TMI Blog2023 (3) TMI 1412X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out by assessee under the marketing support service segment. We therefore hold this comparable to be not functionally similar with that of assessee. Dun Bradstreet Information Services India Pvt. Ltd. - As description of the project or services provided by this company is mentioned to be credit reporting services - we note that this company is engaged primarily in the business of providing risk management and sales and marketing solutions. The background of the company also describes to be providing learning and economic insight services. The company offers a wide suite of information solutions and its services are used extensively by banks, financial institutions, multi nationals, corporate entities, public sector undertaking, exporters and importers. It also describes itself to be in the field of market analysis, locate prospects and incurs revenue from new and existing customers. The sales and marketing solutions offered by this company also include sale of data and related services. In our considered opinion, these functions cannot be compared with the limited services rendered by assessee to its AEs. Pressman Advertising Ltd. - As the company s business activity fal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing including undertaking market research, planning and providing consultancy services and training in the same field. There is no segmental details available and the entire revenue is disclosed as revenue from sale of services. In light of the above, we do not find this company to be functionally similar with that of assessee Interest on receivables - HELD THAT:- We deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR + 300 basis points which is in accordance with the principles laid down by Hon ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., [ 2015 (3) TMI 1031 - DELHI HIGH COURT] by considering a credit of 90 days. - SMT. BEENA PILLAI, JUDICIAL MEMBER AND MS. PADMAVATHY S, ACCOUNTANT MEMBER For the Assessee : Smt. Tanmayee Rajkumar, Advoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price; 2.2. That on the facts and circumstances of the case, the Ld.AO/Ld.TPO erred in rejecting the transfer pricing ( TP ) documentation maintained by the Appellant, in good faith, as required under section 92D of the Act read with rule 10 D of the Income-tax Rules, 1962 ( the Rules ) on the basis that the Appellant did not apply appropriate filters and accordingly contended that the data used in computation of arm's length price is not reliable or correct; 2. 3. The Ld.AO/Ld. TPO erred in law in rejecting the quantitative filters applied by the Appellant in its TP documentation such as: rejecting companies having other operating income (service income) / sales less than 5o% in latest available year. 3. Ground No. 3: Comparability analysis and determination of arm's length price 3.1. That on the facts and in the circumstances of the case, the Ld. Panel erred in upholding the Ld.AO/ Ld. TPO's approach of determining the arm's length price for the provision of SWD, ITeS and MSS by applying the provisions of Rule 10B(5) read with Rule 10CA(2) and Rule 10 CA(4) of the Income-tax Rules, 1962 (`the Rules') while undertaking the fresh benchmarking analysi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gica Testing Services Pvt. Ltd. (xv) Infosys Ltd. (xvi) Cybage Software Pvt. Ltd. and (xvii) Tech Mahindra Ltd. despite these companies being functionally dissimilar to the Assessee. The Ld. Panel erred in upholding the same. 5. Ground No. 5: Comparability analysis ITeS/ TSS segment 5.1. The Ld.AO/Ld.TPO erred in giving effect to the directions of the Ld. Panel, wherein the Ld. Panel directed the Ld. TPO to consider the segmental margins earned by the Appellant, the Ld. TPO erred in not following the said direction of the Ld. Panel, thereby making an adjustment to ITeS/TSS. Absent the error, there would not warrant any adjustment under ITeS/TSS since the margins earned by Appellant under ITeS/TSS segment higher than the 35th percentile of the Ld. TPO set; 5.2. Without prejudice to the above ground, the Ld.AO/Ld.TPO erred in rejecting the following companies (i) Allsec Technologies Ltd. (ii) Cosmic Global Ltd and (iii) Bhilwara Info Technology Ltd. (iv) Informed Technologies India Ltd. and (v) Suprawin Technologies Ltd., despite these companies being functionally comparable to the Assessee. The Ld. Panel erred in upholding the same; 5. 