AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2024 (6) TMI 1284
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....rved that the international transactions that took place between the assessee and its AE 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 Logic....
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....ss Solutions Ltd. 2.8.1 Other comparables that were sought for exclusion were rejected. Thus, post the DRP directions, the final set of comparables were as under: Sl. No. Name of the Company 1. Rheal Software Pvt. Ltd. -1.85% 2. Synfosys Business Solutions Limited -0.08% 3. Kals Information Systems Ltd 3.62% 4. Ace Software Exports Limited 3.68% 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 Pv....
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.... is placed by the Ld.AR on following decisions. a) Brocade Communications Systems (P.) Ltd. v. DCIT Order dated 19.06.2020 passed by this Tribunal in IT(TP)A No. 79/Bang/2019 and b) Bearing Point Business Consulting (P.) Ltd. vs. DCIT reported in (2013) 33 taxmann.com 92 4.2 It is thus submitted that, it is now a settled proposition of law that, necessary adjustments are to be made to the margins of comparables to give effect to the differences in the working capital positions of the tested party and of the comparables. 4.3 The assessee is challenging the action of the Ld.TPO in determining a negative working capital adjustment, which 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 a....
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....ve working capital adjustment for the differences in working capital between the assessee and the companies considered as comparables. The assessee does not agree with the learned TPO as the company does not bear any working capital risk since it is been fully funded by it's A.E. from its inception and has no working capital contingencies. The company has never taken any loans till date from the date of incorporation nor has incurred any expense for meeting the working capital requirement." We have gone through the submissions and the order of the TPO. The assessee pleaded that the DRP has acceded such a plea in some other case. On examination, we find that the DRP, Hyderabad in-the case of Cordys Software 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 pr....
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....e transfer pricing study report has been placed at page 732 and the functional analysis of the assessee are recapitulated as under: 5.2 From the above, it is seen that assessee has been characterized as a captive service provider bearing minimum risk associated with business of providing software development services to the AE. 5.3 Based on the above, we shall undertake the comparability analysis in respect of the comparables sought for inclusion / exclusion. A) Larsen & Toubro Infotech Ltd. The Ld.AR submitted that this company is functionally not comparable with assessee as it is involved in diversified activities like banking financial services, analytics, automation, artificial intelligence, infrastructure management services etc. It is submitted 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....
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....h are different from the intangibles owned by the assessee. The company also invests in products which helped the company establish itself as a credible IP Owner. The company owns several Edge products/platforms and six other product-based solutions. It is submitted that this company has significant activities based on onsite business model, generating around 54.2% of its revenue vide onsite location during FY 2016-17. Relying on the following decisions of Coordinate Bench of this Tribunal, the Ld.AR submitted that this company has been consistently excluded for the above reasons. - Mavenir Systems Pvt. Ltd. v. DCIT (supra) - Yahoo Software Development India Pvt. Ltd. vs. JCIT (supra) - Carl Zeiss India (Bangalore) Pvt. Ltd. v. DCIT (supra) - Sabre Travel Technologies Pvt. Ltd. v. DCIT (supra) - Infor (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....
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.... case of Blue Coat Network (India) Pvt. Ltd. vs. DCIT (supra). In the present facts, the Ld.AR categorically took us to the annual reports wherein this revenue from operations at page 911 has been shown to be from software services and Note no. 26 at page 932 reveals that, there is revenue generated by this company from sale of products. Further at page 916, the value of intangibles reveals the amount of products i.e. generated and owned by this company which is not the case in the present assessee. The present assessee is found to be a captive service provider who carries out software development services in accordance with the direction of its associated enterprises and is compensated on a cost+mark-up basis. Therefore in our considered opinion, both the comparables cannot be considered to be fit for being included. Based on the above observations, we do not find any reason to uphold the inclusion 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 h....
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....m application development ("CAD"), Content Management Systems ("CMS"), Enterprise Mobility, big data analytics. She submitted that, 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 CAD,CMS etc., which are not pure software development. It is submitted that the software services provided by Infobeans are in the nature of KPO services and not pure software development services as defined in the safe harbour rules. Further, it is submitted that Infobeans has not provided any segmental information bifurcating revenue generated from SWD services and that of KPO services. Further, the Ld.AR submitted that this company owns significant intangible assets, and the revenue increased from Rs. 35 crore (FY 2014-15) to Rs. 62 crore (FY 2015-16) in a period of 1 year (76%). This demonstrates that the company does not reflect the market standard, and therefore, the company ought to be excluded from the final list of comparables. The Ld.AR placed reliance on the following decisions in support of the above submissions. - Mavenir Systems Pvt. Ltd. v. DCIT (supra) ....
