TaxTMI 
TaxTMI 
2025 (9) TMI 1855
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....), is bad on facts and in law, and is in violation of the principles of natural justice. The Ld. DRP erred in confirming the same. 2 On the facts and circumstance of the case and in law, the Ld. AO has erred in making a reference to the Deputy Commissioner Of Income Tax DC/ACIT TP 1(2) (1) Bangalore ['Ld. TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. Accordingly, the order passed by the Ld. TPO/Ld. AO is without jurisdiction. The Ld. DRP erred in confirming the same. 3. On the facts and circumstance of the case and in law, the order passed by the Ld. AO is without jurisdiction, inter alia, insofar as it purports to give effect to an invalid order of the Ld. TPO/Ld. AO. 4. On the facts and circumstance of the case and in law, the Ld. AO/Ld. TPO erred in arbitrarily rejecting the transfer pricing analysis carried out by the Appellant which was consistent with the Indian Transfer Pricing Regulations ("Indian Regulations") prescribed under the Act and Income-tax Rules, 1962 ("the Rules"). The Ld. DRP erred in confirming the same. 5. On the f....
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....unds of appeal at any time before or at the time of the hearing of appeal, so as to enable the Hon'ble Income Tax Appellate Tribunal to decide this appeal according to law. 3. The issue arising for consideration in the above appeal pertains to: (i) Transfer Pricing adjustment ("TP adjustment") of Rs. 1,34,63,828/- in respect of software development services provided by the Appellant to its Associated Enterprises ("AE") and TP adjustment towards interest on outstanding trade receivables amounting to Rs. 5,23,378/- on delayed receivables; (ii) Erroneous initiation of penalty proceedings under Section 270A and under Section 271AA(1) of the Income-tax Act, 1961 ("the Act"). 4. BRIEF FACTS OF THE CASE ARE AS UNDER: The Assessee was incorporated on 28.11.2014 and is primarily engaged in providing software development support services to its AEs in Data and Analytics, Cloud, AI/ML, Intelligent Automation, MDM, Data Governance, Visualisation, BigData, Product Development. During the previous year relevant to the assessment year (AY) 2021-22, the Assessee had entered into international transactions of rendering SWD services to its Associated Enterprises ('....
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....ess than 25 percent to the turnover - selected 5. Companies having zero/ negative net worth - rejected 6. Companies having export sales / sales less than 50% in latest available year - rejected 7. Companies engaged in non-comparable functions/services - rejected 8. Companies having related party transactions in excess of 25% of sales - rejected B.5. Comparables selected by Appellant and their arithmetic mean: Sl. No. Name of the company Weighted Average NCP (in %) 1. Yudiz Solutions Private Limited 3.80% 2. Evoke Technologies Private Limited 5.63% 3. Infomile Technologies Limited 5.94% 4. R Systems International Ltd. - seg 15.56% 5. Mindtree Limited 16.07% 6. Sagarsoft (India) Limited 16.81% 7. CG-VAK Software & Exports Ltd 29.09% 35th Percentile 5.94 Median 13.27 65th Percentile 16.07 Out of the 7 comparables selected by the Assessee, the TPO accepted 4 comparables viz. Evoke Technologies Pvt Ltd, Mindtree Limited, Sagarsoft (India) Limited, and, CG-VAK Software & Exports Ltd, and rejected the other 3 comparables. B.6. Filters applied by the TPO: Sl. No. ....
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....u/s. 92CA Rs. 1,34,63,828/- C. DIRECTIONS ISSUED BY THE DRP: The ld. DRP rejected the contentions of the Assessee in toto and affirmed the adjustment determined by the TPO D. LIST OF COMPARABLES POST THE DRP'S DIRECTIONS: On giving effect to the above directions issued by the DRP, the final list of comparables as per the final assessment order dated 26.06.20224 giving effect to the DRP directions is as under: Sl. No. Name of the Company 1. Hurix Systems Pvt. Ltd. 2. Evoke Technologies Ltd. 3. Indianic Infotech Ltd. 4. Orion India Systems Ltd. 14.14% 5. Mindtree Ltd. 6. Sagarsoft (India) Ltd. 7. Great Software Laboratory Pvt. Ltd. 8. Nihilent Ltd. 9. Larsen & Toubro Infotech Ltd. 10. Wipro Ltd. 11. Net4Nuts Ltd. 12. Tata Elxsi Pvt. Ltd. 13. Infosys Ltd. 14. CG-VAK Software & Exports Ltd. 15. Aptus Software Labs Pvt. Ltd. 16. Tata Consultancy Services Ltd. 17. Consilient Technologies Pvt. Ltd. 18. Cybage Software Pvt. Ltd. E. FINAL ASSESSMENT ORDER: The AO passed the final assessment order in line with the directions of the DRP, in terms of which,....
