TMI Blog2022 (11) TMI 1336X X X X Extracts X X X X X X X X Extracts X X X X ..... Infosys BPM Ltd., SPI Technologies India Pvt. Ltd. and Eclerx Services Ltd. to exclude from the final list for failing the turnover filter under ITES segment. R S Software (India) Ltd. - This comparable underwent a shift in the revenue generating segments. This comparable has made investments in developing tools and platforms and has also enhanced the sales and marketing activities. These are any ways not the functions performed by the assessee before us which is a captive service provider, only catering to its AE. Thus we hold that R.S. Software(India) Ltd., should be excluded from the list of comparables. Microland Ltd. - As we have excluded various comparables that exceeded 200 crores turnover, this comparable also deserves to be excluded on the same principle - we direct the Ld.TPO to exclude the above comparables from the Final list of SWD segment for failing in functionality tests. Interest on receivables - We direct the Ld.TPO that in the event the WCA subsumes the outstanding recievables, no separate characterisation is to be made. However for those recievables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al margins as under: Particular ITeS SWD MSS Total Revenue from operations 39,36,80,401 55,50,25,698 14,44,38,306 1,09,31,44,405 Employee benefits and other expenses 13,32,25,635 29,95,60,203 8,71,14,141 51,98,99,979 Depreciation and amortization 4,83,52,035 5,80,22,442 77,88,829 11,41,63,306 Other expenses 16,07,53,112 11,67,98,293 3,52,21,631 31,27,73,036 Forex loss* 8721294 12295614 3199775 24216683 Total expenses 35,10,52,076 48,66,76,552 13,33,24,376 97,10,53,004 Net profit 4,26,28,325 6,83,49,146 1,11,13,930 12,20,91,401 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65th Percentile 10.03% Sales and marketing services segment: Sl. No. Name of the Company Weighted Average 1. Honeycomb Relationship Management Services Pvt. Ltd. 3.61% 2. Hindustan Field Services Pvt. Ltd. 4.85% 3. Spectrum Business Solutions Limited 5.87% 4. ICRA Management Consulting Services Ltd. 9.12% 5. DGM India Internet Marketing Ltd. 14.10% 6. Kestone Integrated Marketing Services Pvt. 15.10% Ltd. 7. Majestic Research Services Solutions Ltd. 25.85% 35th Percentile 5.87% Median 9.12% 65th Percentile 14.10% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Infobeans Technologies Ltd. 32.42% 10. Thirdware Solution Ltd. 36.90% 11. Infosys Ltd. 38.61% 12. Aspire Systems (India) Pvt. Ltd. 39.28% 13. Cybage Software Pvt. Ltd. 66.45% 35th Percentile 24.83% Median 28.20% 65th Percentile 32.42% ITES Sl. No. Name of the Company Weighted Average 1. Tech Mahindra Business Services Ltd. 20.44% 2. Infosys BPM Ltd. 26.44% 3. SPI Technologies India Pvt. Ltd. 37.77% 4. Eclerx Services Ltd. 56.44% Mean 35.27% Sales and ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contention in respect of some comparables sought for exclusion / inclusion under the 3 segments which are as under: 2.10 The comparables that remained after giving effect to the directions of the DRP are as under: SWD Sl. No. Name of the Company Weighted Average 1. Kals Information Systems Pvt. Ltd. 8.60% 2. Rheal Software Pvt. Ltd. 14.50% 3. R S Software (India) Ltd. 20.87% 4. Larsen Toubro Infotech Ltd. 24.83% 5. Nihilent Technologies Ltd. 26.36% 6. Inteq Software Pvt. Ltd. 28.20% 7. Persistent Systems Ltd. 30.89% 8. Infobeans Technologies Ltd. 32.42% 9. Thirdware Solution Ltd. 36.90% 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ye US. FireEye India provides these services in accordance with the specifications provided by its FireEye US. FireEye India is engaged in providing IT services to FireEye US for existing as well as new products. Broadly these services provided by FireEye India includes software developmental activities for modification, enhancement, or improvement to the existing software technology and creation or development of any new software technology, which involves a number of stages that broadly include software requirement analysis, low level designing, coding, testing and maintenance. The head of Products development department is located in US. FireEye India executes the services based on the detailed inputs (including user requirements, technical and engineering specifications etc.) and under the oversight of the product development team at FireEye US. The principal functions relating to the new products are performed by FireEye US. Software engineering is a complex process involving a number of stages ranging from system and requirement analysis to implementation. The development process broadly includes system and requirement analysis, high-level designing, low-level designing, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut will produce actual results that agree with required results.FireEye India is engaged in preliminary testing of the software before releasing the same to FireEye US. Once the preliminary level testing is done by FireEye India, the final testing before the launch of the software is carried out by FireEye US. FireEye India's testing activities follow processes and specifications defined by FireEye US. Acceptance, installation, integration and deployment: FireEye US undertakes the integration of the software modules developed by FireEye India. Software Maintenance for the developer consists of fixing bugs that are found during customer operation and adding enhancements to product functionality to meet evolving customer requirements. Software maintenance is the process of enhancing and optimizing deployed software, as well as remedying defects. The software maintenance phase