9911796707
TMI Blog2025 (5) TMI 1398X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case, and in law, the learned Assistant Commissioner of Income Tax Mumbai (the 'AO') erred in making an addition of Rs. 13,10,59,610/- to the total income and assessing the total income of the Appellant for the captioned AY at Rs. 25,37,46,510/-. Transfer pricing issues: 2:0 Transfer Pricing Adjustment of Rs. 10,14,93,918/- in relation to the international transaction of receipt from production services ['ITeS services'): 2:1 The AO/Learned Transfer Pricing Officer (the 'TPO') / Learned Commissioner of Income Tax Appeals [the 'CIT (A)] have erred on the facts of the case and in law in making an upward adjustment of Rs. 10,14,93,918/- to the total income of the Appellant by holding that the international transaction relating to ITeS services provided by the Appellant to its associated enterprises ('AEs') is not at arm's length. 2:2 The learned AO/TPO/CIT (A) erred on facts and in law in disregarding the benchmarking analysis conducted by the Appellant based on the contemporaneous data in the Transfer pricing study report ('TP Study Report') maintained as per Section 92D of the Income Act 1962 (the 'Act') read wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Adjustment of Rs. 2,95,65,692/- in relation to the international transaction of receipt from software development services ["IT services"]: 3:1 The AO/TPO/ CIT (A) have erred on the facts of the case and in law in making an upward adjustment of Rs. 2,95,65,692/- to the total income of the Appellant by holding that the international transaction relating to IT services provided by the Appellant to its associated enterprises ('AEs') is not at arm's length. 3:2 The AO/TPO/ CIT (A) erred on facts and in law in disregarding the benchmarking analysis conducted by the Appellant based on the contemporaneous data in the Transfer pricing study report (TP Study Report) maintained as per section 92D of the Act read with Rule 100 of the Rules. 3:3 The AO/TPO/CIT (A) have erred in rejecting the economic analysis and methodical search process undertaken by the Appellant to identify comparable companies providing services similar to the IT services rendered by the Appellant. 3:4 The AO / TPO CIT (A) has determined the arm's length price of the Appellant's international transactions without undertaking any scientific search process in violation of sections 92C(1) and 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software and services for use in mobile invocation and other invocations and GIS applications and devices in India. The assessee e-filed its return of income for the year ended 31/03/2014 on 26/11/2014, declaring total income of Rs. 12,26,86,900/-. The assessee's case was taken for scrutiny and the matter referred to the TPO related to transaction with AE. Finally, the draft assessment order under section 143(3) read with section 144C(1) of the Act was passed on 11/12/2017 proposing to assess total income of assessee for the impugned assessment year at R. 25,37,46,510/-. The said order was duly served on the assessee. In response to that the assessee vide letter dated 08/01/2018 informed that the company wishes to exercise its option to appeal before the Ld. CIT(A) instead of Dispute Resolution Panel (DRP). Finally, the issues involved in the proposed variations are finalized and the additions made by the TPO in relation to the receipts of ITES and IT are as follows: - Sr.No. International Transactions Amount as disclosed in Form 3CEB (Rs.) Arm's length price as determined by the ld.TPO (Rs.) Proposed transfer pricing Adjustment (Rs.) 1. Receipt from ITES 69,98,60,154 80, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission was made before the Ld. TPO, that even after considering all the companies from the previous two AY's TP order's no adjustment to the arm's length markup for ITES services was warranted. Further to this, the Id. TPO issued a second show-cause notice dated 24/10/2017, again asking the assessee to explain why some additional companies proposed by him should not be accepted as comparables to benchmark the transaction pertaining to provision of ITES services. Both the above two list of comparable companies proposed by the ld. TPO in the two show-cause notices were not selected by following a methodical search and were selected on an ad-hoc basis. In response to above, the assessee submitted a detailed reasoning, as to why the companies proposed to be selected by Id. TPO were not comparable to the functions performed by the Appellant. 5. On receipt from IT, a detailed and systematic search process was adopted by the assessee in the TP study report ('TPSR') which was submitted on dated 17/01/2017. During the year, the assessee earned a Net cost plus ('NCP') mark-up of 15 percent from rendering of IT services to its AE. The three years weighted av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year data which was in accordance with proviso to Rule 10B(4) of the Rules. The assessee wishes to submit that there is no non-compliance in the manner in which it has undertaken the analysis and that the assessee has complied with all requirements as per Section 92, Section 92C, Section 92D, Section 92E, rule 108, 10C, 10D, 10E for computing its income having regard to ALP, and maintaining necessary information and documentation for determination of ALP. This was done as per procedures outlined and in good faith to comply with all the provisions of law and to provide a true and fair analysis that was undertaken with fair and prudent business intent. Accordingly, the assessee submits that no reasons exist to disregard it's search process and set of comparable companies selected by the assessee considering the fact that the assessee has determined the ALP in compliance with the guidelines provided for in the Act and the Rules. 