TaxTMI 
TaxTMI 
2026 (5) TMI 167
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....ellant"), respectfully craves leave to prefer an appeal against the order passed by the Joint Commissioner of Income Tax. Special Range-5, (hereinafter referred to as "learned Assessing Officer" or the "learned AO"), dated 17 October 2019 for the Assessment Year (AY) 2015-16, under section 143(3) read with section 144C(13) of the Income-tax Act 1961 ('the Act') in pursuance of the directions issued by Dispute Resolution Panel (hereinafter referred to as the "Hon'ble DRP"), Bengaluru dated 09 September 2019 under section 144C(5) of the Act inter-alia on the following grounds which are without prejudice to each other. That on the facts and circumstances of the case and in law: 1. Impugned order of Ld. AO pursuant to directions of Hon'ble DRP, erred in assessing the total income at INR 3,093,153,514, as against returned income of INR 1,675,425,240; Transfer pricing grounds 2. Ld. AO/Transfer Pricing Officer (TPO) pursuant to the directions of the Hon'ble DRP, erred in making addition of INR 1,040,059,562 to total income of Appellant on pretext that price charged was lower than arm's length price determined for software develo....
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....ccepting the following companies that cannot be considered as comparable to the Appellant in law and fact, on one or more grounds: i. Tata Elxsi Limited ii. Mindtree Limited iii. Persistent Systems Limited iv. Nihilent Technologies Private Limited v. Aspire Systems (India) Private Limited vi. Inteq Software Private Limited vii. Cybage Software Private Limited viii. Infosys Limited ix. Infobeans Technologies Limited x. Larsen & Toubro Infotech Limited b) Rejecting the following comparable companies selected by the Appellant in its TP documentation even though the companies are functionally comparable to the Appellant: i. Akshay Software Technologies Limited ii. R Systems International Limited iii. SaskenCommunications Technologies Limited c) Rejecting companies additionally introduced by the Appellant even though the companies are functionally comparable to the Appellant: i. Celstream Technologies Private Limited ii. 12T2 India Limited iii. Maveric Systems Limited iv. Infomile Technologies Limited v. Evoke....
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....ed addition, without any power under the Act and even when such transaction was accepted by the TPO to be at arms-length. Corporate tax grounds 14.1 The learned AO has erred in law and on facts in making an addition of Rs. 364,064,448 towards interest income. 14.2 The learned AO has erred in not appreciating the facts that accounting of interest income in the books of account was in accordance with mercantile system of accounting and Accounting Standard-9 on Revenue Recognition (AS9) 15. The learned AO has erred in not granting appropriate credit of tax deducted at source which are appearing in the name of entities that have merged with the Appellant. 16. The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act." 2.1. Grounds Nos. 1 to 13 raised by the Assessee are directed against the transfer pricing addition. During the relevant previous year the Assessee provided software development services and back office support services to NTT DATA Group Companies which were utilized by the latter for providing services to end customers. The services provided by the Assessee included (a) Application Develo....
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....ement be applied in respect of similar transactions undertaken by the Assessee with Non-US AE's. However, in our view, the aforesaid contention/submission advanced by the Assessee cannot be accepted in the facts and circumstances of the present case. It is admitted position that the Assessee had entered into International Transactions with Non-US AEs in 17 different jurisdictions. In our view the material on record is not sufficient for us to conclude that the scope of services, and other terms of arrangement between the Assessee and each of the Non-US AEs was at par with the arrangement with US AEs of the Assessee. Further, MAP Resolution is reached by the Competent Authority of the treaty nations. An Assessee can either accept or reject the MAP resolution. In the case the Assessee accepts, the MAP resolution is binding only to that Assessee in respect of issues covered by the MAP Resolution. Such MAP Resolution reached in case of an assessee/nation under one tax treaty is not binding upon any other assessee/nation governed by a different tax treaty. Accordingly, in the facts and circumstances of the present case, the preliminary contention/submission of the Assessee cannot be acc....
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....t were at arm's length. The Assessee-company had earned an operating margin (OP/OC) of 14.52% in respect of SWD Segment. 3.2. The Assessee had adopted TNMM as the most appropriate method with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) for benchmarking the SWD Segment. The arm's-length range determined by the Assessee-Company in its Transfer Pricing Study Report (TPSR) [after working capital adjustment], on the basis of 14 comparables selected by it, was 6.24% (35th percentile) to 20.31% (65th percentile), with a median of 14.52%. The TNMM analysis was undertaken by the Assessee in the following manner. (a) In order to identify companies which are comparable to the Assessee, search was conducted on Prowess (a database compiled and managed by The Centre for Monitoring Indian Economy), Capitaline Plus (a database compiled and managed by Capital Market Publishers) and ACE TP (a database compiled and managed by Fintech Private Limited) for obtaining publicly available financial information of companies in India engaged in similar business activity as the Assessee. (b) For the 14 companies identified as comparables for software....
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....yee cost less than 25% of turnover. In respect of those companies, wherein the segmental results had been considered, appropriate filters were applied to segmental results. Applying the new set of filters and on conducting Function, Asset & Risk (FAR) Analysis, the TPO rejected 10 out of 14 comparables selected for SWD Segment and accepted only 4 comparables giving following observations: S. No. Name of the Company Wt. Avg (%) Remarks 1. Sagar Soft India Ltd. -0.02% Operating Profits in SWD segment for two out of three latest years of operations are negative. The company fails Persistent Loss filter. Hence Rejected 2. TVS Infotech Limited 3.84% The company fails the export revenue to sales filter. Hence rejected. 3. Kals Information Systems Ltd. 4.26% The company passes all TPOs filter. FAR similar. Hence accepted. 4. Caliber Point Business Solutions Ltd. (Seg) 4.52% The financials are reported for year ending 31st December 2015. Different year ending compared to that of the taxpayer and hence rejected. 5. Akshay Software Technologies Ltd. 6.24% Akshay Software Technologies Limited ('the Parent') is engaged in ....
