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TMI Blog2023 (1) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... parables that would be finally retained - We direct the Ld.AO/TPO to compute the margine as per rules while passing the OGE. - IT(TP)A No. 278/Bang/2021 - - - Dated:- 29-9-2022 - SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER For the Assessee : Shri Padamchand Khincha, CA For the Revenue : Shri Binod Kumar Singh, CIT DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against assessment order dated 29/03/2021 passed by National e-Assessment Centre, Delhi for A.Y. 2016-17 on following grounds of appeal. The Appellant submits that: I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. 1. The learned Assessing Officer ('learned AO'), learned Transfer Pricing Officer ('learned TPO') and the Honourable Dispute Resolution Panel ('Hon'ble DRP') erred in law and facts in making an aggregate Transfer Pricing adjustment ('TP adjustment') of Rs. 18,16,94,876/- [adjustment of Rs.11,53,50,416/- to the Software Development ('SWD') services segment and an adjustment of Rs. 6,63,44,460/- to the Informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aspire Systems (India) Private Limited Cybage Software Private Limited Exilant Technologies Private Limited ITeS Segment Infosys BPM Limited SPI Technologies India Private Limited Eclerx Services Limited 13. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting companies that ought to have been accepted as comparable: SWD Services Segment I2T2 Limited Minvesta Infotech Limited Sasken Communication Technologies Limited E-Zest Solutions Limited Agilisys IT Services India Private Limited ELuminous Technologies Private Limited Isummation Technologies Private Limited Batchmaster Software Private Limited DCIS DOT COM Solutions Private. Limited Evoke Technologies Limited Sagarsoft (India) Limited Ace Software Exports Limited ITeS Segment Informed Technologies India Limited Ace BPO Services Private Limited Jindal Intellicom Limited Crystal Voxx Limited Microgenetic Systems Limited R Systems International Limited 1\11 14. The learned AO/ learned TPO erred in not considering provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d e-mail chat/ support services for the IT enabled services. 2.2 For year under consideration, assessee filed its return of income on 30/11/2016 declaring total income of Rs.47,90,89,890/-. 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 observed that assessee had entered into international transactions exceeding Rs. 15 crores. Accordingly, the case was referred to the transfer pricing officer. 2.3 On reference received by the Ld.TPO under 92CA, the Ld.TPO called upon assessee to furnish the economic details of the international transaction in form 3CEB. From the details filed, the Ld.TPO observed that following the international transaction entered into by assessee. 2.4 The Ld.TPO observed that the following were the segmental break-up of incremental revenue and corresponding cost: 2.5 The Ld.TPO observed that, the assessee reported international transactions in respect of Software Development Service (SWD), IT Enabled Services (ITeS). The arm's length price of the international transactions in SWD/ITeS segments provided to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.55% 35th Percentile 8.05% 65th Percentile 17.54% Median 12.24% ITES S.no. Company Name 2013-14 2014-15 2015-16 Weighted Average 1. Sundaram Business Services Ltd. -12.33% -4.82% 1.61% -5.20% 2. Informed Technologies India Ltd. 6.70% -5.52% -1.02% -3.13% 3. ACE BPO Services Pvt. Ltd. 0.95% 1.99% -0.27% 0.89% 4. Allsec technologies limited 8.12% -2.81% 9.15% 4.79% 5. Digitally Global Private Limited 6.97% 1.18% -3.06% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted by the Ld.AR that the assessee wishes to press only following grounds wherein it seeks exclusion/inclusion of following comparables under SWD ITes Segment. Ground No. 12 The assessee seeks exclusion of following comparables SWD Segment 1. Larsen Toubro Infotech Ltd. 2. Persistent Systems Ltd. 3. Infosys Ltd 4. Aspire Systems (India) Pvt. Ltd 5. Cybage Software Pvt. Ltd. 6. Nihilent Ltd 7. Thirdware Solution Ltd. 8. Exilant Technologies Pvt.Ltd. 9. Infobeans Technologies Ltd IT Segment 1. Infosys BPO Ltd. 2. SPI Technologies India Pvt.Ltd. 3. Eclerx Services Ltd. 4. Tech Mahindra Business Services Ltd. 2.11 Ground No. 13 The assessee seeks exclusions of following Comparables SED Segment: 1. Sagarsoft (India) Ltd. 2. Evoke Technologies Ltd. 3. Isummation Technologies Pvt.Ltd. 4. Batchmaster Software Pvt.Ltd. 5. DCIS DOT COM Solutions Pvt.Ltd. 6. Ace Software Exports Ltd. ITeS Segment 1. Informed Technologies India Ltd. 2. Ace BPO Services Pvt.Ltd. 3. Crystal Voxx 2.12 Before we undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alore. The services rendered are in the nature of voice, e-mail/ chat based support services. The services are presently rendered through LO, LI., Social Media (SoME), Process Engineering (PE), 2LS, Support Engineering Centres (SEC) and Remote Management Centres (RMCs), End to End Delivery 7 Transformation (E2E), HP Back Office Management (HBOM), Global customer experience (GCE) and Global Support Engineering (GSE). Based on the requirements, the services are provided by HP PPS Services' CSC which is equipped with necessary infrastructure and personnel. The AEs provide training to HP PPS Services for rendering the IT enabled services at the agreed/ required levels of quality. HP PPS Services renders Level 0 ('L0'), Level 1 ( L1 ) and Level 2 ('L2') support, while L3 services are provided by the AEs. a. L0 technical support team facilitates guiding the customer to the service desk and is the first point of contact for the customers. The LO team routes calls to the L1 teams. b. L1 technical support team provides troubleshooting services through phone, web chat and Email. c. L2 support team handles escalation from Level 1 i.e. open issues from Le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate would directly impact the profitability of HP PPS Services. Accordingly, HP PPS Services bears foreign exchange which is mitigated as the