TaxTMI 
TaxTMI 
2025 (6) TMI 1532
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....ear 1989. Vertex US is global IT services provider and has partnerships with various leading computer companies such as Microsoft, etc. Vertex India is engaged in providing software development services to Vertex US. The company operates on cost plus margin model. During the financial year relevant to assessment year under consideration, the appellant has reported international transactions with it's Associated Enterprises [in short "AE"] in respect of provision of ITES services of Rs. 24,10,97,420/-. The appellant has conducted TP study and selected Transactional Net Margin Method [in short "TNMM"] as the most appropriate method. The appellant has selected 16 comparables with margin of 11.09% to 22.26% and claimed that margin earned by the appellant company from providing 'Software Development Services' to it's AE i.e., 15.41% is at Arm's Length Price [in short "ALP"]. 2.1. The case of the appellant company was selected for scrutiny through CASS and during the course of assessment proceedings, a reference u/sec.92CA has been made to the TPO for determination of the ALP of international transactions of the appellant company. The TPO has examined the TP documentation su....
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....utes Resolution Panel-1 [in short "DRP"], Bengaluru and raised various objections including rejection of TP documentation maintained by the appellant company, selection of certain filters and also selection of fresh comparables. The assessee had also challenged re computation of PLI [OP/OC] by excluding provision for bad debt as non-operating cost. The assessee further agitated TP adjustment in respect of interest on delayed receivables from AE. 4. The learned DRP vide it's Directions dated 04.03.2021 issued u/sec.144C(5) of the Income Tax Act, 1961, allowed partial relief to the appellant company, where the DRP has rejected objection raised by the appellant company in respect of rejection of TP documentation and selection of fresh comparables. However, allowed appeal in respect of TP adjustment made towards interest receivable on outstanding receivables from AE and directed the TPO/AO to adopt SBI short-term deposit rate after providing the credit period of 90 days from the date of invoice raised by the appellant company. 5. In pursuance to the Directions dated 04.03.2021 of the DRP, the Assessing Officer has passed Final Assessment Order dated 30.03.2021 u/sec.143(3) r.w.s. 144....
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....erabad Bench, in the case of ADP Private Limited ITA.Nos.227 and 228/Hyd./2021 and also in the case of Infor India Pvt. Ltd., in ITA TP.No.198/Hyd./2021 12. MS. M. Narmada, CIT-DR for the Revenue, on the other hand, supporting the order of the DRP and TPO submitted that, Tata Elxsi Limited is functionally similar to the appellant company which is evident from the brief description of services referred to in their annual report. Further, there is no information in the annual report that company has revenue from product sales. R & D and intangible assets does not matter when comes to comparing profit margin of companies involved in similar line of business. The DRP/TPO after considering all the relevant facts, has rightly rejected the contention of the assessee and, therefore, the order of the DRP/TPO should be upheld. 13. We have heard both the parties, perused the material on record and the orders of the authorities below. We find that Tata Elxsi Limited has segmental revenue from IT services at Rs. 1075.121 crores, whereas, the appellant company's turnover from SDS segment is Rs. 20.41 crores. If we apply 10 times lower and upper turnover median for exclusion of any company, the....
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....he operating margin from the rendering of software services alone. In view of the above services, Persistent Systems Limited has become a global leader in software product and technology services. Further, Persistent Systems Limited is a leader in outsourced product development and works with world's largest software product companies. He also submitted that Persistent Systems Limited invested in future technology trends such as Internet of Things (IoT), wearable computing device and machine-to-machine and also built Google glass based applications. It has also invested in technology specialists in US to provide consultation services and advise on issues including technology strategy, platform and product vendors and architecture. Learned Counsel for the Assessee accordingly submitted that, Persistent Systems Limited is rendering multifaceted functions and, therefore, it cannot be compared with that of appellant company. He accordingly pleaded that Persistent Systems Limited may be deleted in the final set of comparables. 15. MS. M. Narmada, CIT-DR for the Revenue, on the other hand, supporting the order of the DRP and TPO submitted that, Persistent Systems Limited is function....
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....ompany. He submitted that, there is an extraordinary event of amalgamation i.e., Aspire Systems (India) Private Limited and PureApps Consulting Services Pvt. Ltd., are amalgamated with Aspire and, therefore, entire business including assets, liabilities, debtors, cash etc., stands transferred to Aspire Systems (India) Private Limited. He submitted that, though Aspire Systems (India) Private Limited operates under both onsite and off-shore model, the revenue break-up of the same is neither available in the income schedules nor is available under the segment reporting. He submitted that as per website, Aspire Systems (India) Private Limited has created various products/solutions/accelerators as part of it's offerings. He further submitted that, on similar grounds the ITAT, Hyderabad Benches in the case of ADP Private Limited ITA.Nos.227 and 228/Hyd./2021 has excluded Aspire Systems (India) Private Limited on account of amalgamation. He further submitted that, in the case of Capco Technologies Private Limited IT (TP) A.No.204/Bang./2021, ITAT, Bangalore Bench has excluded Aspire Systems (India) Private Limited from the set of comparables on account of it's turnover exceeds 200 crores.....