8. Related to the comparables, the Ld.AR argued and prayed for exclusion of following comparable which are as follows: - 8.1. MPS Ltd. The observation of the Ld. CIT(A) is reproduced as below:- "6.6 MPS Limited: As per the Appellant, this company is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that data digitalisation is the primary activity of this company and no R&D expenditure was incurred. 17. We have considered the submissions of both sides and perused the material available on record. From the perusal of relevant extracts of the annual report of MPS Ltd., as reproduced on page 736 of the paper book, we find that MPS Ltd. provides publishing services relating to typesetting of books and journals, composing of yellow page advertisements and catalogues, data coding, conversion, indexing, editing, editorial services, software development, maintenance and support to global publishers. As regards the segmental information, the company claims that it operates in one business segment of providing publishing solutions, viz. typesetting and data digitalisation services and the same is considered to constitute a single segment in the context of primary segment reporting. Further, this company has claimed to have developed an end-to-end cloud-based publishing platform, MPS DigiCore, which addresses the need for an integrated workflow. Further, this company also has a product named MPS Digitrak, which it claims to be a production tracking system developed by MPS Ltd. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and this company also qualifies all the filters. Before the learned CIT(A), the assessee objected to the inclusion of this company as comparable on the basis that this company is functionally not comparable. The learned CIT(A), vide impugned order, disagreed with the submissions of the assessee and upheld the inclusion of this company for benchmarking the international transaction pertaining to "Receipt from Production Services". Being aggrieved, the assessee has challenged the inclusion of this company as comparable. 19. During the hearing, the learned AR reiterated the submissions made before the lower authorities. On the other hand, the learned DR vehemently relied upon the orders passed by the lower authorities. 20. We have considered the submissions of both sides and perused the material available on record. From the perusal of the annual report of IRIS Business Services Ltd. for the year under consideration, forming part of the annual report paper book from pages 1-106, we find that this company is engaged in the business of supply of software and providing software related services. As per the profit and loss account, the revenue from sale of products is declared a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taining to "Receipt from Production Services". Ground No.2 raised in assessee's appeal is decided accordingly." 8.4. ICRA Techno Analytics: - The relevant part of the appellate order is reproduced as below: - "6.15 ICRA Techno Analytics: As per the Appellant this company Fails RPT filter. However, after perusal of the RIPT working & can be observed that the Appellant has compared the RPT Income and expenses transaction with only Total revenue. Instead of that the Appellant should have compared the RPT with Total Expenses + Total Revenue. The items selected in numerator should have been Included in the denominator. Further, the Appellant has considered the capital account transaction such as loan, issue of share capital in RPT working Considering the above flaws in RPT working the company accepted by the TPO is not disturbed. The Ld. AR made detailed arguments on why ICRA should not be included as a comparable were made before the Ld. CIT(A) as the comparable fails Related Party Transaction ('RPT') filter ICRA has related party transactions of 26.74% on total revenues. Further, this comparable was rejected by TPO in assessee's own case in AY 2012-13 and AY 2013-14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed parties) divided by sales(Rs. 6.22 Crores +.6 Crores)/27.9 x 100 = 24.4%. The ld. TPO observed that the assessee had taken both reimbursements paid to and received from related parties while calculating the RPT ratio and accordingly objected that the same is above 25%. 