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TMI Blog2024 (6) TMI 1284X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is found to be a captive service provider who carries out software development services in accordance with the direction of its associated enterprises and is compensated on a cost+mark-up basis. Persistent Systems Ltd. company is mostly into product development and owns huge intellectual properties. It is also noted that there is no segmental details available in respect of the various systems of revenue earned by this company. Under such circumstances, we do not find it appropriate to be included in the final list. Infobeans Technologies Ltd.is not functionally comparable to that of the assessee. Tata Elxsi Ltd. company is into research and development activities and has developed various product design, industrial design etc. It is also noted that though this company is into software development services, in the process has developed various products that has been sold and revenue has been generated from sale of products. The segmental details in respect of software services rendered and product sale is not available in the financials of this company. It is noted that Hon ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. [ 2023 (3) TMI 597 - ITAT HYDERABAD] for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in the provision of software development services to Intuit Group companies as per the specifications of the AEs. 2.2 During the previous year relevant to the assessment year under consideration, the Ld.AO observed that the international transactions that took place between the assessee and its AE was provision of SWD services. 2.3 The Ld.AO accordingly referred the issue to the Ld.TPO for computation of ALP of the transaction. On receipt of the reference, the Ld.TPO called for the economic details of the international transaction in form 3CEB. The Ld.TPO noted that assessee undertook following international transaction with its associated enterprise. Particulars Amount Provision of SWD services Rs. 655,45,51,676/-, Reimbursement of expenses Rs. 54,04,286/- Payment of Interest on loan Rs. 80,31,070/- Repayment of loan Rs. 22,50,00,000/- Recovery of expenses Rs. 23,11,63,972/- Facility management services Rs. 6,74,58,658/- 2.4 The Ld.TPO noted that assessee used TNMM as the most appropriate method and OP/OC as the PLI to compute its margin at 15.25%. The assessee selected 12 comparables with a median of 7.37%, the details of which are as under: Sl. No. Name of the company Wei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -0.08% 3. Kals Information Systems Ltd 3.62% 4. Ace Software Exports Limited 3.68% 5. Infomile Technologies Ltd. 10.43% 6. Harbinger Systems Pvt Ltd 14.10% 7. C G-V A K Software Exports Ltd. 15.09% 8. Nintec Systems Ltd. 15.15% 9. Larsen Toubro Infotech Ltd. 21.14% 10. Great Software Laboratory Pvt. Ltd. 21.24% 11. Mindtree Ltd. 24.17% 12. R Systems International Ltd. 24.40% 13. Persistent Systems Ltd. 26.17% 14. Tata Elxsi Ltd. 26.19% 15. Aptus Software Labs Pvt. Ltd. 26.32% 16. Cygnet Infotech Pvt. Ltd. 28.55% 17. Infobeans Technologies Ltd. 28.92% 18. Nihilent Ltd. 29.84% 19. OFS Technologies Ltd. 30.80% 20. Infosys Ltd. 39.74% 21. Threesixty Logica Testing Services Pvt. Ltd. 36.64% 22. Cybage Software Pvt. Ltd. 64.79% 23. Consilient Technologies Pvt. Ltd. 65.14% 35th Percentile 21.14% Median 24.40% 65th Percentile 26.32% 2.9 Upon receipt of the DRP directions, the Ld.AO passed the final assessment order by making the TP adjustment at Rs. 70,88,21,288/-. 2.10 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that in respect of the transfer pricing adjustment, assessee wish to argue following comparables for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is submitted that, working capital adjustment is made for the time value of money lost when credit time is given to the customers. The assessee is not an entrepreneur but a captive service provider which is entirely funded by the AEs. This being so, the assessee is compensated on a cost plus basis. It is submitted that, the assessee is running the business without any working capital risk as compared to the comparables. Therefore, requirement for adjustment of negative working capital does not arise. 4.5 The Ld.AR in support of the contention relied on the decisions of this Tribunal in the cases of (i) Lam Research (India) Pvt. Ltd. v. DCIT by order dated 30.04.2015 in ITA No. 1473 and 1385/Bang/2014); (ii) DCIT v. Software AG Bangalore Technologies Pvt. Ltd. by order dated 31.03.2016 passed in ITA No. 1628/Bang/2014) and (iii) Tivo Tech Private Limited [Formerly Veveo (India) Pvt. Ltd.] v. DCIT by order dated 12.06.2020 in IT(TP)A No.1619/Bang/2017. She submitted that in the above decisions, it has been held that, negative working capital adjustment shall not be made in case of a captive service provider, as there is no risk and it is compensated on a total cost plus basis. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2012 has given a finding as under: 7.7.4 Thus, working capital adjustment is made for the time value of money lost when credit time is provided to the customers. The applicant is not an entrepreneur but a captive service provider. Its entire funding needs are provided by the A.E. This being so, the applicant does not stand to lose anything as it is compensated on a total cost plus basis. The TPO probably was carried away by the large amount of receivables appearing in the books of the applicant. But the applicant is running its business without any working capital risk while comparable companies have such a risk for them. If at all any working capital adjustment is to be made to t his situation, only a positive adjustment has to be made to the comparables so that they are brought on par with the applicant. In view of the same, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made. In view of the above, the Panel directs that negative working capital adjustment to the arithmetic mean margin of the comparables shall not be made. 11. In view of the above, we are of the opinion that assessee's case being simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered by this company under various segments. It is also submitted that this company is a market leader and owns intangibles and thus enjoys the benefits of ownership of marketing intangibles, intellectual property rights and business rights. The Ld.AR submitted that this company owns proprietary software products which are developed in-house and is also involved in R D activities that leads to the new intangibles coming into existence. She submitted that this comparable has been consistently excluded from the list of comparables in case of a captive service provider like that of assessee. She relied on the following decisions in support of her submissions. - Mavenir Systems Pvt. Ltd. v. DCIT by order dated 23.03.2023 passed by this Tribunal in IT(TP)A No. 453/Bang/2022 for the assessment year 2017-18 - Carl Zeiss India (Bangalore) Pvt. Ltd. v. DCIT by order dated 16.06.2023 passed by this Tribunal in IT(TP)A No. 192/Bang/2022 for assessment year 2017-18 - Sabre Travel Technologies Pvt. Ltd. v. DCIT by order dated 02.02.2023 passed by this Tribunal in IT(TP)A No. 212/Bang/2022 for assessment year 2017-18 - Yahoo Software Development India Pvt. Ltd. vs. JCIT by order dated 11.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 177/Bang/2022 for assessment year 2017-18 - CIT v. Agnity India Technologies P. Ltd. reported in (2013) 36 taxmann.com 289 (Delhi) On the contrary, the Ld.CIT.DR submitted that assessee is a product company and that assessee before us is also into a software development consultancy. Referring to various extracts from an internet search engines, the Ld.DR argued that the functions carried out by the assessee is similar to that of L T and therefore cannot be excluded. The Ld.DR relied on the decision of Coordinate Bench of this Tribunal in case of Blue Coat Network (India) Pvt. Ltd. vs. DCIT in IT(TP)A No. 78/Bang/2019 by order dated 23.11.2020 for A.Y. 2014-15. In respect of Infosys Ltd., the Ld.DR submitted that as assessee is a product company for the above reasons, the comparable should not be excluded. We have perused the submissions advanced by both sides in the light of records placed before us. We note that, the objections raised by the Ld.DR are based on the general industry classifications. The primary objection raised by the DR is that the assessee is a product company. However from the TP transfer pricing order, we note that the Ld.TPO has not categorised assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stent Systems Ltd. It is submitted that Persistent is functionally dissimilar to the assessee and hence cannot be considered as a comparable. The company is engaged in licensing and sale of products, technology innovation and also earns royalty income. However, segmental details as regards its diverse services are unavailable. Considering the same, it can be observed that Persistent is engaged in software product development unlike the assessee which is a low-risk captive SWD service provider. Even going by the company s reply to the TPO s notice under Section 133(6) of the Act, the company is predominantly engaged in the business of providing outsourced product development services, which are vastly different from the services rendered by the assessee. The company undertakes significant R D activities to develop technologies and intellectual property to differentiate themselves form the industry and has established Persistent Labs to focus on R D activities. Moreover, the company has also incurred significant expenses in foreign currency, demonstrating that it renders significant onsite services, which business model is different from that of the assessee s. Reliance was placed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Private Limited v. DCIT by order dated 27.12.2023 passed in ITA No. 510/Mum/2022 for assessment year 2017-18 On the contrary, the Ld.DR relied on the orders passed by the authorities below. We note that for the above submitted objections by the Ld.AR, this company has been excluded by Coordinate Bench of this Tribunal in case of Airlinq (supra) by observing as under: 13. We have heard rival submissions and perused the material on record. On perusal of the financial of Infobean Technologies Limited (the relevant portion of financial are placed on record), it is clear that the said company is engaged in providing software engineering services primarily in Custom application development, Content Management Systems, Enterprise