9911796707
TMI Blog2022 (7) TMI 1579X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain comparables on turnover filter as well as dissimilarity in functions - HELD THAT:-Exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. for having high turnover as compared to a captive service provider like assessee. Infobeans Technologies Ltd. be excluded as having multiple segments and cannot be compared with a captive service provider like assessee. Inteq Software Pvt.Ltd as noted is involved in multifarious services such as application services, software testing, data warehousing, EDI, BPO, staffing etc. As noticed from the Ld.AO/TPO and the DRP's order, it is stated that Inteq Software Pvt.Ltd., is only involved in software development services and the entire turnover is from such service. It is not clear how DRP had arrived at such a conclusion. The profit and loss account of Inteq Software Pvt.Ltd., is not on record. We therefore, deem it appropriate to restore this issue to the file of Ld.AO/TPO. Aspire Systems (I.) Pvt.Ltd. company is an outsourced technology service company. It is also stated that, there is income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be India's leading local search related service provider. This company has its presence in the e-commerce sector with an unprecedented growth in the year 2014 with about 893 million wireless subscribers by placing India as the largest wireless largest market globally. With the above functions and the wide variety of services rendered by this company, assessee is not at all comparable that has carried on with the captive service provider only rendering services to the clients of its AE. X X X X Extracts X X X X X X X X Extracts X X X X ..... segments, and in conducting a fresh comparability analysis for the software development services, marketing support services and data center services, based on the application of additional filters in determining the arm's length price. 5.3. Using data, which was not contemporaneous, and which was not available in the public domain at the time of preparing the TP documentation. 5.4. Using information under section 133(6) of the Act, which tantamount to choosing secret comparable companies whose information was not available in public domain while preparing the transfer pricing documentation for the relevant financial year. 5-5. Disregarding certain filters applied by the Appellant in selection of the comparable companies for all three segments, at the time of TP documentation: a) Rejection of companies with expenses of R&D ratio to sales greater than 3%; b) Acceptance of companies with ratio of sum of advertising, marketing and distribution expenses to sales less than or equal to 3%. 5.6. Applying/ modifying the following filters while undertaking comparability analysis for all three segments: a) Rejection of companies whose employee cost is less than 25% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment to the transfer price of the marketing support services, the learned DRP/AO/TPO erred in: 12.1. Including the following companies even though they are functionally different from operational profile of the Appellant: a) Axience Consulting Pvt. Ltd. b) Killick Agencies & Marketing Ltd." e) Digital Radio (Delhi) Broadcasting Ltd. d) Just Dial Limited e) Platinum Advertising Pvt. Ltd. 12.2. Excluding the following companies even though they are functionally comparable to the Appellant and passes all the filters applied by the learned TPO in its order: a) Fusion Events Pvt. Ltd. b) MCI Management India Private Limited e) Showhouse Event Management Pvt. Ltd. d) Netscribes India Pvt. Ltd. e) Competent Automobiles Ltd. (Service & Spares) 13. The learned TPO erred in not giving effect to the directions of the learned Panel, and determining a different set of final comparable companies, which was not arrived at in the original TP order or as per the directions of the learned Panel (Tax Effect: INR 1,03-39,660) Grounds for data center services 14. On the fact and in the circumstances of the case and in law, with respect to adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly, the application dated 15/04/2022 raising additional ground stands allowed for the year under consideration. Accordingly, additional grounds raised by assessee stands allowed. 3. Brief facts of the case are as under: 3.1 Blue Coat India is a subsidiary of Blue Coat Systems BV, Netherlands, which in turn is a subsidiary of Blue Coat US. It provides software development services, marketing support services and data center services to its AEs. 3.2 The assessee filed its return of income on 27/11/2015 declaring total income of Rs. 21,17,150/-. The assessee shown book profit at Rs. 25850725/-. The case was selected for scrutiny and notice u/s. 143(2) was issued. The Ld.AO observed that, the assessee had international transaction exceeding Rs. 15 crores, and accordingly, referred the case to the transfer pricing officer to determine the arms length price. 