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TMI Blog2022 (6) TMI 1299X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.8% whereas the RBI rate was determined to be six months LIBOR + 500 basis points - HELD THAT:- We note that the Ld.TPO has carried out fresh benchmarking analysis without following the principles laid down by Hon ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd. [ 2015 (3) TMI 1031 - DELHI HIGH COURT] We direct the Ld.TPO to follow the principles laid down by this Tribunal in case of Cotton Naturals (supra), having referred to the rate applied by the assessee being within threshold limit as per the RBI Circular No. 12/2015-16 dated 01/07/2015 on ECB. Accordingly, this ground raised by assessee stands allowed for statistical purposes. Recharacterising assessee as an agent under the marketing support service segment - HELD THAT:- TPO carried out recharacterisation of assessee without understanding the functions performed by the assessee under the marking support service segment. We are therefore of the opinion that this issue needs to be verified by the Ld.AO/TPO denovo. Assessee is directed to file all relevant information in support of its contention which shall be verified and considered by the Ld.AO/TPO in accordance with law. Needless to say that proper opp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of being heard to SanDisk India Device Design Centre Private Limited (The Appellant' or 'the Company' or 'SanDisk India') before making a reference to the Additional Commissioner of Income-tax, Transfer Pricing - 2(2) ['the Learned Transfer Pricing Officer' or 'the Ld. TPO']. 1.2. The Hon'ble Dispute Resolution Panel ('Hon'ble Panel') Hon'ble Panel erred in upholding the order of the NeAC , which is bad on facts and in law, and is in violation of the principles of natural justice. The NeAC 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/NeAC is without jurisdiction. 2. Fresh comparability/ benchmarking analysis is liable to be quashed 2.1. The Hon'ble Panel erred in upholding the order of the Ld. TPO/NeAC , wherein the Ld. TPO erred in arbitrarily rejecting the Transfer Pricing Documentation maintained by the Appellant as per the provisions of Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (The Rules'), on account of mere difference of interpretation in selection of filter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed: 5.1.2.Nihilent Limited: 5.1.3.Persistent Systems Limited; and 5.1.4. Infosys Limited. 6. Onsite filter 6.1. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in rejecting the Appellant's arguments on application of onsite filter to exclude the following companies in the software development services segment, that have significant onsite operations unlike the Appellant, which is an offshore service provider: 6.1.1. Larsen and Toubro Infotech Limited: 6.1.2. Nihilent Limited: 6.1.3. Thirdware Solution Limited; 6.1.4. Aspire Systems India Private Limited; and 6.1.5. Infosys Limited. 7. Data obtained under section 133(6) of the Act 7.1. The Hon'ble Panel erred in upholding the action of the Ld. TPO/ NeAC, where the data obtained under section 133(6) of the Act for Nihilent Limited, was not shared with the Appellant during the course of the transfer pricing proceedings and without appreciating the fact that no opportunity was provided to the Assessee for rebutting the said information. 7.2. NeAC The Hon'ble Panel erred in upholding the action of the Ld. TPO/ NeAC , wherein the Ld. TPO stated that the decision of selecting co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances during the relevant FY 2015-16. 10.4. The Hon'ble DRP erred in upholding the approach of the Ld. TPO/ NeAC in computing the quantum of related party transactions and accepting Persistent Systems Limited and Aspire Systems (India) Private Limited as passing the related party transactions filter. 10.5. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in excluding Goldstone Technologies Limited, on the basis that it fails persistent loss filter; 10.6. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in excluding Akshay Software Technologies Limited, on the basis that it is not functionally comparable to the Appellant; 10.7. The Hon'ble DRP erred in upholding the action of the Ld. TPO/ NeAC in excluding R System International Limited, on the basis that it has different financial year ending, without considering its functional comparability; 10.8. The Hon'ble DRP erred in excluding E-Zest Solution Limited and Sybrant Technologies Limited, on the basis that the companies do not form part of the search process, without appreciating the fact that both the companies were forming part of the search process of the Ld. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Ld. TPO in applying incorrect quantitative filters while undertaking the fresh benchmarking analysis. 12.6. The Hon'ble DRP erred in upholding the action of the Learned TPO/ NeAC in accepting the following companies as functionally comparable to the Appellant. 