TaxTMI 
TaxTMI 
2023 (8) TMI 1479
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.... the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of subsection (3) of section 92C of the Act. 4. The Ld AO/ Ld TPO/ DRP have erred in not understanding the business model of the Appellant and have erred in not appreciating that the Services rendered by the Appellant under the SWD Segment were in relation to software development activities and not development of software. 5. The Ld AO/ Ld TPO/ DRP have erred in concluding the Appellant is into the business of provision of 'Software Testing and Implementation Services' without considering the submissions of the Appellant that it was merely rendering services in the nature of Job Work on already developed Software of its AE. 6. The Ld AO/ Ld TPO/ DRP erred in applying filter of "IT and ITES Services" in the search process without appreciating that the Appellant was rendering professional services in relation to modification, enhancement or improvement of already developed software of its AE which is in nature of Job Work/ Patch Work. 7. The Ld AO/ Ld TPO/ DRP erred in rejecting comparability analysis undertaken in the TP documentation and in condu....
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....t Your Honours should admit the additional ground of appeal filed with this petition in the abovementioned appeal of Your Petitioner. The Petitioner vide the additional grounds of appeal is seeking exclusion of the following comparables: a. Great Software Laboratory Private Limited b. Elveego Circuits Private Limited c. Infobeans Technologies Limited d. Thirdware Solutions Limited Your Petitioner is also seeking inclusion of the comparable 'Isummation Technologies Private Limited' as comparable to Your Petitioner. 1. Background During the assessment proceedings for the Assessment Year ("AY") 2018-19, the learned Assessing Officer ("AO") passed the final assessment order dated 28 July 2022 under section 143(3) read with section 144C of the Income-tax Act, 1961 ("Act") in pursuance of the direction of the Hon'ble Dispute Resolution Panel ("DRP") making a Transfer Pricing ("TP") adjustment of Rs. 1,54,77,728/characterizing the services rendered by the Petitioner under Software Development ("SWD") segment. Aggrieved by the aforesaid assessment order, Your Petitioner has preferred this first appeal ....
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....Your Petitioner submits that the finding of the Hon'ble Tribunal in the case of MWYN Tech (supra) is equally applicable to its case and hence, Your Petitioner has raised the ground for inclusion of the company 'Insummation Technologies Private Limited' for the first time before Your Honours. In this Petition, Your Petitioner humbly prays that the additional grounds of appeal should be admitted by Your Honours for reasons stated hereunder. 2. Reasons for raising additional grounds of appeal Your Petitioner further humbly submits that the Hon'ble Tribunal in the case of NTS (supra) has held that the companies Great Software Laboratory Private Limited, Elveego Circuits Private Limited and Infobeans Technologies Limited are not comparable to the SWD segment and has directed the exclusion of the said companies. Your Petitioner respectfully submits that the ruling in the case of NTS (supra) should equally apply to its case as well. The comparable 'Third ware Solutions Private Limited' fails the turnover filter and is also functionally different to the Petitioner. Your Petitioner further submits that the Hon'ble Tribunal in t....
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....ounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law." 4. Considering the rival submissions, we note that the assessee has raised the additional grounds before the Tribunal which are legal in nature and relevant for deciding the issues. Therefore, the above additional grounds raised by the assessee are admitted. 5. The assessee has filed further additional ground No. 17 dated 18.07.2023 stating that DRP has not quoted the valid computer generated DIN on the DRP directions dated 30.06.2022 issued u/s 144C(5) of the Act, in contravention of Circular No. 19/2019 issued by the CBDT. The ld. AR further submitted that the DIN was intimated to the assessee by a separate letter dated 30.06.2022 i.e. the same date as the DRP order (dtd. 30.06.2022) and DIN was handwritten in the DRP order emailed to the assessee. In this regard he has filed letter dated 03.08.2023 be....
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.... 82,51,130 Other method Recovery of expense 33,12,991 Other method Reimbursement of expenses 2,45,03,087 Other method 8. From the TP study it was observed that the assessee had applied certain filters and selected nine companies as comparable with the assessee company for the SWD segments and arm length price was computed on the international transactions. However, the TPO did not accept TP study filed by the assessee and rejected the TP study after observing some defects and thereafter he applied certain filters for selection of new comparables which is as under:- S No Filters used for Software development segment 1. Use of current year data 2. Companies having different financial year ending (i.e., not 31.03.2018) or data of the company which did not fall within 12- month period i.e., 01.04.2017 to 31.03.2018, were rejected 3. Companies whose income was less than Rs 1 crore were excluded 4. Companies whose software development service income was less than 75 percent of the total operating revenues were excluded 5. Companies who have more than 25 percent related party transactions were excluded 6. Companies who hav....