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....ting that (a) the comparable selected by the Assessee should be accepted based on functional comparability, (b) the comparable selected by the TPO should be rejected based on functional dissimilarity. Additionally, the Assessee proposed 8 more companies to be selected as comparables on functional comparability. After considering the submissions/objections of the Assessee, the TPO arrived at the final set of the following 16 comparables for SWD Segments: S. No. Company Name Financial Year Wise OP/OC (%) 2014-2015 2013-2014 2012-2013 Average 1 Kals Information Systems Ltd. 5.77 16.94 13.51 11.88 2. E-Zest Solutions Ltd. 12.59 15.80 Fails Export Filter 14.05 3. CG-VAK Software & Exports Ltd. 19.87 13.81 22.07 18.50 4. Tata Elxsi Ltd. (Seg) 23.33 22.02 11.24 19.34 5. Rheal Software Pvt. Ltd. 2.76 36.64 No data in public Domain 19.88 6. Mindtree LTd. 20.55 21.18 19.75 20.55 7. Larsen & Toubro Infotech Ltd. 24.22 23.54 25.10 24.21 8. S Software (India) Ltd. 32.66 24.14 17.44 24.82 9. Infobeans Techno....
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....Shortfall being adjustment ALP-OR 120,66,45,142 22.4.2 The above shortfall of Rs. 12066.45 Lacs is treated as transfer pricing adjustment u/s.92CA in respect of software development segment of the taxpayer's international transactions. xx xx 22.4.3. The above shortfall of Rs. 315 Lacs is treated as transfer pricing adjustment u/s.92CA in respect of ITes of the taxpayer's international transactions." 3.6. While determining ALP as above, the TPO did not allow any working capital adjustments or risk adjustments. 3.7. Further, TPO rejected the Assessee's contention that no separate adjustments was warranted in respect of interest on overdue receivables and proposed Transfer Pricing Adjustment of INR. 72,817,800/- in respect of interest calculated on receivables taking LIBOR-6 months + 400 basis points applicable for the Financial Year 2014-2015 (which works out to 4.3836%). The computation done by the TPO is as under: Description Amount (INR. ) Receivables from AEs (A) 31.03.2015 31.03.2024 Payable due to AEs (B) 243,78,81,302 145,69,30,219 Net receivables (C=A-B) 14,68,08,788 12,52....
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....on on the website cannot be given complete credence ignoring the information in the annual report (based on audited financial statements, & signed management reports) for qualitative analysis of comparability (d) On inclusion/exclusion of comparables, the Learned DRP granted partial relief 3.11. As per the directions of DRP the TPO revised the Transfer Pricing Addition to INR. 104,00,59,562/- and the Assessing Officer passed the Final Assessment Orders, dated 17/10/2019, assessing income of the Assessee at INR. 309,31,53,514/- in the following manner after making following additions: Particulars Amount (in INR.) Returned Income as per Revised Return 167,54,25,240 Add: Aggregate TP Additions 104,00,59,562 Add: Interest Income 36,40,64,448 Add: Mark-up on reimbursement of expenses 1,36,04,264 Total Assessed Income 309,31,53,514 3.12. Being aggrieved the Assessee has preferred the appeal before the Tribunal on the ground reproduced at Paragraph 2 above which are taken up hereinafter in seriatim. Ground No. 1 to 13.3 4. Ground 1 to 13.3 raised by the Assessee pertain to the TP addition. When the appeal was taken up for hearing th....
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....ting) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 4.4. Rule 10B(2)(a) & (b) of the IT Rules are applicable for determination of ALP in terms of Rule 10(2)(1) and therefore, apply to determination of ALP using TNMM as the most appropriate method. Thus, it is clear that the specific characteristics of the services provided and the functions performed (having regard to the assets employed and risk assumed) would be relevant factors for selecting comparables for determining ALP using TNMM. Accordingly, the comparables selected and the tested party must be functionally similar for ascertaining a reliable ALP by TNMM. 4.5. As contended by Revenue, TNMM does not require identical transaction/product a....
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....ty standard to be applied to the transactional net margin method 2.74. A comparability analysis must be performed in all cases in order to select and apply the most appropriate transfer pricing method, and the process for selecting and applying a transactional net margin method should not be less reliable than for other methods. As a matter of good practice, the typical process for identifying comparable transactions and using data so obtained which is described in paragraph 3.4 or any equivalent process designed to ensure robustness of the analysis should be followed when applying a transactional net margin method, just as with any other method. ................." 4.9. The above OECD Guidelines, though not binding, does provide a good guidance for the approach to be adopted while selection of comparables for determining ALP under TNMM. We note that the said approach aligns with by Rule 10B(2)(a)&(b) of the IT Rules providing for consideration of specific characteristic of service and functions performed (taking into account the assets employed and risk assumed), as well as Rule 10B(1)(e)(iii) of the IT Rules (set out herein below) which specifically provides that to th....
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....he starting point or the baseline for selection of comparables, functional dissimilarity may warrant either rejection of the comparable or adjustment of profit margins of comparables to account of functional differences having significant impact on profitability. 4.11. Therefore, we reject the contention that merely because a comparable was selected in the search process and passed all the filters selected by the Assessee/TPO, the same should be selected as a comparable on the ground that such comparable-company operates in the same field or broadly performs similar functions even though FAR Analysis reveals functional dissimilarities and/or need for economic adjustment. 4.12. Having concluded as above, we note that there can be a situation where the above approach/process does not result in selection of reasonable number of comparables and/or there is lack of relevant data which may impede a proper benchmarking analysis. In the aforesaid situation there would be no option but to widen the search/selection process or to select any other method which may be more appropriate for determination of ALP. 5. Accordingly we deem is appropriate to cull out the functional, asset, an....
