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TMI Blog2021 (7) TMI 1401X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(TP)A No.370/Bang/2019 - - - Dated:- 22-7-2021 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER For the Appellant : Mr. Aliasger Rampurawala, Advocate For the Respondent : Mr. Muzaffar Hussain, CIT(DR)(ITAT), Bengaluru. ORDER Per Chandra Poojari, Accountant Member These are cross appeals by the assessee and the revenue against the order of the CIT(Appeals)-3, Bengaluru dated 24.12.2018 for the assessment year 2014-15. 2. The assessee has raised the following grounds:- Transfer Pricing Ground: 1. On the facts and in the circumstances of the case and in law, Learned Assistant Commissioner of Income-tax, circle 3(1)(2) (Ld. AO') / Learned Assistant Commissioner of Incometax (Transfer Pricing)-1(3)(1) (`Ld. TPO') in making an adjustment of Rs. 84,74,69,606 to the transfer price of the Appellant's international transactions in respect of software development services. Further, the Learned Commissioner of Income-tax (Appeals) -III, Bangalore (`Ld. CIT(A)') erred in partially confirming the action of Ld. AO/TPO. 2. On the fact and in the circumstances of the case and in law, with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Limited 2.9. Not providing adjustment for the differences in working capital of the Appellant and the comparable I companies. 2.10. Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies. 2.11.Computing incorrect operating mark-up of certain comparable companies. Direct tax Ground: 3. On the facts and in the circumstances of the case and in law, the Ld. AO erred in levying interest under Section 234B of the Act of Rs. 16,13,16,690. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the tune of hearing of this Appeal. 3. The revenue has raised the following grounds:- 1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. Whether the CIT(A) erred in fact in rejecting Cigniti Technologies Ltd SQS India BSFI Ltd(Thinksoft Global Services Ltd) as a comparable on the grounds that it is functionally different when the primary source of income of the comparables is from provision of software development services. 3. Whether whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchase of consumable 2,644,170 7. The financial of assessee as per P L Account are as under:- Particulars Total Operating Income 5064293224 Operating Cost 4578857490 Operating Profit 485435734 OP/OC 10.60% 8. The segmental financials of assessee for FY 2013-14 as per TPO are as follows:- Particulars Amount (INR) Revenue from operations 5,064,293,224 Other income 14,303,508 Total Revenue (A) 5,078,596,732 Less: Non-Operating income Interest income 0 Profit on sale of fixed assets (net) 1,024,746 Total Non-operating income (B) 1,024,746 Total operating income (C=A-B) 5,077,571,986 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35.10% 5 R S Software (India) Ltd. 35,188 28,321 6,867 24.25% 6 Cigniti Technologies Ltd. 5,563 4,359 1,204 27.62% 7 S Q S India BFSI Ltd. 20,061 16,394 3,667 22.37% 8 Thirdware Solution Ltd. 19,883 13,742 6,140 44.68% Average 29.40% 11. Thus, the TPO made a TP adjustment of Rs.84,74,69,606 relating to SWD segment. Consequently the AO passed assessment order dated 2.2.2018 u/s. 143(3) r.w.s. 92 of the Act. 12. The assessee carried the matter before the CIT(Appeals) who directed exclusion of the companies viz., Cigniti Technologies Ltd. and SQS India BFSI Ltd. (Thinksoft Global Services Ltd.) and inclusion of CG Vak Software Exports Ltd. Finally, the following companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, therefore, Infosys Ltd should be excluded from the list of comparables; the ld. DR submitted that a merger can be considered as extra ordinary event if it had a significant impact on the profits or margins of such other company. The assessee had not indicated that such a merger had impacted the revenue of Infosys Ltd. There is nothing to show that assessee is adversely impacted if this company is selected as a comparable. Therefore this company cannot be excluded on the reason of merger. 20. Another argument of the ld. AR is that Infosys Ltd. is engaged in diversified operations such as business consulting, engineering and outsourcing services and it offers software product and platforms. The annual report clearly specify income deriving from sale of products. Significant R D, brand value, size and scale of operations of Infosys Ltd. made it functionally dissimilar to the assessee. There was no significant information on products and services segment as segmental data was not available. 21. The ld. AR next contended that Infosys Ltd. had huge brand value and contributed to its growth in revenue and hence not comparable. The ld. DR submitted that brand is not restricted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Microsoft Research Lab India Pvt. Ltd. [IT(TP)A No.3131/Bang/2018 for the AY 2014-15. Vide order dated 05.02.2020 the Tribunal excluded this company from the comparables holding as follows:- (i) Infosys Limited : The turnover being rs.44,341 Crores and it is functionally not comparable as the turnover is more than 500 times of the assessee turnover of Rs.84.09 Crores. The company is engaged in developing software products Pinnacle and was rejected by the DRP in assessee own case for the Assessment Year 2011-12. Further has high brand value and incurred huge expenditure in R D with exceptional areas of operation and earned super natural profits and is engaged in diversified activities. We found that the comparable was excluded by the coordinate Bench decision of the Tribunal in the case of M/s. Marwell India P. Ltd. Vs. DCIT in