TMI Blog2023 (6) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... g on case of Radisys India Ltd. [ 2023 (3) TMI 598 - ITAT BANGALORE] we direct exclusion of this company on functional dissimilarity. Nihilent Ltd - Respectfully following the decisions of the Tribunal in assessee s own case for earlier AYs and in the case of Subex Ltd. [ 2023 (4) TMI 224 - ITAT BANGALORE] this company is excluded based on functional dissimilarity. Consilient Technologies (P) Ltd. - As it is appropriate to remit this issue to the file of AO/TPO to consider it afresh in the light of submissions made by the Ld. A.R. with regard to functionality of the comparable. Threesixty Logica Testing Services (P) Ltd - Tribunal in the case of Triology EBusiness Software India (P) Ltd. [ 2013 (1) TMI 672 - ITAT BANGALORE] and Lionbridge Technologies (P) Ltd., [ 2019 (8) TMI 1868 - ITAT MUMBAI] had clearly brought out the distinction between the company which is engaged in the business of providing software testing services and a company which is engaged in software development. As clearly held that a software development company cannot be compared with a software testing services - we restore the issue of exclusion of Threesixty Logica Testing Services (P) Ltd., to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction undertaken by the assessee with its AEs. The TPO passed an order under section 92CA(3) of the Act on 26.01.2021 proposing a TP adjustment of Rs. 87,65,49,142/-. Pursuant to the TPO s order, the draft Assessment Order was passed under section 143(3) r.w.s. 144C of the Act, on 31.03.2021 assessing a total income at Rs. 179,34,41,606/-. 3. Assessee filed objections before the DRP on 27.04.2021. The DRP passed an order giving its directions on 29.12.2021. Pursuant to the DRP s directions, the impugned Final Assessment Order was passed on 27.01.2022 after making the following additions / disallowances : i. TP adjustment - Rs.77,83,81,568/- ii. Disallowance under section 40a(i) - Rs.9,67,88,064/- 4. Aggrieved by the impugned Final Assessment Order, assessee has filed the present appeal before the Tribunal. Assessee has filed 7 grounds and various sub-grounds. However, during the course of hearing, the learned AR had pressed for adjudication of only ground Nos.3.7, 4.1 to 4.6 and 5. In ground No.3.7, although the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Learned AO failed to appreciate that the amounts paid by the Appellant to Applied Inc. were towards 'at-cost' reimbursement of salary costs. 4.6. That on the facts and in the circumstances of the case, the Learned Panel and Learned AO has erred in rejecting the Appellant's reliance on the decision of the Hon'ble Karnataka High Court in DIT v. Abbey Business Services India Pvt. Ltd. [2020] 122 taxmann.com 174 (Karnataka), which is squarely applicable based on the facts and circumstances of the current case. 5. That on the facts and in the circumstances of the case, the Learned AO has erred in considering total assessed income of INR 1,714,279,930 in the computation sheet issued along with the assessment order dated January 27, 2022 as against INR 1,695,274,032 determined in the final assessment order, leading to erroneous levy of the tax demand. 5. The assessee has also raised additional grounds viz., ground Nos.8 to 10. During the course of hearing, the learned AR did not press grounds 9 and 10, hence the same are dismissed. Vide ground No.8, assessee is seeking to exclude four companies from the comparable list. However, during the course of hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, sale of products and licenses and there was no segmental data available. It was also submitted that it had amalgamation during the year and had significant onsite activity and R D expenditure. The TPO rejected the contentions of the assessee and held that this company is into software development services, because principal business is computer programming, consultancy and related activities and functionally similar to assessee. It was also stated by the TPO that compared to the offshore, the profit margin is less and there is no impact of R D expenditure. On objections filed by the assessee, the DRP held that from the Annual report information 10% revenues are from software development services and the plea that this company has diversified services has no basis. There was no mention of product sale or inventory. The amalgamation has no effect in the same line of business. The expenditure does not relate to onsite activity and the margins are less. The R D expenditure is only 0.3% against the generally acceptable tolerable limit of 3%. Therefore the DRP rejected the contentions of the assessee for exclusion of this company. 