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TMI Blog2023 (7) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 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 learned TPO without demonstrating as to why it was necessary and expedient to do so. 3. The lower authorities have erred in not appreciating that, the addition made to the income returned is bad in law as the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 AO has erred in making transfer pricing adjustment of Rs. 2,53,32,409/- towards Marketing Support Segment. 13. The lower authorities have erred in: (i) Rejecting comparables selected and the TP analysis undertaken by the Appellant on unjustifiable grounds. The lower income tax authorities have erred in rejecting following companies selected by the Appellant as comparables: * Spectrum Business Solutions Ltd * ICRA Management (India) Private Limited * Hindustan Fields Services Pvt Ltd (ii) Conducting a fresh TP analysis despite ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an intangible asset; (iii) Not appreciating that Goodwill is a business asset and falls within the meaning of "other business or commercial right of similar nature" Explanation 3(b) to section 32 of the Act and is eligible for depreciation; and (iv) Not following the binding judicial precedents of Hon'ble Supreme Court. OTHER GROUND 20. The learned AO has erred in not providing the credit of Advance Tax paid of Rs. 9,56,00,000 relating to the transferor company (which merged with the Appellant), while computing the tax liability of the Appellant. 21. The lower autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. SOFTWARE DEVELOPMENT SEGMENT 8. The effective issue in ground No.6(i) & (ii) is with regard to rejection of Akshay Software Technologies, Evoke Technologies Ltd. & additional comparables selected by the appellant viz., Sagarsoft India Ltd. and Sasken Communication Technologies Ltd. by the revenue authorities, which the assessee has sought for inclusion of the same in the comparables list. Ground No.6(i) - Akshay Software Technologies Limited [Akshay Software] 8.1 The revenue authorities held that Akshay Software Technologies Limited is functionally different on the ground that it is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services in India and Overseas. Further, the company has substantial onsite operations as it in incurred foreign expenditure of about 77%. The DRP upheld the rejection on the ground that this company is not part of search matrix of TPO. 8.2 Before us, the ld. AR submitted that this company is functionally similar to assessee as it provides Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing technical personnel to various clients. 7.2 The Ld.AR mainly stated that the company is engaged in rendering software development services and the same is evident from Note 18 'Revenue from operations' as it derives revenue from services. 7.3 We have heard both the parties and perused the records. In the Annual report of Akshay it is mentioned as under : "Akshay Software Technologies Limited ('the Company') is engaged in providing professional services and procurement, implementation and support of ERP products and services in India and Dubai" 7.4 On the Web Site of Akshay it is mentioned as under : "We have over three decades of presence in the UAE market of sourcing contract staffing for clients. With deep consideration of UAE rules & laws we manage outsourced staff in a professional manner .We have immense experience to source candidate of all nationalities in all verticals............ Start-ups to unicorn companies require skilled candidates. Our professional staffing solution provides staffing in IT, Sales, Marketing etc. Our solution adheres to matching employer's requirements with top candidates. Akshay's professional staffing solution h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, we remit this issue to the TPO/AO for fresh decision in accordance with law after providing opportunity of being heard to the assessee." 8.5 We have gone through the financial statements placed at page No.1235 of PB. The corporate information of Akshay Software is as under:- "Akshay Software Technologies Ltd. ("the Company") is engaged in providing professional services and procurement, implementation and support of ERP products and services in India and Dubai." 8.6 Further we also note that the total employee benefit expenses is 93.90% of the revenue from operations and as per Note No.25 expenditure in foreign currency is Rs. 23,27.99,126 which is 93.69% of the revenue from operations of Akshay Software. Considering the totality of facts, we remit this issue to the TPO/AO for fresh consideration following the decision of the Pune Tribunal in SAS Research & Development India P. Ltd (supra) after providing opportunity of hearing to the assessee and decide the issue in accordance with law. Evoke Technologies Private Ltd. 9. The TPO held that the company is functionally different as it is engaged in diversified activities and segmental data is not available. 9.1 The DRP u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Segment Reporting, it has reported as under:- "The Company's operations predominantly relate to provide endto-end business solutions to enable clients to enhance business performance. Georgraphic Segmentation ss based on business sourced from that geographic region and delivered both on-site and off-shore at 7106, Corporate Way, Dayton, Ohio, USA." 9.5 We note from the submissions from the DRP that the assessee itself has submitted that Evoke Technologies P. Ltd. is engaged in diversified activities as mentioned supra. However, the ld. AR of the assessee submitted before us that this company is engaged only in software development services. Considering 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. Ground No.6(ii) - Inclusion of Sagarsoft India Limited and Sasken Communication Technologies Limited 10. The ld. AR submitted that the TPO rejected these companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JCIT, LTU (OSD) Circle-1, Bangalore vs M/s.Toyota Kirloskar Motors Private Limited (ITA No.2016/Bang/2018) wherein the AO was directed to calculate RPT ratio on an aggregate basis taking the ratio of RPT income plus RPT expenses divided by operating income for all the comparable companies. Therefore, it was submitted that the RPT ratio should be applied on an aggregate basis to ensure that only uncontrolled transactions are compared as per mandate of Section 92F(ii). The ld. AR submitted that RPT filter of 15% should be adopted as it would result in adopting better uncontrolled comparable companies. In this regard, reliance is placed on the following decisions: * Yodlee Infotech Pvt Ltd ITA No 684 & 685/2017 (Kar HC) * Barracuda Networks India Pvt Ltd v DCIT IT(TP)A No 229/Bang/2021 (Bang ITAT) - Page 2516 of PB-I 10.4 The ld. DR relied on the orders of lower authorities and submitted that the RPT filter applied by the TPO and confirmed by the DRP @ 25% is correct. 