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Facts
The assessee, a private limited company, provided Staff Augmentation and Software Development services to its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) made an adjustment of Rs. 2,90,89,437/- for Staff Augmentation services and an alternate adjustment of Rs. 1,15,06,330/- for Software Development services, holding that these transactions did not meet the arm's length principle.
Held
The Tribunal held that the comparable 'Interactive Manpower Solution Pvt. Ltd.' should be excluded due to differences in NIC codes, ITC codes, and abnormally high profit margins. The Tribunal also held that the alternate adjustment for software development services was not sustainable as the assessee had not disputed the allocation of expenses and the computed profit margin fell within the acceptable range.
Key Issues
1. Whether 'Interactive Manpower Solution Pvt. Ltd.' is a valid comparable for Staff Augmentation services. 2. Whether the alternate adjustment for software development services is justified.
Sections Cited
143(3), 144C(13), 144B, 92CA(3), 92C(3), 10B(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCHES “C”, PUNE
Before: DR.MANISH BORAD & MS. ASTHA CHANDRA
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The captioned appeal at the instance of assessee pertaining to A.Y. 2021-22 is directed against the order dated 18.10.2024 passed u/s.143(3) r.w.s.144C(13) r.w.s.144B of the Income-tax Act, 1961 (in short ‘the Act’)
Assessee has raised following grounds of appeal :
“1. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/ DRP has erred in enhancing the income of Appellant by Rs. 2,90,89,437 while holding that the Appellant's international transaction pertaining to provision of Staff Augmentation Service ("SAs')- Export, to its Associated Enterprises ('AE'), even after reconstruction of segment by TPO, does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in not considering Staffing Augmentation Activity-Domestic as a TNMM comparable in addition to the three comparables considered in page 60 of 65 of TPO order.
Spectraforce Technologies (India) Private Limited
2. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/DRP has erred in enhancing the income of Appellant by Rs. 2,90,89,437 while holding that the Appellant's international transaction pertaining to provision of Staff Augmentation Service ("SAs')- Export, to its Associated Enterprises ('AE'), even after reconstruction of segment by TPO, does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in including certain companies in the final comparable set that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed and proceeding to determining the arms' length price based on three external comparables which are not in the same line of business and are not having the same commercial model.
3. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/DRP has erred in enhancing the income of Appellant by Rs. 2,90,89,437 while holding that the Appellant's international transaction pertaining to provision of Staff Augmentation Service ("SAs')- Export, to its Associated Enterprises ('AE'), even after reconstruction of segment by 3 TPO, does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in denying the benefit of working capital to the Appellant by disregarding the differences in working capital between Appellant vis- à-vis comparable companies proposed by the Ld. TPO even though the Appellant claimed the same and which was objected by the Ld. TPO.
4. Considering the limitation in the number of grounds that can be mentioned in the online Form 36, the other grounds from Ground 3.7 to Ground 8 may be referred in the Attachment in relation to Grounds of Appeal.
That on facts and circumstances of the case and in law, the Order u/s 143(3) rws 144C rws 92CA(3)of the Income-tax Act, 1961 ('Act') is bad in law.
6. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO erred in not making available the Search Process and Accept/Reject Matrix.
7. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/ DRP has erred in enhancing the income of Appellant by Rs.2,90,89,437 while holding that the Appellant's international transaction pertaining to provision of Staff Augmentation Service ("SAs')- Export, to its Associated Enterprises ('AE'), even after reconstruction of segment by TPO, does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in not appreciating that none of the conditions set out in section 92C(3) and Rule 10B(3) are satisfied in the present case.
8. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/DRP has erred in enhancing the income of Appellant by Rs. 2,90,89,437 while holding that the Appellant's international transaction pertaining to provision of Staff 8 Augmentation Service Spectraforce Technologies (India) Private Limited ("SAs')- Export, to its Associated Enterprises ('AE'), even after reconstruction of segment by TPO, does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in disregarding the submissions of the Appellant.
9. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/ DRP has erred in enhancing the income of Appellant by Rs. 2,90,89,437 while holding that the Appellant's international transaction pertaining to provision of Staff Augmentation Service ("SAs')- Export, to its Associated Enterprises ('AE'), even after reconstruction of segment by TPO, does not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in ignoring the internal comparability i.e. OP/TC earned by the Appellant from provision of staff augmentation services to a domestic third party.”
2.1 Assessee has also raised following additional ground :
“Additional Ground # 1 (which is Ground No 8 in the Grounds of Appeal filed):
8. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ DRP failed to consider the principle of Transfer pricing as enshrined in the following decisions: a. ITAT HYDERABAD- APPLABS TECHNOLOGY PVT LTD VS DCIT in pages relying on the ITAT DELHI in the case of GLOBAL VANTAGE PVT LTD VS DCIT (ITA NO: 2763 AND 2764/DEL/2009) that the adjustments (on ARM'S LENGTH PRICE), if any, cannot exceed the global profits earned by the group from those transactions, or else, it amounts to imposing an impossible burden on the Appellant which the law does not contemplate. The essential purpose of TP litigation is only to protect the legitimate tax base of India from being shifted out. It cannot mandate an Appellant to earn more than what is has actually earned from independent third parties.
In view of the above, the Appellant requests your Honour to kindly consider the above additional ground forming part of Form 36 which ground is in addition to those submitted along with the Form 35A before the Dispute Resolution Panel.
