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TMI Blog2023 (8) TMI 1479X X X X Extracts X X X X X X X X Extracts X X X X ..... u, Accountant Member For the Appellant : Shri K.R. Vasudevan, Advocate. For the Respondent : Shri D.K. Mishra, CIT (DR). ORDER PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the final assessment order dated 28.07.2022, DIN & Order No. ITBA/AST/S/143(3)/2022-23/104424297191) passed by the AO u/s 143(3) r.w.s 144(C)(13) of the Income-tax Act, 1961 on the following grounds of appeal:- "1. The assessment order passed by the learned Assessing Officer ("Ld AO") is contrary to law, facts and circumstances of the case. 2. The Hon'ble Dispute Resolution Panel ("DRP") / Ld AO and the learned Transfer Pricing Officer ("Ld TPO") have erred in law and facts in making transfer pricing adjustment to the SWD segment. 3. The Ld AO/ Ld TPO/ DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of subsection (3) of section 92C of the Act. 4. The Ld AO/ Ld TPO/ DRP have erred in not understanding the business model of the Appellant and have erred in not appreciating that the Services rendered by the Appellant under the SWD Segment were in rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d TPO/ Hon'ble DRP grossly erred in not providing an adjustment for difference in working capital between the Appellant and the comparable companies. 14. The learned AO erred in levying interest under section 234B and 234C of the Act, in the final assessment order. The Appellant craves leave to add, alter, rescind, and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 2. The assessee filed additional ground on 19/06/2023, which is as under:- "Your Petitioner humbly prays that Your Honours should admit the additional ground of appeal filed with this petition in the abovementioned appeal of Your Petitioner. The Petitioner vide the additional grounds of appeal is seeking exclusion of the following comparables: a. Great Software Laboratory Private Limited b. Elveego Circuits Private Limited c. Infobeans Technologies Limited d. Thirdware Solutions Limited Your Petitioner is also seeking inclusion of the comparable 'Isummation Technologies Private Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shes to raise additional ground contending that 'Isummation Technologies Private Limited' is comparable to Your Petitioner and hence should be included in the final set of comparables for determining the arm's length price. Your Petitioner submits that this Hon'ble Tribunal in the case of MWYN Tech Private Limited IT(TP)A No. 753/Bang/2022 ("MWYN Tech") has examined the comparability of the company and has held that the company is functionally comparable to the SWD segment and it qualifies all the filters of the TP Officer. The Hon'ble Tribunal has therefore directed the TP Officer to include the said comparable in the final set. Your Petitioner submits that the finding of the Hon'ble Tribunal in the case of MWYN Tech (supra) is equally applicable to its case and hence, Your Petitioner has raised the ground for inclusion of the company 'Insummation Technologies Private Limited' for the first time before Your Honours. In this Petition, Your Petitioner humbly prays that the additional grounds of appeal should be admitted by Your Honours for reasons stated hereunder. 2. Reasons for raising additional grounds of appeal Your Petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the learned TPO accepting / including the following companies as comparable to the Appellant despite the same failing the test of comparability and are functionally different to the Appellant: a. Great Software Laboratory Private Limited b. Elveego Circuits Private Limited c. Infobeans Technologies Limited d. Thirdware Solutions Limited 16. The Hon'ble DRP has erred in upholding the fresh study of the learned TPO without accepting / including the following companies as comparable to the Appellant: a. I summation Technologies Private Limited The above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law." 4. Considering the rival submissions, we note that the assessee has raised the additional grounds before the Tribunal which are legal in nature and relevant for deciding the issues. Therefore, the above additional grounds raised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments filed the TPO noted that the assessee had international transactions and method used for determination of ALP on the International Transactions as under:- International transaction Amount (Rs.) Method Provision of services related to software development and allied services 13,52,59,985 TNMM Provision of ATM outsourcing and Maintenance Services 1,70,66,764 TNMM Provision of support services 3,45,55,587 TNMM Switch, AMC and Professional services 15,35,42,880 TNMM Cost allocation for licenses 82,51,130 Other method Recovery of expense 33,12,991 Other method Reimbursement of expenses 2,45,03,087 Other method 8. From the TP study it was observed that the assessee had applied certain filters and selected nine companies as comparable with the assessee company for the SWD segments and arm length price was computed on the international transactions. However, the TPO did not accept TP study filed by the assessee and rejected the TP study after observing some defects and thereafter he applied certain filters for selection of new comparables which is as under:- S No Filters used for Software development segment 1. Use of current year data 2. Companies hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pheld the order passed by the TPO for adjustments towards the international transactions and other additions in draft assessment order was accepted. The AO passed final assessment order on 28/07/2022 assessing the income at Rs. 37,11,79,000/-. 12. Aggrieved from the final assessment order, the assessee filed appeal before the Income Tax Appellate Tribunal. 