TMI Blog2023 (3) TMI 598X X X X Extracts X X X X X X X X Extracts X X X X ..... uch circumstances we do not deem it fit to be considered in the final set of comparables. Cygnet Infotech Pvt. Ltd. - In the annual report it is mentioned that this company derives revenue various services by providing Enterprise Solutions, Application content, Management services etc. It is also mentioned that the revenue recognition is by providing man power support to its customers. AT page 2033 of the paper book, we note that this company bares all the risks attributable to a full fledged entrepreneur. In our view this company cannot be considered as a good comparable. Excluding R. Systems International Ltd. confirmed. Incorrect computation of margins of comparables by the Ld.TPO - We note that the Ld. TPO has not correctly computed the margins of the comparables those have been finally retained post DRP s directions. As in the present appeal, assessee has already alleged inclusion/exclusion of comparables, we direct the AO/TPO to adopt and compute the correct margins of the comparables that would be finally sustained based on the directions herein above. Accordingly, this ground raised by the assessee stands allowed. Pressman Advertising Ltd. - As business over v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttled by the decision of Hon ble Supreme Court in case of Checkmate Services (P.) Ltd [ 2022 (10) TMI 617 - SUPREME COURT] thus we hold that the employees contribution to PF and ESI should be remitted before the due date as per explanation to section 36(1)(va) i.e. on or before the due date under the relevant employee welfare legislation like PF Act, ESI Act etc., for the same to be otherwise allowable u/s.43B. We therefore see no reason to interfere with the order of the CIT(A). The grounds taken by the assessee on this issue is dismissed. - IT(TP)A No.190/Bang/2022 - - - Dated:- 18-11-2022 - SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER For the Appellant : Shri Mahveer C Jain, A.R. For the Respondent : Shri Binod Kumar Singh, D.R. ORDER PER BEENA PILLAI, JUDICIAL MEMBER: The present appeal is filed by the assessee against the final assessment order dated 28.2.2022 for the assessment year 2017-18 passed by the CIT(A), NFAC, Delhi on following grounds of appeal:- Ground No. 1: The learned Assessing Officer ( AO ) has grossly erred in passing the final assessment order u/s 143(3) r.w.s 144C(13) re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenues, etc and in spite of some of these being held as not comparable to the Assessee either by Tribunal/ DRP or by the learned TPO in preceding years: (i) Larsen Toubro Infotech Ltd (ii) Great Software Laboratory Pvt.Ltd (iii) Persistent Systems Ltd (iv) Tata Elxi Ltd (v) Aptus Software Labs Pvt Ltd (vi) Cygnet Infotech Pvt.Ltd (vii) Infobeans Technologies Ltd (viii) Nihilent Ltd (ix) OFS Technologies Ltd (x) Threesixty Logica Testing Sevices Pvt Ltd (xi) Infosys Ltd (xii) Cybage Software Private Ltd (xiii) Consilient Technologies Pvt.Ltd Ground No. 8: The learned TPO has erred in law and in facts, by not following the directions of the Hon'ble DRP by including R Systems International Limited which has been rejected by the Hon'ble DRP as a comparable company to the Assessee. Ground No. 9: The learned TPO erred on facts by not making changes in arithmetical errors/inaccurate computation in computing NCP of comparable companies based on annual reports despite the directions of the Hon'ble DRP. Ground No. 10 The learned AO/TPO has also erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red from employees and reimbursed to the AE; Ground No. 17: The learned TPO erred in law and facts by not allowing working capital adjustments in order to account for material differences in working capital existing between the Assessee and the set of comparable companies, in spite of the fact that reasonably accurate adjustments can be made to account for these material differences and the Hon'ble DRP has grossly erred in confirming the same. Ground No. 18: The learned TPO erred in not allowing risk adjustments in order to account for material differences in risk profile existing between the Assessee and the set of comparable companies and the Hon'ble DRP has grossly erred in confirming the same. Ground No. 19: The learned Assessing Officer has grossly erred in disallowing the employee provident fund contribution (PF) amounting to INR 2,754 remitted before the due date of filing of the return as per the Income Tax Act, 1961. 2. Brief facts of the case are as under:- 2.1 The assessee is a wholly owned subsidiary company of Radisys International LLC and is engaged in providing software development and marketing sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame to be considered under both these segments are as under: 2.4. The Ld.TPO thus proposed the adjustment under both these segments being the short fall as under: 2.5 On receipt of the transfer pricing order, the Ld.AO passed draft assessment order by proposing to make an addition in the hands of assessee at Rs.18,29,67,620/-. 2.6. The assessee filed objections before the DRP. The DRP after considering the submissions of assessee upheld the order of the Ld.AO/TPO. The Ld. AO on receipt of the DRP s directions passed the final assessment order being the impugned order by making addition in the hands of the assessee at Rs.18,29,67,620/-. Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal. 3. Amongst the Transfer pricing issue alleged in this appeal, the assessee is seeking exclusion/inclusion of comparables under SWD MSS segment. Before we undertake the comparability analysis, it is sine-qua-non to understand the FAR analysis of the assessee under the two segments. Functions Performed As per the agreement entered by Radisys India with its Associated Enterprise, Radisys India shall engage in development and suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Radisys India. Since, Radisys India has to hire and retain good personnel and the responsibility of providing deliverables is on Radisys India, Radisys India assumes this risk. 10.4: Market Risk: Market risk arises for a business due to the uncertainty in the structure of the market, demand patterns and needs of customers, cost, pricing lc., Radisys India is a captive service provider to its Associated Enterprise. Radisys India does not provide any service to any other party and it is the Associated Enterprise who assumes market risk as the third party services are provided by it. This risk arises if the market in which the company operates in is sensitive to introduction of new products and technologies. 