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....sed in IT(TP)A No. 94/CHNY/2024) for the assessment year 2021-22 and Genesys Telecom Labs India Pvt. Ltd. v. DCIT (order dated 28.11.2024 passed in IT(TP)A No. 38/CHNY/2024). Further reliance is placed on the decision of the Tribunal - Bangalore Bench in Autodesk India (P) Ltd. V. DCIT (reported in (2018) 96 taxmann.com 263 (Bang Trib)). He further stated that upon application of the turnover filter, the following companies would be excluded: Name of Comparable Turnover in Cr. (Rs.) 1 - 200 crores 1/10th - 10 times (1.8 crores to 1 crores) Great Software Laboratory Pvt. Limited 265.2 X X Nihilent Limited 335.7 X X Larsen & Toubro Infotech Limited 11,578 X X Wipro Limited 50,638 X X Tata Elxsi Limited 1,828.4 X X Infosys Limited 86,191 X X Tata Consultancy Services 1,36,391 X X Cybage Software Private Limited 1,142.6 X X Mindtree Ltd. 7,996.4 X X Evoke Technology Ltd. 197.54 √ X Hurix Systems Pvt Ltd. 87.85 √ √ Sagarsoft (India) Ltd. 41.02 √ √ CG-VAK Software & Exports Ltd. 29.88 √ ....
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....g, IT Infrastructure support, etc. Lack of segmental information: Despite rendering varied services, the Company does not report relevant segmental information in the audited financial in order to understand and compare the profitability earned from each of the category of services. Instead of service wise segmental information, segmental information relating to industry verticals is provided. In the absence of revenue from profits from various services, it cannot be verified if the Company has earned 75% if its revenue from IT services. Therefore, due to non-availability of relevant segmental information for comparability purpose, Mindtree cannot be considered as a comparable company. Research & Development activities: Mindtree is also engaged in undertaking R&D activities which drives its business operations and boosts its profitability. The Company undertakes R&D activities with respect to (i) Emerging technologies such as Artificial Intelligence, Robotic Process Automation & Bots, Blockchain, Augmented Reality and Virtual Reality, Emerging Architecture Patterns and Technologies; (ii) Solutions for Verticals such as BFSI, Retail, CPG & Manufacturing, Travel, Transpor....
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....nologies Limited ("Nihilent"): Functionally different: Nihilent provides a broad spectrum of services, which includes business consulting in the area of enterprise transformation, change management and performance management, rendering software services, related IT services, and sale of traded software. From the website of the Company, it is evident that the Company renders a host of other services under the board category of services mentioned in the annual report, including brands and marketing transformation, platform and technology transformation, design thinking, data science and analytics etc. The ld. counsel submitted that in terms of Rule 10TA of the Income-tax Rules, 1961, analytics related services have been classified under KPO services under the safe harbor rules. Therefore, it is submitted that Nihilent provides high-end KPO services which is not comparable to a routine software development services provider, such as the Assessee. Significant Research and Development activities and intellectual properties: The ld. counsel submitted that Nihilent undertakes R&D activities to enhance its delivery capabilities. On account of R&D activities, Nihilent has dev....
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.... of Excellence in emerging technologies such as Big Data, Analytics, Internet of Things, Cloud, User Experience etc. This has in turn helped the Company in improving the productivity of the company. Also, the benefits are achieved in the form of product improvement, which indicates that the company is engaged in product development. Absence of segmental information: It is submitted that no relevant segmental information has been disclosed in L&T's annual report to understand and compare the profitability from relevant service portfolio. In absence of availing of segmental information, profitability of the Appellant from undertaking software development functions cannot be compared with L&T's profitability from extensive range of IT services. Presence of intangibles and Brand value: L&T Infotech has presence of high-value, significant and non-routine self- generated intangible assets, brand value and trademarks which drive its business and impacts its profitability. The Company is constantly engaged in brand building activities. During the year under consideration, the Company has intangibles amounting to Rs.721 million, including the intangibles under developmen....
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....el submitted that L&T ought to be excluded from the final list of comparables. 5. Wipro Limited ("Wipro"): Functionally different: Wipro is engaged in providing high end IT and IT enabled services such as Data & Analytics, AI, Applications, Cybersecurity, Consulting, Infrastructure and Engineering services. The IT Segment of the Company provides range of IT services and enabled services which include digital strategy advisory, customer service centric design, technology consulting, IT consulting, custom application design, development, re-engineering and maintenance, systems integration, package implementation, global infrastructure services, analytics services, business process services, research and development, and hardware and software designs. Wipro offers IT products pertaining to various niche and emerging technologies, it is clearly evident that the same is functionally different from Appellant which is engaged in rendering software development services to its AEs. The services rendered by Wipro are of diversified nature and each of these services require different level of technical skill sets and functions / activities and involving different level of technical c....
