TaxTMI 
TaxTMI 
2024 (7) TMI 122
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....the case. 2. The Ld. AO/DRP erred in assessing the total income of the Appellant at INR 57,07,27,813 as against the returned income of INR 42,21 84,820. 3. The Ld. AO/DRP erred in determining a sum of INR as payable by the Appellant. Ground of appeal on validity of the final assessment order 4. Without prejudice Appellant submits that the final assessment order and the notice of demand dated 30 July 2022 issued on the Appellant are without jurisdiction invalid and bad in law, as the same have been passed without following procedure laid down in law. Grounds of appeal relatinq to transfer pricinq matters: 5. The Ld. AO /TPO/ DRP, erred in making an addition of INR 14,85,42,993 to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") for the international transactions entered by the Appellant with its Associated Enterprises CAEs"). 6. The Ld. AO/ T PO/ DRP, erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of sub- section (3) of Section 92C of the Act. 7. Adjustment on account of re-determination of arm's length price for t....
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....us Software Labs Private Limited Black Pepper Technologies Private Limited Cybage Software Private Limited Great Software Laboratory Private Limited Infobeans Technologies Limited Infosys Limited Larsen & Toubro Infotech Limited Mindtree Limited Nihilent Limited Persistent Systems Limited Tata Elxsi Limited Threesixty Logica Testing Services Private Limited Wipro Limited 7.4 The Ld. AO/ TPO/ DRP erred, in law and in facts, by rejecting following functionally comparable companies identified by the Appellant in its TP documentation, based on unreasonable comparable criteria. EC Info Systems India Private Limited Evoke Technologies Private Limited Orion India Systems Private Limited Rheal Software Limited Sasken Technologies Limited Sure IT Solutions India Private Limited 7.5 The Ld AO/ TPO pursuant to the directions of the Hon'ble DRP erred, in law and in facts, by rejecting functionally comparable companies additionally identified by the Appellant during the assessment proceedings, based on unrea....
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....2,99,35,260 in the assessment order under Section 234B of the Act. 10 The Ld. AO has erred in law and in fact, by levying an interest of INR 8, 79,244 in the assessment order under Section 234C of the Act. 11 The Ld. AO has failed to appreciate that interest under section 234C is on the returned income and not on the assessed income and has erred in levying additional interest on the assessed income as against the interest on the returned income. 12 The Ld. AO has erred in law and in fact, in initiating penalty proceedings under Section 270A of the Act. The Appellant submits that each of the 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 hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law." 2. The assessee has raised following additional grounds of appeal: 1. "The Applicant craves leave to raise the following additional grounds. The Hon'ble Tribunal would appreciate that these grounds are to be read i....
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....subsidiary of Infineon Singapore. It provides software development services to Infineon group companies for application in Automotive, Chip card and Security (SWD Segment). It also provides making support services to Infineon group companies (MSS Segment). It is compensated at Net Cost Plus Mark Up of 15% for provision of software development services and Net Cost-Plus Mark up of 9% for the provision of marketing support services. International transactions undertaken by assessee in aforesaid segments were benchmarked using Transactional Net Margin Method (TNMM) using OP/OC-PLI. Post consideration of ld. DRP's direction in order giving effect dated 22.7.2022, the ld. TPO determined the TP adjustments on two accounts: 1. Adjustment of Indian Rupees in software development segment (SWD) : 11,60,23,041/- 2. Adjustment in Indian Rupees as interest on receivables : 3,25,19,952/- 6.2 MSS segment was held to be at Arm's Length. Thus, remaining adjustment of ALP in SDS segment and interest on receivables are subject matter of present appeal. 7. The assessee wants exclusion of following comparables: (a) Nihilent Limited: The ld. A.R. submitted that Nihilent Lim....
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.... Ld.TPO and at the outset deserves to be eliminated. The Ld.AR referring to the annual reports, placed in the paper books filed before this Tribunal reveals that turnover is more than Rs.200 crores and does not match even 10 times the turnover of assessee. The Ld.AR thus submitted that applying either the turnover filter of Rs. 1 crore to Rs. 200 crores or 10 times the assessee's turnover to 1/10th , these comparables deserves to be excluded. 17.4 It is also submitted that these comparables are not functionally similar with that of the assessee as has been observed by Coordinate Bench of this Tribunal in following cases: 1. Decision of Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT in ITA No. 1379/M/2021 by order dated 25.02.2022 for A.Y. 2016-17. 2. Decision of Hon'ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. vs. DCIT in ITA-TP.No. 198/Hyd/2021 by order dated 06.10.2021 for A.Y. 2016-17. 3. Decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT in IT(TP)A No. 182/Bang/2021 by order dated 28.09.2021 for A.Y. 2016-17. 17.5 On the contrary, the Ld.DR placed re....
