TMI Blog2023 (7) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the submissions from both the sides, we think it fit to send the matter back to the AO/TPO for fresh consideration. If the above comparable companies passes the FAR analysis it can be considered as comparable. The assessee is directed to submit necessary documents along with the complete Director s report of the Evoke Technologies Ltd. to substantiate its claim. Sagarsoft India Limited and Sasken Communication Technologies Limited - As submitted that these companies pass all the filters applied by the TPO. Considering the arguments from both the sides, FAR analysis of these above two companies has not been done by the lower authorities. Therefore, this issue is remitted back to the TPO/AO for fresh consideration. Assessee is directed to produce necessary documents for substantiating its case. Adopting inappropriate filter like 15% RPT filter, in the process of selecting comparables - The coordinate Bench of the Tribunal in the case of JCIT, LTU (OSD) v. Circle-1, Bangalore vs M/s.Toyota Kirloskar Motors Private Limited ( 2021 (9) TMI 12 - ITAT BANGALORE ) has held that the RPT ratio has to be consistently calculated on an aggregate basis taking the ratio of RPT income p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g margins of the assessee - AR submitted that fixed assets written off should be excluded from the operating cost, while computing the margins of the assessee - HELD THAT:- DRP has directed the AO/TPO to consider the fixed assets write off as non-operating as fixed assets being a balance sheet of item and write off of the same cannot have impact on operating profits of a particular year. Besides, the write off relate incomes/expense are in no way related to the operating revenue earned during the year, and hence cannot be taken into account in determining the operating profit for the year - we remit this issue to the AO/TPO to follow the directions of the DRP on this issue. Adoption of Cash PLI for computation of arm s length price confirmed. Risk adjustment - As relying on M/S. CAPCO TECHNOLOGIES P. LTD [ 2018 (3) TMI 1932 - ITAT BENGALURU] we remit this issue to the AO/TPO for fresh examination and direct the assessee to provide the details of quantification of risk adjustment in above terms. Notional interest on receivable beyond the credit period - HELD THAT:- Notional interest on receivable is an international transaction, therefore this argument of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61 [the Act] dated 13.4.2021 for the Y 2016-17 and u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act dated 28.02.2022 for the AY 2017-18. These appeals Stay petition were heard together and disposed of by this consolidated order for the sake of convenience. 2. The assessee is engaged in the business of providing software development services and marketing support services to its Associated Enterprises (AE). The services are provided on cost plus basis. A reference was made to the TPO for determining ALP of international transactions entered into by the assessee. IT(TP)A No.238/Bang/2021 3. The assessee has raised the following grounds of appeal:- GENERAL GROUND 1. The Orders passed by learned Additional / Joint / Deputy / Assistant Commissioner of Income Tax / Income-tax Officer, National e-Assessment Centre (hereinafter referred as AO for brevity), learned Deputy Commissioner of Income Tax (Transfer Pricing) 1(1)(1), Bangalore ( TPO ) and the Honourable DRP-1, Bengaluru ( DRP ) ( AO , TPO and DRP collectively referred as lower authorities for brevity) are bad in law and liable to be quashed. GROUNDS RELATING TO TRANSFER PRICING LEGAL ISSUE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sen Toubro Infotech Ltd Nihilent Ltd Inteq Software Pvt. Ltd Persistent Systems Ltd. Infobeans Technologies Ltd Thirdware Solution Ltd Infosys Ltd Aspire Systems (India) Pvt. Ltd Cybage Software Pvt. Ltd 8. The lower authorities have erred in incorrectly computing the operating profit margin of following comparables: Aspire Systems (India) Pvt. Ltd 9. The lower authorities have erred in treating provision for doubtful debt as non-operating in nature while computing operating margins of comparables. 10. The learned AO/TPO have erred in considering Fixed Assets written off as operating in nature despite directions of Honourable DRP. 11. The lower authorities have erred in: (i) Not adopting Cash PLI for computation of arm s length price; (ii) Not recognizing that the Appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account; and (iii) Not providing R D adjustment and marketing adjustment while computing the Arm's length price. GROUNDS RELATING TO TP (SALES AND MARKETING SUPPORT SERVICES SEGMENT) 12. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to the Appellant; (ii) Making adjustment for notional interest on extended payment terms given to AE without appreciating that there is no real income arising to the Appellant; (iii) Not appreciating that the receivable from the AE is not an international transaction within the meaning of section 92B of the Act; (iv) Not appreciating that the receivable from AE is not a separate transaction from the sale of goods or provision of services from which it is arising; (v) Not appreciating that the Appellant had adopted TNMM at segmental level, in which process, the receivables were considered as closely linked transaction and hence were subsumed and accordingly already considered; (vi) Without prejudice, adopting SBI retail term deposit rate at 5.50%. The rate determined is excessive; and (vii) Without prejudice, not adopting only LIBOR as the basis for benchmarking. GROUND RELATING TO CORPORATE TAX 19. The lower authorities have erred in (i) Making addition of Rs. 35,00,40,324/- by disallowing the depreciation claimed on Goodwill; (ii) Not appreciating that the difference between Purchase consideration and the value of net assets acquired constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er giving effect to DRP directions was passed by the TPO dated 08.04.2021 making total TP adjustment of Rs. 56,44,19,964 as follows:- Name of the Segment Average margin TP Adjustment Software development segment 14 comparables with median of 27.28% Rs. 52,67,17,689/- Marketing support services segment 9 comparables with median of 12.99% Rs. 2,11,54,051/- Notional Interest on Trade Receivables Interest rate at 5.50% PA Rs. 1,65,48,223/- 6. Subsequently the AO passed the final assessment order dated 17.02.2021 incorporated the TP adjustment as per TP OGE to DRP directions and corporate tax addition of Rs. 35,00,40,324/-. Disallowance of Goodwill as made in draft assessment order was retained in the final assessment order. Aggrieved by the final assessment order, the assessee is in appeal before the Tribunal. 7. Ground Nos. 1 to 4 were not argued by the ld. AR of the assessee and hence it is dismissed as not pressed. Ground No.5 is general in nature. SOFT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the decision of the Tribunal referred to above, the issue should be remanded to the TPO/AO for fresh consideration, after affording assessee opportunity of being heard. We hold and direct accordingly. 8.4 However, in the above decision, the case has been remitted and in the case of SAS Research Development India P. Ltd. [223] 146 tamann.com 202 (Pune Trib) [ITA No.255(Pune) of 2021] for AY 2016-17 order dated 01.11.2022, the Tribunal examined the financial statements as well as the functional profile and activities of Akshay Software Technologies Ltd. in which it has been held as under:- 7. The TPO has excluded this comparable because as per TPO the comparable Akshay is providing professional services in the nature of Staffing Services by which the company employees IT Professionals and provides them to various clients in the IT Industry on contract staffing/permanent staffing basis. 7.1 The DRP has upheld the exclusion of Akshay Software on the ground mentioned by TPO. The DRP also held that Akshay is providing staffing services i.e. it is providing technical personnel to various clients. 7.2 The Ld.AR mainly stated that the company is engaged in rendering sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from Rs. 6.82 lacs in FY 201415 to negative (Rs. 126.21 lacs) in FY 2015-16 due to reduction in export income on account disinvestment of the subsidiary In FY 2015-16 there is one time credit (net) Rs. 447.13 lacs on account of net gain on sale of investment in wholly owned subsidiary . 7.8 This disinvestment and net gain of Rs. 447 lacs is one time event, has affected profit. But as mentioned in the Annual report the disinvestment has affected export income also. Therefore, considering this onetime event, the Akshay Software Technologies Ltd is not comparable to the assessee. Hence for all the reasons discussed above, we hold that Akshay Software Technologies Ltd is not functionally comparable to the assessee. 