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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI BR BASKARAN & SMT. BEENA PILLAI
Date of Hearing : 16-07-2021 Date of Pronouncement : -08-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER
Page 2 of 37 IT(TP)A No.309 & 426/Bang/2016 Present cross appeals are filed by assessee and revenue against final assessment order dated 31/12/2015 passed by the Ld.DCIT Circle 1(1), Bangalore for assessment year 2011-12, on following grounds of appeal: ITA 309/B/2016 (revenue appeal) “The order of the learned DRP is opposed to law and facts of the case.
2. The learned DRP was not justified in directing the A.O. to follow the decision of the Hon'ble Court in the case of CIT vs Tata Elxsi and others in the consolidated order dated 30.08.2011 in & others (2012) 247 CTR 334 while computing the deduction u/s 1OA.
3. The learned DRP erred in allowing the relief, relying on the decision of the Hon'ble High Court in the case of CIT vs Tata Elxsi and others in the consolidated order dated 30.08.2011 in ITA No. 70/2009 & others (2012) 247 CTR 334, while the same has not been accepted by the department and a SLP has been filed before the Hon'ble Supreme Court against such order is pending.
4. In the facts and circumstances of the case, whether the Hon’ble. DRP is correct in holding that the foreign exchange transactions are to be considered as operating in nature, whel, the Rule 10 1(2)(d) stipulates that the net profit margin realized by the taxpayer in the international transaction shall alone be computed for comparability analysis under TNMM.
5. Application of onsite revenue filter: (i) In the facts and circumstances of the case, Whether the Hon'ble DRP is correct a holding that the, M/s RS Software Pvt. Ltd. and M/s Acropetal Technologies Ltd and M/s. L & T Infotech Ltd. cannot be taken as comparable, when it satisfies all the qualitative and quantitative filters adopted by the TP0. (ii) Whether the Hon'ble DRP is right in applying "onsite revenue filter" without appreciating the fact that the function carried out is "Software Development" irrespective of whether onsite or offshore. (iii) Whether the Hon'ble DRP in correct in excluding M/s RS Software Pvt. Ltd., M/s Acrupetal Technologies and M/s. L & T Infotech Ltd. on the ground that they have significant onsite revenue without appreciating the fact tha, onsite development of software entails more cost and thereby results in lower profit margins. (iv) Whether, the Hon'ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies.
6. M/s. E-infochips :
Page 3 of 37 IT(TP)A No.309 & 426/Bang/2016 Whether the Hon’ble DRP has erred on fact indeleting M/s E-infochips as a comparable on the ground that it fails the filter of service income less than 75% of the sales, when the said company has service income being 100% of the sales.
M/s ICRA Techno Analyties Ltd: Whether the Hon'ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar co1npLrahle companies. 8 M/s Infosys Technologies Ltd. (i) Whether Hon'ble DRP erred in fact in rejecting the company as a comparable on the grounds that it is functionally different when the primary source of income of the comparable is from provision of software development services. (ii) Whether while seeking the exact comparability as mentioned above the DRP was right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. (iii) Whether the Hon'ble DRP is correct in fact and law in disregarding the position of law that there could be differences between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises? 9. M/s Tata Elxsi Ltd. Whether the Hon’ble DRP was right in fact and in law in seeking exact comparability, which searching for comparable companies of the assessee under TNMM whereas the requirement of law and international jurisprudence require seeking similar comparables companies? 10. M/s E-zest Solutions : Whether while seeking the exact comparability, the Hon'ble DRP was right in fact and in a in imposing condition beyond law whereas the requirement of law is to acknowledged only those differences that are likely to materially affect the margin 11. M/s. Jeevan Scientific Technology Limited. (i) Whether the Hon'ble DRP erred in facts and law in excluding the company as a comparable, on the ground of failing the service income filter, when only the segmental results have been considered for comparability. (ii) Whether the Hon'ble DRP ought to have appreciated the fact that when segmental results are available and considered for comparability, the application of service income to total income filter does not arise. (iii) Whether ne Hon'ble DRP was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies.