10.5 We have heard both the sides and perused the material on record. 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 (ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Solution Ltd. (vii) Infosys Ltd. (viii) Aspire Systems (India) Pvt. Ltd. (ix) Cybage Software Pvt. Ltd. Larsen & Toubro Ltd., Persistent Systems Ltd. & Infosys Ltd. 11.1 The assessee sought for exclusion of these 3 companies on various reasons. However, the TPO retained these companies which was upheld by the DRP. 11.2 The ld. AR submitted that Larsen & Toubro is functionally different and it is engaged in diversified activities like infrastructure management services, digital consultation, data and analytics and is not a pure software development 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 FYs and business model is different. It has global brand value and business spread across borders. The Company acquired another entity in FY 2014-15. 11.3 Regarding Persistent Systems Ltd., the ld. AR submitted that this company has substantial RPT transaction for all 3 years (FY 15-16 - 32.04%; FY 2014-15 - 31.32% and FY 13-14 - 21.41%). It is functionally different as it is engaged in both rendering software services & de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Agilis Information Technologies India (P) Ltd. v. ACIT (2018) 89 taxmann.com 440 (Delhi-Trib.) for the same AY 2012-13. In this regard it was submitted that the functional profile of the Assessee is same as that of the Assessee in the case of Agilis Information Technologies India (P) Ltd., is identical in as much as the said company was also involved in providing SWD services to its AE and the TPO had chosen 16 comparable companies out of which 6 companies chosen by the TPO in the case of the Assessee for the purpose of comparability were the same. His submission was that the decision rendered by the Tribunal in the case of Agilis Information Technologies India (P) Ltd., (supra) would be equally applicable to the Assessee in the present case also. The learned DR submitted that the DRP in its directions has merely accepted with the reasoning of the TPO and therefore the issue of exclusion of these companies should be directed to be examined afresh by the DRP. 29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P) Ltd., (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. In this regard we are also of the view that the plea of the learned DR for a remand of the issue to the DRP on the ground that the DRP has not given any reasons in its directions cannot be accepted. The DRP has endorsed the view of the TPO in its directions and therefore the reasons given by the TPO should be regarded as the conclusions of the DRP." 11.8 The coordinate Bench Tribunal considered the issue in respect of the above companies in the case of SanDisk India Device Design Centre Pvt. Ltd. in ITA No.288/Bang/2021 dated 30.6.2022 for AY 2016-17 and it was held to exclude the same. The relevant observations are as under:- "17.6 We have perused the submissions advanced by both sides in the light of records placed before us. 17.7 He placed reliance on the decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT (supra) wherein this Tribunal following its decision in case of LSI India research development (P.) Ltd. vs. DCIT reported in [2021] 124 taxmann.com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., is concerned, the Tribunal in the very same case of LG Soft (P.) Ltd. (supra) in another order dated 27-9-2019 in MP No. 95/Bang/2019 held that exclusion of Larsen & Toubro Infotech Ltd., was omitted to be adjudicated in the original order dated 285-2019 passed by the Tribunal referred in the earlier paragraph and held that Larsen & Toubro Infotech Ltd., is also not a comparable company because there were extraordinary events that occurred in the relevant previous year and that it possessed brand and intangibles and there was no segmental information of sub-contracting expenses". 3.3 There is nothing on record brought by the Ld.CIT.DR in order to establish that these are comparable with assessee that is a captive service provider which functions at the strict supervision and instructions by the AE's. Further we note that turnover criteria has to be applied with an upper limit which is not been considered by the Ld. TPO. The TPO has applied less than 1 crore turnover limit to eliminate the comparables however it failed to apply upper limit considering the functions performed assets owned and risk assumed by assessee under this segment for the year under consideration." 17.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in the case of SanDisk India Device Design Centre Pvt. Ltd. in ITA No.288/Bang/2021 dated 30.6.2022 for AY 2016-17 and submitted that the above 4 companies are to be rejected as comparables. 12.6 The ld. DR relied on the orders of the lower authorities. 12.7 We have considered the rival submissions and perused the material on record. These 4 companies were considered by the coordinate Bench of the Tribunal in the case of SanDisk India Device Design Centre Pvt. Ltd. in ITA No.288/Bang/2021 dated 30.6.2022 for AY 2016-17 and it was held as under:- "17.6 We have perused the submissions advanced by both sides in the light of records placed before us. 17.7 He placed reliance on the decision of Coordinate Bench of this Tribunal in case of OLF (India) Software Pvt. Ltd. vs. ACIT (supra) wherein this Tribunal following its decision in case of LSI India research development (P.) Ltd. vs. DCIT reported in [2021] 124 taxmann.com 83, excluded Persistent Systems Ltd., L&T Infotech Ltd., Thirdware Solutions and Infosys Ltd. by observing as under: "3.2 This Tribunal in LSI India research development (P.) Ltd. v. DCIT (supra) observed in respect of persistent systems, L & T Infotech, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh." "Nihilent Analytics Ltd. (Nihilent) 44. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No.405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise's reportable segment explanatory available at page No.A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No.A304, A405-A406 of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 more than 25% being the threshold limit considered by the Ld.TPO. Nothing has been placed before us by the Ld.DR in order to take a different view. Respectfully following the Hon'ble Mumbai Tribunal, we direct the Ld.TPO to exclude Nihilent, Infobeans and Aspire Systems from the final set." 12.8 Respectfully following the above decision of the coordinate Bench, we direct exclusion of Nihilent, Infobeans, Thirdware Solutions Ltd. and Aspire Systems (India) P. Ltd. from the comparables. However, the assessee has vide ground No.8 has submitted that the revenue authorities have incorrectly computed the operating profit margin of Aspire Systems (India) Ltd. We remit this issue to the TPO/AO for proper computation of the operating profit margin and decide the issue only with regard to Aspire Systems (India) P. Ltd. in accordance with law in the light of the decision in SanDisk India Device Design Centre Pvt. Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including provision of end-to-end solutions to clients in the nature of back office services, transaction-based services, MIS and analytical reporting services. Thus, Inteq is not comparable to the software development functions of the assessee. It is further submitted that the segmental details attributable to the various services rendered by the company is not available and is instead shown as "software development and service charges" under one head. Detailed submissions are available at pages 1911-1914 of the paper book. Significant related party transactions: The company's related party transactions (sales) for the FY 2013-14 stand at 79.49% of sales, and therefore the company ought to be excluded. Wide fluctuation in the margin: It is submitted that the company's margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company's margin stood at 47.21%, for the FY 2014-15 32.14% and for the FY 2015-16 7.56%. Detailed submissions in this regard are placed at pages 419-436 of the paper book. In view of the above, it is submitted that Inteq ought to be excluded from the final list of comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Pvt. Ltd 14. As regards Cybage Software Pvt. Ltd., the ld. AR submitted that it is retained by the lower authorities as a comparable. The Company is functionally different as it is engaged in both rendering software services & developing software products and hence not comparable with assessee. He placed reliance on the decision of the Pune Tribunal in the case of Optiva India Technologies Pvt. Ltd. in ITA No.194/PUN/2021 for the AY 2016-17 dated 21,07.2022 wherein it was held as under:- "17.1 The assessee contends that this company is mainly Onsite service provider whereas the assessee is offsite service provider and therefore, functionally different. Further, there is incorrect reporting figures which are unreliable. This company is product development as well as R & D Intensive Company. The arguments of the assessee were not accepted by the A.O/T.P.O and the company was held to be comparable. The ld. A.R demonstrated through Annual Report at page 1804, as per the description of the business of this company that it is onsite service provider. Furthermore at page 1796 of the Annual Report this company is doing other computer related activities but nowhere software services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exact quantification is not possible in the same year for some expenses and when exact amount of liability is determined in a future year in which actual amount is known then excess provision if any is written back and more provision is made if the provision made earlier is short. But in that year also, similar provisions are made on estimate basis in respect of liability incurred in that year and it is an ongoing process and therefore, neither the provision made can be excluded nor the excess provision written back can be excluded. But in the present case, the issue in dispute is regarding provision for bad and doubtful debts made in the present year. This is not the case of the assessee that sale were accounted for in earlier year on estimate basis and now the exact amount of sales is known and therefore, the excess amount of debts created in earlier year on estimate basis is to be reduced now to make at par with actual debt. In the present case, actual sales were accounted for in earlier years and debts were created in earlier years on the basis of actual sales and invoices and now, the provision is made when it is seen that the recovery of such debt is doubtful. We would like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering the Fixed Assets written off as operating in nature while computing margins of the assessee. The ld. AR submitted that fixed assets written off should be excluded from the operating cost, while computing the margins of the assessee. 16.1 We have heard both the sides and perused the material on record. The DRP has directed the AO/TPO to consider the fixed assets write off as non-operating with the following observations:- "2.6.3.1 Having considered the submissions, we note that the fixed assets do not directly impact the P&L account or operating margins of the company. Revenues/expenses on account of fixed assets written off are not expenses incurred in earning the operating revenue. The 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. ..........." 16.2 Accordingly, we remit this issue to the AO/TPO to follow the directions of the DRP on this issue. CASH PLI 17. Ground No.11 of Software D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the estimated life of the assets are 3 years and 5 years. The cost of depreciation is high compared to other comparable companies. He submitted that the depreciation shall be excluded from the variable cost of all the comparable companies including assessee to determine the ALP. He relied on the following case laws: 1. BA Continuum India (P.) Ltd. TS-490-HC-2014 (TELandAP)-TP 2. BA Continuum India (P.) Ltd. v. Asstt. CIT [2013] 40 taxmann.com 311 (Hyd.) 3. Market Tools Research India (P.) Ltd. v. Asstt. CIT [2013] 32 taxmann.com 358/[2014] 150 ITD 296 (Hyd.) 9.4 Ld. AR also submitted the comparative tables on depreciation as below: .............. .............. 9.5 In our considered view, the method of depreciation adopted by the various comparable companies has an impact on the operating result of the respective comparable companies, which is highlighted in the above charts. The assessee company's percentage of depreciation to total expenditure is 12.80% whereas the mean of the comparable companies are 5.26%. We notice, there is considerable impact on the operating result. Hence, we agree with the DRP that the depreciation should be considered for evaluating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lution Panel erred in directing to exclude depreciation from the cost of tax payer as well as comparables. The aforesaid finding cannot be said to be perverse warranting interference of the Court in this appeal. 9. In view of preceding analysis, the third substantial question of law is answered against the revenue and in favour of the assessee." 