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TMI Blog2023 (10) TMI 251X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in respect of delayed receivables, the aggregate of which is Rs. 6,02,73,415/-. 3. BRIEF FACTS: (i) The Assessee is a subsidiary of Arm Limited, UK. The Assessee is engaged in providing contract software development services ('SWD services') and MSS to its AEs. (ii) During the previous year relevant to the assessment year 2018-19, the relevant international transactions that took place between the Assessee and its AE was the provision of SWD services by the Assessee at a price of Rs. 4,36,29,32,202/- and provision of MSS at a price of Rs. 4,35,41,366/-. The Assessee was compensated on a cost-plus basis, and in the TP study maintained by the Assessee, the Assessee concluded the international transactions as being at arm's length. (iii) On a reference being made by the Assessing Officer, the TPO passed an order dated 29.07.2021 determining a TP adjustment of Rs. 30,48,82,625/- in respect of the SWD services segment, adjustment of Rs. 47,39,738/- in respect of the MSS segment and an adjustment of Rs. 2,84,48,899/- being notional interest in respect of the delayed receivables. (iv) Initially, a draft assessment order dated 30.09.2021 came to be passed by the Assessing Officer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Comparables selected 8 13 Period for which data used FYs 2015-16 to 2017-18 FYs 2015-16 to 2017-18 A.3. Filters applied by Assessee in its TP study: Step Description 1. Companies for which relevant financial data was available for FY 2016-17 and 2017-18 - selected. 2. Companies having positive sale in the current financial year, i.e. FY 2018-19 or the year immediately preceding the current year, i.e. FY 2017-18 - selected. 3. Companies which are independent, non-governmental, non-cooperatives - selected. 4. Companies having sales of less than INR 1 crore - rejected. 5. Companies with average positive net worth in the current financial year or the year immediately preceding the current year- selected. 6. Companies primarily involved in service activity - selected. 7. Companies clearing quantitative and qualitative criteria - selected. A.4. Comparables selected by Assessee and the range of weighted average of OP/TC of comparable companies: Sl. No. Name of the company Average OP/TC (in %) 1. MCI Management (India) Pvt. Ltd. 0.41 2. Netlink Solutions (India) Ltd. (Info Media) 2.26 3. Kestone Integrated Marketing Services Pvt. Ltd. (Marketing and S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Taxpayer operating cost Rs. 4,03,90,434/- Taxpayers operating profit Rs. 33,14,115/- Taxpayers PLI 8.21% 35th Percentile Margin of comparable set 17.11% Adjustment required (if PLI<35th Percentile) Yes Median margin of comparable set Rs. 19.94/- Arm's length price Rs. 4,84,44,287/- Price received 4,37,04,549/- Shortfall being adjustment u/s. 92CA 47,39,738/- 3.1 DIRECTIONS ISSUED BY THE DRP: Briefly, the directions issued by the DRP are as follows: (i) The DRP accepted the Assessee's contention that Focus Suites Solutions & Services Ltd., Egon Zehnder International Pvt. Ltd. and Adfactors P R Pvt. Ltd. are to be excluded. (ii) The DRP upheld the TPOs inclusion of Axience Consulting Pvt. Ltd. as a comparable. (iii)The DRP directed verification and adoption of correct figures as per annual report of Scarecrow Communications Ltd., Ugam Solutions Pvt. Ltd., Confluence Integrated Services Pvt. Ltd, Dun & Bradstreet Information Services India Pvt. Ltd., Pressman Advertising Ltd., Lintas India Pvt. Ltd., Majestic Research Services & Solutions Ltd. and Cheil India Pvt. Ltd., and accordingly compute PLI margin. (iv) All other submissions of the Assessee came t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 3.1 Rejecting the TP documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence, on the grounds that the Assessee did not apply appropriate filters and accordingly contended that the data used in computation of arm's length price (ALP') is not reliable or correct. 3.2. Rejecting the comparability analysis carried out by the Appellant in the TP documentation and in conducting a fresh comparability analysis for the MSS segment based on the application of modified filters in determining the ALP. 3.3. Using data, which was not contemporaneous, and which was not available in the public domain at the time of preparing the TP documentation. 3.4. Conducting a fresh comparability analysis by disregarding certain filters applied by the Appellant in the TP documentation as below: a) Rejection of companies having research & development (R&D') expenses greater than 3% o sales b) Rejection of companies with net fixed assets to sales greater than 200%. 