7.9 The Ld.AR has relied on various ITAT decisions but none of the decision has brought on record the fact of one time Disinvestment leading to profit and reduction of export, the manpower supply activity of the Akshya Software Technologies Ltd, hence all the case law relied by the AR are distinguishable on facts. Following the above decision, we remit this issue to the TPO/AO for fresh decision in accordance with law after providing opportunity of being hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We noted that from the Page No. 1006 of the paper book at para No. 6.17 The assessee has submitted before the DRP as under The assessee further submits that company provides software development, IT outsourcing and IT consulting services. Further the company provides Application development Maintenance, Big Data Analytics, Block Chain solutions , Mobile App development and other services The assessee has placed the financial statement at page No. 1284 to 1298 . Further we noted from the page No. 1296 at Note No. 2.26 the company has reported its turnover geographical-wise. As per this Note, the company has reported turnover in India Rs. 6127.95 and in US 1300.22 (Total Rs. 7428.17 in lakhs), whereas at Note No.2.16, the company has reported export turnover of Rs. 73.84 crores and domestic turnover of Rs. 0.44 crores. It appears that the figures are not matching with the profit loss account. In this Note No.2.26 under the Segment Reporting, it has reported as under:- The Company s operations predominantly relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as not pressed. 10.2 The next issue vide ground No.7(iii) ground No.14(ii) is regarding the lower authorities adopting inappropriate filter (like one sided turnover filter, persistent loss making filter), 15% RPT filter etc. in the process of selecting comparables. However, the issues regarding one sided turnover filter persistent loss making filter was not argued by the assessee. 10.3 The ld. AR submitted Calculation of RPT Ratio has to be on aggregate basis taking ratio of RPT incomes plus RPT expenses by sales. If the RPT ratio is not applied on aggregate basis, the whole purpose of applying RPT filter would be lost because results may not be accurate. For example, related party purchases may be sold to third parties and thus profits from such transactions may be tainted. Similarly, purchases from third parties may be sold to related parties, and profits from such transactions may also be tainted. This would mean that approx. half of profit of such company may come from tainted transactions (Pages 988 to 992 of PB-I). He relied on the decision of the Coordinate Bench in the case of JCIT, LTU (OSD) Circle-1, Bangalore vs M/s.Toyota Kirloskar Motors Private Limited (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her comparable companies. Therefore, this issue is restored to the files of the A.O. The A.O. is directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales across the board for all the comparable companies (including Tata Motors Ltd. and Maruti Suzuki India Limited. 7.5 Therefore, ground No.2 is allowed for statistical purposes. 10.6 Following the above decision, we direct the AO to calculate RPT ratio on aggregate basis considering the RPT income plus RPT expenses by sales for all the comparable companies. 10.7 The issue regarding adoption of rate of RPT filter was considered by the Hon ble High Court of Karnataka in PCIT v. Yodlee Infotech P. Ltd. in ITA NO.685/2017 dated 28.6.201. The AO/TPO is directed to follow the above judgment for applying the RPT filter rate. 11. The next issue vide ground No.7 (v) by the assessee is regarding exclusion of following companies :- (i) Larsen Toubro Infotech Ltd. (ii) Nihilent Ltd. (iii) Inteq Software Pvt. Ltd. (iv) Persistent Systems Ltd. (v) Infobeans Technologies Ltd. (vi) Thirdware Solution Ltd. (vii) Infosys Ltd. (viii) Aspire Systems (India) Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on record. The coordinate Bench of the Tribunal in the assessee s own case for AY 2012-13 (supra) in respect of the above 3 comparables held as under:- 8. The learned counsel for the brought to our notice a decision of the ITAT Bangalore Bench in the case of CGI Information Systems Management Consultants (P.) Ltd. v. Asstt. CIT [2018] 94 taxmann.com 97 wherein 4 out of the aforesaid five comparable companies viz., (a) Genesys International Corpn. Ltd. (b) Infosys Ltd., (c) Larsen and Toubro Infotech Ltd. and ( d) Persistent Systems Ltd. were excluded by the ITAT. The functional profile of the Assessee in this appeal and that of the Assessee in the decision cited by the learned counsel for the Assessee is the same. The following were the relevant observations of the Tribunal: 28. The learned counsel for the Assessee submitted before us that the comparability of the 3 companies out of the aforesaid 4 companies which the Assessee seeks to exclude from the list of comparable companies chosen by the TPO viz., Infosys Ltd., Larsen Toubro Infotech Ltd. and Persistent Systems Ltd., were considered by the ITAT Delhi Bench in the case of Agilis Information Technologies India (P) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of ITAT in the case of Saxo India (P) Ltd. v. ACIT (2016) 67 taxmann.com 155 (Del-Tri). The discussion is contained in paragraphs 4.8 to 4.10 of the Tribunal's order. The Tribunal held that L T Infotech Ltd., was a software product company and segmental information on SWD services was not available. The Tribunal also noticed that the appeal filed by the revenue against the tribunal's order was dismissed by the Hon'ble Delhi High Court in ITA No.682/2016. (c) Persistent Systems Ltd., was excluded from the list of comparable companies on the ground that this company was a software product company and segmental information on SWD services was not available. The Tribunal in coming to the above conclusion referred to the decision rendered by ITAT Delhi Bench in the case of Cash Edge India (P.) Ltd. v. ITO ITA No.64/Del/2015 order dated 23.9.2015 and the decision of Hon'ble Delhi High Court in the case of Saxo India Pvt. Ltd. (supra). The findings in this regard are contained in Paragraphs 4.14 to 4.16 of its order. 30. Respectfully following the decision of the Tribunal we hold that the aforesaid 3 companies be excluded from the final list of comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (ITA No. 1054/Bang/2011) was followed and it was held that M/s Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Persistent Systems Ltd. ***** 17. As far as exclusion of Larsen Toubro Infotech Ltd., is concerned, the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RPT at 16.85%). 12.2 He submitted that Infobeans Technologies is also functionally different as it is a global technology solutions provider of diversified services in the areas of Custom Application Development, Content Management Systems, Enterprise Mobility, Big Data Analytics. It is not a pure software development company. 12.3 Similarly, the ld. AR submitted that Thirdware Solutions Ltd. is functionally different as company has revenue from various sources like Product Sale, Software Implementation, Software Consolidation, Analytics etc. and it is not a pure software development company. The Company has substantial RPT transaction for all 3 years. (FY 15-16 24.87%; FY 2014-15 23.46% and FY 13-14 23.03%). Segmental information pertaining to software development services is not available for all 3 years. 12.4 He submitted that Aspire Systems (India) Private Limited also has substantial RPT transaction for all 3 years. (FY 15-16 37.58%; FY 2014-15 30.12% and FY 13-14 26.86%). Further, Applied Development Software (India) Pvt Ltd and PureApps Consulting Services Pvt Ltd have been amalgamated with the Company. 12.5 Thus, the ld. AR relied on the decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra), where in it was held that M/s Thirdware solutions Ltd is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY ******** 17.8 Before us, the Ld.AR 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 System India Pvt. Ltd. (Aspire) 40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rious 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. Infobeans Technologies Ltd. (Infobeans) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services, Consulting Services, Healthcare BPO. These are evident from company s website which is reproduced below. 