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....ial impact on its profits. It is also submitted that owning of such significant value of intangible assets renders a definitive business advantage to Wipro which is not available to the Appellant. Peculiar economic circumstances: During the financial year 2020-21, Wipro has undertaken several acquisitions and restructuring transactions, which has impacted the profitability of the company of the respective years. Accordingly, given the presence of such extra-ordinary events, the financial results so arrived at could not be used for arm's length determination purposes. Significant onsite expenditure: Wipro has incurred significant foreign expenditure which works out to 53.33, 44.46% and 45.99% of total expenditure incurred for FY 2020-21, 2019-20 and 2018-19, respectively. The ld. counsel submitted that this company is consistently excluded from the final list of comparables in the cases of similarly placed assesses. Reliance in this regard is placed on the decisions of this Tribunal in the case of Infineon Technologies India (P.) Limited v. DCIT (reported in [2024] 159 taxmann.com 245 (Bangalore - Trib.)) (paras 15 - 16.1) and the decision of the Hon'ble Delhi....
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....ations & transportation industries and systems integration and support services for enterprise customers in addition to software development services. It is also engaged in providing digital content creation for media and entertainment industry. Tata Elxsi is a fully integrated global design consultancy, creating innovative products, services, and experiences to build brands and help businesses grow. Tata Elxsi addresses the complete product development lifecycle from R&D, new product development and testing to maintenance engineering for Broadcast, Consumer Electronics, and Communications. The company operates in 2 segments, viz., (i) Systems integration & support services which caters to the domestic market and offers integrated hardware & packaged software solutions, sourced from principles; and (ii) Software development & services under which the Company undertakes diversified activities such as Product design services (i.e., design and development of hardware and software), Innovation design engineering (i.e., Mechanical design with focus on industrial design) and Visual computing labs (i.e., animation and special effects for movies and TV). Such activities can't be equ....
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....ubmitted that this company is consistently excluded from the final list of comparables in the cases of similarly placed assesses. Reliance in this regard is placed on the decisions of this Tribunal in the case of Infineon Technologies India (P.) Limited v. DCIT (reported in [2024] 159 taxmann.com 245 (Bangalore - Trib.)) (paras 9 - 10.1), and the decision of the Hon'ble Delhi High Court in the case of PCIT v. Steria India Limited (Order dated 19.09.2017 passed by the Hon'ble Delhi High Court in ITA No. 762/2017) (para 4). Detailed submissions in this regard are placed by the assessee at pages 204, 223- 224, 248 of the paper book. In view of the above, the ld. counsel submitted that Tata Elsxi ought to be excluded from the final list of comparables. 8. Infosys Limited ("Infosys"): Functionally different: Infosys is a leading global technology services corporation which provides business consulting, technology, engineering and outsourcing services. In addition, the Company offers products in various categories such as banking suite, big data, cloud, customer service, distributive trade, micro-commerce, and sourcing and procurement. It owns products viz. Finacle....
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....s: During the financial year 2020-21, Infosys has undertaken several acquisitions and restructuring transactions, which has impacted the profitability of the company of the respective years. Accordingly, given the presence of such extra- ordinary events, the financial results so arrived at could not be used for arm's length determination purposes. Significant Marketing and selling expenditure: The ld. counsel submitted that the Company has incurred significant expenditure in relation to sales and marketing. This can be substantiated by way of high revenue and profit margins. Infosys has incurred an amount of Rs. 288 crores towards marketing and sales expenditure. Given the same, the ld. counsel submitted that Infosys cannot be compared to the Assessee, who is low risk captive service provider to AE. Significant foreign expenditure: The Company has incurred significant foreign expenditure which works out to 72.66%, 72.23% and 70.44% of total expenditure incurred for FY 2020-21, 2019- 20 and 2018-19, respectively. Super normal profits: A mere analysis of the profit margin of Infosys shows the Company is making unusually high profits and the same is not reflec....