3.5. Applying / modifying the following filters while undertaking comparability analysis: a) Rejection of companies with the different financial year ending b) Reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l list of comparables. 6.2.4 Without prejudice, the Assessee sought the re-computation of margin of Scarecrow Communications Ltd. The ld. A.R. submitted that the correct weighted average margin of this Company is 9.26% as against 10.80%, as computed by the TPO. 6.3. The ld. D.R. relied on the orders of lower authorities. 7. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in assessee's own case for the assessment year 2016-17. The Tribunal vide order dated 30.8.2022 in IT(TP)A No.235/Bang/2021 held as under: "29. Scarecrow Communications Ltd. It is submitted that this company has operated without having a single employee during the financial year 2015-16. The company acts as an intermediary in providing its services which is contrary to the activity undertaken by the assessee as a marketing support service provider. The company having operated without a single employee shows that the company is not rendering any services on its own and is therefore not comparable to the assessee. Further the revenue earned is in respect of different types of services which are not comparable to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Assessee. 8.2. The ld. D.R. relied on the orders of lower authorities. 9. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Tivo Tech Pvt. Ltd. in IT(TP)A No.862/Bang/2022 for the assessment year 2018-19 vide order dated 30.3.2022, wherein held as under: "9(i) Axience Consulting Pvt. Ltd. It is submitted that Axience is engaged in providing consultancy and advisory services in the field of Finance, Market Research and Business Administration which are different from the services provided by the assessee under the MSS segment. Further, from the Company's website, it is clear that it is engaged in financial analytics and research, business intelligence, business and market research and strategic human capital services, which services are more in the nature of knowledge process outsourcing services ('KPO') rather than marketing services. Reliance in this regard is placed on the decision of coordinat bench of this Tribunal in the case of Lloyds Offshore Global Services (P.) Ltd. v. DCIT reported in (2023) 146 taxmann.com 226, wherein on functional dissimilarly for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities undertake by MSS providers such as the Assessee. Further, the Company is not a pure service provider as it also offers technology products, unlike the Assessee. It is also submitted that the Company earns revenue from subscription or retainership arrangements as well as royalty income which is in contrast to the Assessee's business model under MSS segment. It is submitted that no segmental details are available as regards to various suites of services provided by the Company. 10.1 Reliance in this regard is placed by the ld. A.R. on the Order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022, wherein in the case of a similarly placed assessee for the assessment year 2018-19, this company came to be excluded. 10.2 The ld. D.R. relied on the orders of the lower authorities. 11. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Tivo Tech Pvt. Ltd. cited (supra) wherein the Tribunal held as under: "9(ii) It is submitted that Dun & Bradstreet is engaged in providing services in the nature of credit reporting, ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " 11.1 In view of the above order of the Tribunal on the basis of functionality, we direct the AO/TPO to exclude this company M/s. Dun & Bradstreet Information Services India Pvt. Ltd. from the list of comparables. (D) Pressman Advertising Ltd.: Functionally dissimilar: 12. The ld. A.R. submitted that the Company is engaged in providing advertising services and are into selling space for advertising in print media and on a perusal of the Company's annual report it is evident that revenue earned during the relevant AY 2018- 19 is solely from advertising services, which cannot be considered as comparable to the Assessee. 