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 manufacturing processes. Radisys India as a service provider solely to its Associated Enterprise works as per specifications and training of Associated Enterprise. Hence, the Associated Enterprise being the owner of the product and technology associated with the products solely be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olutions Ltd. Accrdingy, the same are dismissed as not pressed. It is submitted that the remaining 5 comparables sought for inclusion, were not considered by the Ld.TPO/AO. We therefore deem it appropriate to remit them to the Ld. AO/TPO. The Ld. AO/TPO shall look into the functional profile of these comparables and verify the same with that of the assessee. If they are functionally found to be similar with that of assessee, the same may be considered in accordance with law, considering the turnover limit of Rs.1 to 200 Crores. Accordingly, this ground raised by the assessee stands partly allowed. 7. Ground No.7 is raised by the assessee seeking exclusion of following 13 comparables: (i) Larsen Toubro Infotech Ltd (ii) Great Software Laboratory Pvt. Ltd. (iii) Persistent Systems Ltd (iv) Tata Elxi Ltd (v) Aptus Software Labs Pvt Ltd (vi) Cygnet Infotech Pvt Ltd (vii) Infobeans Technologies Ltd (viii) Nihilent Ltd (ix) OFS Technologies Ltd (x) Threesixty Logica Testing Sevices Pvt.Ltd (xi) Infosys Ltd (xii) Cybage Software Pvt.Ltd (xiii) Consilient Technologies Pvt.Ltd 7.1 The Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he turnover of these companies is more than Rs.200 Crores and the Assessee s turnover is only Rs.1,21,34,35,876/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. 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 Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. 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 comparabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gies Ltd., Threesixty Logica Testing Services Pvt. Ltd. and Concilient Technologies Pvt. Ltd. Accordingly, these comparables are dismissed as not pressed. 8.1. The two comparables that assessee seeks to exclude on functional dissimilarities are: (i) Infobeans Technologies Ltd. and (ii) Cygnet Infotech Pvt. Ltd. (i) Infobeans Technologies Ltd. 8.2 The Ld.AR submitted that, this company is engaged in Automation Engineering, Customized Software, Custom Application Development (CAD), Content Management Systems, Enterprise Mobility and Big data Analytics. It is the submission of the Ld.AR that this comparable is functionally not similar to the assessee. He also submitted that, there is no segmental details available in respect of the revenue generated by this company and that the content management, Analytic services are considered to be KPO as per safe harbour rules. This comparable was decided to be excluded from the list of comparables by the coordinate bench of Tribunal vide IT(TP)A No.210/Bang/2021 in the case of EIT Services India Pvt. Ltd. Vs. Deputy Commissioner of Income-tax for the AY 2016-17, wherein held as under: 5.7 We have heard the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for AYs 2014-15 2015- 16. Respectfully following the decision of the co-ordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables. 5.8. In view of the above decision of the Tribunal, we are inclined to hold that Infobeans Technologies Ltd. cannot be considered as a comparable and to be excluded from the list of comparables. 8.3. On verification of the financials of this company for AY 2017-18, we note that in the Annual Report at page 2343 placed in paper book Volumes 4 of 6, this has been stated to be catering into vide range of segments as under: INFOBEANS TECHNOLOGIES LIMITED Founded in 2000, InfoBeans Technologies is a leading player offering Customized Software, Digital, Transformation and Enterprise Mobility solutions for clients across the globe. With two state-of-the-art facilities in India, the CMMI level 3 certified Company caters to Fortune 100 clients in USA, Germany and Middle East markets. The Company caters to a wide range of segments in the industry, including distributed storage systems, multi-format multimodal content and e-commerce web and mobile platforms for diverse sectors. The Company's t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, this comparable is directed to be excluded. 9. Ground No.8 has been raised by the assessee for not following the DRP s directions in respect of excluding R. Systems International Ltd., by the Ld.AO while passing the impugned order. 9.1. On perusal of DRP s directions at page 26, we note that in para 7.3, the DRP excluded R.Systems International Ltd. The revenue is not in appeal against this and therefore, we direct the Ld.AO/TPO to pass an order in consonance with the DRP s directions in respect of this comparable. Accordingly, this ground raised by the assessee stands allowed. 10.Ground No.9 is in respect of incorrect computation of margins of comparables by the Ld.TPO. We note that the Ld. TPO has not correctly computed the margins of the comparables those have been finally retained post DRP s directions. As in the present appeal, assessee has already alleged inclusion/exclusion of comparables, we direct the AO/TPO to adopt and compute the correct margins of the comparables that would be finally sustained based on the directions herein above. Accordingly, this ground raised by the assessee stands allowed. 11. Ground Nos.10 11 are not pressed at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Digital tracking, Online communities, Neuro Science, Emotional analysis, Automated audience measurement, Sensory sciences, etc. Under the marketing research services, which can be verified at page Nos. 4125 to 4126 of the paper book. At the outset, the Ld.AR submitted that these activities carried by this company is not akin to the marketing support service segment and the services rendered by assessee under this segment. 13.1. On the contrary, the Ld. DR relied on the order of the DRP. 13.2. We have perused the submissions advanced by both sides in the light of records placed before us. We note that this comparable is into various activities like Digital Network Services and into analysing media and marketing information based on various concepts through different mediums of interactions. Therefore, in our considered opinion, this comparable cannot be compared with assessee and deserves to be excluded. Accordingly, this ground raised by the assessee stands allowed. 