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TMI Blog2023 (1) TMI 1356X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is a captive service provider that renders technical assistance services in the areas of software development and application to its AEs, thus selection of comparables should match with functional profile of assessee. We therefore deem it appropriate to remit them to the Ld. AO/TPO. The Ld. AO/TPO shall look into the functional profile of the comparables and verify the same with that of the assessee. If they are functionally found to be similar with that of assessee, the same may be considered in accordance with law, considering the turnover limit of Rs. 1 to 200 Crores. Exclude Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Larsen Toubro Infotech Ltd., Mindtree Ltd., Nihilent Ltd., Persistent Systems Ltd., Wipro Ltd., Tata Elxsi Ltd., for exceeding turnover limit of Rs. 200 crores. Thirdware Solutions Ltd., to be excluded from the final list as present assessee before us is a captive service provider catering to the needs and at the direction its AE under the SWD segment. As there is no segmental details available, we cannot consider this company to be a good comparable as the entire revenue is catagorised under one head i.e., Revenue from Operation . Even on RPT filter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy services - We remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to consider the same in accordance with law. Non granting of WCA and risk adjustment to the assessee - As relying on HUAWEI TECHNOLOGIES INDIA (P.) LTD. [ 2018 (10) TMI 1796 - ITAT BANGALORE] AO was not justified in denying adjustment on account of working capital adjustment. In the light of the decision referred to above, the assessee is entitled to working capital adjustment. The assessee is directed to provide the working capital adjustment for year under consideration The TPO is accordingly directed to allow the same as per law. Risk adjustment , sought by the assessee, the details will have to be furnished before the Ld.AO/TPO by the assessee itself establishing the differences in the risk. Only then the same could be computed. We are therefore of the view that in the event the assessee is able to file documents/evidences to establish the differences in the risk, the Ld.TPO may consider it and compute is accordance with law. Appeal filed by the assessee stands partly allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... /ACIT, Circle - 6(1)(2), Bangalore. 8. Without prejudice to the above, the impugned final assessment order being signed by the non-existent authority namely 'DC/ACIT, Circle 6(1)(1), Bangalore' is invalid and bad in law. 9. Without prejudice to the above, as regards the draft assessment order dated 18.08.2021 being bad and non-est thus rendering final assessment order dated 23.06.2022 invalid: 9.1. The impugned draft assessment order passed by the Learned Assessing Officer, NaFAC is invalid and bad in law as the same is passed without issuance of intimation under Rule 5(1)(iii) of the Faceless Assessment Scheme, 2019 / section 144B(1)(iii) as it stood prior to its substitution vide Finance Act, 2022. 9.2. Without prejudice to the above, the impugned draft assessment order passed in defiance of the provisions of section 144B(1)(xvi)(b)/(xviii)(b)/(xxi)(b) as it stood prior to its substitution vide Finance Act, 2022 with effect from 01.04.2022 is bad in law. 9.3. Without prejudice to the above, the impugned draft assessment order passed by the Learned Assessing Officer, NaFAC is invalid and bad in law as the same is in substance a final assessment order. 10. As re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment services provided is not tenable: 12.1. The DRP is not justified in upholding the action of the TPO in making transfer pricing adjustment of Rs. 14,43,81,747/- with respect to software development services provided by the Appellant to its' AE. 12.2. The Lower authorities are not justified in recomputing the Appellant's margin incorrectly at 14.22% as against the correct margin of 16.21%. 12.3. The Lower authorities are not justified in considering the notional cost of Rs. 2,62,65,504/- towards ESOP issued by the parent entity as operating cost contrary to Rule 10B(e) of the IT Rules 1961, when the Appellant has not incurred the same and the same was not forming the part of the Appellant's profit and loss account for the FY 2017-18, more so when the same was not proposed in the show cause notice dated 16.07.2021. 12.4. Without prejudice to the above, the Lower Authorities are not justified in failing to allow deduction under section 37(1) in respect of the alleged ESOP cost of Rs. 2,62,65,504/- treated as a part of operating cost. 12.5 As regards rejection of companies selected by the appellant: 12.5.1. The Lower Authorities have erred in incorrect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justified in incorrectly rejecting Rheal Software Pvt. Ltd. as a comparable on the basis that the same "Failed persistent loss filter" contrary to facts of the case. 12.5.9. The Lower Authorities are not justified in arbitrarily rejecting Isummation Technologies Pvt. Ltd. selected by the Appellant by wrongly applying "positive net worth filter", when the said company meets the test of comparability and also satisfies the said filter. 