TaxTMI 
TaxTMI 
2026 (5) TMI 1697
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....er TNMM method degree of functional comparability required is low as the very TNMM method is tolerant to functional differences, especially view the keeping in Range concept of 35th percentile to 65th percentile while determining the tolerance band of Arm's Length Range. S. No. Comparable 1 Kals Information Systems Ltd 2 Rheal Software (P) Ltd 3 CG-VAK Software & Exports Ltd 4 Cimiti Technologies Ltd 5 RS Software (India) Ltd 6. Inteq Software Pt Ltd 7. Infobeans Technolosics Ltd 8 Thirdware Solutions Ltd a) Whether on the facts and circumstances of the case, the CIT(A) is correct in rejecting M/s. Kals Information Systems Pvt. Ltd. as comparable for the taxpayer company without considering the fact that the Annual report of the comparable itself mentions that the comparable company is into business of Software services. b) Whether on the facts and circumstances of the case, the CIT(A) is correct in rejecting M/s. Rheal Software Pvt. Ltd. as comparable for the taxpayer company without considering the fact that the Annual report of the comparable itself mentions that the comparable....
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.... the Annual report of the Comparable Depicts that the revenue from core service is 87.12% of the revenue which is more than threshold limit of 15% of the turnover from software services. 3) Whether on the facts and in the circumstances of the case, the CIT(A) is correct in rejecting comparable company namely Thirdware solutions Ltd without considering the fact that the TPO has correctly computed ratio by taking the revenue account transactions (in the numerator) over total operating revenue (in the denominator) or the expense side transactions (in the numerator) over total operating expenses (in the denominator). 4) Whether on the facts and in the circumstances of the case, the CIT(A) is correct in including M/s Evoke Technologies (P) Ltd without considering the fact that the TPO has correctly rejected the said company as its margins are not reliable. 5) The appellant craves leave to add, delete, substitute and amend any of the grounds of appeal before the hearing of appeal/or at the time of hearing of the appeal." 3. The brief facts of the case are that the assessee is a company engaged in the business of providing software development services. The a....
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....97/Hyd/2021 dated 28.06.2024, has held as under : "9. We have considered these contentions in the light of the decided case law. Insofar as the turnover filter is concerned, Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. (supra), held that huge profit or a huge turnover, ipso facto does not lead to its exclusion; whereas in the case of Pentair Water India Pvt. Ltd. (supra), the Hon'ble Bombay High Court held that turnover is a relevant criteria for choosing companies as comparables in determining the ALP in Transfer Pricing cases. Hon'ble Karnataka High Court, however, in the case of Obopay Mobile Technology (supra), having noticed the view taken by the Hon'ble Delhi High Court in the case Chryscapital Investment Advisors (India) (P.) Ltd. (supra), and also the decision of the Hon'ble Bombay High Court in the case of M/s. Pentair Water India Pvt. Ltd. (supra), upheld the Tribunal order excluding certain entities from the list of comparables on the ground of huge turnover, while following the principle that where two views are possible on an issue, the view favourable to the assessee has to be adopted. 10. In these circum....
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.... 8. Thirdware Solutions Ltd 8. The general objection of the Ld. DR is that the Ld. CIT(A) has adopted a liberal and assumption-based approach for inclusion of comparables, while applying a strict and technical approach for exclusion, thereby resulting in an inconsistent and biased selection process. It was further submitted that under the Transactional Net Margin Method ("TNMM"), broad functional similarity is sufficient, and minor differences ought to be tolerated. However, in the present case, according to the Ld. DR, several comparables have been excluded on minor differences while certain allegedly unreliable comparables have been retained. 9. With regard to exclusion of Thirdware Solutions Ltd., the Ld. DR submitted that the Ld. CIT(A) has adopted an incorrect methodology in computing the Related Party Transactions ("RPT") ratio by aggregating both revenue and expenditure transactions in the numerator, while considering only total revenue in the denominator. It was contended that such computation is erroneous and, therefore, exclusion based on failure of RPT filter is not justified. Reliance was placed on following decisions of coordinate benches in support of the sai....
