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TMI Blog2024 (6) TMI 1135X X X X Extracts X X X X X X X X Extracts X X X X ..... hows that these companies are into software development services and are comparable with the profile of the assessee. Since we do not find any glaring dis-similarity in the functioning of these companies, we do not find any reason to exclude these companies. Thus, we direct the AO/TPO to take these companies as suitable companies. Cigniti Technologies Ltd. - As it has an export revenue of 53.16% of total revenue and hence it is to be rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO - We have already upheld the export revenue filter adopted by the TPO vide detailed discussion made above. As a result, this objection is found to be acceptable. Thus we reiterate the direction issued by the DRP and accordingly direct the AO/TPO to exclude the said company from the list of comparables. Inclusion of SagarSoft (India) Ltd, Evoke Technologies Pvt. Ltd.,Sankhya Infotech Ltd., Harbinger Systems Pvt. Ltd.,Maverick Systems Ltd. and Agilisys IT Services India Pvt. Ltd. - The assessee has raised a specific ground before the DRP, seeking inclusion of these companies. In view of the above, the finding recorded by the DRP that there is no specific ground ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .w.s. 144C(13) r.w.s. 143(3A) 143(3B) of the Income Tax Act, 1961 (for short the Act ), assessee filed this appeal raising the following grounds : 1. The Learned (Ld.) Assessing Officer ( AO )/Ld. Transfer pricing officer ( TPO ) and the Ld. Dispute Resolution Panel ( DRP ) are erroneous in law and on the facts of the case. TP Grounds on Margins and Comparables 2. The Ld. AO/ Ld. TPO and the Ld. DRP are not justified in law in making an adjustment under section 92CA(3) of Rs. 2,17,38,030/- to the price received by the assessee from its Associated Enterprise. 3. The Ld. AO/ Ld. TPO and the Ld. DRP ought to have accepted the Profit margin of the assessee company (OP IOC) of 11.57 % as having complied with the arm's length principle. 4. The Ld. TPO / Ld. DRP erred in rejecting the Transfer Pricing Study prepared by the assessee company without giving any cogent reasons for such rejection. 5. The Ld. AO/ Ld TPO and the Ld. DRP are not justified in law in considering wrong comparables and consequently arriving at a median margin (ALP Margin) of 26.36 % as a ratio of OP/OC. TP Grounds on Exclusion of Comparables 6. The Ld. AO / Ld. TPO and the Ld. DRP erred in not accepting the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and proposing an adjustment of Rs. 32,52,061/- as interest on receivables. General 15. The Ld AO erred in making an adjustment when the assessee company was claiming exemption u/s. 10AA and hence there is no intention to shift profits outside India and more so when the tax rates in USA where the AE is located, were higher than those prevailing in India. 16. Any other ground that may be urged at the time of hearing with the prior approval of the Hon'ble Tribunal. 2. Brief facts of the case are that the assessee is a software development company and the profile of the assessee was captured by the Transfer Pricing Officer (TPO) in the order at paragraph No. 2, which is as under: 2. Functional analysis of the taxpayer: M/s. Clinasia Labs Private Limited is engaged in providing global technology services and solutions specializing in clinical operations, clinical data management and IT solutions. The company has its head quarters and development facilities in India and serves a global customer base through its associate company Maxis IT in USA. 3. During the year under consideration, the assessee has entered into the following international transactions: Sl.No. Name of the AE Intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns before the DRP and the DRP has issued directions rejecting the claim of the assessee. At the stage of the DRP, the assessee had also submitted that various comparables which were selected by the assessee were wrongly rejected by the TPO on the pretext that the annual returns are not available. The objections of the assessee were dealt with by the DRP at pg.2 of its directions. In that order, the DRP was not convinced by the objection raised by the assessee and ultimately passed the order. 8. Based on the directions of the DRP, AO has passed the final assessment order and in the final assessment order, the AO has proposed an addition (TP adjustment) of Rs. 2,49,90,091/- to the total income of the assessee and besides that the AO has also made the addition on account of outstanding receivables. Now, the assessee is in appeal before us for the grounds mentioned herein above. 