IT(TP)A No.3082/Bang/2018 for the Assessment Year 2014- 15 Dt.23.10.2019 at page 20 para 4.2 (b) which read as under: 4.2 (b). Infosys Ltd: It has been submitted by Ld.Counsel that this comparable has been included by Ld.TPO in finalist. It has been submitted that this comparable is not comparable due to high turnover and intang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies for the duration of the project and they are just like employees of the developer as they function under control and direction of the developer. So sub-contracting expenses do not make L T functionally different from the appellant. This is entirely different from the case where the software development work itself is outsourced to the software developer e.g. the AE of the appellant has outsourced its work to the appellant. So these arguments of the appellant are to be rejected. 29. The ld. DR submitted that the issue of brand of this company is similar to the contentions of the revenue in Infosys Ltd. As regards the argument that it was a product company, the ld. DR submitted that from the annuals of the company it is evident that the company is in software development. On perusal of the 'Director's Report' (as in the Annual Report), under the sub head 'Performance of the Company', it is observed that the company is operating in the sector of 'IT services'. The IT service sector revenue is categorized into three parts on the basis of the nature of business of the clients. Of the total IT services revenue, 43.5% comes from the clients from serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred to L T Technology services Limited, and accordingly only the nine month revenue results from Product Engineering Services (PES) were considered in the company's financial statement for the year. As such there wasn't any impact on functional comparability. The appellant has not pointed out any impact on revenue which could have increased the margins of this company or impact on the functional comparability on account of such business transfer. In fact, on account of such transfer, the quantum of revenue will be less which will only lower the margins. 31. On the assessee s argument that L T has substantial Overseas staff cost and sub-contracting expenses, the ld. DR submitted as in the case of Infosys, no such ground of appeal has been raised by the appellant that there should be filter relating to onsite work. No such filter was applied by the appellant itself in its TP study. So this argument of the appellant has to be rejected. 32. On the argument of the assessee that L T has intangibles and so it should not be considered as an appropriate comparable in its case, the ld. DR submitted that on perusing the details of intangible assets of L T, it is observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espectfully following the same we are of considered opinion that this company deserves to be excluded from the final list. We rely on the coordinate bench decision and direct the TPO/A.O. to exclude the comparable from the final list for determination of ALP. 35. In view of the above decision, we direct exclusion of Larsen Toubro Infotech Ltd. from the comparables. (iii) Mindtree Ltd. 36. The ld. AR submitted that Mindtree Ltd. should not be considered as a proper comparable for the following reasons:- TP adjustments have been made in the case of Mindtree. Ownership of Intangibles and Development of Intellectual property Product Business Diversified operations 37. The ld. DR submitted that TP adjustments in the case of Mindtree does not disturb its financials and as such the same does not make the company as functionally incomparable to the appellant. The contention of assessee that this company being functionally different has been discussed by the TPO and his findings has not been controverted by assessee. The basis of claim that the said company is into diversified business or product business is the website of this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of Software Development, substantial intangibles are generated. Considering above, the argument of the appellant cannot not be accepted. 39. This issue came up for consideration before the Tribunal in the case of Microsoft Research Lab India Pvt. Ltd. (supra) wherein this company was excluded from comparables observing as under:- 4.2(f) We found for the Assessment Year 2014-15, the company was excluded by the co- ordinate Bench decision in the case of Marwell India Pvt. Ltd. Vs. DCIT (supra) at page 24 para 4.2 (f) of the order as under : 4.2 (f). Mindtree Ltd This comparable has been included by Ld.TPO the final list. Ld. counsel submitted that it is functionally not similar with that of assessee. It is submitted that assessee engaged in providing services such as Agile, analytics and information management, application development and maintenance, business process management, business technology consulting, Cloud, Digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. Ld.AR referred to page 1088 in support. It is further been submitted that this company does not have segmental informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 166 of the Annual Report also refers to 'income from software services'. It refers to services performed on 'fixed price basis or 'time and material basis'. As per page 181, Note 21 of the Annual Report, the revenue from operations is stated to be on account of sale of software services amounting Rs.11,841.16 million. As per page 195 of the annual report, the earnings in foreign currency of Rs.10,606.23 million, (constituting 89.57%) was from sale of software; and there is no reference to sale of products. Thus it is evident that this company's revenue from operation was predominantly on account of services rendered. There is no mention of any revenue stream from sale of products in the P L account or balance sheet. At page 183 of the Annual Report, it is given that the company's operations predominantly relate to providing software products services and technology innovation covering full life cycle of products to its customers. The primary reporting segments are identified based on review of market and business dynamics based on risk and returns affected by the type of class of customers for the services provided. As per page 164 (Note 1) of the An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) the ITAT held Persistent Systems Ltd to be a proper comparable for software development activities. 