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Income Tax Appellate Tribunal, HYDERABAD “A” BENCH : HYDERABAD
Before: SHRI VIJAY PAL RAO & SHRI MANJUNATHA G
ORDER PER MANJUNATHA G, A.M. : This appeal has been filed by the assessee against the final assessment order dated 30.03.2021 passed by the Assessing Officer u/sec.143(3) r.w.s.144C(13) r.w.s.143(3A) and 143(3B) of the Income Tax Act, 1961, in pursuance of the directions dated 18.02.2021 of the Dispute Resolution Panel-I, [in short “DRP”], Bangalore, relating to the assessment year 2016-2017.
2 ITA.No.193/Hyd./2021 2. The assessee-company has raised the following grounds of appeal :
“The Learned (Ld) Assessing Officer (AO)/Ld Dispute Resolution Panel (DRP) are erroneous in law and on the facts of the case.
The Ld. DRP/AO ought to have accepted the internal TNMM for the purpose of benchmarking the international transactions.
3. The Ld. DRP/ AO erred in rejecting internal TNMM by failing to appreciate the fact that assessee has submitted independent Auditor's certificate for adopting internal TNMM. 4. The Ld DRP/AO ought to have accepted the Profit margin of the assessee company (as computed by the assessee himself in Transfer Pricing documentation) as having complied with the arm's length principle. 5. The Ld DRP/AO are not justified in law in considering wrong comparables and consequently arriving at a high operating profit margin of 26.36% as a ratio of OP/OC. 6. The Ld DRP/AO is not justified in law in making an adjustment u/s 92CA of Rs.6,91,69,741/- to the price received by the appellant. 7. The Ld DRP/AO erred in not accepting the assessee's contention of exclusion of following 13 companies on the grounds of functional comparability, super profit, high turnover or any other appropriate filter etc.
3 ITA.No.193/Hyd./2021 Sl.No. Name of the Company 1. Rheal Software pvt Ltd 2. CG-VAK Software and exports Ltd 3. RS Software (India) Pvt ltd 4. Larsen & toubra Infotech Ltd (seg) 5. Tata Elxsi Ltd (seg) 6. Nihilent Technologies Ltd 7. Inteq Software pvt Ltd Persistent systems Ltd 8. Persistent Systems Ltd., 9. Infobeans Technologies Limited 10. Aspire Systems (India) Pvt. Ltd., 11. Infosys Ltd., 12. Thirdware Solution Ltd., 13. Cybage Software Pvt. Ltd., 8. The Ld. DRP/AO erred in rejecting the following companies for inclusion by failing to appreciate the fact that the following companies are engaged in development of mobile and gaming application.
Sl.No. Name of the Company 1. Mech Mocha 2. Play Simple Games 3. Moon Frog 4. Timuz Solutions 5. Innominds 6. Electronic Arts 7. Griptonite Games 8. GSN Games 9. The Ld DRP/AO erred in not accepting the assessee's contention of inclusion of following & companies which were earlier considered in the TP study.
4 ITA.No.193/Hyd./2021 Sl.No. Name of the Company 1. Akshay Software Technologies Limited 2. MCT India infotech Pvt Itd 3. Celstream Technologies Pvt Ltd. 4. B2B Commerce Pvt Ltd 5. Sagarsoft (India) Ltd. 6. Synerzip Softech India Pvt Ltd. 7. Maveric systems Ltd 8. Infomile Technologies Ltd
10. The assessee company would like to pray for exclusion of R S Software (India) Ltd though originally selected in its TP study.
The learned TPO/DRP failed to appreciate the fact that AEs in USA are into losses and in spite of the same the assessee company performed well and could benchmark with the appropriate comparables who are into functionally similar activity.
12. The Ld AO/TPO erred in not giving full effect to the directions of Ld. DRP in respect of the following aspects a. Excluding Kals Information Systems Private Limited and Cigniti Technologies Limited from the final list of comparable companies. b. Modifying the final list of comparable companies without applying positive net worth filter. 13. The Ld TPO, while including the Companies as comparables has erred in computations of the margins and has considered wrong margins of the companies in the final list of comparables.
