CONCUR TECHNOLOGIES (INDIA) PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 2(2)(1), BANGALORE

The learned TP01 AO erred in law and in facts by incorrectly applying the following quantitative and qualitative filters: 6.1. Applying different accounting year filter as a comparability criterion (i.e.. rejecting companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months): (a) R Systems International Limited 6.2. Applying incorrect/ modified related party transaction filter to reject companies: (a) Tata Consultancy Services Limited 6.3. Rejecting companies reporting loss in two out of three years as persistent loss makers (a) Algonomy Software Private Limited 7. Adjustment on account of re-determination of ALP for IT support/ SWD services rendered by the Appellant to its AEs amounting to INR 18,049,887 7.1. The learned TPO/ AO erred, in law and in facts, by accepting the following companies as comparable although these companies fail the export filter: (a) Consilient Technologies Private Limited 7.2. The learned TPO/ AO erred, in law and in facts, by rejecting the following companies as comparable as they are not forming part of search matrix although these pass TPO's own filters and are functionally comparable: (a) Infomile Technologies Limited (b) Rheal Software Limited

Without prejudice to the above the learned TPO/ AO erred by wrongly computing the operating margins of certain comparable companies.

The learned A01 TPO erred in law and facts by not granting working capital adjustment which was sought for and contended by the Appellant before the learned TPO and the Honorable DRP.

Brief facts of the case shows that assessee is a company who filed its return of income on 12 February 2021 declaring total income of ₹ 333,324,140/–. The case of the assessee is selected for the scrutiny as the assessee company is engaged in the provision of information technology, information technology enabled services and marketing support services to its associated enterprises.

As per the information furnished, the assessee has received information technology infrastructure charges of ₹ 606,445,156 and has paid 232,07,13,740/–, has also paid various other charges to its associated enterprises. The assessee has adopted the transactional net margin method as the most appropriate method for benchmarking its international transactions the reference was made to determine the arm's-length price of the international transaction.

The assessee is performing the functions of strategy management function such as formulation of corporate strategy, Treasury, tax, legal, regulatory affairs etc. involves decision-making on business strategy, selecting lines of business, choosing organisation structure, operating procedure, analysing an undertaking acquisition and disinvestments, responding to competitors and market forces etc. The assessee undertakes limited localisation of the promotional initiatives such as exhibitions, events and participation in trade shows. The marketing sale support services rendered to its associated enterprises includes the services of following the guidelines, procedures and rules established by its associated enterprise in rendering marketing and sales support services. While rendering marketing and sales support services, assessee utilises the literature and other material like brochure is a promotional material provided by its associated enterprises. It undertakes limited localisation of the promotional initiatives such as exit addition, he once and participation in trade shows. In software development services activity assessee based on the instructions, scope and nature of the assignments received from its associated enterprises participates into the stages of the development life cycle determine the role that assessee undertakes in the value chain. The associated enterprises performs the functions of the product conceptualisation and designing. Assessee provides back-office marketing and sales support, software development and technical support services for SAP products in India. Assessee is compensated on a cost-plus basis as per the inter-company agreement with its associated enterprises.

The learned TPO rejected the transfer pricing study report because though assessee is working in three different segments such as software development, ITeS and market support services however the assessee after providing the segmental financial for all these three segments separately, in the transfer pricing study report aggregated all these services without providing any justification. Further in the intercompany agreement, specific services are distinctly mentioned. The learned transfer pricing officer after rejection of the TPSR carried out the fresh search of comparable, also examined the 31 comparable companies selected by the assessee, further selected 15 comparable companies on prowess database and 10 comparable companies as per AceTP database, selected finally 18 comparable companies whose 35th percentile margin was 19.95%, 65th percentile margin was 32.14% and median margin was determined at 25.09%. The objection of the assessee was invited on the same, assessee objected to non-application of upper turnover filter contesting that the learned TPO should have adopted the upper limit of turnover filter while selecting the comparable companies. The learned TPO rejected the same giving a comparative table of various companies wherein despite increase in the turnover, there is no impact on the margins earned. Therefore, the learned TPO

With respect to the market support services segment of the assessee the ld. TPO selected six comparable companies whose 35th percentile margin was 17.55%, median margin was 19.42% and 65th percentile margin was 21.3%.

