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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 ..... d final assessment order is invalid and bad as the same was passed by the DCIT-6(1)(1) when the jurisdiction to pass the same vested with National E-Assessment Centre (NeAC)/ National Faceless Assessment Centre (NaFAC) and finally with the Assessment Unit under section 144B(1)(xxix) of the IT Act as substituted by Finance Act, 2022 with effect from 01.04.2022. 4. Without prejudice to the above, the impugned final assessment order being passed with the prior approval of the Range Head vide letter in F. No./Scr/Addl.CIT/R- 6(1)/21-22, is invalid and bad in law when such approval is not required to be obtained as per the provisions of the Act. 5. Without prejudice to the above, the impugned final assessment order passed by the DCIT-6(1)(1) is invalid and bad as there is no transfer of case from the NeAC/NaFAC/Assessment Unit to the DCIT-6(1)(1) in accordance with the provisions of section 144B(8) and the transfer of case, if any, under section 144B(8) has not been communicated to the Appellant. 6. Without prejudice to the above, the transfer of case, if any, from NeAC/NaFAC/Assessment Unit to the DCIT-6(1)(1) is not a valid transfer under section 144B(8) as such transfer has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CA by the AO, Technical Unit on 23.06.2021 is barred by limitation under section 153(1) read with section 3(1)(a) of the TOLA Act read with the Notifications issued thereunder, thus rendering the impugned assessment order time barred. 10.4. Without prejudice to the above, the TPO's order is invalid and without jurisdiction as the reference made under section 92CA by the AO, Technical Unit on 23.06.2021 is bad when the TP proceedings initiated as a result of earlier reference on 14.05.2020 was pending and was not taken to its' logical end. 10.5. Without prejudice to the above, the TPO's order is invalid and bad in law as the same has been signed by a non-existent authority namely 'DC/ACIT, Transfer Pricing - 2(1)(1), Bangalore'. 10.6. The TPO has erred in computing the incorrect margins of the Appellant company and the comparable companies. 11. As regards the DRP directions dated 06.05.2022: 11.1. The Honourable DRP is not justified in failing to consider 21 companies selected by the Appellant by recording a perverse finding in paragraph 3.3 in respect of objections noted in paragraph 1.3 and 1.4 at pages 12 and 13 that the Learned TPO has given reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected by the Appellant vide the Fresh Study filed vide submissions dated 21.07.2021 vide response dated 21.07.2021, when the same meet the test of comparability. 12.5.4. The Lower Authorities have erred in rejecting CG-VAK Software & Exports Ltd. on the basis that the company is also earning revenue from ITeS Segment and that no segmental details are available, when the said company meets the test of comparability and without appreciating that the revenue from ITeS for FY 2017-18 is only 3.82% of the total revenue from operations. 12.5.5. The Lower Authorities are not justified in arbitrarily rejecting E-Zest Solutions Ltd. as a comparable without examining it's functionality contrary to proviso to Rule 108(5) of the IT Rules. 12.5.6. The Lower Authorities are not justified in arbitrarily rejecting the above company selected by the Appellant by adopting an illegal filter "Data not available in database", without raising any objection on Appellant's search criteria and keywords used for search in his order, thus taking the Appellant by surprise and denying him the opportunity of defending his search criteria and key-words. 12.5.7. The Lower Authorities are not justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veego Circuits Pvt. Ltd., Mindtree Ltd., Nihilent Ltd., Aptus Software Labs Pvt. Ltd., Persistent Systems Ltd., Threesixty Logica Testing Services Pvt. Ltd., Infosys Ltd. and Cybage Software Pvt. Ltd. as comparable companies when the same fail the test of comparability. \12.6.6. The Lower Authorities have erred in wrongly selecting Tech Mahindra Ltd., Larsen & Toubro Infotech Ltd., Great Software Laboratory Pvt. Ltd., Black Pepper Technologies Pvt. Ltd., Mindtree Ltd., Aptus Software Labs Pvt. Ltd., Wipro Ltd., Tata Elxsi Ltd., Thirdware Solutions Ltd. and Infosys Ltd. as comparable companies when the same are engaged in multiple activities and segment information is not available. 12.6.7. Without prejudice, the Lower Authorities have erred in wrongly selecting Exilant Technologies Pvt. Ltd. as a comparable company when the same fails the different year end filter as adopted both by the Appellant and the Learned TPO. 12.6.8. Without prejudice, the Lower Authorities have erred in wrongly selecting Tech Mahindra Ltd. and Exilant Technologies Pvt. Ltd., when the same were excluded from the final list of comparable companies for the preceding AY 2017-18 by the Learned TPO after dul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a captive service provider does not carry out any marketing functions as compared to the other companies. 