5 ITA.No.193/Hyd./2021 14. The Ld. DRP/AO legally erred in disallowing ESI contribution of Rs.13,172/ and treating the same as income under section 2(24)(x) r.w.s 36(1)(va) of the Act.
The Ld. AO legally erred in disallowing interest paid on TDS default of Rs. 3,488/-under section 37(1) of the Act.
16. The Ld AO erred in levying interest u/s 234A, 2348 and 234C of the Act against legally untenable adjustments.
17. Any other ground that may be urged at the time of hearing with the prior approval of the Hon'ble Tribunal.”
Brief facts of the case of that the assessee- company is engaged in the business of development of mobile applications across multiple, recruit professionals and train them up in development of mobile applications and games and rendering software development services. The assessee had filed it's return of income for the assessment year 2016 2017 on 29.112016 admitting total income of Rs.1,58,09,620/- under the normal provisions of the Income Tax Act, 1961 and book profit of Rs.1,59,35,815/- under the provisions of section 115JB of the Income Tax Act, 1961. The case was selected for 6 ITA.No.193/Hyd./2021 scrutiny. During the course of assessment proceedings a reference under section 92CA of the Act has been made to the TPO [in short “TPO”] for determination ALP of international transaction of the assessee-company entered with its Associated Enterprises [in short “AE”].
During the course of Transfer Pricing [in short “TP”] proceedings, the learned TPO noted that the assessee- company has entered into the following international transactions with it’s AE as reported in Form-3CEB.
Transactions Received/ Paid/Payable Receivable (Amount in (Amount in INR) INR) Purpletalk Mobile application 24.81.58,812 -- Inc. software development & Solution Yesgnome Mobile Gaming 1,34,05,596 --- LLC development & Solutions Purpletalk Advance received -- 4.90,89,398 Inc. from AE from services to be rendered Yesgnome Advance received -- 10,93,963 LLC from AE from services to be rendered
7 ITA.No.193/Hyd./2021 5. The assessee-company has adopted Transactional Net Margin Method [in short “TNMM”] as the most appropriate method and computed PLI OP/OC of 4.81%. The assessee has selected 19 comparables with a margin of 7.41% to 17.78% and claimed that it's international transaction with AE are at Arms Length Price [in short “ALP”]. The TPO after considering relevant TP documentation submitted by the assessee and also taking note of comparables has rejected TP documentation and has conducted a fresh TP study by applying certain filters and finally selected 15 comparables with margins of 26.36% and made TP adjustment of Rs.6,91,69,741/- to the international transactions of the assessee-company with it’s AE for providing software development services.
Pursuant to TP adjustment as suggested by the TPO in terms of order passed under section 92CA(3) of the Income-Tax Act, 1961, dated 29.10.2019, the Assessing Officer has passed Draft Assessment Order u/sec.144C of the Income Tax Act, 1961 dated 12.11.2019 and determined the total income at Rs.8,59,64,140/- by making addition
8 ITA.No.193/Hyd./2021 towards TP adjustment of Rs.6,91,69,741/-; addition of Rs.9,81,291/- towards employees contribution to PF & ESI u/sec.36(1)(va) read with section 2(24)(x) of the Income Tax Act, 1961 and also addition towards interest paid on TDS default for Rs.3,488/-.
