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TMI Blog2022 (7) TMI 1579X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case, the learned AO/ Assistant Commissioner of Income-tax (Transfer Pricing) - 1(1)(2), Bangalore (learned TPO), erred in making an upward adjustment to the transfer price of the Appellant's international transactions of INR 37,976,187 in respect of software development services, INR 411,198 in respect of data center services and INR 6,346,182 in respect of marketing support services. The learned DRP erred in further enhancing the adjustment in respect of Appellant's marketing support service segment to INR 10,339,660, and confirming the adjustments in respect of software development services and data center services segments at INR 35,111,149 and INR 411,198 respectively. 3. That on the facts and in the circumstances of the case, the learned Panel/ learned TPO erred in rejecting the segmental financial information as provided by the Appellant and reallocating the "other expenses" between the Software development services, Marketing and support services and Data center services segments on the basis of revenue by disregarding the documents/ information submitted by the Appellant before the learned Panel/ learned TPO during the assessment proceedings, supportin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctionality of such companies vis-à-vis the Assessee. 7. Not providing adjustment for the differences in working capital of the Appellant and the comparable companies selected for each of the three segments. 8. Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis- a-vis the comparable companies selected for each of the three segments. 9. That the learned Panel/ learned TPO erred in not considering certain expenses/income while computing the operating mark-up on cost of the comparable companies on the premise that these are not the routine operating costs, in doing so the learned Panel/ learned TPO failed to provide any cogent reason to substantiate their findings.. (Tax effect: INR 4,58,62,307) Grounds for software development services 10. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services, the learned DRP/AO/ TPO erred in: 10.1. Including the following companies even though they are functionally different from operational profile of the Appellant: a) Mindtree Limited b) RS Software (India) Ltd. e) Larse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;) and rejected the comparability analysis undertaken by the Assessee in its TP documentation. 14.2. Without prejudice to the above ground 15.1, including the following companies even though they are functionally different from operational profile of the Appellant: a) Cross Domain Solutions Pvt. Ltd. b) AGS Health Pvt. Ltd. c) Infosys BPO Ltd. d) SPI Technologies India Pvt. Ltd e) Excel Infoways Ltd f) E-Care India Pvt. Ltd. 14.3. Without prejudice to the above ground 15.1, including the following company at entity level and not segmental level: a) BNR Udyog Ltd 14.4. Without prejudice to the above ground 15.1, 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) Informed Technologies India Ltd. b) Cosmic Global Ltd. c) Sundaram BPO India Ltd. d) e4e Healthcare Business Services Pvt Ltd (Tax Effect: INR 4,11,498) C. Other grounds 15. The consequential relief is to be granted in computation of interest under section 234B and section 234C of the Act. (Tax effect: INR 4,58,62,307) 16. The learned AO has erred in ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in turn is a subsidiary of Blue Coat US. Pursuant to a Research and Development Services agreement ("SWD Agreement") effective April 1, 2013, executed between Blue Coat Switzer and Blue Coat India, Blue Coat India provides software development services in relation to Blue Coat Switzerland's products. Blue Coat India provides certain software services which include software architectural analysis and design, engineering design and documentation, programming, testing, debugging and product sustaining engineering. Blue Coat India develops and designs the software with characteristics specified by Blue Coat Switzerland. It is responsible for ensuring that the services conform to Blue Coat Switzerland's specification. Further, pursuant to the Marketing Support Services agreement ("MSS Agreement"), effective April 1, 2013, executed between Blue Coat India and Blue Switzerland, Blue Coat India provides marketing support services in the nature of marketing and after-sales support functions for customers in India in relations to Blue Coat Switzerland's products. These services focus on increasing the awareness of the Blue Coat brand, educating the market on issues and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,861 18,08,058 4,87,23,217 Operating Profit (A)-(B) 1,16,89,330 1,24,19,157 5,01,945 2,46,10,432 Operating Profit / Total Cost 15.00% 10.00% 10.00% 3.6 Following are the details of the comparables selected by the assessee under the two segments: SWD Segment Sl.No. Name of the Company