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....Y 2008- 09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008- 09, we direct exclusion of M/s Persistent Systems Ltd. We also notice that in AY 2008-09, the co-ordinate bench has excluded M/s Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra), where in it was held that M/s Thirdware solutions Ltd is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own cas....
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....arable is remitted back to the Ld. TPO to decide afresh." "Nihilent Analytics Ltd. (Nihilent) 44. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No.405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise's reportable segment explanatory available at page No.A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No.A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable visà-vis assessee, who is a low risk entity working on cost + markup m....
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.... software and animation services. The company is under the software development unit, is engaged in diversified activities i.e. Product design services, Innovation design engineering, Visual computing labs, etc. He drew our attention to the annual report placed in page Nos.2504, 2524, 2556, 2490 of PB Part III for the FY 2017-18 and pages Nos.4734, 4766 of annual report of PB Part V for the FY 2016-17. He submitted that product development cannot be considered comparable to software development since there was no proper bifurcation of various services provided under software development and services segment and same should be rejected. 9.1 The ld. D.R. relied on the order of lower authorities. 10. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration in the case of Wipro GE Healthcare Pvt. Ltd. in IT(TP)A 803/Bang/2022 for the AY 2018-19 the Tribunal vide order dated 17.5.2023 has held as under: 14.8 Regarding the comparable Tata Elxsi Ltd., the assessee had objected before the TPO and DRP that the same is not functionally comparable. However, the TPO and DRP rejected the objections of the assessee. Th....
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....lly comparable to the assessee. In the financial statements of the company, the nature of business carried out by Tata Elxsi is given below: i) Corpoprate Information "Tata Elxsi Ltd was incorporated in 1989. The Company provides product design and engineering services to the consumer electronics, communications and transportation industries and systems integration and support services for enterprise customers. It also provides digital content creation for media and entertainment industry" 29. We find that in the case of Infor (India) (P) Ltd vs. ACIT in ITA No.2307/Hyd/2018, the Coordinate Bench of the Tribunal has considered similar objections of the assessee therein and has held that these two companies along with Thirdware Solutions Ltd is not comparable to the software development company like the assessee before us. The relevant portions has been reproduced by us in the above paras. Respectfully following the same, these two companies are also directed to be excluded from the final list of ITA No 2233 of 2018 ADP Private Ltd Hyderabad comparables. Thus, assessee's ground of appeal No.2 is partly allowed." 5.3 In the said decision, it has been he....
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....&T Infotech Ltd. He brought to our notice that as far as Persistent Systems Ltd. is concerned, the reasoning given for excluding this company for AY 2014-15 will equally hold good for the present year as well. In this regard, our attention was drawn to page 601 of the assessee's PB wherein in the annual report of this company, Notes forming part of financial statement in Note (i) which gives the description of income from software services, there is a reference to revenue from licensing & software, which sufficiently indicates that the assessee is not a pure SWD services provider. It was also brought to our notice that the profit & loss account which is at page 596 read with Notes forming part of the financial statement at page 604 wherein the segmental reporting is not based on different segments and the statement presents a consolidated financial statement without any segmental reporting. This company has also significant RPT transaction of 25% on sales. He pointed out that the TPO & DRP on the application of RPT filter has not expressed any opinion. The ld. DR relied on the order of DRP wherein the DRP has made extensive reference to each of the objections regarding absence ....
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....veling and conveyance 19.27 Total related party transactions (A) 3,891.93 Total Sales (B) 12,424.98 RPT % of Sales (A/B) 31.32% From the above computation, it is clear that the controlled transactions of Persistent constitutes 31.32% of sales. Based on the above, it can be seen that Persistent fails the `RPT to sales ratio' filter applied by the learned TPO and should therefore not be considered as a comparable." 34. This argument has been addressed by the DRP in its order as follows:- "4.4.9 We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that onsite expenses do not adversely affect comparability and hence, such plea is rejected." 35. Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this compa....