12.5.10. The Lower Authorities are not justified in arbitrarily rejecting Evoke Technologies Pvt. Ltd. and Maveric Systems Ltd. selected by the Appellant as "Failed Export filter, hence rejected" without demonstrating the same and without proper verification of its annual reports, when the said companies satisfy the said filter. 12.6. As regards TPO's wrongful selection of certain companies 12.6.1. The Lower Authorities have erred in selecting 16 companies as comparable companies in Software Segment when the same fail the test of comparability. 12.6.2. The Learned TPO has erred in failing to deal with the objections of Appellant against the companies proposed by the Learned TPO and instead, he sought to deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25%. 12.6.10. Without prejudice to the above, the Lower Authorities have erred in wrongly selecting Threesixty Logica Testing Services Pvt. Ltd. as a comparable company when the same fails the export filter of 75% as adopted by the Appellant and accepted by the Learned TPO. 12.6.11. Without prejudice to the above, the Lower Authorities have erred in wrongly selecting Tech Mahindra Ltd, Larsen & Toubro Infotech Ltd., Infosys Ltd., Persistent Systems Ltd. and Mindtree Ltd. as comparable companies as they hold significant intangibles and claim significant brand value. 12.6.12. Without prejudice to the above, the Lower Authorities are not justified in considering the financial data of Elveego Circuits Pvt. Ltd. for the FY 2016-17 in computing the weighted average margins of the said company, considering the abnormally high margin for the said FY. 12.6.13. Without prejudice to the above, the Lower Authorities have erred in computing higher margins in respect of Black Pepper Technologies Pvt. Ltd., Aptus Software Labs Pvt. Ltd., Infobeans Technologies Ltd., Nihilent Ltd., Thirdware Solutions Ltd. and Cybage Software Pvt. Ltd. as against the margins determined by the Learned TPO i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd therefore reference was made to the Ld.TPO for determining the arms length price of the international transaction. 2.4 The Ld.TPO noted that assessee had following international transaction for the year under consideration. International Transaction Amount (in Rs. ) Provision of software development services 1,75,96,23,609/- 2.5. The Ld.TPO from the TP study observed that the assessee used TNMM as the most appropriate method by using OP/OC as PLI computing its margin at 16.21%. It used following 18 comparables having median to be 14.82 %. The assessee treated its transaction to be at arm's length. SI. No. Name of the Company Weighted Average of OP/OC(%) 1 Kals Information Systems Ltd. (11.95) 2 !summation Technologies Pvt Ltd 3.70 3 Evoke Technologies Pvt Ltd. 3.95 4 Lex Nimble Solutions Ltd 6.65 5 AXISCADES Engineering Technologies Ltd 7.75 6 Fractal Analytics Pvt Ltd 8.60 7 Harbinger Systems Pvt Ltd 10.27 8 Sven Technologies Ltd 14.76 9 Ness Technologies (India) Pvt Ltd. 14.87 10 ASM Technology Ltd 15.02 11 Cg-Vak Software and Exports Ltd 15.28 12 Sabre Travel Technologies Pvt Ltd. 15.76 13 Moodys Analytics Knowledge Services Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee as under: Sl.No. Particulars Amount 1 Employee benefit expense Rs. 1,17,00,02,709/- 2 ESOPs equivalent to Employee benefit expense (Assumed to be @20%) Rs. 23,40,00,541/- 2.7. On receipt on the transfer pricing order, draft assessment was passed by the Ld.AO on 18/08/2021 by proposing total addition in the hands of the assessee as per the transfer pricing order passed by the Ld.AO. 2.8. Aggrieved by the draft assessment order, the assessee field objections before the DRP. The DRP in respect of the various comparables sought for exclusion, upheld the order of the Ld.TPO and in respect of ESOP cost added to the operating margin held as under: "4.1 Panel: In a software industry, the major backbone is the employees. They directly contribute to the software development-part and thus to the revenue so earned by the company. Any expenditure incurred on employees is therefore part of operating cost only and we have no hesitation in confirming the stance taken by the TPO. Even the taxpayer is saying that the ESOPs are provided to' the employees to boost their morale and motivation . Thus, the taxpayer is also affirming the stand taken by the TPO that is ESOP is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessee that assessee has not incurred any cost and nothing has been debited to the profit & loss account of the assessee. 8.2 The Ld. AR submitted that the parent company has issued ESOPs/RSUs to the employees of Spinklr India Pvt. Ltd. However the parent entity has not recovered the cost of such benefits from the company. Accordingly no cost has been incurred by the company relating to ESOPs/RSU benefits and therefore has not considered the same as part of operating cost. The prevailing Accounting Standards also does not mandate the company to account such benefits in its books of accounts as there is no contractual liability nor any financial transaction took place. (a) As stated above the company has not reimbursed any cost of ESOP/RSU benefit provided to employees. (b) Since the company has not incurred any expenditure towards ESOP/RSU issued to the employees by Sprinklr Inc., such cost has not been considered into the operating cost. The perquisite value of issuing ESOP/RSU benefit has been calculated while deducting TDS on salaries paid to employees as per the provisions of Income Tax Act. 8.2. He also referred to the financial of the assessee for the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ications in the areas of Social Media