Wt. Avg (%) 1. New-Age Bizsoft Solutions Pvt. Ltd. -1.03% 2. Akshay Software Technologies Ltd. 3.34% 3. Helios & Matheson IT (Bangalore) Ltd. 8.50% 4. CG-VAK Software & Exports Ltd. 10.25% 5. E-Zest Solutions Ltd. 11.82% 6. Tata Elxsi Ltd. 12.11% 7. Sasken Communication Technologies Ltd. 17.76% 8. Bells Softech Ltd. 19.24% 9. Helios & Matheson Information Technology Ltd. 19.36% 10. Centurylink Technologies India Pvt. Ltd. 20.06% 11. Cigniti Technologies Ltd. 21.14% 12. Ideavate Solutions 24.84% ITES Segment Sl.No. Name of the Company Wt. Avg (%) 1. A2Z Infraservices Ltd. 5.87% 2. Ashiana Maintenance Services Ltd. 8.71% 3. Forbes Facility Services Pvt. Ltd. 3.20% 4. Geo Connect Ltd. 26.31% 5. Kingston Property Services Ltd. 1.87% 6. Lancor Maintenance & Services Ltd. 21.36% 7. Updater Services Pvt. Ltd. 6.48% 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts classified under the service industry This is an appropriate filter. 12 Companies that had average sales of less than 1 INR crore were eliminated. This is an appropriate filter. 13 Software Development segments of companies clearing the quantitative criteria were analysed the qualitatively to select functionally comparable companies. This is an appropriate filter. ITES (Data Center Services) 1 Companies for which data was not available in Prowess and having positive sale over the time period under consideration. This is an appropriate filter. 2 Sales > 0 Sales other Operating Income / Total Sales > 50 to Select companies primarily engaged in services activity This is an inappropriate filter. The TPO has applied service to sale filter greater than 75%. 3 Companies providing Services This is an appropriate filter 4 Companies that had average sales of less than INR 1 crore. This is an inappropriate filter. The TPO has selected more appropriate filter as 5 Companies with net worth less than zero implying companies which have eroded their net This is an appropriate filter. 6 Companies clearing the quantitative criteria were analysed the qualitatively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K Software & Exports Ltd. 19.87 13.81 22.07 18.50 4 Tata Elxsi Ltd. (Seg) 23.33 22.02 11.24 19.34 5 Rheal Software Pvt. Ltd. 2.76 36.64 No data in Public Domain 19.88 6 Mindtree Ltd. 20.55 21.18 19.75 20.55 7 Larsen & Toubro Infotech Ltd. 24.22 23.54 25.10 24.21 8 R S Software (India) Ltd. 32.66 24.14 17.44 24.82 9 Infobeans Technologies Ltd. 20.70 41.95 29.22 29.91 10 Persistent Systems Ltd. 31.11 35.44 28.20 31.69 11 Nihilent Technologies Ltd. 29.19 35.72 No data in Public Domain 32.21 12 Aspire Systems (India) Pvt. Ltd. 30.98 38.04 No data in Public Domain 34.18 13 Inteq Software Pvt. Ltd. 31.16 45.00 Fails Employee cost filter 37.90 14 Infosys Ltd. 40.29 36.28 39.25 38.59 15 Thirdware Solution Ltd. 43.69 44.68 32.65 41.12 16 Cybage Software Pvt. Ltd. 68.17 68.82 60.81 66.27 35th Percentile 20.55% Median 27.37% 65th Percentile 37.90% ITeS Sl.No. Company Name F.Year wise OP/OC (%) Wt. Average 2014- 15 2013- 14 2012- 13 1 ACE BPO Services Pvt Ltd 2.21 1.40 3.21 2.38 2 Jindal Intellicom Limited 7.87 11.56 -2.84 5.44 3 Microgenetic Systems Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P/OC) (%) (OP/OC) (%) (OP/OC) (%) Wt. PLI (SOP/SOC)(%) 1 Adhaan Solution Pvt. Ltd. 1.37 1.46 1.40 2. Kestone Integrated Mktg. Services Pvt. Ltd. 9.73 7.15 6.87 8.13 3. Concept Public Relations India Ltd. 16.22 4.79 0.76 8.54 4. Irclass Systems & Solutions Pvt. Ltd. 15.21 15.21 5. Ugam Solutions Pvt. Ltd. 11.53 29.08 9.86 16.87 6. Axience Consulting Pvt. Ltd. 19.84 17.72 15.63 18.03 7. Majestic Research Services& Solutions Ltd. 18.49 18.49 8. Axis Integrated Systems Ltd. 44.14 23.30 -0.21 22.88 9. Killick Agencies & Mktg. Ltd. 23.12 22.43 26.91 24.16 10. Digital Radio (Delhi) Broadcasting Ltd. 39.70 27.51 11.09 27.20 11 Just Dial Ltd. 32.66 37.15 31.36 33.75 12. Rites Ltd. 33.90 33.90 13 Platinum Advertising Pvt. Ltd. 53.94 14.40 34.07 35th percentile 16.87 Median 18.49 65th percentile 24.16 3.13 The Ld.TPO thus proposed an adjustment under the 3 segments that are summarized as follows: MSS SEGMENT Particulars Formula Amount Taxpayers Operating Revenue OR 13,66,10,710 Taxpayers Operating Cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, marketing support service segment and Data center service segment on the basis of revenue by the Ld.TPO. It is submitted that the directions of the DRP has not been followed by the Ld.TPO while passing the impugned order. Further, the Ld.AR submitted that, in Ground no. 4, the directions of the DRP with respect to rectification of computation of operating markup on cost earned by the assessee by excluding restructuring cost from the operating cost passed was directed to be granted by the DRP. He submitted that the above direction in respect of these two issues have not been applied with by the Ld.AO. 13.1 The Ld.AR relying on the decision of Coordinate Bench of this Tribunal in case of CISCO Systems (India) Pvt. Ltd. vs. DCIT reported in (2014) 50 taxmann.com 280 has held "headcount" to be an appropriate allocation key for allocating common indirect expenses within various segments. 