13.3 On going through the financial statements produced at PB pg. 1559, under the head revenue from operations, the assessee has shown revenue from operations under the accounting head, Software Development Service Charges of Rs. 17.38 crores and at PB pg. 1557 in Form No.NGT-9 which is annual return, the assessee has shown software development services under NIC Code 620-Computer Programming, Consultancy and related activities . This company has been excluded in the case of Finastra Software Solutions (India) P. Ltd. v. DCIT, AY 2016-17 [2023] 147 taxmann.com 515 (Bengaluru Trib) by observing as under:- 18. The assessee sought for exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. on the basis that these companies are functionally dissimilar to the assessee. In this regard the learned A.R. submitted that Inteq Software Pvt. Ltd. ( Inteq ) The company is functionally dissimilar to the assessee. The company is engaged in diversified business lines such as Microsoft dynamics, data warehousing, EI EDI services, Healthcare BPO and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany 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 segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-avis the taxpayer which is a routine software development service provider working on costplus mark up model, hence ordered to be excluded from the final set of comparables. 21.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables.' 22. Respectfully following the decision of the coordinate bench we hold that Inteq Software Pvt. Ltd and Infobeans Technologies Ltd., be excluded from the list of comparables. 13.4 Respectfully following the above decision of the Tribunal, we direct exclusion of Inteq Software Pvt. Ltd. from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -II) 15.1 The ld. DR relied on the orders of the lower authorities. He also relied on the decision of the Tribunal in the case of Marvell India Pvt. Ltd., ITA No.2173/Bang/2017 for AY 2013-14 dated 6.4.2018 where it was held as under:- 6. From the above Para of this Tribunal order, it comes out that in that case, the issue involved was regarding writing back of the provision by the assessee in the present year. The Tribunal order in this case is on this basis that certain liabilities are provided on estimate basis because exact quantification is not possible in the same year for some expenses and when in future year, the actual amount of liability is known then any excess provision made in the earlier year has to be written back and the same has to be considered as operating income for the purpose of computing ALP also. In our considered opinion, this Tribunal order is not applicable in the present case because in the present case, the issue involved is regarding provision for bad and doubtful debts and not writing back of excess provision in earlier years. There is major difference in the nature of these two items. Writing back of excess provision is on this basis that prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent year. Hence such provision for doubtful debts has to be ignored and added back in the profit of the tested party or of the comparable as the case may be while making the TP analysis. Hence on this issue, we find no reason to interfere in the order of AO and DRP and we hold that this Tribunal order is not applicable in the present case but we will also examine the applicability of the second tribunal order cited before us by the learned AR of the assessee. 15.2 After hearing the rival contentions, during the course of hearing, a query was raised to the ld. AR whether the provision for doubtful debts relate to the present assessment year or other year, but the ld. AR was unable to reply. Therefore, the case law relied by the ld. AR is not applicable. We remit this issue to the AO/TPO for verification of this issue afresh after providing opportunity to the assessee. If the doubtful debts is relating to the current assessment year, then it should be treated as operating expenditure. But if it relates to other years, then it cannot be allowed as operating expenses as held by the Tribunal in the case of Marvell India Pvt. Ltd. (supra). 16. Ground Nos. 10 16 by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 In this regard, the ld. AR submitted that the rate of depreciation charged by the assessee is substantially more than the comparable companies/sector industry norms. The assessee s depreciation cost to the total cost is around 5.91%, which is higher than the weighted average for 3 years of final comparables, which is at 3.51% and invited attention to the computation at Pg 1938 of Paper Book I and also, the detailed margin computation at Pg 397 398 of Paper Book I. It was contended that Cash PLI should be adopted for PLI computation and relied on the following decisions:- PCIT v Novell Software Development India (P.) Ltd [2021] 126 taxmann.com 29 (Karnataka) wherein the Karnataka HC directed to exclude depreciation from operating cost. Assessee s own case for AY 2010-11 wherein the ITAT in has upheld the direction of DRP to grant depreciation adjustment - [Para 9.3 to 9.5 of the order]. AY 2011-12 AY 2012-13 The DRP has accepted the Cash PLI adjustment as sought by the assessee. 17.4 In assessee s own case for AY 2010-11, [2015] 64 taxmann.com 468 (Hyd. - Trib.) the Hyderabad Tribunal on this issue held as under :- 9.3 As regards ground No. 4, Ld. AR submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to take into account the differences which could materially affect the net profit margin in the open market. So also, in terms of Rule 10B(3), an uncontrolled transaction shall be considered comparable if none of the differences between the comparable companies and the controlled transaction are likely to materially affect the profit arising from such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effect of such differences. Since the respondent has a policy of charging a higher rate of depreciation as compared to the companies selected by the TPO, there is a definite impact on the net margins of the respondent as compared to the comparable companies. Thus, there is a need for making an adjustment to eliminate the differences in the accounting policies of the appellant and the comparable companies, in terms of the above Rules, especially given that in the bench marked international transaction is the sales by a captive service provider to its associated enterprises, on which depreciation would have no bearing and thus can be excluded altogether. 8. The Tribunal, by placing reliance on the Hyderabad Bench of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... void of any significant risks relating to its business operations whereas the comparable companies operate under uncontrolled conditions bearing risks, as a result of which the companies earn a risk premium which is not earned by a contract service provider like the assessee. Therefore, the profits of a contract service provider would be lesser than the companies selected as comparables, and in that view of the matter, it is humbly submitted that an adjustment to minimise the risk differential would be warranted. Reliance in this regard was placed on this Hon'ble Tribunal's decisions in Analog Devices India P. Ltd. v. DCIT [TS-816- ITAT-2016-Bang] and Intellinet Technologies India P. Ltd. v. /TO [TS-228-ITAT-2012(Bang)] where, in the cases of similar placed assessees, this Hon'ble Tribunal directed that a risk adjustment be granted. The Assessee has prayed for a direction to the TPO/AO to recompute the margins of the companies selected as comparables after taking into account the differences in the risks assumed by the Assessee and the said companies on the basis of the material that is and that may additionally be placed on record. 29. We find that the DRP has prima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLI. However, the ld. DRP has upheld the order of the ld. TPO by observing that it was not in the search matrix of the TPO. During the course of hearing the ld. AR produced the financial report and submitted that the financial data are available in the public domain and passes all the filters applied by the TPO. Therefore, this company can be considered as a comparable with the assessee company. Considering the rival submissions, the lower authorities have not examined the FAR analysis, therefore this issue is remitted back to the AO/TPO for FAR analysis and fresh decision in accordance with law. 20. Vide ground No.14(iii), the assessee has sought exclusion of Ugam Solutions Pvt. Ltd., Majestic Research Services Solutions Ltd., Scarecrow Communications Limited from the comparables which were retained by the lower authorities. 