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....ter-alia includes defining and designing content workflows, publishing and processing, re-engineering and testing." 5.1. The functions performed by the Assessee in respect of SWD Services provided by the Assessee to its AEs are as under [refer to page 1372 of TPSR]: "Briefly tabulated are the functions performed by NTT DATA GDS and NTT DATA Group in relation to the software development services provided by NTT DATA GDS to NTT DATA Group. Type of Functions NTT DATA GDS NTT DATA Group Strategic management functions No Yes Administrative/ Corporate Services Yes No Marketing/Business development No Yes Software development services related functions * Conceptualisation and design No Yes * Functional specification and requirement analysis Limited# Yes * Coding and documentation Yes Yes* * Project management Yes Yes * Testing and quality assurance Yes Yes* * Software release/integration Yes Yes * Software patches/maintenance Yes No * Integration Yes Yes #NTT Data GDS provides its inputs to AEs while understanding the requirements of the c....
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....y provides consulting, product development and testing services to its customers and help customers to develop brands and products. Thus, this company essentially renders software development, system design and testing services for broadcast, consumer electronics, telecom & transportation industries and does not sell products. The VCL division renders animation services for the media and entertainment industry. Thus, this company can be characterised as a software development & design service provider and functionally, comparable to the assessee's activities. Therefore, the plea that this company is functionally different is rejected. xx xx 8.1.5 We note that the inventory details as per page No. 53 of the annual report, relates to traded goods of the "System integration and support segment which was not taken for comparable analysis. Further, this amount of inventory is not significant. Accordingly, this plea is rejected. It was also pleaded that the 'system integration and support segment is also essentially engaged in software development activity and hence that segment may also be considered for comparable analysis a....
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....lack of segmental data. 8.2. TPO selected Mind Tree Limited as a comparable and computed PLI as under: Company Name Financial Year Wise OP/OC (%) 2014-2015 2013-2014 2012-2013 Average Mindtree Ltd. 20.55 21.18 21.86 21.19 8.3. We find that the DRP upheld the inclusion of Mind Tree Limited as a comparable by the TPO holding as under: "8.2.1 Panel: It was contended that this company is not functionally comparable as it is engaged in providing services in diverse areas such as analytics, information management, application development, business process management, business technology consulting, infrastructure management services, product engineering and SAP services. It was also contended that this company is engaged in sale of products and also engaged in out sourcing IT services in banking and financial services and insurance sector, and also has R&D operations and patents and hence not functionally comparable. 8.2.2 Having considered the submissions, on perusal of the annual report of this company we note that this company is engaged in rendering of software development services in different verticals and not engag....
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....are installation 62091 5.6 6. Other information technology and computer service activities n.e.c 62099 53.7 Total 100 The above information clearly show that this company is engaged only in software development and related services. Therefore, the pleas that the company performs different and diverse activities and hence functionally different is rejected. We also reject the plea that this company is product-based company. 8.2.4 xx xx " 8.4. During the course of hearing it was contended on behalf of the Assessee that this company is engaged in diversified services in the areas of agile, analytics and information management, application development and maintenance, business process management, business technology consulting, cloud, digital business's, independent testing, infrastructure management services, mobility, product engineering and SAP services. Further, no segmental information is available. Therefore, the same should be excluded from the list of comparables. 8.5. We note that it is admitted position that this company is structured into five industry verticals - (i) Reta....
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....has sought its exclusion on the ground of functional dissimilarity (being product-based company engaged in diversified activities; and research & development) and lack of segmental information. It was also contended that this comparable failed to pass Related Party Transaction Filer (for short 'RPT Filter') 9.2. TPO selected Persistent Systems Limited as a comparable and computed PLI as under: Company Name Financial Year Wise OP/OC (%) 2014-2015 2013-2014 2012-2013 Average Persistent Systems Ltd. 31.11 28.44 28.20 29.25 9.3. We find that the DRP upheld the inclusion of Persistent Systems Limited as a comparable by the TPO holding as under: "8.3.1 Panel: It was pleaded that this company is a product-based company and has revenue from software licenses; that it is also engaged in R&D activities with significant intangibles. It was pleaded that the company has diversified activities and it has no segmental information & hence cannot be considered as comparable. It was also pleaded that it has significant onsite expenses and RPT transactions. It was also argued that it has made certain acquisition and therefore, on account of su....
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....can be considered to be software product development services". 8.3.4 Further, it is seen that the assessee based on certain information discussed in the consolidated annual report (which included discussion of financial results of Persistent Systems Ltd and its six subsidiaries associates) argued that this company is into product development and IP led revenue. We are of the view, it would be totally incorrect to consider the information pertaining to the entire group as such, when the comparability is to be seen with reference to the stand alone financials of Persistent Systems Ltd, which was considered for comparable analysis by the TPO. 8.3.5 In this regard it is pertinent to note as per the consolidated annual report the revenue from software licence was Rs. 535.59 million for the entire group whereas, such revenue in the case of M/s Persistent Systems Ltd was only Rs. 71.45 million (Ref page 168 and page 211 of the annual report). It is also seen that in the P&L account of the consolidated financial statement expenses were debited towards Royalty expenses of Rs. 176.73 million (refer page 169) and such a debit is not to be noted in the P&L account of M/s. Pe....