42. As regards expenditure incurred towards R D, the ld. DR submitted that as per page 195 of the annual report the same was Rs.39.61 million, which constitute meager 0.33% of operating revenue. As discussed supra while dealing with Infosys ltd as a proper comparable, in its TP study the appellant has itself acknowledged that R D expenditure which is less than 3% of the sales is an appropriate filter to reject companies which are in R D or in development of intangibles. So as per appellant's own yard stick this company cannot be rejected on account of R D or intangibles. Further the value of intangible assets of Persistent systems was only Rs.162.85 million constituting 1.36% of operating revenue. There is no reference to any intangible assets or patent owned or developed by the company, in the stand alone annual report. There is also no acquisition of intangibles during the year. Thus, it can be inferred that the R D and intangible assets do not have impact on the revenue and profitability of the company. On perusing the 'summary of significant accounting policies' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware service provider company by the Hon'ble ITAT Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 (A.Y. 2013-14). In Agnity India Technologies Pvt. Ltd. (supra) also the ITAT had held Persistent Systems Ltd to be a proper comparable for software development activities. 46. Considering above, the ld. DR submitted that the ground relating to this comparable has to be dismissed. 47. This comparable i.e., Persistent Systems Ltd. came up for consideration before the Tribunal in the case of Microsoft Research Lab India Pvt. Ltd. (supra) wherein this company was excluded from comparables observing as under:- We have perused submissions advanced by both sides in the light of the records placed before us. At page-1432, it is observed that companies operations predominantly relates to providing software products services and technology, innovation covering full life cycle of product to its customers. It is observed that Delhi ITAT in case of Aginity India Technologies India private limited (supra) has held as follows: Persistent systems Ltd was excluded from the list of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a proper comparable. 51. On the contention of assessee that the TPO has erroneously considered forex loss as non-operating expense, the ld. DR submitted that the TPO has considered forex gain/loss as operating in nature. The CIT(Appeals) directed the TPO to reverify this aspect in relation to this comparable also and if the forex loss is not considered as operating in nature then he should treat it as operating and recompute the margin of this company. 52. We have heard both the sides and perused the material on record. Similar issue came up for consideration before the Tribunal in the case of Microsoft Research Lab India Pvt. Ltd. (supra) wherein the Tribunal held as under:- We have perused submissions advanced by both sides in the light of the records placed before us. On perusal of the annual reports placed at page 573 of paper book volume 2, it is observed that this company has developed its own product by the name PAPA . It is observed that this company has incurred huge expenses towards import of software services evidencing outsourcing of software services unlike that of assessee. It is also observed that this company is into production of software product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the software development activities of the company and it is observed that the company categorizes its activities as software services and software products. Nature of software services has not been indicated specifically and thus has to be interpreted on the basis of information available in the annual report. Although in the annual report the company repeatedly refers to revenue from its software products and solutions only, however in the segmental data it has shown entire revenue from software services, without explaining the nature of software services. Since complete segmental data relating to revenue from multiple streams and the expenses on the same is not available, so this company is functionally different from the appellant company. The assessee has just relied on the segmental details of 'Software Services and Software Products as given in the annual report without explaining as to how software services constitute software development services only and the details indicated in the annual report are irrelevant. Further, this company has already been rejected as a proper comparable for the Software Development segment by the ITAT in several cases as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices and consulting activities and hence comparable to it, however the same had wrongly been not accepted by the TPO by holding that RPT information was not available. It was submitted that the company satisfied all the filters adopted by the TPO and hence should not be rejected as comparable only because RPT information is not available in the financials of this company. 