20.1 The ld. AR submitted that Ugam Solutions Pvt. Ltd. is functionally different as it provides managed analytics services and solutions combining its proprietary big data platform with a global team of insights and analytics experts. The Company operates in only one primary business segment of Management Analytics. Majestic Research Services Soluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide range of qualitative and quantitative research services which is in line with assessee s functions. As per revenue recognition placed at pg. 2244 of PB, the company s revenue is primarily derived from market research and related services. We are unable to understand once the above company passes all the filters applied by the assessee and considered as comparable, but before the DRP and before us the assessee has sought for exclusion on the above note 3 points. The ld. DRP has dealt the issue in detail which is as under:- 2.9.11 Majestic Research Services Solutions Limited Functionally Different Peculiar economic circumstances or exceptional year of operations Margin Computation 2.9.11.1 Having considered the submissions, we note that the company provides business of rendering creative assistance work for advertisements through market research area is similar to that of assessee in in terms of AMP. As elaborated by the TPO, we note that all the activities carried by this company are only through market research and only the domain area is different. Accordingly we hold that this company is functionally comparable. 2.9.11.2 With regard to the peculiar e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68%.The Hon ble Delhi High Court (TS173HC-2015(Delhi)-TP1), in its verdict in the case of Chryscapital Investment Advisors (India) Private Limited (the appellant), emphasised functional analysis as the key comparability criterion. and inter al a held that: mere earning of high profits/ losses could not be a reason to exclude a company as a comparable. 2.9.11.5 In view of the above, we do not find merit in the plea for exclusion of this comparable on the ground of its high profit margin. The assessee also objected to margin computation error. In this regard, we direct the AO/TPO to verify and recomputed the margin. 20.6 We do not find any infirmity in the order of the ld. DRP. Therefore this company is to be retained as a comparable in the list of comparables. However, the ld. DRP has directed the AO/TPO for error in computation of margin of this company which we uphold. 20.7 With regard to Scarecrow Communications Limited, we note from the financial statement under significant accounting policy overview of the company, that this company is to create advertising that a lasting shelf life. The team works towards creating communication that permeate popular culture. Easily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment of Rs. 2,53,25,332/- by computing arm s length interest rate at 4.985% under CUP method and charged the notional interest on trade receivables. However, the DRP directed the TPO to recompute the interest adjustment by adopting SBI short term deposit interest rate after granting 30 days credit period and to restrict the interest till 31.03.2017. Thereafter, incorporating the directions of the DRP, the TPO in its OGE recomputed interest adjustment at Rs. 16,548,223/- and the same was considered in the final assessment order. 23.1 In this regard, the ld. AR submits that there can be no separate international transaction of `interest' in the international transaction of `provision of service'. Early or late realization of sale proceeds is only incidental to the transaction of sale, but not a separate transaction in itself. Further, TNMM has been adopted at segmental level to benchmark the transaction of Software development Marketing support services, in which process the receivables were considered as closely linked transaction and hence were subsumed and accordingly already considered. Reliance was placed on the following decisions: Kusum Health Care Pvt. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od shall be considered by the TPO for giving effect on this issue. 24. Ground No.19 relates to corporate tax adjustment towards depreciation on goodwill. AMD Research Development Centre India Pvt Ltd (Transferee Company) had acquired M/s AMD India Private Limited (Transferor Company). The scheme of amalgamation was approved by the Hon ble High Court of Karnataka on 24.04.2017 and the appointed date was 01.04.2015. The purchase consideration for such acquisition was Rs. 24,01,01,11,194/-. As per the books, the value of net asset taken over was at Rs. 1,00,08,49,898/- of the Transferor Company. Therefore, the difference between the two was considered as goodwill and depreciation on same was accordingly claimed. 24.1 In the Draft assessment order, the AO has incorporated disallowance of depreciation on goodwill amounting to Rs. 35,00,40,324/- by placing reliance on the sixth proviso to section 32(1)(ii) of the Act. The DRP upheld that the Order of the AO observing that claim is not in accordance with the provisions contained in Explanation 7 to section 43(1) read with Explanation 2 to section 43(6)(c) of the Act read with sixth proviso to section 32(1) of the Act. This additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided to him. But once the consent has been provided by the AO, it cannot be objected unless there has been concealment or misrepresentation of facts, which are absent in the present case. In this regard, the ld. AR relied on the decision of DCIT Circle 4(1)(1) vs. Urmin Marketing (P.) Ltd [2020] 122 taxmann.com 40 (Ahmedabad - Trib.). 24.6 With respect to objections raised by the AO on valuation of goodwill, it is submitted as follows: Objections by the AO Response of the Appellant 1. Scope of amalgamation was nothing but consolidation of group companies to take tax advantages. The objectives of amalgamation have been extensively listed in para 2.3 of Preamble of the scheme. (submissions at Pg 2332-2333 of PB-I). 2. Consideration is in form of exchange of shares which is mere restructuring to reduce taxes. Consideration can be in any form whether monetary or not. The law laid down in section 47(vii) also mandates issue of shares in lieu of purchase consideration to avail the benefit of non-taxable transfer (Submissions at Pg 2333 of PB-I). 3. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value (Refer submissions at Pg 2336-2337 2367-2368 of PB-I). Step 2: Discount Rate- This rate is aggregate of risk-free rate and risk premium. The valuer has adopted 13.5%, which is similar to discount rate of 13% provided by EY cost of capital survey (Refer submissions at Pg 2337- 2338 2369 of PB-I). Step 3: Terminal Value- Terminal value is determined by dividing the perpetuity cash flows with the discount rate as reduced by the stable growth rate, which is generally the inflation rate to reflect the value of the cash flows arising after the forecast period. The valuer has adopted 3% as terminal value which is reasonable when compared to growth rate of that period and lower than India s inflation rate (Refer submissions at Pg 2338-2339 of PB-I). 24.8 Based on all of the above, the Appellant submits that there is no manipulation in share valuation as per DCF method. In case, the AO was dissatisfied, he had all the liberty to seek for information by issuing notice u/s 133(6) of the Act. The valuation adopted is fair and reasonable and cannot be questioned. Same basis of valuation is adopted for amalgamating and resulting company. 24.9 Therefore, the ld. AR sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... malgamating company on transfer of shares of amalgamating company in the scheme of amalgamation [47 (vii)] 6 Cost in the hand of owner/shareholders Cost of capital assets to be the same as in the hands of previous owner where capital assets became the assets of the successor as a result of transfer under section 47(vi) rws [Section 49(1)(iii)(e)] Cost of shares of amalgamated company in the hands of shareholders, received as consideration for transfer of shares of amalgamating company, 30.1 The ld. DR submitted that a bare reading of all the above provisions makes it abundantly clear that it was always the intention of the Legislature to make amalgamation a tax neutral scheme for companies as well as for the shareholders and not to provide an opportunity to anyone to make it a tool to avoid the legitimate tax which it is otherwise is expected to pay. The legislature has taken pain to cover all possibilities as is evident with the number of sections which have been enacted to deal with amalgamation. According to the ld. DR, these are special provisions of the Act dealing with amalgamation an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany has paid Rs 100 crore which is more than the value of the company, then post amalgamation its value will continue to be Rs 1 crore in the hands of the amalgamated company. But if there is no goodwill asset in the hands of an amalgamating company or in other words, the value of goodwill is zero pre-amalgamation and the purchaser company has paid Rs 100 crore (more than the value of the company), then to interpret that this excess amount of Rs 100 crore can be termed as goodwill and depreciation can be claimed by the amalgamated company would not be logical and will give absurd result. 