With respect of the ITeS segment, the learned TPO selected 13 comparable companies whose 35th percentile margin was 20.90%, median margin was 22.21% and 65th percentile margin was 28.23%.

Accordingly, the software development segment where the margin of the assessee was computed at 16.31% the arm's-length price was considered to be 25,71,95,842 compared to actual price received by the assessee of ₹ 239,145,955/– resulting into a shortfall of Rs.1,80,49,887.

The learned AO/TPO further found that there is a considerable delay in receipt of the charges from its associated enterprises and therefore interest on overdue is required to be computed as overdue receivable as a separate international

The draft assessment order was passed on 28/12/2023 wherein the total income of the assessee was determined at 46,00,90,995/–. The assessee filed its objections before the learned dispute resolution panel. During hearing before the panel, the factual report from the transfer pricing officer was asked for and rejoinder of the assessee was also taken. Accordingly, the direction was passed on 17th of September 2024 and based on that an order giving effect by the transfer pricing officer was passed on 23rd of September 2024 wherein the assessee did not get any relief.

Accordingly, the assessment order under section 144 read with section 144C (13) read with section 144B of the act was passed on 25 October 2024 determining total income of the assessee at ₹ 460,090,995/–. Assessee is aggrieved with the same and is in appeal before us.

The assessee has submitted a detailed chart and the submissions. The software development services segment the claim of the assessee is that the turnover of the assessee in the software development segment is only ₹ 23.91 crores whereas the comparable selected by the learned transfer pricing officer are having the huge turnover and therefore non-application of upper turnover filter by the learned TPO has resulted into the unusual addition. It was submitted Mindtree Ltd. has turnover of 339.61 times, Larsen and Toubro Infotech limited has 492.97 times, Wipro Ltd has turnover of 2103.68 times, Infosys Ltd has turnover of 3500 times, Tata consultancy services Limited had 5686 times and Cyberage software private

The assessee also submitted a chart stating that the learned transfer pricing officer has not included the comparable which were there in the transfer pricing study report of the assessee stating that those comparable could not be included because of the reason that they did not appear in the search matrix of the learned transfer pricing officer. He submitted that when these comparable are functionally comparable with the functions of the assessee, those should have been included.

In the information technology enabled services segment, assessee challenged that the assessee has suggested inclusion of virinchi India Ltd and MAA business solutions private limited both have been excluded because these companies they do not appear in the search metrics of the transfer pricing officer. The assessee further submitted that both these companies also pass all the filters. It is further submitted that in the market support segment, 11 comparable subjects selected by the assessee were also excluded as that did not appear in the search metrics of the learned transfer pricing officer.

Assessee also contested that R Systems International Limited is the comparable selected by the assessee in software development segment services as well as ITeS services but it is rejected for the reason that it follows a different financial year it is the claim of the assessee that these company should have been included as it is a listed company and quarterly audited financial results are available..

In case of market support services, the assessee submitted that Saatchi & Saatchi Services Private Limited fails related party transaction filter according to the assessee it has related party transactions of 25.59% but the transfer pricing officer has rejected the same.

The assessee further referred to the working capital adjustment not granted by the learned transfer pricing officer and if the same is granted the financial effect of extended credit terms or delay in collection from associated enterprises would also obliterate. He further referred to the fact that comparable companies have higher No. of days outstanding. He otherwise submitted that even if the interest on overdue receivable from its associated enterprises are to be imputed, the appropriate rate should be of Euribor as the invoices are prepared in Euro.

The learned departmental representative vehemently supported the orders of the learned lower authorities and submitted that upper turnover filter does not impact the margins which is explained by the learned transfer pricing officer by empirical studies and further the learned dispute resolution panel has also given its own reason. There is no evidence available with the assessee that the parties which have higher turnover then the assessee has higher margins or turnover impacts the margin and therefore there is no infirmity in the order of the learned TPO. With respect to the related party filter in case of Saatchi & Saatchi services Ltd in market support segment, it was submitted that the learned transfer pricing officer has given its own reason stating that it does not fail the RPT filter. In case of interest on receivable the learned CIT DR vehemently supported the orders of the learned lower authorities.