Brief facts of the case as culled out of the records are that the assessee is a Private Limited company and is a subsidiary of Spectraforce Technologies Inc. USA. It is engaged in providing Staff Augmentation services and Software Development services to its Associated Enterprises (AEs). Original return of income for Spectraforce Technologies (India) Private Limited A.Y. 2021-22 e-filed on 12.02.2022 declaring income of Rs.2,15,84,040/-. Return selected for scrutiny assessment and statutory notices u/s.143(2) and 142(1) of the Act validly served upon the assessee for carrying the scrutiny proceedings u/s.143(3) of the Act. Since the assessee entered into international transactions with its AE, reference made u/s.92CA(3) of the Act to the ld. Transfer Pricing Officer (TPO). During the course of the proceedings, ld. TPO observed that following are the two types of international transactions (1) Provision of Staff Augmentation services at Rs.30,77,69,583/- and (2) Provision of Software development and other services at Rs.13,09,22,836/-. Ld. TPO issued a show cause notice proposing adjustment to international transaction of the assessee regarding recalculation of segmental profitability, adjustment to international transactions pertaining to recruitment services and Software development services. Ld. TPO observed that with regard to Provision of Staff documents services, the segmental Operating profit/Operating Cost (OP/OC) of the assessee is 5.52% whereas as per Transfer Pricing Study Report (TPSR) furnished by the assessee the comparables OP/TC were within the range of 1.45% to 4.19% with median 3.16% and as per the assessee the international transaction of the assessee with its AE for the Staff Augmentation services were at Arm’s Length Price (ALP). Ld. TPO examined the TPSR and after considering the submissions of the assessee as well as the comparables introduced by TPO, final set of comparables for recruitment services, export segment are as follows :
Sl.No. Name of the comparable Weighted Average Margin 1 Head Field Solutions Pvt. Ltd. 2.20% 2 Husys Consulting Ltd. 2.19% Spectraforce Technologies (India) Private Limited 3 Interactive Manpower Solution Pvt. Ltd. 38.88% 15.09%
Now since OP/TC from Staff Augmentation services determined by ld. TPO came to 15.09% and the OP/TC of the assessee calculated by ld. TPO at 5.46% fall outside the Arm’s Length range of the comparable companied proposed by ld. TPO, therefore, Transfer Pricing adjustment of Rs.2,90,89,437/- was proposed to the total income of the assessee. With regard to the Software development service segment segmental OP/TC reported by the assessee at 16.79% was much better than the OP/TC as per the Transfer Pricing Study Report (TPSR) furnished by the assessee having median 7.05%, no adjustment was proposed by the assessee in the TPSR. Further, ld. TPO based on the set of comparables introduced by it and allocating expense as per “sales” basis, recalculated median at 27.05% and proposed the adjustment of Rs.1,15,06,330/-. However, the said adjustment for Software development service segment was made as an alternate adjustment and the substantial adjustment made at Rs.2,90,89,437/- for the Staff Augmentation services. Thus, ld. TPO proposed to increase the income by Rs.2,90,89,437/- and alternate adjustment of Rs.1,15,06,330/- made only if the assessee disputes the allocation of the expenses at appellate stage and the contention is being accepted by the respective appellate authorities.
5. The order of ld. TPO challenged by the assessee before ld. Dispute Resolution Panel (DRP). Ld. DRP vide its directions dated 20.09.2024 sustained the adjustments proposed by ld. TPO. Ld. Assessing Officer gave effect to the order of ld. DRP Spectraforce Technologies (India) Private Limited and determined the income on substantial basis at Rs.5,06,73,477/- and on alternate basis at Rs.3,30,90,370/-.
Aggrieved assessee is now in appeal before this Tribunal assailing the order of DRP.
With regard to the substantial adjustment of Rs.2,90,89,437/- for the Staff Augmentation services segment and alternate adjustment at Rs.1,15,06,330/- for Software development services, ld. Counsel for the assessee vehemently argued referring to the following written submissions :
PART 1- STAFF AUGMENTATION SEGMENT 7.1 The Appellant now in appeal before HON’BLE ITAT. The appeal grounds span across the following in respect of Staff Augmentation Services on the following: a. TPO erred in rejecting internal TNMM as MAM: While rejecting the internal TNMM the TPO pointed out that there are significant differences in FAR profile of domestic and export recruitment services and internal TNMM cannot be applied reliably- but failed to consider such FAR analysis with respect to Interactive Manpower Solutions Private Ltd. b. While considering Interactive Manpower Solutions Private Ltd, Ld. TPO simply stated that Name of the main product/ service......... Recruitment Process Outsourcing Service NIC CODE of product / service 74999 but failed to note that the NIC code of the Appellant c. TPO/DRP failed to consider para 3.66 of OECD Transfer Pricing guidelines providing potential comparables returning abnormally large profits related toother potential comparables are required to be investigated whether or not it can be considered a comparable. 7.2 The Appellant has preferred an appeal to the Hon’ble ITAT against the addition carried out by the Ld. AO and confirmed by the DRPand raised grounds. In specific, the Appellant requests the Hon’ble ITAT to consider and adjudicate on the below grounds of appeal:
Ground 3.4
3. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ DRP has erred in enhancing the income of Appellant by Rs. 2,90,89,437 while holding that the Appellant’s international transaction pertaining to provision of Staff Augmentation Service (‘‘SAs’)- Export, to its Associated Enterprises (‘AE’), even after reconstruction of segment by TPO, does not satisfy the arm’s length principle envisaged under the Act and in doing so, have grossly erred in:
Spectraforce Technologies (India) Private Limited 3.4. not considering Staffing Augmentation Activity- Domestic as a TNMM comparable in addition to the three comparables considered in page 60 of 65 of TPO order 7.3 The Appellant wishes to submit before your Honour that the Appellant also rendered similar staff augmentation services to unrelated third parties during AY 2021-22.Inview of the above and placing reliance on the corroborative internal benchmarking analysis available with the Appellant, the international transactions of provision for software development services is in accordance with the arm's length standard required under the Indian Regulations.
7.4 In this regard, the Appellant wishes to draw your kind attention to the OECD Guidelines, which state as under on the application of TNMM.