involves changes to the software in order to correct defects and deficiencies found during field usage as well as the addition of new functionality to improve the usability and applicability of the software. Software will undergo some modifications after it is delivered to the customer. Both FireEye US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Creates awareness about the warranties and other representations made by AEs as per the standard terms and conditions of sale among the customers within the territory Provides customers within the territory with pre-sale support, limited onsite installation support, and limited post-sale customer support services with respect to the products. Once a customer has been identified, the customer places an order directly with AEs which will be responsible for the production and delivery of the products directly to the customer. ITES FireEye India provides Customer Support ('CS'] and Infrastructure Support Services ('ISS') to its AEs. Customer Support Services FireEye India provides CSS which includes the following activities: Attending the calls of the customers and providing solutions by the support team from India. The support team is responsible for providing Level 1 and Level 2 support (both voice and non-voice based support) services to the customers of FireEye US. Any bug fix required to resolve the problem is always referred to the R D team located in US. Infrastructure Support Services FireEye India provide ISS whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts own name. As FireEye US deals with and caters to the needs of third party clients, it bears the contract risk with respect to the contracts entered into with third parties. In respect of the services rendered by FireEye India, FireEye India is merely acting as a subcontractor of FireEye US. Accordingly, it does not bear any contract risk vis- -vis FireEye US in relation to the performance of the project. Price Risk Price risk is the risk that future income streams are sensitive to market prices. Since FireEye US negotiate the price with their customers, they bear entire price risk. FireEye India in its role as a captive service provider does neither directly or indirectly bear any pricing risk as it is not directly engaged with FireEye US customers in commercial transactions and is compensated on a cost plus mark-up basis. Credit Risk A firm faces customer credit risk when it supplies products to a customer and the customer fails to make payment or the payment is deferred. FireEye US assumes full credit risk in respect of contracts entered into with its third parties customers. Since FireEye India provides services only to its AEs for which it gets rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No Service Liability Risk No Yes Capacity Utilisation Risk No Yes Human Capital Risk Yes Yes Assets Any business requires assets (tangible or intangible), without which, it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by FireEye India provides an insight into the resources deployed by them and their contribution to the business processes/economic activities. The tangible assets employed in FireEye India are considered essential for running the business. FireEye India does not own any non-routine valuable intangible assets. Tangible Intangible assets owned by FireEye India Particulars Net Block as on 31 March 2016 Computer equipments 141,527,905 Computer equipments appliances 34,399,073 Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the companies comparable to the assessee. It was submitted that application of turnover filter is a relevant criterion in choosing comparable companies. It is submitted that, the difference in the scale of operations have a direct impact on the profitability. Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. 7.5 The Ld.Counsel relied on following decisions in support of the above submissions. Autodesk India (P) Ltd. V. DCIT (reported in (2018) 96 taxmann.com 263 (Bang Trib)). Razorpay Software Pvt. Ltd. v. ACIT (order dated 27.12.2021 passed in IT(TP)A No. 190/Bang/2021) 7.6 The Ld.AR thus submitted that, the above comparables are to be excluded for having turnover more than 200 crores and hence not a fit comparable with that of assessee. On the contrary, the Ld.DR relied on the orders passed by authorities below. He also relied on the decision of Coordinate Bench of this Tribunal in case of BORQS Software Solutions Pvt. Ltd. v. ACIT in IT(TP)A No. 310/Bang/2021 by order dated 25.10.2021. We have perused the submissions advanced by both si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent (P.) Ltd. v. DCIT (supra) observed in respect of persistent systems, L T Infotech, Thirdware Solutions, Infosys Ltd. as under: 16. As far as the challenge by the assessee on exclusion of aforesaid 5 companies in ground No. 2(f), the ld. counsel for the assessee has brought to our notice a decision of Bangalore Bench of ITAT for the very same Assessment Year 2014-15 in the case of LG Soft India (P.) Ltd. v. DCIT [IT(TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019]. In this order rendered in a case of assessee rendering SWD services such as the assessee, the Tribunal excluded 3 out of 5 companies referred to in the earlier paragraph and remanded 1 company for fresh consideration with the following observations:- 5. The Ld A.R submitted that M/s Infosys Ltd, M/s Persistent Systems Ltd and M/s Thirdware Solutions Ltd have been excluded by the co-ordinate bench in the assessee's own case in AY 2008-09 in IT(TP)A No. 1673/Bang/2012. 