TaxTMI 
TaxTMI 
2024 (6) TMI 1284
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....was provision of SWD services. 2.3 The Ld.AO accordingly referred the issue to the Ld.TPO for computation of ALP of the transaction. On receipt of the reference, the Ld.TPO called for the economic details of the international transaction in form 3CEB. The Ld.TPO noted that assessee undertook following international transaction with its associated enterprise. Particulars Amount Provision of SWD services Rs. 655,45,51,676/-, Reimbursement of expenses Rs. 54,04,286/- Payment of Interest on loan Rs. 80,31,070/- Repayment of loan Rs. 22,50,00,000/- Recovery of expenses Rs. 23,11,63,972/- Facility management services Rs. 6,74,58,658/- 2.4 The Ld.TPO noted that assessee used TNMM as the most appropriate method and OP/OC as the PLI to compute its margin at 15.25%. The assessee selected 12 comparables with a median of 7.37%, the details of which are as under: Sl. No. Name of the company Weighted unadjusted average (in %) 1. Evoke Technologies Pvt. Ltd. 4.77 2. Harbinger Systems Private Limited 9.17 3. Threesixty Logica Testing Services Pvt. Ltd. 44.04 4. Maveric Systems Ltd. 0.37 5. CG-VAK Software 8.65 6. OFS Technologies Ltd. 32.53 7. Isummatio....
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.... 5. Infomile Technologies Ltd. 10.43% 6. Harbinger Systems Pvt Ltd 14.10% 7. C G-V A K Software & Exports Ltd. 15.09% 8. Nintec Systems Ltd. 15.15% 9. Larsen & Toubro Infotech Ltd. 21.14% 10. Great Software Laboratory Pvt. Ltd. 21.24% 11. Mindtree Ltd. 24.17% 12. R Systems International Ltd. 24.40% 13. Persistent Systems Ltd. 26.17% 14. Tata Elxsi Ltd. 26.19% 15. Aptus Software Labs Pvt. Ltd. 26.32% 16. Cygnet Infotech Pvt. Ltd. 28.55% 17. Infobeans Technologies Ltd. 28.92% 18. Nihilent Ltd. 29.84% 19. OFS Technologies Ltd. 30.80% 20. Infosys Ltd. 39.74% 21. Threesixty Logica Testing Services Pvt. Ltd. 36.64% 22. Cybage Software Pvt. Ltd. 64.79% 23. Consilient Technologies Pvt. Ltd. 65.14% 35th Percentile 21.14% Median 24.40% 65th Percentile 26.32% 2.9 Upon receipt of the DRP directions, the Ld.AO passed the final assessment order by making the TP adjustment at Rs. 70,88,21,288/-. 2.10 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that in respect of the transfer pricing adjustment, assessee wish to argue following comparables for exclusion in gro....
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....hich was upheld by the DRP. 4.4 It is submitted that, working capital adjustment is made for the time value of money lost when credit time is given to the customers. The assessee is not an entrepreneur but a captive service provider which is entirely funded by the AEs. This being so, the assessee is compensated on a cost plus basis. It is submitted that, the assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise. 4.5 The Ld.AR in support of the contention relied on the decisions of this Tribunal in the cases of (i) Lam Research (India) Pvt. Ltd. v. DCIT by order dated 30.04.2015 in ITA No. 1473 and 1385/Bang/2014); (ii) DCIT v. Software AG Bangalore Technologies Pvt. Ltd. by order dated 31.03.2016 passed in ITA No. 1628/Bang/2014) and (iii) Tivo Tech Private Limited [Formerly Veveo (India) Pvt. Ltd.] v. DCIT by order dated 12.06.2020 in IT(TP)A No.1619/Bang/2017. She submitted that in the above decisions, it has been held that, negative working capital adjustment shall not be made in case of a captive service provider, as there is no risk and it is co....
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....re India P. ltd., for A.Y. 2008-09 in its directions dated 3-8-2012 has given a finding as under: "7.7.4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to t his situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made." In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made." 11. In vie....
