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TMI Blog2023 (2) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... merger as per the directions of the Hon'ble Gujarat High Court and therefore, because of this extra ordinary event having taken place, we direct the ld. A.O./T.P.O on the same parity of reasonings to exclude E-Infochips Ltd. from the final list of compables with that of the assessee. AcewinAgri tech Ltd - We are of the considered view that the actual position has to be ascertained before excluding or including this company, what exactly are the activities of the company has to be examined. Therefore, the issue of comparability regarding this company is remanded to the file of the ld. A.O/T.P.O for re-adjudication as per law complying with the principles of natural justice. Infobeans Technologies Ltd. has to be excluded as comparable as it is performing varied types of services and that also as per the financials of the company, its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. Following the same parity of reasoning for A.Y. 2016-17, we direct the ld. A.O/T.P.O to exclude this company from the final list of comparables. Dun and Bradstreet Technologies Data Services Pvt. Ltd. is into p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndings of the ld. D.R.P. This part of the ground is also dismissed. Appeal of the assessee is partly allowed for statistical purposes. - ITA No. 218/PUN/2021 - - - Dated:- 9-11-2022 - SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER For the Appellant : Shri Tejas Dharwadkar, C.A. Meenal Sabnis For the Respondent : Shri Prashant Gadekar ORDER PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER This appeal preferred by the assessee emanates from findings of the Ld. Disputes Resolution Panel-3, Mumbai-2, (hereinafter referred to as the DRP ) dated 28108-2020 for A.Y. 2016-17 u/s 144C(5) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) as per the following grounds of appeal. 2 1. The learned A.O. / DRP erred in recomputing the transfer price of the international transactions relating to software development services, despite the fact that none of the conditions as prescribed in Section 92C(3) of the Income Tax Act, 1961 ('the Act'), had been violated by the appellant. Thus, the learned Assessing Officer ('AO') erred in making an addition of INR 6,04,95,225/- u/s 92C on the basis of the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd, R S Software India Ltd, Harbinger Systems India Pvt Ltd even though the same was directed by the Hon ble DRP. 9. Without prejudice to the above grounds, the assessee submits that the learned A.O. / DRP erred in not making adjustments to the ALP to account for various differences on account of intangibles, R D, risk factors, etc. etc. between the assessee company and the comparables. 10. The Learned A.O./DRP incorrectly applying turnover filter of INR 5.11 Crore to INR 511.14 Crore i.e. ten times lower and higher turnover than Appellant, thereby using a completely different criteria than what was used by the Appellant. The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal. 2. At the outset, the ld. Counsel for the assessee taking us through grounds of appeal submitted that grounds No. (1) to (3) are general. That in ground No. (4) and (8) the D.R.P has provided relief to the assessee as per their directions. However, it is grievance of the assessee that the said findings of the ld. D.R.P have not been given effect to by the ld. A.O/T.P.O while passing his order. The other grounds pertains to either exclusion or inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services to the end customers in USA. As per the Transfer Pricing Analysis and report submitted by the assessee, Velocity Inc., provides Cloud hosting services, managed application services and Business Process Outsourcing (BPO) for HY/Payroll, Enterprise Performance Management (EPM) and core ERP solutions from Oracle and SAP, Velocity Inc. Serves Fortune 500 and mid market organizations. Velocity Tech-sol India Pvt. Ltd. Is engaged in provision of captive software development services to its parent company Velocity Inc., Velocity India is working in various ERP domains such as SAP, Oracle etc., and provides cloud hosting software related services. It also provides support services to the customers of Velocity Inc., through the data centres available in Velocity India or USA. 4. Now, coming to the issue of comparables, the final list finds place at page 28 and 29 of the ld. T.P.O s order. Referring to that list, the ld. Counsel submitted that at Sr. No. 10 is Fixstream India Pvt. Ltd. and at Sr. No. 22 is Cybercom Datamatics Information Solutions Ltd.. These have been excluded by the ld. D.R.P therefore, there is no dispute. There are certain other comparables for which the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, In a recent decision dated 17/05/2017 in the case of Jacobs Engineering (I) Pvt. (ITA No. 7194/Mum/2012) for A.Y. 2008-09, the Hon'ble Mumbai ITAT held that the upper turnover filter can be reasonably fixed at approximately 10 times the turnover of the tested party and the lower turnover filler can be reasonably fixed approximately 1/10h of the turnover of, the tested Party. For coming lo this view, the Hon ble Mumbai Tribunal relied upon several decisions of Hon'ble ITAT, Bangalore, which included the following: i) Cypress Semiconductors Technology P. Ltd. (TS-144-ITAT-2017)(Bang); ii) Ketera Software India P Ltd. (TS-139-ITAT-2017l)(Bang); iii) Evry India P. Ltd. (TS-76-ITAT-2017)(Bang) 3.2.4 Having regard to the discussion above and the case laws cited, we are of the opinion that application of an upper turnover filter as well as a lower turnover filter is appropriate for carrying out comparability analysis. By relying on the Principle laid down in the decision of the Hon'ble ITAT, Mumbai, in the case mentioned above, we hold that the upper turnover filter should be fixed approximately at 1 O times the turnover of the tested party (asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice, especially since the filter finally applied by the TPO is supported by various decisions of Hon'ble ITAT (as discussed herein above) and no prejudice has caused to it by the action of the TPO in not sharing the revised filter with it before finalizing the order. Accordingly, this contention of the assessee is rejected. 