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....hat there exists some factor having an impact on the margin, and therefore the company cannot be selected as a comparable. (v) Sales Tax: The annual report of the company shows that it incurs Central Sales Tax liability, which demonstrates that the company is not a pure software development company. 14. This company is being consistently excluded from the final set of comparables. Reference is made to the following orders of the ITAT :- (i) San disk India Device Design Centre (P.) Ltd. v. Jt.CIT [IT (TP) Appeal No. 288 (Bang.) of 2021, dated 30-6-2022] for AY 2016- 17)- at paras 17.9 and 17.10 (on account of functional dissimilarity as company renders diverse services and lack of segmental details); (ii) ADP (P.) Ltd. v. Dy. CIT [2022] 135 taxmann.com 44 (Hyd. - Trib.) - at para 7.4 (on account of functional dissimilarity as company earns revenue from export of goods and segmental details are unavailable). (iii) Global Logic India (P.) Ltd. v. Dy. CIT [2022] 134 taxmann.com 35 (Delhi - Trib.) (on account of functional dissimilarity as the company is into diversified activities which are not comparable to routine SWD service provider) (iv) R....
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....unctions set out in the audited financial statements (enclosed as Annexure-A), and therefore, the same cannot be relied upon. Moreover, the website of the company shows that the company is engaged in diverse services, which are not similar to the functions of the assessee in the instant case. Since the learned AR has been able to clearly establish that Infobean TechnologiesLtd. is not functionally comparable to that of the assessee, we follow the orders of the ITAT referred in para 14 (supra) and direct the AO/TPO to exclude Infobean TechnologiesLtd. from the comparable list. It is ordered accordingly." Nothing contrary to the above has been placed on record by the Ld.DR. From the aforesaid findings of the coordinate bench of this Tribunal, we are satisfied that the reasons assigned to excluding the aforesaid comparable deserves to be accepted by us. We are therefore directing the Ld.AO to exclude this comparable from the final list. Accordingly, we direct the Ld.AO/TPO to exclude this company from the final list. E) Tata Elxsi Ltd. It is submitted that Tata Elxsi is functionally dissimilar to the assessee and cannot be accepted as a comparable. The company is eng....
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....h no segmental details are available in respect of functionally dissimilarity, the Ld.AR relied on the following decisions wherein these comparables were directed to be eliminated: - 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 for assessment year 2017-18 - Yahoo Software Development India Pvt. Ltd. vs. JCIT by order dated 11.07.2022 passed by this Tribunal in IT(TP)A No. 178/Bang/2022 for assessment year 2017-18 - Infor (India) Pvt. Ltd. v. ACIT by order dated 25.08.2022 passed by the Hyderabad Bench of this Tribunal in ITA-TP No. 228/Hyd/2022 for the assessment year 2017-18 - 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 have perused the submissions advanced by both sides in the light of records plac....
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....was insignificant and so also expenses of brand value, R&D & intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. (supra) and in the light of this decision and the admitted factual position regarding presence of onsite revenue over and above the threshold limit of 25% of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly." 5. The revenue has not placed anything on record contrary to the above observations. Further admittedly the functions, assets owned and risks assumed by the assessee under the segment is similar with A.Ys. 2014-15 & 2015-16 (supra). Respectfully following the above view, we direct the Ld.AO to exclude Infosys Ltd., Persistent Systems Ltd., Mindtree Ltd. and L&T Infotech Ltd. from the final list." Respectfully following the above, we d....
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....are services, business consulting in the area of enterprise transformation, change and performance management and providing related IT Services. This fact is further supported by the information disclosed at page 50 and 51 of the annual report that the whole revenue of the company is derived from IT consultancy, software development and related services. Further at page 82 & 83 of the consolidated annual report, it is stated that "The group's activities involve predominantly providing software related services, which is considered to be a single business segment since these are subject to similar risks and returns. Accordingly, software services comprise the primary basis of segmental information as set out in these financial statements, which therefore reflect the information required by AS 17 - Segment". Thus, the ld DRP opined that it is functionally comparable to the assessee which renders software development services and other allied services. Thus, the contentions of the assessee that it is engaged in diverse 'activities and not functionally comparable is without merit. Besides, there is no information in the annual report to indicate that this company is engaged in ....
