TaxTMI 
TaxTMI 
2025 (9) TMI 890
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....ner of Income-tax, Circle - 17(2), Hyderabad u/s 143(3) of the Income-tax Act, 1961 ('Act'), pursuant to the directions dated 6 September 2019 by Dispute Resolution Panel, Bangalore ('DRP') u/s 144C(5) of the Act and read with order dated 30 October 2018 issued by Transfer Pricing Officer ('TPO') u/s 92CA(3) of the Act, is bad in law and void ab-initio so far as it is prejudicial to the Appellant. Transfer Pricing Adjustment 2. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred in making transfer pricing adjustment of Rs. 11,85,12,793 on account of provision of software development services by the Appellant to its Associated Enterprises ('AEs'). Rejection of TP Documentation and Cherry picking of comparables 3. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred in rejecting transfer pricing documentation maintained by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('Rules') and undertaking a fresh economic analysis during the course of assessment proceedings and thereby making an adjustment of Rs. 11....
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....ed g. Sasken Communication Technologies Limited 11. That on facts and circumstances of the case and in law, the TPO/AO erred by not following the directions of Hon'ble DRP with respect to inclusion of Orion India Systems Private Limited and Harbinger Systems Private Limited. 12. That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred by not appreciating that the comparables listed in ground 10 are functionally comparable and meets the filter adopted by the TPO and therefore should be included in the list of comparables. 13. That the DRP has accepted the comparable proposed by the appellant namely Orion India Systems Private Limited and Harbinger Systems Private Limited and has not accepted the comparables mentioned in ground 10 without appreciating the fact that the function profile of comparables listed in ground 10 is similar to that of Orion India Systems Private Limited and Harbinger Systems Private Limited. 14. That on the facts and circumstances of the case and in law, the TPO/AO/DRP has erred in rejecting the DCIS DOT COM Solutions Private Limited without appreciating that foreign exchange earnings inf....
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....cess paid by the Appellant is not covered within the provisions of section 40(a)(ii) of the Act and as such allowable under section 37(1) of the Act. 1.3 The AO/ DRP ought to have appreciated that the CBDT vide Circular No.91/58/66 ITJ (19) has clarified that omission of the word "cess" is to disallow only "taxes" under section 40(a)(ii) of the Act and not education cess. 1.4 The AO/ DRP ought to have appreciated that 'education cess and secondary & higher education cess' is not in the nature of 'tax' as envisaged in section 40(a)(ii) of the Act and cannot be disallowed. 1.5 The AO/ DRP ought to have appreciated that taxes are levied on profits whereas 'cess' is levied only on taxes and not profits and as such 'cess' is not covered within the meaning of taxes under section 40(a)(ii) of the Act. 1.6 The AO / DRP ought to have appreciated that cess cannot be construed as tax since it is levied for the specific purpose of providing universalized quality basic / secondary and higher education whereas tax is towards the general collection of the Union of India. 1.7 The Hon'ble Tribunal may issue suitable di....
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.... view of the international transactions involved during the year under consideration, for determination of Arm's Length Price ("ALP"), the case of the assessee was referred to Learned Transfer Pricing Officer ("Ld. TPO"). The Ld. TPO vide his order dated 31.10.2018 suggested upward adjustment of Rs. 18,87,93,975/- on account of SDS. Subsequently, the Ld. TPO passed a rectification order u/s. 154 of the Act on 31.12.2018 rectifying the upward adjustment to Rs. 16,83,50,306/ -. Accordingly, the Ld. AO passed the draft assessment order on 31.12.2018. 6. Aggrieved with the draft assessment order passed by the Ld. AO, the assessee preferred objection before the Ld. DRP. In pursuance to the directions of Ld. DRP dated 06.09.2019, the Ld. AO finalized the assessment on 31.10.2019 at total income of Rs. 57,42,81,716/- by making addition of Rs. 11,85,12,793/- on account of SDS. 7. Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before us. At the outset, the Ld. AR submitted that the assessee is pressing only ground nos. 5, 10, 16, 17 & 19 of appeal and ground no.2 of the additional ground of appeal. Accordingly, ground nos. 1, 2, 3, 4, 6, 7, 8, 9, 11....
