TaxTMI 
TaxTMI 
2023 (3) TMI 1487
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....read with section 144B of the Income Tax Act, 1961 ("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. ....
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....not being available, as in such circumstances the data of the preceding year could be adopted; (f) Not appreciating that a comparable cannot be rejected because it is incurring losses if 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. Aptu....
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....of notional interest imputed on outstanding receivables from Associated Enterprises ("AEs"). (ii) In considering the outstanding dues from AE to be in the nature of loan and not considering the business/commercial expediency of the arrangement (iii) In treating the outstanding dues from AE as a separate international transaction and not considering the same to be closely linked with the primary international transaction of provision of software services to AEs. (iv) In not appreciating that when the 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 o....
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....mited 3.69 6. Sankhya Infotech Limited (Segmental) 3.69 7. Harbinger Systems Private Limited 5.39 8. CG-VAK Software & Exports Ltd. 6.10 9. Sasken Communication Technologies Ltd. 8.52 10. Infomile Technologies Limited (Segmental) 10.17 11. Virinchi Limited (Segmental) 10.86 12. Sagarsoft (India) Ltd. 16.04 13. SQS India BFSI Limited 18.72 14. R Systems International Limited 18.89 15. Larsen & Toubro Infotech Limited 20.04 35th Percentile 3.69 Median 6.10 65th Percentile 10.17 2.6 Dissatisfied with the comparables so selected, the Ld.TPO applied following filters. Step Description 1. Companies 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....
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....td. 3. Exilant Technologies Pvt. Ltd. 4. Tech Mahindra Ltd. 5. Larsen & Toubro Infotech Ltd. 6. Great Software Laboratory Pvt. Ltd. 7. Elveego Circuits Pvt. Ltd. 8. Black Pepper Technologies Pvt. Ltd. 9. Mindtree Ltd. 10. Aptus Software Labs Pvt. Ltd. 11. Acewin Agriteck Ltd. 12. Persistent Systems Ltd. 13. Wipro Ltd. 14. Tata Elxsi Ltd. 15. Infobeans Technologies Ltd. 16. Nihilent Ltd. 17. Threesixty Logica Testing Services Pvt. Ltd. 18. Infosys Ltd. 19. Cybage Software Pvt. Ltd. 2.10 The Ld.AO thus passed the final assessment order in which the transfer pricing adjustment was reworked to Rs. 4,05,37,561/-. 3. At the outset, the assessee has filed an application seeking admission of additional ground that reads as under: "For the reasons stated in the accompanying affidavit, it is most humbly prayed that this Hon'ble Tribunal be pleased to permit the Appellant 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 fa....
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....lusion of 10 comparables by applying turnover filter. She submitted that this ground may be read with additional ground no. 15a. 8. It is submitted that the TPO erred in not applying a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the assessee. In this regard, it is submitted that application of turnover filter is a relevant criterion in choosing comparable companies. It is submitted that the difference in the scale of operations has a direct impact on the profitability. The concept of economies of scale wherein, an increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered. Therefore, the per unit fixed cost of a small-scale company would be much higher than that of a medium/large size organisation. Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It 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 sele....
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....e view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. Following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs. 200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in....
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....ions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are availab....
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....teria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 10.4 In view of the above, the aforesaid 10 companies are directed to be excluded for failing turnover filter. 11. Assessee is seeking exclusion of following 7 comparables on functional dissimilarities. 11.1 Great software Laboratory Pvt. Ltd. 11.1.1 The Ld.AR submitted that this company is engaged in the business of design and development services of software applications including customisation and packaged software. She further submitted that the primary service of the Company are cloud products and operations management, IDM and connected experience practice, big data analytics and support services. The Company has also earned revenue from sale of products. The company is engaged in diverse activities for which no segmental details is available. It is further submitted that the company owns significant intangibles and th....
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....nificantly in intangible assets, during the financial years 201616, 2016-17 and 2017-18. She thus submitted that this comparable is functionally not similar with that of the assessee. 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. 11.2.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was excluded by observing as under: "C.3. We note that this company is in the business of Chip and semiconductor design services where as the assessee before us is into basic SWD services of coding an documentation, Testing and quality assurance, software patches and maintenance. There is no similarity between the functions performed by the assessee vis-à-vis that of this company. We therefore at the threshold reject this company being functionally not similar with that of the assessee. Accordingly, the Ld.TPO is directed to exclude this company from the final list of comparables." Respectfully following the same, ....