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....18-19 Turnover (A) Rs. 7,82,93,475/- Rs. 7,36,81,170/- Rs. 5,66,32,486/- Export Income (B) Rs. 6,95,91,271/- Rs. 1,40,59,191/- Rs. 5,09,57,561/- Percentage ((B)/(A 88.89% 19.08% 89.98% Reliance is placed on the decision of this Tribunal in Sprinklr India Pvt. Ltd. (order dated 11.01.2023 passed in IT(TP)A No. 713/Bang/2022). Detailed submissions in this regard are placed by the assessee at pages 204, 229 and 248 of the paper book. In view of the above, the ld. counsel submitted that Aptus ought to be excluded from the final list of comparables. 9. Tata Consultancy Services ("TCS"): Functionally different: TCS is an IT services, consulting and business solutions organization which offers integrated portfolio of business, technology and engineering services and solutions. From the website of the Company, it can be seen that the Company has varied products and offerings. The Company offers a vast range of proprietary platforms and products and diverse range of high value, complex nature and new age IT services to its clients, whereas the Appellant is engaged in provision of routine software development services. From the annual rep....
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....in which it provides services in. The Company has significant intangible assets namely rights under licensing agreement and software licenses. The Companies having such significant intangibles provide high and IT services to its customers which cannot be compared with Assessee. Research & Development activities: The Company has carried out extensive R&D in its core computing areas. The Company has expanded its research in new areas such as Data science, embedded systems and robotics, sensing technology, AI and 5G. From the annual report of the Company, it is evident that TCS is performing R&D activities to develop intangibles/software products which in turn leads to generation of revenue from sale of such intangibles and gives TCS a competitive edge over other market participants which is not available and is required for the Appellant to operate its business. Significant foreign expenditure: The Company has incurred significant foreign expenditure which works out to be 44.80%, 53.13% and 54.76% of the total expenditure incurred for FY 2020-21, 2019-20 and FY 2018-19. Detailed submissions in this regard are placed by the assessee at pages 204, 229- 232 and 248 of the....
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....ized services, support services, architectural services, transformation services, digital services, etc. The Company also provides support services viz., BPO services such as data/content management, Order management, Data - Entry, Mapping & Cleansing, Product Enrichment, contact centre services, Remote Infrastructure management, Corporate Communications and Branding, Visual Design Graphics and Animations etc. and Information technology enabled services such as documentation. The Company's offerings cannot be compared to the functions performed by the Appellant in its software development segment. No segmental information: In spite of having diversified services in nature of support functions, product engineering and so on, the segmental information does not provide separate details on such activities. Hence, given that Cybage Software is performing non-comparable functions, it should be excluded from the final set of comparable companies. Peculiar economic circumstances: During the FY 2020-21, Cybage and its associate Company, Giftlease Technologies Private Limited has filed an application to demerge Ecommerce and Retail Sales business of Gifttease into a separate ....
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....td. 9. CG-VAK Software & Exports Ltd. In the event the above submissions are accepted by this Tribunal, the margin of the Assessee would fall within the range of the 35th percentile and the 65th percentile of the dataset, and thus the adjustment is liable to be deleted. Ground No. 10 in the appeal: Interest on delayed receivables .: Not pressed by the assessee given the quantum involved. Ground No.11: Erroneous initiation of penalty proceedings under Section 270A and under Section 271AA(1) of the Act. The ld. counsel submitted that the Assessing Officer has erred in initiating penalty proceedings under Section 270A and under Section 271AA(1) of the Act. Therefore, the Assessee prayed that this Tribunal may be pleased to direct the Assessing Officer to drop the penalty proceedings. 5. Per contra, the ld. CIT-DR, while relying upon the findings of DRP and assessment order the following submissions are made. The assessee submitted an additional ground on upper turnover filter. The admission of the above additional ground was countered by the undersigned that the reason of oversight does not constitute sufficient cause. On the adoption of turnover filter t....
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....ch larger scale, or had extraordinary events, and thus warranted exclusion. Application of Upper Turnover Filter: ● It is argued by the Id. counsel that an upper turnover filter should have been applied in the selection of comparables, in line with judicial precedents, including: ● Kumaran Systems (P.) Ltd. v. DCIT ([2021] 131 taxmann.com 156), ● Information Evolution India Pvt. Ltd. v. DCIT (IT(TP)A No. 94/CHNY/2024), ● Genesys Telecom Labs India Pvt. Ltd. v. DCIT (IT(TP)A No. 38/CHNY/2024), and ● Autodesk India (P) Ltd. v. DCIT [(2018) 96 taxmann.com 263 (Bang Trib)]. ● It is submitted that entities with turnover significantly higher than that of the Appellant (Rs.18.10 crore) such as Infosys, Wipro, TCS, etc., should have been excluded. Inclusion and Exclusion of Comparables: ● The Appellant sought exclusion of the following comparables on grounds of functional dissimilarity and size: ● Great Software Laboratory Pvt. Ltd., Nihilent Ltd., L&T Infotech Ltd., Wipro Ltd., Infosys Ltd., TCS, Tata Elxsi Ltd., Cybage Software Pvt. Ltd., Mindtree Ltd., etc. ....