We have carefully considered the rival contention and perused the orders of the learned lower authorities. The brief fact of the case shows that the assessee is engaged in three different segments namely software development segment, information technology enabled services segment and market support services wherein the margins on by the assessee in all these segments are 16.31%. The respective turnover of the assessee in these three segments is ₹ 23.91 crore, Rs. 207.80 crores, and Rs. 10.53 crore. On careful perusal of the orders of the learned lower authorities it was stated that because of higher turnover, margins are not impacted and therefore assessee's argument of applying upper turnover filter is not accepted. The learned dispute resolution panel has also upheld the same. The facts clearly shows that in the software development services segment of the turnover of the assessee is ₹ 23.91 crores which has been compared with Mindtree Ltd which has a turnover of Rs. 8120 crores, Larsen and Toubro Infotech limited which has a turnover of Rs. 11,787 crores, Wipro Ltd whose turnover is Rs. 50,299 crores, Tata Elexsi limited which has a turnover of Rs. 1002 crores , Infosys Ltd whose turnover is ₹ 85,912 crores and Tata consultancy services Limited whose turnover is 1,35,963 crores and Cybaze software private limited whose turnover is 1143 crores. Apparently the higher the turnover, higher the bargaining power, higher capabilities of absorbing losses which could have been a factor to gain control over market with lesser margin. Even otherwise the reason for applying an upper turnover filter is to restrict the No. of comparable.

We find that the assessee has objected before the learned transfer officer for not applying upper turnover filter. The learned TPO held that in software industry, sizes have no influence on the margins earned by the companies. Economies of scale are relevant only in capital intensive companies which have substantial fixed assets in the form of plant and machinery. In the service industry, size does not matter, what matters is the human capital. He further referred to an empirical study conducted by him wherein it is indicated that margins do not show a proportionate increase with increase in the turnover. He held that turnover does not have any significance on the profit margins in software industry. He held that when the comparable companies which are otherwise functionally comparable cannot be excluded merely on account of high turnover particularly when the assessee has not demonstrated as to how the turnover has materially affected the profitability or comparability. Thus, the learned transfer pricing officer rejected the objection of the assessee on applicability of upper turnover filter. Thus, in comparability analysis, the learned TPO selected the comparable companies who has multi times more turnover than the assessee company. Assessee objected before the learned dispute resolution panel as per objection number five. The learned DRP also rejected the contentions while considering each of the comparable company wherein high turnover of comparable company was demonstrated by the assessee. Thus, the companies which have many folds turnover compared to the assessee were retained in comparability analysis and adjustment was made to the arm's- length price. Thus, the question is that whether higher turnover companies are comparable with companies having relatively small turnover. It is undisputed that lower turnover filter of Rs 1 Crore is accepted by assessee as well as the learned transfer pricing officer to remove insignificant companies from comparability analysis. Therefore, upper turnover filter should be applied for comparability analysis or not. If higher and lower turnover filter is applied, it truncates large number of comparable, by eliminating comparable which have fairly large turnover compared to the tested entity. Naturally, large turnover companies have economies of scale compared to lower turnover entity. Para number 3.43 in OECD Guidelines on Transfer Pricing (2022) says that in practice, both quantitative and qualitative criteria are used to include or reject potential comparable. Examples of qualitative criteria are found in product portfolios and business strategies. The most commonly observed quantitative criteria are Size criteria in terms of Sales, Assets or Number of Employees. The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability. Naturally, higher turnover multiple times also shows that comparable company has higher market share compared to the tested entity. Naturally, higher market share gives freedom of selling larger volumes even at strained margins. The various studies carried out by NASSCOM

With respect to the claim of the assessee of the inclusion of eight comparable companies which have been refused by the learned transfer pricing officer as they did not appear in the search metrics of the learned transfer pricing officer and therefore, they cannot be included is correctly held so because of the reason that it will amount to cherry picking. There may be many such companies which are functionally comparable with the assessee but in the search matrix adopted by the learned transfer pricing officer of selecting the keywords, appropriate filters and thereafter applying the quantitative and qualitative factors to the set of comparable, cannot be disturbed by including something out of the blue in the comparability analysis. Comparability analysis is a process which cannot be tampered with which does not crosses the filters and search matrix. Otherwise, such comparability analysis will lose its sanctity. Accordingly ground No. 3 raised by the assessee does not merit any consideration.