30.7 The ld. DR also referred to Explanation 2 to section 43(6)(c) of the Act which reads as under: (6) written down value means ** ** ** [Explanation 2. Where in any previous year, any block of assets is transferred, (a) ** ** ** (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, then, notwithstanding anything contained in clause (1), the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) by virtue of the order being erroneous, Prejudice has been caused to the interest of the Revenue, that cannot be said erroneous so far as prejudicial to interest of the Revenue. 2. There is no discussion in the order about the various provisions of the Income Tax Act such as 5th provision to section 32(1), section 49(1)(iii)(e), Explanation 7 to section 43(1) and /or Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii). Truine Energy Services (P) Ltd vs DyCIT [2016] 65 taxmann.com 288/237 taxmann 230 Delhi High Court In the case of it was held that consideration paid by assessee in excess of its value of tangible assets was rightly classified as goodwill. In the facts of the present case, the Tribunal has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Assessee and erstwhile partnership firm were different entities and there was transfer of intangible assets by partnership to assessee for a valuable consideration that was by way of allotment of shares. 2. The honorable high court was conscious of the fact that the transaction was between different entities and valuation of the intangible assets has not been questioned or genuineness of the transactions has been doubted. 3. In the instant case, the transaction is between related parties and valuation has been questioned both by Assessing Officer as well as DRP. Zydus Wellness Ltd [2016] 76 taxmann. Com 328 GujaratHigh Court in [2019] 112 taxmann.com 400 and also SC in [2020] 113 taxmann.com 154 ITAT Ahmedabad Gujarat HC Supreme Court Depreciation on goodwill arising on amalgamation claimed by assessee-company during course of assessment proceedings vide a revised computation of income without filing revised return of income was allowable. It was upheld by honorable Gujarat High Court in [2019] 112 taxmann.com 400 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld the same relying on the same. 2. There is no discussion in the order about the various provisions of the Income Tax Act such as 5th provision to section 32(1), section 49(1)(iii)(e), Explanation 7 to section 43(1) and/or Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii). [2019] 112 taxmann.com 217 (Ahmedabad - Trib.) Bodal Chemicals Ltd. IN THE ITAT AHMEDABAD BENCH 'A' [2019] 112 taxmann. com 217 (Ahmedabad - Trib.)/[2020] 180 IT... INCOME TAX: Where pursuant to Scheme of amalgamation, assessee claimed depreciation on Goodwill representing higher amount paid to transferor company as compared to its net assets, in view of fact that relevant year was second year of amalgamation whereas assessee's claim for depreciation had been allowed in first year of amalgamation, following principle of consistency, assessee's claim was to be allowed in assessment year in question as well 1. Kind attention is drawn to para 10 to 12 of the judgement. They agreed that the intent of the Legislature was to make amalgamation a tax neutral scheme for companies as well as for the shareholders and not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to valuation and revaluation of assets and liabilities. Moreover, the amalgamation is not a transaction of purchase and sale of shares/ assets/liabilities but to join hands together for the business expediencies. 1. Arguments made in para 3 as well as other paras of this submission may kindly be considered. [2020] 113 taxmann.com 6 (Hyderabad- Trib.) Mylan Laboratories Ltd. ITAT HYDERABAD Where assessee amalgamated with a company by way of acquisition/purchase, consideration paid in excess of net value of assets and liabilities of amalgamating company was to be treated as goodwill and; assessee was to be allowed depreciation on such goodwill acquired on amalgamation. 1. The Tribunal relied on Smifs Securities Ltd. , AP Paper Mills Ltd. (ITAT Hyd) Delhi High Court in the case of Areva T D India Ltd. Delhi High Court in the case of Tribune Energy Services (P.) Ltd. 2. All these cases has already been discussed in this table and various submissions. Depreciation on goodwill arising out of merger should not be allowed Name of the case Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom various provisions of the Income Tax Act, it is very clear that amalgamation was meant to be a tax neutral proposition. Entire anomaly has arisen because of the decision of the Hon ble Supreme Court in the case of Smifs Securities Ltd., wherein it was held that ' goodwill is an intangible asset eligible for depreciation under the provisions of section 32 of the IT Act. The relevant paragraphs are reproduced below:- Explanation 3 to section 32(1) states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words 'any other business or commercial rights of similar nature ' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial rights of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3 (b). (Para 4) In view of the above, it is opined that 'Goodwill' is an asset under Explanation 3(b) to section 32(1). (Para 5) One more a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; which was noted as a finding of fact and was not appealed by the revenue before the High Court and the only issue for consideration was whether goodwill is an asset within the meaning of Section 32 of the Income Tax Act, which the court answered in affirmative. It is a settled position that a case is an authority, for what it decides, and not for what logically follows from it. Reference may be made to the following:- A case is only an authority for what it actually decides. I entirely deny that it can be quoted for a proposition that may seem to logically follow from it. Such a mode of reasoning assumes that the law is necessarily a logical code, whereas every lawyer must acknowledge that the law is not always logical at all. 30.13 This decision of House of Lords was quoted with approval by the Constitution Bench of Supreme Court in the case of Sudhansu Sekhar Misra and Others wherein it stated that a decision is only an authority for what it actually decides. Hence, the said case can be said to be an authority only to the extent that goodwill is a depreciable asset. 30.14 Even though the Supreme Court in the case of Smifs Securities has decided that goodwill is depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor {[2009] 179 Taxman 326 (SC)/[2009] 312 ITR 254 (SC)} wherein it held that profits for income-tax purpose are to be computed in accordance with ordinary principles of commercial accounting, unless such principles stand superseded or modified by legislative enactments. The relevant portion of the aforesaid judgement is as under: As profits for income-tax purpose are to be computed in accordance with ordinary principles of commercial accounting, unless such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following year's account in a continuing business are not brought to the charge as a matter of practice, though loss due to fall in the price below cost is allowed even though such loss has not been realized actually. The said system of commercial accounting can be superseded or modified by legislative enactment. Under section 145(2), the Central Government is empowered to notify from time-to-time the Accounting Standards to be followed by any class of the assessees or in respect of any class of income. Accordingly, und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem, if possible, and carry into effect the intention of the parties. 30.21 While elaborating upon the need for harmonious construction of the statutory provisions, the oft-quoted treatise Justice GP Singh on the Principles of Statutory Interpretation (14th paperback edition @ page 159)', has these words of advice: .. It has already been seen that a statute must be read as a whole and one provision of the Act should be construed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute. Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between a section and other parts of the statute. It is the duty of the courts to avoid a head-on clash between two sections of the same Act and, whenever it is possible to do so, to construe provisions which appear to conflict so that they harmonise In the words of GAJENDRAGADKAR, J., The sub-sections must be read as parts of an integral whole and as being interdependent; an attempt should be made in construing them to reconcile them if it is reasonably possible to do so, and to avoid repugnancy . As stated by VE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the books of amalgamating company, such an asset emerges only due to revaluation of assets liabilities for which amalgamated company does not incur any cost. Hence, as per the provision of section 55(2)(a)(ii) of the Act value of assets which has been acquired without incurring any cost should be taken at NIL. Similarly, there would not be any possibility for allowing the deduction for the assets resulting on account of revaluation of assets. Therefore, the AO held that the assessee has not incurred cost in order to acquire goodwill and also such goodwill was not transferred from amalgamating company. Therefore, the value of the same for the purpose of taxation is NIL. Thus, depreciation on goodwill is not allowable in the year under consideration. General vs Special Provisions 30.26 The ld. DR also submitted that a combined reading of the various provisions reveals that the intention of the legislature behind the introduction of the amalgamation scheme was to achieve tax neutrality. Besides the above, the intention of the legislature is reflecting from the following provisions:- There is no capital gain in the hands of the amalgamating company on the transfer of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the assessee that the Assessing Officer was given a time of 15 days to offer comments / objections if any. All the facts related to the Amalgamation were provided to the AO at the time of Amalgamation itself and any objection should have provided at the time, when opportunity was provided to him. Once the consent has been provided by the AA, it cannot be objected unless there has been concealment or misrepresentation of facts, which are absent in the present case. In this regard, the ld. DR submitted that No objection being filed by the Assessing officer only implies that there was no objection to the scheme of amalgamation. Tax implications of the said amalgamation will be examined by the Assessing Officer only at the time of scrutiny. This is a right as well as duty of the Assessing Officer which flows directly from the statute itself and this right cannot be taken away in any manner. 15 days is too less a time to make any meaningful study of the scheme of amalgamation. Therefore, the AO is not prevented in examining the tax implications of the scheme of amalgamation. Same argument holds when the assessee argued that the scheme has been approved by the Hon ble High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1), Explanation 7 to section 43(1) and Explanation 2 to section 43(6)(c) of the Act and contends that in the scheme of amalgamation, the WDV of the amalgamated company will continue to be the same as it would have been in the hands of amalgamating company, had there been no amalgamation. In this regard, the ld. AR submits that the above provisions are applicable when an existing and recorded asset is transferred by the amalgamated company to the amalgamating company. In the instant case, Goodwill arose in the hands of the Appellant for the first time on account of the amalgamation. The Appellant has paid for and hence, economically suffered in acquiring the goodwill. The scheme of amalgamation which has been approved by the National Company Law Tribunal ( NCLT ) itself clearly provides that aggregate excess of consideration (discharged in form of issue of shares) over and above the net asset value of the amalgamating companies shall be recognized as goodwill. This aspect has also been stated even in the NCLT order (Page 901 and 903 of PB-I). 31.1 As per the NCLT Order, objections were invited from the Income Tax department against the scheme of amalgamation. In response, the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is evident that 5th proviso to section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The fifth proviso to section 32 of the Act comes into play only when there are existing assets. In the instant case, goodwill is arising out of amalgamation, therefore, it is outside the purview of 5th proviso and hence, the contention of the DR is without basis. 31.6 The Hyderabad Tribunal in the case of Mylan Laboratories Ltd in ITA No. 2335/Hyd/2018 ITA No. 12/Hyd/2019 rejected the contention of learned DR about the applicability of fifth proviso to section 32 of the Act for disallowing depreciation on goodwill. The tribunal discussed the decision of Hon ble Supreme Court in case of Smifs Securities [2012] 24 taxmann.com 222/210 Taxman 428 and observed that the Apex Court has considered the circumstances under which the goodwill has arisen on which depreciation was claimed. Relying on the judgement of Smifs Securities Ltd., the Tribunal allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 10/- each fully paid of AMD R D (Transferee) for every 1 share of AMD IPL (Transferor) was determined on the basis of fair share exchange ratio . M/s SSPA Co, Chartered Accountants were appointed for valuation of equity shares. The valuation was performed using Discounted Cash Flow Method ( DCF ) and all the 3 components of DCF, namely cash flows, discounting factor and terminal value were justified. The computation of DCF is explained in detail at pages 2336 to 2346 of PB I. These valuations are blessed by NCLT while accepting the exchange ratio. 31.10 Further, the valuation reports of assets and equity shares were made available for scrutiny. The DCF computation is on record. The learned DR as well as the lower authorities have not pointed out single mistake with the figures or valuation. The argument that valuation is not correct due to related party is without any basis. The basis of valuation of both amalgamating and amalgamated company is same. The valuation is approved by NCLT and reflects future earning potential of the company. The actual future turnover and profits are more than that adopted for valuation, which reflects that valuation is in fact done on conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Breweries case for disallowance of depreciation on goodwill has been rejected by Tribunal in the case of Mylan (supra) and Altimetrik India Pvt. Ltd vs DCIT (supra). 31.12 In the case of Smifs Securities (supra), the Revenue itself accepted the finding of the Tribunal that difference between cost of asset and amount paid constituted goodwill and the assessee company in the process of amalgamation had acquired a capital right in the form of goodwill. The learned DR has also accepted this in page 19 of the DR Submission. Having accepted this aspect, the question of valuation was not there before Supreme Court. However, that does not mean that the ratio of SC decision is not binding. The decision having been rendered on the similar facts as in the case of Appellant, is a binding precedent and has to be followed. 31.13 The ld. AR referred to the contention of the ld. DR that profits for income tax purpose are to be computed in accordance with ordinary principles of commercial accounting unless such principles stand superseded or modified by legislative enactments and submitted that there was no provision in the Act which conflicts with mandate of AS-14. As explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder consideration. Further, if goodwill was not eligible for depreciation, the question of reducing depreciation from the purchase price of goodwill would not arise. Thus, amendment by Finance Act, 2021 support the view that prior to AY 21-22, goodwill was eligible for depreciation. 31.17 In view of the above submissions, it is prayed that the depreciation on goodwill as claimed by the assessee is to be allowed. 32. After hearing both the sides, perusing the entire material on record and the orders of the lower authorities, we note that, goodwill has arisen because of amalgamation scheme. The ld. AR submitted that assessee has recorded goodwill in the books of accounts on the difference between the net assets (total assets liabilities) taken over by the assessee and consideration paid to the amalgamating company. The assessee claimed depreciation on the goodwill treating it as intangible asset. The AO and DRP did not accept the claim of depreciation on goodwill. During the course of hearing on different dates, both the parties argued extensively and filed written synopsis which are stated hereinabove. In the written submissions filed by the assessee, it is stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax (Transfer Pricing Officer) 1(1)(1), Bangalore (hereinafter referred as TPO for brevity) and the Honourable DRP-1, Bengaluru ( AO , TPO and DRP collectively referred as lower authorities for brevity) are bad in law and liable to be quashed. GROUNDS RELATING TO TRANSFER PRICING LEGAL ISSUES 2. The learned AO has erred in making a reference for the determination of the Arm s Length Price of the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do so. 3. The lower authorities have erred in passing the Order without demonstrating that the Appellant had any motive of tax evasion. GROUNDS RELATING TO TP ADJUSTMENT IN SOFTWARE DEVELOPMENT SEGMENT 4. The learned AO has erred in making transfer pricing adjustment of Rs. 51,80,22,306/- towards international transactions in software development segment. 