12.6.1. NGRT Systems Private Limited; 12.6.2. Bhatia Communications & Retail (India) Limited; 12.6.3. Creative Peripherals & Distribution Limited; 12.6.4. Prime Retail India Limited 12.6.5. Cyrix Infotech Private Limited 12.6.6. Khosla Electronics Private Limited 12.6.7. Zicom Electronic Security Systems Limited 12.6.8. Ample Technologies Private Limited 12.6.9. Advanced Telemedia Private Limited 12.7. Without prejudice to the contentions of the Appellant on the recharacterization, the Ld. TPO erred in not providing the relief for the incremental revenue of MSS (relating to share based compensation cost) already offered to tax by the Assessee. 13. Free of cost assets: 13.1. The Hon'ble Panel erred in upholding the action of the NeAC in treating the value of free of cost assets received by the Appellant as perquisites/ benefits arising to the Appellant under section 28(iv) of the Act and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. 20. Interest under section 234B of the Act 20.1. The NeAC has erred in law and on facts in levying interest under section 234B of the Act. 21. Initiation of Penalty Proceedings 21.1. The NeAC erred in initiating penalty proceedings under section 271 of the Act. 22. Relief 22.1. The Appellant prays that directions be given to grant all such relief arising from the preceding grounds as also all reliefs consequential thereto. 22.2. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal." 2. Brief facts of the case are as under: 2.1 Assessee is found to be engaged in the business of designing, developing and manufacturing data storage solutions in a variety of form factors using their flash memory, proprietary controller and firmware technologies. For year under consideration, assessee filed its return of income on 30.11.2016 declaring total income of Rs.60,43,93,000/-. The case was selected for scrutiny and statutory notices were issued to assessee. In response to the notices, assessee filed the relevant details as called for. The Ld.AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, the Ld.TPO rejected the comparables and the filters applied by assessee. He observed that assessee used 7 comparables, by using OP/PC as PLI, and computed average margin at 15%. Following were the comparables selected by assessee . 2.10 The Ld.TPO thereafter applying various filters finalised the following 17 comparables with an average margin of 25.64%. S.No. Company Name Financial Year wise OP/OC (%) 2015-16 2014-15 2013-14 Average 1 Kals Information Systems Pvt. Ltd. 3.97% 5.77% 16.94% 8.60% 2 E-Zest Solutions Limited 7.65% 11.80% 14.88% 10.87% 3 Rheal Software Pvt. Ltd. 3.20% 2.76% 36.64% 14.50% 4 Sybrant Technologies Private Limited 16.10% 13.88% 15.26% 14.74% 5 Harbinger Systems Pvt. Limited 12.69% 17.18% No Data in Public Domain 15.06% 6 C G-V A K Software & Exports Ltd. 19.60% 19.87% 13.81% 18.50% 7 R S Software (India) Ltd. -2.09% 32.75% 24.14% 20.87% 8 Larsen & Toubro Infotech Ltd. 26.29% 24.22% 23.54% 24.83% 9 Orion India Systems Private Limited 26.08% 25.14% No Data in public domain 25.64% 10 Nihilent Ltd. 15.94% 29.19% 35.72% 26.36% 11 Inteq Software Pvt. Ltd. 7.53% 32.14% 45.00% 1 12 Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded by the DRP suo moto. In respect of the other issues alleged on transfer pricing adjustments, the DRP upheld the observation of the Ld.TPO. On the issues of corporate tax addition, the additions proposed in the draft assessment order were also upheld by the DRP. 2.18 On receipt of the draft assessment order, the Ld.AO passed impugned order by making addition of Rs.2,24,07,01,345/-, to the taxable income as per return of income filed by the assessee. 2.19 Aggrieved by the final assessment order passed, assessee has filed present appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that Ground nos. 1 and 4 are general in nature and do not require independent adjudication. 4. Ground nos. 5 - 7 is in respect of the comparables sought for exclusion by assessee under software development service segment. 5. Ground no. 8 is on not allowing the Working Capital Adjustment. 6. Ground no. 9 is on risk adjustment sought by assessee. At the outset, the Ld.AR submitted that assessee did not wish to press this issue and therefore the same is rejected. 7. Ground nos. 10.1 - 10.4 are connected with Ground nos. 5-7 and therefore need not be separately adjudicated. 8. Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide an overview of the significant capitalized and non-capitalized assets employed by the AEs in the transaction group provision of software development services, ITES Services and Marketing Support services. A total overview about the capitalized assets is presented in the financial statement of the related parties. For the purposes of the analysis, the significant assets are subdivided in tangible and intangible assets below. Any business requires assets (tangible or intangible) without which it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important Intangible Assets SanDisk India does not own or develop significant intangible assets and it also does not undertake any significant design and development activities on its account that leads to development of non-routine intangibles. SanDisk India uses computer software to carry out its business activities. Tangible Assets SanDisk India employs necessary tangible assets required in respect of the above mentioned functions. Risks undertaken Entity characterisation SanDisk India only performs software development, ITeS and MSS activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of OLF (India) Software Pvt. Ltd. vs. ACIT in IT(TP)A No. 182/Bang/2021 by order dated 28.09.2021 for A.Y. 2016-17. 