12.10. Without prejudice to the above the Lower Authorities have erred in incorrectly computing the margins of the companies selected by them. 13. The Learned Assessing Officer is not right in law and on facts in levying interest under section 234B. 14. Without prejudice to the above, the Learned Assessing Officer is not justified in levying the aforesaid interest under section 234B, when the impugned disallowance is not tenable." 2. Brief facts of the case are as under: 2.1 The assessee is a wholly owned subsidiary of Sprinklr US. The assessee provides software development services including coding, documentation and quality assurance and testing of the software modules which are required to be developed as per the specifications discussed and provided by Sprinklr US's product management team who is responsible for contacting customers and understanding their requirements. 2.2 The assessee filed its return of income on 16/10/2018 declaring the total income of Rs. 29,80,08,850/- for the impugned A.Y. 2018-19. 2.3 The assessee's case was selected for scrutiny through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. 25.82 17.27 8.50 17.17 4 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57 5 Larsen & Toubro Infotech Ltd. 20.78 19.21 17.14 18.94 6 Great Software Laboratory Pvt. Ltd. 17.88 , 23.87 I 17.31 19.73 7 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 20.19 8 Black Pepper Technologies Pvt. Ltd. 9.63 13.84 24 83 20.62 9 Mindtree Ltd. 26.11 20.12 18.41 21.21 10 Aptus Software Labs Pvt. Ltd. 27.67 24.83 15.16 22.70 11 Acewin Agriteck Ltd. 26.54 23.23 22.73 24.51 12 Persistent Systems Ltd. 23.9 24.44 26.94 24.98 13 Wipro Ltd. 27.27 26.38 27.03 26.83 14 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24 15 Infobeans Technologies Ltd. 34.98 23.89 27.82 28.52 16 Nihilent Ltd. 24.46 30.8 35.11 30.17 17 Thirdware Solution Ltd. 30.18 33.36 29.27 30.94 18 Threesixty Logica Testing Services Pvt. Ltd. 48.46 36.63 26.2 36.58 19 Infosys Ltd. 38.29 38.79 35.27 37.38 20 Cybage Software Pvt. Ltd. 62.04 61.40 47.78 56.81 35th percentile 20.19 Median 23.60 65th percentile 26.83 2.6. The Ld.TPO further noted that the assessee treated the ESOP cost as non-operating. He accordingly called upon assessee to furnish the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not require adjudication. 4. The Ld.AR submitted that, in Ground no.3, the assessee is raising legal issue regarding the validity of the assessment order passed by the assessment unit. He submitted that, the jurisdiction to pass the assessment vested with National e- Assessment Centre / National Faceless Assessment Centre w.e.f. 01/04/2022. The Ld. AR argued that the present assessment order passed by the Ld. DCIT, Circle 6(1)(1) is bad in law. 4.1. On the contrary, the Ld. DR filed a report from the field wherein there is a change of jurisdiction and certain posts were diverted / abolished for creation of the e-assessment hierarchy. The Ld.DR submitted that, this objection of the Ld.AR cannot be entertained due to this technical reason. For the sake of convenience, the report filed by the Ld. DR dated 18/10/2022 is scanned and reproduced herein below. On perusal of the above report, we do not find any strength in the argument of the Ld.AR and therefore Ground no.3 raised by assessee stands dismissed. 7. The Ld.AR then submitted that the Ground nos. 4-10 are also on similar issues. As we have already considered the report, these issues raised by the assessee stands dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egards to the financials of the assessee. The Ld. AO/TPO is directed to consider the issue in accordance with the view taken by this Tribunal in case of Radysis India vs. DCIT reported in (2022) 145 taxmann.com 294. Accordingly this issue raised by the assessee stands allowed for statistical purposes. 10. The assessee in grounds 12.5 & 12.6 is seeking inclusion/ exclusion of certain comparables. 10.1 Before we undertake the comparability analysis it is sine qua non to understand the FAR of the assessee under the SWD segment for the year under consideration, which is as under: Functions Performed: Services Provided Sprinklr India provides the following two types of services to Sprinklr Inc., USA: * Software Development services Sprinklr India has entered into a Master Agreement with Sprinklr US as per which, Sprinklr India is remunerated on a cost plus 16 percent mark-up for the services rendered. Some of the features of the said agreement are enumerated below: * The agreement is effective from April 1, 2016, and shall continue until One Hundred & Twenty (120) months after the Effective Date ("Initial Term"). Thereafter, this Agreement may be renewed at CLIENT's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the other unit in Bengaluru, which handles all other functions such as quality control & assurance, monitoring, maintenance, administration etc." Assets employed The assets employed by Spinklr as on 31 March 2018 (after depreciation) are as follows: Nature of assets Cost (Rs.)WDV (Rs.) Tangible Assets Motor Vehicles 15,81,433 Nil Leasehold Improvements 8,03,59,793 1,47,83,091 Furniture & Fixtures 2,52,20,026 85,87,629 Office Equipment 1,46,05,820 45,38,501 Computers 15,66,78,226 3,30,00,800' Intangible Assets Software 1,70,268 24,166 Total 27,86,15,566 6,09,34,188 Sprinklr India does not own any significant intangible assets as on 31.3.2018. Risk Assessment Business Risks Briefly summarized below are some of the key business risks, which are applicable to Sprinklr