The assessee-company filed it’s objections before the DRP against the Draft Assessment Order dated 12.11.2019 passed by the Assessing Officer u/sec.144C of the Income Tax Act, 1961 and challenged the TP adjustments as proposed by the TPO in respect of international transaction of the assessee-company with it’s AE. The assessee had also challenged additions made by the Assessing Officer towards disallowance of employees contribution towards PF & ESI in terms of section 36(1)(va) read with section 2(24)(x) of the Act. The assessee had also challenged addition towards disallowance of interest paid on delayed payment of TDS. The DRP after considering the submissions of the assessee-company and also by taking note of various facts brought on record by the Assessing Officer, vide their Directions u/sec.144C(5) of the Income 9 ITA.No.193/Hyd./2021 Tax Act, 1961 dated 18.02.2021 excluded Kals Information Systems Private Limited, Cigniti Technology Ltd., from the list of final set of 15 comparables selected by the TPO and upheld remaining 13 comparables relied by the TPO. The DRP has also rejected the ground taken by the assessee- company challenging inclusion of certain comparable as per their TP study on the ground that the assessee is not able to file relevant evidences to prove the functional similarity and comparable selected in their TP documentation. The DRP had also sustained additions made by the Assessing Officer towards disallowance of employees contribution to PF and ESI. Pursuant to directions of the DRP issued under section 144C(5) of the Act dated 18.02.2021, the Assessing Officer has passed Final Assessment Order dated 30.03.2021 u/sec.143(3) r.w.s.144C(13) r.w.s.143(3A) and 143(3B) of the Income Tax Act, 1961 and determined total income at Rs.8,49,96,021/-.
Aggrieved by the Final Assessment Order passed by the Assessing Officer, the assessee is now in appeal before The Tribunal.
10 ITA.No.193/Hyd./2021 9. The first issue that came-up vide ground nos.1 and 17 of assessee’s appeal are general in nature and, therefore, it does not require a specific adjudication. Therefore ground nos.1 and 17 are dismissed.
The next issue that came-up for consideration vide ground nos.2 and 3 of the assessee’s appeal is, rejection of internal TNMM for the purpose of benchmarking the international transaction of the assessee-company with its AE. Learned Counsel for the Assessee submitted that, the DRP was erred in rejecting internal TNMM for benchmarking international transaction of the assessee- company with it’s AE, even though, the assessee-company has filed relevant evidences to prove that the transactions with AE are at cost +10% margin, whereas, the assessee- company has entered into transactions with Non-AEs which was at (-)9% operating margin. Learned Counsel further referring to various documents submitted that the parent company which has a risk bearing entity, has been running into losses. Further, our local business has been running into losses because of multiple factors, which include
11 ITA.No.193/Hyd./2021 increase in cost multiplier competition, thin operating margins and recruitment of freshers and train them up, considerable expenses with high attrition. Although, the assessee-company is operating with thin margin and also proved that it's transaction with AE are at cost +10% and further, when compared to third party transactions, the AE segment is making profit, the learned DRP has erred in rejecting internal TNMM for the purpose of benchmarking transactions of the assessee-company with it’s AE. Therefore, he submitted that the TPO and the DRP erred in combining the revenue from AE with those from other clients, even though, the assessee-company has maintained separate set of documents for transactions with it’s AE and non-AE.
11. The learned CIT-DR Shri B. Bala Krishna, on the other hand, supporting the order of the DRP submitted that in absence of relevant evidences i.e., maintaining separate books of accounts for transactions with it’s AE and Non-AE the, argument of assessee-company that it's Internal- TNMM shows the transaction with it’s AE at ALP cannot be 12 ITA.No.193/Hyd./2021 accepted. The TPO and the DRP after considering relevant facts has rightly rejected the contention of the assessee- company and, therefore, the findings recorded by the DRP for rejection of Internal-TNMM should be accepted.
We have heard both the parties, perused the material on record and gone through the orders of the authorities below. Although, the assessee-company has filed a chart showing separate transactions with it’s AEs and Non-AEs and claimed that AE’s margin is 10% and it’s Non- AE’s margin is at (-)10%, but, on perusal of details filed by the assessee-company, except a chart in it’s submission, there is no evidence was filed to substantiate the argument of the assessee-company that it's Internal-TNMM is appropriate for benchmarking transaction with it’s AEs. Further, the assessee-company has not filed any evidence, except a Certificate from the Accountant to prove it’s claim. From the details filed by the assessee-company, we are of the considered view that, the assessee-company has failed to demonstrate that the AEs and Non-AEs are functionally comparable. Further, the nature of the transactions with 13 ITA.No.193/Hyd./2021 AEs and Non-AEs along with terms were not produced to substantiate the functional comparability. The Non- Associated Enterprises transactions were predominantly from Indian operations, whereas Associated Enterprises transactions were outside India. No explanation was given for the assessee-company’s geographical differences in it’s transactions and how much material difference was adjusted for the purpose of comparability. The assessee- company failed to prove segmental allocation on actual basis. Therefore, we are of the considered view that, when there is no evidence to prove the argument of the assessee- company in respect of Internal-TNMM, it is difficult for us to accept the contention of the assessee-company that Internal-TNMM is an appropriate parameter for benchmarking the international transaction with it's AEs. Thus, we reject the argument of the assessee-company and reject ground nos.2 and 3 of the assessee’s appeal.