17.6 Respectfully following the above decisions, we direct the AO/TPO to adopt the Cash PLI. Theses grounds are allowed. 18. As regards risk adjustment vide grounds No.11(ii) & 17(ii), the assessee made submissions for allowing risk adjustment which was not accepted by the lower authorities. The ld. AR submitted that the assessee provides services on cost plus model. Under cost plus model, assessee would never incur a loss. Since all the costs are subsumed, while computing the billing / revenue, the assessee is assured of profits. The risk profiles of comparable companies differ from that of the assessee as they undertake business risks, financial risks, credit and collection risks, etc. In such circumstances, it is necessary to give effect to functional and risk differences while determining ALP. Without these adjustments, the comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of risk adjustment has not been given and in the absence of such quantification, the plea cannot be accepted. Besides the above, the DRP has also placed reliance on judicial pronouncements holding that risk adjustment cannot be allowed in the absence of proper and reliable computation of risk adjustment. We are in agreement with the conclusions of the DRP in this regard and find no grounds to interfere with its conclusions." 18.3 Respectfully following the above judgment, 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. 19. Ground No.11(iii) is not argued by the assessee and dismissed as not pressed. MARKETING SUPPORT SEGMENT (MSS) 19.1 By ground No.13, the assessee seeks inclusion of 3 companies viz., Spectrum Business Solutions Ltd., ICRA Management (India) P. Ltd. and Hindustan Fields Services P. Ltd., which were rejected by the lower authorities on the ground that the data was not available in the public domain. 19.2 The ld. AR submitted that Spectrum Business Solutions Ltd. is functionally similar to assessee and engaged in providing business support services and man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of technology for data acquisition. It provides qualitative and quantitative Research Services. The Company has abnormal and peculiar growth as its revenue increased by 102% during AY 2016-17. In subsequent years, the revenue of the Company has reduced dramatically to almost NIL. Scarecrow Communications Limited is functionally different as it is engaged in Advertising in press, television, radio etc. The ld. AR relied on the decision of this Tribunal in the case of Epson India Pvt. Ltd. v. DCIT in IT(TP)A No.206/Bang/2021. 20.2 The ld. DR relied on the orders of lower authorities. 20.3 We have heard both the parties and perused the material on record. With regard to Ugam Solutions Pvt. Ltd., we note that before the lower authorities the assessee has submitted that the company is engaged in various activities as contended in page 1130 & 1131 of PB and as per the annual report MGT-9 the NIC code is 7020 under the head 'Managed Analytics. However, the ld. TPO has included this company by observing that it passes all the filters. But the lower authorities have not examined the issue in the light of submissions made by the assessee. Therefore, we remand this issue to the AO/TPO f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is found to be functionally comparable in terms of Rule 106 The Hon`ble ITAT Spl. Branch Mumbai in the case of Maersk Global Centres (India) Private Limited held that comparables with high profit margins cannot be discarded per se and it has to be examined whether the profit margin was on account of normal business conditions or not. Such a view was earlier taken by the Bangalore ITAT in the case of 2417 Customer.com Private Limited holding that high profit companies need not be excluded as the Indian TP regulations adopt the Arithmetic mean for determining the ALP. 2.9.11.3 Again in the case of Trilogy E-Business Software India Private Limited Vs. DCIT (2013) 29 taxmann.com 310 the Bangalore Tribunal held that there is no bar to considering companies with either abnormal profits or abnormal losses as comparable to tested parties as long as they are functionally comparable, and it is lor the taxpayer to demonstrate the existence of any abnormal factors that would have caused the high profit margin. Similar views were taken in the case of Autodesk (India) Pvt. Ltd. vs. DCIT in ITA No.1108/Bang/2010 and Yodlee Infotech Pvt. Ltd. Vs. ITO (2013) 31 taxmann.com 230 (ITAT, BNG). In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered by the assessee. Pages 2295 to 2304 of PB-I gives the details of revenue generated by this comparable. On pursual of pg. 2302 of PB, the revenue from operations is from retainership fee, shoot production receipt and service receipt & other fees. Therefore, this company is excluded from final list. Accordingly this comparable is directed to be excluded from the final list. 21. Regarding Ground No.15, the ld. AR submitted that the lower authorities have erred in incorrectly computing the operating profit margins of the following comparables and furnished the correct margins given below:- SL No Companies TPO Margins Correct margins Reference 1 Quadrant Communications Ltd -0.34% -12.09% Submission at Pg 1125 of PB I and Detailed Margin Computation at Pg 2044 & 2045 of PB I. 2 Pressman Advertising Ltd 12.99% 11.54% Submission at Pg 1129 of PB I and Detailed Margin Computation at Pg 2305 & 2307 of PB I. 3 Ugam Solutions Private Limited 17.75% 12.97% Submission at Pg 1132 of PB I and Detailed Margin Computation at Pg 2305 & 2308 of PB I. 4 Killick Agencies & Mktg. Ltd 20.99% 16.28% Submission at Pg 1138 of PB I and Detailed Margin Computation at Pg 2044 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention, the Assessee relies on the following decisions: * Techbooks International P Ltd v DCIT (2015) 63 taxmann.com 114 (Delhi Trib) (Para 13.13 of Pg 2557 of PB II) * Indegene Lifesystems (P.) Ltd. [2017] 85 taxmann.com 60 (Bangalore - Trib). * Tata Autocomp Systems Ltd. [2012] 21 taxmann.com 6 (Mum.) 23.3 Without prejudice to above, it was submitted that credit period of nine months for realizing export proceeds from AE outside India should be considered for making adjustment towards interest on receivables. Reliance is placed on FEMA Regulations (page 1181-1182 of PB-I) which provides for 9 months for realisation of dues. In the alternative, average days of receivables of final comparables should be adopted as the credit period. The calculation is attached as Annexure 1 to the Synopsis filed by the ld. AR for the assessee. 