5. The lower authorities have erred in: (i) modifying the segmental results of the Appellant and allocating all expenses on revenue basis. The Appellant submits that segmental as given in TP study report should be adopted; (ii) Conducting a fresh TP analysis despite absence of any defects in the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the receivable from the AE is not an international transaction within the meaning of section 92B of the Act; (iv) Not appreciating that the receivable from AE is not a separate transaction from the sale of goods or provision of services from which it is arising; (v) Not appreciating that the Appellant had adopted TNMM at segmental level, in which process, the receivables were considered as closely linked transaction and hence were subsumed and accordingly already considered; (vi) not adopting LIBOR as basis for determining arm s length interest rate; (vii) adopting SBI short term deposit rate for AY 201718 for computing ALP; (viii) Computing interest till the realisation of receivables and not restricting the computation for the financial year despite directions of DRP to restrict the interest adjustment up to the end of financial year and (ix) not adopting reasonable credit period for computing ALP. GROUND RELATING TO DISALLOWANCE OF DEPRECIATION ON GOODWILL 10. The learned DRP/AO have erred in (i) Making addition of Rs. 26,25,30,243/- by disallowing the depreciation claimed on Goodwill; (ii) Not appreciating that the difference between Purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parables with median of 24.33% Rs. 51,80,22,306/- Notional Interest on Trade Receivables Interest rate at SBI short term rate Rs. 6,67,51,732/- Total Rs. 58,47,74,038/- 37. The AO passed the final assessment order u/s 143(3) r.w.s 144C(13) r.w.s 144B of the Act dated 28.02.2022 incorporating the TP adjustment as per TP OGE to DRP directions. Also, corporate tax addition of Rs. 26,25,30,243/- towards disallowance of depreciation on goodwill was retained in final assessment order as confirmed by DRP. Aggrieved by the final assessment order, the assessee is in appeal before the Tribunal. 38. Grounds No.1 to 3 are not pressed, hence it is dismissed as not pressed. Ground No.4, 5 (i) (ii) are general in nature. 39. Ground No.5(iii) regarding application of RPT filter. The ld. AR submitted that the TPO has applied 25% of sales as threshold limit and submitted that it should be 15% of RPT filter. This ground has been considered for the AY 2016-17 in ground No.7(iii) hereinabove and it is held that 15% RPT filter should be applied. It is held accordingly for AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is stated that functional profile of this company is different and it provides licensable software products for speech, video, fax and analog modem communications market. We have gone through the judgment cited by the ld. AR in the case of Conexant Systems (P). Ltd. (supra), we did not find any reference of this company. We remit this issue to the AO/TPO for fresh consideration Threesixty Logica Testing Services Ltd 40.5 The ld. AR submitted that the Company has substantial RPT for FY 2016-17 (16.85%). Computation for RPT is placed at pg.951 of Pb.. He also submitted that the RPT should be 15% of the sales instead of 25% of the sales. This would result in selection of better uncontrolled comparable transactions as envisaged in the Indian TP regulations. He also relied in the case of Autodesk India P. Ltd. [2018] 96 taxmann.com 263 (Bang. Trib) and other decisions quoted at pg. 868 869 of PB. Hence this company is to be rejected. 40.6 The ld. DR relied on the orders of lower authorities. He further submitted that the lower authorities have rightly taken the RPT filter @ 25%. We have considered the rival submissions and perused the material on record. From page 951 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. Accordingly, this comparable is directed to be excluded. 40.10 Following the above decision of the coordinate Bench, we direct the AO/TPO to exclude this company from the list of comparables on functional dissimilarity, hence we are not adjudicating the issue of RPT filter of this company which is left open. Infobeans Technologies Limited 40.11 The ld. AR submitted that this company is functionally different as it is engaged in providing diversified services in the areas of Custom Application Development, Content Management Systems, Enterprise Mobility, Big Data Analytics. It is not a pure software development company. Relevant submission and website extracts are at Pg 942-946 of PB I. He further submitted that the ITAT in following cases has held that Infobeans Technologies Ltd is into diversified software services and cannot be considered as a comparable to the Assessee. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment company. The services are provided under two segments, namely Services cluster and Industrial cluster. Software service segmental data is not available. The Company has substantial onsite operations for all 3 FY s. Thus, business model is different from Appellant. The Company has global brand value and has business spread across borders. GDA technologies Limited amalgamated with L T in FY 2016-17. Reliance is placed on the following decisions:- ADP Pvt. Ltd., Hyderabad vs DCIT-1(1), Hyderabad for AY 2016-17 (TS-63-ITAT-2022 Hyd) 40.18 The ld. DR relied on the orders of lower authorities. 40.19 We have considered the rival submissions and perused the material on record. This company has been considered in assessee s own case for AY 2016-17 hereinabove. Since there is no change in functional profile of this company for the present year, in view of this, the AO/TPO is directed to follow the decision for AY 2016-17. Mindtree Limited 40.20 The ld. AR submitted that The company is functionally different as it is engaged in IT consulting and implementation and segmental information is not available. The company has global brand and owns Intellectual Property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port, did not think it proper to accept the contentions of assessee and observed that it is self-evident that its entire revenue from operations is derived from software development services moreover, Mindtree Ltd., may be offering add on associated services which is integral to the core services of the software development, that does not vitiate the core operations which still remains software development itself and entire revenue from operations is derived from software development services, no need for segmental arise. Ld. TPO also referred the case of Capgemini of ITAT, Mumbai, wherein it was held that - the Sr. Counsel has also pointed out that the Infosys and Wipro have substantial revenue, 51.7% in case of Infosys, and 45.3% in case of Wipro from on-site work done overseas at the site of clients whereas the onsite work in the case of the assessee is just 5%. It has been pointed out that the employees if sent overseas have certain dead hours, which cannot be properly utilized as can be done in the home country. But, this argument as rightly pointed out by the Ld. CIT-DR does not support the case of higher margin in case of onsite work because dead hours would mean less output ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systems Limited and Cybage Software Private Limited has come up for consideration and the Tribunal directed the exclusion of the same on the ground of non-comparability. 40.24 In the order dated 6-8-2019 in Infor (India) (P.) Ltd. v. Dy. CIT [2019] 109 taxmann.com 435 (Hyd. - Trib.) vide paragraph No. 76, the Co-ordinate Bench excluded Infosys Limited, Larsen Toubro Infotech Limited and Mind Tree Ltd., in the light of the findings of the Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26. Vide paragraph No. 77 of the same order, Tata Elxsi Limited (seg) and Persistent Systems were deleted while following the view taken in assessee's own case for the assessment year 2007-08. E-Infochips Ltd., is excluded on the ground of super normal profits because, on this ground itself, Infosys Limited, Larsen Toubro Infotech Limited and Mindtree Ltd., were excluded. 40.25 In the assessment year 2015-16, by order dated 19/10/2020 in Infor (India) (P.) Ltd. v. ACIT ITA No. 1689/Hyd/2019, the Co-ordinate Bench excluded Infosys Limited, Larsen Toubro Infotech Limited, Mindtree Ltd, Tata Elxsi Limited (seg), P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Company is functionally different as it is engaged in both rendering software services developing software products. Segmental information pertaining to software development services is not available for all 3 years. The Company has incurred substantial R D expenditure. The Company has undertaken business restructuring and acquisition in FY 2016-17. Reliance is placed on the following decisions:- M/s. Yahoo Software Development India Pvt. Ltd. vs JCIT, Special Range 7, Bengaluru IT(TP)A No. 178/Bang/2022 for AY 2017-18 ADP Pvt. Ltd., Hyderabad vs DCIT-1(1), Hyderabad for AY 2016-17 (TS-63-ITAT-2022 Hyd) 40.30 The ld. DR relied on the orders of lower authorities. 