13.2 On the contrary, the Ld.DR relied on the orders passed by authorities below. 13.3 We have perused the submissions advanced by both sides in the light of records placed before us. 13.4 We note that the Ld.AO/TPO rejected the segmental financial details provided by assessee and reallocated o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... del of software product development life cycle with the role of Blue Coat India & Blue Coat Switzerland are: i) Low level design ii) Coding iii) Testing iv) Post Implementation Support Assets Blue Coat Switzerland is the owner or licensee, as the case may be, of rights; titles and interest in intellectual properties and Blue Coat India do not own any significant intangibles. Blue Coat India uses the process, technical data software, quality standards etc. Risks Risk Category and Description Exposure of Blue Coat India Exposure of AEs Market Risk: Market risk arises for a business due to increased competition and relative pricing pressures, change in demand patterns and needs of customers, inability to develop/ penetrate in a market, etc. Blue Coat India does not have any exposure to market risk as it renders software development services exclusively for Blue Coat Switzerland and is compensated irrespective of the success or failure of its activity. However it may bear a secondary consequential risk if the business of Blue Coat Switzerland were to be materially and adversely affected for any foreseen / unforeseen reasons. Blue Coat Switzerland is entirely re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted with the exchange rate fluctuations. MSS Functions Blue Coat India performs marketing and after-sales support functions for the customers in India, cusing on increasing the awareness of the Blue Coat products, educating the market on issues and challenges associated with WAN Application Delivery and Secure Web Gateway products and creating demand for its products and technology etc. The primary role of Blue Coat India is to function as a local contact for Blue Coat Group's customers. As such, Blue Coat India * facilitates customers' orders; * maintains relationship with the customers; * introduces new products to the customers; and * conducts market research. Blue Coat India uses it best efforts to promote the products of Blue Coat Switzerland in India, including advertising and sales, service and support, distribution of promotional materials and participation in trade shows. Blue Coat India uses promotional and advertising material supplied by its AE. Blue Coat India does not make decisions on pricing or key terms, or take title to Blue Coat Switzerland's products at any time - Blue Coat Switzerland sells products directly to third-party distributo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only to its associated enterprise and thus is assured of payment for services on raising the invoice. Blue Coat India does not sell products to customers directly and therefore do not hold receivables from customers. As a result, of Blue Coat India do not bear credit and collection risk in their operations. As such, Blue Coat Switzerland bears credit and collection risk relating to the sale of Blue Coat US products in India. Inventory Risk: This risk is associated with management of inventory in case of overstocking or slow/ non- moving inventory resulting from a rapidly changing and technology/ price sensitive market. As a result the enterprise may be forced to bear a loss of margin on the inventory, or incur additional costs to dispose the same. Blue Coat India does not take title to Blue Coat Group's products at any time, and, as a result, do not bear any inventory risk. Blue Coat Switzerland directly sells to third party customers and thus takes the inventory risks associated with maintaining adequate inventory to meet customer requirements. Foreign Exchange Risk: This risk relates to the potential impact on profits that may arise because of changes in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th a low turnover. The Ld.AR submitted that assessee has a turnover of Rs. 8 crores under SWD service segment and therefore companies with high turnover cannot be included for comparability analysis. 16.2 The Ld.AR also relied on decision of Coordinate Bench of this Tribunal in case of M/s. Zynga Game Network India Pvt. Ltd. vs. DCIT in ITA No. 2573/Bang/2019 by order dated 23/03/2021 for A.Y. 2015-16 wherein the above comparables under SWD service segment were rejected on account of high turnover. He also relied on following decisions. * Radisys India Pvt. Ltd. v ACIT for AY 2015-16 in IT (TP) A No. 2482/Bang/2019 * Yahoo Software Development India Pvt. Ltd for AY 2015-16 in IT(TP)A No. 2365/Bang/2019 * Arista Networks India Pvt. Ltd. for AY 2015-16 in IT(TP)A No.2440/Bang/2019 * Goldman Sachs Services Pvt. Ltd. for AY 2015-16 in IT(TP)A No. 2355/Bang/2019 * Pearson India Support Services Pvt. Ltd. v. DCIT in ITA No.3171/Bang/2018 16.3 The Ld.DR relied on the orders passed by authorities below. 