TMI Blog2023 (1) TMI 1356X X X X Extracts X X X X X X X X Extracts X X X X ..... s a captive service provider that renders technical assistance services in the areas of software development and application to its AEs, thus selection of comparables should match with functional profile of assessee. We therefore deem it appropriate to remit them to the Ld. AO/TPO. The Ld. AO/TPO shall look into the functional profile of the comparables and verify the same with that of the assessee. If they are functionally found to be similar with that of assessee, the same may be considered in accordance with law, considering the turnover limit of Rs. 1 to 200 Crores. Exclude Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Larsen Toubro Infotech Ltd., Mindtree Ltd., Nihilent Ltd., Persistent Systems Ltd., Wipro Ltd., Tata Elxsi Ltd., for exceeding turnover limit of Rs. 200 crores. Thirdware Solutions Ltd., to be excluded from the final list as present assessee before us is a captive service provider catering to the needs and at the direction its AE under the SWD segment. As there is no segmental details available, we cannot consider this company to be a good comparable as the entire revenue is catagorised under one head i.e., Revenue from Operation . Even on RPT filter we not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices - We remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to consider the same in accordance with law. Non granting of WCA and risk adjustment to the assessee - As relying on HUAWEI TECHNOLOGIES INDIA (P.) LTD. [ 2018 (10) TMI 1796 - ITAT BANGALORE] AO was not justified in denying adjustment on account of working capital adjustment. In the light of the decision referred to above, the assessee is entitled to working capital adjustment. The assessee is directed to provide the working capital adjustment for year under consideration The TPO is accordingly directed to allow the same as per law. Risk adjustment , sought by the assessee, the details will have to be furnished before the Ld.AO/TPO by the assessee itself establishing the differences in the risk. Only then the same could be computed. We are therefore of the view that in the event the assessee is able to file documents/evidences to establish the differences in the risk, the Ld.TPO may consider it and compute is accordance with law. Appeal filed by the assessee stands partly allowed. - Smt. Beena Pillai, Judicial Member And Shri Laxmi Prasad Sahu, Accountant M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bangalore. 8. Without prejudice to the above, the impugned final assessment order being signed by the non-existent authority namely 'DC/ACIT, Circle 6(1)(1), Bangalore' is invalid and bad in law. 9. Without prejudice to the above, as regards the draft assessment order dated 18.08.2021 being bad and non-est thus rendering final assessment order dated 23.06.2022 invalid: 9.1. The impugned draft assessment order passed by the Learned Assessing Officer, NaFAC is invalid and bad in law as the same is passed without issuance of intimation under Rule 5(1)(iii) of the Faceless Assessment Scheme, 2019 / section 144B(1)(iii) as it stood prior to its substitution vide Finance Act, 2022. 9.2. Without prejudice to the above, the impugned draft assessment order passed in defiance of the provisions of section 144B(1)(xvi)(b)/(xviii)(b)/(xxi)(b) as it stood prior to its substitution vide Finance Act, 2022 with effect from 01.04.2022 is bad in law. 9.3. Without prejudice to the above, the impugned draft assessment order passed by the Learned Assessing Officer, NaFAC is invalid and bad in law as the same is in substance a final assessment order. 10. As regards the TPO proceedings: 10.1. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP is not justified in upholding the action of the TPO in making transfer pricing adjustment of Rs. 14,43,81,747/- with respect to software development services provided by the Appellant to its' AE. 12.2. The Lower authorities are not justified in recomputing the Appellant's margin incorrectly at 14.22% as against the correct margin of 16.21%. 12.3. The Lower authorities are not justified in considering the notional cost of Rs. 2,62,65,504/- towards ESOP issued by the parent entity as operating cost contrary to Rule 10B(e) of the IT Rules 1961, when the Appellant has not incurred the same and the same was not forming the part of the Appellant's profit and loss account for the FY 2017-18, more so when the same was not proposed in the show cause notice dated 16.07.2021. 12.4. Without prejudice to the above, the Lower Authorities are not justified in failing to allow deduction under section 37(1) in respect of the alleged ESOP cost of Rs. 2,62,65,504/- treated as a part of operating cost. 12.5 As regards rejection of companies selected by the appellant : 12.5.1. The Lower Authorities have erred in incorrectly rejecting certain companies selected by the Appellant on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed persistent loss filter contrary to facts of the case. 12.5.9. The Lower Authorities are not justified in arbitrarily rejecting Isummation Technologies Pvt. Ltd. selected by the Appellant by wrongly applying positive net worth filter , when the said company meets the test of comparability and also satisfies the said filter. 12.5.10. The Lower Authorities are not justified in arbitrarily rejecting Evoke Technologies Pvt. Ltd. and Maveric Systems Ltd. selected by the Appellant as Failed Export filter, hence rejected without demonstrating the same and without proper verification of its annual reports, when the said companies satisfy the said filter. 