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....tted that segmental details are not available in respect of the industry clauses and the services rendered by this company under various segments. It is also submitted that this company is a market leader and owns intangibles and thus enjoys the benefits of ownership of marketing intangibles, intellectual property rights and business rights. The Ld.AR submitted that this company owns proprietary software products which are developed in-house and is also involved in R&D activities that leads to the new intangibles coming into existence. She submitted that this comparable has been consistently excluded from the list of comparables in case of a captive service provider like that of assessee. She relied on the following decisions in support of her submissions. - Mavenir Systems Pvt. Ltd. v. DCIT by order dated 23.03.2023 passed by this Tribunal in IT(TP)A No. 453/Bang/2022 for the assessment year 2017-18 - Carl Zeiss India (Bangalore) Pvt. Ltd. v. DCIT by order dated 16.06.2023 passed by this Tribunal in IT(TP)A No. 192/Bang/2022 for assessment year 2017-18 - Sabre Travel Technologies Pvt. Ltd. v. DCIT by order dated 02.02.2023 passed by this Tribunal in IT(TP)A No. 212/Bang/2022....
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....(India) Pvt. Ltd. v. ACIT (supra) - Arris Group India Pvt. Ltd.v. DCIT by order dated 20.01.2023 passed by this Tribunal in IT(TP)A No. 177/Bang/2022 for assessment year 2017-18 - CIT v. Agnity India Technologies P. Ltd. reported in (2013) 36 taxmann.com 289 (Delhi) On the contrary, the Ld.CIT.DR submitted that assessee is a product company and that assessee before us is also into a software development consultancy. Referring to various extracts from an internet search engines, the Ld.DR argued that the functions carried out by the assessee is similar to that of L&T and therefore cannot be excluded. The Ld.DR relied on the decision of Coordinate Bench of this Tribunal in case of Blue Coat Network (India) Pvt. Ltd. vs. DCIT in IT(TP)A No. 78/Bang/2019 by order dated 23.11.2020 for A.Y. 2014-15. In respect of Infosys Ltd., the Ld.DR submitted that as assessee is a product company for the above reasons, the comparable should not be excluded. We have perused the submissions advanced by both sides in the light of records placed before us. We note that, the objections raised by the Ld.DR are based on the general industry classifications. The primary objection raised by the....
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....n of L&T Infotech Ltd. and Infosys Ltd. Accordingly we direct the Ld.AO/TPO to exclude L&T Infotech Ltd. and Infosys Ltd. from the final list. C) Persistent Systems Ltd. It is submitted that Persistent is functionally dissimilar to the assessee and hence cannot be considered as a comparable. The company is engaged in licensing and sale of products, technology innovation and also earns royalty income. However, segmental details as regards its diverse services are unavailable. Considering the same, it can be observed that Persistent is engaged in software product development unlike the assessee which is a low-risk captive SWD service provider. Even going by the company's reply to the TPO's notice under Section 133(6) of the Act, the company is predominantly engaged in the business of providing outsourced product development services, which are vastly different from the services rendered by the assessee. The company undertakes significant R&D activities to develop technologies and intellectual property to differentiate themselves form the industry and has established 'Persistent Labs' to focus on R&D activities. Moreover, the company has also incurred significant expenses in ....
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.... of comparables. The Ld.AR placed reliance on the following decisions in support of the above submissions. - Mavenir Systems Pvt. Ltd. v. DCIT (supra) - Varian Medical Systems International (India) Private Limited v. DCIT by order dated 27.12.2023 passed in ITA No. 510/Mum/2022 for assessment year 2017-18 On the contrary, the Ld.DR relied on the orders passed by the authorities below. We note that for the above submitted objections by the Ld.AR, this company has been excluded by Coordinate Bench of this Tribunal in case of Airlinq (supra) by observing as under: "13. We have heard rival submissions and perused the material on record. On perusal of the financial of Infobean Technologies Limited (the relevant portion of financial are placed on record), it is clear that the said company is engaged in providing software engineering services primarily in Custom application development, Content Management Systems, Enterprise Mobility, big data analytics (The company's overview is annexed to this order as Annexure-A) (placed at page 1130 of the paper book submitted by the assessee). The above services rendered by the company are vastly different from the services rendered....