The next issue that came-up for consideration through ground nos.4, 5 and 6 of the assessee’s appeal is 14 ITA.No.193/Hyd./2021 rejection of TP study conducted by the assessee-company and fresh TP study conducted by the TPO.
Learned Counsel for the Assessee CA PVSS Prasad, submitted that, learned TPO is erred in disregarding the economic analysis including benchmarking analysis carried-out by the assessee-company in the TP documentation. The learned TPO has proposed to reject TP documentation by pointing-out that information of data used in computation of ALP is not reliable or correct. In arriving at this conclusion, the TPO has contended that, the assessee-company has applied certain inappropriate benchmarking, but, the fact remains that the assessee- company has never applied inappropriate filters as contended by the Assessing Officer. But, on the other hand, all filters applied by the assessee-company are appropriate filters going by the nature of transactions and, therefore, the reasons given by the TPO to reject TP study conducted by the assessee-company is not in accordance with law and, therefore, he submitted that the reasons given by the DRP upholding the rejection of TP study should be rejected.
15 ITA.No.193/Hyd./2021 15. The Learned CIT-DR Shri B. Bala Krishna, on the other hand, referring to para 2.3.6 of DRP’s order submitted that, the DRP has given valid reasons for upholding the findings of TPO for rejecting TP study conducted by the assessee-company, wherefrom it is very clear that the assessee-company has selected some inappropriate filters which are not relevant for selecting comparables. Further on account of adopting inappropriate filters, certain functionally comparable companies have been eliminated. The DRP after considering relevant facts has rightly upheld the reasons given by the TPO for rejection of TP study and fresh TP search proceedings conducted by the TPO. Therefore, he submitted that the grounds taken by the assessee-company should be rejected.
We have heard both the parties, perused the material on record and gone through the orders of the authorities below. As per section 92C(3) of the Act, if the TPO finds that the price charged or paid in an international transaction has not been determined in accordance with secs.(1) and (2) or any information and document relating to 16 ITA.No.193/Hyd./2021 an international transaction have not been kept and maintained by the assessee-company in accordance with the provisions contained in sec.92D(1) and further, the information or data used in computation of the ALP is not reliable or correct and further, the assessee-company has failed to furnish any information or document, which it was required to furnish, then, the TPO can reject the TP study conducted by the assessee-company and conduct a fresh TP analysis to determine the ALP of international transactions of the assessee-company with its AE. In the present case, going by the reasons given by the TPO and by the DRP, we find that TP study conducted by the assessee-company is not in accordance with provisions of sec.92CA(3) of the Act, because, the assessee-company has failed to prove with relevant evidences that it applied appropriate filters while selecting comparable companies and also maintain relevant data to prove the comparability analysis of comparable companies. We further note that, Rule-10B in this regard requires to use of current year data, even if it is subsequently available at the time of determination of ALP
17 ITA.No.193/Hyd./2021 during the course of assessment proceedings. From the words of Rule-10B(5), it is very clear that the current year data has to be necessarily considered for the purpose of comparable analysis. Since the assessee-company had not considered current year data for its comparability analysis, in our considered view, the filters adopted by the assessee- company for selection of comparable companies is not in accordance with sec.92CA(3) of the Income Tax Act, 1961 and Rule 10B(5) of the Income Tax Rules 1962. Therefore, in our considered view, there is no merit in the grounds taken by the assessee-company challenging the reasons given by the TPO/DRP for rejection of TP analysis conducted by the assessee-company Thus, we are inclined to uphold the findings of the DRP and reject the grounds nos.4, 5 and 6 taken by the assessee-company.