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...., and hence, it cannot he excluded as comparable. 11.2 The ld DR further stated that with regard to pleas of R&D, the ld DRP noted that the R&D activities are in the nature of routine activities to improve service delivery and there is no specific debit towards R & D in the P & L --account. These indicate that the R&D activities are towards routine business activity. The company does not own intangibles except for computer software licenses. Therefore, the ld DRP was of the view that this company is comparable to the assessee company. The ld DRP also noted that the assessee has failed to establish that such differences, if any, on account of R & D / intangibles, have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas were rejected by the ld DRP. In view of the above, the ld DRP upheld the selection of this comparable. ....
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....ing 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 that this company earned significant onsite revenue which demonstrates that it operates on a different model and therefore functionally not comparable with the assessee. 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. The Ld.DR placed reliance on the decision of Coordinate Bench of this Tribunal in case of NTS Technology Services Pvt. Ltd. vs. DCIT in IT(TP)A No. 940/Bang/2022 vide order dated 27.03.2023. ....
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.... We note that the Ld.TPO has considered this comparable by simply holding that entire income has been earned by this company on the software development service segment. However, the Ld.TPO failed to note that this company is not captive service provider like that of assessee and is an independent entrepreneur owning intangibles. Under such circumstances, it is not appropriate to consider this comparable with that of assessee. We direct the Ld.AO/TPO to exclude this company from the final list. I) Cybage Software Pvt. Ltd. The Ld.AR submitted that this company provides services which includes architectural services, application development and maintenance, outsourced product engineering services. It is submitted that Cybage provides diversified services which include architectural services, application development and maintenance, outsourced product engineering services, testing & QA, digital services, MIS and Data analytics, transformation services, support services, UX design, and technical documentation. Further from the website of Cybage, it is evident that it is engaged in product development apart from providing spectrum of services including ITeS and BPO se....
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....P India Services Private Limited (ITA No. 4425/Mum/2010) did not reject companies having margin of 75.6% (Datamatics Technologies Limited) and 68.7% (Hinduja TMT Ltd) and in the case of Exxon Mobil, upheld selection of Alpha Geo India Ltd., having margin of 47.79% and Vimta Lab having margin of 57.68%. The Hon'ble Delhi High Court (TS173- HC-2015 (Delhi)-TP) in its verdict in the case of Chryscapital Investment Advisors (India) Private Limited (the appellant), emphasised functional analysis as the key comparability criterion, and inter alia held that - mere earning of high profits/losses could not be a reason to exclude a company as a comparable. In view of the above, Ld. DRP did not find merit in the plea of exclusion of certain companies on the ground of its high profit margin and uphold the selection of Cybage Software Private Limited as a comparable." Nothing contrary has been placed on record by the Ld.DR. Accordingly, we direct the Ld.AO/TPO to exclude this comparable from the final list. J) Consilient Technologies Pvt. Ltd. & Aptus Software Labs Pvt. Ltd. The Ld.AR submitted that this company is into diversified activities as per the website informat....
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....is comparable back to the Ld.TPO for necessary verification and to consider the claim of assessee in accordance with law. Accordingly, ground no. 2.14 stands partly allowed for statistical purposes. 7. Ground nos. 3.1, 3.2, 4-6 On the corporate tax issues, the Ld.AR submitted that necessary verifications are to be carried out based on the evidences filed by the assessee as there is computational errors that has crept in. The Ld.AR submitted that the returned income has been considered wrongly vis-à-vis that has been declared by the assessee. In respect of the deduction u/s. 10AA, the Ld.AR submitted that assessing officer failed to include the deduction claimed even though the same was not disputed in the draft assessment order. She further submitted that there is an erroneous levy of interest u/s. 234A of the act even though assessee had filed the return of income before the due date and there is an erroneous levy of interest u/s. 234B, C of the act as a consequence of the same. We note that all the above issues raised by assessee deserves necessary verification at the end of the Ld.AO. Assessee is directed to furnish details / evidences in respect of the sam....
