TaxTMI 
TaxTMI 
2021 (12) TMI 1547
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....w and on facts and is in violation of the principles of natural justice. 1.2 Without prejudice to the generality of the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to Dell International Services India Private Limited (For the merged entity M/s SonicWall Info Security Private Limited) ('DISPL', 'the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. 1.3 The directions issued by the Ld. Dispute Resolution Panel ('DRP/Ld. Panel') did not take cognizance of the objections raised by the Appellant in relation to the transfer pricing matters while issuing the directions under Section 144C(5). 1.4 On the facts and in the circumstances of the case and in law, the Ld. Panel and AO/TPO erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. 2. Comparability Analysis adopted by the TPO for determination of arm's length price for t....
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....ies identified as comparable by the TPO. 2.8 The AO/TPO erred in arbitrarily rejecting the comparable companies selected by the Appellant in the transfer pricing document, despite these companies being functionally comparable. The Ld. Panel also erred in confirming the same. 2.9 The AO/TPO erred in including Persistent Systems & Solutions Ltd, R S Software, Acropetal Technologies Limited, E-Zest Solutions, E-Infochips Limited, ICRA Techno Analytics Limited as comparable despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same. II. ITeS Services Segment 2.10 The Ld. Panel and the AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability, such as, (i) companies whose data for financial year ('FY')2010-11 was not available, (ii) companies with ITeS revenue less than 75% of total operating revenue, (iii) companies with related party transactions greater than 25% of sales (vi) companies with export sales less that 25% of total sales, (viii) companies with different financial year en....
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....o. The Appellant desires leave to add or alter, by deletion, substitution or otherwise, any or all of the above grounds of objections, at any time before or during the hearing." 3. The assessee is engaged by its AE, SonicWALL Inc., USA, to render contract software development services (also referred to as research and development services in the TP study) and post sales customer support services through the operation of customer contact centers. The said international transactions of provision of software development services ("SWD services") and Information Technology Enabled services ("ITES") were benchmarked by the assessee in its TP study and on reference to the TPO, a TP adjustment was made totalling to Rs. 4,26,36,462/- i.e. Rs. 1,97,53,267/- in the SWD segment and Rs. 2,28,83,195/- in the ITES segment. 4. Incorporating the said TP adjustment, the AO passed a draft assessment order dated 30.03.2015. Aggrieved, the Assessee filed its objections before the DRP, which, vide its directions dated 01.12.2015 rejected most of the contentions raised by the Assessee. 5. Pursuant to the directions of the DRP, the AO passed the final assessment order dated 29.01.2016 i....
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.... 124 (Bangalore - Trib.) at para 15, and Finastra Software Solutions (India) (P.) Ltd v. ACIT reported in [2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 where, in the case of similarly placed assessees, the exclusion of the said company from the list of comparables was upheld. (ii) E-Zest Solutions Ltd (E-Zest) 13. It is submitted that E-Zest Solutions Ltd. is engaged in end to end product development, including product design and development and also development of Intellectual Property. Thus, it is clearly incomparable to the Assessee. Further, it has significant inventory (nearly 15% of the income from its operations) which substantiates the assessee's contention that it is a product development company, and thus incomparable to the Assessee which is engaged in rendering routine IT services. In addition, the services rendered by E-Zest are diverse such as specialized product development services, software services, web development, and support services. The company is also engaged in rendering business intelligence and analytical services, which are akin to IT enabled services [ITeS] / Knowledge Process Outsourcing ('KPO') services. Since there are no segmental d....
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....com 460 (Bangalore - Trib.) at para 17 where, the exclusion of the said company from the list of comparables was upheld. Consequently, for the above reasons, E-Infochips ought to be excluded from the final list of comparables. (iv) ICRA Techno Analytics Ltd (ICRA): 19. It is submitted that ICRA is engaged in diversified activities such as software development, Consultancy services, Engineering services, Web development and hosting services, business analytics and business process outsourcing for which no separate segmental information is available. Further, it is submitted that ICRA concentrates in niche areas of business intelligence and analytics space. The annual report of ICRA clearly demonstrates that the company has significant growth in the Business Intelligence and Analytics space which shows that the activities carried out by ICRA are different from that of the Assessee. The revenue recognition policy of the company also shows that the company is engaged in rendering diverse services. The company is also engaged in licensing activity. Also, ICRA has high related party transactions amounting to 24.81% of the total sales. It is submitted that this company is consistent....
