M/S. SPRINKLR INDIA PRIVATE LIMITED,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6(1)(2), BENGALURU

This appeal at the instance of the assessee is directed against final assessment order dated 18.02.2022. The relevant assessment year is 2017-2018.

The brief facts of the case are as follows: The assessee is a wholly owned subsidiary of Sprinklr US. It provides software development services to its parent company. For the assessment year 2017-2018, the return of income was filed on 31.10.2017 declaring total income of Rs.24,99,66,540. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued. During the 2 IT(TP)A No.250/Bang/2022 & SA 22/B/2022. M/s.Sprinklr India Private Limited. course of assessment proceedings, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the international transaction undertaken by the assessee with its Associated Enterprises (AEs). The TPO vide his order u/s 92CA of the I.T.Act dated 27.01.2021 determined the TP adjustment of Rs.12,63,71,153. The details of the TP adjustment made by the TPO reads as follows:-

Pursuant to the TPO’s order, the draft assessment order was passed on 07.04.2021 by incorporating the TP adjustment proposed by the TPO.

Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP) on 28.05.2021. The DRP vide order dated 24.01.2022 rejected the objections raised by the assessee. However, the DRP in its order directed the TPO to verify certain issues. Pursuant to the DRP’s directions, final assessment order was passed on 18.02.2022 incorporating the same transfer pricing adjustment proposed in the TPO’s order.

Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal. The assessee has filed a concise ground raising therein 11 grounds and various sub-grounds. However, the learned AR during the 3 IT(TP)A No.250/Bang/2022 & SA 22/B/2022. M/s.Sprinklr India Private Limited. course of hearing submitted that if ground 8.5.1 is adjudicated in the software development segment, the other grounds may be left open.

The learned Departmental Representative supported the orders of the TPO and the DRP. The specific contentions of the learned AR and the learned DR shall be mentioned in the respective grounds when we adjudicate the same. The first ground that needs to be adjudicated in the software development segment is ground 8.5.1, which reads as follows:- TP Adjustment (Software development segment) Ground 8.5.1 “8.5.1 The Lower Authorities are not justified in failing to adopt the upper turnover filter of Rs.200 crores that resulted in wrongful selection of 8 companies viz., Larsen & Toubro Infotech Ltd., Mindtree Ltd., R Systems International Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., Nihilent Ltd. Infosys Ltd., and Cybage Software Pvt. Ltd. selected by the TPO which even otherwise fail the test of comparability.”

In the above ground, the assessee is seeking application of upper turnover filter and thereby exclusion of following seven companies:-

According to the learned AR, since a lower turnover filter has been applied, the TPO / DRP ought to have applied a higher turnover filter to exclude the above seven companies. The DRP has rejected the objections of the assessee by observing that turnover does not have an influence on the margins of the company. The learned AR has placed reliance on the order of the Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. v. ITO in IT(TP)A No.310/Bang/ 2021 (Bangalore) A.Y. 2016-2017 and Northern Operating Services Pvt. Ltd. in IT(TP)A No.101/Bang/2016 & CO 8/Bang/ 2017 (order dated 15.02.2019).

The learned Departmental Representative supported the orders of the Income Tax Authorities. It was submitted by the learned DR that if the turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company.

In the rejoinder, it was submitted that the DR’s plea for application of multiplier of 10 times the turnover was rejected by the ITAT in case of Northern Operating Service Private Limited (supra) and Autodesk India (P) Ltd. (2018) 96 taxmann.com 263. It was further submitted that in several cases where turnover was between Rs.100 crore and 200 crore, the ITAT had directed the companies having turnover

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.,

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 of Rs 1 crore to Rs 200 crores. Therefore, the companies not falling within the range, i.e, companies having turnover less than Rs.1 crore or turnover more than Rs 200 crores deserves to be excluded. The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. v. ITO (supra) has considered various judicial pronouncements on this issue including that of the Hon’ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that application of turnover filter is justified on the basis of classification of companies as per the report of Dun and Bradstreet. As regards the specific plea of the learned DR that if turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company, we find this plea was rejected by the Bangalore Bench of the Tribunal in the case of Northern Operating Services Pvt Ltd. (supra). The relevant submission of the parties and the finding of the Tribunal in case of Northern Operating Services Pvt. Ltd. (supra) read as follows:-

From the aforesaid findings of the learned Tribunal, we are satisfied that the reasons assigned by the learned Tribunal in excluding the aforesaid company as comparable is also reasonable and the same deserves to be accepted by us. It is analysed by the learned Tribunal in extenso which arrived at a decision that the company which is having only Rs.45.33 lakhs turnover cannot be considered as comparable to the Assessee-company whose turnover is more than Rs.27 Crores.