9. So far as Mindtree Ltd., is concerned, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it has diversified business activities and is functionally dissimilar. It was also contended that Infosys Ltd., has significant R D activities, onsite activity and lack of segmental data. It focused on branding. The TPO was of the view that this company is in business of software development and therefore comparable functionally. He rejected the assessee s arguments on brand, investment in R D, IP and onsite activity. The DRP upheld the order of the TPO. 12. The ld. AR reiterated the submissions made before the TPO and DRP in respect of the above four companies and submitted that the said company was excluded in the assessee s own case in Assessment Year 2015-16 as well as in earlier Assessment Years in regard to some of these comparables. It was further stated for the very same Assessment Year 2017-18, the Bangalore Bench of the Tribunal in the case of Yahoo Software development India P. Ltd. in ITA(TP)A No.178/Bang/2022, order dated 11.7.2022 these companies were excluded. 13. The ld. DR relied on the orders of TPO and DRP. 14. We have heard both the parties and perused the material on record. We notice that this company has been excluded in assessee s own case for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fails the Related Party Transaction to Sales filter applied by the learned TPO In the show-cause notice issued, the learned TPO has excluded companies for which the ratio of RPT to sales exceeds 25% during the current year i.e., during FY 2014-15. The relevant extract from the show-cause notice is reproduced below for ease of reference: e) Companies who have more than 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble company with a company which does not have any onsite revenue. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. v. DCIT, ITA No.1054/Bang/2011 for AY 2007-08 dated 23.11.2012 wherein this Tribunal took the following view:- 64. The next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropriately applied by the TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly. 36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO's order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt. 39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the functional dissimilarities brought to our notice:- Functionally dissimilar - owns intellectual properties, incurs significant R D costs onsite activity. - Engaged in diversified business activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit loss account not available. Commands substantial brand value. 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R D have all been brushed aside. In our view, the difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted factual position regarding presence of onsite revenue over and above the threshold limit of 25% of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly. 5. The revenue has not placed anything on record contrary to the above observations. Further admittedly the functions, assets owned and risks assumed by the assessee under the segment is similar with A.Ys. 2014-15 2015-16 (supra). Respectfully following the above view, we direct the Ld.AO to exclude Infosys Ltd., Persistent Systems Ltd., Mindtree Ltd. and L T Infotech Ltd. from the final list. 15. In the present case, the functional profile, assets, risks and activities of the assessee company are admittedly similar to the previous assessment years. Following the earlier years orders in the assessee s own case and the order of the Tribunal in the case of Yahoo Software development India P. Ltd. (supra), we direct exclusion of the above four companies from the final list of comparables. (v) Tata Elxsi Ltd. 16. The ld. AR submitted that it was urged that this company is providing high end services in niche area other t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment for which no segmental details are available. A.3 Further, the Ld.AR submitted that this company has been consistently being excluded from the final list of comparables in assessee s own case for the previous years. It is submitted that for the assessment year 2011-12, coordinate bench of this Tribunal excluded Tata Elxsi from the final list reported in (2016)73 taxmann.com 160 and for the assessment years 2012- 13 to 2014-15, the Ld.TPO himself did not considered the same to be comparable to the Assessee. On the contrary, the Ld.DR relied on the observations of the DRP/TPO. We have perused the submission advanced by both sides in light of records placed before us. A.4 We note that this comparable has been excluded in assessee s own case by observing as under: (6) Tata Elxsi Ltd. 