MITEL COMMUNICATIONS PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1), BANGALORE

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ITTPA 860/BANG/2022Status: DisposedITAT Bangalore20 July 2023AY 2018-199 pages
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What did the Tribunal hold?

The Tribunal admitted the additional grounds of appeal, citing the Supreme Court judgment in M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), as the additional grounds raised legal issues. Regarding the turnover filter, the Tribunal followed a coordinate bench decision in MWYN Tech Private Ltd. (supra) and Autodesk India Pvt Ltd. (supra), holding that companies with a turnover exceeding Rs. 200 crores in the current year should be excluded from the list of comparable companies. Consequently, the Tribunal directed the exclusion of the specified companies from the comparables list. The assessee's submission that excluding these companies would bring its ALP within the arm's length was noted. As a result, the other grounds of appeal were not adjudicated and were left open. The operative direction was to exclude the companies based on the turnover filter.

What were the facts?

The assessee, Mitel Communications Private Limited, is in appeal against the final assessment order dated 25.07.2022 passed by the National Faceless Assessment Centre (NFAC), Delhi, for the assessment year 2018-19. The dispute pertains to an international transaction of Rs. 61.99 crores related to software development services. The Transfer Pricing Officer (TPO) rejected the assessee's Transfer Pricing (TP) documentation, applied certain filters, and selected 26 comparable companies, ultimately arriving at a median profit level indicator (PLI) of 23.60%. The Assessing Officer (AO) incorporated an adjustment of Rs. 2,40,90,788. The Dispute Resolution Panel (DRP) provided marginal relief, and the AO passed the final assessment order with an adjustment of Rs. 1,33,33,148. The assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT).

What were the issues?

1. Whether the Tribunal has jurisdiction to admit additional grounds of appeal filed by the assessee, which raise legal issues arising from the order of the lower authorities, despite the delay in filing. - Assessee's Contention: The additional grounds are legal issues that arise from the impugned order and should be admitted, relying on Supreme Court and High Court decisions. - Revenue's Contention: The additional grounds were filed after a significant delay (10 months after the original grounds). 2. Whether companies with a turnover exceeding Rs. 200 crores should be excluded from the list of comparable companies when benchmarking the arm's length price (ALP) of software development services, given the assessee's turnover of Rs. 47.20 crores. - Assessee's Contention: Companies with turnovers exceeding Rs. 200 crores, specifically listed (Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Mindtree Ltd., Nihilent Ltd., Persistent Systems Ltd., Wipro Ltd., Tata Elxsi' Ltd., Infosys Ltd., Larsen & Toubro Infotech Limited, Cybage Software Pvt. Ltd.), should be excluded as they are not comparable, and their exclusion would bring the assessee's ALP within the arm's length. - Revenue's Contention: Only the turnover criteria should not be applied, and other filters applied by the TPO must be considered.

Which sections of the Income-tax Act were involved?

Section 274,Section 270A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “B” BENCH : BANGALORE

Before: SHRI GEORGE GEORGE K. & SHRI LAXMI PRASAD SAHU

For Appellant: Shri Nageshwar Rao, Advocate
For Respondent: Shri Sunil Kumar Singh, CIT-2(DR)(ITAT), Bengaluru
Hearing: 17.07.2023Pronounced: 20.07.2023

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., VICE PRESIDENT AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(TP)A No.860/Bang/2022 Assessment year : 2018-19

Mitel Communications Private Limited, Vs. The Assessment Unit, 9th Floor, Block M2, Madhuvan North Income Tax Department, Avenue, Manyata Embassy Business National Faceless Assessment Centre, Park, Nagavara, Delhi [NFAC], Delhi. / Bangalore – 560 045. PAN : AAKCM 8610R DCIT, Circle 4(1)(1), Bangalore.

APPELLANT RESPONDENT

Appellant by : Shri Nageshwar Rao, Advocate Respondent by : Shri Sunil Kumar Singh, CIT-2(DR)(ITAT), Bengaluru.

Date of hearing : 17.07.2023 Date of Pronouncement : 20.07.2023 O R D E R Per Laxmi Prasad Sahu, Accountant Member This appeal filed by the assessee is against the final assessment order DIN ITBA/AST/S/143(3)2022-23/1044043539 (1) dated 25.07.2022 of the Assessing Officer, National Faceless Assessment Centre, Delhi [NFAC], Delhi for the assessment year 2018-19 on the following grounds of appeal:- “1. Ld. AO/ TPO/ DRP have erred in law and on facts and circumstances of the case, in making an addition of INR 13,333,148/- to the total income in respect of international