Page 4 of 37 IT(TP)A No.309 & 426/Bang/2016
12. M/s. iGate Global Solutions (i) Whether the Hon'ble DRP erred in fact and law in rejecting the comparable on the round that segmental information is not available, when the company had classified itself to be operating in one segment i.e. provision of ITES. (ii) Whether the order of the Hon'ble DRP in rejecting comparable cases by insistence on strict comparability under TNMM defeats the very purpose of the law relating to determination of ALP under income Tax Act? 13. M/s. Infosys BP0 Limited.: (i) Whether while seeking the exact comparability as mentioned above the DRP s right in fact and in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin. (ii) Whether the Hon'bIe DRP is correct in fact and law in disregarding the position of law that there could be differences between the enterprises compared under the TNMM method that are not likely to materially affect the price or cost charged or the profits accruing to such enterprises? The appellant crave, leave to add, alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”
(assessee appeal) Based on the facts and circumstances of the case and in law, Cisco Systems Services B.V. - India Branch (hereinafter referred to as the 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax (International Taxation) - Circle 1(1) ('Assessing Officer' or 'AO') dated December 31, 2015 in pursuance of the directions issued by the Dispute Resolution Panel ('DRP'), Bangalore dated November 17, 2015, under section 253 of the Income-tax Act, 1961 ('Act') on the following grounds:
That on the facts and in the circumstances of the case and in law and based on the directions of the DRP: A. Grounds of appeal relating to corporate tax matters The learned AO has erred in law and in fact by not considering the plea of the Appellant that communication expenses, foreign currency expenditure incurred by the Appellant in relation to outsourced services, recharge of international assignee costs and recharge of other costs, should not be reduced from 'export turnover' for the purpose of computing deduction under Section 1 OA of the Act.
2. The learned AO has erred in law and in fact, by not considering the plea of the Appellant that foreign currency expenditure incurred in relation to recharge of international assignee costs and recharge of other costs constitute 'reimbursements' and are not in the nature of income chargeable to tax under the Act. B. Grounds of appeal relating to transfer pricing matters
Page 5 of 37 IT(TP)A No.309 & 426/Bang/2016 i) Grounds of appeal specific to advanced services segment
3. The learned TPO/ learned AO have erred, in law and in fact, by rejecting certain comparable companies identified by the Appellant using the export sales less than 75% of the sales as a comparability criterion.
4. The learned TPO/ learned AG have erred, in law and in fact, by rejecting certain comparable companies identified by the Appellant using the employee cost less than 25% of the total revenues as a comparability criterion. ii) Grounds of appeal specific to technical services segment
5. The learned TPO/ learned AO have erred, in law and in fact, by rejecting certain comparable companies identified by the Appellant using the export sales less than 25% of the sales as a comparability criterion.
6. The learned TPG/ learned AO have erred in law by using a filter of non-financial income less than 75% for rejection of certain companies, without describing the said filter in the show cause notice! TP order.
7. The learned DRP/ learned TPO/ learned AG have erred in law and in fact by concluding that the technical services provided by the Appellant are high end services and comparing the same with companies engaged in providing high end technical services ('KPO'). iii) Grounds of appeal common to advanced services and technical services transaction
8. The learned TPO/ learned AO have erred, in law and in facts, by not appreciating the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length.
9. The learned TPO/ learned AO have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using the related party transactions more than 25% of the sales as a comparability criterion;
10. The learned TPO/ learned AO have erred, in law and in facts, by not applying a higher threshold while applying the turnover filter;
11. The learned TPO/ learned AO have erred, in law and in facts, by applying the filter of companies having different accounting year for rejecting the comparable companies (i.e., companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months);
12. The learned TPO/ learned AO have erred, in law and in facts, by determining the arm's length margin/price using only FY 2010-11 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements.
