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TMI Blog2024 (6) TMI 1135X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The Ld. AO/ Ld. TPO and the Ld. DRP ought to have accepted the Profit margin of the assessee company (OP IOC) of 11.57 % as having complied with the arm's length principle. 4. The Ld. TPO / Ld. DRP erred in rejecting the Transfer Pricing Study prepared by the assessee company without giving any cogent reasons for such rejection. 5. The Ld. AO/ Ld TPO and the Ld. DRP are not justified in law in considering wrong comparables and consequently arriving at a median margin (ALP Margin) of 26.36 % as a ratio of OP/OC. TP Grounds on Exclusion of Comparables 6. The Ld. AO / Ld. TPO and the Ld. DRP erred in not accepting the assessee's contention of exclusion of following 10 companies on the grounds of functional dissimilarity, super profit and high turnover or on other filter etc. i. Rheal Software Pvt. Ltd. ii. Cigniti Technologies Ltd iii. Larsen & Toubro Infotech Ltd. (Segmental) iv. Tata Elxsi Ltd (Segmental) v. Inteq Software Pvt. Ltd. vi. Persistent Systems Ltd. vii. Infobeans Technologies Ltd viii. Aspire Systems (India) Pvt. Ltd. ix. Infosys Ltd. x. Thirdware Solution Ltd. xi. Cybage Software Pvt. Ltd. 7. The Ld. AO/ Ld. TPO and the Ld. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case are that the assessee is a software development company and the profile of the assessee was captured by the Transfer Pricing Officer (TPO) in the order at paragraph No. 2, which is as under: "2. Functional analysis of the taxpayer: M/s. Clinasia Labs Private Limited is engaged in providing global technology services and solutions specializing in clinical operations, clinical data management and IT solutions. The company has its head quarters and development facilities in India and serves a global customer base through its associate company Maxis IT in USA." 3. During the year under consideration, the assessee has entered into the following international transactions: Sl.No. Name of the AE International transactions Amount (in Rs. ) Method applied 1. Maxis IT Inc, USA Provision of software services 159494796 TNMM 2. Maxis IT Inc, USA Outstanding balance as on March 31, 2016 47302709 TNMM 4. The assessee has computed the PLI OP/OC at 11.35%, as under: Description Amount (in Rs. ) Operating Revenue 161265267 Operating Cost 144826921 OP/OR (%) 10.19% OP/OR (%) 11.35% 5. The assessee has compared the TP study, based on that the OP/OC was computed at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat order, the DRP was not convinced by the objection raised by the assessee and ultimately passed the order. 8. Based on the directions of the DRP, AO has passed the final assessment order and in the final assessment order, the AO has proposed an addition (TP adjustment) of Rs. 2,49,90,091/- to the total income of the assessee and besides that the AO has also made the addition on account of outstanding receivables. Now, the assessee is in appeal before us for the grounds mentioned herein above. 9. Grounds No. 1 to 5 are general in nature and require no adjudication. With respect to Ground No. 6, learned AR for the assessee has submitted that the assessee divided the ground and submitted that the assessee is not pressing the exclusion of the companies i.e., Rheal Software Pvt. Ltd. and Inteq Software Pvt. Ltd. As the assessee is not pressing the exclusion of Rheal Software Pvt. Ltd., therefore, we dismiss the challenge of the assessee for Rheal Software Pvt. Ltd. 9.1. Besides that the assessee has sought the exclusion of the following comparables: 1. Larsen & Toubro Infotech Ltd., (Segmental) 2. Tata Elxsi Ltd. (Segmental) 3. Persistent Systems Ltd., 4. Infobeans Techno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he comparable companies for a captive service provider like the Assessee. Out of 12 Companies asked for exclusion the following 9 Companies are having Turnover > 200 Crores and the same are to be excluded from the final list of comparables selected by the Ld.TPO/Ld DRP. In this connection the Assessee Company would rely on the following case law: 3.2. The Hon'ble Bangalore Tribunal in the case of Prism Networks Private Limited Vs ACIT (ITAT Bangalore) IT(TP)A No.349/Bang/2021 pronounced on 11.02.2022 held as under: 13. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmanftcom 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not Comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides that, it was submitted that these companies are functionally dissimilar to the assessee company and have intangibles and brand segmental information that are not available. 12. Learned DR relied upon the orders of the authorities below. 13. We have heard the rival contentions and perused the material available on record. Admittedly, these companies are having huge turnover, whereas the turnover of the assessee is meagre as compared to these companies. The turnover of the assessee company was only Rs. 16.12 crores, whereas the turnover of these companies is more than Rs. 200 crores. Thus, these companies are not at all comparable with the assessee. Besides that the issue has already been dealt with by the Co-ordinate Bench of the Tribunal, wherein it was held that these companies are not comparable with the assessee company. Therefore, we direct the AO/TPO to delete these companies Larsen & Toubro Infotech Ltd., (Segmental) Tata Elxsi Ltd. (Segmental), Persistent Systems Ltd.,Aspire Systems (India) Pvt. Ltd. And Infosys Ltd.from the list of comparables. 14. Now, we deal with Infobeans Technologies Ltd., and Thirdware Solution Ltd. for which the assessee has also sought excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciled in India and incorporated under the provisions of the Companies Act, 1956. The Company is engaged in the business of Software Development and Consultancy services. The company caters to both domestic and international markets. (Extract from annual report) The combined revenue from sale of license, subscription & training amounts to Rs. 41.36 lakhs which constitute of the total operational income of Rs. 22136.09 lakhs. Therefore, the taxpayer's objection that the company is functionally similar to the taxpayer is not accepted. As per the annual report, the company is into Information Technology Software Services and is primarily involved in business of Implementaiton Services. Application Management Services and other Software Support Services around 95% of the total revenue belongs to Implemetnation services, Application Management