IT(TP)A No.860/Bang/2022 Page 2 of 9

transaction pertaining to provision of software development services (hereinafter referred to as "impugned transaction"). 2. Ld. AO/ TPO/ DRP have erred in not accepting the economic analysis undertaken by the Appellant in accordance with provisions of the Act read with the Income- tax Rules, 1962 ("the Rules") and in modifying the same for determination of arm's length price ("ALP") of the impugned transaction and in holding that the same is not at arm's length. 3. Ld. AO/ TPO/ DRP have erred in applying a filter to reject certain comparable companies for having different accounting year (i.e., having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). 4. Ld. AO/ TPO/ DRP have erred in rejecting certain comparable companies using 'employee cost to total cost less than 25 percent of total cost' as a comparability criterion for benchmarking the impugned transaction. 5. Ld. AO/ TPO/ DRP have erred in rejecting certain comparable companies using 'export earnings to service revenues less than 75 percent of service revenues' as a comparability criterion for benchmarking the impugned transaction. 6. Ld. AO/ TPO/ DRP have erred in rejecting certain comparable companies identified by the Appellant having losses in two out of three years including the current financial year. 7. Ld. AO/ TPO/ DRP have erred by modifying the related party filter i.e., related party transactions greater than 25 percent of revenue applied by the Appellant as a comparability criterion for benchmarking the impugned transaction.

IT(TP)A No.860/Bang/2022 Page 3 of 9

8.

Ld. AO/ TPO/ DRP have erred in selecting certain companies (which are earning super normal profits) as comparable to the Appellant to benchmark the impugned transaction. 9. Ld. DRP has erred in law and on facts and circumstances of the case, by making certain mistakes apparent from record while passing their directions leading to incorrect rejection and selection of companies for benchmarking impugned transaction. 10. Ld. AO/ TPO/ DRP have erred in law and on facts and circumstances of the case, by wrongfully rejecting and adding certain companies for benchmarking the impugned transaction on an ad-hoc basis, thereby resorting to cherry picking of comparables. 11. Ld. AO/ TPO/ DRP have erred in law and on facts and circumstances of the case, by considering provision for doubtful debts, bad debts, rates and taxes and miscellaneous expenses as non-operating item while computing the operating margins of the comparable companies. 12. Ld. AO/ TPO/ DRP have erred in law and on facts and circumstances of the case, by considering provision for doubtful debts, bad debts, rates and taxes and miscellaneous expenses as non-operating item while computing the operating margins of the comparable companies and operating item while computing the margin of the Appellant thereby leading to an inconsistent approach. 13. Ld. AO/ TPO/ DRP have erred in failing to make appropriate adjustments to account for differences in working capital employed by the Appellant vis-à-vis comparable companies while benchmarking the impugned transaction of the Appellant. 14. Ld. AO/ TPO/ DRP have erred in not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies.

IT(TP)A No.860/Bang/2022 Page 4 of 9

15.

Ld. AO has erred in facts and law, by initiating penalty proceedings under Section 274 read with Section 270A of the Act, without recording any adequate reasons for such initiation. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.”

2.

The assessee has filed the additional grounds as follows:- “In addition to the grounds of objections raised in Form 36 filed earlier before the Hon'ble Tribunal, after ground number 15, the Petitioner hereby wishes to include additional grounds number 16 and 17 as under: 16. The Ld. AO/ TPO/ DRP have erred, in law and facts, by accepting/ rejecting the following companies based on unreasonable comparability criteria: a) Accepting the following companies that cannot be considered as comparable to the Appellant in law and fact, on one or more grounds:

(i) Exilant Technologies Pvt. Ltd. (ii) Tech Mahindra Ltd. (iii) Mindtree Ltd. (iv) Nihilent Ltd. (v) Persistent Systems Ltd. (vi) Wipro Ltd. (vii) Tata Elxsi' Ltd. (viii) Infosys Ltd. (ix) Larsen & Toubro Infotech Limited (x) Cybage Software Pvt. Ltd. (xi) Great Software Laboratory Pvt. Ltd. (xii) Elveego Circuits Pvt. Ltd. (xiii) Aptus Software Labs Pvt. Ltd. (xiv) AcewinAgriteck Ltd. (formerly known as OFS Technologies Limited) (xv) Infobeans Technologies Ltd. (xvi) ThreesixtyLogica Testing Services Pvt. Ltd. (xvii) Black Pepper Technologies Pvt. Ltd.

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b) Rejecting the following comparable companies selected by the Appellant in its TP documentation/ additionally identified during proceedings even though the companies are functionally comparable to the Appellant. (i) Evoke Technologies Private Limited (ii) Kcube Consultancy Services Private Limited (iii) Sankhya Infotech Limited (Segmental) (iv) Sasken Technologies Limited (Segmental) (v) Virinchi Limited (Segmental) (vi) Jindal Intellicom Limited (Segmental) (vii) Hurix Systems Private Limited (viii) Kals Information Systems Limited (ix) Rheal Software Private Limited 17. The learned AO/ DRP/ TPO have erred in law and in facts, by applying only the lower turnover filter of less than INR 1 crore as a comparability criterion under software development services segment and not applying a higher threshold limit of INR 200 crores for turnover filter. In the above circumstances the Petitioner prays that this Hon'ble Tribunal be pleased to: (i) admit and adjudicate the above additional grounds, and (ii) pass any other order that may be required in the circumstances of the case and render justice.”

3.