13. The learned TPO/learned AO have erred, in law and in facts, by rejecting the filter of ratio of research and development expenses to sales
Page 6 of 37 IT(TP)A No.309 & 426/Bang/2016 less than 3% considered by the Appellant for the purpose of selecting the companies which do not own intangibles and are pure service providers; 14. The learned TPO/ learned AO have erred in law and in facts, by rejecting the filter adopted by the Appellant for selecting companies having a ratio of sum of advertising, marketing and distribution expenses to sales less than 3%; 15. The learned TPO/ learned AG have erred, in law and in facts, by accepting/rejecting certain companies based on unreasonable comparability criteria; 16. The learned TPO/ learned AO have erred, in law and in facts, by wrongly computing the operating margins of some of the comparable companies identified in the transfer pricing order; 17. The learned TPO/ learned AG have erred, in law and in facts, in computing the arm's length price without giving the benefit of 5 percent under the proviso to section 92C of the Act; 18. The learned TPG/ learned AO have erred, in law and in facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables.
The learned AO/TPO have erred, in law and in facts, by making negative working capital adjustment of -12.96% in relation to the advanced services segment and - 13% in relation to the technical services segment without appreciating the fact that the Appellant is a captive service provider and does not bear any working capital risk.
The learned AG has erred in making a reference to the TPO without recording a finding that he considers it 'necessary or expedient' to do so as required under section 92CA(1) of the Act, hence the reference made by the learned AO to TPO suffers from jurisdictional error.
The learned DRIP erred by ignoring the fact that since the Appellant is availing tax holiday benefits under section 10A of the Act, there is no motive or reason to shift the profits outside India, restricting of which is the basic intention of introducing the transfer pricing provisions. C. Grounds of appeal
relating to other matters
22. The learned AO has erred in law by not allowing a set off of the brought forward losses of AY 2010-11 amounting to INR 5,56,68,704 while computing the taxable income for AY 2011-12. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.”
Page 7 of 37 IT(TP)A No.309 & 426/Bang/2016 Brief facts of the case are as under: 2. The assessee is primarily engaged in providing technical, advanced, professional engineering and consultancy services in the area temp telecommunication and networking technologies. Assessee is 100% subsidiary of Cisco Systems Netherlands Holdings BV and has set up branch office in India. 2.1 For the year under consideration assessee filed return of income on 30/11/2011 declaring total income of Rs.17,92,72,000/-. The case was taken up for scrutiny and notice under section 143(2) was issued. Subsequently notice under section 142(1) was issued in response to which representative of assessee appeared before Ld.AO and filed requisite details as called for. The Ld.AO observed that assessee had entered into international transaction with its associated enterprises exceeding Rs.15 crore and therefore the case was referred to Transfer Pricing officer to determined the arm’s length price of the international transactions. 2.3 On receipt of the reference, the Ld.TPO called upon assessee to file economic details of the international transaction in form 3 CEB. Ld.TPO observed that assessee had following international transaction with its associated enterprises: Particulars Amount (Rs. '000) Receipt for provision of technical services 20,778 Receipt for provision of Advanced services 1,246,914 Purchase of assets 11,383 Payment for outsourced services 139,150 Reimbursement of expenses 352,452 Recovery of expenses 257,134