3. The Ld.AO/Ld.TPO erred in incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the services provided by the Appellant and thereafter selecting high profit-making entrepreneurial companies as comparables. In doing so, the Ld.AO/Ld. TPO has erred in not providing an appropriate adjustment towards the risk differential, even when the full-fledged entrepreneurial companies have been selected by the Ld. TPO as comparables. The Ld. Panel erred in upholding the same. 8. Ground No.8: Treatment of forex as operating in nature 8.1.The Ld AO/Ld.TPO erred in considering gain/loss on foreign currency fluctuation as operating in nature for the purposes of computation of operating mark-up on cost of the Appellant and the comparable companies. The Ld. Panel erred in upholding the same. 9. Ground No. 9: Interest on outstanding receivables 9.1. The Ld.AO/Ld.TPO erred in considering outstanding receivables from the AEs as an international transaction under the provisions of section 92B of the Act. In doing so, the Ld.AO/Ld.TPO erred in imputing an interest on such outstanding receivables. The Ld.AO/Ld.TPO has not considered the Appellant's contention that the said balances have been settled during the normal course of business, having regard to the economic and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice to the other grounds preferred by the Appellant. 2. Brief facts of the case are as under: 2.1 The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is a wholly owned subsidiary of Veveo Inc., USA. Subsequent to the acquisition of Veveo Inc., USA by Rovi Corporation, the Assessee also forms part of Rovi Group. The assessee provides IT, ITE and MS services to its Associated Enterprises. 2.2 The Ld.AO noted that assessee had earned revenue exceeding Rs. 15 crores out of the international transactions with its AE and therefore a reference was made to the TPO to compute arms length of such transactions. On receipt of the reference, the Ld.AO called for economic details of the assessee with its AE. In form 3CEB from the details filed by the assessee, the Ld.TPO noted that assessee had following international transactions. Transaction Amount Provision for Software Development Services ( SWD ) Rs. 1,13,02,97,729/- Provision for Information Technology enabled services ( ITeS ) Rs. 10,94,28,954/- Provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 4.34 3. Evoke Technologies Pvt. Ltd. 4.36 4. Sasken Communication Technologies Ltd. 9.69 5. Infomile Technologies Ltd. 9.71 6. CG-VAK Software Exports Ltd 9.85 7. Orangescape Technologies Ltd. 10.70 8. E-Zest Solutions Ltd 14.42 9. Mindtree Ltd. 15.19 10. R Systems International Ltd. 20.75 35th Percentile 9.69 Median 9.78 65th Percentile 10.70 2.5 Dissatisfied with the comparability analysis carried out by the assessee, the Ld.TPO adopted following filters and shortlisted the set of 20 comparables with a median of 23.6%. The details of which are as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tata Elxsi Ltd. 28.24 15. Infobeans Technologies Ltd. 28.52 16. Nihilent Ltd. 30.17 17. Thirdware Solution Ltd. 30.94 18. Threesixty Logica Testing Services Pvt. Ltd. 36.58 19. Infosys Ltd. 37.38 20. Cybage Software Pvt. Ltd. 56.81 35th Percentile 20.19 Median 23.60 65th Percentile 26.83 The Ld.TPO thus proposed the shortfall under SWD segment to be at Rs.10,99,47,197/-. ITeS: 2.6 The Ld.TPO noted that assessee used following 8 comparables with a median of 9.66% and thus held the transaction to be at arms length. Sl. No. Name of the company Weighted average (in %) 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Microland Ltd. 8.58 3. Datamatics Business Solutions Ltd. 13.41 4. Fuzen Software Pvt. Ltd. 15.75 5. Tech Mahindra Business Services Ltd. 18.85 6. Infosys BPM Services Pvt. Ltd. 20.95 7. CES Ltd. 21.77 8. Manipal Digital Systems Pvt. Ltd. 23.54 9. Domex E Data Pvt. Ltd. 26.34 10. Vitae International Accounting Services Pvt. Ltd. 27.35 11. AGS Health Pvt. Ltd. 27.64 12. Ultramarine and Pigment Ltd. 33.28 13. Access Healthcare Services Pvt. Ltd. 39.03 14. Inteq BPO Services Pvt. Ltd. 39.15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies having different financial year ending (i.e., not March 31, 2018) or data of the company does not fall within 12 month period i.e., 01-04-2017 to 31-03-2018 - excluded. 3. Companies whose income was less than Rs. 1 Crore - excluded. 4. Companies whose MSS income is less than 75% of the total operating revenues - excluded. 5. Companies which have more than 25% related party transactions of the sales - excluded. 6. Companies which have export service income less than 75% of the sales - excluded. 