TaxTMI 
TaxTMI 
2025 (11) TMI 1900
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....lowing grounds of appeal:- " That on the facts and circumstances of the case and in law: General grounds 1. The impugned order of the learned AO pursuant to the directions of the Honorable DRP, erred in assessing the total income at INR 460,090,995 as against the returned income of INR 333,324,140 reported by the Appellant. 2. The learned AO/ TPO erred in law and in facts in making an addition of INR 126,766,855 to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") for international transactions entered by the Appellant with its associated enterprises ("AEs") as follows: 2.1. INR 18,049,387 in respect of provision of information technology ("IT") support services/ software development ("SWD") services ; 2.2. INR 105,40',201 in respect of provision of IT enabled services ("ITeS"); 2.3. INR 2,815,469 in respect of provision of marketing support services ("MSS"); and 2.4. I NR 500,298 in respect of interest on delayed receivables. Grounds relating to transfer pricing ("TP matter) 3. The learned TPO/ AO erred, in law and in facts, by rejecting comp....
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....t proceedings, based on unreasonable comparability criteria: (a) Globant India Private Limited (forming part of TPO's search matrix) (b) Sybrant Technologies Private Limited (forming part of TPO's search matrix) (c) Algonomy Software Private Limited (forming part of TPO's search matrix) (d) Kireeti Soft Technologies Limited (forming part of TPO's search matrix) (e) Batchmaster Software Private Limited (f) Kals Information Systems Private Limited (g) Kcube Consultancy Services Private Limited (h) Orangescape Technologies Private Limited (i) Toxsl Technologies Private Limited 7.4. The learned AO / TPO erred, in law and in facts, by accepting certain companies based on unreasonable comparability criteria although these are not functionally comparable to the Appellant's functional profile: (a) Aptus Software Labs Private Limited (b) lndianic Infotech Limited (c) Infosys Limited (d) Mindtree Limited (e) Net4Nuts Limited (f) Wipro Limited (g) Consilient Technologies Private Limited (h) Tata Consultancy Servic....
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....ed to the AE and thereby erred in computing notional interest on the outstanding balance from the AE amounting to INR 500,298. While doing so, the learned AO/TPO erred by not appreciating the fact that the outstanding receivables from AE were purely on account of genuine business reasons and was not undertaken with any mala-fide intention to extend any indirect credit period benefit to AEs. 10.2. The learned AO/ TPO erred in law and facts by rejecting the contention of Appellant that the receivables have resulted out of international transactions undertaken by the Appellant with its AE and is subsumed within the arm's length price determination of the principal transactions itself using the transactional net margin method ("TNMM") as the most appropriate method in the TP study report. The learned AO/ TPO has also erred in law and facts by treating outstanding receivables as a separate international transaction as per provisions of section 928 of the Act. 10.3. Without prejudice to Appellant contentions that the outstanding receivables should not be treated as a separate international transaction, even where the learned AO/ TPO has alleged it to be separate int....
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....g the operating margins of certain comparable companies. 12. The learned A01 TPO erred in law and facts by not granting working capital adjustment which was sought for and contended by the Appellant before the learned TPO and the Honorable DRP. 13. The learned AO/ TPO erred in law and facts by not granting risk adjustment which was sought for and contended by the Appellant before the learned TPO and the Honorable DRP. 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 Honorable Income-tax Appellate Tribunal, :o decide on the appeal in accordance with the law." 3. Brief facts of the case shows that assessee is a company who filed its return of income on 12 February 2021 declaring total income of Rs. 333,324,140/-. The case of the assessee is selected for the scrutiny as the assessee company is engaged in the provision of information technology, information technology enabled services and marketing sup....
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....ngly the margin of the assessee was computed at 16.31% considering operating profit to operating cost. The assessee has also provided the segmental information of software development activity, information technology enabled services activity and market support services. The assessee has given segmental data where in it earns uniform margin of 16.31 % in all these activities. The assessee selected 31 company comparable for all three segments, transactional net margin method (TNMM) as the most appropriate method. The median margin of the comparable and software development segment was 5.66%, in ITeS segment of 18.87% and in market support services of 7.14% and therefore it was stated that the international transactions of the assessee are at arm's-length. 7. The learned TPO rejected the transfer pricing study report because though assessee is working in three different segments such as software development, ITeS and market support services however the assessee after providing the segmental financial for all these three segments separately, in the transfer pricing study report aggregated all these services without providing any justification. Further in the intercompany agreem....
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....gment the arm's-length price was considered at Rs. 2,183,693,433/- against the actual price received of Rs. 2,078,292,232 resulting into a shortfall of Rs. 105,401,201/-. 13. The learned AO/TPO further found that there is a considerable delay in receipt of the charges from its associated enterprises and therefore interest on overdue is required to be computed as overdue receivable as a separate international transaction. Accordingly, he found that the invoices have been raised in a foreign currency and therefore interest rate is to be charged based on markup on prevailing LIBOR rates. He computed the LIBOR rate of 5.186 percentage. With respect to 12 invoices he computed the interest on overdue receivable of Rs. 500,298/-. Accordingly, the total arm's-length price adjustments was determined at Rs. 126,766,855. As per order passed under section 92CA(3) of the act dated 25/10/2023. 14. The draft assessment order was passed on 28/12/2023 wherein the total income of the assessee was determined at 46,00,90,995/-. The assessee filed its objections before the learned dispute resolution panel. During hearing before the panel, the factual report from the transfer pricing offic....