14. Ground No.13 is with regard to seeking rectification of certain errors in computing operating expenses under marketing support services segment. The Ld.AO/TPO is directed to recalculate the margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng: (a) 'The purchase price of each share covered by each Incentive Option shall not be less than 100% of the Fair Market Value of the Common Stock of the Company on the date the Incentive Option is granted; provided, however, that if at the time an Incentive Option is granted the Optionee owns or would be considered to own by reason of Section 424(d) of the Code more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or Parent of the Company, the purchase price of the shares covered by such Incentive Option shall-not be less than 110% of the Fair Market Value of the Common Stock on the date the Incentive Option is granted. (b) The purchase price of each share covered by each Non-Qualified Option shall not be less than 85% of the Fair Market Value of the Common Stock of the Company on the date the Non-Qualified Option is granted; provided, however, that if the Optionee owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary or Parent of the Company, the purchase price of the shares covered by such Incentive Option shall not be less than 1 10% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quested in the notice of exercise, upon tender of delivery thereof, the Committee shall have the right to terminate his or her Option with respect to such shares. (d) The Company may make loans to Optionees as the Committee, in its discretion, may determine in connection with the exercise of outstanding Options granted under the Plan. Such loans shall (i) be evidenced by promissory notes entered into by the holders in favor of the Company; (ii) be subject to the terms and conditions set forth in this subsection (d) and such other terms and conditions, not inconsistent with the Plan, as the Committee shall determine; and (iii) bear interest at such rate as the Committee shall determine. In no event may the principal amount of any such loan exceed the purchase price of the shares of Common Stock covered by the Option, or portion thereof, purchased by the Optionee. The initial term of the loan, the schedule of payments of principal and interest under the loan, the extent to which the loan is to be with or without recourse against the holder with respect to principal and applicable interest and the conditions upon which the loan will become payable in the event of the holder' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO has recorded that the Israeli company is remunerated at cost plus mark up by foreign affiliate for services. In the present facts, the re is no mark up paid by the AE to the assessee. Such abstract reference by the revenue authorities is least expected. 15.10. In our view the Ld.TPO failed to consider the basic fact that, purchase cost of the shares of foreign AE is charged from the employees of the assessee directly and the assessee deducts TDS on the 15% discount received by such employees, who have opted for the scheme. In our view, based on the option scheme and the Employee Information Supplement India , the 15% discount received by such employees of the assessee cannot be treated as operating in nature. Accordingly, this ground raised by the assessee stands allowed. 16. Ground No.17 is in respect of non-granting of working capital adjustment. We note that this issue is no longer res integra, as the Tribunal has been consistently granting working capital adjustment to the assessee while computing ALP of international transactions on actual. This view is fortified by the order of this Tribunal in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.194 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f) . (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely: (a) the specific characteristics of the property transferred or 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 Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high leve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No.2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO s working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 192 of the Assessee s paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1)( e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT(A) that differences in wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o rest the contradicting decisions of various High Court. The relevant extract of the decision is as given below 52. When Parliament introduced Section 43B, what was on the statute book, was only employer s contribution (Section 34(1)(iv)). At that point in time, there was no question of employee s contribution being considered as part of the employer s earning. On the application of the original principles of law it could have been treated only as receipts not amounting to income. When Parliament introduced the amendments in 1988-89, inserting Section 36(1)(va) and simultaneously inserting the second proviso of Section 43B, its intention was not to treat the disparate nature of the amounts, similarly. As discussed previously, the memorandum introducing the Finance Bill clearly stated that the provisions especially second proviso to Section 43B - was introduced to ensure timely payments were made by the employer to the concerned fund (EPF, ESI, etc.) and avoid the mischief of employers retaining amounts for long periods. That Parliament intended to retain the separate character of these two amounts, is evident from the use of different language. Section 2(24)(x) too, deems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cond is deemed an income, by definition, since it is the deduction from the employees income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under Section 43B. 54. In the opinion of this Court, the reasoning in the impugned judgment that the non-obstante clause would not in any manner dilute or override the employer s obligation to deposit the amounts retained by it or deducted by it from the employee s income, unless the condition that it is deposited on or before the due date, is correct and justified. The nonobstante clause has to be understood in the context of the entire provision of Section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amo ..... 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