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....assessment order, the assessee filed appeal before the Income Tax Appellate Tribunal. 13. The ld.AR of the assessee reiterated the submissions made before the lower authorities and he submitted that the following 11 companies fail upper turn over limit of Rs. 1 to 200 crores. The AO has fixed the lower level of the turnover and he has not fixed the upper turnover filter limit looking to the turnover of the assessee. In this regard, it is submitted that application of turnover filter is a relevant criterion in choosing comparable companies. The difference in the scale of operations has a direct impact on the profitability. The concept of economics 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 ser....
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.... 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 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 d....
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....t Ltd 332.43 4 Tech Mahindra Ltd 23,661.20 5 Larsen & Toubro Infotech Ltd 6,906.40 9 Mindtree Ltd 5,325.00 12 Persistent Systems Ltd 1,732.00 13 Wipro Ltd 44,710.00 14 Tata Elxsi Ltd 318.67 16 Nihilent Ltd 280.06 17 Thirdware Solution Ltd 204.38 19 Infosys Ltd 61,941.00 20 Cybage Software Pvt Ltd 737.16 18. Considering the facts and respectfully following the decision of the coordinate bench of the Tribunal in the case of Autodesk India Pvt Ltd., (supra) we hold that the companies whose turnover in the current year is more than Rs. 200 crores should be excluded from the list of comparable companies. 16. Respectfully following the above judgement we direct AO/TPO for exclusion of the above eleven comparable companies from the list of comparables. Accordingly, the ground No. 10 is allowed. Ground No. 11 & 15-Exclusion of companies 17. The ld.AR of the assessee submitted that five companies i.e., Acewin Agriteck Ltd. (formerly OFS Technologies Ltd.), Threesixty Logica Testing Services Pvt. Ltd., Great Software Laboratory Pvt. Ltd., Elveego Circuits Pvt. Ltd. & ....
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....O 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 company has been retained by the Ld.TPO only because it renders services under the category SWD. It is also noted by the Ld.TPO that the operations of this comparable is from SWD segment without there being any segmental details, which according to the Ld.TPO is irrelevant. In our considered opinion, this Tribunal has been consistently rejecting the comparables whether there are no segmental information available in order to compare "an apple with an apple". Therefore the services rendered by the assessee under a contract with its AE cannot be compared with a company that renders various services under SWD segment. We do not find any reason to include this comparable in the final list. Accordingly we direct the Ld.AO/TPO to exclude Great software Laboratory Pvt. Ltd. 11.2 Elveego Circuits Pvt. Ltd. 11.2.1 The Ld.AR submitted that this company is engaged in the business of electronics and semiconductor design services which is no way comparable to the captive software development activities a....
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....ining commercial products and digital solutions. Further, she submitted that, this company has significant R&D expenses. 11.5.3 She thus prayed for exclusion of this comparable as it is into varied activities for which there is no segmental details. 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. 11.5.4 In the annual report of this comparable at page 2854 of the paper book, we note that the NIC code is 8920 at the description of the project / services is software development. At page 2879, the business overview of the company has been described to be as under: "OFS Technologies is a leading software development and information technology outsourcing company. In the last financial year, we intensified our technology expertise with latest technologies in our core business-Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development and DevOps Implementation. In addition, we are technically developing on the leading Blockchain platforms, widening our service offerings and domains more specifically in Healthcare, Med....
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....l 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 30.06.2022 passed in IT(TP)A No. 288/Bang/2021) and the decision of the Tribunal at Hyderabad in ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 at para 7] where, in the case of a similarly placed assessee, the Tribunal directed the exclusion of Infobeans from the list of comparables for assessment year 2016-17 on the ground that it is not functionally comparable and no segmental details were available for the said year and the decision of the Delhi Bench of the Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17. He also placed reliance on the decision of this Tribunal in para-11 in the case of Airlinq Technology Pvt. Ltd. In IT(TP)A No. 231/Bang/2021 dated 28.7.2022. 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. 11.6.5 In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in I....
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.... 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 software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee ". 22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee's own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables." 11.6.6 Same view was taken by the T....
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....ingly, this comparable is directed to be excluded." 20. Respectfully following the above decision of the coordinate bench in the case of NTS Technology Services Pvt. Ltd., we direct exclusion of the above companies. 21. Further, the ld. AR sought exclusion of Aptus Software Labs Pvt. Ltd. However, we note that in the case of NTS Technology Services Pvt. Ltd. (supra) this company is held to be comparable. The relevant observations are as under:- 11.4 Aptus Software Labs Pvt. Ltd. 11.4.1 The Ld.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 wa....