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.... routine. The value of intangible assets was only Rs. 162.85 million constituting 1.31% of operating revenue. There is no reference to any intangible assets or patent owned or developed by the company, in the stand alone annual report. There is also no acquisition of intangibles during the year. Further as per note in of the annual report, software product developments costs are expensed as incurred unless the technical and commercial feasibility of the project enable to use or sell the software, they are not capitalized. Such a development is not reflected in the Asset schedule. Thus, it can be inferred that the R&D and intangible assets do not have impact on the revenue and profitability of the company. We also note that, the assessee has failed to establish that such differences, if any, on account of R&D, brand and IRPs have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such tra....
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....ngly, we do not find any reason to interfere with the aforesaid factual findings returned by the Learned DRP and accordingly, reject the contentions raised by the Assessee assailing the same. 9.5. However, we do find merit in the contentions advanced on behalf of the Assessee regarding the applicability/application of RPT Filter. The TPO has applied split RPT Filer - taking related party transaction affecting the expenses side and revenue side separately. The DRP also approved the aforesaid approach adopted by the TPO holding that the same was logical and correct. The Assessee has now contended that aggregate RPT Filer should have been applied taking all the related party transactions. In the present case TNMM has been selected as most appropriate method. The net margins would bear the impact of related party transactions pertaining to expense side as well as the revenue side. Since the PLI for TNMM would be sensitive to all transactions with related parties, in our view in the facts and circumstances of the present case the better approach would be to adopt aggregate RPT Filter. 9.6. Out above view draws support from the following decision of Co-ordinate Benches of the Tribu....
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....ed in product development. Thus, the contentions of the assessee that it is engaged in diverse activities and not functionally comparable is without merits. Besides, there is no information in the annual report to indicate that this company is engaged in product development or to indicate that it has revenue stream from product sales. The assessee also could not point to any such information in the annual report. We also note at page 6 of the annual report, the independent auditor has certified, 'the company does not have any purchase of inventories or sales of goods since it is a service company'. In view of these, we hold that this company is functionally comparable to the assessee and the pleas raised in this regard are rejected. 8.4.2 We note that the assessee has relied on certain information said to be available in the website of this company and argued that this company is engaged in product development and has diverse activities and hence not comparable to the assessee. At the outset, we are of the considered view that much credence cannot be given to the information said to be available on the website, as such information may be motivated towards advertise....
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....notice issued under Section 133(6) of the Act shows that in addition to providing software development services, this company was also engaged in developing products which were then utilised for providing business consulting services in its clients. The Assessee had objected to the non-availability of the segmental information before the TPO. However, the TPO rejected the same observing as under [refer to page 36 of 95]: "The taxpayer has submitted that the company is engaged in development of products such as Lamat, CAS, CFS and FMS. Hence, it should be rejected. In this context, it is important to understand that the products mentioned above are all utility product developed by the company in order to make its service delivery to clients more efficient. The company is not engaged in developing off the shelf products which can be traded directly. This fact has been explicitly clarified in point no. 4 of 133(6) reply reproduced above. The revenue stream shown in P&L account also doesn't show and revenue from products. The entire revenue is from services only. A detailed note on the distinction between off the shelf software products and the routine utility pro....
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....te expenses, we note that the assessee has assumed that the entire expenditure incurred in foreign currency would be onsite expenses, which is incorrect, as there may be requirement to incur expenditure in foreign currency for offshore transactions also like payment of professional charges, sales commission etc. Besides, we have already discussed at para 2.6.3.4 that onsite activity, as such would not affect adversely comparability when the company is otherwise functionally comparable. Therefore, we consider it appropriate to reject these pleas. Therefore, we reject the pleas raised. The selection of this company is upheld." (Emphasis Supplied) 11.4. From above it is clear that the TPO/DRP rejected the contention raised by the Assessee observing that this company failed RPT Filter. According to the Learned DRP the Assessee failed to appreciate that the formula used by the TPO. According to Learned DRP the Assessee had incorrectly aggregated the purchase and sale side related party transaction before dividing the same by total sales. Whereas the TPO has applied RPT filer separately to purchase side and revenue side and as per the said formula the related party transactio....
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....). The independent Audit report states that the company is a service company primarily rendering software services. As per Revenue Recognition Policy, there is mention relating to revenue from software development and not to product sales. We also note that this company satisfies the various filters adopted by the TPO. Besides, as per the information furnished by this company in response to query u/s 133(6), the company is engaged in software development services only. Therefore, we have no hesitation in holding this company as functionally comparable to the assessee, We also note that there is no infirmity in the use of information u/s 133(6), as it is used only for qualitative analysis, and as the same was shared with the assessee. 8.6.2. On the plea regarding RPT, we note that as per information in the Annexure AOC2 to the annual report of the company for F.Y. 2014-15, it has reported RPT transaction of value Rs. 6,27,325/- only. Thus, it passes the filter adopted by the TPO. However, for F.Y. 2012-13 and F.Y. 2013-14, as contended by the assessee, this company fails the RPT filter adopted by the TPO. Therefore, the PLI margin for these two years need not be taken into ....
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....he inclusion of Cybage Software Private Limited (CSPL) in the list of final comparables and has sought its exclusion, inter alia, on the ground of functional dissimilarity. 13.2. TPO has selected CSPL as a comparable and computed PLI as under: Company Name Financial Year Wise OP/OC (%) 2014-2015 2013-2014 2012-2013 Average Cybage Software Pvt. Ltd. 68.17 68.82 60.81 65.93 13.3. We find that the DRP upheld the inclusion of CSPL as a comparable by the TPO holding as under: "8.8.1 Panel: Having considered the submissions, and on perusal of the annual report, we note that as per information under Company's overview, it is stated that the company is engaged in the business of software development services. The Revenue Recognition Statement also discussed about the accounting principle adopted in recognizing revenue from software development services and not as to product sales. There is no discussion about any other revenue stream. Further, under Note 22, it is mentioned that the company had earnings from export of software development services. Under Segment Reporting, it is mentioned that the company operates in a single bu....