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....f Tata Elxsi Ltd on the ground that the Assessee itself had included it as a comparable in its transfer pricing study. It was argued that the Assessee should not be permitted to take a contrary stand at this stage. The Ld. DR submitted that once a comparable is accepted by the Assessee, it should be held bound by its own selection unless exceptional circumstances are shown. 11. We have heard both the parties and perused the material on record. The issue before us is whether Tata Elxsi Ltd, though originally included by the Assessee in its TP documentation, can be excluded on the ground that it is not functionally comparable. We find merit in the contention of the Ld. AR. The Hon'ble Bombay High Court in the case of Pr. CIT Vs. Pfizer Limited (supra) has categorically held in paragraph 8.2 as under: " 8.2 So far as the first objection is concerned, the same is not sustainable as this Court in case of CIT V/s. M/s. Tata Power Solar Systems Ltd (Income Tax Appeal No. 1120 of 2014 decided on 16.12.2016) which upheld the order of the Tribunal held that merely because an assessee had included a particular company as comparable, it would not by itself estop / prohibit a pa....
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....Pvt. Ltd. Vs. ACIT (supra) due to non-availability of segmental information. It was submitted that in absence of proper segmental data, these companies could not be reliably compared with a routine software development service provider like the assessee. 12.2 Regarding Cybage, the Ld. AR submitted that although functionally comparable, the profit margin of Cybage was abnormally high at 60.17% to 66.27%, which is not achievable under normal market conditions. It was submitted that the assessee's margin was only 18.76%, while the average margin of the remaining comparables (excluding Cybage) was 24.21%, with a range between 2.76% to 40.29%. Therefore, the Ld. AR argued that inclusion of Cybage would distort the overall average margin and result in an unfair arm's length analysis. In support of this argument as well, the Ld. AR relied on the decision of this Tribunal in the case of Infor (India) Pvt. Ltd. (supra) and prayed for exclusion of Cybage from the final list of comparables. 13. Per contra, the Ld. DR relying on the order of the Ld. TPO and Ld. DRP, submitted that all the comparables for which the Ld. AR is seeking exclusion are broadly engaged in SDS, and theref....
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....arable as it is a giant company in the area of development of software. The same ratio applied to both L&T and Mindtree as well. Thus, we direct exclusion of all these three companies on account of huge turnover.' 6.2.1. Both the Ld.AR and the Ld.DR have agreed that there is no change in the facts of the case for the year under consideration. The assessee's turnover was Rs. 46.69 crores whereas the turnover in the above companies is huge and uncomparable. Therefore, respectfully following the view taken by this Tribunal in the assessee's own case (supra), we hold that the above companies are not comparables and direct the TPO/AO to delete the above companies from the list of final comparables." 14.1 On perusal above, we find that this Tribunal has excluded Mindtree Ltd., L&T Infotech, and Infosys Ltd. on the ground that these companies were operating on a significantly larger scale and were not comparable to a mid-sized software development service provider like the assessee. The turnover of the assessee in the present case is only Rs. 232.05 crores, whereas the turnover of these three companies is several thousand crores, clearly demonstrating scale and ris....
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....e, respectfully following the decision of the Coordinate Bench at Mumbai in ITA No.520/Mum/2012 dated 4.12.2018, in the case of Infor Global Solutions India (P.) Ltd. v.Deputy Commissioner of Income Tax, we direct the exclusion of these three companies from the final list of comparables. For the sake of ready reference, the relevant paras are reproduced hereunder: "29. We have considered rival submissions and perused materials on record. The primary and fundamental reason on the basis of which assessee seeks rejection of the aforesaid comparable is, it is also engaged in the development of product and segmental details are not available. Notably, in case of LSI Technologies India (P.) Ltd. (supra), the Co-ordinate Bench while examining the comparability of the aforesaid company to a software development service provider, has rejected this company as a comparable considering the fact that it is engaged in product development and product design services. The same view has been reiterated by the Tribunal in the other decisions cited by the learned Authorised Representative. Since, many of these decisions pertain to the impugned assessment year, respectfully following the afor....
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.... the facts either in the case of assessee's company or in the case of comparables. No major changes in the activities of the comparables of the assessee's have been brought to our notice. Therefore, respectfully following the view taken by the coordinate bench of the tribunal in the earlier years, we direct the TPO (AO) to exclude the Tata Elxsi Ltd., Thirdware Solutions Ltd. and Persistent Systems Ltd. from the final list of the comparables. " 14.3 On perusal of above, we find that, this Tribunal had excluded these companies due to lack of segmental data. In the absence of any contrary findings placed before us by the Revenue following the same principle, we direct the exclusion of Persistent Systems Ltd. and Tata Elxsi Ltd. as well. 14.4 With respect to exclusion of Cybage, we find merit in the argument of the Ld. AR that the profit margin of over 60% is significantly higher than the rest of the comparables, which range between 2.76% to 40.29%, thereby making Cybage an outlier. The inclusion of such an outlier would distort the arm's length margin. We have also gone through the decision of this Tribunal in the case of Infor (India) Pvt. Ltd. vs ACIT(supra) as re....