5.1 The ld. Counsel for the assessee thereafter referred to the Annual Report of this company and submitted that this company should be excluded from the final list of comparables since there has been an extra ordinary event of acquisition which is demonstrated from the Annual Report as follows: Global operations: Overview : Being a global business consulting and IT services solutions Integration Company, our mission is to deliver organizational change systematically for our clients. The key iindustries to which we provide our services include BFSI, media and entertainment, mobility and telecommunications, life sciences and healthcare, manufacturing, retail and consumer products. We have also been engaged by the government and public sector companies in several countries. The company derived a majority of revenues from South Afric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir findings from paras 14.1 onwards. The assessee submitted that the said company i.e. Aspire systems (India) Pvt. Ltd. is not functionally comparable with the assessee. That, before the ld. T.P.O the assessee objected regarding this company as a comparable on the ground of validity of turnover filter since it failed the initial upper turnover filter of Rs. 75.6 crores proposed by the ld. T.P.O. The D.R.P had held on this issue that the ld. T.P.O had initially proposed the turnover filter at Rs. 75 crore which was subsequently modified by him during the course of proceedings before him which was based on judicial decisions and therefore, the ld. D.R.P had approved such modified turnover filter adopted by the T.P.O. The contention of the assessee was rejected. Further, the assessee had submitted that this company is functionally not comparable with that of the assessee and at para 14.2.4 and 14.2.5 the D.R.P rejected this objection of the assessee also and upheld the inclusion of this company in the final set of comparables. The ld. Counsel for the assessee at the time of hearing demonstrated from the Annual Report of this company at page 445 in the paper book that there has been e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities of the company has to be examined. Therefore, the issue of comparability regarding this company is remanded to the file of the ld. A.O/T.P.O for re-adjudication as per law complying with the principles of natural justice. 9. Infobeans Technologies Ltd. 9.1 The assessee contends that this company is functionally different. This contention was not accepted by the ld. A.O/TP.O since on perusal of the Annual Report of this company it was noticed that the company is engaged in providing the I.T. related services. The D.R.P has discussed this issue at para 13.2.1 of their findings where the first contention was that this company was not functionally comparable to the assessee. It was contended that as per the Annual Report, this company is engaged in diversified activities such as custom application development, content management system, enterprise mobility and big data analytics, besides providing development and maintenance, big data UX and UI, automation engineering services, including product engineering and business process management. As against the same, the assessee is engaged in only one type of activity of providing software services to its AE, and therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven its finding at page 92 of their order. The ld. A.R submitted that this company should be excluded for functionality difference and in support thereof placed reliance on the decision of Bombay Bench of the Tribunal in ITA No. 1379/Mum/2021 for .Y. 2016-17 dated 25-02-2022 in the case of Red Hat India Pvt. Ltd. Vs. ACIT wherein it was observed and held as follows: :Infobeans Technologies Ltd. (Infobeans) 49. The assessee 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 comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated technology services and solutions. The principal business from which this company earns its revenue is from sale of services which is 100%. Therefore, the sale of products for this year is NIL. The company is dominantly engaged in providing software development services to its clients. Hence, the objections were rejected and the company was held to be comparable. 11.2 The ld. D.R.P has upheld the decision of the A.O/T.P.O at para 8.2(b) at page 87 of their order. The ld. A.R at the time of hearing brought to our notice the Annual Report of this company at page 1986 of the Paper Book it is totally functionally different with regard to the assessee. He even took us through the related party schedule at page 2104 of the paper book. He further submitted on functionality difference that the Co-ordinate Bench Bombay for the same assessment year 2016-17 has held that this company should be excluded from the list of comparables. The Co-ordinate Bench Bombay in ITA No. 1379/Mum/2021 for A.Y. 2016-17 dated 25-02-2022 on this issue observed and held as follows: 47. The assessee sought to exclude Dun Bradstreet as a comparable on the ground that it is functionally dissimilar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir findings from para 5.2.1 onwards and as held at para 5.2.4 the ld. A.O/T.P.O is directed to exclude this company from the final set of comparables if the ratio of RPT income to the total operating revenue is found to be more than 25% after verification. Admittedly, the ld. A.O/T.P.O has not considered these findings of the ld.D.R.P. The ld. D.R also could not bring any materials on record or evidences to demonstrate that the ld. A.O/T.P.O has complied with such directions of the D.R.P. Considering these facts in the interest of justice, this ground is remitted back to the file of the Ld. A.O/T.P.O for complying with the principles of natural justice and giving effect to the directions given by the ld. D.R.P. regarding the above mentioned companies. 12. In Ground No. 8, the assessee contends that the ld. A.O/T.P.O has erred in not considering the corrected margin computation of comparable companies as mentioned in the ground itself on record. Before the D.R.P objection raised by the assessee was as under: Objection Nos. 1.6 to 1.10: Incorrectly considering operating margins of Evoke Technologies Pvt. Ltd (as 6.01% instead of 4.29%), CG Vak Software and Exports (as 12.59% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regarding this company at para 17.2.1 which is as follows: 17.2.1 This company was also identified by the assessee as an additional comparable during the course of the TP proceedings. Howedver, the TPO rejected the company, observing that as per its Annual Report, it is engaged in product development, and, therefore, not comparable to the assessee, which is a software development service provider. Before this Panel, the assessee has contended that the company's activities are similar to the functions performed by the assessee. 17.2.2 We have considered the contention of the assessee. As pointed out by the TPO, in Note A-19 of the Annual Report of the company for the F.Y. 2015-16, regarding Significant Accounting Policies, under the heading Revenue Recognition , it has been stated that, The company is in the business of 'outsourced product development' which is different from traditional 'Software Services business'. Similarly, in the Directors' Report forming part of the Annual Report of the company for the F.Y.2015-16, u 1der the heading State of Company Affairs Prospects for the year and also in Note A-20 to the Accounts, regarding Signifi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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