same is included in the cost base of HP PPS Services. Credit risk HP PPS Services invoices its AEs for the provision of software development services on a regular basis and realizes the same in line with industry standards. The risk of nonpayment by AEs is mitigated for HP PPS Services since they are related enterprises. In respect to the software development services rendered by HP PPS Services, the AEs do not bear any credit risk since the services are availed by the AEs for internal consumption only. Capacity utilization risk As HP PPS Services is compensated on a cost plus basis for all direct and indirect costs of operation including idle time cost, the capacity utilization risk is effectively borne by its AEs. Technology risk HP PPS Services provides services on the basis of the requirements of its AEs, any change in technology will have a limited impact on the profitability of HP PPS Services. HP Group is exposed to higher technology risk, being the technology owner. Due to market competition and an everPag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss IT services (comprising application development and maintenance, Big Data, UX UI, Automation engineering services, including product engineering and lifecycle solutions, and business process management); in the Verticals of Storage Virtualization, Media Publishing, HR Payroll and e commerce The Ld.AR referred to page 854 of the paper book in support of the submission. The Ld.DR on the contrary relied on orders passed by the authorities below and decision of Coordinate Bench of this Tribunal in case of BORQS Software Solutions Pvt. Ltd. vs. ITO in IT(TP)A No. 310/Bang/2021 by order dated 25/10/2021 for A.Y. 2016-17. We have perused the submission advanced by both sides in light of records placed before us. 6. We note that coordinate bench of this Tribunal in case of M/s.SanDisk India Device Design Centre Pvt. Ltd. vs. JCIT (supra) observed and held as under: 17.3 At the outset, the Ld.AR submitted that the above comparables have been considered by Coordinate Bench of this Tribunal, Hon ble Hyderabad Tribunal as well as Hon ble Mumbai Tribunal in other cases having similar facts it is also been submitted by Ld.AR that these comparables do not satisfy the turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, the Tribunal excluded 3 out of 5 companies referred to in the earlier paragraph and remanded 1 company for fresh consideration with the following observations:- 5. The Ld A.R submitted that M/s Infosys Ltd, M/s Persistent Systems Ltd and M/s Thirdware Solutions Ltd have been excluded by the co-ordinate bench in the assessee's own case in AY 2008-09 in IT(TP)A No. 1673/Bang/2012. 6. We notice that the co-ordinate bench has excluded M/s Infosys Ltd in AY 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 comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 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, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed assets owned and risk assumed by assessee under this segment for the year under consideration. 17.8 Before us, the Ld.AR has not been able to place anything on record contrary to the above observation. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Persistent Systems Ltd., L T Infotech Ltd., Thirdware Solutions and Infosys Ltd. from the final list. 17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee. 17.10Perusal of the annual report, filed before us in respect of the above two comparables, we note that the segmental financials are not available in respect of Nihilent and Infobeans and the RPT in respect of Aspire Systems India Pvt. Ltd. is more than 25% being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin: The revenue increased from Rs.35 crore (F.Y.2014- 2015) to Rs.62 crore (FY 2015-2016) in a period of 1 year (76%). Also, the company's profitability increased by 147%. Also, the company's margin fluctuates widely (34.98% - F.Y.2015-016, 20.78% - F.Y. 2014-2015, 41.95% - F.Y.2013-2014) which demonstrates that there exists some factor having an impact on the margin, and therefore the company cannot be selected as a comparable. (v) Sales Tax: The annual report of the company shows that it incurs Central Sales Tax liability, which demonstrates that the company is not a pure software development company. 9. For all the above noted reasons, this company has been consistently excluded from the final set of comparables. Reference is made to the following orders of the ITAT :- (i) SanDisk India Device Design Centre Pvt. Ltd. v. JCIT (Order dated 30.06.2022 passed by this Hon'ble Tribunal in IT(TP)A No. 288/Bang/2021 for AY 2016-17)- at para 17.9 and 17.10 (on account of functional dissimilarity as company renders diverse services and lack of segmental details); (ii) ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227 228/Hyd/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra), this Tribunal merely affirmed the findings of the DRP, which in turn relied on the reply filed by the company in response to notice u/s 133(6) of the I.T.Act. Further, this Tribunal held the finding of DRP has not been countered by the assessee in the said case. However, the company's response to the notice u/s 133(6) of the I.T.Act is contrary to the functions set out in the audited financial statements (enclosed as Annexure-A to this order), and therefore, the same cannot be relied upon. 10.1 Further, the website of the company shows tht the company is engaged in diverse service, which are not similar to functions of a captive service provider like the assessee in the instant case. Since the Ld.AR has clearly established that Infobean Technologies Limited is not functionally comparable to that of the assessee, we follow the orders of the ITAT referred in para 9 (supra) and direct the Ld.AO / TPO to exclude Infobean Technologies Limited from comparable list. It is ordered accordingly. Accordingly, we direct the Ld.TPO to exclude the above comparables from the Final list of SWD segment for failing in TO criteria as well as functionality tests. 11 . For ITeS ..... X X X X Extracts X X X X X X X X Extracts X X X X
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