rs. 9,06,17,060/-. 3. The Ld. AO/ DRP erred in determining a sum of Rs. 1,49,35,996/- as balance tax payable by the Appellant. GROUNDS ON NATURAL JUSTICE: 4. The lower authorities have erred in passing the order based on conjecture and surmises. without considering all the submissions and / or without appreciating properly the facts and circumstances of the case and the law applicable. 5. The learned AO has erred in making a reference for the determination of the arms-length price of the ....

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.... it is otherwise functionally comparable and not considering the various judicial precedents on this matter including the jurisdictional tribunal decision: (g) Concluding that the methodology adopted by the Appellant in applying the Related Party Transaction filter is skewed; (h) Adopting the RPT filter at 25% instead of 15% on operating sales. 13. The Ld DRP erred in upholding the action of the Ld TPO in finalizing the TP order with the following companies as comparable to the Appellant even though they are not comparable in respect of one or more of functions performed, risks assumed, assets utilized, size, turnover, related party filter non-availability of segmental information etc: i. Exilant Technologies Pvt. Ltd. ii. Tech Mahindra Ltd iii. Great Software Laboratory Pvt. Ltd. iv. Elveego Circuits Pvt. Ltd. v. Black Pepper Technologies Pvt. Ltd. vi. Acewin AgriteckLtd. vii. Mindtree Ltd. viii. Aptus Software Labs Pvt. Ltd. ix. Persistent Systems Ltd x. Wipro Ltd xi. Tata Elxsi Ltd xii. lnfobeans Technologies Ltd xiii. Nihilent Ltd xiv. Threesixty Logica Testing services Pvt. Ltd. xv. Cybage Software Pvt. Ltd. xvi. Infosys Ltd. 14. The Lower....

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.... primary international transaction of provision of software services to AEs has already been held to be at arm's length. there is no need to propose a separate addition on account of notional interest imputed on outstanding dues from AEs since the transaction is closely linked with the primary international transaction. (v) By not appreciating the facts that Appellant does not have a policy of charging interest from other unrelated parties in similar transactions nor has it paid any interest on its outstanding trade payable at year end to unrelated vendors. 19. Without prejudice to above ground, the Ld. AO/ TPO/ DRP has erred, in law and on facts by adopting the SBI short term deposit interest rate to compute the notional interest on outstanding receivable as on 31 March 2018 instead of LIBOR rate. OTHER GROUNDS 20. The Appellant craves for consequential relief of interest under section 234B & 234C under the Act. The Appellant submits that each of above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of heari....

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....panies having different financial year ending (i.e. not March 31,2018) or data of the company which does not fall within 12month period i.e. 01-04-2017 to 31-03-2018 - rejected. 2. Companies for which data is available for FY 2017-18- selected. 3. Companies whose income was less than Rs. 1 Crore - rejected. 4. Companies whose SWD service income is less than 75% of its total operating revenues - rejected. 5. Companies who have more than 25% related party transactions of the sales - rejected. 6. Companies who have export service income less than 75% of the sales - rejected. 7. Companies with employee cost less than 25% of turnover - rejected. 8. Companies reporting persistent losses - excluded. 9. Companies having positive net worth - accepted 10. Companies with similar FAR - accepted 2.7 On the application of the above filters, the Ld.TPO shortlisted a set of 20 comparables with a median of 23.6%. Sl. No. Name of the Company weighted average (in %) 1. Infomile Technologies Ltd. 9.69 2. Harbinger Systems Pvt. Ltd. 11.65 3. Exilant Technologies Pvt. Ltd. 17.17 4. Tech Mahindra Ltd. 18.57 5. Larsen & Toubro Infotech Ltd. 18.94 6. Great Software La....