7. Companies with employee cost less than 25% of turnover - excluded. Comparables selected by the TPO Sl. No. Name of the Company Mark-up on Total Costs (WC unadj) (in %) 1. Goldmine Advertising Ltd. 1.68 2. Scarecrow Communications Ltd. 10.80 3. Ugam Soluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e draft assessment order, the assessee filed objections before the DRP. The DRP after considering the objections raised by assessee directed as under: 4.1. For SWD Segment The DRP directed the Ld.TPO to consider the segmental financial results as furnished by the Assessee; (i) The DRP directed inclusion of CG-Vak Software and Exports Ltd. Isummation Technologies Pvt. Ltd., Orangescape Technologies Ltd., Extentia Information Technology Pvt. Ltd., DCIT Dot Com Solutions Pvt. Ltd. And Inteq Software Pvt. Ltd. (ii) The DRP directed the exclusion of Thirdware Solutions Ltd. (iii) The remaining contentions with respect to inclusion and exclusions of comparables were rejected. 4.2. ITeS (i) The DRP directed the Ld.TPO to consider the segmental financial results as furnished by the Assessee; (ii) The DRP directed the inclusion of the following companies, after verification by the TPO: - Informed Technologies Ltd. - Crystal Voxx Ltd.; - ISN Global Solutions Ltd.; - I Services India Pvt. Ltd.; and - Suprawin Technologies Ltd. (iv) The DRP directed exclusion of AGS Health Pvt. Ltd., Ultramarine and Pigment Ltd., Access Healthcare Pvt. Ltd. (v) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Tribunal in case of Autodesk India (P) Ltd. V. DCIT reported in (2018) 96 taxmann.com 263. Further reliance is placed on the decision of this Hon ble Tribunal in MWYN Tech Private Ltd. by order dated 31.10.2022 passed in IT(TP)A No. 753/Bang/2022. On application of the turnover filter of 1-200 crores, the Ld.AR submitted that, following comparables deserves to be excluded for having high turnover as against assessee under SWD and ITeS segments: SWD segment S.No. Name of the comparables Turnover (in crores) 1. Exilant Technologies Pvt. Ltd., 2. Tech Mahindra Ltd., 3. Larsen Toubro Infotech Ltd., 4. Mindtree Ltd. 5. Wipro Ltd. 6. Tata Elxsi Ltd. 7. Nihilent Ltd. 8. Persistent Systems Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. Following were the conclusions of the Tribunal in the case of Dell International (supra): 41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No. 1231/Bang/2010, relying on Dun and Bradstreet s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). In view of the above, the aforesaid companies under SWD ITeS segment are directed to be excluded for failing turnover filter. Accordingly, ground no. 3.5 raised by assessee stands allowed. 6. The Ld.AR submitted that Ground nos. 4.1, 4.3 and 5.3 has been raised by assessee seeking inclusion of certain comparables. She submitted that in the event the comparables sought for exclusion on turnover filter is upheld under SWD ITeS segment, the comparables alleged by assessee in Ground nos. 4.1, 4.3 and 5.3 need not be adjudicated. We accordingly leave these comparables open and grant liberty to the assessee to argue in an appropriate circumstances. 7. Ground nos. 5.1 and 6.1 raised by assessee for correction of segmental margins in respect of the comparables that would remain. She submitted that the DRP directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng comparables sought for exclusion. Before we undertake the comparability analysis, it is sine qua non to understand the FAR of the assessee under MSS segment. (i) Axience Consulting Pvt. Ltd. It is submitted that Axience is engaged in providing consultancy and advisory services in the field of Finance, Market Research and Business Administration which are different from the services provided by the assessee under the MSS segment. Further, from the Company s website, it is clear that it is engaged in financial analytics and research, business intelligence, business and market research and strategic human capital services, which services are more in the nature of knowledge process outsourcing services ( KPO ) rather than marketing services. Reliance in this regard is placed on the decision of coordinate bench of this Tribunal in the case of Lloyds Offshore Global Services (P.) Ltd. v. DCIT reported in (2023) 146 taxmann.com 226, wherein on functional dissimilarly for the assessment year 2015-16 and 2016-17, this company came to be excluded. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that no segmental details are available as regards the varied services provided by the Company. It is evident from the Company s website that the company is engaged in providing varied products/ services such as Business Information Report, Credibility Business Insights Solutions, Supply Management Solutions, etc. These suites of services are in the nature of credit risk solutions and trading exchange solutions, which are not comparable to the activities undertaken by a routine MSS provider. Therefore, the company ought to be excluded from the final list of comparables. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us. We note that as per the annual report placed at page 4556, the description of the project or services provided by this company is mentioned to be credit reporting services. At page 4662, we note that this company is engaged primarily in the business of providing risk management and sales and marketing solutions. The background of the company also describes to be providing learning and economic insight services. The company offers a wide suite of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s advertising services and other operating income under schedule 18. In note 28 at page 4855, it has been stated that the company s business activity falls within a single business segment i.e. advertising, selling of space for advertisement in print media and public relations and hence no additional disclosure other than those made in the financial statements are required under indas 108 operating segments . Thus it is clear that under the advertising services, this company also earns revenue from selling of space for advertisement in print media and public relations for which no bifurcation has been provided. In any event, advertisement services provided by this company also cannot be compared to the services rendered by assessee to its AE under the marketing support services which is limited to presale support activities. Accordingly, we direct this comparable to be excluded from the final list. (iv) Lintas India Pvt. Ltd. It is submitted that Lintas is engaged in providing advertising services and as per its revenue recognition policy, the company earns revenue from advertisement published or displayed or aired, retainer fees, client agency commission, etc. whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded from the final list of comparables. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us. The annual report of the company placed at page 5353 reveals this company is engaged in digital marketing research. At page 5391 in the company overview, we note that this company deliver critical media and marketing information, analytics. Further, it is noted that this company is also doing significant investments in resource and associates all over India supported by strength of Majestic MRSS. In the notes forming part to financial statements at page 5401, under the head corporate information, this company is said to be first Indian market research company to be listed on BSE on SME platform and is engaged in providing market research services offering a wide range of qualitative and quantitative research services. The only segment under which the revenue is revealed is under sale of services in note 17 at page 5409 of the paper book. In our view this company cannot be held to be functionally similar with that of assessee. Accordingly, we direct this comparable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as revenue from sale of services. In light of the above, we do not find this company to be functionally similar with that of assessee. Accordingly, we direct this comparable to be excluded. Accordingly Ground no.6.3 raised by the assessee stands allowed 10. Interest on receivables. It is submitted that the amounts outstanding have been settled by the AE on an on-going basis in the normal course of business having regard to economic and commercial factors. Since the outstanding receivables related to the primary services rendered, the assessee submits that, the determination of ALP of the outstanding receivables is not warranted as the same is subsumed in the ALP of the principal transaction. The Assessee also contends the outstanding receivables could not be made subject matter of TP adjustment as the same is not covered under the provisions of Section 92B of the Act. Also, it is submitted that the Assessee is a debt free company and does not bear any working capital risk since it is fully funded by its AEs. The Assessee has not incurred any interest expenses for its working capital requirement. Hence, the Assessee does not have any interest cost in the funds ..... X X X X Extracts X X X X X X X X Extracts X X X X
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