Management Services and business consultancy services by Sprinklr India to Sprinklr US. • Pricing will be based on a Cost plus Formula which shall be Cost + mark-up as agreed upon for the services rendered. • Cost means all revenue expenses including foreign exchange gain/losses, depreciation and overhead costs, provision for gratuity, but excluding any service tax (of which input credit is taken or refund is claimed), income tax, wealth tax, gift tax and corporate dividend tax. For the purpose of calculation of costs, any foreign exchange losses would be considered for the purpose of mark-up while any foreign exchange fluctuation gain would be netted off from expenses while arriving at the cost base. Any service tax refund received for earlier periods which was part of the operating cost during such earlier period shall be reduced from the operating cost of the year of receipt of refund while arriving at the cost for the purpose of mark-up. • The full compensation and consideration for the Services and other obligations of Sprinklr India set forth shall be made in US Dollars. • Sprinklr US shall own all right, title ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et risk to a limited extent, since it provides services only to Sprinklr US and does not approach third pdrties to render services. Sprinklr India is compensated for work done even if the final product is unsuccessful, or if substantial re working is required to make the final product to meet market requirements. Nevertheless, Sprinklr India bears the market risk to an extent, associated with the IT industry. Foreign exchange risk Exchange rate risk relates to the potential variability of profits that can arise because of changes in foreign exchange rates and arises whenever the transacting currency of an entity is different from its functional currency. Sprinklr raises invoices on Sprinklr US for the provision of services in its operational currency itself which is the Indian Rupee. Therefore, Sprinklr India does not bear any risk of foreign exchange fluctuation Credit and collection risk The credit and collection risks arise when a firm supplies products or services to a customer in advance of the payment. In such a scenario the firm runs the risk that the customer will fail to make payment. As the AE directly transacts with the end customers, it bears the risks in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligrape Software Pvt. Ltd. h) Ace Software exports Ltd. i) Enlighten Software Services Pvt. Ltd. j) Sagar soft India Ltd., k) CES Ltd. (segmental) l) O F S Technologies Ltd. and m) A S M Technologies Ltd. 11.1. It is submitted that the comparables sought for inclusion, were not considered by the Ld.TPO/AO. We therefore deem it appropriate to remit them to the Ld. AO/TPO. The Ld. AO/TPO shall look into the functional profile of these comparables and verify the same with that of the assessee. If they are functionally found to be similar with that of assessee, the same may be considered in accordance with law, considering the turnover limit of Rs. 1 to 200 Crores. Accordingly, this ground raised by the assessee stands partly allowed 12. Grounds 12.6.1 to Grounds 12.6.3 are general in nature and do not require adjudication. 12.1. Ground no.12.6.4 raised by assessee seeking exclusion of certain comparables. The Ld.AR submitted that, following comparables do not fulfil the criteria of turnover filter of less than 200 crores and therefore deserves to be excluded. 1) Exilant Technologies Pvt. Ltd. -Rs. 332.51 Crs. 2) Tech Mahindra Ltd. -Rs. 23,661 Crs. 3) Larsen & T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiplier of 10 times the turnover was rejected by the ITAT in case of Northern Operating Services (supra) and Autodesk India (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263 (Bang. - Trib.). It was further submitted that in several cases where turnover was between Rs. 100 crore and 200 crore, the ITAT had directed the companies having turnover exceeding Rs. 200 crore to be excluded from comparable list on account of turnover filter. The details of the said case are as follows:-- Sl. No. Citation Turnover of the tested party (Rs.) 1. Autodesk India (P.) Ltd. v. DCIT (2018) 96 taxmann.com 263 (Bang-Trib.) 2. Tavant Technologies India (P.) Ltd. v. DCIT (2020) 120 taxmann.com 122 (Bang-Trib.) 100,18,13,973 3. Micro Focus Software India (P.) Ltd. v. ACIT (2020) 113 taxmann.com 244 (Bang-Trib.) 154,06,39,918 4. Dell International Services India (P.) Ltd. v. DCIT (2018) 89 taxmann.com 44 (Bang-Trib) 109,98,69,000 5. Zynga Game Network India (P.) Ltd. v. DCIT (2020) 119 taxmann.com 403 (Bang-Trib) 109,99,71,917 6. Sami - Sabinsa Group Ltd. (TS-183-ITAT-2022 (Bang)-TP) 165,58,22,100 11. We have heard rival submissions and perused the material on record. At th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Operating cost OP/OC 1 Accentia Technologies Ltd. 1,069,026,524 82,93,91,898 28.98% 2 Acropetal Technologies 494,399,332 389706574 26.86% 3. Cosmic Global Ltd. 62,496,615 5,69,15,360 9.81% 4. e4e Healthcare (capitaline) 613,160,587 54,56,25,872 12.38% 5. ICRA Online Ltd. (seg) 156,691,000 11,67,49,267 34.21% 6 Jeevan scientific Technology Ltd. 1,721,400,000 1,00,86,52,592 70.66% 7 Infosys B PO Ltd. 11,291,147,909 9,57,73,24,546 17.89% 8. Jindal Intellicom (capitaline) 390,358,799 35,12,69,641 11.13% 9. Mindtree Ltd. (seg.) 5,653,000,000 5,10,39,05,999 10.76% 10 iGate Global Solutions Ltd. 11,845,540,000 9,47,11,65,000 25.07% He submitted that if such criterion is applied, then that would be the proper basis for excluding companies for the purpose of comparability based on turnover. 