12.1 Reliance in this regard is placed by the ld. A.R. on the Order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022, wherein in the case of a similarly placed assessee for the assessment year 2018-19, this company came to be excluded. Further, reliance in this regard is placed on the decision of this Tribunal in case of Radisys India Ltd. v. DCIT, (2022) 145 taxmann.com 294 (Bang-Tri) for the AY 2017-18 where in the case of an assessee engaged in providing similar service as the Assessee, this Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company's business activity falls within a single business segment i.e. advertising, selling of space for advertisement in print media and public relations and hence no additional disclosure other than those made in the financial statements are required under indas 108 "operating segments". Thus it is clear that under the advertising services, this company also earns revenue from selling of space for advertisement in print media and public relations for which no bifurcation has been provided. In any event, advertisement services provided by this company also cannot be compared to the services rendered by assessee to its AE under the marketing support services which is limited to presale support activities. Accordingly, we direct this comparable to be excluded from the final list." 13.1 In view of the above order of the Tribunal on the basis of functionality, we direct the AO/TPO to exclude this company M/s. Pressman Advertising Ltd. from the list of comparables. (E) Lintas India Pvt. Ltd.: Functionally dissimilar 14. The ld. A.R. submitted that Lintas is engaged in providing advertising services and as per its revenue recognition policy, the company earns revenue from adve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice & Solutions Ltd. ('Majestic'): Functionally dissimilar: 16. The ld. A.R. submitted that the company is engaged in market research services. It offers customer service evaluation, mobile analytics, eye tracking, data analytics etc. It offers a suite of customized solutions that cater to business at various stages of product development or launch across the product life cycle. It offers a wide range of qualitative and quantitative research services. It is involved in high-end services like research services, data analytics, product development and testing. market scoping etc. 16.1 The ld. A.R. further submitted that the Company focuses on market research, advertising research, and brand research and to deliver powerful insights into the effectiveness of branding, advertising and consumer choices relies on high level technologies such as eye tracking, mobile analytics, video analysis, facial recognition, digital tracking, online communities, neuroscience, emotional analysis, automated audience measurement, sensory sciences, etc., which is functionally different as compared to the Assessee. 16.1.1 The ld. A.R. placed reliance in this regard on the Order dated 30.03.2023 passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omated audience measurement, sensory sciences, etc., which is functionally different as compared to the Assessee. Reliance is placed on following decisions of coordinate bench of this Tribunal: - Lloyds (supra), wherein for the assessment year 2016-17, this company was excluded; - Epson India Pvt. Ltd. v. DCIT reported in (2022) 144 taxmann.com 63, wherein for the assessment year 2016-17, this company was excluded; and - Radisys India Ltd. (supra), wherein for the assessment year 2017- 18, this company was excluded. Therefore, it is submitted that the company ought to be excluded from the final list of comparables. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us. The annual report of the company placed at page 5353 reveals this company is engaged in digital marketing research. At page 5391 in the company overview, we note that this company deliver critical media and marketing information, analytics. Further, it is noted that this company is also doing significant investments in resource and associates all over India supported by strength of Majestic MRSS. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022, wherein in the case of a similarly placed assessee for the assessment year 2018-19, this company came to be excluded. In view of the above, the ld. A.R. submitted that the companies ought to be excluded from the final list of comparables. 18.2 The ld. D.R. relied on the orders of the lower authorities. 19. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Tivo Tech Pvt. Ltd. cited (supra) wherein the Tribunal held as under: "9(vi) It is submitted that Cheil is engaged in providing digital solutions, analytical solutions (data analytics) which are not akin to the services rendered by the Assessee. It derives its income primarily from advertising, communication, publicity and merchandising and undertakes consultancy services and training. It is submitted that an advertising agency undertakes functions such as attracting clients who are advertisers, developing an advertising strategy, creation of advertisements by a creative team consisting of writers, desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en though they are functionally comparable to the Appellant and pass all the filters applied by the learned TPO. a) MCI management India Pvt. Ltd b) Kestone Integrated Marketing Services Pvt Ltd - Marketing and sales services segment c) Fusion Events Ltd. d) Cheers Interactive India Pvt. Ltd. e) Deepali Designs & Exhibits Pvt. Ltd. f) Netlink Solutions (India) Ltd. - Info Media segment" 20.1 In this ground, assessee pressed only two comparables which are as follows: a) MCI Management India Pvt. Ltd. b) Kestone Integrated Marketing Services Ltd. - Marketing and sales services segment. (A) MCI Management India Pvt. Ltd. 20.1.1 The ld. A.R. submitted that the TPO rejected the above comparable on the ground that it did not form part of the search matrix (page 392). The DRP upheld the rejection of the comparables on the ground that the Company is a globally renowned event management company which is engaged in providing AMC, PCO, PIP, Meeting and Event services. It is submitted that the companies rendering comparable services cannot be rejected only on the ground that they are large event management companies, which is purely ad hoc and arbitrary. She submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estone") 22. The ld. A.R. submitted that the TPO rejected the above comparable on the ground that it did not form part of the search matrix (page 392). The DRP, inspite of noting that the Company is predominately providing integrated business marketing and sale services, upheld the rejection of the comparables on the ground that the above functions of the Company is not similar to the Appellant. She submitted that this ground for rejection of the Company is ad hoc and arbitrary. Further, she submitted that the company passes all the filters applied by the TPO. 22.1 The ld. A.R. further submitted that the DRP's action of upholding the company's exclusion solely on the ground that the company did not feature in the TPO's search matrix is erroneous. Reliance in this regard is placed on the order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022 for assessment year 2018-19 and Prism Networks Private Limited v. ACIT, Order dated 11.02.2022 passed by this Tribunal in IT(TP)A No. 349/Bang/2021]. In view of the above, she submitted that the companies ought to be included in the final list of comparables. 22.2 The ld. D.R. re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. Ground No.3.9 of the assessee's appeal is reproduced as under: "3.9. Computing the mark-up on operating cost of certain comparable companies by not considering expenses such as provision for doubtful debts, provision for warranties, miscellaneous expenditure etc.. as operating in nature on the premise that they are not routine operating costs." 25.1 We direct the AO/TPO to compute the correct operating margin as per the direction of the ld. DRP. 26. Ground Nos.4 & 5 of the assessee's appeal are reproduced as under: "Working capital adjustment 4. On the facts and in the circumstances of the case and in law. the learned Panel / AO / TPO erred in not providing working capital adjustment for determining the ALP by relying on the judicial precedents based on a fact pattern, which is not applicable to the Appellant. Risk adjustment 5. On the facts and in the circumstances of the case and in law, the learned Panel I AO / TPO erred in ignoring the limited risk nature of the services provided by the Appellant and thereafter selecting high profit-making entrepreneurial companies as comparable. While doing so. the learned Panel / AO / TPO has erred in not providing an appropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outstanding receivables relates to the SWD and MSS rendered by the Assessee, the Assessee submits that the determination of ALP of the outstanding receivables is not warranted as the same is subsumed in the ALP of the principal transaction. The Assessee also submitted that the outstanding receivables cannot be made subject matter of a TP adjustment as the same is not covered under the provisions of Section 92B of the Act. 27.1.1 The ld. A.R. placed reliance in this regard on the following decisions: (i) Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 (Bangalore-Trib)): The appeal against the above order came to be dismissed by the Hon'ble High Court of Karnataka in PCIT and anr. V. Avnet India (P.) Ltd. (Order dated 01.08.2018 passed by the Hon'ble High Court of Karnataka in ITA No. 358/2016). (ii) Goldstar Jewellery Ltd. v. JCIT (reported in [2015] 53 taxmann.com 353 (Mumbai-Trib)). (iii) Kusum Healthcare Pvt. Ltd. v. ACIT ([2015] 62 taxmann.com 79 (Delhi - Trib.)). This decision came to be upheld by the Hon'ble Delhi Court in PCIT v. Kusum Healthcare Pvt. Ltd. ([2017] 398 ITR 66 (Delhi)). 27.1.2 In view of the above, she submitted that the delayed re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Special Bench of Kolkotta Tribunal in case of in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15- 7-2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 9.10 Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loan and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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