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....anies. PRODUCT T INDIA ANGALORE CENTRE PVT LTD Document 2 2.5 The learned AO/ learned TPO/ Hon'ble DRP grossly erred in applying the threshold limit of 75 percent in respect of export sales to total sales while selecting comparable companies thereby, leading to a narrower set of comparable companies. 2.6 2.7 2.8 2.9 The learned AO/ learned TPO/ Hon'ble DRP grossly erred in selecting the companies only if the data pertaining to FY 2016-17 (i.e., latest year) is available i.e., the learned AO/learned TPO/ Hon'ble DRP has erred in rejecting companies whose data is available for FY 2015-16 and FY 2014-15. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in rejecting companies having different FY ending or whose data does not fall within the 12 month period of 1 April 2016 to 31 March 2017 and thereby, failed to appreciate that disregarding companies that have a FY ending other than March 2017 would lead to having a limited set of comparable companies and would have bearing on the comparability analysis. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in rejecting companies having employee cost filter lo....
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....lowed the deduction under section 10AA of the Act of Rs. 11,88,28,769 while computing the taxable assessed income and applicable tax 3.3 Secondary and Higher Education Cess ("Education cess') a. The learned AO and Hon'ble DRP erred in law and on facts by not allowing deduction in respect of the Education Cess. b. The learned AO and Hon'ble DRP erred in law and on fact in concluding that Education Cess is not an expenditure. DEVEL 7 RODUCT RAALORE CENTRE PVT LTD Document 4 4. 4.1 4.2 5. 5.1 c. The learned AO and Hon'ble DRP erred in law and on fact in concluding that Education Cess is income tax not allowable under section 40(a)(ii). d. The learned AO and Hon'ble DRP ought to have allowed deduction of the Education Cess for the year under consideration, though not claimed as a deduction by the Appellant while filing its return of income. e. The learned AO erred in not following the binding circular issued by the CBDT No.14 (XL-35) dated 11.04.1955, wherein it is instructed the assessing officers to guide the Assessee with respect to any relief and deduction entitled even though such deductions are not cl....
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.... of designs - The conceptualisation and design of the final software module or solutions, deliverable to the end customers is done by the AES and AEs are also Document 6 responsible for all product innovation and research and development activities for the final software products or solutions. Development or coding Intuit PDC provides application development services according to the specifications provided by the AEs. The spectrum of services provided include: • . . Development of new versions of Intuit software products or solutions; Provide assistance in enhancements and release of Intuit group's existing software products or solutions; and Support in development of new software products or solutions. Testing and quality assurance - Intuit PDC undertakes the testing and quality assurance activities for the software products or solutions developed, so as to ensure that the same meets the specification or requirements of Intuit group and also that defects are recognized at an early stage. Deployment / Implementation -Intuit PDC undertakes the activities related to deployment or implementation of the software....
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....y the AEs. 5.4 Risk Analysis Risks are those business factors that may expose a company to the possibility of loss or damage. In other words, risk is the probability that a particular adverse event may occur during a stated period, or may result from a particular challenge. The following section discusses the risk borne by the Company vis-Ã -vis its AEs. Market risk - Market risk arises when a company is subject to adverse sales conditions due to elther increased competition in the marketplace, adverse demand conditions within the market, or the inability to develop markets, or position products to service targeted customers. Intuit PDC does not bear any market risk since it provides software development services in the capacity of a captive services provider exclusively to its AEs. As a result, Intuit PDC is not affected by factors such as non-availability of markets for its services, fluctuation in demand and prices, etc. AEs are responsible for marketing the products and services offered to its customers and therefore bears the market risk. Contract risk Contract risk arises when a company fails to perform its services or supplies g....
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.... of potential revenues due to inefficiencies arising from obsolete infrastructure and tools as well as obsolescence of manufacturing processes. Document 8 The risk of technological obsolescence is common to any company in the software industry and is borne by Intuit PDC as well. However, given that Intuit PDC is compensated on a cost plus basis, this risk is negligible as costs of technological upgrades or obsolescence would be covered in the cost base considered for the application of the mark-up. IPR risk - This risk relates to the infringement of patent rights/copyrights to the technology software. The IPR are owned by AEs. Hence, Intuit PDC does not bear the IPR risk, as the same is borne by AEs. Capacity utilisation risk - This refers to risk due to under-utilisation of the existing capacity of the organisation in terms of service capacity, etc. Intuit PDC bears costs related to idle manpower. However, given that Intuit PDC is compensated on a cost plus basis, the Company recovers the bench costs incurred, with a mark-up. Hence, the Company is insulated from bearing capacity utilization risk. Risk of attrition of manpower - Workforce....