12.6. As regards TPO's wrongful selection of certain companies 12.6.1. The Lower Authorities have erred in selecting 16 companies as comparable companies in Software Segment when the same fail the test of comparability. 12.6.2. The Learned TPO has erred in failing to deal with the objections of Appellant against the companies proposed by the Learned TPO and instead, he sought to deal with alien objections not at all raised by the assessee. 12.6.3. The Lower Authorities have erred in selecting companies on the basis of information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y when the same fails the export filter of 75% as adopted by the Appellant and accepted by the Learned TPO. 12.6.11. Without prejudice to the above, the Lower Authorities have erred in wrongly selecting Tech Mahindra Ltd, Larsen Toubro Infotech Ltd., Infosys Ltd., Persistent Systems Ltd. and Mindtree Ltd. as comparable companies as they hold significant intangibles and claim significant brand value. 12.6.12. Without prejudice to the above, the Lower Authorities are not justified in considering the financial data of Elveego Circuits Pvt. Ltd. for the FY 2016-17 in computing the weighted average margins of the said company, considering the abnormally high margin for the said FY. 12.6.13. Without prejudice to the above, the Lower Authorities have erred in computing higher margins in respect of Black Pepper Technologies Pvt. Ltd., Aptus Software Labs Pvt. Ltd., Infobeans Technologies Ltd., Nihilent Ltd., Thirdware Solutions Ltd. and Cybage Software Pvt. Ltd. as against the margins determined by the Learned TPO in the Show-Cause Notice dated 16.07.2021. 12.7. The Lower Authorities are not justified in considering the incorrect weighted average margins of the following 3 companies select ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under consideration. International Transaction Amount (in Rs. ) Provision of software development services 1,75,96,23,609/- 2.5. The Ld.TPO from the TP study observed that the assessee used TNMM as the most appropriate method by using OP/OC as PLI computing its margin at 16.21%. It used following 18 comparables having median to be 14.82 %. The assessee treated its transaction to be at arm s length. SI. No. Name of the Company Weighted Average of OP/OC(%) 1 Kals Information Systems Ltd. (11.95) 2 !summation Technologies Pvt Ltd 3.70 3 Evoke Technologies Pvt Ltd. 3.95 4 Lex Nimble Solutions Ltd 6.65 5 AXISCADES Engineering Technologies Ltd 7.75 6 Fractal Analytics Pvt Ltd 8.60 7 Harbinger Systems Pvt Ltd 10.27 8 Sven Technologies Ltd 14.76 9 Ness Technologies (India) Pvt Ltd. 14.87 10 ASM Technology Ltd 15.02 11 Cg-Vak Software and Exports Ltd 15.28 12 Sabre Travel Technologies Pvt Ltd. 15.76 13 Moodys Analytics Knowledge Services India Pvt Ltd 17.50 14 NetCracker Technology Solutions (India) Pvt Ltd. 18.05 15 Sure IT Solutions India Pvt Ltd. 18.59 16 Exilant Technologies Pvt Ltd 21.42 17 AGS Health Pvt Ltd 26.11 18 E Care India Pvt Ltd 27.97 Data place Range OP/OC 7 35th perce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the draft assessment order, the assessee field objections before the DRP. The DRP in respect of the various comparables sought for exclusion, upheld the order of the Ld.TPO and in respect of ESOP cost added to the operating margin held as under: 4.1 Panel: In a software industry, the major backbone is the employees. They directly contribute to the software development-part and thus to the revenue so earned by the company. Any expenditure incurred on employees is therefore part of operating cost only and we have no hesitation in confirming the stance taken by the TPO. Even the taxpayer is saying that the ESOPs are provided to' the employees to boost their morale and motivation . Thus, the taxpayer is also affirming the stand taken by the TPO that is ESOP is nothing but the cost incurred by the employees of the company. As we already discussed that the employee's cost constitute the major cost of any software development company, thus, the view adopted by the TPO to consider the ESOP cost as operating cost is absolutely correct and accordingly, we reject the contention of the taxpayer in this regard. Further, the TPO is also right' in stating that ESOP is nothing but the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot considered the same as part of operating cost. The prevailing Accounting Standards also does not mandate the company to account such benefits in its books of accounts as there is no contractual liability nor any financial transaction took place. (a) As stated above the company has not reimbursed any cost of ESOP/RSU benefit provided to employees. (b) Since the company has not incurred any expenditure towards ESOP/RSU issued to the employees by Sprinklr Inc., such cost has not been considered into the operating cost. The perquisite value of issuing ESOP/RSU benefit has been calculated while deducting TDS on salaries paid to employees as per the provisions of Income Tax Act. 8.2. He also referred to the financial of the assessee for the year under consideration at page 444 to 452. It was submitted that the assessee has not incurred the ESOP cost of Rs. 2,62,65,504/-. 8.3. The Ld. DR on the contrary relied on the observation of authorities below. 