TaxTMI 
2025 (6) TMI 2190
X X X X Extracts X X X X
X X X X Extracts X X X X
....rt 'ITES']. During the relevant AY 2014-15, the assessee rendered SWD services and ITeS to its Non-Resident, Associated Enterprise (AE) which were reported as international transactions in terms of Section 92 of the Act. The assessee had drawn up the internal segmental accounts of (i) SWD services segment and (ii) ITES segment and applied TNMM as Most Appropriate Method (MAM) to both these segments and PLI was taken to be OP/OC. Subsequently, the case was selected for scrutiny and the AO referred the matters to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) in relation to international transactions with AE. The TPO is noted to have perused the segmental information of (i) SWD services segment and (ii) ITES segment, whose PLI was computed by the assessee at 12.86% & 11.73% respectively. The TPO observed that the assessee company had undertaken an economic analysis and selected 13 (thirteen) comparables for SWD services segment whose ALP PLI was 10.56% and seven (7) comparables for ITES Segment, whose ALP PLI was %. Since the PLI(s) of the assessee was higher than the comparables for both the segments, the international transactions were ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee has filed the present appeal before us. 6. At the time of hearing, the Ld. AR restricted his arguments to effective grounds of appeal only and supported the arguments with chart and paper book. The Ld. AR submitted that, five (5) out of the ten (10) comparables are to be excluded in SWD services segment viz., (i) Infosys Ltd., (ii) Persistent Systems Ltd., (iii) Thirdware Solutions Ltd., (iv) Larsen & Toubro Infotech Ltd., (v) SQS India BFSI Ltd., and three (3) comparables namely (i) CAT Technologies Ltd., (ii) Lucid Software Ltd., (iii) Akshay Software Technologies Ltd. are to be included for determining the ALP. Further, he contended that, three (3) out of seven (7) comparables were to be excluded in the ITES segment and two (2) comparables of the assessee were to be included. The Ld. AR further claimed risk and working capital adjustment, which was denied by the lower authorities. The Ld. CIT, DR, on the other hand, supported the order(s) of the lower authorities. 7. We heard the rival contentions and perused the material on record. We first take up the issue concerning exclusion/ inclusion of comparables in the SWD services segment. The Ld. Counsel for the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed. We found that the company was excluded from the final list of comparables in assessee's own case for the Assessment Year 2011-12 by the DRP and revenue has accepted. The Learned Authorised Representative supported his arguments relying on the decisions in the case of CIT Vs. Agnity (India) Technologies Pvt. Ltd. (2013); CGI Systems and Management Ltd. Vs. ACIT (2015) 94 taxman.com The learned Authorised Representative also substantiated that for the Assessment Year 2014-15, the co-ordinate Bench of the Tribunal in the case of LG Soft India Pvt. Ltd. Vs. DCIT in IT(TP)A No.3122/Bang/2018 for the Assessment Year 2014-15 D128.5.2019. We support our views relying on the LG Soft India Pvt. Ltd. Vs. DCIT (supra) where the Tribunal has observed at paras 6 and 6.1 as under: 6. We notice that the co-ordinate bench bas excluded Mis. Infosys Ltd in A.Y 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd (IT(TP)A No. 1303/Bang/2012 dated 28.11.2013, wherein the decision, rendered in the case of Triology E Business Software India P Link (ITA No. 1054/Bang/2011) was followed and it was held that M/s. Infosys Technol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....No.3122/Bang/2018 for the Assessment Year 2014-15 has dealt on the sue at page 2 para 4 as under: "4. We heard Ld.DR and perused the record. We find merit in the miscellaneous petition filed by the assessee. Accordingly following paragraph is inserted after paragraph 10 in the impugned order of the Tribunal, which will adjudicate the issue relating to "L&T Infotech Lid": "10A The assessee has sought exclusion of M/s. L&T Infotech Ltd on the ground that there were extraordinary events during the year, it possesses brand and intangibles, it has not provided segmental information and it has got sub-contracting expenses. The Ld A.R submitted that the above said company has been excluded by the co- ordinate bench in the case of Metric Stream Infotech P Ltd., (IT(TP)A No.1418 & 2735/Bang/2017) relating to AY 2013-14 and also in the case of Electronics for Imaging India P Ltd., (IT(TP)A No.1506/Bang/2016 relating to AY 2011-12). The Ld.AR submitted that there is no change in facts in this year also and accordingly prayed for exclusion of the above said company. 