23.4 The ld. DR relied on the orders of lower authorities and he further submitted that various Hon'ble High Courts and the Tribunal have held that notional interest on receivable beyond the credit period is to be considered as an international transaction. Therefore, the argument of the ld. AR of the assessee is baseless. He submitted that the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having been used for the purpose of business, the prerequisites for availing depreciation are satisfied. In support of the above contention, reliance was placed on the following decisions: * Smifs Securities Ltd. (2012) 348 ITR 302 (SC)-Pg 2607 to 2608 of PB II * Mylan Laboratories Ltd in ITA No. 2335/Hyd/2018 & ITA No. 12/Hyd/2019- Pg 2639 to 2642 of PB II * Foodworld Supermarket vs DCIT, Circle-3(1)(1), Bangalore ITA Nos.2071, 2072, 2074 & 2075/Bang/2017- Pg 2658 of PB II * Padmini Products (P.) Ltd vs DCIT, Circle 12(2), Bangalore [2020] 121 taxmann.com 237 (Karnataka) 24.3 The ld. AR also relied on the decision of the Coordinate bench in the case of M/s. Altimetrik India Pvt.Ltd vs DCIT, Circle 1(1)(1), Bangalore (IT(TP)A No. 2511/Bang/2019) (Pg 2730 of PB-II) where it was held that the depreciation claimed by the assessee on goodwill acquired deserves to be allowed in accordance with law and the learned AO was directed to compute the depreciation. 24.4 The Appellant further submits that the Regional Director, Ministry of Corporate Affairs, South-East Region, Hyderabad represented by Registrar of Companies had filed a joint affidavit dated 28th October 2016 before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Guide on Valuation by the ICAI (submissions at Pg 2334- 2336 & 2347-2366 of PB-I). 4. Valuation was solely based on information given by management. The Valuer is an independent entity and free to consider the reliability and creditability of the information provided to him. He is free to make necessary modifications if required. Therefore, it is incorrect to say valuation is solely based on management's information (Refer submissions at Pg 2340 of PB-I). 5. There is no justification in lieu of brand name to claim such high goodwill. The Appellant submits that valuation of goodwill was not based on brand name of the company but various other factors (Refer submissions at Pg 2341 of PB-I). 6. The valuation report does not separately delve upon the components of goodwill. The goodwill valuation is not justified separately. The Appellant submits that goodwill arising on amalgamation is anticipation of future income. The goodwill has been recognized as per the AS-14 issued by ICAI (Refer submissions at Pg 2342-2343 of PB-I) 24.7 Further, with respect to DCF method of valuation of shares, the Appellant submits that there are three important inputs necessary (detailed valuation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 2 to Section 32(1)] Restrictions on depreciation in the hands of amalgamating company and amalgamated company in the previous year to the depreciation calculated on 'actual cost' of capital asset in the hands of amalgamating company prior to amalgamation [5th proviso to Section 32(1)] 2 Cost/Written down value of capital assets in the hand of companies Actual cost of capital assets in the hands of amalgamated company to be same as in the hands of amalgamating company [Explanation 7 to Section 43(1)] 'Written down value' of capital assets in the hands of amalgamated company to be same as in the hands of amalgamating company [Explanation 2(b) to Section 43 (6) (c)] 3 Cost of stock-in-trade 'Cost' of stock-in-trade in the hands of amalgamated company to be taken the same as in the hands of amalgamating company held either as capital asset or stock-in-trade [43C(1)] 4 Exemption in the hands of company Exemption of capital gains in the hands of amalgamating company on transfer of capital asset of amalgamating company in the scheme of amalgamation [Section 47(vi)] 5 Exemption in the hands of shareholders Exemption of capital gains in the hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed a higher depreciation as this was a non-existent asset before amalgamation. 30.5 He submitted that to wriggle out of this situation, an argument has been made by the assessee that this section is not applicable because goodwill was not in the balance sheet of the amalgamating company. Goodwill came into existence because of amalgamation and therefore, it was never transferred from amalgamating company to an amalgamated company. He contended that this argument of the assessee militates against the intention of the legislature and hence, must be rejected. To bring out inherent flaw in this argument of the assessee, the ld. DR illustrated the cases where goodwill exists and does not exist, prior to amalgamation as under:- Sl No Goodwill in Amalgamating Company Goodwill in Amalgamated company Case 1 1 crore 1 crore Case 2 zero 100 ore 30.6 It was submitted that if an amalgamating company has goodwill of Rs 1 crore and the purchaser company 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 amalgama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [2010] 128 TTJ 596 ITAT, Hyderabad The goodwill is a business or commercial right of similar nature and the assessee is benefited by amalga- mation by acquiring that commercial value being intangible assets which the assessee has paid on amalgamation. The excess consideration over and above the excess of assets over liabilities is the goodwill which is an asset entitled to depreciation under section 32 of the IT Act. As such, the AO is justified in granting depreciation on goodwill while completing the assessment under section 143(3) of the IT Act and the CIT is not justified in invoking of provisions of section 263 on this issue. 1. It was a case related to 263. ITAT held that the provision of s. 263 could be invoked by the CIT if the circumstances specified therein viz., (1) the order is erroneous (2) 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 Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation 7 to section 43(1) and/or Explanation 2(b) to section 43(6)(c) and section 55(2)(a)(ii). 2. Reliance was placed on AricentTechnologies (Holdings) Ltd [2019] 109 taxmann.com 47 (Delhi-Trib). 3. Amalgamation has to be tax neutral. Padmini Products (P) Ltd Karnataka High court Where under a scheme of succession intangible assets of a partnership firm were transferred to assessee-company in lieu of shares issued to partners of erstwhile firm, successor assessee-company was entitled to claim depreciation onsuch intangible assets on cost incurred by it with reference to such intangible assets. 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pex Court in CIT v. Smifs Securities Ltd. [2012] 348 ITR 302 / 210 Taxman 428 / 24 taxmann.com 222. In the above view, question no.