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....AR submitted that, the nature of business of this company is not available in the public domain. It is submitted that from the annual report of the company, the NIC code of the product/ service is mentioned to be 6201 which includes computer programming, consultancy and related activities. 11.4.2 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. 11.4.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was remanded for want of sufficient information in annual reports filed by the assessee therein before this Tribunal. However, in the present case, the Ld.AR has filed complete annual report. 11.4.4 We notice that this company is deriving revenue from both domestic as well as foreign company. The notes to the account being note 24 reveals the revenue is recognised by this comparable from service transactions. The NIC code being 6201 as appearing at page 3383 of paper book reveals the description to be information technolo....
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....d the Food processing ERP product with predictive analytics." 11.5.5 It is also revealed at page 2881 that this company has invested in enlarging its business development team and also has the product development vertical the income recognition is only from the sale of services being export and therefore this company does not have a segmental details of the variety of services rendered by it. Moreover, the company is a leading software development and information technology outsourcing company and therefore as the entire revenue is categorised under one single segment, it is not comparable with the captive service provider like that of assessee before us that renders its services on a cost plus model with its AE. We accordingly reject this comparable and direct the Ld.AO/TPO to exclude from the final list. 11.6 Infobeans Technologies Ltd. 11.6.1 The Ld.AR submitted that this company is engaged in providing software engineering services primarily in product engineering, digital transformation, automation and devOps. Though the annual report of the company mentions that the company is earning 100% revenues from sale of software services, such services are in the nature of CA....
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.... Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons: 1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year 3. Leading provider of consulting technology & next generation service. 4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore. 5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribu....
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....nclined to direct the AO/TPO to exclude this company from the list of comparables. Respectfully following the above view, we direct the Ld.AO/TPO to exclude this company from the final list. 11.7 Threesixty Logica Testing Services Pvt. Ltd. 11.7.1 The Ld.AR submitted that this company derives revenue primarily from software testing, quality assurance and related services. Further, the company also earns revenue from sale of third party software products and hardware. No segmental details are not available. 11.7.2 She submitted that this company has invested significantly in intangible assets during the financial years 2015-16, 2016-17 and 2017-18. 11.7.3 It is submitted that this company has incurred significant marketing expenditure and this company has significant RPT transactions during the year. It was thus submitted that the comparable may be excluded. 11.7.4 The Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Altair Engineering India Pvt. Ltd. vs. ACIT in IT(TP)A No. 1025/Bang/2022 by order dated 09.01.2023. The Ld.DR on the contrary relied on the orders passed by the authorities below. We have perused the submissi....
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....th filter applied by the TPO. 12.2.2 In this regard, it is submitted that the company has a positive net worth of Rs. 47,49,635/- as on 31st March 2018. Further, it is submitted that the company passes all the filters applied by the TPO. 12.2.3 Reliance is placed on the decision of this Hon'ble Tribunal in MWYN Tech Private Ltd. (order dated 31.10.2022 passed in IT(TP)A No. 753/Bang/2022). Further, it is submitted that in case of a similar assessee, the DRP had directed inclusion of the said company for the year under consideration. 12.2.4 In view of the above, it is submitted that Isummation ought to be included in the final list of comparables. 12.3 Virinchi Limited 12.3.1 It is submitted that the company came to be rejected by the TPO for the reason that the same fails the export income filter. 12.3.2 In this regard, it is submitted that the company has an export income of Rs. 137,28,26,154/- which constitutes 79.8% of the total revenue (Rs. 172,00,51,553/-) of the company. In view of the above, it is submitted that the company ought to be included in the final list of comparables. 12.4 Evoke Technologies Private Limited 12.4.1 It is submitted that the co....
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....ome to a conclusion of the same being functionally similar with that of assessee. Accordingly we remand the above comparables sought for inclusion by the assessee to the Ld.AO/TPO to carry out necessary verification. Accordingly, this ground raised by assessee stands partly allowed. 12.10 The Ld.AR submitted that the remaining comparables may be left open to be argued in an appropriate circumstances. We accordingly grant liberty to assessee to contest the comparables that has not been argued herein to be raised in an appropriate situation. Accordingly, ground no. 16 raised by assessee stands partly allowed. 13. Ground no. 17 is not pressed by assessee. Accordingly, the same is not adjudicated. 14. Ground nos. 18-19 are raised by assessee for computing interest on outstanding receivables. 14.1 The Ld.AR submitted that the Ld.TPO proposed transfer pricing adjustment in respect of outstanding receivables in respect of trade creditors being the AEs by using SBI rate and CUP as the most appropriate method. 14.2 The Assessee wishes to submit that the delayed/ outstanding receivables should not be considered as a separate international transaction. Further, it is humb....
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....rchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....' . 14.6 Ld.CIT DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case....
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....ion 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 benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors whic....