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Facts
Mercedes-Benz Research and Development India Private Ltd. (MBRDI) is a captive software R&D and Engineering Design Services provider. The case involves cross-appeals by the assessee and the revenue against the CIT(A)'s order regarding transfer pricing adjustments for Assessment Year 2017-18. The dispute centers on the selection and exclusion of comparable companies for determining the arm's length price (ALP) of international transactions.
Held
The Tribunal held that Infosys Ltd. and 360 Logica are not comparable to the assessee due to functional dissimilarity and turnover differences. It also directed the exclusion of Nihilent Ltd. and Cybage Software Pvt. Ltd. based on lack of segmental information and functional dissimilarity. The Tribunal allowed the revenue's ground for inclusion of Cadsys (India) Ltd. after finding the assessee's margin to be within arm's length even with its inclusion. The TPO was directed to recompute the ALP as per the directions.
Key Issues
The primary issue was the correctness of the CIT(A)'s decision in including/excluding comparable companies in the transfer pricing analysis, particularly concerning functional comparability, turnover, and segmental information.
Sections Cited
92C, 234B, 270A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B’’BENCH: BANGALORE
Before: MS. PADMAVATHY S. & SHRI KESHAV DUBEY
PER PADMAVATHY S., ACCOUNTANT MEMBER:
These cross appeals by the assessee and the revenue are against the order of the Commissioner of Income Tax (Appeals)-12, Bangalore (in short CIT(A)) passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”) dated 29.9.2023 for the assessment year 2017-18.
The assessee has raised the following grounds of appeals:
IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 7 of 26 3. The assessee is a company engaged in the business of providing captive software research and development, which provides services to Daimler AG and its overseas group entities. The assessee filed a return of income for the assessment year 2017- 18 on 30.11.2017 declaring a total income of Rs.148,65,39,620/-. The assessee filed revised return on 29.3.2019. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions, a reference was made u/s 92CA of the Act for computation of Arm’s length price of the international transactions the assessee had with its Associated Enterprises. The TPO made adjustments in software development segment to the tune of Rs.66,16,19,971/- and in Engineering Design Services (EDS) amounting to Rs.50,99,54,357/. The AO passed the final assessment order incorporating the Transfer Pricing adjustments. The assessee preferred further appeal against the final assessment order. The ld. CIT(A) after considering the various submissions of the assessee gave partial relief to the assessee. Both the assessee and the revenue are in appeal against the order of the ld. CIT(A).
The assessee is a 100% subsidiary of DAG and set up in India as a captive software R&D and Engineering Design Services provider. MRDIPL undertakes software development in the areas of engineering services, electrical/electronics and information technology. MRDIPL operates on an extended enterprises model wherein the engineers of MRDIPL collaborate with other development centres and business units of the Diamler Group.
4.1 Engineering design services Functions Main vehicle Module (MVM) o MVM Cars & Vans (MVM-CV) o MVM Trucks (MVM-T) o MVM Interior/Exterior (MVM-IE) Products design and development typically involves the following stages. While the process described below is sequential in nature, MRDIPL could assist DAG in all or only some of the activities. o Execution of Engineering design and software development activities o Project set-up and monitoring o Budget set-up and budget control o Quality control o Procurement o Strategic management functions o Administrative service function. 4.2 The assessee applied Transaction Net Margin Method (TNMM) as the most appropriate method (MAM) and the Profit Level Indicator (PLI) is considered at Operating Profit by Operating Cost (OP/OC). The operating profit of the assessee in EDS segment is 13.92%. The TPO rejected the TP study and applied revised filters to arrive at fresh set of comparables. After issuing show cause notice to the assessee and considering the responses from the assessee, the TPO arrived at the following final set of comparables – 4.3. The TPO accordingly arrived at the adjustment in EDS segment as under:
Taxpayers operating revenue OR 9,91,92,43,276 Taxpayers operating cost OC 8,70,69,60,789 Taxpayers operating profit OP 1,21,22,82,487 Taxpayers PLI PLI=OP/OC 13.92% 35th Percentile Margin of 16.51% comparable set Adjustment required (if PLI<35th Yes Percentile) Median Margin of comparable M 19.78% set Arm’s length Price ALP=(1+M)*OC 10,42,91,97,633 Price Received OR 9,91,92,43,276 Shortfall being adjustment ALP-OR 50,99,54,357 IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 10 of 26 4.4 On further appeal the CIT(A) excluded certain comparables and included certain comparables. The revised margin after giving effect to the order of the ld. CIT(A) is as under: # Name of the company Margin as per TPO’s order giving effect to CIT(A) order 1 Tata Elxsi Limited 7.04% 2 Taal Tech India Limited 8.47% 3 Prothious Engineering 13.17% Services Private Limited 4 Axiscades Engineering 15.92% Technologies Limited 5 Neilsoft Private Limited Excluded by CIT(A) 6 Devita Engineering (India) Excluded by CIT(A) Private Limited 7 X S Cad India Private 19.78% Limited 8 L&T Technology Services 20.44% Limited 9 Cadsys (India) Limited Excluded by CIT(A) 35th Percentile 13.17% Median 14.55% 65th Percentile 15.92% Count 6 MBRDI’s margins 13.50% Conclusion At ALP 4.5 Out of the comparables excluded by the CIT(A), the revenue is contending the exclusion of Cadsys (India) Limited (Cadsys). The ld. A.R. submitted that even if Cadsys is included in final list of comparables, the margin would still be at arm’s length. Accordingly, the ld. A.R. submitted that the even if the ground raised by the revenue is allowed in this regard, it will not result in any TP adjustment in the hands of the assessee. The ld AR also submitted that consequently the grounds raised by the assessee with regard to EDS segments would become academic.
IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 11 of 26 5. The ld. D.R. on the other hand, submitted that the ld. CIT(A) is not correct in excluding CADSYS (India) Pvt. Ltd. on the ground of functional dissimilarity.
We have heard the rival submissions and perused the materials available on record. During the course of hearing, our attention was drawn to the following working of the ALP even after inclusion of CADSYS (India) Pvt. Ltd., which was excluded by the ld. CIT(A).
# Name of the company Impact after taking into account the comparables mentioned in previous column 1 Tata Elxsi Limited 7.04% 2 Taal Tech India Limited 8.47% 3 Prothious Engineering Services 13.17% Private Limited 4 Axiscades Engineering 15.92% Technologies Limited 5 Neilsoft Private Limited Excluded by CIT(A) 6 Devita Engineering (India) Excluded by CIT(A) Private Limited 7 X S Cad India Private Limited 19.78% 8 L&T Technology Services 20.44% Limited 9 Cadsys (India) Limited 30.22% 35th Percentile 13.17% Median 15.92% 65th Percentile 19.78% Count 7 MBRDI’s margins 13.50% Conclusion At ALP 6.1 From the above, it is clear that even after including CADSYS (India) Pvt. Ltd., the margin of the assessee is within arm’s length. Considering the submissions of the ld AR in this regard, we allow the ground raised by the revenue for inclusion of CADSYS (India) Pvt. Ltd. Consequently, the grounds raised by the assessee towards EDS segment have become academic and dismissed accordingly.
Software Development Services Segment Functions 7.1 SAP & ITM/RD – Applicaton Support, Maintenance and Enhancement o Application support o Application maintenance & Enhancement ITM/SS 7.2 The ITM/SS division of MRDIPL is involved in roll-out of both SAP and non-SAP application to users across the world. The users of the applications could be either internal for DAG or a third party such as dealers. ITI/GS-Infrastructure support and maintenance 7.3 This department is primarily involved in the hardware maintenance and also includes data centre operations, back-office, network resources and services required for the existence, operation and management of an enterprises IT environment. It allows an organization to deliver IT solutions and services to its employees, partners and/or customers and is usually internal to an organization and deployed within owned facilities. The ITI/GS comprises of 3 sub-divisions namely Data Centre Operations, Network Operations, and client operations.