(i) as proposed does not give rise to any substantial question of law Thus, not entertained. Reliance was placed on Smifs Securities Ltd to hold that depreciation on goodwill is allowable. Even Gujarat HC and SC upheld 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& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red any cost in acquiring such intangible assets. Therefore, under the provisions of section 32 of the Act there is no allowance of depreciation available for any asset created in the books of account due 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 goodwil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition. 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 aspect needs to be highlighted. In the present case, the Assessing Officer, as a matter of fact, came to the conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration 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 depreciable asset, one may note that the contention before the court was not as to whether difference arising out of amalgamation was g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinary 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, under section 209 of the Companies Act, mercantile system of accounting has been made mandatory for companies. In other words, Accounting Standard, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, 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 VENKATARAMA AIYAR, J., "The rule of construction is well settled that when there are in an enactment two provisions which cannot be reconciled with each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 capital assets in the scheme of amalgamation under the provisions of section 47(vi) of the Act. * The cost of stock-in -trade in the hands of amalgamated company shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O 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 and the approval of the scheme of amalgamation must be limited to that extent as such. 30.30 The ld. DR submitted that the cash flow projections of the assessee is estimated proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Income Tax department raised objection on the sole issue of TDS/TCS. The AO had not raised any objections in the impugned scheme of amalgamation at the time when opportunity was provided to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 allowed the depreciation claimed on goodwill. 31.7 Based on the above, it was submitted that the interpretation of the relevant provisions by the learned DR is not correct. In the instant case, the goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 conservative basis. Thus, the arguments of learned DR for rejecting the reliance placed on various case laws is without basis and bad in law. 31.11 The ld. AR submits that submits that the judicial precedents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht 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 explained in AS-14 issued by Institute of Chartered Accountants of India, amalgamation can be, (a) in the nature of merger; and (b) in the nature of purchase. In the second type of amalgamation by purchase, the consideration paid in excess of the net value of assets and liabilities of the amalgamating company is to be treated as goodwill. In the books, the Appellant has rightly followed accounting treatment prescribed by the AS. The Appellant has rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 goodwill has arisen for the excess consideration paid and it has been recorded as per the scheme approved by the Hon'ble High Court. We further note from the rejoinder dated 26.12.2022 filed by the ld. AR that at para No.13, it is stated as under:- "As per Scheme approved by NCLT, various intangibles like licences, registrations, copyrights, patents, trade names, trademarks, other rights, domain/website, all staff, workmen, trained employees, document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transfer pricing analysis submitted by the Appellant; (iii) Adopting inappropriate filters like one sided turnover filter, 25% RPT filter, etc. in the process of selecting comparables and not adopting appropriate filters like onsite revenue filter, etc; (iv) Selecting inappropriate comparables and selecting companies as comparables even though they are not comparable in terms of functions performed, assets utilized, risks assumed, size, one sided turnover, unusual business circumstan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 Purchase consideration and the value of net assets acquired constitute an intangible asset; (iii) Not appreciating that Goodwill is a business asset and falls within the meaning of "other business or commercial right of similar nature" Explanation 3(b) to section 32 of the Act and is eligible for depreciation; and (iv) Not following the binding judicial precedents of Hon'ble Supreme Court. OTHER GROUND 11. The lower authorities have erred in levying interest of interest u/s 234B of Rs. 17,26,48,455/-. On the facts and circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted 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 2017-18 also. 40. The next issue vide ground No.5 (iv) by the assessee is regarding exclusion of following companies :- i. Aptus Software Labs Pvt. Ltd. ii. Consilient Technologies Pvt. Ltd. iii. Cybage Software Pvt. Ltd. iv. Cygnet Infotech Pvt Ltd. v. Infobeans Technologies Ltd. vi. Infosys Ltd. vii. Larsen & Toubro Ltd. viii. Mindtree Ltd. ix. Nihilent Ltd. x. OFS Technologies Ltd. xi. Persistent Systems Ltd. xii. Tata Elxsi Ltd. xiii. Threesixty Logica Testing Services Pvt. Ltd. 40.1 During the course of hearing, the ld. AR has not pressed the companies at Sl.No. (i), (iii), (ix) & (x), which are dismissed as not pressed. We now take up for consideration the following companies. Consilient Technologies Pvt. Ltd. 40.2 The ld. AR submitted that the Company is functionally different as it provides licensable software products for speech, video, fax and analog modem communications market. Relevant extract of website and submissions are placed at Pg 96 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted 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 PB, we note that the RPT filter computed by the assessee for AY 2014-15 is 16.85% which is more than 15% RPT filter as argued by the ld. AR . Since this issue for AY 2016-17 in ground No. 7(iii) is remitted back to the AO/TPO, following the same, we remit this issue to the AO/TPO with similar directions. Cygnet Infotech Pvt Ltd. 40.7 The ld. AR submitted that the Company has substantial RPT for FY2016-17 (19.85%) & FY 2015-16 (17.49%). Computation of RPT for FY 2016-17 is placed on record. It is is functionally different as it is is engaged in the provision of various services such as enterprise solutions, Application, Content Management services and IT enabled services. Therefore this company has to be excluded. 