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....ded because of the reason that they did not appear in the search matrix of the learned transfer pricing officer. He submitted that when these comparable are functionally comparable with the functions of the assessee, those should have been included. 18. In the information technology enabled services segment, assessee challenged that the assessee has suggested inclusion of virinchi India Ltd and MAA business solutions private limited both have been excluded because these companies they do not appear in the search metrics of the transfer pricing officer. The assessee further submitted that both these companies also pass all the filters. It is further submitted that in the market support segment, 11 comparable subjects selected by the assessee were also excluded as that did not appear in the search metrics of the learned transfer pricing officer. 19. Assessee also contested that R Systems International Limited is the comparable selected by the assessee in software development segment services as well as ITeS services but it is rejected for the reason that it follows a different financial year it is the claim of the assessee that these company should have been included as it is a....
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.... learned lower authorities it was stated that because of higher turnover, margins are not impacted and therefore assessee's argument of applying upper turnover filter is not accepted. The learned dispute resolution panel has also upheld the same. The facts clearly shows that in the software development services segment of the turnover of the assessee is Rs. 23.91 crores which has been compared with Mindtree Ltd which has a turnover of Rs. 8120 crores, Larsen and Toubro Infotech limited which has a turnover of Rs. 11,787 crores, Wipro Ltd whose turnover is Rs. 50,299 crores, Tata Elexsi limited which has a turnover of Rs. 1002 crores, Infosys Ltd whose turnover is Rs. 85,912 crores and Tata consultancy services Limited whose turnover is 1,35,963 crores and Cybaze software private limited whose turnover is 1143 crores. Apparently the higher the turnover, higher the bargaining power, higher capabilities of absorbing losses which could have been a factor to gain control over market with lesser margin. Even otherwise the reason for applying an upper turnover filter is to restrict the No. of comparable. 24. We find that the assessee has objected before the learned transfer officer....
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....d qualitative criteria are used to include or reject potential comparable. Examples of qualitative criteria are found in product portfolios and business strategies. The most commonly observed quantitative criteria are Size criteria in terms of Sales, Assets or Number of Employees. The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability. Naturally, higher turnover multiple times also shows that comparable company has higher market share compared to the tested entity. Naturally, higher market share gives freedom of selling larger volumes even at strained margins. The various studies carried out by NASSCOM and Dun Bradstreet also supports it. Though such studies have compartmentalised turnover filter of Rs. 1-200 hundred crores. Naturally in transfer pricing analysis lower turnover filter and upper turnover filter cannot be fixed and how to adopt the same depends upon the facts of each case looking at the turnover of the tested entity. In fact, the purpose of applying a filter is to have a manageable level of independent business concern having br....
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.... of selecting the keywords, appropriate filters and thereafter applying the quantitative and qualitative factors to the set of comparable, cannot be disturbed by including something out of the blue in the comparability analysis. Comparability analysis is a process which cannot be tampered with which does not crosses the filters and search matrix. Otherwise, such comparability analysis will lose its sanctity. Accordingly ground No. 3 raised by the assessee does not merit any consideration. 26. Coming to the comparability analysis in case of ITeS segment the assessee has stated that when Virinchi Ltd and MAA Business Solutions Private Limited should be included. Virinchi Limited was part of the transfer pricing study report prepared by the assessee whereas the MAA Business Solutions Private Limited is an addition comparable produced during assessment proceedings. We find that Virinchi Limited is not part of the TPO search metrics and similarly is the MAA Business Solutions Private Limited was also not found place in the search matrix of the learned transfer pricing officer. As we have already held that if the comparable companies are not finding place in the search matrix of the l....
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....e assessing officer/transfer pricing officer has applied the RPT filter. In view of this we restore this issue back to the file of the learned transfer pricing officer with a direction that if Saatchi & Saatchi Private Limited passes the RPT filter, then only it should be included. The application of RPT filter should also be uniformly applied. 29. The last issue raised before us is with respect to the working capital adjustment as well as adjustment on account of interest on overdue receivable from its associated enterprises. We find that assessee has asked for the working capital adjustment but it is denied by the learned transfer pricing officer for the reason that assessee could not show that there is a difference in the working capital employed by the assessee as well as of the comparable companies and what is the cost of such fund which is deployed in working capital. We find that it is the case of the learned transfer pricing officer where he has selected the comparable, and therefore the onus is on him to show that there is no difference in the working capital of the assessee as well as of the comparable companies. Any person who is computing the arm'slength price, i....