16. The ld. Counsel for the assessee, on the other hand, submitted that the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) merely dismissed the appeal of assessee on the ground that no substantial question of law arises for consideration. In particular, he drew ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables which absolutely is a decision to be taken by the learned Tribunal as last fact finding authority. This view is supported by our judgment dated 25-8- 2018 on Softbrands case (supra), which we find it appropriate to quote hereunder to its relevant extent:-" 17. He submitted that the question of law which the assessee sought to raise before the Hon'ble High Court was justification for excluding Mercury Outsourcing Management Ltd. as a comparable company. It is in that context that the aforesaid decision was rendered by the Hon'ble High Court. He pointed out that the Tribunal in excluding Mercury Outsourcing Management Ltd., had taken a view that its turnover was small compared to the assessee's turnover and therefore not comparable, even if the tolerance range of turnover of 10 times on both the sides of assessee's turnover is applied. There is no positive finding by the Tribunal that the company can be excluded for the purpose of comparability on the basis of turnover, only if the turnover is 10 times on both the sides of assessee's turnover. On the conclusions of the Tribunal, the Hon'ble High Court only held that it is reasonable and deserves t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing were the relevant observations of the Tribunal:- "17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5-8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Ld.AR submitted that, in the absence of segmental details, this company cannot be selected. He relied on the decision of coordinate bench of this Tribunal in case of Yahoo Software Development India Pvt. Ltd vs. JCIT reported in (2020) 115 taxmann.com and 3DPLM Software Solutions Ltd. vs. DCIT reported in (2014) 42 taxmann.com 333. 12.4.1. The Ld.DR placed reliance on the observations of the authorities below. We have perused the submission advanced by both sides in light of records placed before us. 12.4.2. We note that the revenue recognition of this company is from consulting, design, implementation and support of Enterprise Application and Cloud Applications and other related serviced. It is noted that this company also earns revenue from sale of licence and subscription for software products. These details are available at page 614 of paper book in the Annual report of this company. The Present assessee before us is a captive service provider catering to the needs and at the direction its AE under the SWD segment. As there is no segmental details available, we cannot consider this company to be a good comparable as the entire revenue is catagorised under one head i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2017-18. In the event, there are any new materials obtained by the Ld.TPO, the same must be shared with the assessee. After considering the objections and scrutinising the functional similarities, the Ld.TPO shall then consider this comparable if at all it fits into all the necessary criteria. We also note that, merely because this company is into software development, cannot be a reason to consider its inclusion. Needless to say that proper opportunity of being heard must be granted to assessee. B. Tech Mahindra Ltd. This company has been held to be not functional with that of assessee as its RPT filter is 33.84%. The Ld.AR submitted that, this comparable has been selected by the Ld.TPO, only for the reason that it is into software development. The Ld.AR further submitted that, this comparable is into sale of products as well as sale of services which is evident from page 574 of the paper book and it has a turnover of more than 1000 crores. It is submitted that this comparable fails the turnover filter and deserves to be excluded from the final list. B.1. The Ld.DR relied on the orders passed by authorities below. B.2. Admittedly, the turnover of this comparable is more tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with law. Accordingly this company is remanded to the Ld.AO for re adjudication. E. Black Pepper Technologies Pvt.Ltd E.1. The Ld.AR submitted that this company earns revenue for Information technology services and Software development services for which segmental details not available. He referred to Annexure 62 placed at page 607-608 of the paper book. E.2. On verification of the above pages we note that the, annexure is only Note No.18 forming part of the financial statement. No other details from the annual report has been filed in respect of this company. E.3. We therefore remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to consider the same in accordance with law. Accordingly this company is remanded to the Ld.AO for re adjudication. F. Aptus Software Labs Pvt.Ltd F.1. The Ld.AR submitted that this company earns revenue for Information technology services. He referred to Annexure 57 placed at page 591 of the paper book. F.1. On verification of the above pages we note that the, annexure is only NIC details. No other details from the annual report have been filed in respect of this company. F.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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