The next issue that came-up for our consideration from ground nos.7 and 10 of assessee’s appeal is, exclusion of 13 comparables on the ground of functional dissimilarity, superior profit and turnover and other appropriate filter etc.
18 ITA.No.193/Hyd./2021 18. Learned Counsel for the Assessee Shri CA PVSS Prasad, referring to the financial statements for the year under consideration submitted that, the assessee has earned revenue of Rs.34 crores approximately, from provision of software development services and thus, upper turnover threshold of Rs.200 crores should be accepted based on the classification provided in the Dun &Bradstreet report under the category of small firms. Learned Counsel further referring to 13 comparables selected and retained by the DRP submitted that, out of 13 comparable companies, 08 companies are having turnover of above Rs.200 crores which cannot be compared with the assessee-company which is having turnover of Rs.34 crores. On this filter itself, these 08 companies needs to be excluded. Learned Counsel further submitted that, the above 08 companies are functionally dissimilar when compared to functions performed by the assessee-company. Further, in some cases the segmental details were not available and further, few companies fails RPT filter test. Further, few companies have incurred huge marketing expenses and also engaged in R
19 ITA.No.193/Hyd./2021 and D activities. Although, the assessee-company has brought-out clear facts in light of relevant annual reports of those companies and stated that those companies are not functionally similar to assessee-company, but, the learner TPO has ignored the details submitted by the assessee- company and included those 15 companies in the list of final set of comparables. The DRP even though excluded two comparables, out of 15 selected by the TPO, but, retained 13 comparables, even though, all these companies are functionally dissimilar, having high fluctuation margin, incurred brand promotion expenses and also fails RPT filter. Therefore, he submitted that, these 08 companies should be excluded from the list of comparables.
Learned CIT-DR Shri B Bala Krishna, on the other hand, supporting the order of the DRP submitted that, the turnover filter is not an appropriate filter for excluding companies for the purpose of TP analysis, when the FAR analysis of said companies are similar to the assessee- company. Further, when the assessee-company adopted TNMM as most appropriate method, it is re-silent to minor
20 ITA.No.193/Hyd./2021 differences and unlike in CUP method, strict comparison of product is not necessary when TNMM is applied as the most appropriate method. Further, the learned DRP has given it’s valid reasons for inclusion of these companies from the list of comparables. Therefore, he submitted that there is no merit in the ground taken by the assessee-company for exclusion of above 08 companies on high turnover, super profit and fluctuation margin etc.
We have heard both the parties, perused the material on record and gone through the orders of the authorities below. The assessee-company seeks to exclude the following 08 companies from the list of final set of 13 comparables retained by the learned DRP.
