TaxTMI 
TaxTMI 
2025 (4) TMI 1253
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in rejecting internal TNMM by failing to appreciate the fact that assessee has submitted independent Auditor's certificate for adopting internal TNMM. 4. The Ld DRP/AO ought to have accepted the Profit margin of the assessee company (as computed by the assessee himself in Transfer Pricing documentation) as having complied with the arm's length principle. 5. The Ld DRP/AO are not justified in law in considering wrong comparables and consequently arriving at a high operating profit margin of 26.36% as a ratio of OP/OC. 6. The Ld DRP/AO is not justified in law in making an adjustment u/s 92CA of Rs. 6,91,69,741/- to the price received by the appellant. 7. The Ld DRP/AO erred in not accepting the assessee's contention of exclusion of following 13 companies on the grounds of functional comparability, super profit, high turnover or any other appropriate filter etc. Sl. No. Name of the Company 1. Rheal Software pvt Ltd 2. CG-VAK Software and exports Ltd 3. RS Software (India) Pvt ltd 4. Larsen & toubra Infotech Ltd (seg) 5. Tata Elxsi Ltd (seg) 6. Nihilent Technologies Ltd 7. Inteq Software pv....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Act. 16. The Ld AO erred in levying interest u/s 234A, 2348 and 234C of the Act against legally untenable adjustments. 17. Any other ground that may be urged at the time of hearing with the prior approval of the Hon'ble Tribunal." 3. Brief facts of the case of that the assessee- company is engaged in the business of development of mobile applications across multiple, recruit professionals and train them up in development of mobile applications and games and rendering software development services. The assessee had filed it's return of income for the assessment year 2016 2017 on 29.112016 admitting total income of Rs. 1,58,09,620/- under the normal provisions of the Income Tax Act, 1961 and book profit of Rs. 1,59,35,815/- under the provisions of section 115JB of the Income Tax Act, 1961. The case was selected for scrutiny. During the course of assessment proceedings a reference under section 92CA of the Act has been made to the TPO [in short "TPO"] for determination ALP of international transaction of the assessee-company entered with its Associated Enterprises [in short "AE"]. 4. During the course of Transfer Pricing [in short "TP"] proceedings....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wards PF & ESI in terms of section 36(1)(va) read with section 2(24)(x) of the Act. The assessee had also challenged addition towards disallowance of interest paid on delayed payment of TDS. The DRP after considering the submissions of the assessee-company and also by taking note of various facts brought on record by the Assessing Officer, vide their Directions u/sec.144C(5) of the Income Tax Act, 1961 dated 18.02.2021 excluded Kals Information Systems Private Limited, Cigniti Technology Ltd., from the list of final set of 15 comparables selected by the TPO and upheld remaining 13 comparables relied by the TPO. The DRP has also rejected the ground taken by the assessee- company challenging inclusion of certain comparable as per their TP study on the ground that the assessee is not able to file relevant evidences to prove the functional similarity and comparable selected in their TP documentation. The DRP had also sustained additions made by the Assessing Officer towards disallowance of employees contribution to PF and ESI. Pursuant to directions of the DRP issued under section 144C(5) of the Act dated 18.02.2021, the Assessing Officer has passed Final Assessment Order dated 30.03.2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ernal- TNMM shows the transaction with it's AE at ALP cannot be accepted. The TPO and the DRP after considering relevant facts has rightly rejected the contention of the assessee- company and, therefore, the findings recorded by the DRP for rejection of Internal-TNMM should be accepted. 12. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. Although, the assessee-company has filed a chart showing separate transactions with it's AEs and Non-AEs and claimed that AE's margin is 10% and it's Non-AE's margin is at (-)10%, but, on perusal of details filed by the assessee-company, except a chart in it's submission, there is no evidence was filed to substantiate the argument of the assessee-company that it's Internal-TNMM is appropriate for benchmarking transaction with it's AEs. Further, the assessee-company has not filed any evidence, except a Certificate from the Accountant to prove it's claim. From the details filed by the assessee-company, we are of the considered view that, the assessee-company has failed to demonstrate that the AEs and Non-AEs are functionally comparable. Further, the nature of the transactions....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see-company, wherefrom it is very clear that the assessee-company has selected some inappropriate filters which are not relevant for selecting comparables. Further on account of adopting inappropriate filters, certain functionally comparable companies have been eliminated. The DRP after considering relevant facts has rightly upheld the reasons given by the TPO for rejection of TP study and fresh TP search proceedings conducted by the TPO. Therefore, he submitted that the grounds taken by the assessee-company should be rejected. 16. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. As per section 92C(3) of the Act, if the TPO finds that the price charged or paid in an international transaction has not been determined in accordance with secs.