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TMI Blog2022 (11) TMI 1336X X X X Extracts X X X X X X X X Extracts X X X X ..... 92CA, the Ld.TPO called for the economic analysis of the following international transaction in form 3CEB. Particulars Amount in Rs. Provision of software development services Rs. 55,50,25,698/- Provision of sales and marketing services Rs. 14,44,38,306/- Provision of IT enabled services Rs. 39,36,80,401/- Purchase of fixed assets Rs. 4,64,73,040/- Issue of shares Rs. 16,51,22,464/- Recovery of expenses (in the nature of ESOP taxes of employees) Rs. 72,66,034/- Reimbursement of expenses (in the nature of computer hardware maintenance and travel cost) Rs. 2,22,60,171/- Remittance of amount collected from employees towards Employee Stock Purchase Plan Rs. 2,51,03,011/- 2.3 The Ld.TPO observed that assessee computed its segmental margins as under: Particular ITeS SWD MSS Total Revenue from operations 39,36,80,401 55,50,25,698 14,44,38,306 1,09,31,44,405 Employee benefits and other expenses 13,32,25,635 29,95,60,203 8,71,14,141 51,98,99,979 Depreciation and amortization 4,83,52,035 5,80,22,442 77,88,829 11,41,63,306 Other expenses 16,07,53,112 11,67,98,293 3,52,21,631 31,27,73,036 Forex loss* 8721294 12295614 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial year ending (i.e., not March 31 2016) or data of the company does not fall within 12 month period i.e., 01-04-2015 to 31-03-2016 - excluded. 3. Companies whose income was less than Rs. 1 Crore - excluded. 4. Companies having negative net worth 5. Companies having persistent losses for any 2 out of 3 years 6. Companies whose software development service income is less than 75% of the total operating revenues - excluded. 7. Companies which have more than 25% related party transactions of the sales or 25% of the expenses - excluded. 8. Companies which have export service income less than 75% of the sales - excluded. 9. Companies with employee cost less than 25% of turnover - excluded. And the following are the comparables selected by the Ld.TPO for the 3 segments. SWD Sl. No. Name of the Company Weighted Average 1. Kals Information Systems Pvt. Ltd. 8.60% 2. Rheal Software Pvt. Ltd. 14.50% 3. CG-VAK Software & Exports Ltd. 18.50% 4. R S Software (India) Ltd. 20.87% 5. Larsen & Toubro Infotech Ltd. 24.83% 6. Nihilent Technologies Ltd. 26.36% 7. Inteq Software Pvt. Ltd. 28.20% 8. Persistent Systems Ltd. 30.89% 9. Infobeans Technologie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Rheal Software Pvt. Ltd. 14.50% 3. R S Software (India) Ltd. 20.87% 4. Larsen & Toubro Infotech Ltd. 24.83% 5. Nihilent Technologies Ltd. 26.36% 6. Inteq Software Pvt. Ltd. 28.20% 7. Persistent Systems Ltd. 30.89% 8. Infobeans Technologies Ltd. 32.42% 9. Thirdware Solution Ltd. 36.90% 10. Infosys Ltd. 38.61% 11. Aspire Systems (India) Pvt. Ltd. 39.28% 35th Percentile 24.83% Median 28.20% 65th Percentile 32.42% ITES SI. No. Name of the Company 1. Microland Ltd. 2. Tech Mahindra Business Services Ltd. 3. Infosys BPM Ltd. 4. SPI Technologies India Pvt. Ltd. 5. Eclerx Services Ltd. Marketing Support service segment SI. No. Name of the Company 1. Esha Media Research Ltd. 2. Goldmine Advertising Ltd. 3. ICRA Management Consulting Services Ltd. 4. Pressman Advertising Ltd. 5. Ugam Solutions Pvt. Ltd. 6. Killick Agencies & Marketing Ltd. 7. Majestic Research Services & Solutions Ltd. 8. Scarecrow Communications Ltd. 2.11 All other objections raised by assessee were dismissed by the DRP. The Ld.AO on receipt of the DRP directions passed the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the low-level designing, coding, testing and implementation support is done by both FireEye US and FireEye India. The following activities generally form part of the software development life-cycle: Requirement analysis or feasibility study encompasses all of the tasks that go into the instigation, scoping and definition of a new or altered system. This is an important part of the system design process whereby requirements engineers and business analysts, along with systems engineers or software developers, identify the needs or requirements. Once the requirements have been identified, the system designers proceed to design a solution. FireEye US solely performs the system and requirement analysis function. Softwaredesign is a multi-step process that focuses on package architecture, the database design, the data structure design etc. and creates a software development model. The design process translates requirements into a representation of the software that can be assessed for quality before code generation begins. The high level design function is undertaken by FireEye US where as low level design is performed by both FireEye US and FireEye India. Development of Software/C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el design √ √ Software development/Coding √ √ Testing & Quality assurance √ √ Maintenance √ √ Sales and marketing services FireEye India provides MSS to FireEye US and FireEye Ireland. Pursuant to the intercompany agreement, FireEye India has been appointed as nonexclusive marketing & support representative to market and promote the products within the specified territory. FireEye India promotes enquiries but does not accept orders on behalf of AEs. While providing pricing information, it disseminates only those prices as specified in the most current product price list for the territory as provided by AEs. On behalf of AEs, FireEye India solicits orders from the customers in the territory. All orders and modifications to orders were subjected to written acceptance by AEs. The MSS provided by FireEye India to AEs primarily comprise of the following activities - * Driving the marketing efforts to market and promote the products within the territory and generate leads that are passed on to distributors, resellers, and AEs. * Organizing programmes for advertising and promotion of the produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvise and guide FireEye India in relation to the activities performed in rendering the services. In