“2.58 The transactional net margin method examines the net profit relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realises from a controlled transaction (or transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied. This means in particular that the net profit indicator of the taxpayer from the controlled transaction (or transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) should ideally be established by reference to the net profit indicator that the same taxpayer earns in comparable uncontrolled transactions, i.e. by reference to “internal comparables” (see paragraphs 3.27-3.28). Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise (“external comparables”) may serve as a guide (see paragraphs 3.29-3.35). A functional analysis of the controlled and uncontrolled transactions is required to determine whether the transactions are comparable and what adjustments may be necessary to obtain reliable results. Further, the other requirements for comparability, and in particular those of paragraphs 2.68 -2.75, must be applied.”
7.5 Further, Para 3.27 of the OECD guidelines on the use of internal comparable data state as under:”
“3.27 Step 4 of the typical process described at paragraph 3.4 is a review of existing internal comparables, if any. Internal comparables may have a more direct and closer relationship to the transaction under review than external comparables. The financial analysis may be easier and more reliable as it will presumably rely on identical accounting standards and practices for the internal comparable and for the controlled transaction. In addition, access to information on internal comparables may be both more complete and less costly.”
7.6 From the above, it is clear that the internal comparable data (wherever available) should be preferred over the external comparable data for the application of TNMM. Since reliable and accurate information for application of internal TNMM is available with the Appellant, such internal data should only be used for the Spectraforce Technologies (India) Private Limited purpose of TNMM analysis. The Appellant submits that the details of the margin earned by Spectraforce India from services rendered to the Associated Enterprise vis-à-vis services rendered domestically to third parties is available and mentioned in the TP Order (Please refer Page 42 to Page 48 of the Paper book) ( Page 34 to Page 41 of the TP Order)
7.7 The Appellant submits that during the course of the TP assessment proceedings, the Company has specifically raised the argument that Internal TNMM be considered, which has been ignored on presumptions by the Ld. TPO. (Please refer Page 65 to Page 67 of the Paper book) ( Page 58 to Page 60 of the TP Order) Judicial Precedence 7.8 The Appellant submits that in the following rulings, it has been held that as reliable and accurate information for application of internal TNMM is available with the Appellant, such internal data should only be used for the purpose of TNMM analysis
Table 5: Judicial Precedence on Internal TNMM to be considered Ruling Forum Citation Reference Reference Para Para in case law In Ruling compilation Birlasoft ITAT [ITA No.3839/Del/2010] Para 16.2 Page 16 to (India) Delhi to Para 18 18 Limited Vs of the DCIT Ruling M/s ITAT (ITANo.4608/Mum/2010) Para 10 to Page 27 to Tecnimont Mumbai- Para 12 of Page 28 ICB Private Third the Ruling Limited vs Member Additional CIT M/s. Agila ITAT IT(TP)A Para 9 to Page 30 to Specialties Bangalore No.214/Bang/2015 Para 15 of Page 37 Pvt. the Ruling Ltd.(Now merged with Mylan & Laboratories Ltd)
IT(TP)A No.179/Bang/2015 Ground 4 4. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ DRP has erred in rejecting Staffing Augmentation Activity- Domestic should be considered as Most Appropriate Method (MAM) in para 12 (page 58 of 65 of TPO’s order and proceeding to determining the Arms’ Length Price based on three external comparables ignoring in his approach and in doing so ignored that:
Spectraforce Technologies (India) Private Limited a. the comparables are not in the “same line of business and are different in functions (as compared to the function of the Appellant as a Contract Service Provider) and are not having the same commercial model. The Appellant does support the Contract Staffing Services department of the Associated Enterprise, by undertaking part of the Statement of Work undertaken by the Associated Enterprise with the ultimate Clients. Contract Staffing Services department of the Associated Enterprise also has its own salary costs.
Reference is invited to the Service Agreement between the Appellant and its AE (Ref: paper book 1 -page 133 to 139) at 138 it clearly defines the nature of Staff Augmentation Service – engaging with the recruitment of temporary workers for the clients of AE b. Interactive Manpower Solution Private Limited is not in the “same line of business” as the Appellant, as narrated below:
Particulars NIC CODE NO: (OF ITS ACTIVITY) Interactive Manpower Solution Private Limited 74999 (See TPO ORDER 58 OF 69)- As per National Industrial Classification – Economic Activities publication, this NIC code 74999 falls under Division 74 OTHER PROFESSIONAL, SCIENTIFIC AND TECHNICAL ACTIVITIES.
APPELLANT- Spectraforce Technologies (India) Private Limited 7830 (AS PER MGT-9 ANNUAL REPORT OF THE COMPANY- see Paper Book Page 80). This NIC code 7830 falls under DIVISION 78 EMPLOYMENT ACTIVITES. c. The ITC code of Interactive Manpower Solutions Private Limited –page 481 of Paper Book 2 is 99851110 described as EXECUTIVE / RETAINED SEARCH SERVICES while the ITC Code of the Appellant- see page 96 of Paper Book 1- is 99851210- described as CONTRACT STAFFING SERVICES. Both are two different level of business and are not comparable.
7.9 The Appellant submits that the Ld. TPO has considered Interactive Manpower Solution Private Limited (‘Interactive’) as a comparable in respect to the Staff Augmentation services segment. The same is not comparable to the Appellant on account of the fact that Interactive and Appellant are not functionally similar and in different line of business:
Judicial Precedence 7.10 The Appellant submits that in the following rulings, it has been held that as NIC Codes are different, the comparable has to be excluded.
