TaxTMI 
TaxTMI 
2025 (8) TMI 1596
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.... Dotgo Systems Inc., both based in the United States. The assessee raised invoices aggregating to Rs. 10,23,09,289/- only in the year under consideration to both the AEs only. The transactions were reported in Form 3CEB and benchmarked using the Transactional Net Margin Method (TNMM), with Operating Profit to Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The assessee treated both AEs as separate segments and accordingly prepared AE- wise segmental results, reporting a margin of 15% for each. However, the segment report attached in Factual Paperbook - I, Page 218, reflects a margin of only 7.99%. The assessee while calculating its ALP has treated certain cost as unconnected to the international transaction carried out with its ALP and accordingly excluded the same while calculating its PLI. The details of such costs, which are under dispute, include salaries claimed as sales and marketing expenditures amounting to Rs. 72,85,857/- and bank charges amounting to Rs. 42,653/- only. 3. In addition, the assessee claimed to have applied appropriate filters, which resulted in the selection of 14 comparables that were allegedly functionally similar. According to the assessee....
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....cted to adopt the LIBOR considering the location of the AEs which resulted in the reduction of interest adjustment to Rs. 48,69,666/-, while upholding the primary adjustment. 7. In the final order passed by the AO, the total transfer pricing adjustment stood at Rs. 3,07,91,859/-, comprising Rs. 2,59,22,193/- towards software development services and Rs. 48,69,666/- towards notional interest. 8. Aggrieved by the order/direction of the AO and ld. DRP, the assessee has preferred this appeal before the Tribunal. 9. Assessment order barred by limitation - The ld. AR did not press Ground 1, hence it is dismissed as not pressed. 10. The Ld. AR before us filed a paper book running from pages 1 to 146, along with a chart and written submissions comprising 7 and 9 pages respectively. In respect of the exclusion of costs amounting to Rs. 72,85,857/- and Rs. 42,635/-, representing marketing and bank charges respectively, the Ld. AR contended that these expenditures should be excluded from the operating cost for the purpose of computing the PLI, as Rs. 72,85,857/- pertains to marketing expenses and Rs. 42,635/- to bank charges which relate to non-operating cost. 10.1 Likewise, th....
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....B] ⁃ Continental Automotive Components (India) (P) Ltd. Vs. DCIT (167 taxmann.com 433) [ITAT Bang] [Pg 62 to 68 of the Legal PB] ⁃ Marvell India Pvt. Ltd. Vs. DCIT (IT(TP)A Ño. 115/Bang/2023) [ITAT Bang] [Pg 69 to 83 of the Legal PB] - Comer Industries India (P.) Ltd. Vs. DCIT (150 taxmann com 180) [TAT Bang] Motorola Mobility India (P) Ltd ys. DCIT (147 taxmann.com 444) [TAT Bang] ⁃ Verifone India Technology (P.) Ltd. Vs. NFAC (150 taxmann.com 466) [ITAT Bang] V UCB India (P) Ltd vs. ACIT (73 taxmann.com 389) [ITAT Bang] IG Infotect (India) (P) Ltd Vs. ACIT (153 taxmann.com 684) [ITAT Bang] Triology E-Business Software Ind (P.) Ltd v. DCIT (127 taxmann.com 255) [ITAT Bang] ⁃ Marlabs Innovations (P.) Ltd. vs DCIT (149 taxmann.com 477) [ITAT Bang] reported in Appendix-1. 10.7 The learned AR also submitted that there are certain comparables selected by the TPO are functionally dissimilar to the activities of the assessee. Accordingly, these companies should not be taken into consideration while choosing the comparables. The list of such companies stands as under: i. Orion India Systems. ii. Net4Nuts Ltd. iii. Aptus Software....
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....Whether the segmental reports prepared by the assessee to calculate the PLI is justifiable in the given facts and circumstances. iv. Whether the comparables excluded and included by the TPO while determining the ALP of the international transactions carried out by the assessee is in the light of settled judicial pronouncement. 12.1 Regarding the Notional Interest on the outstanding receivables from the AE, we note that the assessee recorded advances from its Associated Enterprises (AEs) and trade receivables as separate items in its financials. These advances were, in effect, were representing the advances for software development (SWD) services. The funds received were meant to settle with the outstanding receivables with the AE. The details of the same is enclosed on page 280 in the Factual paper book-1. 12.2 In this case, even after such offset, the books still reflected a balance payable (advances from the AE), indicating there were not any outstanding receivables as alleged by the Revenue. As such advances were part of an integrated transaction with the outstanding receivables. The doctrine of substance over form enables tax authorities to examine economic reali....
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....do not require market solicitation. The copies of invoices and emails submitted by the assessee further support these claims and weaken the position of the TPO. Additionally, the order of the TPO and the Ld. DRP's justification lacks detailed reasoning and is merely based on opinion, without any concrete evidence. In light of the above, the expenditure of Rs. 72,85,857/- is rightly classified as advertising/promotional expenses incurred for generating business in India. Furthermore, the learned DR did not provide any reason for rejecting the contention of the assessee that the marketing expenses were incurred to obtain the business from the non- AE. It is relevant to refer the relevant portion of the learned DRP which is reproduced as under: "However, the Panel is of the opinion that any expense incurred for business purposes have to be treated as operating in nature whether they yield income in the current year or in the later years. Hence this contention of the assessee has no merits and rejected" 13.2 from the above finding of the learned DRP, there remains no confusion that the impugned cost was incurred by the assessee for generating the business within India which....