addition, AEs will create market visibility for the services provided by FireEye India through various marketing techniques. It will carry out research and develops strategies and identify marketing opportunities. Some of the key responsibilities of AEs include: * Targeting new customers, * Services - Defining the kind of services offered; and * Promotion (Communication). AEs will carry strategic functions which include but are not limited to, assessments of marketing opportunities and target markets, intelligence gathering on customers and competitors, generating leads for possible sales and follow-up sales activity. Risks Market Risk Market risk arises when a firm faces adverse sales conditions resulting from either increased competition in the marketplace, declines in demand within the market, or the inability to market or position products for targeted customers. The primary market risk lies with FireEye US as FireEye India is solely responsible for provision of IT, ITeS and MSS services to its AEs. FireEye India does not bear any market risk as it is compensated at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, AEs could be subject to significant liability for personal injury. FireEye India provides IT services, ITeS and MSS to FireEye US based on its service agreement. The services rendered by FireEye India are based on the specifications received from FireEye US. FireEye India does not assume any risk with respect to the ultimate success or failure of the activities. In the event that FireEye US determines that the services provided by FireEye India do not meet the specifications prescribed and rework is required, the entire costs related to such rework are marked up by FireEye India and invoiced to FireEye US. Human Capital Risk: This risk is specific to the industries which require skilled manpower. Increase in the human capital turnover would result in excessive cost on account of training and retention to the companies and also loss of business in certain cases. FireEye India and the AEs both bear the normal risks related to human capital. The risks undertaken by FireEye India with respect to rendering services to its AEs has been summarized below: Summary of Risk Analysis Risk FireEye India AEs Market Risk Limited Yes Contract Risk &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thirdware Solution Ltd. c. Larsen & Toubro Infotech Ltd. d. Infosys Ltd. e. Nihilent Ltd. f. Cybage Software Pvt Ltd. g. Aspire Systems (India) Pvt Ltd. 7.2 Following comparables are also sought for exclusion under ITES segment. a. Tech Mahindra Business Services Ltd. b. Infosys BPM Ltd. c. SPI Technologies India Pvt. Ltd. d. Eclerx Services Ltd. e. Microland Ltd. (which was directed to be included by the DRP) 7.3 It is submitted that the turnover of the assessee from rendering SWD services is Rs. 55,50,28,698/-. This being so, the Ld.TPO ought to have applied the upper turnover filter, to reject companies generating turnover far in excess of the assessee, and thereby not being comparable. 7.4 It is submitted that, the Ld.TPO erred in not applying a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the assessee. It was submitted that application of turnover filter is a relevant criterion in choosing comparable companies. It is submitted that, the difference in the scale of operations have a direct impact on the profitability. Further, it is submitted that medium/large size organisation operating in a particular in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .Y. 2016-17. 3. Decision of Coordinate Bench of this Tribunal in case 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. 201617. 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able. 8.1 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lid comparable visà-vis assessee, who is a low risk entity 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 servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions or not. Such a view has been taken by coordinate bench of this Tribunal in the case of 24/7 Customer.com (P.) Ltd. vs DCIT reported in (2012) 28 taxmann.com 258 holding that high profit companies need not be excluded, as the Indian TP regulations adopt the Arithmetic mean, for determining the ALP. We have considered the submissions advanced by both sides in light of records placed before us. The main contention of the Ld.AR is that this assessee is having super profit in immediate two financial years and also having huge turnover is more that 200 crores in the assessment year under consideration. In our opinion, these facts to be examined by the Ld.AO/TPO. Accordingly, the issue remitted to the Ld.AO/TPO. If the functionality of the Cybage Software Pvt. Ltd. is not similar to the assessee and/or if the turnover is more that Rs.200 crores for the assessment year under consideration, it deserves to be excluded on any one of the above reasons. Accordingly this comparable is remitted back to the file of AO/TPO for fresh consideration. 8. In respect of the comparables sought for exclusion under ITES segment, we note that Coordinate Bench of this Tribunal in case of Mindteck Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c circumstance which is bound to have an impact on the margin of the company. 9.2 It is also submitted that the turnover of this comparable for F.Y. 2013-14 and 2014-15 is in excess of Rs. 200 crores and therefore the margins of the said year needs to be excluded for computing the average margin for comparability analysis. 