6. We notice that the co-ordinate bench has excluded M/s Infosys Ltd in AY 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd (IT(TP)A No. 1303/Bang/2012 dated 28-11-201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of sub-contracting expenses . 3.3 There is nothing on record brought by the Ld.CIT.DR in order to establish that these are comparable with assessee that is a captive service provider which functions at the strict supervision and instructions by the AE s. Further we note that turnover criteria has to be applied with an upper limit which is not been considered by the Ld. TPO. The TPO has applied less than 1 crore turnover limit to eliminate the comparables however it failed to apply upper limit considering the functions performed assets owned and risk assumed by assessee under this segment for the year under consideration. 17.8 Before us, the Ld.DR has not been able to place anything on record contrary to the above observation. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Persistent Systems Ltd., L T Infotech Ltd., Thirdware Solutions and Infosys Ltd. from the final list. 17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under: Comparable Sought to be excluded by the assessee Aspire S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, 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. .................. 17.10 Perusal of the annual report, filed before us in respect of the above two comparables, we note that the segmental financials are not available in respect of Nihilent and Infobeans and the RPT in respect of Aspire Systems India Pvt. Ltd. is more than 25% being the threshold limit considered by the Ld.TPO. Nothing has been placed before us by the Ld.DR in order to take a different view. Respectfully following the Hon ble Mumbai Tribunal, we direct the Ld.TPO to exclude Nihilent, Infobeans and Aspire Systems from the final set. We thus direct the Ld.TPO/AO to exclude Persistent Systems Ltd., Thirdware Solution Ltd., Larsen Toubro Infotech Ltd., Infosys Ltd., Nihilent Ltd. and Aspire Systems (India) Pvt L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and/or if the turnover is more that Rs.200 crores for the assessment year under consideration, it deserves to be excluded on any one of the above reasons. Accordingly this comparable is remitted back to the file of AO/TPO for fresh consideration. 8. In respect of the comparables sought for exclusion under ITES segment, we note that Coordinate Bench of this Tribunal in case of Mindteck India Limited in IT(TP) No 252/Bang/2021 for AY 20162017 by order dated 27/06/2022, wherein the companies sought for exclusion by present assessee were excluded in ITeS segment for having turnover of more than 200 crores. It is also submitted that these comparables are also functionally not similar to the assessee due to various reasons such as diversified business, segmentation unavailability, presence of extraordinary events, etc. The Ld.AR submitted that similar view has been taken in another decision of this coordinate bench, in the case of Swiss Re Global Business Solutions India (P.) Ltd. vs. ACIT reported in (2022) 137 taxmann.com 417 for assessment year 2016-17, the comparables Infosys BPO Ltd. (in para 20), and Eclerx Services Limited. (in para 29) were excluded on the basis of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Barracuda Networks India (P.) Ltd. vs. DCIT reported in [2021] 131 taxmann.com 337 wherein this comparable has been retained in the final list. We have perused the submissions advanced by both sides in the light of records placed before us. 9.4 We note that this comparable was retained in the decision of Barracuda Networks India (P.) Ltd. vs. DCIT (supra) by Coordinate Bench for satisfying the turnover filter however on functionality this comparable was not analysed. The figures reproduced hereinabove in respect of the revenue generated by this comparable in the proceedings 3 years reveals that this comparable has exceeded the turnover filter of 200 crores during FY 2013-14 and 2014-15 and the margin of this comparable in FY 2015-16 is (-)2.09%. There is a vide fluctuation in the profits in the immediately preceding year and the previous years thereby this comparable margin cannot be relied on. This Tribunal however observed as under: 15. As far as company listed at Sl.No.(h) of Grd.No.4 and Grd.No.5 i.e., R.S.Software (India) Ltd., is concerned, the turnover of this company in the current year is less than Rs. 200 Crores but in the earlier two years its turnover was more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or after 1 April 2014 (i.e. from FY 2014-15 and onwards). These amended provisions are applicable only when the determination of 'ALP' is done under the MAM being resale price method ('RPM'), cost plus method ('CPM') or transactional net margin method ('TNMM'). The relevant provisions of Rule 10CA of the Rules, in so far as it relates to choice of comparable companies, read as follows: Computation of arm's length price in certain cases. 10CA. (1) Where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more than one price, then the arm's length price in respect of such international transaction or specified domestic transaction shall be computed in accordance with the provisions of this rule. (2) A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an ascending order and the arm's length price shall be determined on the basis of the dataset so constructed: Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar uncontrolled transaction during the current year; or (ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction, then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by such enterprise shall not be included in the dataset. (3) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year, then for the purposes of sub-rule (2) the weighted average of the prices of such transactions shall be computed in the following manner, namely: (i) where the prices have been determined using the method referred to in clause (b) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of sales which has been considered for arriving at the respective prices; (ii) where the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules and the margin so arrived at has to be included in the dataset. 