17.5 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 17.6 We have perused the submissions advanced by both sides in the light of records placed before us. 17.7 He placed reliance on the decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT (supra) wherein this Tribunal following its decision in case of LSI India research development (P.) Ltd. vs. DCIT reported in [2021] 124 taxmann.com 83, excluded Persistent Systems Ltd., L&T Infotech Ltd., Thirdware Solutions and Infosys Ltd. by observing as under: "3.2 This Tribunal in LSI India research development (P.) Ltd. v. DCIT (supra) observed in respect of persistent systems, L & T Infotech, Thirdware Solutions, Infosys Ltd. as under: 16. As far as the challenge by the assessee on exclusion of aforesaid 5 companies in ground No. 2(f), the ld. counsel for the assessee has brought to our notice a decision of Bangalore Bench of ITAT for the very same Assessment Year 2014-15 in the case of LG Soft India (P.) Ltd. v. DCIT [IT(TP) Appeal No. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Thirdware Solutions Ltd. 17. As far as exclusion of Larsen & Toubro Infotech Ltd., is concerned, the Tribunal in the very same case of LG Soft (P.) Ltd. (supra) in another order dated 27-9-2019 in MP No. 95/Bang/2019 held that exclusion of Larsen & Toubro Infotech Ltd., was omitted to be adjudicated in the original order dated 28-5-2019 passed by the Tribunal referred in the earlier paragraph and held that Larsen & Toubro Infotech Ltd., is also not a comparable company because there were extraordinary events that occurred in the relevant previous year and that it possessed brand and intangibles and there was no segmental information of sub-contracting expenses". 3.3 There is nothing on record brought by the Ld.CIT.DR in order to establish that these are comparable with assessee that is a captive service provider which functions at the strict supervision and instructions by the AE's. Further we note that turnover criteria has to be applied with an upper limit which is not been considered by the Ld. TPO. The TPO has applied less than 1 crore turnover limit to eliminate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO and assessee. On the contrary, the Ld.DR submitted that DRP excluded this comparable since it was incurring persistent loss in the preceding two years. 19.2 We note that this issue needs to be verified by the revenue. Accordingly the Ld.TPO is directed to verify the submissions and to consider the claim in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 20. Ground no. 11 20.1 The Ld.TPO has computed adjustment in respect of interest paid by assessee on ECB loan provided by the AE. He submitted that the said rate is within the threshold limit as per the RBI and no adjustment is called for. Referring to the observations of Ld.TPO, the Ld.AR submitted that the TPO himself accepts that assessee has paid the interest to its AE between 4.5 and 4.8% whereas the RBI rate was determined to be six months LIBOR + 500 basis points. However, he submitted that the TPO determined the comparable loan transaction at 3.74%. 20.2 On the contrary, the Ld.DR submitted that the rate applied by the Ld.AO is to be upheld. 20.3 We have perused the submissions advanced by both sides in the light of records placed before us. 20.4 We note th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded employees. The Ld.AR submitted that TDS has been deducted on the entire salary paid by assessee to the seconded employees and what is reimbursed is the payment which has been partly made by the AE to the families of such seconded employees. The Ld.AR submitted that though the 100% salary has been subjected to TDS assessee has paid only part of the salary to the seconded employees in India and balance of such salary has been reimbursed to the AE as the same has been paid by the AE to the employees. The Ld.AR submitted that all the details relevant in respect of the salaries and the TDS deduction which were submitted before the authorities below which has not been considered. He has placed reliance on the observation of Coordinate Bench of this Tribunal in case of M/s. Toyota Boshoku Automotive India Pvt. Ltd. vs. DCIT in IT(TP)A No. 1646/Bang/2017 by order dated 13.04.2022 and in the case of Goldman Sachs Services Pvt. Ltd. vs. DCIT in IT(IT)A Nos. 362 to 369 & 338 to 345/Bang/2020 by order dated 29.04.2022. Identical issue has been considered at length. 23.1 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 23.2 We have perused the submission ..... 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