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....lant to raise the following additional ground in continuation of the existing grounds of appeal and be read as Ground Nos. 15(a) in the interests of justice and equity: Ground No. 15(a): That in the facts and circumstances of the case, the lower authorities erred in not excluding Larsen & Toubro Infotech Ltd. from the final list of comparables although the said company failed the turnover filter and is otherwise not functionally comparable to the Appellant." 3.1 The Ld.AR submitted that this comparable was not included in the grounds of appeal filed by the assessee due to oversight. It is submitted that this comparable is sought for exclusion by applying the turnover filter which has been alleged by assessee in ground no. 15. 3.2 It has been submitted that no new facts needs to be considered in order to dispose of the additional grounds raised by the assessee. It is submitted that the additional grounds is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee. 3.3 On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which ....

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.... is submitted that the turnover of the assessee from rendering SWD services is Rs. 58,86,93,724/-. This being so, the TPO ought to have applied the upper turnover filter while selecting companies comparable to the assessee. In this regard, the assessee places reliance on the decision of this Hon'ble Tribunal in Autodesk India (P) Ltd. V. DCIT reported in (2018) 96 taxmann.com 263. On application of the turnover filter of 1-200 crores, 9. Assessee thus submitted that following comparables deserves to be excluded for having high turnover as against assessee. Further reliance is placed on the decision of this Hon'ble Tribunal in MWYN Tech Private Ltd. by order dated 31.10.2022 passed in IT(TP)A No. 753/Bang/2022. S.No. Name of the comparables Turnover (in crores) 1. Exilant Technologies Pvt. Ltd. 332.51 2. Tech Mahindra Ltd. 23,661 3. Larsen & Toubro Infotech Ltd. 6906.40 4. Mindtree Ltd. 5325 5. Nihilent Ltd. 280 6. Persistent Systems Ltd. 1733 7. Wipro Ltd. 44710 8. Tata Elxsi Ltd. 1386 9. Infosys Ltd. 60,941 10. Cybage Software Pvt. Ltd. 737 10. Assessee seeks exclusion of above 10 comparables. 10.1 The assessee seeks exclusion of the above 10 co....

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....e agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are 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 w....

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.... the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 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 wa....

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.... submitted that the company owns significant intangibles and that this company earned significant onsite revenue which demonstrates that it operates on a different model and therefore functionally not comparable with the assessee. 11.1.2 The Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. in IT(TP)A No. 713/Bang/2022 by order dated 11.01.2023. The Ld.DR on the contrary, relied on the observations of the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 11.1.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was remanded for want of complete annual reports. However in the present case, the Ld.AR has filed the necessary details and complete annual report to verify the arguments advanced. On perusal of the detailed submissions, filed by the assessee at pages 141-145 of the appeal set as well as 820-822 of the paper book, we note that admittedly the TPO accepts that this comparable provides various services using the same platform of SWD. It is also an admitted fact that this company works in a different horizontal and this compan....

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....ectfully following the same, we direct the Ld.AO/TPO to exclude this company from the final list. 11.3 Blackpepper Technologies Pvt. Ltd. 11.3.1 The Ld.AR submitted that this company is engaged in the business of software development and consultancy services. Further, the company has incurred significant R&D expenses towards development of a new product design. The company has significant intangibles of about 96% of the total assets and also has high inventory risk. 11.3.2 Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. (supra). The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 11.3.3 We note that this comparable was remanded in case of Sprinklr India Pvt. Ltd. (supra) by this Tribunal for want of complete annual report. However in the present case, the Ld.AR has filed complete details in the paper book. 11.3.4 On perusal of the DRP direction, we note the following observation by them: "Having considered the submissions, on perusal of Note 18 forming part of financial statement of the annual report, the....