and its Group Companies in relation to the provision and receipt of services undertaken by Sprinklr: Business/ Market risk Market risk arises when a company is subject to adverse sales conditions due to either increased competition in the marketplace, demand supply, etc. Sprinklr US is responsible for approaching and marketing the products/ solutions to final customers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Sprinklr India is compensated for work done even if there are any defects, or if substantial re-work is required. Therefore, Sprinklr India does not bear the service liability risk. Product liability risk Product liability risk refers to the risk associated with failure of a product or the possibility of facing legal action from customers due to defects in the products provided. All the IPR in the products are owned by Sprinklr US and bears the product liability risk of the non-performance of the product/solution sold to the customer. Risk summary Briefly tabulated below are the risks assumed by Sprinklr and its AEs in relation to the activities undertaken by Sprinklr: Type of risks Level of risk Business/ Market risk Limited Foreign exchange fluctuation risk No Credit and collection risk No Service liability risk No Product liability risk No From the above, it is clear that the assessee is a captive service provider that renders technical assistance services in the areas of software development and application to its AEs. Based on the above, we under the functional compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been excluded for failing the turnover filter. The Ld.AR submitted that, the assessee has turnover of Rs. 175 crores, whereas, the above comparables have a turnover of more than 200 crores. This Coordinate Bench of this Tribunal in assessee's own case observed as under: 7. In the above ground, the assessee is seeking application of upper turnover filter and thereby exclusion of following seven companies:- (i) Larsen & Toubro Infotech Ltd. (ii) Nihilent Ltd. (iii) Persistent Systems Ltd. (iv) Tata Elxsi Ltd. (v) Infosys Ltd. (vi) Mindtree Ltd. (vii) Cybage Software Pvt.Ltd. 8. According to the learned AR, since a lower turnover filter has been applied, the TPO/DRP ought to have applied a higher turnover filter to exclude the above seven companies. The DRP has rejected the objections of the assessee by observing that turnover does not have an influence on the margins of the company. The learned AR has placed reliance on the order of the Bangalore Bench of the Tribunal in the case of BORQS Software Solutions (P.) Ltd. v. Asstt. CIT [2022] 135 taxmann.com 337 and Dy. CIT v. Northern Operating Services [2019] 108 taxmann.com 451 (Bang. - Trib.). 9. The learned D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the companies not falling within the range, i.e, companies having turnover less than Rs. 1 crore or turnover more than Rs. 200 crores deserves to be excluded. The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions (P.) Ltd. (supra) has considered various judicial pronouncements on this issue including that of the Hon'ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that application of turnover filter is justified on the basis of classification of companies as per the report of Dun and Bradstreet. As regards the specific plea of the learned DR that if turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company, we find this plea was rejected by the Bangalore Bench of the Tribunal in the case of Northern Operating Services (supra). The relevant submission of the parties and the finding of the Tribunal in case of Northern Operating Services (supra) read as follows:- '15. The ld. DR submitted that the Hon'ble High Court of Karnataka in the case of M/s. Acusis Software (I) P. Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the outset, we note that turnover of this company in the ITES segment is only Rs. 45.33 lakhs which is any case does not satisfy any filter of turnover in comparison to the assessee's turnover more than Rs. 27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee's turnover then the company which is having less than Rs. 2.7 Crores of turnover will be outside the said range of 10 times. Accordingly, we are of the view that this company which is having only Rs. 45.33 lakhs turnover cannot be considered as a good comparable to the assessee". 15. From the aforesaid findings of the learned Tribunal, we are satisfied that the reasons assigned by the learned Tribunal in excluding the aforesaid company as comparable is also reasonable and the same deserves to be accepted by us. It is analysed by the learned Tribunal in extenso which arrived at a decision that the company which is having only Rs. 45.33 lakhs turnover cannot be considered as comparable to the Assessee-company whose turnover is more than Rs. 27 Crores. 16. The decision of the learned Tribunal in the other cases referred to by the learned counsel for the Appellant-Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [2012] 53 SOT 159 lays down the correct law on the application of turnover filter and that decision has to be followed. He pointed out that the DRP in the present case has followed the ruling in the case of Genesis Integrated Systems (I) P. Ltd. (supra) and therefore the order of DRP has to be upheld. 