Table 6: Judicial Precedence on exclusion on companies with different NIC Codes Ruling Forum Citation Reference Reference Para Para in case law compilation In Ruling The ACIT, ITAT Para 22, Page 61 to Jaipur Para 22.1 62 Spectraforce Technologies (India) Private Limited Circle-2 and Para 22.2 Vs M/s. Sakata Inx (India) Ltd Finastra ITAT 147 taxmann.com 515 Para 18 to Page 71 to Software Bangalore (Bengaluru – Trib.)[28- Para 22 Page 72 Solutions 11-2022] (India) P. Ltd. v. DCIT, [2023] Radisys India ITAT 145 taxmann.com 294 Para 8.4 Page 99 Ltd. vs. Bangalore (Bangalore - Trib.)[18-11- Deputy 2022] Commissioner of Income-tax [2022] AMD India ITAT IT(TP)A Nos. Para 13.3 Page 143 to Private Bangalore 238/Bang/2021 & Page 144 Limited vs 262/Bang/2022 Asst Comm of Income-tax Ground 6 That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO/ DRP has erred in choosing 3 comparables (page 60 of 65) as detailed below Company Name Weighted average margin (%) Head Field Solutions Pvt Ltd 2.20 Husys Consulting Ltd 4.19 Interactive Manpower Solution P Ltd 38.88 Without considering the principle enshrined in OECD Transfer Pricing Guideline 3.65 and 3.66 in case where there are more than one comparables with extreme results, further examination is advisable to understand the reasons for such extreme results.
Reliance placed on ITAT DELHI MAVENIR INDIA PRIVATE LTD (ITA NO: 81/DEL/2021) PARA 32, REJECTING INTERACTIVE MANPOWER SOLUTION “ IT IS OBSERVED THAT THE COMPANY HAS REPORTED HUGE INCREASE IN ITS PROFIT MARGIN. THEREFORE, WITHOUT PROPOERLY ANALYSING THE FACTORS LEADING TO ABNORMAL INCREASE IN PROFIT MARGIN, IT WOULD NOT BE SAFE TO INCLUDE THIS COMPANY AS A COMPARABLE”
7.11 The Appellant submits that it is necessary to exclude companies which reflect abnormal margins and/or reflect abnormal increase in profit margins. This is on account of the fact that the high margins are account of the said comparable being functionally different, having brand value, engaged in product sale etc. In this regard, reliance is placed on the OECD Guidelines- 2022, which state as under:
Spectraforce Technologies (India) Private Limited
3.59. Where the application of the most appropriate method (or, in relevant circumstances, of more than one method, see paragraph 2.12), produces arrange of figures, a substantial deviation among points in that range may indicate that the data used in establishing some of the points may not beas reliable as the data used to establish the other points in the range or that the deviation may result from features of the comparable data that required adjustments. In such cases, further analysis of those points may be necessary to evaluate their suitability for inclusion in any arm’s length range. …….. …….. 3.65. Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses.
3.66. A similar investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables 7.12 The Appellant submits that in the case of the Company as well, the Ld. TPO has selected Interactive as a comparable with a margin of 38.88%, whereas the remaining two companies are having a margin of 2.20% and 4.19% respectively. This margin of Interactive is quite abnormal and it has to be examined as to reasons for the same. The Appellant has provided in detail, reasons for such abnormal margin during the course of the TP Assessment proceedings (Refer Page 60 to Page 63 of the Paper Book) Judicial Precedence 7.13 The Appellant submits that in the following rulings, wherein it has been held that companies with abnormal margins, the comparable has to be excluded.
Table 7: Judicial Precedence on exclusion of companies with abnormal margins when the comparable set is less in number Ruling Forum Citation Reference Reference Para Para in case law In Ruling compilation Mavenir India ITAT 141 taxmann.com 160 Para 29 to Page 251 to (P.) Ltd. vs. Delhi (Delhi - Trib.)[17-05- Para 34 Page 253 Deputy 2022] Commissioner of Income-tax [2022] Mentor Graphics ITAT [2007] 109 ITD 101 Para 37 Page 271 (Noida) (P.) Ltd. Delhi (Delhi)/[2007] Spectraforce Technologies (India) Private Limited v.
DCIT, Circle 6(1), New Delhi Prayer for Relief 7.14 The Appellant submits that considering the above factual matrix as well as the judicial precedence, the primary TP adjustment carried out by the Ld. TPO in respect of the staff augmentation services segment be deleted andappropriate relief granted.
PART 2- SOFTWARE DEVELOPMENT SERVICES SEGMENT GROUND NO: 7 Grounds in relation to Alternate adjustment in relation to software development services That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO erred in enhancing the income of the Assessee by Rs. 1,15,06,330 while holding that the Assessee’s international transaction pertaining to provision of Software development services segment to its Associated Enterprises does not satisfy the arm’s length principle envisaged under the Act and in doing so. Without prejudice, the TPO in para 20 stated that itis reiterated that alternate adjustment or Rs.1,15,06,330 is made only if the assessee disputes allocation of the expenses at appellate stage and the contention is being accepted by the respective appellate authority. Submitted that no dispute on allocation of expenses, as done by TPO, has been made by the Appellant and therefore, the addition is infructuous.
7.15 WITHOUT PREJUDICE TO OUR SUBMISSIONS RELATING TO ALP DETERMINATION OF STAFF AUGMENTATION SERVICES IN THE EARLIER PART, WE SUBMIT AS UNDER WITH RESPECT TO THE ALP IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES SEGMENT.
7.16 The Ld. TPO while analysing the Arm’s Length Price of the Appellant, had made an alternate adjustment (some sort of conditional adjustment) of Rs. 1,15,06330/-, in respect of the Appellant’s International Transactions in its SOFTWARE SEGMENT-
The Ld. TPO in his order dated 29th October 2023- page 64 of 65 para 7.17 20(Please refer Page 71 of the Paper Book)- stated as follows-
20. Thus substantial adjustment of Rs.2,90,89,437/- is made to the international transaction relating to Recruitment / Staffing Augmentation services. As a result , income of assessee shall be increased by Rs. 2,90,89,437.