9.3 On the contrary, the Ld.DR relied on the decision of Coordinate Bench of this Tribunal in case of Barracuda Networks India (P.) Ltd. vs. DCIT reported in [2021] 131 taxmann.com 337 wherein this comparable has been retained in the final list. We have perused the submissions advanced by both sides in the light of records placed before us. 9.4 We note that this comparable was retained in the decision of Barracuda Networks India (P.) Ltd. vs. DCIT (supra) by Coordinate Bench for satisfying the turnover filter however on functionality this comparable was not analysed. The figures reproduced hereinabove in respect of the revenue generated by this comparable in the proceedings 3 years reveals that this comparable has exceeded the turnover filter of 200 crores during FY 2013-14 and 2014-15 and the margin of this comparable in FY 2015-16 is (-)2.09%. There is a vid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis. The Amended Incometax Rules, 1962 ('Rules') via Notification 83 of 2015 which is the 16th amendment to the originally drafted Indian Tax Rules, 1962, are applicable for transactions undertaken on or after 1 April 2014 (i.e. from FY 2014-15 and onwards). These amended provisions are applicable only when the determination of 'ALP' is done under the MAM being resale price method ('RPM'), cost plus method ('CPM') or transactional net margin method ('TNMM'). The relevant provisions of Rule 10CA of the Rules, in so far as it relates to choice of comparable companies, read as follows: Computation of arm's length price in certain cases. 10CA. (1) Where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more than one price, then the arm's length price in respect of such inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in subrule (1) : Provided also that where the use of data relating to the current year in terms of the proviso to sub-rule (5) of rule 10B establishes that,- (i) the enterprise has not undertaken same or similar uncontrolled transaction during the current year; or (ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction, then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by such enterprise shall not be included in the dataset. (3) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year, then for the purposes of sub-rule (2) the weight ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average margin of 24.83% has been considered by the TPO. 18. The second proviso to Sec.10CA(2) of the Rules provides for a situation where R.S. Software (India) Ltd., has undertaken comparable uncontrolled transaction only in Financial year 2014-15 & 2015-16, then the weighted average of the two financial year 2014-15 and 201516 has to be computed in the manner laid down in Rule 10CA(3) of the Rules and the margin so arrived at has to be included in the dataset. 19. The third proviso to Sec.10CA(2) of the rules provides that if in the current year i.e., financial year 2015-16 if R.S. Software (India) Ltd., has not undertaken any uncontrolled comparable transaction then that company can never be considered for inclusion in the dataset. 20. The submission of the learned Counsel for the Assessee was that as per the proviso to rule 10CA(2) of the Rules, R.S. Software (India) Ltd., cannot be regarded as comparable company for Financial Year 2013-14 and 2014-15 because in those years, the turnover of this company was more than Rs. 200 crores. Therefore as per the first and second proviso to rule 10CA(2) of the Rules, the profit margin of this company for Financial year 2013-14 & 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions being compared". If by application of any filter an enterprise undertaking uncontrolled transaction similar to an international transaction is regarded as not being comparable in the earlier two years immediately preceding the current year and thereby attracting the provisions of rule 10B(2) or 10B(3) then the data for those years will not have any influence on the determination of transfer prices in relation to the transactions being compared for the current year and hence have to be ignored. On a harmonious reading of the provisions of rule 10CA, 10B(3) (4) of the Rules, we agree with the stand taken by the learned counsel for the Assessee. Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We hold accordingly." Applying the above principle, it is not appropriate to consider the margins for AY 2014-15 and 2015-16. Coming to the margin earned by this comparable for AY 2016-17, we have already noted herein above that it is (-) 2.09%. We have also noted in the preceding para that this comparable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts (enclosed as Annexure-A to this order), and therefore, the same cannot be relied upon. 9.9 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 functionality tests. 9.10 Microland Ltd. The Ld.AR submitted that DRP accepted the contentions of the assessee and directed the inclusion of Microland Ltd. in the final set. However before this Tribunal, the Ld.AR has submitted that this comparable has a turnover of more than 200 crores in the written submission filed. As in the preceding paragraphs, we have excluded various comparables that exceeded 200 crores turnover, this comparable also deserves to be excluded on the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion under MSS segment raised in Ground nos. 5.1 and 6.1 remanded to the Ld.AO/TPO for de novo consideration. 12. Interest on receivables 12.1 The Ld.AR submitted that the Ld.TPO proposed transfer pricing adjustment in respect of outstanding receivables in respect of trade creditors being the AEs by using 6 months LIBOR + 450 basis points and CUP as the most appropriate method. 12.2 The Assessee wishes to submit that the delayed/ outstanding receivables should not be considered as a separate international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of intercompany transactions of provision of services has been already determined and no separate adjustment is necessary in this regard. 12.3 The Ld.AR placed reliance on decision of Hon'ble Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. reported in (2017) 398 ITR 66, held that, no interest could have been charged as it cannot be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case referred to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 108, which dealt with question of law: (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' 3.5.6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. vs. 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." 12.8 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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