9. We have perused the submissions advanced by both sides in light of records placed before us. 9.1 We note that the Ld. AO/TPO has not considered the ESOP agreement between the employees and the AE. Unless the expenditure has been incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend tax. For the purpose of calculation of costs, any foreign exchange losses would be considered for the purpose of mark-up while any foreign exchange fluctuation gain would be netted off from expenses while arriving at the cost base. Any service tax refund received for earlier periods which was part of the operating cost during such earlier period shall be reduced from the operating cost of the year of receipt of refund while arriving at the cost for the purpose of mark-up. The full compensation and consideration for the Services and other obligations of Sprinklr India set forth shall be made in US Dollars. Sprinklr US shall own all right, title and interest including copyrights, intellectual property rights and other rights throughout the world relating to all Deliverables, any and all works of information and authorship assimilated and accumulated by CONTRACTOR during the term of this Agreement. We also note that, the Ld.TPO recorded the functions of the assessee by observing as under: 2.1 Sprinklr India was incorporated on 30th January, 2012 and is a wholly owned subsidiary of Sprinklr US. Sprinklr India provides software development services including coding, documentati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrency of an entity is different from its functional currency. Sprinklr raises invoices on Sprinklr US for the provision of services in its operational currency itself which is the Indian Rupee. Therefore, Sprinklr India does not bear any risk of foreign exchange fluctuation Credit and collection risk The credit and collection risks arise when a firm supplies products or services to a customer in advance of the payment. In such a scenario the firm runs the risk that the customer will fail to make payment. As the AE directly transacts with the end customers, it bears the risks in relation to late or non-receipt of payments from customers. Sprinklr India renders software development services only to Sprinklr US and therefore does not bear significant credit and collection risks as compared to the risk that independent Indian third party service providers may bear in relation to receivables from customers. Service liability risk Service liability risk is borne by a company when its service offerings fail to perform at accepted or advertised standards and the company is required to compensate the customer or undertake defect resolution at its own cost. Sprinklr US transacts with final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. Accordingly, this ground raised by the assessee stands partly allowed 12. Grounds 12.6.1 to Grounds 12.6.3 are general in nature and do not require adjudication. 12.1. Ground no.12.6.4 raised by assessee seeking exclusion of certain comparables. The Ld.AR submitted that, following comparables do not fulfil the criteria of turnover filter of less than 200 crores and therefore deserves to be excluded. 1) Exilant Technologies Pvt. Ltd. -Rs. 332.51 Crs. 2) Tech Mahindra Ltd. -Rs. 23,661 Crs. 3) Larsen Toubro Infotech Ltd. -Rs. 6,906.40Crs. 4) Mindtree Ltd. -Rs. 5,325 Crs. 5) Nihilent Ltd. -Rs. 280 Crs. 6) Persistent Systems Ltd. -Rs. 1,733Crs. 7) Wipro Ltd. -Rs. 44,710Crs. 8) Tata Elxsi Ltd. -Rs. 1,386Crs. 9) Thirdware Solutions Ltd. -Rs. 204.38 Crs. 10) Cybage Software Pvt. Ltd. -Rs. 737Crs. 11) Infosys Ltd. -Rs. 61,941Crs. 12.2. The Ld.AR submitted that consistently above comparables have been excluded for having turnover more than Rs. 200 Crs. For assessment year 2018-19. The Ld.AR relied on the decision of Coordinate Bench of this Tribunal in assessee s own case for A.Y. 2017-18 in IT(TP)A No. 250/Bang/2022 by order dated 15/07/2022, wherein comparables Larsen Toubro Infotech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. ACIT (2020) 113 taxmann.com 244 (Bang-Trib.) 154,06,39,918 4. Dell International Services India (P.) Ltd. v. DCIT (2018) 89 taxmann.com 44 (Bang-Trib) 109,98,69,000 5. Zynga Game Network India (P.) Ltd. v. DCIT (2020) 119 taxmann.com 403 (Bang-Trib) 109,99,71,917 6. Sami - Sabinsa Group Ltd. (TS-183-ITAT-2022 (Bang)-TP) 165,58,22,100 11. We have heard rival submissions and perused the material on record. At the outset, we notice that the TPO/DRP have erred in not applying the upper turnover filter to reject high turnover companies, while on the other hand, he has rejected companies with lower turnover of less than one (1) Crore. As per the Dun Bradstreet classification of software industry, the companies could be classified under three major heads depending on the turnover of the company viz., (a) Less than Rs. 200 crores categorized as small size companies; (b) Rs 200 crores to Rs. 2000 crores categorized as medium size companies; (c ) More than Rs. 2,000 crores categorized as large size companies. 