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason to interfere with the finding of the DRP'. Respectfully following the above view we direct exclusion of Tata Elxsi Ltd., from the final list. 20. Respectfully following the above decision, we hold that this company is not comparable with pure SWD services provider like the assessee this Assessment Year also. Therefore the same is directed to be excluded from the comparables. vi) Cygnet Infotech 21. The assessee submitted that this company is to be excluded since as per website it offers solutions, engineering technical services and products. It lacks segmental data. The TPO was of the opinion that the entire revenue is from operations in SWD services, intangibles form only 2% of total assets and there was no evidence of functional dissimilarity. The DRP confirmed the order of the TPO. 22. The learned AR reiterated the submissions made before the Revenue authorities and submitted that this issue was considered in favour of assessee for Assessment Year 2017-18 in the case of Radisys India Ltd., IT(TP)A No.190/Bang/2022, order dated 18.11.2022. 23. The ld. DR supported the orders of revenue authorities. 24. Having considered the rival submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the view that there cannot be high or low end SWD activities. 28. The ld. AR made submissions as contended before the revenue authorities and submitted that it is functionally dissimilar with assessee and in the earlier Assessment Years 2015-16 2016-17, this company was excluded by the Tribunal in IT(TP)A Nos. 2582/Bang/2019 (order dated 30.12.2022) and 209/Bang/2021 (order dated 30.11.2022) respectively. Further, the Tribunal for the same Assessment Year 2017-18 in the case of Radisys India Ltd. in IT(TP)A No.190/Bang/2022 excluded this company as a comparable. 29. The ld. DR relied on the orders of the TPO and DRP. 30. We have heard both the parties and perused the material on record. We find that this company was excluded by this Tribunal in assessee s own case for earlier years (supra). Further for AY 2017-18, the Tribunal in Radisys India Ltd. (supra) directed exclusion of this company with the following observations:- Infobean Technology 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 Analytic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee . 22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the co-ordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the co-ordinate bench did not consider this company as comparable in assessee's own case 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 ran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices and amalgamation will have no effect. The DRP confirmed the TPO s order by holding that it does not hold any inventory and assessee could not point out that profit margin was affected due to acquisition. 34. The ld. AR reiterated the submissions made before the lower authorities and submitted that it was excluded in assessee s own case for earlier years i.e., Assessment Years 2015-16 2016-17 (supra). Further the Tribunal in the case of Subex Ltd. for Assessment Year 2017-18 in IT(TP)A No.282/Bang/2022 (order dated 30.11.2022) considered this issue and excluded it. 35. The ld. DR supported the orders of lower authorities. 36. We have heard both the parties and perused the material on record. We find that this company was excluded by this Tribunal in assessee s own case for earlier years (supra). Further for AY 2017-18, the Tribunal in Subex Ltd. (supra) excluded this company by holding as under:- 12. We have heard the rival submissions and perused the materials available on record. This comparable fails the functionality test and this company Nihilent Ltd. is not functionally similar to assessee s case as held by the coordinate bench of the Tribunal in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 49. The assessee sought exclusion of Infobeans on the ground that it is also functionally dissimilar being into providing business IT services (CAD) (application development and maintenance, Big Data, UX and UI, Automation engineering services, including product engineering and lifestyle solutions and business process management) in verticals of storage and virtualization, media and publishing, HR and Payroll and e-commerce. It is also providing software engineering services primarily in Custom Application Development (CAM), enterprise mobility and Big Data Analytics (BDA). 50. Perusal of financials available at page A303, A418 to A421, Infobeans shows that it is into diversified services but its segmental financials are not available without which it is difficult to compute the correct profit margin of the relevant segment. So Infobeans is also ordered to be excluded as a comparable being not a comparable to the assessee. 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 mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from page 82 of the annual report (Page 869 of Annual Report Compilation), reproduced below, which states that the company earns revenue from royalties. Revenue software development 3,92,54,100 4,18,94,889 Revenue royalties 22,12,299 14,29,516 Total gross income from services rendered 4,14,66,399 4,33,24,415 15.4 The ld AR submitted that the TPO, at internal page 39 of his order (Page 149 of ITAT Appeal set), records his comments on the objections raised by the assessee on this company, in the following words: Given below is the extract of the annual report, from the page number 2 of the PDF, it is evident, which unambiguously states the description of the products to be Information Technology Design and Development Service which fits straight into the ambit of software development services itself . 