9. Grounds No. 1 to 5 are general in nature and require no adjudication. With respect to Ground No. 6, learned AR for the assessee has submitted that the assessee divided the ground and submitted that the assessee is not pressing the exclusion of the companies i.e., Rheal Software Pvt. Ltd. and Inteq Software P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the Ld. DRP order. However, the Ld. TPO/ AO have not excluded the same while passing the final assessment order and we request the Hon ble ITAT to exclude all 9 companies based on upper turnover filter. Thus, the Assessee submits to apply the upper turnover filter for selecting the comparable companies for a captive service provider like the Assessee. Out of 12 Companies asked for exclusion the following 9 Companies are having Turnover 200 Crores and the same are to be excluded from the final list of comparables selected by the Ld.TPO/Ld DRP. In this connection the Assessee Company would rely on the following case law: 3.2. The Hon ble Bangalore Tribunal in the case of Prism Networks Private Limited Vs ACIT (ITAT Bangalore) IT(TP)A No.349/Bang/2021 pronounced on 11.02.2022 held as under: 13. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmanftcom 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not Comparable with a company that has low turnover. The following were the relevant observations: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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 co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res should be excluded from the list of comparable companies. 11. It was submitted that since the turnover of these companies is huge vis- -vis the turnover of the assessee, which is meagre, these companies are to be excluded. Besides that, it was submitted that these companies are functionally dissimilar to the assessee company and have intangibles and brand segmental information that are not available. 12. Learned DR relied upon the orders of the authorities below. 13. We have heard the rival contentions and perused the material available on record. Admittedly, these companies are having huge turnover, whereas the turnover of the assessee is meagre as compared to these companies. The turnover of the assessee company was only Rs. 16.12 crores, whereas the turnover of these companies is more than Rs. 200 crores. Thus, these companies are not at all comparable with the assessee. Besides that the issue has already been dealt with by the Co-ordinate Bench of the Tribunal, wherein it was held that these companies are not comparable with the assessee company. Therefore, we direct the AO/TPO to delete these companies Larsen Toubro Infotech Ltd., (Segmental) Tata Elxsi Ltd. (Segmental), P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. NOTES FORMING PART OF STANDALONE FINANCIAL STATEMENTS 1. CORPORATE INFORMATION Thirdware Solution Limited (the Company) is a public company domiciled in India and incorporated under the provisions of the Companies Act, 1956. The Company is engaged in the business of Software Development and Consultancy services. The company caters to both domestic and international markets. (Extract from annual report) The combined revenue from sale of license, subscription training amounts to Rs. 41.36 lakhs which constitute of the total operational income of Rs. 22136.09 lakhs. Therefore, the taxpayer s objection that the company is functionally similar to the taxpayer is not accepted. As per the annual report, the company is into Information Technology Software Services and is primarily involved in business of Implementaiton Services. Application Management Services and other Software Support Services around 95% of the total revenue belongs to Implemetnation services, Application Management Services Software Support Services. Hence, the taxpayer s contention on functional comparability is rejected. Segmental data not available The company is engaged in providing software development serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count, available at page 570 of the annual reports paper book, shows that it has income earned from sale of licence and provision of training services also under the head 'software services from local unit', 'export of software services', 'revenue from subscription training' and 'sale of licence' to the tune of Rs. 2809.62 lakhs, Rs. 19285.11 lakhs, Rs. 32.59 lakhs Rs. 8.77 lakhs respectively. The taxpayer has also brought on record website of the company, available at pages 71 to 73 of the appeal memo, which shows that Thirdware is having competency in providing services in most advanced and niche area of technologies such as Robotic Process Automation, Big Data Analytics Cloud Computing. 42. From the profile of Thirdware it has come on record that Thirdware is functionally dissimilar vis- -vis the taxpayer as it has been deriving income from sale of licence and software services export from SEZ unit and revenue from subscription and training etc. and it is also into sale of licence and its segmental financials are not available. 43. Thirdware has been ordered to be excluded by the coordinate Bench of the Tribunal in case of Fiserve India (P.) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y classification and norms. Thus, there cannot be any dispute as to functional comparability. The argument that testing activity does not fall within the definition of software services given in the Safe Harbour Rules, has, no merits, as the purpose and ambit of Safe Harbour Regulation is totally different from the methodology prescribed for comparable analysis under the TNMM method, it is necessary that the services compared are broadly similar and fall within the same industrial classification. This requirement is satisfied in the present case, and hence, this company can be taken as functionally comparable to the assessee. Accordingly, this company is functionally comparable. 2.5.2.2 However, on perusal of the annual report it is seen from the page no. 54 of the Annual Report of the F.Y.2015-16 that income from export of software is Rs. 108 crores and total revenue as per page no. 119 is Rs. 204 crores. Therefore, it has an export revenue of 53.16% of total revenue and hence it is to be rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO. We have already upheld the export revenue filter adopted by the TPO vide detailed discussion made at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not demonstrated the passage of this comparable through all the filters of the TPO. Hence, rejected. 6. Agilisys IT Services India Pvt. Ltd., The company s Annual Report does not mention the related party transactions entered into by the company during the FY 2015-16. Since the information is not disclosed in the Annual Report, the company is not considered as a comparable. Hence rejected. 22. The assessee had preferred the appeal before the DRP. The DRP has rejected the inclusion of these companies in paragraph No. 2.1.1, at page No. 2, 13, 17, 54 and 57 of the DRP s order. It was the contention of the ld.AR that the information in respect to these companies were available and even the assessee had raised the specific ground before the DRP and our attention was drawn to page No. 532 of the paper book, which the ground raised by the assessee before the DRP to buttress his argument. 23. On the other hand, the ld.DR relied upon the order passed by the TPO/DRP. 24. We have considered the rival contentions and perusal the material available on record. The DRP at page No. 13 of his order, has noted down that the assessee has not raised the plea of inclusion of these comparables befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on delayed outstanding payments is an international transaction or not. This issue has come up for our consideration in the decisions referred by the ld.DR in the case of M/s Zeta Interactive Systems (India) Pvt. Ltd., M/s. Satyam Ventures Engineering Services and M/s. Apache Footware India Pvt. Ltd. (supra). 31. We have consistently held that the interest on delayed outstanding trade receivables is an international transaction and after holding so, we have benchmarked the international transactions at 6% SBI rate. 31.1. In the case of Apache Footware India Pvt. Ltd. (supra), we have held as under : 9. We have heard the rival submissions and perused the material on record. From the perusal of the order passed by the TPO, it is clear that both the lower authorities have given an elaborate reasoning for coming to the conclusion that the delay in receiving the receivables is an international transaction and is required to be bench marked in accordance with law. We are reproducing hereinbelow the chart filed by the assessee which is to the following effect : APACHE FOOTWEAR INDIA PVT. LTD / AY 2018-19 Export Receivables Realisation pattern during A.Y. 2018-19 Particulars Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot find any error in the same. 13. The reliance of the assessee in the case of Betchal India Pvt Ltd (supra) is also not correct as A.Y. in that case was 2010-11. By the Finance Act, 2012, the Explanation was inserted in Sec.92B of the Act and by virtue of which payment or deferred payment or receivable or any other debt arising during the course of business has been considered to be an international transaction which is required to be benchmarked. Following the above said Explanation, the co-ordinate Bench for the subsequent assessment years vide order dt.16.05.2017 in the case of Betchal India Pvt. Ltd ITA No.6530/Del/2016 (supra) had decided the issue against the assessee. In view of the above, the decision relied upon by the assessee is of no help to assessee. 14. So far as the argument of the assessee that the assessee is a debt free company and therefore, no borrowed fund was used for making supplies to it s A.E. and therefore, is not liable to be compensated for the delay in receiving the receivable is concerned, the same in our view, suffers from inherent flaw as in the T.P. analysis, the TPO is required to examine whether the assessee had supplied the product / services to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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