40.8 The ld. DR relied on the orders of lower authorities. 40.9 We have considered the rival submissions and perused the material on record. The ld. AR has submitted that the company is functionally dissimilar and fails RPT filter. However, the ld. DRP held that this company is functionally comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in following cases has held that Infobeans Technologies Ltd is into diversified software services and cannot be considered as a comparable to the Assessee. - ADP Pvt. Ltd., Hyderabad vs DCIT-1(1), Hyderabad (TS63-ITAT-2022 Hyd) for AY 2016-17 - M/s.Airlinq Technology Pvt. Ltd vs DCIT, Circle 3(1)(1) Bangalore IT(TP)A No.231/Bang/2021 for AY 2016-17 40.12 The ld. DR relied on the orders of lower authorities. 40.13 We have considered the rival submissions and perused the material on record. This company has been excluded in assessee's own case for AY 2016-17 hereinabove. We also note from the PB pg. 613 the company is engaged in diversified activities and there is no change in facts from the previous AY. It is engaged in the development of platforms and technologies using custom scrips, AI technologies, robotic process automation, chatbox, integration tools and frameworks like jenkiins, Selelium, CAD, content management system (CMS), enterprises mobility and big data analytics, etc. 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. Infosys Ltd 40.14 The ld. AR sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... implementation and segmental information is not available. The company has global brand and owns Intellectual Property and therefore, cannot be compared to captive service provider like Appellant. The Company has substantial onsite revenue. Thus, has different business model when compared to Appellant. The company, during the FY 2016-17 has entered into various high value acquisition and merger transaction. Such extraordinary events have an effect on the profitability. Hence this company has to be excluded. Reliance is placed on 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. 40.21 The ld. DR relied on the orders of lower authorities. 40.22 We have considered the rival submissions and perused the material on record. We note from the order of the DRP that this company is engaged in rendering of software development services in different verticals and comparable to assessee. The company is earning foreign currency from software development services of Rs. 42.73 million. As per Note from the Annual Report, the principal business is software development services and 99% revenue is generated from the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT-DR does not support the case of higher margin in case of onsite work because dead hours would mean less output with the same employee cost, which would in fact reduce the margin. No material has also been placed before us to show that the margin in case of on-site work is higher. Basing on the same, Ld. TPO rejected Mindtree Ltd., as comparable. Ld. TPO also observed that the assessee has not stated as to how the approach of the assessee to the operating margin and that would there be a possibility of any comparables left, which are not controlled. It was also observed by the Ld. TPO that the assessee did not demonstrate as to how the R&D expenditure being incurred by this company is the reason for the higher profit margins, earned. Although the company may be incurring expenditure on R&D. It does not change the fact that the core business is SWD. Ld. DRP after going through the annual report, judicial precedents and considering the contentions of the assessee, observed that the company is engaged in international information technology consulting and implementation delivering business solutions through global software development and further observed that the company's ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench excluded Infosys Limited, Larsen & Toubro Infotech Limited, Mindtree Ltd, Tata Elxsi Limited (seg), Persistent Systems Limited, and Cybage Software Private Limited on the ground that such entities were considered to be un-fit for comparison with the assessee in assessee's own case for the assessment years 2013-14 and 2014-15 and there was no change in the factual matrix of the case. 40.26 A perusal of the orders in Infor (India) (P.) Ltd. Case (supra), Infor (India) (P.) Ltd. case (supra) and Infor (India) (P.) Ltd.'s case (supra) therefore, makes it clear that all these seven comparables were found to be not comparable with the assessee consistently for the assessment years 2014-15, 2015-16 and 2016-17 on the ground of either functional dissimilarity or scales of turnover and profits or non-availability of segmental information, where it is necessary. All these entities are excluded from the list of comparables from the assessment years 2013-14 to 2016-17 consistently. Learned DR does not plead any change in the factual position for this assessment year from any of the earlier assessment years. Considering the similarly of the facts and circumstances, and respectf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as it is engaged in Embedded product design, Industrial design, Visual Computing Labs, Systems Integration. The Company has global brand image and has paid brand fees of Rs. 344.98 lakhs to Tata Sons Limited for AY 2017-18. There is vast difference between the profile of Tata Elxsi and the Appellant. 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) 40.33 The ld. DR relied on the orders of lower authorities. 40.34 We have considered the rival submissions and perused the material on record. The ld. DRP has discussed the issue in detail. We hold that his company is functionally dissimilar following the decision of the coordinate Bench of the ITAT Hyderabad in the case of Infor (India) Pvt. Ltd. [2022] 143 taxmann.com 68 (Hyderabad - Trib.) noted supra. The AO/TPO is directed to exclude this company. 41. By ground No.5(v), the assessee seeks inclusion of certain companies as comparables. In this regard, the orders of lower authorities and the submissions of the assessee are as follows:- Companies Findings of lower authorities Contentions of Appellant Akshay Software Technologies Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 of Appeal Papers) 1. The company is listed in databases & financial data is available on public domain and databases for analysis. 2. The company is functionally similar as it provides solutions and services in product engineering and software development. (Submission at Pg 880-881 of PB I). 3. This company passes all filters applied by the TPO (Submission at Pg 882 of PB I). Nitor Infotech Private Limited DRP 1. This company does not appear in the search matrix of the TPO (Pg 90 of Appeal Papers). 