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....l set of comparables with the appellant's company. INFOSYS LIMITED : 20. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, although, the TPO/DRP observed that it is functionally similar to appellant company, but fact remains that going by nature of services provided by Infosys Limited, it is engaged in diversified activities which cannot be considered to appellant-company which is providing software development services to it's AE on cost plus mark-up basis. Learned Counsel for the Assessee submitted that Infosys Limited carries huge brand value which is a key intangible asset of the company and as per the report of brand financials, the total value of brand of Infosys Limited was $USD3114 million. The company incurred significant amount for R & D activities which is more than 1000% of the turnover of the appellant-company. Infosys Limited is a giant company and it's size and scale of operations is several times higher than the appellant company. Therefore, Infosys Limited cannot be compared to appellant-company which is the captive service provider to it's AE on cost plus mark-up basis. In this regard, the Learned Counsel for the Assessee relied on th....
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....ness consulting, technology, engineering and outsourcing services which includes software products and platforms which are not limited only to routine software development. Further, the company also into product development which is evident from the annual report where it generates revenue from sale of 'Finacle' and "EdgeVerve'. Further, Infosys Limited is a giant company carries huge brand value besides incurred significant amount of expenditure on R and D activities which is more than the turnover of the appellant-company. From the nature of services rendered by Infosys Limited and it's scale of operations, in our considered view, it cannot be compared with appellant company which is a capitive service provider to it's AE on cost plus mark-up. We find force in the submissions of the Learned Counsel for the Assessee that, on functional dissimilarity, huge turnover filter, brand value, Infosys Limited shall be excluded from the list of final set of comparables. Further, we find that, the ITAT, Hyderabad Bench, in the case of ADP Private Limited ITA.Nos.227 & 228/Hyd.2021 has excluded Infosys Limited on account of diversified activities and in the case of Infor (India) Private Limit....
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....ce. 24. Ms. M. Narmada, Learned CIT-DR for Revenue, on the other hand, supporting the order of the DRP and TPO submitted that, Thirdware Solutions Limited is functionally similar to the appellant company which is evident from the brief description of services referred by the Learned Counsel for the Assessee. Further, revenue from software licence constitutes meagre of 0.04% of total operating revenue. Thus, Thirdware Solutions Limited is predominantly into sale of software services and hence can be taken as a comparable. Further, the intangible assets of Thirdware Solutions Limited does not matter when comes to comparing profit margin of companies involved in similar line of business. The DRP/TPO after considering all the relevant facts, has rightly rejected the contention of the assessee and, therefore, she submitted that, the order of the DRP/TPO should be upheld. 25. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We find that, ITAT, Hyderabad Bench, in the case of ADP Private Limited ITA.Nos.227 & 228/Hyd./2021 has excluded Thirdware Solutions Limited on account of functional dissimilarity and non-availabili....
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....er filter, then, Cybage Software Private Limited does not pass the turnover filter test. Therefore, we are of the considered view that, Cybage Software Private Limited cannot be considered as comparable to the appellant company which is engaged in providing software development services to it's AE on cost plus mark-up basis. Thus, we direct the Assessing Officer/TPO to exclude Cybage Software Private Limited from the list of final set of comparables. LARSEN & TOUBRO INFOTECH LIMITED : 29. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, Larsen & Toubro Infotech Limited is functionally different as it provides wide range of services and sought for exclusion of the above company from the list of comparable before the TPO and DRP on the ground that the said company is functionally different from appellant company and there is an extraordinary event of acquisition and amalgamation for the year under consideration, which significantly affect the operating margins. The company has made substantial investments in technology absorption. Therefore, the above company i.e., L & T Infotech Limited cannot be compared with the appellant-company which is a simple se....
