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TMI Blog2021 (3) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant's international transactions in respect of software development services, Rs. 102,622,022 to the transfer price of the Appellant's international transactions in respect of marketing and sales support services and Rs. 113,123 in respect of notional interest on outstanding receivables. (Tax Effect: Rs. 43,943,534) 2. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services and marketing and sales support services, the learned DRP/ AO/TPO erred in: 2.1. Rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 2.2. Rejecting the comparability analysis carried out by the Assessee in the TP documentation and in conducting a fresh comparability analysis for the international transaction of software development services and marketing and sales support services based on the application of additional filters in determining the arm's length price. 2.3. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant and the comparable companies. 2.12. Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a- vis the comparable companies. 2.13. Computing incorrect operating mark-up of certain comparable companies. (Tax Effect: Rs. 43,905,084) Grounds for imputation of notional interest on outstanding receivables 3. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in: 3.1. Considering overdue receivables from Associated Enterprises ('AEs') as a separate international transaction under the provisions of Section 92B of the Act. 3.2. Without prejudice to ground no 3.1, the learned DRP/AO/TPO erred in ignoring that, if at all transfer pricing adjustment to be sustained with respect to notional interest on overdue receivables, it should be restricted to AEs outstanding for more than 18o days. (Tax Effect: Rs. 38,451) Other than Transfer Pricing Related 4. Disallowance under section 40(a)(ia) of the Act 4.1. That on the facts and circumstances of the case, the Learned AO and the Learned Panel erred in holding that tax had not been deducted at source on expenditure amounting to INR 24,586,946 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Markup on Total Cost 1 Akshay Software Technologies Limit ed 5.97% 2 Bluestar Infotech Limited (Consolidated ) 4.43% 3 Caliber Point Business Solutions Limited(Segmental) 4.19% 4 Cat Technologies Limited -11.91% 5 CG-VAK Software & Exports Limited (Seg) 3.29% 6 Cigniti Technologies Limited 19.81% 7 Evoke Technologies Private Limited 11.60% 8 Goldstone Technologies Limited 11.01% 9 Helios & Matheson Information Technology Limited 18.45% 10 Kellton Tech Solutions Ltd 24.19% 11 Larsen & Toubro Infotech Limited 24.74% 12 Lucid Software Limited 7.08% 13 Maveric systems Limited 9.96% 14 Mindtree Limited (seg) 17.40% 15 Persistent Systems Limited 30.16% 16 R S Software India Limited 19,56% 17 R Systems International Limited (Seg) 13.38% 18 Sasken Communications Technologies Limited (Segmental) 8.59% 19 Satyam Computer Services Limited 18.92% 20 Spry Resources India Pvt Ltd 7.45% 21 Thinksoft Global services Limited 20.70% 22 Zylog Systems Limited 18.11% 5. Insofar as MSS segment is concerned, assessee selected following 7 comparables with an average margin of 5.10% S. NN Comparable Company Average A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies having positive net worth. * Companies whose export service income is less than 75% of the Sales were excluded. * Companies having different financial year ending (i.e. not March 31, 2013) or date of the company not available for the 12 month period i.e. 01-04-2013 to 31-03-2014, were rejected. * Companies that experienced persistent operating losses were excluded. 8. The Ld.TPO thus selected following comparables in the final list: 8.1 SWD Segment SI. No Comparable Company Markup on Total Cost 1 Infosys Ltd 36.13 % 2# Larsen & Toubro Infotech Limited 24.61 % 3# Mindtree Ltd 20.43 % 4# Persistent Systems Ltd 35.10 % 5# R S Software India Ltd 24.25 % 6# Cigniti Technologies Limited 27.62% 7 SQS India BFSI Ltd 22.37 % 8 Thirdware Solutions Ltd 404.68 % 8.2 MSS Segment Sl. No Comparable Company Markup on Total Cost 1 I Media Corp Ltd. 34.17% 2 Irunway India Pvt. Ltd. 44.83% 3 Alia Creative Consultants Pvt. Ltd. 14.51% 4 Killick Agencies & Mktg. Ltd. 23.05% 9. The Ld.TPO computed proposed adjustment being shortfall under both the segments as under: Sl. No. Description Adjustment u/s 92CA (In Rs.) 1 Software deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .: Functions performed: 17.1 SWD Segment: The assessee has entered into an intercompany agreement with its AE according to which it shall perform contract SWD services for its AE and is compensated on a cost +15% markup basis. In the transfer prising study, it is stated that assessee shall perform following are functions as per the service agreement: "Conceiving, proposing and developing new products under the directions and instructions of Salesforce Inc Analyzing competitive products, evaluating costs and benefits of competitive or alternative designs and reporting its findings to Salesforce Inc. and Providing such other services with respect to the products as Salesforce Inc. may request from time to time." 17.2 MSS Services: The assessee is engaged in providing MSS services for its AE and is compensated on a cost +11% markup the basis. In the transfer pricing study, it is stated that assessee would be performing following services as per the service agreement: * SIPL shall perform following services as per the service agreement. * SIPL shall assist SSPL in marketing Salesforce Inc's products and services within India. * SIPL shall have full responsib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holly owned subsidiary Infosys Consulting India Limited. 20.2 It is submitted that this company was excluded from the final list of comparables in assessee's own case for the Assessment Year 2011-12, which has been accepted by revenue. The Ld.AR relied on decision of co-ordinate Bench of the Tribunal in the case of LG Soft India (P.) Ltd. v. Dy. CIT in IT(TP)A No. 3122/Bang of 2018 for dated 28.5.2019 for Assessment Year 2014-15, the. The contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. 20.3 We have perused submissions advanced by both sides in light of records placed before us. 20.4 We support the view taken by this Tribunal in case of LG Soft India Pvt. Ltd. (supra), where this Tribunal observed as under: "6. We notice that the co-ordinate bench has excluded M/s.