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....argin has excluded Cybage from the set of comparbales. Accordingly, respectfully following the decision of this Tribunal, we direct the exclusion of Cybage from the final list of comparables. 14.6 In view of the above findings and respectfully following the decision of this Tribunal, in the case of Infra (India) Pvt. Ltd. Vs. ACIT (supra), we direct the Ld. AO/TPO to exclude these six companies i.e. Mindtree Ltd., L&T Infotech, Infosys Ltd., Persistent Systems Ltd., Tata Elxsi Ltd. and Cybage from the final set of comparables. The Ld. AO/TPO is accordingly directed to recompute the ALP in accordance with law, after excluding the above comparables. 15. Under ground no.10, the assessee is seeking inclusion of 7 comparables. However, the Ld. AR submitted that, the assessee is pressing inclusion of only Daffodil Software Limited and Evoke Technologies Pvt. Ltd. As far as the inclusion of Daffodil Software Ltd. is concerned, the Ld. AR submitted that, the Ld. DRP rejected the inclusion of Daffodil Software Ltd. as per the observation placed at para nos. 2.27.1 of its order (pages 46-47), stating that the Profit & Loss Account of Daffodil Software Ltd. reflects software product sal....
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....the company's audited annual report, which is placed at page 1884 of the paper book. It was submitted that this note clearly provides separate audited financial details for Indian operations and overseas operations, and therefore, audited segmental information for India is available and can be used for comparability analysis. In support of his submission, the Ld. AR relied upon the decision of this Tribunal in the case of Indeed India Operations Pvt. Ltd. vs. DCIT, order dated 10 August 2022, (2022) 143 taxmann.com 212, wherein the Tribunal at paragraph 13.5 of the order remanded the issue of comparability of Evoke Technologies Pvt. Ltd. to the file of the Ld. TPO on the ground of subsequent availability of financials of the company . Accordingly, the Ld. AR prayed that the matter be remanded to the Ld. TPO for fresh consideration of Evoke Technologies Pvt. Ltd. as a potential comparable, after duly verifying the segmental audited data available in the financial statements. 16. Per contra, as far as inclusion of Daffodil Software Limited and Evoke Technologies Pvt. Ltd. are concerned, the Ld. DR relied on the order of Ld. TPO / DRP. 17. We have heard the rival contentions....
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....ndia is available and capable of being used for ALP benchmarking. We have also gone through the decision of this Tribunal in the case of Indeed India Operations Pvt. Ltd. vs. DCIT (supra), while dealing with a similar situation, held as under in para 13.5: "13.5 it is noticed from the order passed by the TPO, that this company was excluded by the TPO on account of the nonavailability of the current year data at the time of preparation of the TP study by the assessee .DRP has rejected the inclusion of this company, on account of the fact that various companies were excluded only on account of nonavailability of the information at the relevant time . Though it is correct that the tribunal in the above cited order had directed to include Evoke Technologies, as comparable however in the present case there is no examination of the profile of the Evoke Technologies on the parameters laid down by Rule 10 B of Income Tax Rules 1962, with the assessee. In the light of the above we deem it appropriate to remand back the inclusion of evoke technologies to the file of TPO with the direction to consider whether this company is functionally similar on the touchstone of the parameters la....
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....aised by the assessee pertains to the non-grant of Working Capital Adjustment ("WCA") while determining the ALP. The Ld. AR submitted that the assessee had duly furnished the complete workings and justification for WCA both before the Ld. TPO and the Ld. DRP. Despite this, the adjustment was denied without detailed examination or rebuttal of the submissions. The Ld. AR relied upon the decision of the Coordinate Bench of this Tribunal in the case of Cavium Networks India (P.) Ltd. Vs. ACIT (2021) 128 taxmann.com 452 for A.Y. 2015-16, order dated 18.02.2021, wherein the Tribunal accepted the principle of WCA and directed the Ld. TPO to verify the correctness of the computation and allow the adjustment, if found appropriate. Accordingly, the Ld. AR requested that similar directions be issued in the present case. 22. Per contra, the Ld. DR invited our attention to para no.17.3 of page no.67 of the order of Ld. TPO and submitted that, the assessee has provided the workings for WCA on the basis of opening and closing balances for the year. However, the opening / closing balance do not show the movement in the accounts during the year. Further, working capital requirements are not unif....