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....statement of Cybage Software Pvt. Ltd placed at Page 2453 to 2486 of the Paper Book we find that this company is a service company, primarily rendering software services. It does not hold any physical inventories. Therefore, this company is not engaged in sale of software products. On perusal of accounting policies relating to revenue recognition we find that same deals with recognition from revenue from software development services in case of fixed price contracts and/or contracts on time & material basis. The revenue recognition policy does not deal with licensing or sale of software products. Under Segmental Reporting it has been recorded that this Company operates in a single business segment, viz. software development services. Therefore, we do not find any infirmity in the selection of CSPL as a comparable by the TPO. The Assessee has failed to controvert the factual findings returned by the Learned DRP in Paragraph 8.8.1 to 8.8.3 (reproduced in Paragraph 13.3 above). In view of the aforesaid factual findings, the judicial precedents on which reliance was placed by the Assessee do not advance the case of the Assessee. Therefore, we do not find any infirmity in the selection ....
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....anization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, reducing attrition rate, increasing the offshore mix, improving delivery expertise etc., As per information in page 14 of annual report, 97.8% of revenues was from repeat business. At page 67 of the annual report, it is discussed, "clients often cite our industry expertise, comprehensive end-to-end solutions, ability to scale, superior quality and process execution, global delivery model, experienced management team, talented professionals, track record and competitive pricing as reasons for awarding contracts. Thus, the growth in revenue is not on account of its brand or any exceptional event, and hence cannot be a reason for rejecting this company, which is otherwise found to be functionally comparable. 8.9.3 The perusal of the details in the annual report show that the company has incurred R & D expenditure to the tune of Rs. 605 crores, which constitute meagre 1.3% of its total operating revenue, and which is much less than the generally acceptable tolerable limit of 3% of the total revenue. It is also noted that out of this, only Rs. 15 crore was capital in nature ....
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....e Arm's Length Price shall be taken to be Arithmetic Mean of such prices. It does not talk of excluding companies with high or low turnover or high or low profit rate. Further, the Delhi Tribunal in Nokia India Pvt Ltd (ITA No.242/D/2010) has held that a potentially comparable company cannot be excluded for the reason of high or low turnover or high or low profit margin. In reaching this conclusion, the Delhi bench also considered a special bench order passed in the case of Maersk Global Centre India Pvt Ltd. Vs ACIT (2014) 147 ITD 83 (BOM)(SB)'. Similarly, the Hon'ble Mumbai Tribunal in Capgemini, took note of the ITAT, Bangalore decision in Genisys (supra), and other Tribunal decisions to conclude (in Para 5.3.5 & 5.3.6) that there was no such correlation of profit margins with the turnover of the IT companies, which is primarily based on skilled manpower and related costs, and that the classification based on turnover made in Dun and Bradstreet study was not based on prelit margins and hence not relevant. Now, this view also find support from the decision of the Hon'ble Delhi High Court in the case of Chrys capital Investment Advisors (India) Pvt. Ltd. vs. DCIT, ....
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....ove. It is relevant to refer to the case of Trilogy E-Business Software India Private Limited Vs. DCIT (2013) 29 taxmann.com 310, where the Bangalore Tribunal held that there is no bar to considering companies with either abnormal profits or abnormal losses as comparable to tested parties as long as they are actionally comparable, and it is for the taxpayer to demonstrate the existence of any abnormal factors that would have caused the high profit margin. Similar views followed in the case of Autodesk (India) Pvt. Ltd, vs. DCIT in ITA No.1108/Bang/2010 and YodlonInfotech Pvt. Ltd. Vs. ITO (2013) 31 taxmann.com 2.30 (ITAT. BNG). In the case of ITO vs. Next Lino India Pvt. Ltd. TS-722-ITAT-2012-Bang-TP the Hon'ble ITAT Bangalore upheld the company with profit margin of 40% holding that in ITES sector this would not constitute extraordinary or super profits. 8.9.7 In the light of rationale laid down in the above decisions, we reject the plea raised by the assessee to exclude this company based on the size and level of operations. In this regard it is relevant to note that the Hon'ble ITAT Bangalore in the case Advice America Software Development Centre Private Limited....
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....echnologies Limited as a comparable by the TPO holding as under: "8.10.1 Panel: Having considered the submissions, we note at the outset, that the assessee had selected this company as functionally comparable in its TP study report. However, it has strangely taken a plea that this company is functionally different, without assigning any specific reason. On perusal of the annual report of the company, we find that the annual report clearly depicts that the revenue of the company was from provision of software services and it is also noted that this company has qualified all the filters applied by the TPO. The independent Auditor's report certifies that the company is a service company, primarily rendering software services. Therefore, this company is functionally comparable to the assessee. We note that the assessee referring to some information said to be contained in the website of the company's argued that the company is engaged in diversified activities, and as there is no segmental data, it cannot be taken as comparable. The information said to be contained in the website cannot be given credence. Even otherwise, these activities fall within the ambit of softwa....