Total Sl.No. Company Name Revenue Sales – Turnover Weighted (Rs. In (Rs. In Crores) Average OP/OC Crores) 1. Thirdware Solution Ltd. 227.55 221.37 39.41 2. Aspire Systems (India) Pvt. 233.05 230.81 33.74 Ltd. 3. Nihilent Ltd. 258.08 251.22 26.36 4. Cybage Software Pvt. Ltd. 754.55 722.25 65.91 5. Tata Elxsi Ltd. 1088.5 1075.2 25.09 6. Persistent Systems Ltd. 1542.27 1447.14 30.09 7. Larsen & Toubro Infotech 5799.4 5568.5 23.67 Ltd. 8. Infosys Ltd., 57365 54034 38.31
21 ITA.No.193/Hyd./2021 21. The assessee-company seeks to exclude the above 08 companies on the ground of functional dissimilarity, super profit, high turnover and other appropriate filters etc. We have gone through the reasons given by the DRP to reject the argument of the assessee-company in light of turnover of these companies. In respect of Cybage Software Private Limited, Tata Elxsi Ltd., Persistent Systems Ltd., Larsen & Toubro Infotech Ltd., and Infosys Ltd., in our considered view, these companies are having high turnover which is more than 20 times of turnover of assessee- company. Although, the assessee-company contended for application of Rs.0 to Rs.200 crore turnover is appropriate turnover filter for exclusion of certain companies, but, in our considered view, going by the settled principle of law by the decisions of various Tribunals, application of 10 times upper and lower limit of turnover at a company is appropriate for exclusion of companies for the purpose of comparability of analysis. If we apply 10 times lower or upper turnover limits for companies, then, in our considered view, going by the revenue earned by the 22 ITA.No.193/Hyd./2021 assessee-company of Rs.34 crores approximately, in our considered view, the above 05 companies viz., Cybage Software Pvt. Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., Larsen & Toubro Infotech Ltd., and Infosys Ltd., are having turnover of above the tolerance range fixed for inclusion of companies. Therefore, we are of the considered view, that Cybage Software Pvt. Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., Larsen & Toubro Infotech Ltd., and Infosys Ltd., are definitely not comparable to assessee-company on turnover filter itself. Thus, we direct the TPO to exclude the above 05 companies for the purpose of benchmarking the ALP of international transaction of the assessee-company with its AE.
Coming back to Thirdware Solution Ltd., Aspire Systems (India) Pvt. Ltd., and Nihlent Ltd., although, the assessee-company seeks to exclude these 03 companies on Rs.0 to Rs.200 crore turnover filter, but, in our considered view, since we have applied 10 times upper and lower limit for exclusion of companies and if we apply the said limit, the above 03 companies are coming within the range of 23 ITA.No.193/Hyd./2021 turnover fixed for comparable analysis and thus, on this ground, these 03 companies cannot be excluded from the list of comparables. Therefore, we reject the argument of the Counsel for the assessee-company.
22.1. Having said so, let us compare is there any functional dissimilarity between these three companies and the assessee- company. Having considered the submissions of both the parties and on perusal of the annual report, we find that these companies are engaged in provision of software development services and satisfied all the filters adopted by the TPO. We further note that these three companies activities involve predominantly providing software related services which is considered to be a single business segment. Since these are subject to similar risk and returns, therefore, in our considered view, these three companies are engaged in diverse activities and not functionally comparable is without any merit. Further, although, the assessee-company contended that these three companies are engaged in Research and Development activities and also there are certain extraordinary events,
24 ITA.No.193/Hyd./2021 but, in our considered view, unless the assessee-company makes it a case that the R and D activities carried-out by the above three comparable companies are above the tolerance range, we cannot accept the argument of the assessee-company based on certain details provided in the annual report. Further, when it comes to software development services, it has a bundle of services which includes project engineering, enterprise solution, independent testing services and application of support services and these are services comes under one segment of software development services, although, may be in a different business segments. Therefore, going by the description provided in the annual report of the relevant companies, it cannot be said that these 03 companies are engaged in a different or diversified activities and there is no segmental data available in respect of each segments. Since the functions performed by the assessee-company are similar that of the functions carried-out by the above 03 companies, in our considered view, the above 03 companies are functionally similar to the assessee-company and 25 ITA.No.193/Hyd./2021 comparable to the assessee-company. We are, therefore of the considered view that the DRP has rightly included the above 03 in the list of final set of comparables. We, therefore, uphold the findings of DRP and reject the ground taken by the assessee-company.