It is reiterated that alternate adjustment of Rs.1,15,06,330/- is made only if the Assessee disputes allocation of expenses at appellate stage and the contention is being accepted by the respective appellate authority.
Spectraforce Technologies (India) Private Limited 7.18 The Appellant originally submitted before the Ld. TPO its segment accounts. The Ld. TPO reallocated the expenses based on a different allocation key and re arrived at the Operating Profit margins as tabled below-
Table 8: OPM AS PER THE APPELLANT- refer page 7 of 65 of TPO’s order(Page 14 of the Paper Book)
S.No Staff Augmentation Software Staff Augmentation Activity-EXPORT Development & Activity- Domestic Service Activity 1 5.52% 16.79% (loss)
Table 9: OPM AS PER TPO- reference page 41 of 65 of TPO’s order (Page 48 of the Paper Book)
S.No Staff Augmentation Software Staff Augmentation Activity-EXPORT Development & Activity- Domestic Service Activity 1 5.46% 24.09% (loss)
7.19 A. The Ld. AO, while passing his draft assessment order – u/s144C(1)- at page 5- repeated the adjustment in Software Segment as follows-(Refer Page 5 of Paper Book)
“Apart from above adjustment (of Rs. 2,90,89,437) the TPO has made an alternative adjustment of Rs.1,15,06,330/- to the international transactions pertaining to provision of software development services. Hence alternative addition of Rs.1,15,06,330/- is made and income is assessed as under on alternative basis as per condition mentioned by the TPO in para 20 of the TPO order” Xxx 7.20 The Appellant filed its objections before Dispute Resolution Panel (DRP), interalia vide ground 4(reference page 4 of 160 of DRP order), on the rejection of Segmental Information- “The TPO erred in disregarding the segmental financial information submitted by the assessee.” B. Ld.DRP in page 157-158 of 160 of the DRP directions, upheld allocation key adopted by TPO- 7.21 The DRP finds that the TPO’s adoption of sales as the allocation key is not only justified but also necessary to ensure correct evaluation of the Appellant’s segmental profitability. Therefore, the Panel concludes that the method adopted by TPO is appropriate. The recalculated segmental profitability, using sales as the allocation key, provides a more accurate representation of the Appellant’s financial performance, leading to a correct determination of the arm’s length price.
7.22 C.1. Vide Objection 3, the Appellant raised objections to certain companies taken as comparables in arriving at the ALP in respect of Software Development Services.
Spectraforce Technologies (India) Private Limited 7.23 Ld.DRP in page 153 of 160 of the DRP directions, while dealing with the Alternate Adjustment to be considered directed as follows- Panel Notes that this (Rs.1,15,06,330/) is an alternate adjustment proposed by the Transfer Pricing Officer. Accordingly, the primary adjustment pertains to the Human Resource and Staff Augmentation Services Segment (SAS). The adjustment in this segment is to be examined only if the adjustment in SAS segment is rejected, leading to reduction in the Profit Level Indicator(PLI) of the applicant.
7.24 C.2. The above direction of DRP, in our view, is an enhancement without providing an opportunity to the Appellant and hence liable to be struck down.
7.25 D. The Ld. AO in his Final Order , passed on 18/10/2024, under sec. 143(3) r.w.s. 144C(13) did not follow theabove revised directions of DRP and held (at page 5 of 7) as follows- Apart from above adjustment, the TPO has made an alternative adjustment of Rs. 1,15,06,330/- to the international transaction pertaining to the provision of software development services. Hence, alternative addition of Rs. 1,15,06,330/- is made and income is assessed as under on alternative basis as per condition mentioned by the TPO in para 20 of the TPO order 7.26 D.1. It is a settled law that the jurisdiction of AO in passing a final order under sec.114C(13), as per mandate of Sec.144C every direction of DRP is binding on the Assessing Officer and he is duty bound to pass the final assessment order in conformity with the directions of ld. DRP. The AO merely repeated the contents of the draft assessment order without following the specific directions of DRP. Therefore, the final assessment order passed was without jurisdiction and hence unsustainable.
7.27 A host of decisions support this… listed in para 7 of the ITAT DELHI BENCH ORDER IN BECHTEL LIMITED (ITA Nos. 8904/Del/2019 & 795/Del/2021) enclosed. In this case, Hon’ble ITAT refused to set aside the Final Order with a direction to AO to pass fresh assessment orders in compliance with the DRP directions. Upholding the above view, in para 8 the Hon’ble ITAT Delhi- in PARA 14, has held:
14. As could be seen from the aforesaid observations of the Hon’ble Jurisdictional High Court, non-implementation of directions of DRP in terms of Sec. 144C renders the final assessment order wholly without jurisdiction and void-ab-initio. The plethora of decisions cited by Ld Counsel appearing for assessee express similar view. Therefore, we don’t intend to deal in detail with them. Xxxxx we hold that the impugned assessment orders are wholly without jurisdiction or in excess of jurisdiction, hence, void- ab –initio . Therefore, assessment orders under challenge in these appeals deserve to be quashed. Accordingly, we do so.
Prayer for Relief 7.28 The Appellant submits that considering the above factual matrix as well as the judicial precedence, the TPO order is null and void. Alternatively, we pray for a direction as no dispute on allocation of expenses among the different segments, as done by TPO, has been made by the Appellant and the alternate addition under software segment is infructuous.”
Spectraforce Technologies (India) Private Limited
On the other hand, ld. Departmental Representative vehemently argued supporting the order of ld. DRP.