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.... activities which are not comparable to routine SWD service provider) (iv) Red Hat India (P.) Ltd. (supra) (Order dated 25-5-2022 passed by the Mumbai Bench of this Hon'ble Tribunal in ITA No. 1379/Mum/2021 for AY 2016-17)- at paras 49 and 50 (on account of functional dissimilarity as company renders diverse services and lack of segmental details). (v) Skillnet Solution India (P.) Ltd. v. Dy. CIT [IT Appeal No. 6570 (Mum.) of 2017, dated 24-2-2021] (Order passed by the Mumbai Bench of this Hon'ble Tribunal for the AY 2013-14) - at para 6 (on account of functional dissimilarity as the company renders diverse services and segmental details are unavailable) (vi) Alcated Lucent India Ltd. v. Addl. CIT [IT Appeal No. 4706 (Delhi) of 2018, dated 29-11-2019] (Order passed by the Delhi Bench of this Hon'ble Tribunal in for AY 2014-15) - at para 15 (on account of functional dissimilarity as the company was engaged in providing custom development services to offshore customers and was engaged in software engineering services in different fields and segmental details were unavailable) (vii) Kony IT Services (P.) Ltd. v. Dy. CIT [2020] 113 taxmann.com 214 (Hyd. - Trib.) (Or....
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....epted as a comparable. The company is engaged in providing high end services in the nature of technology consulting, product design, development and testing services, design and technology services for consumer goods sector, high-end content development and 3D animation services for media and entertainment industry. It is submitted that the services rendered in the SWD segment are in the nature of embedded product design, industrial design and visual computing labs, which are not comparable to the services rendered by the assessee. Further, it is submitted that, the company renders services in niche areas as opposed to routine SWD services rendered by the assessee. The Ld.AR submitted that Tata Elxsi is focused on research and development activities and incurs expenses for developing new functionalities and patenting innovative technologies. Reliance was placed by the Ld.AR on the following decisions in support of her contentions. - Mavenir Systems Pvt. Ltd. v. DCIT (supra) - Infor (India) Pvt. Ltd. v. ACIT (supra) - Sabre Travel Technologies Pvt. Ltd. v. DCIT (supra) On the contrary, the Ld.DR relied on the orders passed by authorities below. We have perused the submi....
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....of this Tribunal in case of Carl Zeiss India (Bangalore) Pvt. Ltd. vs. DCIT (supra) has excluded Mindtree Ltd. by placing reliance on the decision of Coordinate Bench of this Tribunal in case of Yahoo Software Development India Pvt. Ltd. vs. JCIT in IT(TP)A No. 178/Bang/2022 by observing as under: "The relevant extract of the observation by Coordinate Bench of this Tribunal in case of Yahoo Software Development India Pvt. Ltd. vs. JCIT (supra) in respect of Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd. and Infosys Ltd. is as under: ......................... ......................... ........................ 41. The next company sought to be excluded is Mindtree Ltd. The submissions made before us were as follows:- "Functionally dissimilar, diversified operation, significant R&D spend, ownership of intangibles. - Also engaged in business of rendering IP-Led revenue, infrastructure management, package implementation, consultancy services, etc. constituting 45% of overall revenue during FY 2014-15. - Diversified operation i.e. engaged in infrastructure management services, business process management, technology consulting, product engineeri....
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.... this Tribunal in case of Carl Zeiss India (Bangalore) Pvt. Ltd. vs. DCIT (supra) excluded Nihilent Ltd. by following the decision of Coordinate Bench of this Tribunal in case of Subex Ltd. vs. DCIT in IT(TP)A No. 282/Bang/2022 for A.Y. 2017-18 by order dated 30.11.2022. This Tribunal observed and held as under: "8.5 The decision of Coordinate Bench of this Tribunal in case of Subex Ltd. vs. DCIT (supra) for A.Y. 2017-18 by order dated 30.11.2022 has considered Nihilent Ltd. and OFS Technologies Ltd. "Nihilent Ltd. 10. The ld AR for the assessee submitted that this company Nihilent Ltd. is predominantly engaged in rendering of software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. Nihilent in engaged in rendering diverse services. The Company intends to diversify and expand into various other areas such as analytics, big data, internet of things, etc. In this regard he referred page nos. 763 to 767 of the paperbook. 10.1 The assessee relied on the following rulings, wherein Nihilent Ltd. has been excluded as a comparable: - SanDisk India Device Design Centre Pvt. Ltd., vs. J....