19. The third proviso to Sec.10CA(2) of the rules provides that if in the current year i.e., financial year 2015-16 if R.S. Software (India) Ltd., has not undertaken any uncontrolled comparable transaction then that company can never be considered for inclusion in the dataset. 20. The submission of the learned Counsel for the Assessee was that as per the proviso to rule 10CA(2) of the Rules, R.S. Software (India) Ltd., cannot be regarded as comparable company for Financial Year 2013-14 and 2014-15 because in those years, the turnover of this company was more than Rs. 200 crores. Therefore as per the first and second proviso to rule 10CA(2) of the Rules, the profit margin of this company for Financial year 2013-14 2014-15 has to be ignored and the profit margin of the financial year 2015-16 alone should be taken. If one looks at rule 10CA(2) in isolation, we have to reject this argument because the 1st and 2nd proviso to rule 10CA(2) of the Rules refers to only R.S.Software (India) Ltd., (i.e., where the comparable uncontrolled transaction has been identified on the basis of data relating to the current ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length price in relation to the international transaction [or the specified domestic transaction]; ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled (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 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. transaction shall be judged with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the transactions being compared for the current year and hence have to be ignored. On a harmonious reading of the provisions of rule 10CA, 10B(3) (4) of the Rules, we agree with the stand taken by the learned counsel for the Assessee. Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We hold accordingly. Applying the above principle, it is not appropriate to consider the margins for AY 2014-15 and 2015-16. Coming to the margin earned by this comparable for AY 2016-17, we have already noted herein above that it is (-) 2.09%. We have also noted in the preceding para that this comparable underwent a shift in the revenue generating segments. This comparable has made investments in developing tools and platforms and has also enhanced the sales and marketing activities. These are any ways not the functions performed by the assessee before us which is a captive service provider, only catering to its AE. Based on the above principle, we hold that R.S. Software(India) Ltd., should be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to that of the assessee, we follow the orders of the ITAT referred in para 9 (supra) and direct the Ld.AO / TPO to exclude Infobean Technologies Limited from comparable list. It is ordered accordingly. Accordingly, we direct the Ld.TPO to exclude the above comparables from the Final list of SWD segment for failing in functionality tests. 9.10 Microland Ltd. The Ld.AR submitted that DRP accepted the contentions of the assessee and directed the inclusion of Microland Ltd. in the final set. However before this Tribunal, the Ld.AR has submitted that this comparable has a turnover of more than 200 crores in the written submission filed. As in the preceding paragraphs, we have excluded various comparables that exceeded 200 crores turnover, this comparable also deserves to be excluded on the same principle. Accordingly, we direct the Ld.TPO to exclude this comparable from the final list. 10. In Ground no. 5.1, assessee has sought for inclusion of following comparables under SWD segment. IT Segment a) Akshay Software Technologies Ltd. b) Evoke Technologies Pvt. Ltd. c) Sasken Communication Technologies Ltd. d) Intense Technologies Ltd. ITeS S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 basis points and CUP as the most appropriate method. 12.2 The Assessee wishes to submit that the delayed/ outstanding receivables should not be considered as a separate international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of intercompany transactions of provision of services has been already determined and no separate adjustment is necessary in this regard. 12.3 The Ld.AR placed reliance on decision of Hon ble Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. reported in (2017) 398 ITR 66, held that, no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Hon ble Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order dated 21/07/16 in ITA No. 379/2016, also upheld by Hon'ble Supreme Court vide orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case referred to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 108, which dealt with question of law: (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' 3.5.6. She submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in lig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions. 12.8 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding recivables, no separate cheracterisation is to be made. However for those recivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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