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.... on a case-by-case basis rather than being accepted or rejected in totality. 14.5 In the present case, the assessee has submitted segmental accounts, digitally signed by a Chartered Accountant, that distinctly classify bank charges into operational and non-operational components. This categorization supports the view that only charges directly linked to the transaction should be treated as operating costs. Since the amount of Rs. 42,635 is non-operating in nature, it should not be included in the computation of the Profit Level Indicator (PLI). Therefore, the action of the TPO in this regard is not valid, and the assessee's view is upheld. Segment 15. The assessee, having provided software development services to its Associated Enterprises, both incorporated in the United States of America, claimed distinct segmental classifications for each AE. However, the Ld. TPO rejected the segmentation, contending that it lacked a coherent and rational basis, thereby deeming the division inappropriate for the purposes of transfer pricing analysis. 15.1 Indeed, modern organizations often use segmentation as a key strategy. They divide their structure based on different factors. The....
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....viz., i. M/s Athena Global Technologies, ii. KSolves India Ltd, iii. Orchasp Ltd., iv. GSS Infotech; 17.1 The assessee does not wish to press for exclusion of the same and thus the contention of assessee is hereby rejected. 18. So far as five (5) comparables are concerned included by the assessee and rejected by the TPO i.e. i. Rate Gain Travel Technologies Ltd. ii. Toxsl Technologies Pvt, Ltd., iii. CES Ltd. (Segment Data of IT Services), iv. Infomile Technologies Ltd and v. Bennett Technologies Pvt. Ltd; 18.1 The assessee had provided the audited financials and functional profile of these comparables, and further raised that it was not the case that Ld. TPO did not find these comparables to be functionally dissimilar. All these comparables met the filters/criteria of the TPO. The Ld. TPO however rejected the same on the ground that it did not feature in his search result. Reliance in this regard is placed on the following decisions wherein the coordinate benches of the ITAT, Bangalore decided the issue favouring assessee. 1. Autodesk India (P.) Ltd. Vs. ACIT (150 taxmann.com 78) [IT....
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....dited financial statements in this regard show that revenue from the export of services constitutes more than 99% of the total revenue. It is also to be noted that one of the search filters applied by the TPO was to exclude companies whose revenue from the export of services is less than 75% of their total revenue. Hence, the view of the TPO in rejecting this comparable is not valid. (ii) M/s Kireeti Soft Technologies Ltd. - The assessee has additionally submitted the relevant extracts from the website of the company separately at the time of hearing as well claiming the company to be a leading software development company, engaged in developing mobile applications and providing innovative and customized software solutions hence claiming it to be functionally comparable. The assessee relied on the following case of Hon'ble ITAT, Bangalore in the case of Arm Embedded Technologies Pvt Ltd vs. ITO (126 taxmann.com 296). TPO however rejected the comparable on the ground of functional dissimilarity. 19.2 In line with Factual PB-II (pages 107 to 108), relevant extracts from the website, and the ruling of the Hon'ble ITAT, Bangalore in the case of Arms Embedded Technologies ....
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....ssed above, the TPO's failure to apply an upper turnover filter is not justified. The absence of such a filter, despite applying a lower limit, leads to inconsistency and affects the reliability of the comparability analysis. 22. The remaining four (4) comparables were claimed by the assessee to be not functionally similar to the assessee company and should therefore be required to be rejected. Assessee further claimed that these companies were engaged in diversified businesses and thus not comparable to the assessee. Reliance in this regard was placed on the decision of the Hon'ble Delhi High Court in the case of PCIT vs. Freescale Semiconductor India (P.) Ltd (169 taxmann.com 48) [Refer Pg 91 of the Legal PB] 23. Orion India Systems - On perusal of the functional profile enclosed at Pages 114 to 116 of the Factual PB-ll, it shall be observed that, this company is engaged in the business of providing technology solutions such as cloud services, mobility, system integration; business solutions such as BPTO business solution, business inteligence, strategic outsourcing and application development. This company is therefore engaged in a diversified business of providing bus....
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....ices such as functional testing, security testing, performance scalability reliability testing, test automation. The provision of such services differs greatly from the software development services provided by the assessee company. This company is thus not functionally comparable 26.1 Reliance in this regard is placed on the decision of the Hon'ble ITAT, Bangalore in the case of Citrix R&D India (P.) Ltd vs. DCIT (145 taxmann.com 579) [Refer Pg 112 & 113 of Legal PB] wherein it has been held that the company engaged in diversified business segments including testing and quality assurance services cannot be held as a comparable for a company which is a captive service provider providing SWD services to its AEs. Similarly, the Hon'ble ITAT Bangalore in the case of NTT Data Information Processing Services (P.) Ltd vs. DCIT (154 taxmann.com 460) [Refer Pg 123 & 124 of the Legal PB] also excluded a company providing software testing and QA services in the final list of comparables in the case of an assessee company providing SWD services to its AEs. 27. Consilient Technologies - Upon going through the functional profile of this company which is enclosed at Page 126 of the....