15.5 The ld AR stated that on perusal of the above, this company being a product company is functionally different from the Appellant. 15.6 Thus, he argued that the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there is no need of providing segmental information as per AS 17. Thus, the plea of the assessee was not accepted by the ld. DRP. Against this, assessee is in appeal before us. 17. We have heard the rival submissions and perused the materials available on record. In our opinion, it is appropriate to remit this issue to the file of AO/TPO to consider it afresh in the light of submissions made by the Ld. A.R. with regard to functionality of the comparable. This issue is accordingly remitted to the file of AO/TPO for fresh consideration. 40. In view of the above order of the ITAT, we restore the issue of exclusion of Consilient Technologies (P) Ltd., from the list of comparables to the files of the AO/TPO. x. Threesixty Logica Testing Services (P) Ltd. 41. The assessee sought exclusion of this company since it provides high end software testing services unlike the assessee. The TPO was of the view that it is integral part of SWD services. The DRP upheld the TPO s order stating that software testing forms very much part of SWD services. 42. Before us, the ld. AR reiterated the submissions for exclusion of this company and relied on the decisions of Triology E- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, support services, etc. It is submitted that this company is engaged in product development and has developed a product called excelshore apart from providing spectrum of services including ITeS and BPO services and that segmental information of the diverse business functions undertaken by the company is not available. The Ld.AR submitted that this company is making super normal profits and that it is not reflective of the performance of the industry in which it operates. Particulars FY 2013-14 FY 2014-15 FY 2015-16 OP/OC 68.82% 67.75% 62.04% Reliance in this regard is placed on the decision of the Hon ble Hyderabad Tribunal in Infor (India) Pvt. Ltd. v. DCIT (supra). On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. Primarily we note that this company is a product company and has diversified business segments. We note that this company is a full fledged entrepreneur and assumes all t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as the orders of the Tribunal. The learned AR reiterated the submissions made before the CIT(A). 53. The learned DR supported the orders of the Income Tax authorities. 54. We have heard the rival submissions and perused the material on record. On identical facts, the Bangalore Bench of the Tribunal in the case of M/s. Scania CV AB Vs. DCIT in IT(IT)A No.3432/Bang/2018, order dated 06.07.2022, restored the matter to the files of the AO to consider the issue afresh in light of the subsequent judgment of the Hon ble High Court in the case of Flipkart Internet Pvt. Ltd., Vs. DCIT (IT) in W.P. No.3619/2021 (T-IT), order dated 24.06.2022. The relevant finding of the Tribunal in the case of M/s. Scania CV AB Vs. DCIT (supra) reads as follows: 2. At the outset, the Ld.AR submitted that the only issue alleged before this Tribunal is non-deduction of TDS on reimbursement of salary expenses made on behalf of the seconded employees as fee for technical services. 2.1 The Ld.AR submitted that TDS has been deducted on the entire salary paid by assessee to the seconded employees and what is reimbursed is the payment which has been partly made by the AE to the families of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of highly skilled employees and having regard to their expertise were seconded to the assessee and upon cessation of the term of secondment would return to their overseas employees, while returning Civil Appeal Nos.2289-2293/2021 such finding on facts, the assessee was held liable to pay service tax for the period as mentioned in the show cause notice. x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of man power was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as 'FIS' which is make available to the Indian Company. (xi) Accordingly, any conclusion on an interpretation of secondment as contained in the M.S.A. to determine who the employer is and determining the nature of payment by itself would have no conclusive bearing on whether the payment made is for 'FIS' in light of the further requirement of make available. 3. On the contrary, the Ld.DR placed reliance on orders pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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