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.... provider bearing limited risk: - Metric Stream Infotech (India) (P.) Limited Vs. Assistant Commissioner of Income Tax Circle 4(1)(2) [IT(TP)A No.2347/Bang/2019, dated 24/04/2020] - SAP Labs India Private Limited Vs, JCIT Special Range-6 [IT(TP) No.2506/Bang/2019, dated 25/05/2023] 15.7. We have perused the above decisions of the Tribunal, which clearly support the stand taken by the Assessee that this company cannot be considered as comparable to a captive software development service provider on account of different functions and risk profile. Accordingly, respectively following the same we direct exclusion of Infobeans Technologies Limited from the list of comparables. 16. Larsen and Toubro Infotech Limited (Segmental) 16.1. The Assessee is aggrieved by the inclusion of Larsen & Toubro Infotech Limited (SWD Segment) in the list of final comparables and has sought its exclusion, inter alia, on the ground of functional dissimilarity, lack of segmental information, acquisition & amalgamation, existence on intangibles etc. 16.2. TPO selected Larsen & Toubro Infotech Limited (Segmental) as a comparable and computed PLI as under: Company Name Financ....
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....o sale of products. The financial statements do not mention about any product sale or inventory. As there is no revenue stream on account of product sales, we do not find any merit in the argument that the company is engaged in product sales. Accordingly, we hold it as functionally comparable being a software service provider. 8.11.3 It was also contended that the company is engaged in diversified activities with reference to certain information said to be available in the company's web site. At the outset, we note that the information put in website cannot be given much credence, as they are mere forward-looking statements with the motive of advertisement and other promotion. Further, the information in website are dynamic and cannot be related to a particular period. The information in the website in the year 2018-19 or 2019-20 will show the functionality for the current period which may be very much different from that existing in 2014-15, the year of scrutiny. There is no way to verify whether the said information have relevance for the year under scrutiny. Therefore, as a principle, this Panel strictly goes by the information in the annual report which is based on....
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....ompany, as could be seen from the information at page S-1339 of the annual report. The assessee has not demonstrated, how this acquisition will have positive impact on the profitability of the comparable, if there is no material transaction between them. The TPO has considered standalone financials of this comparable. Hence, we do not find any merit in the assessee's pleas and are rejected. 8.11.6 Further, it is seen that this company was upheld to be functionally comparable to a software service provider company, by the Hon'ble ITAT Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, we uphold the selection of this comparable In the cases of DCIT vs Target Corporation of India Pvt Ltd IT. (TP.) A. No 343/ Bang/2015 & CO No 103/Bang/2015 AY 2010-11 and DCIT vs. Oracle Solutions Services (India) Pvt. Ltd-TS-663-ITAT-2017(bang)-TP-T(TP)A No. 880/hang/2013 dated 09.08.2017, the ITAT decided the issue of L&T against the assessee, by holding it to be proper comparable." (Emphasis Supplied) 16.4. During the course of ....
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....n trading of goods which is evident from page 1364 of the annual report for FY 2014-15. It was also argued by the Ld. A.R. that because of investment in technology absorption and R&D, it should not be considered as comparable. 9.2 Ld. DRP observed that, at the outset, the assessee had selected this company as functionally comparable in its TP study giving the following reasons, "Larsen & Toubro Infotech Limited is an IT service company. The company is engaged in providing Application Maintenance and Development, Enterprise Resource Planning and specialized services like Data Warehousing and Business Intelligence, Testing Services and Infrastructure Management Services. The services offerings are focussed mainly towards four verticals namely manufacturing, utilities, financial services and telecom. For the period ended March 31, 2015, March 31, 2014 and March 31, 2013. 100% of the operating revenues respectively were derived from software development services". However, without giving reasons, it has raised a plea that it is functionally different, when the TPO has selected this company as comparable. Further, Ld. DRP also noted that this company has two business segments -....
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....ion of comparables. Hence, these pleas of assessee were rejected by Ld. DRP. 9.5 Further, Ld. DRP observed that this company was upheld to be functionally comparable to as software service provider company, by the coordinate bench of Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14). In view of the above, Ld. DRP upheld the selection of this comparable. 9.6 Against this assessee is in appeal before us. 9.7 We have heard the rival submissions and perused the materials available on record. This company is considered as not a comparable in the case of LG Soft Pvt. Ltd. cited (supra) wherein it was held as under:- "38. As far as L&T Infotech Ltd. is concerned, the ld. counsel for the assessee brought to our notice the decision of ITAT Delhi Bench in the case of Saxo India Pvt. Ltd. v. ACIT, ITA No.6148/Del/2015 for AY 2011-12, order dated 5.2.2016, wherein the Tribunal took note of the fact that this company was also trading in software and owned insignificant intangible assets. The company was excluded from the list of comparable compani....
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....nch Expenditure of INR. 18.04 Cr. Against total expenditure INR. 21.78 Cr. During the year (85%). Hence operating model of the company is different from the taxpayer. Functionally different. Hence rejected." 17.2. We find that the DRP had upheld the exclusion of AST as a comparable holding as under: "10.1.1 Panel: Having considered the submissions, and on perusal of the annual report we note that, as per information given at page 18 of the annual report, the company is engaged in providing professional services and procurement, implementation and support of ERP products and services in India and Dubai. It is seen from its P&L account, that it has reported revenue from operations of Rs. 21,78,73,073/- which comprised revenue from Rs. 21,67,50,038/- Commission income of Rs. 5,91,033/- and sales of software licence of Rs. 5,32,002/-. As per Note 26 at p25 of annual report the revenue from export of software service was Rs. 19,48,38,068/- and as per Note 25, the foreign branch expenditure was Rs. 18,03,89,196/- As per information at page 2 of the annual report revenue mainly represent income from professional services from Dubai. 10.1.2 In this regard, it is releva....