10A.1 We heard Ld D.R and perused the record. We notice that M/s. L&T Infotech Ltd has been excluded b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the case of the assessee for the purpose of comparability were the same. His submission was that the decision rendered by the Tribunal in the case of Agilis Information Technologies India (P) Ltd., (supra) would be equally applicable to the assessee in the present case also. The learned DR. submitted that the DRP in its directions has merely accepted with the reasoning of the IPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP. 29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P) Ltd., (supra), this Tribunal considered the comparability of the 3 companies which the assessee seeks to exclude from the list of comparable companies chosen by the TPO. The functional profile of me assessee and that of the assessee in the case of Agilis Information Technologies India (P) Ltd., (supra) is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by the TPO in the case of assessee for the purpose of comparability. In the aforesaid decision, the Tribunal held on the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP. We rely on judicial decisions and facts in respect of comparable Persistent Systems Ltd. and direct the Assessing Officer to exclude from the final list of comparable for determination of ALP." 10. Likewise, we note that the Tribunal in the case of EMC Software & Services India Pvt. Ltd. (supra), also held M/s. Thirdware Sales Ltd., to be functionally dissimilar and held it to be non-comparable and consequently directed exclusion of this comparable by observing as under: "(iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....DR vehemently objected to the admission of this additional ground raised by the assessee. According to him, when the assessee had not disputed this comparable before the Ld. DRP & the TPO, then this objection cannot be raised at this stage. On merits, he further submitted that, the assessee was a 100% captive service provider for its foreign AE and therefore the RPT filter had no relevance. 14. We first take up the legal plea raised by the Revenue for non- admissibility of this claim raised by the assessee. It is noted that similar objection as raised by Ld. CIT, DR (supra) was raised by the Revenue in the case of M/s. Citrix R&D India Pvt. Ltd. v. DCIT (supra), wherein also, as in the present case, the assessee did not object to the inclusion/exclusion of comparable before the DRP but agitated the same before this Tribunal. The Tribunal is noted to have repelled this objection raised by the Ld. DR, by holding as under: "12. As far as CG Vak Software & Exports Ltd. is concerned, the TPO excluded the aforesaid company for the reason that this company was engaged in both SWD services and ITeS and no segmental details were available. Before the DRP, the assessee did not ch....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in the case of M/s. Citrix R&D India Pvt. Ltd. (supra) had excluded M/s.SQS India BFSI Ltd from the final list of comparables, for failing the RPT filter. However, in the fitness of the matters, we deem it fit and appropriate to remit this matter back to the file of the TPO/AO for de novo consideration of the claim of the taxpayer seeking exclusion of M/s. SQS India BFSI Ltd, after giving an opportunity of being heard. We order accordingly. 16. We now come to the three (3) comparables (i) M/s.CAT Tec Technologies, (ii) M/s. Lucid Software Ltd., & (iii) Akshay Software Technologies Ltd., which are sought to be included by the assessee. 16.1 M/s.CAT Technologies - The TPO was of the view that this company is engaged in medical transcriptions, etc., and no segmental details are available, and therefore he didn't include this company as a comparable. The finding of the TPO was confirmed by Ld. DRP which held that the activity of medical transcription cannot be characterized as software development and also this comparable fails the persistent- operation loss filter. To this, the Ld. AR took us through the financials of M/s.CAT Technologies [Page No.1152 of the PB-2] to show....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t. Ltd., (supra) we hold that this company cannot be rejected on the `persistent loss-making' filter. 16.4 On the functional comparability, we note that the Ld. DRP in assessee's own case for AY 2013-14 had accepted this company as functionally comparable even though rejected by TPO. It was also brought to our notice that the Bangalore Bench of this Tribunal in the case of M/s. Microsoft Research Lab India Pvt. Ltd. [IT(TP)A No. 3131/Bang/2018] dated 05.02.2020 for AY 2014-15 in the context of assessee rendering SWD services had held this company as comparable by observing as under :- "(v) Lucid Software Limited, has a margin of (-) 0.57% and the turnover is Rs.3.60 Crores. It was rejected on the ground that it is engaged in the business of software development and rendering software services to the global non-destructive testing and material sciences industry and further the company has incurred losses for the previous year ending March, 2013 and March, 2014. The Ld.AR submit that the comparable is functionally similar and is engaged in the business of software development and passes all the filters, and whereas persistent loss filters has been incorrectly appl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company and further the functional similarity has not been disputed by the TPO, we order to include this company in the list of comparables." We found this comparable was included by the Pune Bench of the Tribunal for the Assessment Year 2009-10. whereas in the present case, the Assessment Year is 2014-15 and also the observations of the TPO that it is a loss making company for the year ending March, 2013 and March, 2014. Considering the functionality and precedent losses and the decision of the co-ordinate Bench of the Tribunal, we restore this comparable to the file of TPO to examine and verify the functional profile for inclusion in determination of ALP." 16.5 Since the Revenue was unable to point out any distinguishable facts and particularly because the Ld. DRP had also included this comparable in the final list for AY 2013-14, we direct inclusion of this company as a comparable. 