We have given a careful consideration to the rival submissions and are of the view that as rightly submitted by the ld. Counsel for the assessee, the decision rendered by the Hon’ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) does not positively say that for a company to be excluded on the basis of high turnover, the tolerance range of turnover of 10 times on both the sides of assessee’s turnover has to be seen. Even the Tribunal in the order against which the appeal was filed, did not proceed on application of turnover filter with any such condition. Therefore, it is not correct to say that for application of turnover filter, tolerance range of turnover of 10 times on both the sides of assessee’s turnover has been laid down by the Hon’ble High Court. The Hon’ble High Court held that the order of Tribunal is correct and calls for no interference and further held that no question of law arose for consideration. The decision rendered in the case of Autodesk (I) P. Ltd. (supra) of the Tribunal after analysing every conflicting views has ultimately concluded that the law laid down in the case of Genesis Integrated Systems (I) P. Ltd. (supra) has to be followed. The following were the relevant observations of the Tribunal:- “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 (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 (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 (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate 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 10 IT(TP)A No.250/Bang/2022 & SA 22/B/2022. M/s.Sprinklr India Private Limited. 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 and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).”

In ground 8.5.1, the assessee is also seeking exclusion of R Systems International Limited from the list of comparables on turnover filter. The learned AR submitted that the turnover of R Systems International Limited exceeded Rs.200 crore for the relevant assessment year, namely, A.Y. 2017-2018, hence, cannot be taken as a comparable and margins for the same are to be ignored for previous two assessment years also. In support of his contention, the learned AR relied on 3rd proviso to Rule 10CA(2) of the I.T.Rules, 1962. Further, the learned AR submitted that R Systems International Limited is having a different financial year and on account of the same, the said company has to be excluded. In this regard the learned AR relied on the order of the ITAT in the case of M/s.ACI Worldwide Solutions Pvt. Ltd. in IT(TP)A No.106/ Bang/2022 (order dated 13.05.2022, A.Y.2017-2018).

We have heard rival submissions and perused the material on record. The issue is restored to the files of the AO / TPO. The AO / TPO is directed to exclude M/s R Systems International Limited, if it is found the said company has prepared financials for the year ending December 2016. It is ordered accordingly.

Since we have adjudicated ground 8.5.1, the other ground raised with regard to software development services segment is left open.

The learned Departmental Representative supported the orders of the TPO and DRP.

We have heard rival submissions and perused the material on record. The functions of the assessee under the support service division as per TP study are as follows:-

From the above reply of the assessee it is clear, it was contended that the activities in support service segment falls under the activities of “back office operation”, “call centre or contract centre services” and “for remote maintenance and support centres” under Rule 10TA(e) that defines ITES. The TPO in his order dated 27.01.2021 has not conducted any study with respect to support services. In page 23 of the TPO’s order, he had listed 11 companies (6 companies rejected by the TPO on the basis of assessee’s objection and 5 companies retained), without conducting any study similar to the study 14 IT(TP)A No.250/Bang/2022 & SA 22/B/2022. M/s.Sprinklr India Private Limited. made in para 10 with respect to software segment (page 17 to 19 of the TPO’s order). Therefore, without a proper study, the TPO could not have selected 11 companies at the first instance, hence, , the TP addition made in respect of support services cannot be sustained.

The assessee has raised specific objections before the DRP with regard to re-characterisation of support services as marketing support services instead of ITES. The relevant objection of the assessee before the DRP reads as follows:- “The company further submits that the Learned TPO has not characterized the nature of Support Services provided by the assessee company. Without a proper characterization, it is not desirable to proceed with the bench-marking. The nature of work carried out by the assessee company falls into ITES Segment. Therefore, the assessee company objects for the selection carried out by the Learned TPO).”

There is no discussion by the DRP with regard to the above objection raised by the assessee. Therefore, we are of the view that the entire TP adjustment made under the MSS segment needs fresh TP analysis by the TPO. Accordingly, the issues raised in ground 9 and its sub-grounds are restored to the files of the AO / TPO for conducting fresh TP study analysis in support services segment of the assessee. It is ordered accordingly.

No arguments were raised with regard to grounds 10 and 11, hence, the same are dismissed.

In the result, the appeal filed by the assessee is partly allowed and the stay application filed by the assessee is dismissed.