TMI Blog2023 (4) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of NTT Data FA Insurance Systems (India) Pvt. Ltd ( 2022 (10) TMI 1153 - ITAT BANGALORE] where the issue was remitted back to the AO/TPO. Accordingly respectfully following these decisions we remit the issue of inclusion of SagarSoft back to the AO/TPO for fresh examination. Needless to say that the assessee may be given a reasonable opportunity of being heard. AO/TPO is directed to recompute the ALP in accordance with the directions given in this order. - IT(TP)A No.211/Bang/2021 - - - Dated:- 19-12-2022 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER For the Assessee : Smt. Tanmayee Rajkumar, Advocate For the Respondent : Shri K. Sankar Ganesh, Jt.CIT(DR)(ITAT), Bengaluru. ORDER Per Padmavathy S., Accountant Member This appeal is against the final assessment order passed by the AO, National e-Assessment Centre, Delhi u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 07.04.2021 for the assessment year 2016-17. 2. The assessee provides software development and support services to Microsemi SoC on a captive basis in the areas of circuit and logic design and verification, softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Sagarsoft (India) Ltd. 7.11 5. Cigniti Technologies Ltd. 9.10 6. CG-VAK Software and Exports Ltd. 9.46 7. Bells Softech Ltd. 10.38 8. E-Zest Solutions Ltd. 11.38 9. Thirdware Solutions Ltd. 42.98 35th Percentile 7.11 Median 9.10 65th Percentile 9.46 5. Out of the above 9 comparables selected by the assessee, the TPO accepted the 3 comparables viz. Cigniti Technologies Ltd., CGVak Software Exports Ltd. and Thirdware Solutions Ltd. and rejected the remaining 6 comparables. The TPO applied fresh filters and accordingly the comparables selected by TPO and the median of weighted average of PLIs of the companies is as under:- Sl. No. Name of the Company Weighted Average 1. K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Aspire Systems (India) Pvt. Ltd. and Cybage Software Pvt. Ltd. which ought to be excluded on account of the companies being functionally dissimilar to the Assessee. (Ground No. 4.6); b) The TPO erred in rejecting Akshay Software Technologies Ltd., Evoke Technologies Private Limited and Sagarsoft (India) Ltd. despite the companies being functionally similar to the Assessee and satisfying all the filters applied by the TPO and the DRP erred in upholding the same (Ground No. 4.7); Additional grounds c) The TPO while applying the turnover filter at the lower limit erred in not applying the said filter at the upper end so as to reject high turnover companies. The DRP further erred in confirming the same. (Additional ground No. 4.5(c)) d) That the TPO erred in upholding the inclusion the RS Software Ltd. though the same was functionally not comparable to the Assessee. Without prejudice, in the event RS Software Ltd. is retained in the final list of comparable, the weighted average margin for FY 2015-16 alone ought to be considered, as the company fails the upper turnover filter for FYs 2013-14 and 2014-15. (Ground No. 4.6 and Additional Ground No. 4.6(a)) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2021 passed in IT(TP)A No. 190/Bang/2021) and NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) wherein the said companies were excluded on application of the upper turnover filter. On other hand the ld. DR relied on the order of the lower authorities. 12. We heard the rival submissions and perused the material on record. The coordinate bench of the Tribunal in the case of Autodesk India Pvt.Ltd (supra), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 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 ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital 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 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). 13. Respectfully following the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 345.50 351.89 Operating cost 175.07 260.26 283.47 Operating profit -3.66 85.24 68.42 OP/OC -2.09% 32.75% 24.14% 20. The reason for decline in margin is attributable to the strategic shift made by the company as it is making substantial investments in a) developing tools and platforms and b) sales and marketing to enhance its customer base. Further, there is a significant drop in revenue (51 percent) vis- -vis the previous year. Further, the company recognizes that this shift has impact on the margin of the company. In view of the same, the company ought to be excluded. Presence of intangibles. 21. It is submitted that the company owns significant intangible assets. The company is also developing further intangible assets. The total value of intangible assets as a percentage of fixed assets is 17.3%, which is significantly higher than the intangible assets owned by the Assessee, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany is not comparable to a routine software development service provider. 27. Significant related party transactions: It was submitted that the company s related party transactions (sales) for the FY 2013-14 stand at 79.49% of sales, and therefore the company ought to be excluded. 28. Wide fluctuation in the margin: The ld. AR submitted that the company s margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company s margin stood at 47.21%, for the FY 2014-15 32.14% and for the FY 2015-16 7.56%. 29. It is submitted that the TPO has relied on the information received under Section 133(6) of the Income tax Act, 1961 ( the Act ) for the assessment year 2015-16 on the ground that no response was received from the company to the notice issued under Section 133(6) of the Act for AY 2016-17. It is submitted that in the absence of response to notice by the Company for AY 2016-17, the TPO erred in considering the information received for AY 2015-16 and holding that the company is functional comparable for the assessment year in question when the details available in the public domain illustrate otherwise. 30. It is su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee, and therefore the company ought to be excluded as being functionally different. Further, the segmental details for these diverse services are not available and therefore the company cannot be selected as a comparable. 33. Significant intangible assets: It was submitted that during the FYs 2013-14 to 2015-16, the company owned intangible assets representing around 7% of the total fixed assets held by the company. 34 . Expenses in foreign currency: The ld. AR stated that the annual report of the company at Note 33 under the head earnings in foreign currency shows export of goods/services calculated on F.O.B basis, which indicate that the Company has product sales as well. In the absence of segmental details, the company cannot be selected as a comparable. 35. Abnormal increase in revenue and fluctuation in margin : It was submitted that the revenue increased from Rs. 35 crores (FY 2014-15) to Rs. 62 crores (FY 2015-16) in a period of 1 year (76%). Also, the company s profitability increased by 147%. Also, the company s margin fluctuates widely (34.98%- FY 2015-16, 20.78%- FY 2014-15, 41.95%-FY 2013-14) which demonstrates that there exists some factor having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these three companies and held that Infobeans Technologies Ltd 18. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- 7. Infobeans Technologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons: 1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year 3. Leading provider of consulting technology next generation service. 4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore. 5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables. 18.1 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgement, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Inteq Software Pvt. Ltd 21. We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. Vs. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:- 46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE. 24.1 In view of the above order of the Tribunal, we hold that this comparable to be excluded from the list of comparables as it is functionally not comparable with the assessee and directed accordingly. Since we allowed the ground taken by the assessee on the basis of functionality itself, other arguments of the assessee has been not considered. 39. Respectfully following the decision of the coordinate bench we direct AO/TPO to exclude R S Software (India) Ltd., Inteq Software Pvt. Ltd., and Infobeans Technologies Ltd. 40. Vide Ground No. 4.7, the Assessee is seeking the inclusion of Akshay Software Technologies Ltd. ( Akshay ), Evoke Technologies Private Limited ( Evoke ) and Sagarsoft (India) Ltd ( Sagarsoft ). In this regard the ld AR presented the following arguments - Akshay Software Technologies Ltd. ( Akshay ) 41. As regards Akshay, it is submitted that the TPO rejected this company on the ground tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) has considered the issue of inclusion of Akshay and Evoke and held as under We have perused the submissions of both sides in light of records placed before us. We note that this Tribunal in case of Prism Networks Pvt. Ltd.(supra) observed and held as under: 18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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