Page 8 of 37 IT(TP)A No.309 & 426/Bang/2016 2.4 The assessee used OP/OC as PLI and TNMM as most appropriate method to determined arm’s length price of the consolidated transactions. Particulars Rs. (000) Technical Services 20,778 Advanced Services 1,246,914 Operating Income 1,267,692
Total Expenditure 1,093,369 Less: Exchange Loss 6,189 Operating Expenditure 1,087,180
Operating Profit 180,512 OP/OC 16.60% 2.5 In the TP study, the Ld.TPO observed that assessee had used 5 comparables in respect of technical service service and advanced service segment with an average margin of 17.71% respectively. 2.6 The Ld.TPO was of the opinion that assessee provided services under 2 segments being technical services and advanced services as per service agreement between assessee and the AE. It was observed by the Ld.TPO that the services provided by assessee for preceding 2 assessment years were same however assessee had used different set of comparables to benchmark the international transaction for provision of same set of technical services and advanced services. 2.7 The Ld.TPO dissatisfied with the approach of benchmarking the transaction, segregated the technical services to be in the nature of IT enabled service and advanced services to be in the nature of software development services Dissatisfied with the Page 9 of 37 IT(TP)A No.309 & 426/Bang/2016 comparables selected by the assessee under both the segments. The Ld.TPO thus computed the segmental details based on the cost as under:
Particulars ITES SWD Total Revenues 20,778,000 1,246,914,000 1,267,692,000 Operating Cost 17,662,029 1,059,290,971 1,076,953,000 Operating Profit 3,115,971 187,623,029 190,739,000
Add: Miscellaneous Income 509,000 Less : Other Expenses 41,000 Less : Foreign Exchange Loss 6,189,000 Less Prior Period Expenses 5,744,000 Profit Before Tax 179,274,000 17.64% 17.71% OP/OC 17.71% 2.8 The Ld.TPO applied certain filters and finalised the following comparables: software development service segment
SI. PLI Name Sales Cost No 1 Acropetal Technologies Ltd.(seg) 814,016,893 616,754,876 31.98%
93255341 21.03% 2 e zest solutions (from Capitaline) 112866098 166447527 56.44% 3 E-infochips Ltd 260384251 133996568 8.11% 4 Evoke (from Capitaline) 144869912 5 I C R A Techno Analytics Ltd. (in 000) 158401000 126894000 24.83% 6 Infosys Ltd 253850000000 177,030,000,000 43.39%
7 Larsen & Toubro Infotech Ltd. 23318122096 19,764,861,289 19.83% 7,937,143,242 10.66% 8 Mindtree Ltd.(seg) 8,783,000,000
155,172,089 22.12% 9 Persistent Systems & Solutions Ltd. 189,490,457 22.84% 6,101,270,000 4,971,860,000 10 Persistent Systems Ltd. 16.37% 1,882,638,471 1,617,804,170 11 R S Software (India) Ltd.
3,175,616,000 24.13% 12 Sasken Communication Technologies 3,941,962,000
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13 Tata Elxsi Ltd (seg) 3,581,985,000 2,962,533,352 20.91% AVERAGE MARGIN . , 24.82% engaluw 7/ IT enabled service segment: Sl.no name of the case operating income operating cost OP/OC 1 Accentia Technologies Ltd. 1,069,026,524 82,93,91,898 28.89% 2 Acropetal Technologies 494,399,332 389706574 26.86% 3 Cosmic Global Ltd. 62,496,615 5,69,15,360 9.81% e4e Healthcare(capitaline) 613,160,587 54,56,25,872 12.38% A 4 5 I C R A Online Ltd.(seg) 156,691,000 11,67,49,267 34.21% , 6 Jeevan scientific technology Ltd 1,721,400,000 1,00,86,52,592 70.66% 7 Infosys B P 0 Ltd. 11,291,147,909 9,57,73,24,546 17.89% 8 Jindal Intellicom (capitaline) 390,358,799 35,12,69,641 11.13% 9 Mindtree Ltd (seg) 5,653,000,000 5,10,39,05,999 10.76% 10 iGate Global solutions Ltd 11,845,540,000 9,47,11,65,000 25.07% Average Margin 24.77% 2.9 The Ld.TPO restricted the average working capital at 1.63% for software development service segment and 1.47% for ITES service segment. However he denied the risk adjustment. 