In the TP study, the assessee has declared a margin of 14.31% in the SWD segment. The TPO rejected the comparables chosen by the assessee and by applying fresh filters, arrived at the following final set of comparables:
8.1 Accordingly, the TPO arrived at the TP adjustment as per below working:
8.2 The ld. CIT(A) gave partial relief to the assessee by excluding M/s. Infosys Ltd., M/s. Threesixty Logica Testing Services Pvt. Ltd., M/s. R Systems International Ltd. and M/s. Tata Elxi Ltd. from the final set of comparables. The CIT(A) also directed the TPO to include Evoke Technologies Ltd., Yudiz Solution Private Ltd., Indianic Infotech. The assessee sought certain additional comparables to be included and the CIT(A) in this regard directed the TPO consider the same provided the comparables pass all the filters applied by the TPO. The TPO passed the order giving effect whereby the ALP was reduced to nil. Both the assessee and the revenue are contending the inclusion / exclusion by the CIT(A).
The ld. A.R. submitted that out of the department’s appeal against the exclusion of the above comparables, if 2 comparables, i.e. M/s. Infosys Ltd., M/s.Threesixty Logical Testing Services Pvt. Ltd. are dismissed, then the rest of the grounds regarding exclusion would become academic. Similarly out of inclusions contended by the revenue if Indianic Infotech Ltd and Evoke Technologies Pvt Ltd are dismissed i.e.retained as included then the other grounds against inclusion may become academic. With regard to assessee's appeal the ld. A.R. submitted that if 2 comparables i.e. Nihilent Ltd. and Cybage Software Ltd. are excluded then the margin of the IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 16 of 26 assessee in SWD segment will be at Arm’s length. The ld. A.R. further submitted that the inclusions and exclusions as prayed here have been considered by the coordinate bench in various decisions and decided in favour of the assessee.
Inclusion of Infosys Ltd (Infosys) – Revenue's ground
The TPO included above comparable stating that the Infosys is functionally similar. The TPO while doing so, did not accept the contention of the assessee that Infosys is engaged in the business of consulting Technology, engineering and outsourcing services, which is not comparable to the functions of the assessee, which is a captive service provider. The TPO also did not accept the submission of the assessee that the brand value and the expenditure incurred by Infosys are not comparable with that of the assessee. On further appeal, the ld. CIT(A) accepted the exclusion by placing reliance on the decision of the coordinate bench in various cases, where it is held that the revenue of Infosys Ltd. from SWD is very high and cannot be compared to a captive service provider like the assessee.
We heard the parties and perused the materials on record. We notice that in the case of Infinon Technologies India Pvt. Ltd. Vs. DCIT (2024) 159 Taxmann.com 245 (Bang. Trib), the coordinate bench has considered the exclusion of Infosys Ltd., wherein it was held as under:
11.1 We further notice that a similar view has been taken by the coordinate bench in various other cases. For the year under consideration, the turnover of the assessee is Rs.620 crores whereas the turnover of Infosys Ltd. is Rs.59,829 Crores, which is more than 95 times. Therefore, we are of the considered view that the ratio laid down by the coordinate bench in the above case stating that Infosys Ltd. should be excluded on the basis of turnover filter is applicable to assessee’s case also. Accordingly, we direct the TPO to exclude Infosys Ltd. Inclusion of Three Sixty Logica Testing Services Pvt. Ltd (360 logica) – Revenue's ground
The assessee submitted before the TPO that 360 logica is engaged in software testing services and therefore, functionally not IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 18 of 26 comparable to the assessee. The TPO however rejected the said submission of the assessee stating that testing is an integral part of software development cycle and the assessee is also offering testing services as a part of the entire process of software development. The ld. CIT(A) however accepted the submission of the assessee to exclude 360 logica by stating that it is functionally different from that of the assessee.