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....ces as against computer programming, consultancy and related activities as submitted by the assessee in the synopsis. We therefore do not find any reason to exclude this company from the final list. We direct the Ld.AO/TPO to retain this company in the list. 11.5 Acewin Agritech Ltd. 11.5.1 The Ld.AR submitted that this company is engaged in software development and information technology outsourcing company, wherein the core business of this company is Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development and DevOps Implementation. In addition, she submitted that this company is developing on the leading Blockchain platforms and widening its service offerings and domains more specifically in Healthcare, Media, and Financial Services. The Ld.AR also submitted that in terms of product offerings, the company enhanced the Food processing ERP product with predictive analytics. No segmental details are available. 11.5.2 She further submitted that, in the software services outsourcing business, this company does designing, building, testing and maintaining commercial products and digital solutions. Further, she submitted that, this comp....

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....re of KPO services. The above services rendered by the company are vastly different from the SWD services rendered by the assessee, and therefore the company ought to be excluded as being functionally different. Further, the segmental details for these diverse services are not available and therefore the company cannot be selected as a comparable. 11.6.2 She submitted that the company has huge inventory and allied inventory risk whereas the assessee is a mere captive service provider who is engaged routine software development services. Further, it is submitted that Infobeans has employed significant intangibles during the financial years 2016-17 and 2017-18. 11.6.3 Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of NTT data FA Insurance Systems (India) Pvt. Ltd. in IT(TP)A No. 261/Bang/2021 for the AY 2016-17 by order dated 03.10.2022. 11.6.4 She placed reliance on the decision of this Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Tribunal in IT(TP)A No. 235/Bang/2021]), the decision of this Tribunal in the case of SanDisk India Device Design Centre Pvt. Ltd. v. JCIT (order dated 30.06....

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....es for determining ALP by observing as under: 21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below: "18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two activities carried on by the said concern were not available and in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing softwar....

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....pany derives 100% income from writing, modifying, testing of computer program to meet the needs of a particular client excluding webgage and designing. In the annual report, the revenue recognition by this company is stated to be primarily from software testing, QA and related services which is also supported from the notes to account being note 1 wherein the company overview also states that it is primarily engaged in providing information technology services being software testing and QA services and it also stated in the segmental report and operating segmental details that there are no other reportable segments. We therefore see merit in the arguments of the Ld.AR that this company is not comparable functionally since the assessee is a contract service provider rendering limited services to its AE alone. Accordingly, this comparable is directed to be excluded. 12. Ground no. 16 is raised by assessee seeking inclusion of following comparables. a) Kcube Consultancy Services Pvt. Ltd. b) Jindal Intellicom Ltd. c) Isummation Technologies Pvt. Ltd. d) Evoke Technologies Pvt. Ltd. e) Virinchi Ltd. f) CG-Vak Software & Exports Ltd. g) Sagarsoft Ltd. h) Maveric System....

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....88,20,51,191 of the company. In view of the above, it is submitted that the company ought to be included in the final list of comparables 12.5 CG-Vak Software & Exports Ltd. 12.5.1 It is submitted that the company is functionally comparable to the assessee. It is submitted that 96% of the revenue is from software services. Further, it is submitted that the company passes all the filters applied by the TPO. Therefore, in view of the above, it is submitted that CG-Vak Software & Exports Ltd. ought to be included in the final list of comparables. It is submitted that in case of a similar assessee, the DRP had directed inclusion of the said company for the year under consideration. 12.6 Sagarsoft Limited 12.6.1 It is submitted that the company is engaged in the business of software services. As the company is engaged only in the business of software development, business segment reporting is not applicable. 12.6.2 Further, it is submitted that the company passes all the filters applied the TPO and therefore, ought to be considered as a comparable in the final list of comparables. 12.7 Maveric Systems Limited 12.7.1 It is submitted that the said company came to be excluded by ....

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....nce on decision of Hon'ble Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. reported in (2017) 398 ITR 66, held that, no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Hon'ble Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order dated 21/07/16 in ITA No. 379/2016, also upheld by Hon'ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 14.4 It was submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables as assessee adopted TNMM ....

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....e assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' 3.5.6. She submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/undercharging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that currency in which such amount is to be re-paid, determines rate of interest....