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....nate bench of this Tribunal in the case of Infor (India) Pvt. Ltd. Vs. DCIT in ITA No. 198/Hyd/2021 for A.Y 2016-17, dated 06.10.2021, wherein this company has been held to be functionally not comparable to a routine software development service provider. The Ld. AR also relied on Indeed India Operations Private Limited Vs. Dy. CIT in ITA No.254/Hyd/2021 for the A.Y 2016-17, dated 10.08.2022, and ADP Private Limited Vs. Dy. CIT in ITA Nos. 227 & 228/Hyd/2021 for the A.Y 2016-17, dated 03.02.2022, wherein also this company have been held to be functionally not comparable to a routine software development service provider. It was further contended that even independent of the RPT filter, the company fails the test of functional comparability. 12. With regards to exclusion of Kals Information Systems Ltd., the Ld. AR submitted that the said company is primarily engaged in software product development and also undertakes implementation and maintenance of such products. It was submitted that the assessee, on the other hand, is a routine software development service provider without owning any intangibles or developing any software products. Therefore, the functional profile of Kals I....
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.....1 Accordingly, the Ld. AR submitted that the issue is no longer res integra and the order of the Ld. CIT(A) deserves to be upheld. Findings of the Tribunal qua Ground nos. 2 & 3 : 14. We have considered the rival submissions and perused the material available on record including the case laws relied upon. With regard to exclusion of Thirdware Solutions Ltd, we have gone through page Nos. 267 & 268 of the order of the Ld. CIT(A), which is to the following effect: Marketing expenditure 16.98 percent Source Pg. 172 of AR It is pertinent to note that the Appellant is engaged in rendering offshore services, which cannot be compared to onsite activity of Thirdware Solution, demonstrated by the significant expenses incurred in relation to onsite services. i. Significant Related Party Transactions: On a perusal of the Annual Report of Thirdware for the financial year 2012-13, 2013-14 and 2014-15, the Appellant would like to draw your kind attention to the fact that Thirdware has significant Related Party Transactions and the computation of the same is reproduced hereunder: Particulars FY. 2013-14 FY 2014-15 FY 2015-16 Revenue fro....
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....o summarize, the remaining 9 comparables considered by the TPO are also rejected. 14.1 On perusal of the above, we find that the Ld. CIT(A) has excluded Thirdware Solutions Ltd. from the list of comparables not only on account of failure of the RPT filter but also on the ground of functional dissimilarity. We further find that the Ld. CIT(A), while holding the said company as functionally dissimilar, has relied upon the decision of the coordinate bench of this Tribunal in the case of Infor (India) Pvt. Ltd. Vs. DCIT (Supra) for Assessment Year 2016-17. The Ld. DR has primarily challenged the computation of the RPT filter adopted by the Ld. CIT(A); however, she has failed to bring on record any material or evidence to demonstrate that Thirdware Solutions Ltd. is functionally comparable to the assessee, which is engaged in providing routine software development services. We have also gone through para nos. 12 to 12.4 of the decision of this Tribunal in the case of Indeed India Operations Pvt. Ltd. Vs. DCIT (Supra) for the same assessment year, which is to the following effect: 12. THIRDWARE SOLUTIONS LIMITED : 12.1 The next company sought for exclusion as compara....
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.... 4. It has revenue from subscripting and training R s. 32.59 lakhs and also income from licensing amounting to Rs. 8.77 lakhs and, therefore, functionally not comparable. He relied various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company was excluded from the final set of comparables. He, therefore, requested to exclude this company for determining ALP. 10.1 The Id. DR, on the other hand, submitted that this company is engaged in rendering of software services and hence, functionally comparable to assessee. In this regard, he has drawn inference to note 37 pertaining to earnings in foreign exchange earnings, which is placed at page 2268 of the paper book of assessee vide volume 3. 10.2 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribunal in assessee's own case for AY 2014-15 in ITA No. 2233/Hyd/2018 vide order dated 18/12/2020 directed the AO/TPO to exclude this company as comparable for determining ALP by observing as under: "16. Having regard to the rival contentions and....