Mobility, big data analytics (The company's overview is annexed to this order as Annexure-A) (placed at page 1130 of the paper book submitted by the assessee). The above services rendered by the company are vastly different from the services rendered by routine software development companies like that the assessee in the instant case. Further, the segmental details for these diverse services are not available and therefore the company cannot be selected as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 and 50 (on account of functional dissimilarity as company renders diverse services and lack of segmental details). (v) Skillnet Solution India (P.) Ltd. v. Dy. CIT [IT Appeal No. 6570 (Mum.) of 2017, dated 24-2-2021] (Order passed by the Mumbai Bench of this Hon'ble Tribunal for the AY 2013-14) - at para 6 (on account of functional dissimilarity as the company renders diverse services and segmental details are unavailable) (vi) Alcated Lucent India Ltd. v. Addl. CIT [IT Appeal No. 4706 (Delhi) of 2018, dated 29-11-2019] (Order passed by the Delhi Bench of this Hon'ble Tribunal in for AY 2014-15) - at para 15 (on account of functional dissimilarity as the company was engaged in providing custom development services to offshore customers and was engaged in software engineering services in different fields and segmental details were unavailable) (vii) Kony IT Services (P.) Ltd. v. Dy. CIT [2020] 113 taxmann.com 214 (Hyd. - Trib.) (Order passed by the Hyderabad Bench of this Hon'ble Tribunal in for AY 2014-15)- at para (iii) on page 15 (on account of functional dissimilarity as it has earning from export of goods and has deposited MODVAT and sales tax). (viii) Avaya Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... animation services for media and entertainment industry. It is submitted that the services rendered in the SWD segment are in the nature of embedded product design, industrial design and visual computing labs, which are not comparable to the services rendered by the assessee. Further, it is submitted that, the company renders services in niche areas as opposed to routine SWD services rendered by the assessee. The Ld.AR submitted that Tata Elxsi is focused on research and development activities and incurs expenses for developing new functionalities and patenting innovative technologies. Reliance was placed by the Ld.AR on the following decisions in support of her contentions. - Mavenir Systems Pvt. Ltd. v. DCIT (supra) - Infor (India) Pvt. Ltd. v. ACIT (supra) - Sabre Travel Technologies Pvt. Ltd. v. DCIT (supra) On the contrary, the Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. Admittedly this company is into research and development activities and has developed various product design, industrial design etc. It is also noted that though this company is into software developme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant extract of the observation by Coordinate Bench of this Tribunal in case of Yahoo Software Development India Pvt. Ltd. vs. JCIT (supra) in respect of Larsen Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd. and Infosys Ltd. is as under: ......................... ......................... ........................ 41. The next company sought to be excluded is Mindtree Ltd. The submissions made before us were as follows:- Functionally dissimilar, diversified operation, significant R D spend, ownership of intangibles. - Also engaged in business of rendering IP-Led revenue, infrastructure management, package implementation, consultancy services, etc. constituting 45% of overall revenue during FY 2014-15. - Diversified operation i.e. engaged in infrastructure management services, business process management, technology consulting, product engineering and SAP services. Also lacks segmental data. - Significant research development activity. By incurring R D expenses, it was able to deliver IP based video surveillance management, recording and analytic products and solutions. It has filed 4 patents in India and US so far in the area of Video analysis. - Ownership of inta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Subex Ltd. vs. DCIT (supra) for A.Y. 2017-18 by order dated 30.11.2022 has considered Nihilent Ltd. and OFS Technologies Ltd. Nihilent Ltd. 10. The ld AR for the assessee submitted that this company Nihilent Ltd. is predominantly engaged in rendering of software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. Nihilent in engaged in rendering diverse services. The Company intends to diversify and expand into various other areas such as analytics, big data, internet of things, etc. In this regard he referred page nos. 763 to 767 of the paperbook. 10.1 The assessee relied on the following rulings, wherein Nihilent Ltd. has been excluded as a comparable: - SanDisk India Device Design Centre Pvt. Ltd., vs. JCIT IT(TP)A No. 288/Bang/2021dated 30.6.2022 - Extracts from the annual report are provided below by the ld AR: (Page 73 of Annual report FY 2016-17) (Page 20 of Annual report FY 2016-17) (Page 20 of Annual report FY 2016-17) (Page 20 of Annual report FY 2016-17) 10.2 The Appellant also submitted screenshots from the official website of Nihilent Ltd., which evidences the fact that it is en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no need of providing segmental information as per AS 17. 11.1 The ld DR further stated that the assessee has argued before the ld DRP that the Company acquired G Net Group LLC in the US and Intellect Bizware Services Pvt Ltd, which are engaged and specialised in ERP and SAP. On careful perusal of the information in the annual report, the ld DRP noted that during the year, Gnet Group LLC, USA ( Gnet ) has merged with its holding Company Nihilent Technologies Inc.. USA ( NTI ), with effect from 1 January 2017 vide the Article of Merger filed in the State of Minnesota. As this merger was between a holding company and its wholly owned subsidiary, no consideration was payable . This acquisition was not made by Nihilent, which is being compared. During the year the Group through holding company i.e., Nihilent Technologies Limited has acquired 100% stake in a India base subsidiary Analytics Nihilent with effect from 8th October 2016. The acquisition by a subsidiary will not have any impact on the profitability of this company especially when it is acquired from O8 October 2016. Further, the group company through the holding company has acquired 51% stake in case of Intellect Bizware Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hilent Ltd. 44. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis- -vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis- -vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded. There is nothing on record i.e. placed by the Ld.DR contrary to the above observations by this Tribunal in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable with that of assessee which is a captive service provider. Accordingly, we direct this comparable to be excluded from the final list. H) Cygnet Infotech Pvt. Ltd. The Ld.AR submitted that this comparable is functionally not similar to that of assessee as it is engaged in diversified services including rendering solutions in the nature of blockchain, AI, robotic process automation, cloud, IoT, tax technology, augmented/ virtual realty; engineering services of Digital transformation, consulting, product engineering, application testing and development, content management and implementation; technology services. Cygnet has products portfolio such as R7VAT Solution for GCC, TestingWhiz, Cygnature, ePUBHub, eShabda, CYGNETO which makes the functional profile of Cygnet significantly different from a pureplay software development service provider. It is submitted that the company is also engaged in providing information technology enabled services and staff augmentation services. It is submitted that segmental information regarding the diverse activities are not available, and there is a presence of intangibles owned by the company. She placed reliance on the decision of Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices, presence of intangibles, lack of segmental data, abnormal margins, onsite revenue and non-contemporaneous data. Ld. TPO brushed aside the contentions of assessee and basing on the annual report, observed that the revenue of Cybage Software Private Limited from operations is derived from software development services and also observed that the assessee did not demonstrate the impact of intangibles on profit margins. Further it was observed by the Ld. TPO that over all averaging of profit margins has also been done by taking median of all the weighted average margins. Thus, fluctuation in profit margins cannot be a valid reason for rejecting a comparable when measures to ensure averaging out of fluctuations are already in-built in the overall process. Further, Ld. TPO relying on the decision of ITAT, Mumbai in the case of Capgemini and considering the CBDT Notification No. 83/2015 (F.No.142/25/2015- TPL) rejected the contentions of assessee. Ld. DRP considering the contentions of the assessee and judicial precedents in the cases of Trilogy E-Business Software India Private Limited Vs. DCIT (2013) 29 taxmann.com 310 (Bangalore Tribunal), Autodesk (India) Pvt. Ltd. Vs. DCIT in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground for not considering the same. Based on the above proposition, we remand this comparable back to the Ld.TPO to consider the comparability analysis based on the FAR of the assessee in accordance with law. B) Indianic Infotech Ltd. ( Indianic ) It is submitted that, the said company was rejected by the Ld.TPO merely holding that the company is functionally different, without assigning reasons as to how the company was incomparable to the assessee. The DRP rejected it for the reasons that the company failed the export turnover filter and the related party transaction information of the company was not available. In this regard, at the outset, it is submitted that, the action of the DRP in upholding the exclusion of the company on an altogether new basis without putting the assessee to notice is wholly erroneous and unsustainable. It is submitted by the Ld.AR that Indianic is primarily engaged in providing software development services in the nature of design and development of software applications similar to that of the assessee. Therefore, it is submitted that the company is functionally similar to the assessee. We note that the above comparable needs to be verified based on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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