The ld. AR submitted that the issues raised in the additional grounds are legal issues and arise out of the order of the lower authorities and hence the same may be admitted. Reliance is based on the decisions of the Hon'ble Supreme Court in the case of jute Corporate of India vs. C.I.T (187 ITR 688) and National Thermal Power Corporate vs C.I.T (229 ITR 383); decision of the Bench of the Bombay High court in the case of Ahmadabad Electricity Co. Ltd. (199 ITR 351) and decision of Chandigarh special bench in the case of DCIT vs Quark Systems (P.) Ltd (IT Appeal No. 100 (CHD.) of 2009).

IT(TP)A No.860/Bang/2022 Page 6 of 9

4.

The ld. DR objected to accepting the additional grounds and submitted that the original grounds were filed by the assessee on 09.09.2022 and after expiry of 10 months, the assessee has filed additional grounds.

5.

After hearing both the parties, we note that the additional grounds are legal issues and following the Hon’ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional grounds are admitted for adjudication.

6.

The brief facts of the case are that the assessee is engaged in the business of software development, testing and help desk services. It e- filed return of income on 28.11.2018 declaring total income at Rs.5,49,64,480. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee had carried out international transaction of Rs.61.99 crores and therefore the case was referred to the TPO after obtaining approval from the competent authority for determination of ALP of the international transactions with its AE for the FY 2017-18.

7.

After receipt of reference from the AO the TPO issued notice to the assessee for filling the documents, accordingly the assessee filed documents & the TPO observed from the TP study that the assessee had adopted TNMM for calculating PLI and after applying certain filters selected 15 companies as comparables. The TPO rejected the TP documentation and he applied certain filters and selected 26 companies as comparables including the 3 companies selected by the

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assessee and calculated the median at 22.27%. After considering the objections of the assessee, the TPO retained 20 companies and calculated the median at 23.60%. Accordingly, he proposed adjustment on international transactions of Rs.2,40,90,788 which was incorporated by the AO in the draft assessment order. The assessee filed objections before the DRP. The ld. DRP gave marginal relief to the assessee and accordingly the AO passed the final assessment order and made adjustment of Rs.1,33,33,148. Aggrieved, the assessee is in appeal before the Tribunal.

8.

At the outset, the ld. AR pressed for adjudication of only the additional ground 16 (a) (i) to (x) challenging the turnover filter of the following companies having turnover exceeding Rs.200 crores.:-

(i) Exilant Technologies Pvt. Ltd. (ii) Tech Mahindra Ltd. (iii) Mindtree Ltd. (iv) Nihilent Ltd. (v) Persistent Systems Ltd. (vi) Wipro Ltd. (vii) Tata Elxsi' Ltd. (viii) Infosys Ltd. (ix) Larsen & Toubro Infotech Limited (x) Cybage Software Pvt. Ltd. 9. The ld. AR submitted that the assessee’s turnover is Rs.47,20,45,143 and applying the upper turnover filter of more than Rs.200 crores, the above 10 companies have to be excluded from the list of comparables. In support, he relied on the following decisions:- (i) M/s. Sprinklr India Private Limited v. DCIT, IT(TP)A No.713/Bang/2022, order dated 31.7.2022 (ITAT, Bang.) (ii) MWYN Tech Private Ltd. v. ITO, IT(TP)A No.753/Bang/2022, order dated 31.10.2022 (ITAT, Bang.)

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The ld. AR further submitted that if the above companies are excluded from the comparables list, the assessee’s case will be within the arm’s length price.

10.

The ld. DR supported the orders of lower authorities and submitted that only turnover criteria should not be applied and the other filters as applied by the TPO have to be considered.

11.

After hearing both the sides, perusing the entire material on record and the orders of the lower authorities, we note that the coordinate Bench of this Tribunal in the case of MWYN Tech Private Ltd. (supra) has considered the comparability of these companies on the turnover filter criteria and it was held as under:- “17. During the course of hearing the ld AR drew our attention to the table with details of the turnover of the companies, for which the exclusion is sought based on upper turnover filter and submitted that the turnover of the assessee is Rs. 9,13,63,594 and therefore these companies need to be excluded. On perusal of the same, we notice that the turnover of the companies are as listed below –

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18.

Considering the facts and respectfully following the decision of the coordinate bench of the Tribunal in the case of Autodesk India Pvt Ltd., (supra) we hold that the companies whose turnover in the current year is more than Rs.200 crores should be excluded from the list of comparable companies.” 12. Respectfully following the above decision of the Tribunal, we direct exclusion of all the companies from the list of comparables since the upper turnover filter of these companies exceeds Rs.200 crores whereas the assessee’s turnover is Rs.47.20 crores.

13.

The ld. AR had submitted that if the above companies are excluded from the comparables list, the assessee’s ALP of its international transactions with the AE in SWD segment would be within the arm’s length. In view of the above submission of the ld. AR, the other grounds are not adjudicated and are left open.

14.

In the result, the assessee’s appeal is partly allowed.

Pronounced in the open court on this 20th day of July, 2023.

Sd/- Sd/- ( GEORGE GEORGE K.) (LAXMI PRASAD SAHU ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 20th July, 2023. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DRP 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.

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