13.4.1. The ld. TPO did not agree to this computation made by the assessee and accordingly held that since the RPT transaction are not more than 25%, the said company is a good comparable. We find under various filters applied by the ld. TPO for benchmarking the international transactions, one such filter applied thereon is with "companies with related party transactions less than 25% of the revenues are selected." Under this caption, the ld.TPO had also observed that related party transactions on revenue and expenditure side were considered for applying this criterion. This is the filter and credential applied by the ld. TPO, then it is incumbent on the part of the ld. TPO to consider all the aforesaid three transactions together while arriving at the RPT ratio i.e., a) Services rendered related parties is -Rs. 6.22 Crores b) Reimbursement of expenses by related parties - Rs. 0.6 Crores c) Reimbursement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only argument of Ld. DR in this regard is that the SLP filed by the revenue against the decision of Hon'ble Delhi High Court is admitted by the Hon'ble Supreme Court and the same is pending. We find that as on date, the issue has already been decided by the Hon'ble Delhi High Court in favour of the assessee, wherein, Eclerex Services Ltd., has been stated to be engaged in the business of KPO and not BPO and hence, the same cannot be considered as a comparable with the assessee. Accordingly, ground No 1 raised by the revenue is dismissed. 5.2. With regard to inclusion of Accentia Technology Ltd., we find that the Ld. DRP had granted relief to the assessee on the ground that segmental results are not available with regard to different activities carried out by the said comparable. Accordingly, we do not find any infirmity in the said action of the Ld. DRP. The Ld. DR before us could not controvert the findings of the Ld. DRP before us by adducing fresh evidences on record contrary to the findings of the Ld. DRP. Accordingly, ground No. 2 raised by the revenue is dismissed." Ground no.3 :Adjustment on Rs. 2,95,65,692/- related "IT services" 9. The TPO selected the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersified activities such as automation engineering services, ServiceNow implementation, big data, UI and UX customised software, data mining, data modelling, statistical analysis, machine learning techniques etc., whereas the assessee herein was engaged only in routine software development services. The ld. TPO however, did not heed to the contentions of the assessee and included the same as a comparable. The ld. DRP held that the said comparable has got only one segment i.e., sale of software and accordingly the same is comparable with the assessee. We find from the financial statements of the said comparable that it had derived revenue from sale of software (export) to the tune of Rs. 32,96,59,883/- which is enclosed in page 1069 of the paper book. We also find from note No.27 in page 1069 of the paper book which is notes forming part of the financial statements for the year ending 31/03/2014, the said company under the caption "earnings in foreign exchange" had reflected export of goods / services calculated on FOB basis to the tune of Rs. 32,96,59,883/-. We find that there is no segmental break-up available with regard to sale of software and revenue derived from the software d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is argument towards following comparable: - i) Thirdware SolutionsLtd.: - Learned Counsel of the assessee contended that exclusion of Thirdware Solutions as a comparable has been accepted by the ITAT in its order for A.Y. 2013-14. For the same reasoning learned counsel contended that this comparable should not be considered as a valid comparable." 10. The Ld. DR vehemently argued that the set of comparable in question had been furnished by the assessee itself, particularly highlighting two comparables submitted by the assessee before the Ld. TPO. In the course of arguments, the Ld. DR opposed the assessee's plea for exclusion of five comparables from the analysis, contending that such exclusion would unduly narrow the scope of the comparability study. In support of his contention, the Ld. DR placed reliance on the judgment of the Hon'ble Bombay High Court in CIT-7 vs. Tata Power Solar Systems Ltd. [77 taxmann.com 326], wherein the relevant extract reads as under: "3(d). We find that the impugned order of the Tribunal held that a party is not legally precluded from withdrawing a company from its list of comparables, provided such inclusion was due to an error and the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supported by decisions of various coordinate benches of ITAT. 13. We find merit in the contentions of the assessee with respect to the following comparables: * MPS Ltd is engaged in activities involving significant R&D and has developed proprietary cloud-based platforms. It does not provide segmental data for its various streams of revenue. Respectfully following the order of the coordinate bench in assessee's own case in ITA No. 5919/Mum/2024 dated 17.03.2025, we direct its exclusion. * IRIS Business Services Ltd. earns revenue from multiple service lines such as advertisement, software development, data conversion, hosting, and subscriptions, without furnishing segmental revenue bifurcation. In absence of segmental information, and following judicial precedent in assessee's own case, it is liable to be excluded. * Omega Healthcare Management Services Pvt. Ltd. derives the entirety of its revenue from related parties, thereby failing the RPT filter of 25%. The coordinate bench in assessee's own case (ITA No. 5919/Mum/2024) has already directed its exclusion. * ICRA Techno Analytics Ltd., now Nihilent Analytics Ltd., has related party transactions exceeding 25% of total r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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