TMI Blog2023 (7) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... luded as cannot be considered to be functioning in 100% risk mitigated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee. Include I2T2 India Ltd. and Infomile Technologies Ltd. in the list of comparables for determining the ALP of international transactions. - IT(TP)A No. 2506/Bang/2019 - - - Dated:- 25-5-2023 - Shri Chandra Poojari, Accountant Member And Smt. Beena Pillai, Judicial Member For the Appellant : Shri Aliasgar Rampurawala, A.R. For the Respondent : Shri Sankar Ganesh K., D.R. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against final assessment order passed by JCIT Special Range-6, Bangalore for the assessment year 2015-16 u/s 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 ['the Act' for short]1 dated 10.10.2019. The assessee has raised following grounds: The grounds mentioned herein by the Appellant are without prejudice to one another. 1. On the facts and in circumstances of the case and in law, the order of the Joint Commissioner of Income- Tax Special Range-6, Bengaluru ('learned AO') to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal sales; c) Rejection of companies having export sales less than 75% of the total sales; and d) Rejection of companies having different financial year ending or data of the company do not fall within 12 month period. 4.8. Including the following companies even though they are functionally different from operational profile of the Appellant: a) Tata Elxsi Limited (Seg); b) Rheal Software Private Limited; c) Mindtree Limited ) ..Larsen Tubro Infotech Limited; d) R S Software (India) Limited e) Infolvans Technologies Limited f) Persistent Systems Limited; g) Nihilent Technologies Limited; h) Aspire Systems (India) Private Limited;. i) Inteq Software Private Limited; Infosys Limited; and 4.9. Excluding the following companies even though they are functionally comparable to the Appellant and passes all the filters applied by the learned TPO in its order: a) Akshay Software Technologies Limited; b) Celstream Technologies Limite c) I2T2 India Limited; and d) Infomile Technologies Limited. 4.10 Not considering certain expenses such as provision for doubtful debts/bad debts/expenses and l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen from the annual report of this company, it is engaged in international information technology consulting and implementation delivering business solutions through global software development. Its software development is structured into five verticals. As per Note 2.8.1, it is stated, that the company derives its revenue primarily from software services'. Again, as per Note 3.9 of the annual report the company is engaged in software development services'. Further, as per Note 3.1.2 of the annual report, the company's earnings in foreign currency from software development services was Rs. 34.45 millions. As per the Note on Revenue Recognition, it has stated the principles adopted in recognizing revenue from software development services and there is no reference to product sales. 4.3 The ld. D.R. submitted that all this information clearly indicate that this company is engaged in software development. Besides, it is also relevant to note that the IP led revenue constituted meagre 2% of the consolidated revenue of the company for the F,Y. 2014-15 1% for F.Y. 2013-14. Considering this information in the annual report, the ld. DRP observed that this company is pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only certain software and tools, write codes to perform certain tasks. Like any other software application, these tools also facilitate and enables business enterprises for informed management and decision. Therefore, the ld. DRP did not find merit in the plea. Further, there cannot be any distinction between high end software activity and low end activity, so long as it falls within the purview of software development services. Besides, under the TNMM, such differences are tolerable and there is no requirement that the services / activities performed are identical. It is enough that the services are similar and fall within the same domain of software development. Accordingly, the pleas raised were rejected by the ld. DRP. 4.5 The ld. D.R. contended that this company has brand identity and earns significant brand profit on account of the same. He stated that the ld. DRP observed that the plea of assessee is purely based on conjectures as the assessee could not point to any information in the annual report to indicate that brand has contributed to the revenue growth or profitability of the company. Further, a careful perusal of the annual report for FY 2014-15 that there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of business. Besides, the ld. DRP observed that as per the information in the Asset Schedule (at page 11 of Annual report), the intangible assets comprised of Intellectual Property and computer software. The value of Intellectual Property as on 31.03.2013 was Rs. 67 million, as on 31.03.2014 Rs. 15 million and as on 31.03.2015 Rs. 2 million which is insignificant and meagre in regard to its Asset Portfolio of Rs. 6407 million; Rs. 3436 million Rs. 4626 million in the corresponding period. The computer software refer to routine computer licences not Intellectual Property generated by the company. Besides, the ld. DRP also observed that as per information in the annual report at page 90, the IP led revenue was only 2% during the year and meagre 1% in the earlier year. Thus, it is evident the intangibles have no material impact on the revenue growth or profitability of the company. Besides, the assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivities and hence functionally different was rejected by Ld. DRP. Further, it was observed by Ld. DRP that provision of data analytic services is not functionally different from software development activity. Data analytic services also used only in certain software and tools, writes codes task. Like in other software application, these tools also facilitate and enable business of enterprises for enough management and decisions. Therefore, the Ld. DRP observed that there cannot be any distinction between high end software activity and lowend activity so long as it falls within the purview of software development services. It was observed that under TNMM, such differences are tolerable and there is no requirement that services for activities performed are identical. It is informed that the services are similar and fall within the same domain of software development. Accordingly, Mind Tree Ltd. was included in the list of comparables while determining the ALP of international transactions with A.Es. Against this assessee is in appeal before us. 5.1. We have heard the rival submissions and perused the materials available on record. This company Mind Tree Ltd. was considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordingly. 