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....d on a time and material basis are recognized when services are rendered and related costs are incurred. Revenues from time bound fixed price contracts, are recognized over the life of the contract using the proportionate of completion method, with contract costs determining the degree of completion. Foreseeable losses on such contracts are recognized when probable. Revenues from maintenance contracts are recognized pro-rata over the period of the contract. Revenues from sale of software licenses, net of discounts are recognized upon delivery of goods to customers. Dividend income is accounted when the right to receive it is established. Interest income is accounted." 17.5. The TPO had taken note of the above while rejecting AST as a comparable. The TPO further noted that AST was following a different operating model from the Assessee and therefore, was functionally different. On perusal of the order passed by the DRP we find that while confirming exclusion of AST the DRP has noted that the Assessee was probably providing a mix of software development services and professional services. During the course of hearing Learned Authorized Representative for the Asse....
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....56 Particulars For the year ended March 31, 2015 (INR) For the year ended March 31, 2015 (INR) Note 25- Expenditure in foreign currency Foreign Branch Expenditure incurred on accrual basis (net of recovery) 18,03,89,196 19,31,86,280 Others 21,264 12,680 Total 18,04,10,460 19,31,98,960 17.8. It is not disputed that AST had also passed all the filters applied by the TPO. At the same time we note that the 'income from services' and 'cost of services' does not provide break-up between 'professional services' and 'procurement, implementation and support of ERP products and services'. We note that the DRP has also not returned a clear finding and has concluded that the revenue disclosed 'may be' a mix of software services and professional services. We note that order passed by TPO does not make any reference to notice issued under Section 133(6) of the Act. A perusal of financial statements also makes it clear that the Assessee has been maintaining a foreign branch. While the TPO has observed that the Assessee has been following a different operating model, the Assessee has not placed any material on record to show t....
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.... "The company is into Embedded design and programming Sasken Communication Technologies Limited ("Saxken" or "the Company") is a leader in providing Engineering R&D and Productized IT services to customers in the Communications & Devices, Retail, Insurance and Independent Software space." (Page 67 of AR). The company offers IC Design, multi-layer analog/RF/high speed digital, mixed signal and high power PCBs boards, post-diagnostics, boot code, board support packages, device drivers, and verification and pre/posg for semiconductor industry validation services Functionally different. Hence rejected." 19.2. We find that DRP confirmed exclusion observing as under: "10.4.1. Panel: The TPO observed that the company is into embedded design and programming. As per the annual report it is seen that the company offers engineering R&D and productized IT services to customers in Communications and design, retail, insurance and independent software space. The company offers IC design software and similar embedded software for semiconductor industry. Hence it is functionally very dissimilar to the assessee. Accordingly, we hold that the rejection of this company is on rig....
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....here data is available in public domain, we are of the view that the primary onus to demonstrate the requirement of working capital adjustment and its quantification in on the Assessee claiming the same. Where the TPO denies such working capital adjustment (say on the ground that the actual working capital during the year differed from the estimated working capital computed as per annual accounts), the onus shifts on the TPO to quantify the working capital adjustment and confront the Assessee with the same along with the relevant data set before rejecting claim working capital adjustment made by the Assessee. 20.5. Our above view finds support in OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 on which reliance was placed on behalf of the Assessee. Section A.6 of Guidelines on Comparability Adjustments and Paragraph 1 of Annexure to Chapter III provide that (a) working capital adjustment is designed to reflect differing levels of accounts receivable, accounts payable and inventory. Such adjustments should not be performed on a routine or mandatory basis. Rather, the improvement to comparability should be shown when proposing these type....
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....es not require examination of agreed credit terms with specific AEs and the ultimate realisation of outstanding receivables from such AE as per the terms of such arrangement from the perspective of the aforesaid terms/agreement being at arm's length. Further, the delayed realisation of receivables from AE is regarded as a separate international transaction in the nature of financing which is generally required to be benchmarked separately. 22.2. However, the case before us pertains to a captive service provider. In a case of where Assessee/tested party is a captive service provider the working capital adjustment would certainly overlap/subsume the impact of transfer pricing adjustment made on delayed realisation of receivables. In our view, when the price charged by the Assessee to its AE for a service is found to be at arm's length after performing working capital adjustment, no further transfer pricing adjustment is required on the issue of delayed receipt of the corresponding receivables. In case it is otherwise and transfer pricing adjustment is warranted, the AO/TPO would be required to re-compute the transfer pricing addition on account of interest on receivables after tak....
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....erred to group companies outside India * Stamp duty on share transfer 23.3. Before the Assessing Officer/TPO the Assessee contended that the above reimbursement payments did not have any element of profit. However, the Assessing Officer was not convinced. The Assessing Officer treated the entire amount of reimbursement as expenses incurred by Assessee towards providing ticketing and reservation services to group companies. According to the Assessing Officer the aforesaid ticketing and reservation services were low value-added services in respect of which the Assessee should have earned a mark-up of 5%. 23.4. The DRP dismissed the objections raised by the Assessee challenging the above addition. 23.5. During the appellate proceedings, the addition on mark up was assailed by the Assessee, inter alia, on the ground that (a) no services were rendered by the Assessee to group companies; and (b) no transfer pricing addition was proposed by the TPO in relation to the same. 23.6. We note that in paragraph 17.4 the DRP had recorded in its order as under: "17.4 With reference to the issue of jurisdiction of AO in raising TP issue post TPO's order, it is expl....