61. The ld. DR submitted that perusal of the annual report of this company (Directors report- Acknowledgements) shows that the company is in the ITES industry and has done transaction processing work, which is not functionally comparable. Further RPT information is an important aspect in selection of comparables and in absence of such data a company cannot be considered as a proper comparable. 62. This issue was considered by the Tribunal in the case of LSI India Research Development Pvt. Ltd. in IT(TP)A No.3170/Bang/2018 dated 7.10.2020 wherein it was held as follows:- 27. As far as inclusion of I2T2 India Ltd. is concerned, we find that in the case of LG Soft India (P.) Ltd. (supra) this company was directed to be included. The Tribunal in para 11 of its order held that the TPO excluded this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Infor (India) Pvt. Ltd. ITA No.2307/Hyd/2018 for AY 2014-15. In the aforesaid decision, the Hyderabad Bench took the following view :- 3. 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 from Indian Branch only. Thus, the ground for Maveric Systems Ltd is rejected and for Evoke Technologies Ltd is allowed for statistical purposes. 16. We are of the view that it would be appropriate to direct the TPO/AO to consider this issue afresh, after opportunity to the assessee and in the light of facts brought to our notice as above. 67. Following the aforesaid decision, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), Bengaluru of [2018J 91 taxmann.com 403 (Bengaluru - Trib) dt 28.02.2018, the ITAT held as follows:- 24. We have gone through the records and perused the orders passed by the DRP as well as the TPO. In our view, it is for the assessee to prove as to how the working capital had an impact on its profit and is required to follow the analysis cis mentioned in para 12.1 of the DRP order. Needful has not been done despite opportunity granted by the DRP. However considering the totality of the circumstances, we are remitting back six companies for consideration by the TPO. We deem it fit to remand this issue afresh. Needless to say that the TPO shall be bound by the decision of the ITAT, Chennai Benches in Mobis India Dd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. Accordingly this ground is allowed for statistical purpose. 70. The ld. DR submitted thus ITAT held that it was for the assessee to prove as to how the working capital had an impact on its profit. In the present case also, the appellant has not produced any details to show the same. So the decision in the case of Mobis India(Supra) gets applied to the facts of the present case. Similarly in the case of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmination 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 defence 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 Delhi Bench of ITAT in the case of ITO Vs. E Value Serve.com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternational transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an undisputed fact that entire revenue has been generated by this company from software testing services rendered to its independent clients as against simple testing carried out by assessee of integrated circuits along with designing, customer support of integrated circuits related ancillary services provided by assessee only to its AE. Considering the holistic approach having regards to the annual reports of this company and the specialised services provided by this company to its own clients in the field of software testing as against captive service provided by assessee exclusively to its AE, we are of considered opinion that this company cannot be held as a good comparable with that of assessee. Therefore we direct Ld. AO/TPO to exclude this company from the final list of comparables. Following the judicial precedence, we found the company is in specialized area and has to be excluded. Accordingly, we direct the TPO/A.O. to exclude from the final list of comparables . 76. In view of the above decision of the Tribunal, we find no infirmity in the order of the CIT(Appeals) in exclusion of this company from the comparables. SQS India BSFI Ltd. (Thinksoft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s practice of combining both revenue and expenses items of related party transactions and comparing it against net sales, would distort the application of the proposed RPT filter. In the case of the assessee and that of the comparable, significant revenue party transactions are on revenue side and hence (RPT)revenue/Net sales was taken as the appropriate filter. Accordingly, the RPT/Sales for this comparable works out to 5.8% (i.e. Rs. 1164Lakhs/ Rs. 20060.8 Lakhs). Hence, the revenue s ground is allowed and this company is directed to be included in the comparables. 81. The next grievance of the revenue is regarding inclusion of CG Vak Software Exports Ltd. as comparable. 82. The ld. DR supported the findings of the TPO. The ld. AR submitted the company satisfies all the filters adopted by the TPO and that its major share of revenue was from software development services. The appellant submitted that revenue from BPO services was a meager 1.88% and as such the company passes filter of '75% revenue from Software development' as applied by the TPO. The appellant submitted that the company was considered as functionally comparable by the TPO in its own case for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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