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.... Infotech Limited on account of huge turnover. In the case of OLF (India) Software Private Limited in IT TP A.No.182/Bang./2021, the ITAT, Bangalore Bench has excluded Larsen & Toubro Infotech Limited on the ground that there is an extraordinary event of amalgamation In the case of Capco Technologies Private Limited IT.TP.A.No.204/Bang./2021 the ITAT, Bangalore Bench, has excluded Larsen & Toubro Infotech Limited as it's turnover exceeds 200 crores. In the case of Auriga Software Technologies Private Limited in IT.TP.A.No.178/Bang./2021, the Bangalore Bench of the Tribunal has excluded Larsen & Toubro Infotech Limited on account being a giant company. He accordingly submitted that, Larsen & Toubro Infotech Limited cannot be compared with that of appellant's company on account of turnover filter, functional dissimilarity and engaged in diversified activities. Further, although, the appellant-company has selected Larsen & Toubro Infotech Limited in their TP study as comparable to appellant-company, but, on verification of facts, it emerges that it is totally un-comparable to appellant-company on the basis of FAR analysis and, therefore, merely for the reason of inclusion of the said ....
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....o Infotech Limited, we find that largely the functions performed by both the companies are similar. Although, the Learned Counsel for the Assessee seeks to exclude the Larsen & Toubro Infotech Limited on the ground of significant intangibles/business rights and huge brand value, but, in our considered view, going by the value of IPR, they are miniscule and insignificant. Further, although the company has required 100% stake in M/s. Information Systems Resources Centre Private Limited which also engaged in the provision of software development services. Further the appellant had failed to prove how the brand value effects the operating margin of the company. Therefore, in our considered view, once a particular company is a part of comparable selected in it's TP documentation by the appellant-company, it cannot be excluded at subsequent stage merely on the basis of some decisions of Tribunal, unless the appellant-company makesout a case that such company is functionally dissimilar to that of the appellant-company. Therefore, we are of the considered view, that there is no merit in the arguments advanced by the Learned Counsel for the Assessee for exclusion of Larsen & Toubro Infotech....
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....able to appellant-company, but, on verification of facts, it emerges that it is totally un-comparable to appellant-company on the basis of FAR analysis and, therefore, merely for the reason of inclusion of the said company by the appellant-company, there is no need to retain the above company in the final set of comparables when assessee has made-out a case that it is functionally different from appellant-company. He accordingly pleaded that, Assessing Officer/TPO be directed to exclude Infobeans Technologies Limited from the list of comparables on functional dissimilarities with that of appellant company. 33. MS. M. Narmada, learned CIT-DR, on the other hand strongly relied on the orders of the Assessing Officer/TPO. She submitted that in TP comparability analysis, consistency is not a mandatory requirement in light of new information, one company may be chose as comparable even though it was rejected in previous years. She submitted that the Assessing Officer/TPO upon gathering information through Annual reports and 133(6) response and after analysing the same, Infobeans Technologies Limited was included as comparable as it is purely into software development like the appellant ....
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....sing Officer/DRP and reject the arguments of the appellant-company. 35. Ground No.4 relates to rejection of comparable companies. 36. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee referring to ground no.4 of appellant company submitted that, although, the appellant seeks to include 10 companies in the list of comparables, however, not pressed Akshay Software Technologies Limited, (2) TVS Infotech Limited, (3) Celstream Technologies Limited and (4) Isummation Technologies Private Limited. If we exclude the above 04 companies, then, we left with 06 comparables viz., (1) Sagarsoft India Limited (2) Sasken Communication Technologies Limited (3) Maveric Systems Limited (4) Infomile Technologies Limited (5) Evoke Technologies Limited and (6) Harbinger Systems Private Limited. 36.1. Shri Nageswar Rao, Advocate-Learned Counsel for the Assessee submitted that, although, the above companies are functionally comparable to appellant company because of their nature of business, but, the TPO/ DRP excluded the above companies only on the ground that those companies do not figure in TPO's search matrix and thus, functionality is not required to be seen. However, the fact remains ....
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....h (P.) Ltd., vs., ACIT [2024] 166 taxmann.com 92 [Hyderabad-Trib.] where on similar grounds, the Tribunal directed the Assessing Officer /TPO to examine the functionality of the above companies and consider for the purpose of inclusion or exclusion. Similar view has been taken by ITAT, Hyderabad Bench in the case of IVY Software Development Services Private Limited, Hyderabad vs., ACIT, Circle-2(1), Hyderabad in ITA.No.1801/Hyd./2019 - A.Y. 2015-2016, order dated 06.03.2025 wherein it has been held that, once a particular company is functionally similar to the appellant company, then, said company cannot be rejected on the ground of data not available in particular data searches/search matrix. Therefore, we are of the considered view that, the DRP/TPO erred in rejecting the above companies without examining the functionality test. Thus, we set-aside ground no.4 of assessee's appeal and more particularly, 06 comparables argued by the learned CIT(A) to the file of Assessing Officer/TPO and direct the TPO to examine the contention of assessee in light of relevant evidences and decide the comparability of companies. 39. Ground No.5 of assessee's appeal relates to determination of oper....