The ld. A.R. submitted that the TPO has not disputed the fact that 360 logica is into software testing and in this regard drew our attention to the annual report of the company, where the principal business activity is listed as writing, modifying, testing of computer program to meet the need of a particular client. The ld. A.R. also drew our attention to the annual report where the revenue consists of export of testing services (page 2673 & 2764 of Paper Book II). The ld. A.R. accordingly argued that the company is functionally dissimilar to that of the assessee, which is providing software services. In this regard, the ld. A.R. placed reliance on the decision of the coordinate bench in the case of ETISALAT Software Solutions Pvt. Ltd. Vs. DCIT (2024) 111 ITR 475.
The ld. D.R. on the other hand supported the order of the TPO.
We heard the parties and perused the materials available on record. We notice that the exclusion of 360 Logica has been considered by the coordinate bench in the case of ETISALAT (supra) where it has been held as under:
15.1 The ratio laid down by the above decision of the coordinate bench is that the company which is deriving 100% of its income from writing, modifying, testing of computer program to meet the specific needs of clients cannot be compared with the company, which is engaged in the software development services as captive service provider. Accordingly, we see no reason to interfere with the decision of ld. CIT(A) in excluding the 360 Logica from the list of comparables.
Exclusion of Evoke Technologies Ltd (Evoke) – Revenue's ground
The TPO excluded the Evoke stating that the financials of the company include figures from a foreign branch which is unaudited IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 20 of 26 and therefore, it is not reliable. The ld. CIT(A) by placing reliance on assessee’s own case for assessment year 2013-14 allowed the inclusion of the company on the ground that it is functionally similar.
The ld. A.R. in this regard submitted that even if the margins of the overseas branch which according to the TPO is not reliable is excluded, the margin of only the Indian branch of this comparable if considered as part of the list of comparables, then the margin of the assessee will be at arm’s length.
The ld. D.R. on the other hand submitted that the financials of the company includes foreign branch and the submissions of the assessee with regard to the income of the foreign branch cannot be relied upon since the same is unaudited. Accordingly, the ld. D.R. supported the order of the TPO.
We heard the parties and perused the materials on record. We notice that in the case of Infor India Pvt. Ltd. Vs. ACIT (2019) 109 Taxmann.com 435, the Hyderabad Bench of the Tribunal has considered the similar issue of exclusion based on the foreign branch income being unaudited and held as follows:
19.1 We further notice that a similar view has been held in the case of ADR (Pvt.) Ltd. Vs. DCIT (2022) 135 Txmann.com 44 considering that the TPO in the present case has excluded the IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 21 of 26 comparable on similar grounds. We also notice that the CIT(A) while allowing the inclusion of the company has done so on the basis of functional similarity and has not considered the TPO's contention with regard to Foreign branch. In view of this discussion and considering the above decision of the coordinate bench, we are remitting the issue back to the AO/TPO with similar directions.
Exclusion of Indianic Infotech Ltd (Indianic) – Revenue's ground
The TPO had excluded the company from the list of comparables stating that on perusal of the annual report, it is seen that the company fails export filter. The ld. CIT(A) allowed the inclusion stating that the export revenue of the company is 79.10%, which is more than 75% filter and therefore, the TPO was directed to include the company as comparable.
The ld. A.R. drew our attention to the following table from the annual report:
Particulars FY 2016-17 FY 2015-16 FY 2014-15 Export Revenue 17,51,57,918 19,73,92,356 20,28,81,359 Sales 22,14,40,685 20,93,27,856 20,52,51,858 Percentage 79.10% 94.30% 98.85% Page 31 8 17 21.1 The ld. A.R. submitted that from the above it is clear that the export turnover of the company is more than 75% and therefore, the exclusion of the company on the ground of failure of export filter by the TPO is factually incorrect.
IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 22 of 26 22. We heard the parties and perused the material on record. From the above facts, it is clear that the TPO has not properly considered the export turnover percentage of the assessee for the year under consideration, which is at 79.10%. It is also clear that the company has been consistently having more than 75% of the export turnover, which is the export filter applied for the purpose of comparables. Therefore, we see no reason to interfere with the decision of the ld. CIT(A) who has factually verified the above and allowed the exclusion of the said company.
Exclusion of Nihilent Ltd – Assessee's Ground 23. The TPO included the comparable on the ground that it is functionally similar. While doing so, the TPO held that the company is engaged in rendering software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. The TPO also rejected the submissions of the assessee with regard to no segment information/no breakup of revenue being available and also extraordinary events happening during the year under consideration in the comparable company. The ld. CIT(A) upheld the inclusion of the company by holding that the assessee has claimed functional dissimilarity based on the information available in the company’s website, which cannot be completely relied on. The ld. CIT(A) further held that as per the annual report, the functions of the company are similar to that of the assessee and therefore, the company cannot be excluded.
The ld. AR. Submitted that the assessee is a captive software R&D provider and primarily undertakes SAP and non-SAP software support and maintenance services. The ld. A.R. further submitted that the company is involved in other services such as enterprise transformation and change management services, which is IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 23 of 26 evidenced from the annual report. The ld. A.R. also submitted that as per the website of the company, it provides brand marketing and transformation services. The ld. A.R. argued that since no segmental information is available with regard to the various accounts of services provided by the company, it cannot be compared with that of the assessee, which is a captive service provider. The ld. A.R. placed reliance on the decision in the case of Infinion Technoligies India Ltd. (supra).
We heard the parties and perused the materials on record. We notice that the coordinate bench in the case of Infinion Technologies India Ltd. has considered the issue of exclusion of Nihilent Ltd., where it has been held as follows:
25.1 On perusal of the above, we notice that Nihilent Ltd. is held to be not functionally comparable with a which is engaged in software development services. Since the assessee is also engaged in software development services, we see merit in the argument of the ld. A.R. that the company is not a comparable with the assessee. Accordingly, we direct the AO/TPO to exclude the same from the list of comparables.
Exclusion of Cybage Software Pvt. Ltd.: 26. The TPO included the company rejecting the contention of the assessee that the company is functionally different. The ld. CIT(A) confirmed the inclusion stating that the company renders information technology and consulting and support services as seen from the disclosure of principal services as per the annual report. The ld. CIT(A) further held that the financial statement reflects income from software services and therefore, the claim of the assessee that it is functionally dissimilar cannot be accepted.
The ld. A.R. argued that Cybage Software Pvt. Ltd. website shows consulting, GSS Services which are not comparable to the functions of the assessee. The ld. A.R. further argued that the annual report of Cybage Software Pvt. Ltd. does not show any segment wise revenue details and the entire revenue I clubbed under software development services. The ld. A.R. in this regard placed reliance on the decision of the coordinate bench in the case of Applied Materials India Pvt. Ltd. Vs. ACIT (2023) 154 Taxmann.com 463 (Bang. Trib.)
The ld. D.R. on the other hand, vehemently argued that the website details cannot be considered for the purpose of analysing whether the company is functionally similar to that of the assessee.
We heard the parties and perused the materials available on record. We note that the exclusion of Cybage Software Pvt. Ltd. has been considered by the coordinate bench in the case of Applied Materials India Pvt. Ltd. (supra), wherein it has been held as under:
29.1 From the perusal of the above findings, we notice that the company is excluded on the ground of its providing diversified IT(TP)A No.1029/Bang/2023 Mercedes-Benz Research & Development India Pvt. Ltd., Bangalore Page 26 of 26 services and the segmental information with regard to the various business functions is not available. Respectfully following the above decision of the coordinate bench, we hold that the company cannot be included in the list of comparables with the assessee’s which is engaged in software development services. Accordingly, we direct the TPO to exclude the comparable.
We direct the TPO to recompute the ALP of the assessee as per the directions given in this order. The rest of the grounds raised by the revenue and the assessee have become academic and dismissed accordingly
In the result, appeal of the assessee and the appeal of the revenue are partly allowed.