We have heard the rival contentions and perused the record placed before us. We will first take up the substantial upward adjustment made by ld. Assessing Officer for the Staff Augmentation services proved by the assessee to its AE based on the calculation of ALP by the ld. TPO. Ld. Counsel for the assessee has made multifold arguments challenging the said adjustment and the same are as follows :
(a) That ld. DRP erred in accepting the ld. TPOs finding rejecting the internal TNMM even when the assessee provides similar type of services to unrelated third parties in the domestic market.
(b) That ld. AO erred in considering Interactive Manpower Solution Pvt. Ltd. (in short IMSPL) as a comparable for the purpose of computing ALP disregarding the fact that the nature of activity of “IMPSL” is different and also the NIC Codes and ITC Codes of IMSPL are different than the assessee.
(c) IMSPL should not be included as comparable because the profit margin of IMSPL are much higher to that of the assessee and other comparables considered by ld. TPO.
So far as the contention of ld. Counsel for the assessee on application of TNMM, we have gone through the Functions, Assets, and Risks analysis (FAR) of the Staff Augmentation services exported vis-à-vis domestic market and observe that there are various services which are not given in the case of Spectraforce Technologies (India) Private Limited export of services namely placing the candidate as per the customer requirement, recruitment –on boarding formalities, processing payroll for the candidate, invoicing and collection, service liability risk, credit risk and customer relation management. All these activities which are taken care of by the assessee in the domestic market sales to third parties are being taken care of by AE incase of export of Staff Augmentation services. It thus indicates that nature of services in case of export are different to that of domestic market. This fact has even accepted by the assessee in the FAR analysis report also. Further, it has been contended before the lower authorities that the profitability in the domestic market is more because assessee provides more service but for the year under consideration, the assessee has landed up into losses in the domestic market and has surplus in the category of export of Staff Augmentation services. All these facts are sufficient enough to draw inference that in the given case internal TNMM cannot be applied for calculating the ALP of the transaction of Staff Augmentation segment. Therefore, no interference is called for in the finding of ld. DRP and the grounds raised by the assessee for application of internal TNMM are hereby dismissed.
Now the second and third fold contention of ld. Counsel for the assessee revolves around the comparable namely Interactive Manpower Solution Pvt. Ltd. (IMSPL). The thrust of arguments of ld. Counsel for the assessee is mainly for exclusion of IMSPL from the list of comparables for calculating the ALP. It has been submitted by ld. Counsel for the assessee that IMSPL is functionally dissimilar on account of the following points :
Spectraforce Technologies (India) Private Limited In the case of IMSPL : (a) Payment of Royalty expense to group company for utilizing brand and acquiring technical know-how, research consultancy and advice from the group company. (b) Payment of market fee by IMSPL for availing existing market set up of M/s. Poland Traders Pvt. Ltd. as per Marketing and Operation Sales Services agreement (c) Payment of Marketing Support services to other related parties (d) Expenditure incurred for Advertisement and Promotional services.
It is further stated that so far as assessee is concerned no such type of expenses including royalty, market support fees, advertisement have been incurred which shows that IMSPL is an Entrepreneurial company whereas the assessee is a Risk Related company wherein significant risks are undertaken by AE and is characterized as a routine service entity. It is further stated from assessee’s side that comparables are not in the same line of business and are different in functions and are not having the commercial model. The assessee supports the contract staffing service department of the AEs by undertaking part of the statement of working undertaken by AEs with the ultimate clients. Further, comparative chart showing the nature of services rendered by the assessee as well as the IMSPL has been placed in the paper book at pages 453 to 454 which reads as under :
Spectraforce Technologies (India) Private Limited Spectraforce Technologies (India) Private Limited
13. On going through the above details of services, we note that there are major differences between nature of services rendered by both the assessee and IMSPL. Assessee is working for recruitment of temporary workers for the clients based on the requirement of AE and on the other hand IMSPL is engaged in recruitment services for senior posts for which the sourcing includes Head Hunting, Passive Search, Job Board Search, VMS sources, Market Mapping and Research services.
We also observe that IMSPL is not in the same line of business as that the assessee because the NIC codes of both are different. In the case of IMSPL NIC Code is 74999 which falls under Division-74 and relates to “Other Professional, Scientific and Technical Activities’. On the other hand the assessee has the NIC Code 7830 which falls under Division-78 for the Spectraforce Technologies (India) Private Limited Employment activities. Also there is difference of ITC Code between the two. As the ITC code for IMSPL is 99851110 which is described as “Executive/Retained Search services” whereas the ITC Code of the assessee is 99851210 described as “Contract Staffing services”. It clearly indicates that both companies carry out the activity at different level of business and in the following cases it has been held by the Coordinate Benches that if the NIC Codes of two companies are different, then they cannot be taken as comparables for the purpose of calculating the Arm’s Length Price :
Ruling Forum Citation Reference Reference Para Para in case law In Ruling compilation The ACIT, Circle- ITAT Para 22, Page 61 to 2 Jaipur Para 22.1 62 and Para Vs 22.2 M/s. Sakata Inx (India) Ltd Finastra Software ITAT 147 taxmann.com 515 Para 18 to Page 71 to Solutions (India) Bangalore (Bengaluru – Trib.)[28- Para 22 Page 72 P. Ltd. v. DCIT, 11-2022] [2023] Radisys India Ltd. ITAT 145 taxmann.com 294 Para 8.4 Page 99 vs. Deputy Bangalore (Bangalore - Trib.)[18-11- Commissioner of 2022] Income-tax [2022] AMD India ITAT IT(TP)A Nos. Para 13.3 Page 143 to Private Limited vs Bangalore 238/Bang/2021 & Page 144 Asst Comm of 262/Bang/2022 Income-tax
In the case of AMD India Private Limited Vs. ACIT – and 262/Bang/2022 order dated 26.06.2023 where the comparable namely Inteq Software Ltd. (ISL) was excluded from the list of comparables because the NIC Spectraforce Technologies (India) Private Limited Code of ISL was different to that of AMD India Private Limited. Relevant finding of Coordinate Bench, Bangalore reads as under:
“Inteq Software Ltd.