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....on share transfer was taken note of by the AO/DRP. However, instead of bifurcating the reimbursements payments after examining the underlying facts, the Assessing Officer factored the same while arriving at the ad-hoc rate of mark-up of 5%. In view of the aforesaid, we hold that the approach adopted by the Assessing Officer has no factual or legal basis. In absence of any transfer pricing addition proposed by the TPO in order passed under Section 92CA(3) of the Act, the Assessing Officer could not have made the addition under consideration by merely calling for opinion/report from the TPO under Section 131 of the Act. Therefore, the addition of INR. 25,91,726/- made by the Assessing Officer (as mark-up on reimbursement of expenses) cannot be sustained and is hereby deleted. 24. Conclusion 24.1. In view of paragraph 4 to 23.8 above: (a) Ground No.1 to 3 raised by the Assessee are dismissed as being general in nature. (b) Ground No. 4, 5 and 6 raised by the Assessee are partly allowed. (c) Ground No. 7 raised by the Assessee is allowed for statistical purposes. (d) Ground No.8 raised by the Assessee is dismissed. (e) Ground No.9 rais....
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.... of accounting. It has to follow either mercantile method or cash method of accounting. It is now a settled issue of law that assessee cannot change its method of accounting to suit itself. If assessee allowed to choose its method of accounting, it will choose the method best suited for it minimise its taxable income. 3.5 In the case of Sarubhai Chemicals, the issue of whether interest income is to be calculated on accrual basis or on actual receipt basis had come. The Hon'ble Gujarat High Court had stated that interest income should be computed on accrual basis. The Hon'ble Supreme Court had affirmed the order. Assessee has not raised the issue of real income. Even if we apply this test, income has accrued to assessee. Assessee has been paid interest by KAMCO in FY 2013-14 as well as in FY 2015-16. Income is accruing to assessee at 8% (in some cases 12%) of loan given to KAMCO. It is a liability on KAMCO. KAMCO is paying it. Hence, income is real. In this context, the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore Vs. Commissioner of Income Tax [1986] Taxman 337 (SC), dated January 8, 1986 becomes important. The Apex court made the f....
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....r, the assessee has not admitted the interest income on accrual basis for the reason that the receipt of interest is unpredictable in the light of Governmental review of contracts undertaken by KAMCO. However, the AO examined the issue in detail and observed that the unpredictability is only a perception and not based on facts. It is noted that subsequent to review the Government continued the contracts and KAMCO also the company won the litigation for cost escalation. The AO also observed that in all democratic governmental contracts certain element of calculated risks exist and they are taken into account while entering into contractual terms. The assessee selectively admitted the interest income on cash basis for FY 2013-14 and FY 2015-16 but no interest is admitted for current financial year. Sec 145 of the IT Act provides that the assessee can follow either mercantile system or cash system consistently and not an inconsistent hybrid system. The reliance on accounting standard AS-9 has correctly brought the interest income to tax for this year. Ground rejected." 25.5. Being aggrieved the Assessee has carried the issue in appeal before the Tribunal. 25.6. During the course....
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....he preparation of accounts is correct free from any technical infirmities and also compliant with Accounting Standards. Furthermore, it may be noted that in the assessments of AY 2013-14 and AY 2014-15, the learned AO did not raise this concern. Additionally, the Appellant wishes to submit before your Hon'ble bench that it had received a portion of interest amounting to INR 322,064,488 in FY 2013-14 and INR 39,369,863 in FY 2015-16 which has been offered to tax in the respective years." 25.7. Per Contra, the Learned Departmental Representative placed reliance upon the findings returned by the Assessing Officer and the DRP. 25.8. We have taken into consideration the above written submissions as well as the oral submissions advanced by both the sides during the course of hearing. 25.9. Before the Assessing Officer and the DRP the Assessee had explained that the interest income in respect of loan granted to KAMCO was not recognised since the realisation of interest was uncertain. Reliance on this regard was placed on Accounting Standards 9 and the Revenue Recognition Policy followed by the Assessee. The aforesaid contentions were rejected by the Assessin....
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.... 337 (SC). In that case the Hon'ble Supreme Court has observed that in determining the question whether it is hypothetical income or whether real income has materialised or not, various factors will have to be taken into account. What has really accrued to the assessee has to be found out, and what has accrued must be considered from the point of view of real income, taking the probability or improbability of realisation in a realistic manner and dovetailing these factors together, but once the accrual takes place, on the conduct of the parties subsequent to the year of closing, an income which has accrued cannot be made no income. However, we find the Assessment Order does not contain any reference or discussion on the terms of arrangement/agreement relating to accrual of interest income. We have already noted herein above that the fact that the Assessee had impaired entire amount of equity investment in KAMCO and had created a provision for entire outstanding loan from KAMCO during the Financial Year 2011-2012 and 2012-2013 did not came up for consideration before the authorities below. 25.11. We note that in written submissions, dated 11/09/2025, reproduced in paragraph 25.6 ....
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....ies and claiming corresponding credit for prepaid taxation as reflected in Form 26A of the said companies. The Assessing Officer accepted the income offered to tax but denied credit of corresponding credit for prepaid tax claimed by the Assessee. The Assessee placed on record following details regarding the merger and the prepaid taxes (as reflected in Form 26AS): (a) Details of merged companies and the orders passed by the Hon'ble High Courts Merger - Entity First Order Second Order NTT DATA India Enterprise Application Services Private Limited 10 July 2013 in the High court of Andhra Pradesh 3 September 2013 in the High court of Delhi Keane International (India) Private Limited 6 July 2009 in the High Court of Delhi 17 July 2009 in the High court of Karnataka Optimal India Delivery Services Private Limited 8 September 2015 in the High court of Karnataka 3 February 2016 in the High Court of Delhi (b) The break-up of credit of prepaid taxes claimed by the Assessee in its ROI filed for AY 2015-16 is captured below: Entity TDS credit available as Form 26AS TDS credit claimed in ITR TDS credit allowed in the AO order ....