13. The ld.AR of the assessee reiterated the submissions made before the lower authorities and he submitted that the following 11 companies fail upper turn over limit of Rs. 1 to 200 crores. The AO has fixed the lower level of the turnover and he has not fixed the upper turnover filter limit looking to the turnover of the assessee. In this regard, it is submitted that application of turnover filter is a relevant criterion in choosing comparable companies. The difference in the scale of operations has a direct impact on the profitability. The concept of economics of scale wherein, an increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered. Therefore, the per unit fixed cost of a small-scale company would be much higher than that of a medium/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the companies are as listed below - S No. as per Chart Company Name Rs/Cr Turnover of the Appellant in software development segment 13.52 3 Exilant Technologies Pvt Ltd 332.43 4 Tech Mahindra Ltd 23,661.20 5 Larsen & Toubro Infotech Ltd 6,906.40 9 Mindtree Ltd 5,325.00 12 Persistent Systems Ltd 1,732.00 13 Wipro Ltd 44,710.00 14 Tata Elxsi Ltd 318.67 16 Nihilent Ltd 280.06 17 Thirdware Solution Ltd 204.38 19 Infosys Ltd 61,941.00 20 Cybage Software Pvt Ltd 737.16 18. Considering the facts and respectfully following the decision of the coordinate bench of the Tribunal in the case of Autodesk India Pvt Ltd., (supra) we hold that the companies whose turnover in the current year is more than Rs. 200 crores should be excluded from the list of comparable companies. 16. Respectfully following the above judgement we direct AO/TPO for exclusion of the above eleven comparable companies from the list of comparables. Accordingly, the ground No. 10 is allowed. Ground No. 11 & 15-Exclusion of companies 17. The ld.AR of the assessee submitted that five companies i.e., Acewin Agriteck Ltd. (formerly OFS Technologies Ltd.), Threesixty Logica Testing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook, we note that admittedly the TPO accepts that this comparable provides various services using the same platform of SWD. It is also an admitted fact that this company works in a different horizontal and this company has been retained by the Ld.TPO only because it renders services under the category SWD. It is also noted by the Ld.TPO that the operations of this comparable is from SWD segment without there being any segmental details, which according to the Ld.TPO is irrelevant. In our considered opinion, this Tribunal has been consistently rejecting the comparables whether there are no segmental information available in order to compare "an apple with an apple". Therefore the services rendered by the assessee under a contract with its AE cannot be compared with a company that renders various services under SWD segment. We do not find any reason to include this comparable in the final list. Accordingly we direct the Ld.AO/TPO to exclude Great software Laboratory Pvt. Ltd. 11.2 Elveego Circuits Pvt. Ltd. 11.2.1 The Ld.AR submitted that this company is engaged in the business of electronics and semiconductor design services which is no way comparable to the captive software d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts and digital solutions. Further, she submitted that, this company has significant R&D expenses. 11.5.3 She thus prayed for exclusion of this comparable as it is into varied activities for which there is no segmental details. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 11.5.4 In the annual report of this comparable at page 2854 of the paper book, we note that the NIC code is 8920 at the description of the project / services is software development. At page 2879, the business overview of the company has been described to be as under: "OFS Technologies is a leading software development and information technology outsourcing company. In the last financial year, we intensified our technology expertise with latest technologies in our core business-Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development and DevOps Implementation. In addition, we are technically developing on the leading Blockchain platforms, widening our service offerings and domains more specifically in Healthcare, Media, and Financial Services. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of SanDisk India Device Design Centre Pvt. Ltd. v. JCIT (order dated 30.06.2022 passed in IT(TP)A No. 288/Bang/2021) and the decision of the Tribunal at Hyderabad in ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 at para 7] where, in the case of a similarly placed assessee, the Tribunal directed the exclusion of Infobeans from the list of comparables for assessment year 2016-17 on the ground that it is not functionally comparable and no segmental details were available for the said year and the decision of the Delhi Bench of the Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17. He also placed reliance on the decision of this Tribunal in para-11 in the case of Airlinq Technology Pvt. Ltd. In IT(TP)A No. 231/Bang/2021 dated 28.7.2022. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 11.6.5 In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No. 227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee ". 22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee's own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables." 11.6.6 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgment, we are inclined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the ld. AR sought exclusion of Aptus Software Labs Pvt. Ltd. However, we note that in the case of NTS Technology Services Pvt. Ltd. (supra) this company is held to be comparable. The relevant observations are as under:- 11.4 Aptus Software Labs Pvt. Ltd. 11.4.1 The Ld.AR submitted that, the nature of business of this company is not available in the public domain. It is submitted that from the annual report of the company, the NIC code of the product/ service is mentioned to be 6201 which includes computer programming, consultancy and related activities. 11.4.2 Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. (supra). The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 11.4.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was remanded for want of sufficient information in annual reports filed by the assessee therein before this Tribunal. However, in the present case, the Ld.AR has filed complete annual report. 11.4.4 We notice that this company is deriving revenue from bot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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