The ld. AR submitted that Inteq Software Ltd. is functionally different as it is engaged in both rendering software services & developing software products. The Company owns substantial intangibles and cannot be compared to the assessee. The Company has substantial RPT transaction for FY 13-14 (79.45%). It was further submitted that despite directions by DRP to exclude FY 13-14 for PLI computation, the TPO has considered all the 3 years. Therefore this company has to be excluded from the comparables list.
13.1 The ld. DR relied on the orders of lower authorities.
13.2 We have heard both the sides and perused the material on record. On going through the submissions made before the lower authorities which is placed at page 1039, para 6.103, the assessee submitted as under:-
"The Assessee submits that this company is functionally different as it is engaged in both rendering software services and developing software products. Further, it provides wide range of services such as Application Development, Application Migration, Application Maintenance, Oracle Application, Microsoft Dynamics, Data Warehousing, EI & EDI Services, Consulting Services, Healthcare BPO. These are evident from company's website which is reproduced below."
13.3 On going through the financial statements produced at PB pg. 1559, under the head revenue from operations, the assessee has shown revenue from operations under the accounting head, Software Development & Service Charges of Rs.17.38 crores and at PB pg. 1557 in Form No.NGT-9 which is annual return, the assessee has shown software development services under NIC Code "620-Computer Programming, Consultancy and related activities". This company has been excluded in the case of Finastra Software Solutions (India) P. Ltd. v. DCIT, AY 2016-17 [2023] 147 taxmann.com 515 (Bengaluru Trib) by observing as under:-
18. The assessee sought for exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. on the basis that these companies are functionally dissimilar to the assessee. In this regard the learned A.R. submitted that Inteq Software Pvt. Ltd. ("Inteq")
The company is functionally dissimilar to the assessee. The company is engaged in diversified business lines such as Microsoft dynamics, data warehousing. El & EDI services, Spectraforce Technologies (India) Private Limited
Healthcare BPO and consulting services including provision of end-to-end solutions to clients in the nature of back office services, transaction-based services, MIS and analytical reporting services. Thus, Inteq is not comparable to the software development functions of the assessee. It is further submitted that the segmental details attributable to the various services rendered by the company is not available and is instead shown as "software development and service charges" under one head. Detailed submissions are available at pages 1911-1914 of the paper book.
Significant related party transactions:
The company's related party transactions (sales) for the FY 2013-14 stand at 79.49% of sales, and therefore the company ought to be excluded.
Wide fluctuation in the margin:
It is submitted that the company's margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company's margin stood at 47.21%, for the FY 2014-15 32.34% and for the FY 2015-16 7.56%. Detailed submissions in this regard are placed at pages 419-436 of the paper book. In view of the above, it is submitted that Inteq ought to be excluded from the final list of comparables. xxxxxx
21. We have heard the rival contentions and perused the material on record. We notice that the coordinate bench in the case of NTT Data FA Insurance Systems (India) (P.) Ltd. (supra) has considered the issue of exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. and held as under:-
'18. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in & 228/Hyd/2021 dated 3-2-2022 at para 7 page 3678 to 3680 wherein held as under:- xxxxxx xxxxxx
We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. v. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:-
"The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product Spectraforce Technologies (India) Private Limited development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services.
When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-a-vis the taxpayer which is a routine software development service provider working on costplus mark up model, hence ordered to be excluded from the final set of comparables." 21.1 In view of the above order of the Tribunal, we direct the AO/ΤΡΟ to exclude this company from the list of comparables.' 22. Respectfully following the decision of the coordinate bench we hold that Inteq Software Pvt. Ltd and Infobeans Technologies Ltd., be excluded from the list of comparables." 13.4 Respectfully following the above decision of the Tribunal, we direct exclusion of Inteq Software Pvt. Ltd. from the comparables.”
Similarly, in the case of ACIT Vs. Sakata Inx (India) Ltd. – and others order dated 16.09.2011 the Coordinate Bench, Jaipur confirming the finding of ld.CIT(A) held that the NIC Codes of the assessee company is 24223 whereas the NIC Code of the comparable namely Indian Toners and Developers Ltd. is 24222. As NIC codes were different Indian Toners and Developers Ltd. was excluded from the list of comparables.
We further observe that in the list of comparables which was selected by ld. TPO and confirmed by ld. DRP, there is huge difference in the Weighted Average Margin of IMSPL (38.88%) as against the Weighted Average Margin of Head Field Solutions Pvt. Spectraforce Technologies (India) Private Limited Ltd. and Husys Consulting Ltd. at 2.20% and 2.19%. In the case of Mavenir India (P) Ltd. vs. DCIT reported in 141 taxmann.com 160 the Coordinate Bench, Delhi in Del/2021 order dated 17.05.2022 has rejected the comparable IMSPL by observing that the company has reported huge increase in its profit margins. Therefore, without properly analyzing the factors leading to abnormal increase in profit margin, it would not be safe to include this company as comparable. The above observations of change in NIC Codes, ITC Codes, as well as abnormal profit margin of IMSPL remain unrebutted by ld. Departmental Representative.
We therefore respectfully following the decisions referred hereinabove and also considering the facts of the instant case, find that since the NIC Codes, ITC Codes of the assessee company is different to that of IMSPL, profit margin of IMSPL are abnormally high as compared to the other comparables selected by ld. TPO as well as the profit margin of the assessee and also the nature of services eventhough apparently looking similar but as discussed in the preceding paragraphs they are different therefore they cannot be functionally comparable. We are therefore are of the considered view that the comparable namely Interactive Manpower Solution Pvt. Ltd. deserves to be excluded from the list of final comparables. Ld. AO is accordingly directed to give effect to the same and recalculate the Weighted Average Margin after excluding the IMSPL from the list of comparables, then calculate the ALP of the transaction with AE of Staff Augmentation services in case the segmental OP/TC of the assessee is outside the range. Relevant grounds of appeal raised Spectraforce Technologies (India) Private Limited by the assessee relating to exclusion of IMSPL from the list of comparables are hereby allowed as per terms indicated above.