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....e I.T. Rules. We are of the view that this argument again ignores the fact that the approach of the TPO has been to highlight the fact that there can be no functional comparability, if the assets employed and risks assumed are taken into consideration. It is in that context the TPO has referred to the margins. 67. The companies who generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as w....
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....h reference to SWD services provider such as the assessee. The ld.Counsel pointed out that though this decision was rendered with reference to AY 2011-12, the same reasoning would apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee's PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee's PB that this company as part of its operating profit in Schedule- O of profit & loss account contains expenditure for 'cost of bought out items for resale' and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit & loss account, there is no break- up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon'ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the H....
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....ucts and solutions. It has filed 4 patents in India and US so far in the area of Video analysis. - Ownership of intangibles in the form of intangible property. Significant onsite activity: - 46% of revenue earned under Onsite model. - Incurred overseas branch office expenses amounting to INR 1582 crores - Receives incentives from State of Florida in relation to the development center located overseas. Lack of segmental data - Does not maintain segmental information in respect of profitability reported from business activities in the nature of infrastructure management services, technology consulting and SAP services. - Acquisition of subsidiary - Discoverture Solutions LLC. 42. The DRP while dealing with the aforesaid objections has merely taken the view that the presence of IPR revenue 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 alrea....
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....ity. (e) Wipro Limited: 15. The ld. A.R. submitted that M/s. Wipro Limited is functionally dissimilar to the assessee company since it is engaged in providing cognitive computing, hyper automation, robotics, cloud, analytics and emerging technologies. Also, the company is engaged in offering software products. In this regard, he drew our attention to annual report which is placed in page Nos.2328, 2293 & 2181 of PB part III for the FY 2017-18. 15.1 The ld. D.R. relied on the orders of lower authorities. 16. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration in assessee's own case for the AY 2008-09 in IT(TP)A No.1670/Bang/2012 dated 6.11.2015 wherein held as under: 12. "Wipro Ltd. 12.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representat....
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....s that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration." 16.1 Being so, we direct the ld. AO/TPO to exclude this company M/s. Wipro Ltd. from the list of comparables. (f) Info....
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.... this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R&D have all been brushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee." 18.2 Accordingly, we direct the ld. AO/TPO to exclude this company on the basis of functionality as well as on turnover basis. 19. In the result, the main ground Nos.5 to 7.8 and additional ground No.3 are allowed. 20. Regarding the next main ground No.8 and additional ground Nos.1 & 2 the ld. A.R. submitted that the Ld. TPO vide order dated 21.07.2022 while giving effect to DRP directions proceeded to make an adjustment of INR 3,25,19,952/-. The ld. A.R. submitted that receivables in the present assessment year arose from international transaction pertaining to SWD and MSS services. Thus, the same ar....
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....en related parties has to be assumed to be tainted, it would be absurd to contend that credit period of 30 days mentioned therein is sacrosant. Such selective reliance on the agreement is impermissible. In terms of principle laid down in Chapter X comparison on all aspects with independent third parties is necessary, hence he submitted that the average credit period of comparable companies being 78 days may be directed to be used for imputation of interest. 20.1 The ld. A.R. for the assessee requested for granting working capital adjustment in terms of decision of Bangalore Tribunal in case of Huawei Technologies India Pvt Ltd. vs. ACIT: IT(TP)A No.731/Bang/2022. 21. The ld. D.R. relied on the order of the Tribunal in the case of M/s. Thought Focus Information Technologies Pvt. Ltd. in IT(TP)A No.742/Bang/2022 dated 11.1.2023 for the AY 2018-19 wherein the ld. DRP referred to the decision of jurisdictional High Court in the case of DCIT Vs. AMD India Pvt. Ltd. in ITA No.274/2018 dated 31.8.2018 wherein held that the deferred receivables would constitute "an independent international transaction and hence, separate bench marking has to be done and TP adjustment is to be made a....
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....ideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[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 Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7- 16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same ca....
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....this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: "(c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the 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?" 23.6. Ld.CIT.DR 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/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international t....
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....earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions." 23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law." 36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon'ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018. ....