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 Ltd. (ITA No.1054/Bang/2011) was followed and it was held that M/s. Infosys Technologies Ltd is not functionally comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLM Software Solutions Ltd. (supra), where in it was held that M/s Persistent Systems Ltd. is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Persistent Systems Ltd." Based on the above observation we direct Ld.AO/TPO to exclude this comparable from final list. Thirdware Solutions Ltd. 20.10 The Ld.AR submitted that this comparable is to be excluded for its huge turnover of Rs. 206.75 Crores and the margin is 44.68%. It is also submitted that this comparable is functionally different and has diversified activities and earns revenue from export of services, transcription and provides consultancy services and there is no segmental data. Further delivery locations are outside India and has an extraordinary events and fails the turnover filter of more than Rs. 200 Crores. The Ld.AR relied on LG Soft India(P.) Ltd. (supra). 20.11 On the contrary Ld.CIT.DR placed reliance on orders passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. Admittedly, the turnover of above said companies is more than 200 crores and hence cannot be considered as good comparable companies. We also observed that this company is functionally not similar with that of assessee as it is involved in diversified activities which is not comparable with a captive contract service provider like that of assessee. Accordingly we direct Ld.AO/TPO to exclude this comparable from finalist. Larsen and Toubro Infotech Ltd. 20.18 This comparable was upheld by authorities below and has been objected by assessee for its inclusion. Ld.AR submitted that this company is functionally not comparable with that of assessee and is engaged in providing consultancy and testing services. Further it has been submitted that there is no segmental information available in the annual reports of this company. Ld.AR submitted that this company owns its own brand and have products and are engaged in trading activity. This company also has R&D services and presence of huge intangibles an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith acquisition of Two Companies. The Ld.AR relied on decision of LG Soft India(P.) Ltd. (supra). 20.24 On the contrary the Ld. CIT DR placed reliance on orders passed by authorities below. 20.25 We have perused submissions advanced by both sides in light of records placed before us. 20.26 We note that coordinate bench of Tribunal in case of LG soft India (P.) Ltd (supra) observed as under : "9. We have noticed that the assessee seeks exclusion of M/s Cigniti Technologies Ltd. It is pertinent to note that the assessee itself had selected this company as a comparable and it has urged for exclusion of the same only before Ld DRP. The Ld A.R. submitted that the Ld DRP did not address the same. The Ld A.R submitted that M/s Cigniti Technologies Ltd is a Testing company and hence it cannot be considered as a comparable. However, we notice that this contention has been raised by the assessee for the first time before Ld DRP and there was no occasion for the TPO to examine the same. Accordingly we restore this comparable to the file of AO/TPO for examining it afresh." Based on the above observation we direct Ld.TPO to exclude this comparable from final list. MSS Segment 1. I med ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advanced by both sides in light of records placed before us. 21.6 Is on perusal of the annual accounts placed in the paper book, we note that the functions carried out by this company is not very clear the notes to the financial statements only refers to service income without mentioning the nature of services rendered by this comparable also from the profit and loss account it is not discernible the kind of services rendered by this company that has been considered by the Ld.TPO akin to MSA services rendered by assessee. We owe note that the Ld.TPO has included this into the final list only by mentioning that the functions performed by this company are similar to assessee and under TNMM only similarities to be seen and not exact comparability. The Ld.TPO also note that the RPT of this comparable is only 3.7% however from page 3959 of paper book transactions with related party have been recorded and it does not tally with the rate computed by the Ld.TPO. Under such circumstances we do not find this comparable to be fit to be included in the finalist. Accordingly we direct Ld.AO/TPO to exclude this comparable from final list. Killick Agencies and Marketing Ltd. 21.7 This compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India (P.) Ltd. (supra) wherein on similar reasoning the Ld.TPO excluded this comparable therein and this Tribunal observed as under: "12. We find force in the contentions of Ld. ar. If the annual report of this company does not mention about related party transactions, then the assessee cannot be held responsible to prove a fact relating to a 3rd party, which may or may not exist. We notice from auditors report that the auditor in paragraph 5 (b) of Annexure to the auditors report has mentioned as under:- "There are no transactions that are made enterprises exceeding Rs. 5 Lacs in respect of any part who is covered under section 301 of the Act during the financial year." Hence, in the absence of any specific information, there is merit in the contentions of the assessee that the above said company might not have had related party transactions during the year under consideration. Accordingly we do not agree with the reasoning given by Ld. DRP for excluding this company as a comparable. Accordingly we direct the Ld. AO/U.S. include this company." 22.7 Annual report of this comparable has been placed at page 593 of paper book volume 2. It is observed functionally it is providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the submissions advanced by both sides in light of records placed before us. 22.14 In our opinion the Ld.AO/TPO shall verify annual reports filed by assessee in respect of these comparables and then ascertain the functional comparability with that of assessee. If the segmental details could be ascertained in respect of software services then these comparables may be considered afresh for purposes comparability with that of assessee in accordance with law, keeping in mind that assessee is a captive service provider that operates at low risk levels. Accordingly these comparables are remanded to the Ld.AO/TPO for verification afresh. MSS Segment 1. Concept Public Relation India Ltd. 2. MCI management India Ltd. 23. We note that per se, the authorities below have not disputed of functionality, however rejects them without any cogent reasons. We note that both the above comparables have been excluded by authorities below without verifying FAR with that of assessee. Under such circumstances we deem it fit to remand these comparables to Ld.TPO/AO for considering it afresh. Assessee is directed to furnish all relevant details to carry out the functional similarity with that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." 24.6 In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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