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....T reported in [2017] 85 taxmann.com 124 (Bangalore - Trib.) wherein it was held as under:- "8. Having considered the rival submissions as well as the relevant material on record, first we will deal with the functional comparability of the six companies namely Acropetal Technologies Limited (Seg.), E-Zest Solutions Ltd., L&T Infotech Ltd., Persistent System & Solution Ltd., Persistent Systems Ltd. and Tata Elxsi Limited. The business activities of these six companies have been examined on the point of functional comparability in the software development services provider by the co-ordinate bench of this Tribunal vide decision dt. 21.9.2016 in the case of Applied Materials India (P.) Ltd. (supra) in paras 9.1.1 to 9.2.4; 16.1 to 16.4 and 19 to 20 as under: ' (i) E-Jest Solutions Ltd. 9.1.1 The learned Authorised Representative has submitted that the assessee raised the objection before the DRP for exclusion of this company from the set of comparables but the DRP has not adjudicated the objections of the assessee. He has referred the objections raised before the DRP at page No. 1373 of the paper book as well as referred the relevant part of the Annual Re....
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.... this Tribunal in the case of DCIT v. Electronics for Imaging India (P.) Ltd. (supra) in paras 60 and 61 & paras 24 to 26 as under: " Persistent Systems & Solutions Ltd. 60. The assessee has the grievance against rejection of this company by the DRP. The ld. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. 61. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of Rs.6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under o....
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....nd software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables." ............ 10. Icra Technology Analytics Limited & Infosys Technologies Limited were rejected by the DRP on functional comparability and the revenue has not challenged the said directions of the DRP. Even otherwise we find that the functional comparability in these two companies was considered in the case of Applied Materials India Pvt. Ltd. (supra) wherein the Tribunal found that these two companies are not functionally comparable to the software development captive services provider on various reasons." 26. Further, in the case of Finastra Software Solutions (India) (P.) Ltd v. ACIT reported in [2018] 93 taxmann.com 460 (Bangalore - Trib.) at para 17 it was held as under:- "17. The following 7 companies were excluded by the Tribunal ITAT Bangalore in the case of Applied Materials Pvt. Ltd....
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....ails of its various activities are unavailable. The company further owns significant inventories and intangibles. The company also has several products and is into development of Software as a Service offering but no segmental details are available as regards the diverse activities. Detailed submissions in this regard are placed at pages 351-358 and 601-610 of the paperbook. 31. Reliance on the decision of this Hon'ble Tribunal in Finastra Software Solutions (India) (P.) Ltd. v. Assistant Commissioner of Incometax, Circle (4) (1) (2) [(2018) 93 taxmann.com 460 (Bangalore - Trib.) at paras 24-25] where, in similar circumstances and for the same assessment year, this Hon'ble Tribunal directed the exclusion of Accentia Technologies Ltd. from the list of comparables. b) Acropetal Technologies Ltd (Acropetal): 32. It is submitted that the company operates under three business segments - Engineering design, information technology and health care. The TPO has compared the margin of the engineering design services segment to the Assessee. It is submitted that under the said segment, the company provides architectural, electrical, design engineering services etc., which cannot be c....