16.6 M/s.Akshay Software Technologies Ltd. - According to the TPO, based on website of this company, it is functionally different. Though the DRP did not dispute the functional comparability but rejected this company on the ground that the revenue model of this company is different as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was functionally dissimilar as it was engaged in product development. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 8.2 The Ld. AR has submitted that the inference of Ld. TPO is erroneous since the extract made from annual report of this entity are not with respect to the assessee but with respect to assessee's wholly owned subsidiary vis. Akshay Software International Inc. The Ld. AR submitted that this entity is functionally similar since it is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and overseas. The revenue from software services is more than 75% of total revenues which is one of the filter applied by Ld. TPO. The Ld. AR submitted that this entity has been accepted by Bangalore Tribunal in the decision of Mercedes-Benz Research & Development India (P.) Ltd. (95 Taxmann.Com 134) as well as Kolkata Tribunal in the decision of Labvantage Solution Pvt. Ltd. (ITA No.1051/Kol/2015 & ors. dated 19.10.2016). The Ld. CIT-DR opposed inclusion of the same on the ground that it was a low-profile company carrying out f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r consideration in the assessee's own case for the earlier A.Y 2011-12 and also in 2013-14. In A.Y 2011-12, the Tribunal had directed its exclusion while in 2013-14, the DRP itself had directed its exclusion and the Revenue has not filed any appeal as against the same. He placed reliance upon the decision of the Hon'ble Delhi High Court in the case of Aginity India Ltd. (supra) wherein the said company has been directed to be excluded." (ii) Cross Domain Solutions P. Ltd. "57. As regards Cross Domain Solutions Ltd is concerned, the case of the assessee is that it is functionally dissimilar as it renders KPO services. The learned DR, however, supported the orders of the TPO & DRP. 58. As regards the services rendered by this company, we find that at Page 172 of the Paper Book which is the Website printout, it is shown as a "knowledge center". The learned DR had submitted that if the contents of a Website given by a company is taken into consideration, then even the assessee would be falling in the same category i.e. Knowledge Process Outsourcing. The learned DR, except for relying upon his argument that the assessee is also into high-end BPO servic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egment. Having regard to the foregoing, according to us, the earlier results/losses in preceding two assessment years cannot be reason to exclude this company by applying persistent loss-making filter. 20.2 The Ld. DRP is noted to have additionally held that the export Revenue bearing to this segment was only 50% and therefore it cannot be taken as a comparable. The Ld. AR has rightly pointed out that, the export turnover filter of 25% was applied in the TP study and that the TPO had not disturbed the same. Also, the Ld. DRP has nowhere prescribed this filter of 50% instead of 25% in their order. This finding of the DRP is therefore whimsical/arbitrary. For the foregoing reasons, we direct inclusion of this company in the final list of comparable companies. 20.3 M/s. Informed Technologies India Ltd. - This company was excluded by the TPO on the ground that even though said company is engaged in the business of running BPO, the Revenue from ITeS is less than 75% of the Revenue as other income is more than 47.52%. The assessee challenged the exclusion of this company before the DRP and brought to its notice that the Annual Report shows more than 50 % of the Revenue was from ITe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tity was functionally different. 12.3 We find that this entity has been held to be a comparable entity under ITeS segment by Bangalore Tribunal in Ocwen Financial Solutions P. Ltd. (supra). As per Directors' Report (Page No.1210 of paper book), this entity is operating as IT enabled Service provider and is a leading content provider to the securities and financial research industry. Its entire revenue is out of revenue information technology services (Page 1299 of the paper book). These functions are similar to assessee's functions. Therefore, we direct for inclusion of this entity." 21. The last effective grounds that remains for consideration is against the non-grant of working capital adjustment and risk adjustment while arriving at average arithmetic margin of comparable companies. Both the lower authorities are noted to have refused to allow the working capital & risk adjustment. 22. Having heard both the parties, we note that similar issue had come up before the Bangalore Tribunal in the case of M/s. Citrix R&D India Pvt. Ltd. v. DCIT (supra), wherein, identical plea was raised by the assessee company and the Tribunal is noted to have observed as under:....
X X X X Extracts X X X X
X X X X Extracts X X X X
....long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure(e.g. where the purchase of inventory is partly funded by equity)or by the risk associated with holding specific types of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that in the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has, on the other hand powers, to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defense to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Tribunal in the decision ....