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....ied, 'the company does not have any purchase of inventories or sales of goods since it is a service company primarily rendering software services'. In view of these, the ld DRP held that this company is functionally comparable to the assessee and the pleas raised in this regard were rejected by him. As the company is primarily engaged in software development services and earns the revenue from this activity there is no need of providing segmental information as per AS 17. 11.1 The ld DR further stated that the assessee has argued before the ld DRP that the Company acquired G Net Group LLC in the US and Intellect Bizware Services Pvt Ltd, which are engaged and specialised in ERP and SAP. On careful perusal of the information in the annual report, the ld DRP noted that "during the year, Gnet Group LLC, USA ("Gnet") has merged with its holding Company - Nihilent Technologies Inc.. USA ("NTI"), with effect from 1 January 2017 vide the Article of Merger filed in the State of Minnesota. As this merger was between a holding company and its wholly owned subsidiary, no consideration was payable". This acquisition was not made by Nihilent, which is being compared. During the year ....
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.... case of M/s. SanDisk India Device Design Centre Pvt. Ltd. in IT(TP)A No.288/Bang/2021 dated 30.6.2022, wherein held as under: "17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: "Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire) .......................... ........................ ........................ Nihilent Ltd. 44. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation ser....
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....arried out by this company at page 323 of the paper book. It is noted that this company is engaged in the business of providing software development services, with expertise into cloud applications, communication, identity management and system technologies. Further at page 325, it is noted that the revenue recognition is from software development however revenue is also generated from sale of software products. However, at page 308, we note that this company has huge intangibles and therefore in our considered opinion cannot be considered to be a fit comparable with that of assessee which is a captive service provider. Accordingly, we direct this comparable to be excluded from the final list. H) Cygnet Infotech Pvt. Ltd. The Ld.AR submitted that this comparable is functionally not similar to that of assessee as it is engaged in diversified services including rendering solutions in the nature of blockchain, AI, robotic process automation, cloud, IoT, tax technology, augmented/ virtual realty; engineering services of Digital transformation, consulting, product engineering, application testing and development, content management and implementation; technology services. Cygnet h....
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....ate Limited v. DCIT (supra) On the contrary, the Ld.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. We note that Hon'ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. vs. ACIT has excluded this comparable by observing as under: "16. As far as Cybage Software Private Limited is concerned, before the Ld.TPO, assessee raised objections for its inclusion in the list of comparables basing on functionally not comparable - diversified activities, product company, marketing services, presence of intangibles, lack of segmental data, abnormal margins, onsite revenue and non-contemporaneous data. Ld. TPO brushed aside the contentions of assessee and basing on the annual report, observed that the revenue of Cybage Software Private Limited from operations is derived from software development services and also observed that the assessee did not demonstrate the impact of intangibles on profit margins. Further it was observed by the Ld. TPO that over all averaging of profit margins has also been done by taking median of all the weighted average margins. Thus, fluctuation in p....
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.... sought for inclusion by the assessee to the Ld.AO/TPO to carry out necessary verification. Accordingly, ground no. 2.13 stands allowed. 6. Ground no. 2.14 - Assessee is seeking inclusion of the following two comparables. A) Batchmaster Software Pvt. Ltd. The Ld.TPO rejected this comparable as it did not appear in the search matrix carried out by the TPO. Reliance in this regard is placed on the Coordinate Bench of this Tribunal in case of Prism Networks (P.) Ltd. vs. ACIT reported in (2022) 141 taxmann.com 163 wherein it has been held that the company not figuring in the Ld.TPO's search matrix, cannot be a ground for not considering the same. Based on the above proposition, we remand this comparable back to the Ld.TPO to consider the comparability analysis based on the FAR of the assessee in accordance with law. B) Indianic Infotech Ltd. ("Indianic") It is submitted that, the said company was rejected by the Ld.TPO merely holding that the company is functionally different, without assigning reasons as to how the company was incomparable to the assessee. The DRP rejected it for the reasons that the company failed the export turnover filter and the related party transaction i....