In so far as ground no.10 of the assessee for exclusion of R S Software (India) Ltd., though originally it was selected by the assessee in it’s TP study, after considering it’s FAR analysis as comparable, but, the assessee company subsequently on the basis of an order of some Tribunal cannot seek to exclude unless it has makes out a case that said company is functionally dissimilar to assessee-company and also on other grounds. In the present case, going by the FAR analysis of R S Software (India) Ltd., it is predominant engaged in the business of providing software development services. Although, the assessee has contended for exclusion of a company in light of other parameters including R & D expenditure and segmental information was not available, but, in our considered view, the argument of the assessee does not hold
26 ITA.No.193/Hyd./2021 good for the simple reason that even if there is some expenditure incurred in R & D, but, if such expenditure is within tolerance limit, then, the same company cannot be excluded. Further, once the company is engaged in providing software development services which may be in respect of other segments of business, but, when said services comes under one umbrella of software development services, then, the question of segmental information for comparison purpose does not arise. Since the assessee itself has selected the company in it’s TP study and further the assessee failed to make-out a case that it is functionally dissimilar from the assessee-company, in our considered view, based on certain decisions, the said company cannot be excluded. Thus, we reject the arguments of the Counsel for the Assessee and uphold the reasons given by the DRP for inclusion of R S Software (India) Ltd., in the final set of comparables.
Ground No.8 relates to inclusion of 08 companies as listed in the grounds of appeal itself by the assessee- company. However, the Learned Counsel for the Assessee,
27 ITA.No.193/Hyd./2021 at the time of hearing submitted that, assessee does not wish to press ground no.8 for inclusion of above companies and, therefore, ground no.8 of assessee’s appeal is dismissed as not pressed.
Coming to ground no.9 of assessee’s appeal is for inclusion of 08 companies which were earlier considered in the TP study of the assessee. Learned Counsel for the Assessee CA PVSS Prasad, submitted that the learned TPO and DRP erred in excluding these 08 companies without appreciating the fact that those companies are engaged in providing software development services and also passed all filters adopted for exclusion of companies. Learned Counsel for the Assessee further referring to reasons given by the TPO for inclusion of said companies submitted that, if we go by the reasons given by the TPO in the remarks column, the TPO has given stereotype remarks for all companies and claimed that FAR is not similar to assessee-company. However, when it comes to few comparables, the TPO and DRP has given reason that even if the appellant providing / engaged in software development services for various
28 ITA.No.193/Hyd./2021 segments/stream of business, but, once the said services is come within an umbrella of software development services needs to be considered as one segment of software development services. In the present case, going by the reasons given by the TPO, the TPO has given stereotype reasons for exclusion of said companies which is evident from pages 8 and 9 of the TPO order. He further submitted that going by Form No.MGT9 which is extract of annual report filed under the provisions of Companies Act, 2013, all these companies are engaged in providing software development services and derived 100% revenue from one segment. Therefore, the contention of the learned TPO that in some cases FAR is not similar and the taxpayer has not demonstrated the passage of all filters is incorrect. Therefore, he submitted that the TPO may be directed to include the above 08 companies in the list of comparables.
The learned CIT-DR Shri B Bala Krishna, on other hand, supporting the order of the DRP/TPO submitted that the TPO has examined each and every company’s annual reports and observed that, on verification of the 29 ITA.No.193/Hyd./2021 annual report the said companies are providing professional services, ERP and also product services which are not similar to the functions performed by the assessee- company. Further, the assessee has also not able to demonstrate with evidences that these companies have passed all the filters required to be adopted for inclusion of such companies. The TPO after considering relevant facts has rightly excluded the above companies from the list of comparable companies and the learned DRP after thoroughly examining the reasons given by the Assessing Officer has uphold the findings of the TPO for exclusion of the above 08 companies and thus, the order of TPO and DRP should be upheld.