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....n and analysis, accounting and finance research and analytics. Also, the research and analytics functions of the company involve highly skilled manpower and tools which would therefore classify the services provided as high end services whereas the Assessee provides low end IT enabled services. The website of the company itself mentions that the company leverages on the knowledge and expertise of other ICRA group companies due to which it has an edge over other ITES companies. Also, during the year, the company has acquired new business for the provision of high-end services. Therefore, ICRA Online Ltd. cannot be held to be comparable to the Assessee. Further, it is submitted that ICRA Online Ltd. has related party transaction of 29.33% which exceeds the filter of 25% applied by the TPO himself. Details in this regard are placed at pages 364- 366 and 624-628 of the paperbook. 36. Reliance is placed on the decisions of the Tribunal in Sitel India Pvt Ltd v. DCIT (Order dated 03.05.2019 passed in ITA No. 1821/mum/2016) at para 5 where, the said company was directed to be excluded from the final list of comparables and Finastra Software Solutions (India) (P.) Ltd. v. Assistant Comm....
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.... the parties and perused the material on record. This Tribunal considered the comparability of all the above 4 companies in the case of Finastra Software Solutions (India) (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle (4) (1) (2) [(2018) 93 taxmann.com 460 (Bangalore - Trib.) wherein it was held as under:- "25. As far as Accentia Technologies Ltd., Accropetal Technologies Ltd., and Jeevan Scientific Technology Ltd., are concerned, ITAT Bangalore Bench in the case of Swiss Re Shared India Pvt. Ltd. v. Asstt. CIT [2016] 76 taxmann.com 22 (Bang-Trib), ( a company which is also engaged in providing ITES such as the Assessee), was pleased to hold that these three companies cannot be regarded as comparable companies with companies providing ITES. Following the said decision, we hold that these three companies have to be excluded from the comparable companies. 26. As far as the company ICRA Online Ltd. is concerned, this tribunal in the case of M/S. Zyme Solutions Pvt. Ltd. v. Asstt. CIT IT(TP) A.No.85/Bang/2016 for AY 2011-12 order dated 28.4.2017 in paragraph-26 of its order was pleased to remand to TPO/AO for fresh consideration, the comparability of th....
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....reject the companies functionally not comparable to the appellant i.e. companies not engaged in providing ITeS (BPO) service. In the case of Tesco Hindustan Service Centre Pvt. Ltd. (supra), ICRA has been held to be non-comparable to an ITeS service provider. Accordingly, following the decision of Tesco Hindustan Service Centre Pvt. Ltd. (supra) and the observations in the Tribunal decision in appellant's own case for AY 2010-11, we reject ICRA Online as a comparable." 43. Following the aforesaid decision of the Tribunal in the case of Finastra Software Solutions (India) (P.) Ltd. (supra), we direct the AO to exclude Accentia Technologies Ltd., Acropetal Technologies Ltd., and Jeevan Scientific Technology Ltd. from the list of comparables 44. With regard to ICRA Online Ltd., following the decision in Finastra Software Solutions (India) (P.) Ltd. (supra), we remit the issue to the AO/TPO for fresh consideration with similar directions contained therein. 45. Ground No.4.2 is regarding adjustment on account of negative working capital. The ld. AR submitted that the TPO/DRP made a negative working capital adjustment without affording an opportunity to the Assessee. Su....
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....issions in this regard are placed at pages 154-155 and 333-337 of the paperbook. 16. The Assessee also places reliance on Digital Juice Animation (P.) Ltd. v. Asstt. CIT [order dated 6-2-2020 in IT(TP) No. 215/Bang/2017], Lam Research India (P.) Ltd. [IT Appeal No. 1473 & 1385 (Bang.) of 2014, order dated 30-4-2015] and Dy. CIT v. Software AG Bangalore Technologies (P.) Ltd. in [IT Appeal No. 1628 (Bang.) of 2014, order dated 31-3-2016] passed by this Hon'ble Tribunal, where it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. The Tribunal in the aforesaid decisions have followed decision of ITAT Hyderabad Bench in the case of Adaptec (India) (P.) Ltd. v. Asstt. CIT [2015] 57 taxmann.com 307. The learned DR relied on the order of the TPO/DRP on the issue. 17. On the above ground, it is undisputed that the Hyderabad Bench of the ITAT in case of Adaptec (India) (P.) Ltd. (supra) held that no such addition can be made for the following reasons:- 'Ground No. 8 pertains to the issue of negative working capital. As briefly s....