12. The turnover of the assessee for the relevant assessment year is Rs. 134 crores and therefore would fall under the category of small size company having turnover in the range ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. The ld. Counsel for the assessee, on the other hand, submitted that the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) merely dismissed the appeal of assessee on the ground that no substantial question of law arises for consideration. In particular, he drew our attention to the following paragraphs of the judgment of Hon'ble High Court:- 14. The findings of the learned Tribunal as regards the comparable namely, Mercury Outsourcing Management Ltd., which too have been excluded by the Tribunal are quoted below for ready reference: (ii) Mercury Outsourcing Management Ltd. 13.1 The learned Authorised Representative has submitted that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost. 13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than Rs. 1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO. 13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be excluded for the purpose of comparability on the basis of turnover, only if the turnover is 10 times on both the sides of assessee's turnover. On the conclusions of the Tribunal, the Hon'ble High Court only held that it is reasonable and deserves to be accepted. In para 16, the Hon'ble High Court has clearly observed that the decisions rendered in other cases referred to by the ld. Counsel for the assessee would not render the findings of the Tribunal in the case before the High Court as negatory or perverse for the reason that analysing of the comparables may be in a different context. The same need not be blindly or generally adopted in all the cases, irrespective of the context or circumstances calling for exclusion/inclusion of the comparables. The finding in each case is therefore a finding of fact. He pointed out that the Tribunal in the case of Autodesk (I) P. Ltd. v. DCIT [2018] 96 taxmann.com 263 [Bang. Trib.] after analysing the entire cases on the point, came to the conclusion that the decision rendered by the Tribunal in the case of Genesis Integrated Systems (I) P. Ltd. [2012] 53 SOT 159 lays down the correct law on the application of turnover filter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S. NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atering to the needs and at the direction its AE under the SWD segment. As there is no segmental details available, we cannot consider this company to be a good comparable as the entire revenue is catagorised under one head i.e., Revenue from Operation . Even on RPT filter we note that this company has RPT of more that 25% which does fails the filter applied by the Ld.TPO. We therefore direct Thirdware Solutions Ltd., to be excluded from the final list. Accordingly, Ground no. 12.6.4 stands allowed. 12.5. In Grounds 12.6.5 to Ground 12.6.13, t he Ld.AR submitted that only following comparables to be considered on functionality with assessee: a) Exilant Technologies Ltd. b) Tech Mahindra Ltd. c) Elveego Circuits Pvt. Ltd. d) ThreeSixty Logica Testing Services Pvt.Ltd e) Black Pepper Technologies Pvt.Ltd f) Aptus Software Labs Pvt.Ltd g) Great Software Laboratory Pvt.Ltd. 12.6. He submitted that, other comparables not considered herein above though raised in the grounds may be left academic at this stage. We are therefore restricting our view only in respect of the above three comparables. A. Exilant Technologies Pvt. Ltd. A.1 . The Ld.AR at the outset submitted that this company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fails the turnover filter and deserves to be excluded from the final list. B.1. The Ld.DR relied on the orders passed by authorities below. B.2. Admittedly, the turnover of this comparable is more than 200 crores. We have already considered and excluded comparables for failing the turnover filter by following the observations of Coordinate Bench of this Tribunal in assessee s own case(supra). Following same principles, we direct the exclusion of Tech Mahindra Ltd. from the final list. C. Elveego Circuits Pvt. Ltd. C.1. The Ld.AR submitted that this comparable has abnormally high margin for the year under consideration. He also contended that this company was considered by the Ld.TPO without furnishing the annual report. He also submitted that this company is engaged in the business of electronics and semiconductor design services, which is not similar to the SWD services rendered by the assessee. He submitted that this company is into chip and semiconductor designing services where as the assessee before this Tribunal is a captive service provider rendering limited SWD services to its AE. The Ld.AR thus submitted that this company is functionally not at all similar with that of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F.1. On verification of the above pages we note that the, annexure is only NIC details. No other details from the annual report have been filed in respect of this company. F.2. We therefore remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to consider the same in accordance with law. Accordingly this company is remanded to the Ld.AO for re adjudication. G. Great Software Laboratory Pvt.Ltd. G.1. The Ld.AR submitted that this company earns revenue for Information technology services and Software development services for which segmental details not available. He referred to Annexure 53 placed at page 576-578 of the paper book. G.2. On verification of the above pages we note that the, annexure is only some portion of the annual report. No other details from the annual report has been filed in respect of this company. G.3. We therefore remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to consider the same in accordance with law. Accordingly this company is remanded to the Ld.AO for re adjudication. Accordingly Ground No.12.6 stands partly allowed. 13. Ground no. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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