We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered the relevant reasons given by the TPO for exclusion of above 08 companies. On perusal of reasons given by the TPO, we find that the TPO has given stereotype reasons for all these companies and observed that FAR is not similar to the 30 ITA.No.193/Hyd./2021 assessee company and further there is no evidence with the assessee to prove that the said companies have passed all the filters of TPO. In some cases, the TPO observed that there is no data in respect of said companies in the public domain. In our considered view, the reasons given by the TPO is not in accordance with the provisions of sec.92CA(3) of the Act, where it has been clearly held that how the comparable should be eliminated from the list of comparables. In the present case, the TPO has simply given a reason that FAR of the companies is not similar to the assessee company, even though, on perusal of relevant evidences filed by the assessee, it is undisputedly clear that the said companies are engaged in providing software development services which is similar to the FAR analysis of the assessee company. Further, once the company is engaged in providing software development services, even if it is providing said services to multiple segments of business, in our considered view, once the services rendered by the companies is comes under one umbrella of software development services, then merely for the reason of said
31 ITA.No.193/Hyd./2021 companies providing services to diversified segment businesses, those companies cannot be excluded for the purpose of comparison of analysis. In the present case, going by the reasons given by the TPO, in our considered view, the TPO has given stereotype reasons for all companies even though the evidences filed by the assessee clearly demonstrates that the said companies are providing software development services and derived 100% revenue from one segment. Further, the assessee had also proved with evidences that all these companies have passed the filters applied by the TPO. Therefore, we are of the view that the TPO was erred in excluding the said companies from the list of comparables. The DRP without appreciating the relevant facts, simply upheld the reasons given by the TPO and excluded the above 08 companies from the list of comparables. Thus, we set aside the order of DRP/TPO and direct the Assessing Officer/TPO to include the above 08 companies in the list of final set of comparables for the purpose of comparison of international transactions of the assessee-company with it’s AEs.
32 ITA.No.193/Hyd./2021 28. The next issue that came up for consideration through ground no.12 of assessee’s appeal is, the Assessing Officer/TPO are erred in not giving full effect to the directions of the DRP.
Learned Counsel for the Assessee CA PVSS Prasad, submitted that, although, the DRP has directed the TPO/AO to exclude Kals Information Systems Private Limited and Cigniti Technologies Limited from the final list of comparable companies, but, the Assessing Officer and the TPO has not given full effect to the directions of the DRP. Therefore, he submitted that the directions of the DRP may be given full effect by directing the Assessing Officer/TPO to exclude the above 02 companies from the final list of comparables.
The Learned CIT-DR B Bala Krishna, fairly agreed that although, the learned DRP has directed the TPO to exclude the above 02 companies, but, the assessee claims that TPO has not given full effect and, therefore, a suitable direction may be given to the learned Assessing Officer/TPO.
33 ITA.No.193/Hyd./2021 31. We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also considered the arguments of both the sides in light of findings of DRP on the issue of exclusion of Kals Information Systems Private Limited and Cigniti Technologies Limited from the final list of comparable companies. Although, the DRP has directed the TPO to exclude the above 02 companies, but, the Learned Counsel for the Assessee submitted that the TPO has not given full effect to the directions of the DRP to exclude the above 02 companies. In our considered view, once the DRP has given a direction to the TPO/AO to exclude or include any company, the Assessing Officer/TPO is bound to give full effect to the directions of the DRP without any modifications. Therefore, we direct the Assessing Officer/TPO to verify the fact and give effect to the order of the DRP in toto and exclude the above 02 companies viz., Kals Information Systems Private Limited and Cigniti Technologies Limited from the final list of comparable companies.
34 ITA.No.193/Hyd./2021 32. The next issue that came-up for consideration from ground no.14 and 15 of assessee’s appeal is addition towards disallowance of employees contribution to ESI u/sec.36(1)(va) r.w.s.2(24)(x) of the Act and interest paid on TDS default of Rs.3,488/- u/sec.37(1) of the Act.
Learned Counsel for the Assessee CA PVSS Prasad at the time of hearing submitted that, assessee does not wish to press ground nos.14 and 15. Therefore, grounds of appeal nos.14 and 15 of assessee’s appeal is dismissed as not pressed.
Grounds of appeal no.16 of assessee’s appeal is levy of interest u/sec.234A, 234B and 234C of the Income Tax Act, 1961.
35. In our considered view, levy of interest u/sec.234A, 234B and 234C of the Act is consequential to the total income determined by the Assessing Officer and, therefore, the Assessing Officer is directed to verify the claim of the assessee-company in light of total income computed
35 ITA.No.193/Hyd./2021 and levy interest u/sec.234A, 234B and 234C of the Act in accordance with law.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 27.03.2025