3.3 On receipt of the reference, the Ld.TPO called for the economic details of the international transaction in form 3CEB. From the details filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g available the data center equipment and other support that enables Blue Coat US to Blue Coat Group's global customers. Blue Coat India leverages on all valuable intellectual property rights (know-how, copyrights etc.) and other commercial or marketing intangibles (brand names, trademarks etc.) owned by the Blue Coat Group. During the FY 2014-15 Blue Coat India engaged about 41 employees approximately to provide the services as per the agreements. During the year ended March 31, 2015 Blue Coat India had the following International Transactions with its Associated Enterprises; a) Receipt for provision of Software Development Services, b) Receipt for Marketing Support Services, c) Receipt for provision of data center equipment and other support, and d) Recovery of restructuring costs." 3.4 The Ld.TPO noted that the following were the international transactions undertaken by the assessee. Particulars Amt (Recd) Method Software Development Services 8,96,18,197 TNMM Marketing Support Services 13,66,10,710 TNMM Data Center Services 55,21,397 TNMM Recovery of Restructuring costs 1,90,28,483 CUP Total 25,07,78,787 3.5 The Ld.TPO observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted, thereby resulting in selection of companies which do not own intangibles and are pure service providers This is an inappropriate filter 5 Companies with ratio of net fixed assets to sales less than 200% were selected thereby resulting in selection of comparables which do not undertake manufacturing or hold substantial assets that are not utilized for the provision of services This is an inappropriate filter 6 Companies that had average sales of less than INR 1 crore. This is an inappropriate filter. The TPO has selected more appropriate filter as discussed below. 7 Companies with net worth less than zero implying companies which have eroded their net worth and hence are not comparable were rejected. This is an appropriate filter. 8 Companies with ratio of the sum of advertising marketing and distribution expenses to sales less than 3% were selected, thereby resulting in identification of comparables that do not have ownership of marketing intangibles This is an inappropriate filter 9 Software Development companies clearing the quantitative criteria were analysed the qualitatively to select functionally comparable companies. A subjective filter. To be seen on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess than INR 1 crore. This is an inappropriate filter. The TPO has selected more appropriate filter as discussed below. 6 Companies with net worth less than zero implying companies which have eroded their net worth and hence are not comparable were rejected. This is an appropriate filter. 7 Companies clearing the quantitative criteria were analysed the qualitatively to select functionally comparable companies. This is an appropriate filter. 8 Segments having data for at least one out of the three financial years under consideration This is an inappropriate filter. The TPO has selected more appropriate filter as discussed below. 9 Segments classified under the service industry This is an appropriate filter. 3.8 The Ld.TPO treated the foreign exchange gains / loss as operating in nature and computed the margins of assessee under the 3 segments as under: Particulars Software Development Services Marketing Support Services Data Center Services Total Operating Profit (A)-(B) -1,05,57,970 1,59,61,802 7,08,470 61,12,302 Operating Profit / Total Cost -10.54% 13.23% 14.72% 3.9 The Ld.TPO selected the following comparables for SWD and ITES as under: SWD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulars Formula Amount Taxpayers operating revenue OR 55,21,397 Taxpayers operating cost OC 48,12,927 Taxpayers operating profit OP 7,08,470 Taxpayers PLI PLI=OP/OC 14.72% 35th Percentile Margin of 18.81% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 23.27% Arm's Length Price ALP=(1+M)* OC 59,32,895 Price Received OR 55,21,397 Shortfall being adjustment ALP-OR 4,11,498 3.11 The Ld.TPO subsequently observed that, the assessee applied TNMM as the most appropriate method for marketing support service segment and computed its margin at 10%. Assessee selected the comparables that had the weighted median margins at 7.33% by using OP/OC as PLI. Sl. No Name of the Company Wt. Avg (%) 1 Fusion Events Pvt. Ltd. 6.81% 2 Majestic Research Services & Solutions Ltd. 9.16% 3 MCI Management India Pvt. Ltd. 5.49% 4 Showhouse Event Management Pvt Ltd 7.37% 5 Netscribes India Pvt. Ltd. 8.61% 6 Competent Automobiles Ltd. (Service & Spares) 8.15% 7 Empire Industries Ltd. (trading & Indenting) 5.72% 3.12 The Ld.TPO rejected the study carried out by assessee for the marketing support serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment proposed by the Ld.TPO. 3.16 On receipt of the DRP directions, the Ld.AO passed the impugned order by incorporating the additions proposed in the draft assessment order. 3.17 Aggrieved by the order of Ld.AO, the assessee filed the present appeal before this Tribunal. 4. At the outset, the Ld.AR submitted that Ground nos. 1 & 2 are general in nature. 5. Ground nos. 5 & 6 are not pressed. 6. Ground no. 7 - Assessee is seeking working capital adjustment in this ground. 7. Ground nos. 8-10 are general in nature and therefore not pressed. 8. Ground no. 10 entirely is not pressed and is only seeking to argue the additional ground no. 17. 9. Ground no. 12 is also not pressed by the assessee. 10. In Ground No. 12.1, assessee is restricting to seek exclusion of only 3 comparables under the MSS segment on functional dissimilarities. a) Killick Agencies & Marketing Ltd. b) Digital Radio (Delhi) Broadcasting Ltd. c) Just Dial Ltd. 11. The assessee is not pressing Ground nos. 12.2, 13, 14 to 14.4. Accordingly we are restricting our view only in respect of Ground nos. 3-4, Ground nos. 7, 12.1 and additional ground no. 17 raised by assessee. 12. The Ld.AR filed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to pass the order in consonance with the directions of the DRP as per the sub clause (13) to section 144C of the Act. We therefore direct the Ld.TPO/Assessing Officer to consider this issue in accordance with the directions of DRP. Accordingly this ground raised by the assessee stands allowed for statistical purposes. 14. The assessee in additional ground no. 17 and 12.1 is seeking exclusion of certain comparables on turnover filter as well as dissimilarity in functions. 15. Before we undertake the comparability analysis it is sinequa non to understand the FAR of the assessee under SWD and MSS. SWD Functions Blue Coat India carries out software development services for Blue Coat Switzerland based on the intercompany services agreement defining the scope and nature of the assignments. An understanding of Blue Coat India's participation in the various stages of the product lifecycle determines the role that Blue Coat India undertakes in the value chain of Blue Coat Switzerland. It is important to note that, the product conceptualization and designing i.e., requirement analysis, is the most critical stage in a product lifecycle which is performed by Blue Coat Switzer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market in which the company operates in is sensitive to introduction of new products and technologies. Hence, business units may face loss of potential revenues due to inefficiencies arising from obsolete infrastructure and tools as well as obsolescence of processes. Blue Coat India does not bear any risk in this regard because it operates as a captive service provider, and is remunerated on the basis of costs incurred by it plus an agreed mark-up. Blue Coat Switzerland being the entrepreneur bears the risks with respect to the technology obsolescence or introduction of new products or technologies. Credit Risk: This is the risk arising from non-payment of dues by customers. Blue Coat India assured of its payment from Blue Coat Switzerland and hence does not bear any risk of no-payment for services provided. Blue Coat Switzerland provides services to a wide array of customers worldwide, both on advance payment or payment in arrears, which might result in non-payments and bad debts. Foreign Exchange Risk: This risk relates to the potential impact on profits that may arise because of changes in foreign exchange rates. Blue Coat India incurs expenses in local currency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contracting entity is unable to fulfil the terms of contract entered into with third party. Blue Coat India does not take part in negotiations with the prospective Indian clients and thus bears no contract risk. All negotiations and terms of sale of the products and services are carried out independently by Blue Coat Switzerland with prospective Indian clients. Further, the sales contracts are entered into with the customers by Blue Coat Switzerland directly or through channel partners. Product Development risk: This risk arises if the market in which the company operates in is sensitive to introduction of new. Hence, in that case, business units may face loss of potential revenues due to inefficiencies arising from obsolete infrastructure and tools as well as obsolescence of development processes. Blue Coat India does not undertake any research and development activities on its own account and does not bear any risk on this count. Blue Coat US / Blue Coat Switzerland undertake the activity related to the development of the products, As a result, Blue Coat US / Blue Coat Switzerland bear a portion of the risk associated with the success or failure of R&D activities, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products. Characterisation Based on the functional profile, assets utilised and the risks borne, as documented in the above analysis, for transfer pricing purposes, it is possible to characterise Blue Coat India as a captive contract service provider providing software development services, being a contract service provider, Blue Coat India is risk insulated for the provision of software development services. With regard to marketing support services, Blue Coat India is characterised as a contract service provider providing services to its AEs. Blue Coat India is risk insulated for the provision of marketing support services. 16. The Ld.AR thus challenged exclusion of following comparables under SWD service segment by way of a chart filed on 14/06/2022. SWD Segment: a) Mindtree Ltd. b) Larsen and Toubro Infotech Ltd. c) RS Software India Ltd. d) Infobeans Technologies Ltd. e) Persistent Systems Ltd. f) Nihilent Technologies Ltd. g) Aspire Systems India Pvt. Ltd. h) Inteq Software Pvt. Ltd. i) Infosys Ltd. j) Cybage Software Ltd. 16.1 Additional ground no. 17, 12.1 - It is submitted that the Ld.AO has applied turnover filter of less than Rs. 1 crore but fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06. This Tribunal reviewed gamut of case laws to consider, whether companies having turnover more than Rs.200 crores should be regarded as comparable with a company having turnover less than 200 crore. This Tribunal held as under: "17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far ITA No.2573/Bang/2019 as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital 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 ITA No.2573/Bang/2019 cannot be the basis to hold that high turnover is not relevant 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)." 40. Ld.AR submitted that though this decision was rendered with reference to AY 2005-06 and 2006-07, same reasoning would apply to AY 2015-16 also and in this regard. Based upon above discussions and the decision relied by Ld.AR herein above. We are of opinion that objection raised by revenue cannot withstand the test of law. Accordingly we direct Ld. AO/TPO to exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee. Accordingly we direct this comparable to be excluded from finalist." 17.3 The assessee therein was a captive service provider to its AE for assessment year 2015-16. Nothing has been placed by the Revenue to deviate from the above view taken by the coordinate bench of this Tribunal in Zynga Game Network India (P.) Ltd. (supra). Respectfully, following the order of the Tribunal in the case of Zynga Game Network India (P.) Ltd. (supra), we direct the AO/TPO to exclude Infobeans Technologies Ltd., from the list of comparables. 18. Inteq Software Pvt.Ltd. 18.1 The assessee is seeking to exclude the above company from the list of comparables. According to the assessee, Inteq Software Pvt.Ltd., provides application services, software testing, data warehousing, EI & EDI, BPO and staffing services. It is stated that Inteq Software Pvt.Ltd., is also involved in end to end product development with primary focus in healthcare industry and there is no segmental information. The Ld.AR referred the audited accounts of Inteq Software Pvt.Ltd., placed at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of the assessee company is not enclosed, we are not in a position to examine the observation of the DRP that, this comparable is a pure software development service provider. Therefore, in the facts of the instant case, we deem it appropriate to restore the issue to the files of the AO/TPO. The AO/TPO is directed to afford a reasonable opportunity of hearing to the assessee and take a decision whether Aspire Systems (I.) Pvt.Ltd., can be a comparable. 19.5 This comparable is remand to the Ld.AO/TPO to be considered in accordance with law. Needless to say that proper opportunity of being heard must be granted to the assessee. Accordingly Additional Ground No.17 stands allowed as indicated herein above. 20. Ground No.7 is in respect of non granting to WCA while computing the margines of the comparables. 20.1 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. JCIT reported in [2019] 101 taxmann.com 313. This Tribunal held as follows : '10. The next grievance projected by the Assessee in its appeal is with regard to the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the day-to-day management of the organization (e.g. finance, human resources, information systems etc.). With respect to human resources, financial management, routine administration etc. In our view this comparable cannot be held functionally similar with that of the assessee before us. Accordingly we direct this comparable to be excluded from the list of comparables. 21.2 Digital Radio Broadcasting Ltd. 21.2.1 The Ld.AR submitted that this company is predominantly earning revenue from the sale of advertisement and sale of concert tickets. The Ld.AR submitted that this comparable is earning revenue from which head is not identifiable from the audit reports placed at page 1666 of the paper book in the Director's report. 21.2.2 Though it is mentioned that the company have above revenue of Rs.55 crores however in the note 17 at page 1679, income from other sources are computed at Rs.6,97,05,166/-. At page 1681, this company has entered into Broadcast open commencement of commercial operations, music in which phonographic performance ltd. has a copyright. Further at page 1684, the segmental report of this company has been mentioned to be as under: "Segment Reporting: a) P ..... X X X X Extracts X X X X X X X X Extracts X X X X
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