5.2. In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Directed accordingly. Respectfully following the same, we direct the Ld.AO to exclude this comparable. 5.1 In view of the above order of the Tribunal, we are inclined to direct the AO/TPO to exclude Mind Tree Ltd. from the list of comparables to determine the ALP of international transactions. (d) L T Infotech Ltd.: 6. The ld. A.R. raised the following objections: Functionally dissimilar Presence of Brand value Significant onsite activity 6.1 The ld. D.R. relied on the order of ld. DRP and supported the inclusion of this comparable. 6.2 We have heard the rival submissions and perused the materials available on record. This comparable has been considered in the case of M/s. SAP Labs India Ltd. in ITA No.2510/Bang/2019 wherein they placed reliance on the earlier decision in the case of M/s. SAP Labs India Pvt. Ltd. in IT(TP)A No.684/Bang/2017 dated 23.7.2021 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion development for web and mobile. In the company overview this company has been stated to be primarily engaged in providing custom developed services to offshore clients and it provides software engineering services primarily in custom application development, content management systems, enterprise mobility, Big Data analytics. Ld.AR thus submitted that this company is functionally not at all similar with a captive service provider like assessee that this providing Ltd services to its associated enterprises. 14.3.1. On the contrary Ld. CIT DR, referring observations of DRP in para 3.6.1 submitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133 (6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to learnt AO/TPO for verification. 14.3.2. We have perused submissions advanced by both sides in light of records placed before us. It is observed that the annual report of this company categorises the diversify services provided by this company under software development segment. We also note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 25% related parry transactions of the sales were excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon'ble ITAT has upheld the application of this filter by the TPO in its order in the case of M/s. Supporisoft India Pvt. Ltd for AY 2005-06 in IT (TP)A 1372/B/11 20/2012 dated 28.03.2013 following its own decision in the case of M/s. Actis Advertisers Pvt. Ltd vide ITA No.5277/De1/2011 dated 12.10.2012. On perusal of the Annual Report of Persis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... next objection of the Assessee is that when the most appropriate method selected for determining ALP is the TNMM there is no reason as to why one should look at price difference in offshore software development and onsite software development. It is no doubt true that in TNMM it is only the margins in an uncontrolled transaction that is tested with reference to the controlled transaction but it is not possible to ignore the fact that pricing will have an effect on the margins obtained in a transaction. The argument that if pricing structure were to be considered as criteria, then it will have to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO. 68. Admittedly the onsite revenue in the case of the following comparable companies identified by the Assessee was more than 75% of its export revenues viz., a) Visu International Ltd. b) Maars Software International Ltd. c) Akshay Software Technologies Ltd. d) VJIL Consulting Ltd. e) Synfosys Business Solutions Ltd. The above companies were therefore rightly not considered as comparable by the TPO. We hold accordingly. 36. It is seen that the TPO in coming to the conclusion that the onsite revenue filter is not applicable has placed reliance on the decision of the ITAT Mumbai Bench in the case of Capegemini as quoted in para 16 in para 14 of the TPO s order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness activities. - Involved in development of software products in addition to software services. - Owns intellectual property rights. - Incurs significant research and development costs. - Carries out significant activities based on onsite business. - Owns products such as Finacle, Edge Verve and other product based solutions. Extra-ordinary event of merger with Infosys Consulting India Ltd. Segmental profit loss account not available. Commands substantial brand value. 40. The DRP, however, has not thought it fit to exclude this company by observing that this company has substantial pre-dominant revenue from software services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R D have all been brushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Accordingly we direct this comparable to be excluded from finalist. 9. Following the above said decisions rendered by co-ordinate benches, we direct exclusion of Persistent Systems Ltd., Larsen Toubro Infotech Ltd. and Infosys Ltd. Infobeans Technologies Ltd. from the final list of comparables. 9.3 In view of the above order of the Tribunal, we direct the AO/TPO to exclude Persistent Systems Ltd. Infosys Ltd. from the list of comparables. Ground No.4.9: 10. The ld. A.R. sought inclusion of following comparables: (c) I2T2 India Ltd. (d) Infomile Technologies Ltd. 10.1 The ld. A.R. submitted that it satisfies all the filters adopted by the TPO. Regarding Infomile Technologies Ltd., the ld. A.R. submitted that this is functionally similar and passes all the filters. 10.2 With regard to both the comparables, the ld. D.R. submitted that Annual report of this company do not disclose related party transactions and non-availability of such crucial information make the data unusable for TP analysis and rejected to be upheld. 10.3 After hearing both the parties, we are of the opinion that this comparable is considered as comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the contentions of the assessee that the above said company might not have had related party transactions during the year under consideration. Accordingly we do not agree with the reasoning given by Ld DRP for excluding this company as a comparable. Accordingly we direct the AO/TPO to include this company. 20. Following the said decision, we direct inclusion of this company in the list of comparable companies. As far as Infomile is concerned, the company was rejected for the reason that the RPT details were not available. The reasoning contained in the decision rendered in the case of LG Soft (I) Pvt. Ltd., (supra) will apply and therefore this company should be included as a comparable company as otherwise this company is comparable. We hold and direct accordingly. 13.2 The Ld.DR has not brought any contrary decision or facts in order to take a different view in respect of the above comparables. Respectfully following the same, we direct the Ld. TPO to include I2T2 India Ltd. Infomile Technologies Ltd. Accordingly, this ground raised by assessee stands partly allowed. 10.4 In view of the above order of the Tribunal, we direct the TPO to include I2T2 Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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