1. The financial data relating to this company is available in public domain. 2. The company is functionally similar as it provides consultancy and technology services in the area of Business intelligence, collaboration, portals and performance management domain (Submission at Pg 894-895 of PB I). 3. This company passes all filters applied by the TPO (Submission at Pg 895 of PB I). Sasken Communication Technologies Limited DRP 1. The company is not comparable because it is engaged in diversified activities, has R&D activities and owns patents (Pg 90-91 of Appeal Papers) 1. The company is functionally similar as it is primarily engaged in software consulting and development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial, and distribution. It is used to integrate core business processes which are required for various functions concerning the SAP module. In this regard, it is relevant to note that ERP is a multi-layered software that integrates all the different functions within an organization. The ERP implementation requires professionals who have expertise in: - 1) Functional domain (i.e. domain knowledge of the business, its operations & management). 2) Software domain (i.e. technology expertise in software development) 2.6.11.3 Thus, ERP implementation & support involves personnel from professional domain and technology or software domain. Therefore, such services cannot be strictly said to be software services as non-software personnel may play a dominant role in the implementation. The very fact that this company has described that it had rendered professional services in Dubai, indicate that it pertained to the non-software services; or it is also possible it may be a mix of software services and professional services. As segmental information is not available for the same, we consider it appropriate to hold that this company is not functionally comparable to the assessee. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual functions and annual reports. We are therefore directing these comparables to be reconsidered by the Ld.AO/TPO based on the annual reports. 13.3 The Ld.TPO shall consider these comparables after verifying the FAR of these comparables with that of assessee. Accordingly, Batchmaster Software Pvt. Ltd., DCIS DOT COM Solutions India Pvt. Ltd. and Evoke Technologies Ltd. for denovo consideration to Ld.AO/TPO." 12.4 We further observed that the ld. DRP have observed that the figures are wrongly reported in the schedule NO. 2.29 & 2.16 & 2.26 in the financial statement in regard to the Export Turnover but this aspects were not discussed in the above said order as relied by the ld. AR, therefore this decision is not applicable. For the sake of convenience we are reproducing the findings of the ld. DRP as under:- "Having considered the submissions, and on perusal of the annual report, we note that in the statutory auditor's report, it is stated in note 2.29 that the financial statements include branch revenue of Rs. 1605 lakh and branch net-profit of Rs. 2.19 lakh based on audited financial statement of the Branch outside India. Also, as per the geographic segmentation informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to pg. 1452-1456 of PB-II and submission at pg. 707-708 of PB-I and also referred to pg.1469-1470 of PB-II and submission at pg. 708-709 of PB-I. Considering the arguments from both the sides and findings recorded by the lower authorities, we remit this issue to the AO/TPO for fresh consideration. 25. Athena Global Technologies Limited 15. The TPO & DRP rejected the company on the ground that it fails networth filter. The ld. DRP further noted that the negative net worth filter eliminates the intrinsically sick and nonperforming companies owing to various internal reasons. The ld. AR submitted that the company is functionally similar as it is primarily engaged in software development. This company passes all filters applied by the TPO. He submitted that Companies having similar FAR cannot be excluded on the basis of negative net worth filter and relied on decision of Gillette Diversified Operations Pvt Ltd [TS-218-ITAT-2016(DEL)-TP]. 151/DEL/2013 AY 2005-06, Order dated 01.04.2016 15.1 The ld. DR relied on the orders of lower authorities. 15.2 We have heard both the parties and perused the material on record. We notice from the financial statement that the net worth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me cannot be taken as comparable. The case laws relied upon by the appellant were also rejected as according to him those were relied upon high loss making company and not for a negative net worth comparables. ii. Before us the ld AR submitted that merely because a company is having negative net worth it cannot be excluded as comparable if the functions performed, Assets deployed and risk assumed are comparable with the business of the company. Against this the ld AR relied on the order of the lower authorities 25. We have carefully considered the rival contentions. According to rule 10(B)(a) of the Income Tax Rules the comparability of international transactions with an uncontrolled transaction shall be judged with respect to the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions. According to the Rule 10B(3) a uncontrolled transaction shall be comparable to an international transaction none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of hearing, the ld. A.R. pressed only following 4 comparables for inclusion: a. Bhilwara Infotechnology Limited; b. R Systems International Limited; c. ISN Global Solutions Private Limited; and d. E-ZestSolutions Limited; 13.2 The other comparables are not pressed. Accordingly, dismissed as not pressed. Bhilwara Infotechnology Limited & R Systems International Limited: 13.3 ......... 13.4 ...... ISN Global Limited: 13.5 ............ 13.6 ......... 13.7 .......... E-ZestSolutions Limited: 13.8 Now coming to E-ZestSolutions Limited, the ld. DRP observed that on perusal of the annual report it was noted that the company has income from sale of services amounting to Rs. 81.46 crores as per the information statement of profit and loss account given at page nos. 123-125 of the annual report. The company reported that it is exclusively engaged in the business of IT enabled services. This is the context of on segment reporting and is considered to constitute a single primary segment. As it is part of search matrix of the TPO and functionally similar to the assessee, the TPO is directed to include the comparable for the comparability analysis under ITES segment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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