18. We have given a careful consideration to the rival submissions and are of the view that as rightly submitted by the ld. Counsel for the assessee, the decision rendered by the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) does not positively say that for a company to be excluded on the basis of high turnover, the tolerance range of turnover of 10 times on both the sides of assessee's turnover has to be seen. Even the Tribunal in the order against which the appeal was filed, did not proceed on application of turnover filter with any such condition. Therefore, it is not correct to say that for application of turnover filter, tolerance range of turnover of 10 times on both the sides of assessee's turnover has been laid down by the Hon'ble High Court. The Hon'ble High Court held that the order of Tribunal is correct and calls f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)." 19. In the given facts and circumstances of the case, we find no grounds to interfere with the order of DRP on this issue. Consequently, ground Nos.4 & 5 raised by the revenue are dismissed as without any merit. 20. In the result, the appeal by the revenue is dismissed.' 13. Accordingly, by following the above orders of the Tribunal, we direct the AO/TPO to apply appropriate upper turnover filter and exclude above mentioned seven companies from the list of comparables. It is ordered accordingly. 12.3. We also not that in respect of Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Wipro Ltd., Tata Elxsi Ltd., the above ratio would be applicable as these comparables also has a turnover of more that Rs. 200 Crores. Accordingly, following the above view, we direct the Ld.AO/TPO to exclude Exilant Technologies Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above three comparables. A. Exilant Technologies Pvt. Ltd. A.1. The Ld.AR at the outset submitted that this company was not considered by the Ld.TPO for A.Y. 2017-18. It is submitted that this company has a total turnover of Rs. 332.43 crores and is involved in diversified business activities. It is submitted that this comparable is also into sale of products and there is no segmental data available in respect of the same. A.2. On the contrary, the Ld.DR submitted that this company is primarily into software development segment and therefore deserves to be retained. We have perused the submissions advanced by both sides in the light of records placed before us. A.3. We note that this company has been granted patents in various jurisdiction including India. This reveals that this company is into research and development in the process of delivering the software development services. We also note that the Ld.TPO while considering the objections has recorded that the segmental details are available. However in the paper book filed before us at pages 619 & 620, only have the P&L account without any annexure. We are therefore not able to appreciate the arguments of the Ld.AR rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendering limited SWD services to its AE. The Ld.AR thus submitted that this company is functionally not at all similar with that of the assessee. C.2. On the contrary, the Ld.DR relied on the observations of the authorities below. We have perused the submission advanced by both sides in light of records placed before us. C.3. We note that this company is in the business of Chip and semiconductor design services where as the assessee before us is into basic SWD services of coding an documentation, Testing and quality assurance, software patches and maintenance. There is no similarity between the functions performed by the assessee vis-à-vis that of this company. We therefore at the threshold reject this company being functionally not similar with that of the assessee. Accordingly, the Ld.TPO is directed to exclude this company from the final list of comparables. D. ThreeSixty Logica Testing Services Pvt.Ltd D.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 59 placed at page 597-598 of the paper book. D.2. On verification of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same in accordance with law. Accordingly this company is remanded to the Ld.AO for re adjudication. Accordingly Ground No.12.6 stands partly allowed. 13. Ground no.12.7 is in respect of correcting the margins of following three comparables: (a) Harbinger systems Pvt.Ltd (b) Acwein Agritek Ltd. We direct the Ld.AO/TPO to compute the correct margin of the comparables that are retained in the final list in accordance with law. Accordingly Ground No.12.7 stands allowed. 14. Ground no.12.8 is in respect of non granting of WCA and risk adjustment to the assessee. 14.1. At the time of hearing, the Ld.AR pressed for providing working capital adjustment. Identical issue was considerd by coordinate bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT (2019) 101 taxmann.com 313, wherein this Tribunal, directed the Ld.AO to grant WCA as it is necessary to iron out the differences between the assessee and the comparables that are finally retained. 14.2. Respectfully following the above decision, we are of the view that, the Ld.AO was not justified in denying adjustment on account of working capital adjustment. In the light of the decision referred to abov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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