15. We note that, the Coordinate Bench of this Tribunal in case of M/s. Zynga Game Network India Pvt. Ltd. vs. DCIT (supra) in respect of the alleged comparables observed as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptive service provider to its AE for assessment year 2015-16. Nothing has been placed by the Revenue to deviate from the above view taken by the coordinate bench of this Tribunal in Zynga Game Network India (P.) Ltd. (supra). 16.5 Respectfully following the above, we direct Ld. AO/TPO to exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. for having high turnover as compared to a captive service provider like assessee. 17. Infobeans Technologies Ltd. 17.1 The assessee is seeking the exclusion of this company from the comparable list. According to the Ld.AR, Infobeans Technologies Limited is engaged in providing Custom Application Development (CAD), Content Management Systems (CMS), Enterprise Mobility (EM), Big Data Analytics (BDA). Therefore, it was submitted that Infobeans Technologies Limited cannot be compared to assessee, who is engaged in providing routine software development services to its AEs. 17.2 We have heard rival submissions and perused the material on record. The Tribunal in the case of Zynga Game Network India (P.) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable, we note that it is involved in multifarious services such as application services, software testing, data warehousing, EDI, BPO, staffing etc. However, we noticed from the Ld.AO/TPO and the DRP's order, it is stated that Inteq Software Pvt.Ltd., is only involved in software development services and the entire turnover is from such service. It is not clear how DRP had arrived at such a conclusion. The profit and loss account of Inteq Software Pvt.Ltd., is not on record. We therefore, deem it appropriate to restore this issue to the file of Ld.AO/TPO. The AO/TPO is directed to afford a reasonable opportunity of hearing to the assessee and decide whether Inteq Software Pvt.Ltd., is to be included in the comparable list of companies. 18.4 This comparable is remand to the Ld.AO/TPO to be considered in accordance with law. Needless to say that proper opportunity of being heard must be granted to the assessee. 19. Aspire Systems (India) Private Limited 19.1 The assessee is seeking the exclusion of the above company from the list of comparables. It is contended that Aspire Systems (I.) Pvt.Ltd., is an outsourced technology service company focused on helping software co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d) .... (e)transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment 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. Accordingly this ground raised by the assessee stands allowed. 21. Ground No.12.1 is in respect of following 3 comparables sought for exclusion by the assessee under the MSS segment. 1. Killick Agencies & Marketing Ltd. 2. Digital Radio Broadcasting Lts. 3. Justdial Ltd. The Ld.AR submitted that, apart from above three, the assessee do not wish to contest any other comparables for exclusion under this segment. 21.1 Killick Agencies & Marketing Ltd. 21.1.1 It was argued before us that the comparable was functionally different whereas the ld. DRP held that the business model are type of income does not matter with reference to functional comparability. 21.1.2 The DRP also held that the comparable provides lot of services which help the companies to sustain the market. 21.1.3 We find that "Killick" is engaged in acting as agent for various foreign principals for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eds of Indian market and there are no reportable geographical segments." 21.2.3 The Ld.TPO considered it to be functionally similar merely because it is performing advertisement sales as mentioned at page 1684 of the paper book. 21.2.4 On the contrary, the Ld.DR placed reliance on the orders passed by authorities below. 21.2.5 We have perused the submissions advanced by both sides in the light of records placed before us. 21.2.6 Comparing the above functions with that of assessee before us, is after sales support functions for customers in India causing an increasing awareness of the Bluecoat products. Further the services are rendered only to the clientele of the AE to whom the Bluecoat products are sold. The above functions of this comparable is therefore not akin to the functions performed. Accordingly we direct the Ld.AO/TPO to exclude this comparable from the final list. 21.3 Justdial Ltd. 21.3.1 The Ld.AR submitted that this comparable is not functionally similar with that of assessee as it is a search engine providing search related services to its customers. It is further submitted that Just dial provides users with a search option, which enables them to enter the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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