Services Software Support Services. Hence, the taxpayer's contention on functional comparability is rejected. Segmental data not available The company is engaged in providing software development services only. Therefore, the company in entirety considred as a comparable. Revenue from products is insignificant and less than 5%. Same has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licence and provision of training services also under the head 'software services from local unit', 'export of software services', 'revenue from subscription & training' and 'sale of licence' to the tune of Rs. 2809.62 lakhs, Rs. 19285.11 lakhs, Rs. 32.59 lakhs & Rs. 8.77 lakhs respectively. The taxpayer has also brought on record website of the company, available at pages 71 to 73 of the appeal memo, which shows that Thirdware is having competency in providing services in most advanced and niche area of technologies such as Robotic Process Automation, Big Data Analytics& Cloud Computing. 42. From the profile of Thirdware it has come on record that Thirdware is functionally dissimilar vis-à-vis the taxpayer as it has been deriving income from sale of licence and software services export from SEZ unit and revenue from subscription and training etc. and it is also into sale of licence and its segmental financials are not available. 43. Thirdware has been ordered to be excluded by the coordinate Bench of the Tribunal in case of Fiserve India (P.) Ltd. v. ITO [2015] 60 taxmann.com 48 (Delhi - Trib.) on ground of dissimilarity to routine softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctional comparability. The argument that testing activity does not fall within the definition of software services given in the Safe Harbour Rules, has, no merits, as the purpose and ambit of Safe Harbour Regulation is totally different from the methodology prescribed for comparable analysis under the TNMM method, it is necessary that the services compared are broadly similar and fall within the same industrial classification. This requirement is satisfied in the present case, and hence, this company can be taken as functionally comparable to the assessee. Accordingly, this company is functionally comparable. 2.5.2.2 However, on perusal of the annual report it is seen from the page no. 54 of the Annual Report of the F.Y.2015-16 that income from export of software is Rs. 108 crores and total revenue as per page no. 119 is Rs. 204 crores. Therefore, it has an export revenue of 53.16% of total revenue and hence it is to be rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO. We have already upheld the export revenue filter adopted by the TPO vide detailed discussion made at para 2.1.12.1 to 2.1.12.2 above. As a result, this objection is found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable through all the filters of the TPO. Hence, rejected. 6. Agilisys IT Services India Pvt. Ltd., The company's Annual Report does not mention the related party transactions entered into by the company during the FY 2015-16. Since the information is not disclosed in the Annual Report, the company is not considered as a comparable. Hence rejected. 22. The assessee had preferred the appeal before the DRP. The DRP has rejected the inclusion of these companies in paragraph No. 2.1.1, at page No. 2, 13, 17, 54 and 57 of the DRP's order. It was the contention of the ld.AR that the information in respect to these companies were available and even the assessee had raised the specific ground before the DRP and our attention was drawn to page No. 532 of the paper book, which the ground raised by the assessee before the DRP to buttress his argument. 23. On the other hand, the ld.DR relied upon the order passed by the TPO/DRP. 24. We have considered the rival contentions and perusal the material available on record. The DRP at page No. 13 of his order, has noted down that the assessee has not raised the plea of inclusion of these comparables before the TPO and has not raised the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding payments is an international transaction or not. This issue has come up for our consideration in the decisions referred by the ld.DR in the case of M/s Zeta Interactive Systems (India) Pvt. Ltd., M/s. Satyam Ventures Engineering Services and M/s. Apache Footware India Pvt. Ltd. (supra). 31. We have consistently held that the interest on delayed outstanding trade receivables is an international transaction and after holding so, we have benchmarked the international transactions at 6% SBI rate. 31.1. In the case of Apache Footware India Pvt. Ltd. (supra), we have held as under : "9. We have heard the rival submissions and perused the material on record. From the perusal of the order passed by the TPO, it is clear that both the lower authorities have given an elaborate reasoning for coming to the conclusion that the delay in receiving the receivables is an international transaction and is required to be bench marked in accordance with law. We are reproducing hereinbelow the chart filed by the assessee which is to the following effect : APACHE FOOTWEAR INDIA PVT. LTD / AY 2018-19 Export Receivables Realisation pattern during A.Y. 2018-19 Particulars Total Number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If we examine the issue in the above-said 21 Apache Footwear India Pvt.Ltd. context, it would be clear that the assessee would charge bank interest or any other interest with a view to compensate itself on account of delay in making the payment. Hence, we do not find any error in the same. 13. The reliance of the assessee in the case of Betchal India Pvt Ltd (supra) is also not correct as A.Y. in that case was 2010-11. By the Finance Act, 2012, the Explanation was inserted in Sec.92B of the Act and by virtue of which "payment or deferred payment or receivable or any other debt arising during the course of business" has been considered to be an international transaction which is required to be benchmarked. Following the above said Explanation, the co-ordinate Bench for the subsequent assessment years vide order dt.16.05.2017 in the case of Betchal India Pvt. Ltd ITA No.6530/Del/2016 (supra) had decided the issue against the assessee. In view of the above, the decision relied upon by the assessee is of no help to assessee. 14. So far as the argument of the assessee that the assessee is a debt free company and therefore, no borrowed fund was used for making supplies to it's A.E. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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