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....issions and perused materials on record. Though, it may be a fact that the assessee may not have objected to selection of this company before the Transfer Pricing Officer, however, the assessee raised objections against selection of Infor Global Solutions India Pvt. Ltd. this company before the DRP as well as before us. The grievance of the assessee is, the company being involved in development of products and since no segmental details are available in the annual report, it cannot be treated as comparable, The Co-ordinate Bench in Tech Mahindra Ltd. (supra) having found this company to be involved in development of software product and trading in software licenses has held that it cannot be a comparable to a software development service provider. Similar view has been expressed in the other decisions cited before us by the learned Authorised Representative. Since, many of these decisions relate to very same assessment year, following the ratio laid down in these decisions, we hold that this company cannot be a comparable to the assessee". 12.4. Accordingly following the above noted decision, we direct the AO / TPO to exclude this company as comparable from the list of com....
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....from the final list of comparable companies. Although, the DRP has directed the TPO to exclude the above 02 companies, but, the Learned Counsel for the Assessee submitted that the TPO has not given full effect to the directions of the DRP to exclude the above 02 companies. In our considered view, once the DRP has given a direction to the TPO/AO to exclude or include any company, the Assessing Officer/TPO is bound to give full effect to the directions of the DRP without any modifications. Therefore, we direct the Assessing Officer/TPO to verify the fact and give effect to the order of the DRP in toto and exclude the above 02 companies viz., Kals Information Systems Private Limited and Cigniti Technologies Limited from the final list of comparable companies." 15.2 On perusal of the above, we find that this Tribunal for the same assessment year has excluded Kals Information Systems Ltd. from the list of comparables. Further, the Revenue has not brought on record any distinguishing facts or contrary judicial precedent to deviate from the view taken by the Tribunal. Therefore, as a matter of consistency and respectfully following the decision of the coordinate bench of this Tribunal,....
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.... compared are broadly similar and fall within the same industrial classification. This requirement is satisfied in the present case, and hence, this company can be taken as functionally comparable to the assessee. Accordingly, this company is functionally comparable. 2.5.2.2 However, on perusal of the annual report it is seen from the page no. 54 of the Annual Report of the F.Y.2015-16 that income from export of software is Rs. 108 crores and total revenue as per page no. 119 is Rs. 204 crores. Therefore, it has an export revenue of 53.16% of total revenue and hence it is to be rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO. We have already upheld the export revenue filter adopted by the TPO vide detailed discussion made at para 2.1.12.1 to 2.1.12.2 above. As a result, this objection is found to be acceptable. 2.5.2.3 In view of the above, we direct the AO/TPO to exclude this company as comparable to the assessee." 19. Per contra, learned DR had submitted that a fresh direction may kindly be issued to AO/TPO to comply with the directions of the DRP. 20. We have considered the rival contentions and peru....
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....ced before us. We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE. We therefore direct the Ld.AO/TPO to exclude R.S Software [I) Pvt.Ltd, from the final list. Accordingly this ground raised by the assessee stands allowed. 17.1 On perusal of the above, we find that the Bangalore Bench of the Tribunal has directed Ld. AO/TPO to exclude R S Software (India) Ltd. from the list of comparable. Further, the Revenue has not brought on record any distinguishing facts or contrary judicial precedent to deviate from the view taken by the Tribunal. Therefore, as a matter of consistency and respectfully following the decisions of the Coordinate Bench of the Tribunal in identical facts, we hold that R S Software (India) Ltd. is functionally different from the assessee company and hence not a valid comparable. Accordingly, the action of the Ld. CIT(A) in excluding R S Software....