19. Now we take up the grounds challenging the alternate adjustment of Rs.1,15,06,330/- made by ld. Assessing Officer based on the Ld.TPO’s report for the Software development services segment. As per the TP study report submitted by the assessee, PLI of the assessee is 16.79%. Thereafter, ld. TPO observed that in the TP study report 16 companies were selected by the assessee as comparables in respect of Software development services and the Weighted Average margin is shown at 7.05%. ld. TPO thereafter rejected most of the comparables included in the TP study report and introduced some fresh comparables from its side thereby calculating the PLI and calculated the Weighted Average margin at 27.05%.
We further note that ld. TPO called for the details of segmental PLI to which the assessee made the submission allocating the expenses based on the number of employees but as per ld. TPO no adjustment for appropriateness of the allocation key was furnished by the assessee. Ld. TPO also noted that number of employees is not a proper allocation expenses viz., legal, professional and consultancy charges including audit fees, managerial remuneration etc. Ld. TPO also observed that said income has been recognized in audited financial statement as operating income by the assessee. Ld. TPO thereafter calculated the segmental profitability of the assessee using “sales” as allocation key as per Rule 10TA and based on the said allocation Operating Profit margin from Software development services activity calculated at 24.09%. Ld. TPO thereafter having included other comparables from its side Spectraforce Technologies (India) Private Limited rejected the comparables provided by the assessee in the TP study report, calculated the Weighted Average median at 27.05% but since the PLI of the assessee recalculated by TPO after reallocation of expenses on the basis of sales, profit margin of the assessee is calculated at 24.09% and the same was lying within the range of comparables therefore no adverse inference was drawn. However, ld. TPO proposed an alternate adjustment pertaining to Software development service segment on a without prejudice basis by considering assessee’s Operating Profit margin at 16.79% as declared by the assessee in the financial statements and ALP median of 27.05% as per comparables selected by ld. TPO assuming that if the assessee is able to justify the allocation of expenses and segmental profitability as given in TP study report. Further, concluding the proceedings, ld. TPO while calculating the alternate adjustment of Rs.1,15,06,330/- adopting the segmental Operating Profit margin declared by the assessee at 16.79% as against the ALP median at 27.05% proposed adjustment of Rs.1,15,06,330/-. Ld. TPO reiterated that alternate adjustment is made only if the assessee disputes allocation of expenses at appellate stage and the contention is being accepted by the respective appellate authority. Thereafter, when the matter travelled before the ld. DRP, on one hand ld. DRP has dealt with the comparables included by the ld. TPO for calculating the Operating Profit margin from Software development services but then on page 153 of the DRP order ld. DRP while dealing with alternate adjustment to be considered gave following directions :
Spectraforce Technologies (India) Private Limited “Alternate Adjustment to be considered: Panel notes that this is an alternate adjustment proposed by the Transfer Pricing Officer. Accordingly, the primary adjustment pertains to the Human Resource and Staff Augmentation Services Segment (SAS). The adjustment in this segment is to be examined only if the adjustment in SAS segment is rejected, leading to reduction in Profit Level Indicator (PLI) of the applicant.”
21. Before us, Ld. Counsel for the assessee has submitted that the above direction of the ld. DRP is enhancement without providing any opportunity to the assessee and hence liable to be struck down. Further it has been submitted that ld. AO in his final order did not follow the revised directions of DRP and made the alternate addition of Rs.1,15,06,330/- which is not as per the mandate of section 144C of the Act because every direction of ld. DRP is binding on the ld. AO.
Going through all the above facts relating to the alternate adjustment made for Software development services, we firstly note that the assessee has not challenged the allocation of expenses carried out by ld.TPO. Further, TPO has specifically mentioned in its order that the alternate adjustment of Rs.1,15,06,330/- is made only if the assessee disputes allocation of the expenses at appellate stage. It is also an admitted fact that ld. TPO after allocating the expenses based on the ‘sales’ has computed the Operating Profit margin of the assessee at 24.09% and the same was within the range of the Weighted Average margin calculated by ld. TPO. Under these given facts and circumstances since the assessee has not disputed the allocation of expenses on the basis of ‘sales’ and secondly as per the own working of ld. TPO the Operating Profit margin are calculated by TPO at 24.09% which is within the range of Spectraforce Technologies (India) Private Limited Weighted Average margin calculated by TPO based on his comparables, therefore, no alternate adjustment of Rs.1,15,06,330/- deserves to be made in the instant case towards ALP of Software development service. Therefore, relevant grounds of appeal challenging the alternate adjustment made in the Software development services are hereby allowed in favour of the assessee.
To conclude, we hold that as against segmental Operating Profit margin reported by the assessee at 5.52%, the recalculated profit margin after allocation of expenses as per the ‘sales’ is 2.37% and for the purpose of calculating ALP of Staff Augmentation services the median of the Weighted Average margin of only two comparables namely Head Field Solutions Pvt. Ltd. (2.20%) and Husys Consulting Ltd. (4.19%) is to be considered and thereafter, ld. AO shall calculate the ALP of the international transaction carried out by the assessee with its AE for the Staff Augmentation services. Needless to mention that reasonable opportunity of hearing will be afforded to the assessee.
In the result, appeal of the assessee is partly allowed for statistical purposes as per terms indicated hereinabove.
Order pronounced on this 18th day of July, 2025.