40.31 We have considered the rival submissions and perused the material on record. This company has been considered in assessee s own case for AY 2016-17 hereinabove. Since there is no change in functional profile of this company for the present year, in view of this, the AO/TPO is directed to follow the decision for AY 2016-17. Tata Elxsi Ltd 40.32 The ld. AR submitted that the Company is functionally different as it is engaged in Embedded product design, Industrial design, Visual Computi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany has been included by the learned TPO in Appellant s own case for AY 2018-19 vide Order giving effect to directions u/s 144C dated 22.07.2022 and is attached as Annexure 2. Evoke Technologies Private Limited TPO 1. The company is functionally different as it is engaged in diversified activities and segmental data is not available. (Pg 206 of Appeal Papers. DRP 1. Unreliable data provided in annual report with regard to export revenue (Pg 84- 85 of Appeal Papers) 1. The company has single segment of Software Development Services and is therefore functionally similar (Submission at Pg 878-879 of PB I). 2. This company passes all filters applied by the TPO (Submission at Pg 879-880 of PB I and relevant extract of AR at Pg 1399, 1413-1415 of PB II). 3. The Appellant relies on the following decision: Quicklogic Software (India) Pvt. Ltd. vs DCIT, Circle- 3(1)(1), Bengaluru (IT(TP)A No. 181/Bang/2022) for AY 2017-18 (Para 13.1 to 13.3 at Page 1370 of PB-II-Case law Compilation) ADP Pvt. Ltd., Hyderabad vs DCIT-1(1), Hyderabad (TS-63-ITAT-2022 Hyd) for AY 2016-17 (Para 12.4 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany passes all the filters applied by the TPO and it is functionally comparable. The ld. DRP has examined this issue in detail and it is held that the company is mainly engaged in providing professional services, procurement, installation, support and maintenance of ERP products in India and overseas. The observation of the DRP is as under:- 2.6.11.1 Having considered the submissions, and on perusal of the annual report we note that, as per information given at page 19 of the annual report, the company is engaged in providing Staffing services and SAP Business one services. It is seen from its P L account, that it has reported revenue from operations of Rs. 2557 lakhs which comprised revenue from services of Rs. 2494 lakhs and sales of software licence of Rs. 63 lakhs. As per Note 25 of annual report the revenue from export of software service was Rs. 2003 lakhs and as per Note 24, the foreign branch expenditure was Rs. 1956 lakhs. As per information in the notes forming financial information of the annual report revenue mainly represent income from professional services from Dubai. 2.6.11.2 System Application and Product in Data Processing is the short used for SAP. They a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Stream Infotech (India) Pvt. Ltd. in IT(TP)A No.153/Bang/2022 for AY 2017-18 dated 16.06.2023 and it was held as under:- 22. Evoke Technologies Private Limited 12. The TPO excluded this company for the reason that the company is functionally different. Before the DRP the assessee raised objection the DRP upheld the same and observed that data provided in annual report with regard to export revenue is unreliable. 12.1 The ld. AR submitted that the company has single segment of Software Development Services and is therefore functionally similar. This company passes all filters applied by the TPO. He relied on the decision of Quicklogic Software (India) Pvt. Ltd. vs DCIT, Circle-3(1)(1), Bengaluru (IT(TP)A No. 181/Bang/2022) for AY 2017-18 to submit that this company has to be included in the comparables list. 12.2 The ld. DR relied on the orders of lower authorities. 12.3 We have heard the rival submissions and perused the material on record. In the case of Quicklogic Software (India) Pvt. Ltd. (supra), this Tribunal held as under:- 13.1 It is submitted by Ld.AR that Batchmaster Software Pvt. Ltd. and DCIS DOT COM Solutions India Pvt. Ltd. was ignored by the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by TPO is upheld. 12.5 From the above observation of the ld. DRP we also note from financial statement that the ld. DRP have rightly observed that the figures are wrongly reported. Considering the above findings, in the absence of the correct reporting of the financial data by the comparable company, even if it satisfies the FAR filters applied by the TPO, this company cannot be considered as comparable company. 23. Sasken Communication Technologies Limited 13. The TPO observed that the company is functionally different and fails export revenue filter. The DRP held that the company is not comparable because it is engaged in diversified activities, has R D activities and owns patents. 13.1 The ld. AR submitted that the company is functionally similar as it is primarily engaged in software consulting and development. The company passes all filters including export revenue filter as applied by the TPO. He referred to pg. 1440, 1446-1450 of PB-II and submission at pg. 711 of PB-I. The DRP in Appellant s own case for AY 2018-19 has held Sasken to be functionally similar. Considering the arguments advanced from both the sides, we remit the issue to the AO/TPO for verifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and as per Note No.36, which is placed at Pg. 1490 of PB, states as under:- The company s operations primarily relate to providing information technology (IT services). Accordingly, the company operates in a single segment which represents the primary segment. Secondly, segmental reporting is performed on the basis of geographical location of the customers as under:- US Rs. 8.20 crores UK Rs. 0.63 crores India Rs. 1.62 crores Norway Rs. 0.13 crores Total Rs. 10.58 crores 15.3 Since the lower authorities have rejected this company only on the basis of negative net worth, which leads to intrinsically sick and non-performing companies, but FAR analysis has not been done by both the parties. If the company passes FAR applied by the ld. TPO, the company cannot be excluded only because of the negative net worth. This view is supported in the judgment relied by the AR in the case of Gillette Diversified Operations Pvt Ltd (supra) in which it has been held as under:- 24. Ld. TPO rejected two comparables which are disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the profitability of the comparable company. We have also noted the issue decided by Special bench in the case of DCIT V Quark Systems Limited in 2010-TII-02ITAT-CHD-SB-TP where in the negative net worth company was considered and it was held that business organization with negative net worth cannot be treated at par with a normal business organization. However while considering that issue the comparable was also functionally not comparable in that case. Therefore there was no view expressed in that decision that though comparable has similar FAR still negative net worth company is required to be excluded without showing the impact of negative net worth on the profitability of the company. In view of this we direct the inclusion of this Company i.e. Muller Phipp India Limited as comparable for the purpose of determining arms length price. 15.4 Accordingly, we remit this issue to the AO/TPO for fresh consideration as per above directions. 26. E-Zest Solutions Limited 16. The TPO DRP excluded this company on the ground of functionality as it is engaged in ITeS. The ld. AR submitted that it is functionally similar as it provides software development services and passes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the ITeS company. Respectfully following the above judgment, we reject the contention of the assessee and uphold the orders of lower authorities. 27. Nitor Infotech Private Limited 18. This company was rejected since it did not appear in the search matrix of the TPO. The ld. AR submitted that the financial data relating to this company is available in public domain. It is functionally similar as it provides consultancy and technology services in the area of Business intelligence, collaboration, portals and performance management domain and passes all filters applied by the TPO. 18.1 The ld. DR relied on the orders of lower authorities. 18.2 We have heard both the parties and perused the material on record. During the course of hearing, the ld. AR submitted that the data is available in public domain and it is functionally comparable, but during the course of search process by the ld. TPO, it was not appearing in the search process. The ld. AR of the assessee has filed paperbook in which the financial statement of this company is placed at page No.1561 to 1575. We remit this issue to the AO/TPO for examination whether this company passes the FAR and decide the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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