(1) and (2) or any information and document relating to an international transaction have not been kept and maintained by the assessee-company in accordance with the provisions contained in sec.92D(1) and further, the information or data used in computation of the ALP is not reliable or correct and further, the assessee-company has failed to furnish any information or document,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....retained by the DRP submitted that, out of 13 comparable companies, 08 companies are having turnover of above Rs. 200 crores which cannot be compared with the assessee-company which is having turnover of Rs. 34 crores. On this filter itself, these 08 companies needs to be excluded. Learned Counsel further submitted that, the above 08 companies are functionally dissimilar when compared to functions performed by the assessee-company. Further, in some cases the segmental details were not available and further, few companies fails RPT filter test. Further, few companies have incurred huge marketing expenses and also engaged in R and D activities. Although, the assessee-company has brought-out clear facts in light of relevant annual reports of those companies and stated that those companies are not functionally similar to assessee-company, but, the learner TPO has ignored the details submitted by the assessee- company and included those 15 companies in the list of final set of comparables. The DRP even though excluded two comparables, out of 15 selected by the TPO, but, retained 13 comparables, even though, all these companies are functionally dissimilar, having high fluctuation margin,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....times of turnover of assessee- company. Although, the assessee-company contended for application of Rs. 0 to Rs. 200 crore turnover is appropriate turnover filter for exclusion of certain companies, but, in our considered view, going by the settled principle of law by the decisions of various Tribunals, application of 10 times upper and lower limit of turnover at a company is appropriate for exclusion of companies for the purpose of comparability of analysis. If we apply 10 times lower or upper turnover limits for companies, then, in our considered view, going by the revenue earned by the assessee-company of Rs. 34 crores approximately, in our considered view, the above 05 companies viz., Cybage Software Pvt. Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., Larsen & Toubro Infotech Ltd., and Infosys Ltd., are having turnover of above the tolerance range fixed for inclusion of companies. Therefore, we are of the considered view, that Cybage Software Pvt. Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., Larsen & Toubro Infotech Ltd., and Infosys Ltd., are definitely not comparable to assessee-company on turnover filter itself. Thus, we direct the TPO to exclude the above 05 companies f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in a different or diversified activities and there is no segmental data available in respect of each segments. Since the functions performed by the assessee-company are similar that of the functions carried-out by the above 03 companies, in our considered view, the above 03 companies are functionally similar to the assessee-company and comparable to the assessee-company. We are, therefore of the considered view that the DRP has rightly included the above 03 in the list of final set of comparables. We, therefore, uphold the findings of DRP and reject the ground taken by the assessee-company. 23. In so far as ground no.10 of the assessee for exclusion of R S Software (India) Ltd., though originally it was selected by the assessee in it's TP study, after considering it's FAR analysis as comparable, but, the assessee company subsequently on the basis of an order of some Tribunal cannot seek to exclude unless it has makes out a case that said company is functionally dissimilar to assessee-company and also on other grounds. In the present case, going by the FAR analysis of R S Software (India) Ltd., it is predominant engaged in the business of providing software development services. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in software development services for various segments/stream of business, but, once the said services is come within an umbrella of software development services needs to be considered as one segment of software development services. In the present case, going by the reasons given by the TPO, the TPO has given stereotype reasons for exclusion of said companies which is evident from pages 8 and 9 of the TPO order. He further submitted that going by Form No.MGT9 which is extract of annual report filed under the provisions of Companies Act, 2013, all these companies are engaged in providing software development services and derived 100% revenue from one segment. Therefore, the contention of the learned TPO that in some cases FAR is not similar and the taxpayer has not demonstrated the passage of all filters is incorrect. Therefore, he submitted that the TPO may be directed to include the above 08 companies in the list of comparables. 26. The learned CIT-DR Shri B Bala Krishna, on other hand, supporting the order of the DRP/TPO submitted that the TPO has examined each and every company's annual reports and observed that, on verification of the annual report the said companies are p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ered view, the TPO has given stereotype reasons for all companies even though the evidences filed by the assessee clearly demonstrates that the said companies are providing software development services and derived 100% revenue from one segment. Further, the assessee had also proved with evidences that all these companies have passed the filters applied by the TPO. Therefore, we are of the view that the TPO was erred in excluding the said companies from the list of comparables. The DRP without appreciating the relevant facts, simply upheld the reasons given by the TPO and excluded the above 08 companies from the list of comparables. Thus, we set aside the order of DRP/TPO and direct the Assessing Officer/TPO to include the above 08 companies in the list of final set of comparables for the purpose of comparison of international transactions of the assessee-company with it's AEs. 28. The next issue that came up for consideration through ground no.12 of assessee's appeal is, the Assessing Officer/TPO are erred in not giving full effect to the directions of the DRP. 29. Learned Counsel for the Assessee CA PVSS Prasad, submitted that, although, the DRP has directed the TPO/AO to e....