2.10 The Ld.TPO thus proposed an adjustment of Rs.20,79,16,220/-under software development service segment and Rs.35,32,017/- under IT enabled service segment being the shortfall. 2.11 On receipt of the Transfer Pricing order, Ld.AO passed draft assessment order by making following disallowances in addition to the proposed transfer pricing adjustment: Disallowance under section 40(a)(i) i) international assignee cause- Rs.5,50,93,000/- ii) recharge of other costs- Rs.7,08,65,000/-
Page 11 of 37 IT(TP)A No.309 & 426/Bang/2016 Disallowance under section 10A- Rs.11,87,87,177/- 2.12 Aggrieved by the draft assessment order of Ld.AO, assessee filed objections before the DRP. 2.13 The DRP in considering the comparables alleged by assessee did not accept exclusion of 8 comparables under software development service segment and 4 comparables under ITES service segment. Following were the final set of comparables post DRP directions: 2.14 Software Development service segment
Cisco Systems Services BV - India Branch Advanced services segment
Operating margin of Appellant: 17.05% (taking forex as operating)
TPO TPO Comparables Comparables Comparables Comparables upheld by DRP upheld by DRP (single year (single year (single year (single year SI. Particulars margins margins margins margins No. considering considering considering considering forex as non- forex as forex as non- forex as operating) operating) operating) operating)
1 Acropetal Technologies Ltd (Seg) 31.98% 31.70% 21 03% 22.64% 2 e-Zest Solutions Ltd 3 E-Infochips Ltd 56.44% 62.58% 4 Evoke Technologies Pvt Ltd 8.11% 8.11% 5 ICRA Techno Analytics Ltd 24.83% 25.91% 6 lnfosys Ltd 43.39% 43.76% 19.71% 19.83% 7 Larsen & Toubro Infotech Ltd 11.79% 8 Mindtree Limited (Seg) 10.66% 9 Persistent Systems and Solutions Ltd 22.12% 21.51% 22.12% 21.51% 22.84% 26.44% 22.84% 10 Persistent Systems Ltd 26.44% 16.37% 16.35% 11 R S Software (India) Ltd 12 Sasken Communication Technologies Ltd (Seg) 24.13% 27.62% 24.13% 27.62% 13 Tata Elxsi Ltd (Seg) 20.91% 21.73%
Page 12 of 37 IT(TP)A No.309 & 426/Bang/2016 Arithmetic mean 24.82% 26.14% 23.03% 25.19% Less: Working capital adjustment (Note 1) -12.52% -12.45% -12.96% -12.90%
37.34% 38.59% 35.99% Adjusted arithmetic mean 38.09% 2.15 ITES service segment:
Comparables margins as per TPO Comparable SI No Company Name order considering forex as operating margins post DRP direction (single year margins)
1 Accentia Technologies 28.89% 28.89% Limited 26.86% 26.86% 2 Acropetal Technologies 34.21% 34.21% Limited 9.81% 9.81% 3 ICRA Online Limited 12.38% 12.38% (segmental) 4 11.13% 11.13% Cosmic Global Limited 5 70.66% e4e Healthcare Business 17.89% Services Pvt. Ltd. 10.76% Jindal Intellicom Limited 6 25.07% Jeevan Scientific Technology Limited
8 lnfosys BPO Limited
Mindtree Ltd (segmental) iGate Solutions Limited 10 24.77% 20.55% Adjusted arm's length mean
16.98% 16.98% Assessee margin
22.83% 22.83% 105% of the Transfer Price
Conclusion At arm's length 2.16 The DRP granted relief in terms of deduction under section 10A by directing to include communication expenses, foreign currency expenses incurred in relation to outsource services, recharge of international assignee cause and recharge of other costs from the export turnover.
Page 13 of 37 IT(TP)A No.309 & 426/Bang/2016 2.17 Upon receipt of the DRP directions, Ld.AO passed the final assessment order by making addition in the hands of assessee at Rs.33,86,57,348/-. 2.18 Aggrieved by the order of Ld. AO, assessee as well as revenue are in appeal before us now. We shall 1st take up the appeal filed by revenue: 3. