TMI Blog2021 (3) TMI 1393X X X X Extracts X X X X X X X X Extracts X X X X ..... al has been filed by assessee against final assessment order dated 23/10/2018 passed by Ld.ACIT Circle6(1)(1) under section 143(3) read with 144C(13) of the Act on following grounds of appeal: The grounds mentioned herein by the Appellant are without prejudice to one another. Transfer Pricing Matters 1. On facts and in the circumstances of the case and in law, Dispute Resolution Panel ('learned DRP') erred in confirming the action of the Deputy Commissioner of Income-tax, Circle-6(i)(1), Bengaluru ('learned AO')/ Deputy Commissioner of Income-tax (Transfer Pricing), Circle 2(2)(1), Bengaluru ('learned TPO') in making an adjustment of Rs26,548,569 to the transfer price of the Appellant's international transactions in respect of software development services, Rs. 102,622,022 to the transfer price of the Appellant's international transactions in respect of marketing and sales support services and Rs. 113,123 in respect of notional interest on outstanding receivables. (Tax Effect: Rs. 43,943,534) 2. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d; f) Daffodil Software Limited; g) Kireeti Soft Technologies Limited; h) Exiliaiit Technologies Private Limited; i) Celstream Technologies Limited; j) Maveric Systems Limited; and k) Evoke Technologies Limited. Marketing and sales support services a) Concept Public Relations India Limited; b) ICRA Management Kestone Integrated; and c) MCI Management (India) Ltd. 2.10. Not considering certain expenses such as provision for doubtful debts, provision for warranties, provision of doubtful deposits, and miscellaneous expenditure written off, as part of operating cost for the computation of Appellant's Profit Level Indicator ('PU'). 2.11. Not providing adjustment for the differences in working capital of the Appellant and the comparable companies. 2.12. Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a- vis the comparable companies. 2.13. Computing incorrect operating mark-up of certain comparable companies. (Tax Effect: Rs. 43,905,084) Grounds for imputation of notional interest on outstanding receivables 3. On facts and in the circumstances of the case, the learned DRP/A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mic details of international transactions entered by assessee. The Ld.TPO from the details filed observed that, the assessee had following international transactions with its AE: SI. No. Particulars Amount (in INR) 1. Receipts for SWD services 23,95,52,266 2. Receipts for MSS services 62,42,08,406 3. Cost reimbursements 9,67,50,260 4. The Ld.TPO noted that, assessee followed TNMM as most appropriate method with OP/OC as PLI. The Ld.TPO observed that, assessee computed its margin at 15.36% under software development segment and 10.91% under MSS segment. It has been submitted that, the assessee selected following 22 comparables under software development service segment with average margin of 13.08%: Sl. No Comparable Company Average Adjusted % Markup on Total Cost 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Cost 1 Concept Public Relations 11.44% 2 EDCIL (India) Ltd. (Seg) 2.4% 3 ICRA Management India Ltd. 4.39% 4 Impresario Event -0.31% 5 India Tourism Development Corporation Ltd. (Seg) 2.08% 6 MCI Management (India) Ltd. 5.57% 7 Kestone Integrated Marketing Services Pvt. Ltd. (Seg) 10.15% 6. The assessee used following filters to select above comparables to determine the arm s length of the international transactions under both the segments: Sl. No. As per TP Study 1. Companies for which sufficient financial or descriptive information is not available to undertake analysis. 2. Companies that had ceased business operations or were currently inactive. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egment SI. No Comparable Company Markup on Total Cost 1 Infosys Ltd 36.13 % 2# Larsen Toubro Infotech Limited 24.61 % 3# Mindtree Ltd 20.43 % 4# Persistent Systems Ltd 35.10 % 5# R S Software India Ltd 24.25 % 6# Cigniti Technologies Limited 27.62% 7 SQS India BFSI Ltd 22.37 % 8 Thirdware Solutions Ltd 404.68 % 8.2 MSS Segment Sl. No Comparable Company Markup on Total Cost 1 I Media Corp Ltd. 34.17% 2 Irunway India Pvt. Ltd. 44.83% 3 Alia Creative Consult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to argue for inclusion of ICRA management and Keystone Integrated. Assessee also do not press Ground 2.10-2.13 raised in the grounds of appeal. Accordingly, these comparables and issues raised in the respective grounds are dismissed as not argued. 16. We restrict our decision only in respect of the comparables sought for exclusion/inclusion by assessee in Ground No.2.8, - 2.9, along with Ground No. 3-3.2 and 4-4.3 as under. 17. Before we undertake the comparability analysis it is (sine qua non) to understand the functions performed, assets owned and risks assumed by assessee under both these segments.: Functions performed: 17.1 SWD Segment : The assessee has entered into an intercompany agreement with its AE according to which it shall perform contract SWD services for its AE and is compensated on a cost +15% markup basis. In the transfer prising study, it is stated that assessee shall perform following are functions as per the service agreement: Conceiving, proposing and developing new products under the directions and instructions of Salesforce Inc Analyzing competitive products, evaluating costs and benefits of competitive or alternative des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted that, this company is functionally dissimilar and provides end to end business solutions like business consulting technology engineering and outsourcing services and no segmental details in respect of services are available. It is also submitted that this comparable made investments in products to establish as a tradable IPO owner. The Ld.AR submitted that this comparable owns significant brand value products and focus on brand building and incurred expenditure on R D and that the company owns 7 Edge products / platforms, and six other product based solutions. The company leverages on its premium banking solution and during the year the company merged with its wholly owned subsidiary Infosys Consulting India Limited. 20.2 It is submitted that this company was excluded from the final list of comparables in assessee's own case for the Assessment Year 2011-12, which has been accepted by revenue. The Ld.AR relied on decision of co-ordinate Bench of the Tribunal in the case of LG Soft India (P.) Ltd. v. Dy. CIT in IT(TP)A No. 3122/Bang of 2018 for dated 28.5.2019 for Assessment Year 2014-15, the. The contrary, the Ld.CIT.DR placed reliance on orders passed by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of cloud squads and fails the turnover filter of more than Rs. 200 Crores. The Ld.AR relied on decision of co-ordinate Bench of this Tribunal in case of LG Soft India(P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019. 20.7 On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. 20.8 We have perused submissions advanced by both sides in light of records placed before us. 20.9 We support the view taken by this Tribunal in case of LG Soft India Pvt. Ltd., where this Tribunal observed as under : 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd. also by following the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra), where in it was held that M/s Persistent Systems Ltd. is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Persistent Systems Ltd. Based on the above o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendering into an digital transformation and technology services to its clients the Ld.AR thus submitted that this comparable is functionally not similar with that of assessee and is a giant company with huge turnover thereby not fulfilling turnover criteria. 20.15 On the contrary Ld.CIT DR placed reliance on orders passed by authorities below. 20.16 We have perused submissions advanced by both sides in light of records placed before us. 20.17 The decision rendered in the case of Genisys Integrating (supra) by coordinat bench of this Tribunal had analysed the application of upper turnover filter in order to exclude companies whose turnover is more than that of assessee. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. Admittedly, the turnover of above said companies is more than 200 crores and hence cannot be considered as good comparable companies. We also observed that this company is functionally not similar with that of assessee as it is involved in diversified activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... significant intangibles and is thus not comparable to captive software development service providers such as the Appellant who does not own any significant or nonroutine intangibles. Further, L T enjoys significant brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market. Based on the above observation we direct Ld.AO/TPO to exclude this comparable from final list. 2. Cignity Technologies Ltd. 20.23 The Ld.AR submitted that turnover of this company is Rs. 54.63 Crores and margin is 27.62%. It is also submitted that this company is functionally dissimilar and offers publication network services and solutions and has expanded the business operations in Australia and UK .This Company has extraordinary events with acquisition of Two Companies. The Ld.AR relied on decision of LG Soft India(P.) Ltd. (supra). 20.24 On the contrary the Ld. CIT DR placed reliance on orders passed by authorities below. 20.25 We have perused submissions advanced by both sides in light of records placed before us. 20.26 We note that coordinate bench of Tribunal in case of LG soft India (P.) Ltd (supra) observed as under : 9. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovides technology analysis and research services to corporations, law firms and other leading technology investment and licensing firms worldwide. It is also submitted that related party transaction of this comparable for the year under consideration is 30.89%. It has been submitted that these services rendered by this comparable are not discernible from the annual report however from the website of the company the details have been ascertained. It is also submitted that from the balance sheet it is clear that this comparable owns huge intangibles and is into some kind of research and development as every year there is an addition to the intangible asset which is clear from page 3954 of paper book. On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. 21.5 We have perused submissions advanced by both sides in light of records placed before us. 21.6 Is on perusal of the annual accounts placed in the paper book, we note that the functions carried out by this company is not very clear the notes to the financial statements only refers to service income without mentioning the nature of services rendered by this comparable also from the profit and lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld.TPO. However the Ld.TPO rejected this comparable as it does not have related party transaction details in the annual report. 22.2 The Ld.CIT.DR placed reliance on orders passed by authorities below. 22.3 We have perused submissions advanced by both sides in regards records placed before us. 22.4 The Ld.AR had submitted that, this comparable has been considered to be a good comparable by coordinate bench of this Tribunal in case of LG Soft India Pvt.Lltd. (supra) On the contrary, Ld.CIT.DR placed reliance upon orders of authorities below. 22.5 We have perused submissions advanced by both sides in the light of the records placed before us. 22.6 The only reason for excluding this comparable by the authorities below is for the reason that RPT transactions have not been reported in the annual report. We have perused the decision of this Tribunal in case of LG Soft India (P.) Ltd. (supra) wherein on similar reasoning the Ld.TPO excluded this comparable therein and this Tribunal observed as under: 12. We find force in the contentions of Ld. ar. If the annual report of this company does not mention about related party transactions, then the assessee cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the public domain. Evoke Technologies Ltd. 22.11 Ld.AR submitted that the assessee prayed for inclusion of this company before DRP. However, DRP rejected the prayer of the assessee for the reason that financial results incorporated branch revenue and profit, which was based on unaudited financial statements of bralnch outside India. It was also observed by the DRP that export revenue constituted only 20.34% which did not fulfill filter applied by the Ld.TPO. The Ld.AR placed reliance upon annual reports of this company placed at page 3439 of paper book wherein income from software services and products by this company has been shown to be at Rs.3621.72 lakhs. 22.12 In respect of above, comparables being Kireeti, Exliant, Ulstream and Evoke the Ld.CIT DR submitted that these companies may be sent back to the Ld.AO/TPO for due verification due to contradictions in respect of annual report. 22.13 We have considered the submissions advanced by both sides in light of records placed before us. 22.14 In our opinion the Ld.AO/TPO shall verify annual reports filed by assessee in respect of these comparables and then ascertain the functional comparability with that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This Bench referred to decision of Special Bench of this Tribunal in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in [IT Appeal No. 1548 and 1549 (Kol.) of 2009, dated 15- 7-2016], held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. It has been argued that, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lone and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT reported in [2018] 91 taxmann.com 286 has observed that: There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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