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.... response to notice by the Company for AY 2016-17, the TPO erred in considering the information received for AY 2015-16 and holding that the company is functional comparable for the assessment year in question when the details available in the public domain illustrate otherwise. 30. It is submitted that in the case of Barracuda Networks India Pvt. Ltd., the Tribunal upheld the inclusion of the aforesaid company on the ground that the Company cannot be excluded basis non receipt of response to the notice issued under Section 133(6) of the Act. In this regard, it is submitted that the Assessee herein is seeking exclusion of the aforesaid company on the basis of its functional dissimilarity and not for the reason that no response was received from the company under Section 133(6) of the Act. In fact, in Barracuda/BORQS, this Hon'ble Tribunal proceeded on the basis that the Assessee therein had not placed material to doubt the functional comparability of the company whereas, the submissions above in the instant case clearly show that the Company is not similar coupled with the website extracts it is evident that the company is not a pure software developer. It is submitted....
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....6 crore. 5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribunal in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: 21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced b....
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....Rheal Software Pvt Ltd and CG-VAK Software & Exports Ltd., we have considered the submissions of both the parties and perused the material available on record. We find that the Ld. CIT(A) has excluded the aforesaid companies after examining their functional profile and other relevant parameters for comparability analysis. The Ld. DR, though supported the order of the Ld. TPO, could not place on record any material to controvert the specific findings recorded by the Ld. CIT(A) for exclusion of these companies. No contrary evidence or distinguishing facts have been brought before us to demonstrate that these companies are functionally comparable to the assessee or that the findings of the Ld. CIT(A) suffer from any infirmity. In the absence of any contrary material produced by the Revenue, we do not find any reason to interfere with the well-reasoned order of the Ld. CIT(A). Therefore, we uphold the action of the Ld. CIT(A) in excluding Rheal Software Pvt. Ltd. and CG-VAK Software & Exports Ltd. from the final set of comparables. 21. Accordingly, the ground nos. 2 and 3 raised by the Revenue are dismissed. 22. Under Ground No. 4, the Revenue has challenged the inclusion of Evok....
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.... ALP by observing as under: "31. As far as Evoke Technologies Ltd is concerned, the TPO has rejected the said company as a comparable on the ground that from the annual report of the said company, it is noticed that the stand alone financials reported from 2013-14 include revenue and net profit figures of one Branch outside India also. The learned Counsel for the assessee brought to our notice that in the case of Infor (India) (P) Ltd, the Coordinate Bench of this Tribunal in ITA No.2307/Hyd/2018 has held as under: "73. As regards Evoke Technologies is concerned, the contentions of the assessee are that this company is functionally similar to the assessee, whereas the TPO & DRP have held that the financials of this company include the revenue of one branch outside India which are unaudited and hence are not reliable. The learned Counsel for the assessee however, drew our attention to page 963 of the Paper Book, which is part of the Annual Report of Evoke Technologies Ltd wherein the revenue of Indian Branch of assessee is separately shown. Taking the same into consideration, we direct the AO/TPO to reconsider the comparability of this company by taking the revenue....
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....saction or a number of such transactions is computed having regard to the same base. Here comparison of net margin is done between enterprise or unrelated enterprise from a comparable transaction or number of comparable transactions, that is, one or more. The comparability analysis between the controlled transaction and the comparable uncontrolled transaction has to be on the same base, i.e., either cost incurred; or sales effected; or assets employed; for determining the PLI. Thus, this rule envisages that the net profit margin realized can be bench marked either from one comparable uncontrolled transaction or from more than one. Further first proviso to section 92C provides that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be arithmetic mean of said prices. Thus, the main emphasis under the law is to identify comparable case to benchmark the arm's length price of the controlled transaction. If there are more than one comparables then various comparability factors can be examined and it may lead to a proper determination of ALP, because many factors and differences J P Morgan Advisors India Private Limited....