Coming to the comparability analysis in case of ITeS segment the assessee has stated that when Virinchi Ltd and MAA Business Solutions Private Limited should be included. Virinchi Limited was part of the transfer pricing study report prepared by the assessee whereas the MAA Business Solutions Private Limited is an addition comparable produced during assessment proceedings. We find that Virinchi Limited is not part of the TPO search metrics and similarly is the MAA Business Solutions Private Limited was also not found place in the search matrix of the learned transfer pricing officer. As we have already held that if the comparable companies are not finding place in the search matrix of the learned transfer pricing officer where there is no allegation that the search matrix adopted by the learned transfer pricing officer is inappropriate, so far as selection of the keywords, filters, etc., the incorporation of any company stating that it is comparable and therefore it should be included amounts to cherry picking. And therefore, the contention of the assessee for inclusion of the above company as well as suggestion of further inclusion of 11 companies in the market support services segment is rejected.

The next contention of the assessee is that R Systems International Limited which is part of the comparability study of the assessee as well as the learned TPO but is excluded for the simple reason that it follows a different accounting year. We find that the above company is a listed entity wherein according to clause 41 of the listing agreement with the stock exchanges, the quarterly audited results reviewed by the auditor are made public. Therefore, if the data is available in the public domain, and assessee is in a position to reconstruct the financial data for the respective financial year comparable to the assessee's financial year, to the satisfaction of the ld AO/ TPO, the same company should be included. Accordingly, we direct the assessee to substantiate before the learned AO that R Systems International Limited's financials are comparable on such reconstruction.

The assessee has also stated that in the market support services segment the Saatchi & Saatchi private limited fails the related party transaction filter. It is stated that Saatchi & Saatchi private limited has related party transactions to the extent of 25.59%. It is further stated that the learned transfer pricing officer has applied the RPT filter by dividing the RPT income with total turnover and RPT expenses by total expenses and if the resultant figure of either of the combination is more than 25% of the same, it is rejected. However, assessee computes the RPT filter by dividing the total of RPT income and RPT expenses by the total turnover and if the resultant figure is more than 25%, same is rejected. The claim of the assessee is that according to the transfer pricing officer this company passes the RPT filter however according to the method applied by the assessee, this company does not pass the RPT filter. However, we are also not aware that how the assessing officer/transfer pricing officer has applied the RPT filter. In view of this we restore this issue back to the file of the learned transfer pricing officer with a direction that if Saatchi & Saatchi Private Limited passes the RPT filter, then only it should be included. The application of RPT filter should also be uniformly applied.

The last issue raised before us is with respect to the working capital adjustment as well as adjustment on account of interest on overdue receivable from its associated enterprises. We find that assessee has asked for the working capital adjustment but it is denied by the learned transfer pricing officer for the reason that assessee could not show that there is a difference in the working capital employed by the assessee as well as of the comparable companies and what is the cost of such fund which is deployed in working capital. We find that it is the case of the learned transfer pricing officer where he has selected the comparable, and therefore the onus is on him to show that there is no difference in the working capital of the assessee as well as of the comparable companies. Any person who is computing the arm's- length price , is required to compute the arm's-length price of the international transactions giving the proper adjustment of working capital as well as the risk adjustment. As the comparables are selected by the learned transfer pricing officer on a particular analysis and search metrics, he is duty-bound to prove that assessee does not warrant such adjustment , otherwise he is also duty bound to grant the working capital adjustment to the assessee. If the working capital adjustment is granted to the assessee, the computation of the interest on overdue receivable from associated enterprises does not arise because it is subsumed in the adjustment of the transfer pricing of the main transaction. However, if it is found that assessee is not entitled to the working capital adjustment, then only interest on overdue receivables is required to be computed. It should be computed in the currency in which the invoices are outstanding. It is stated that the assessee is outstanding is in Euro and therefore the appropriate rate of euro is directed to be applied if in case such interest is to be imputed.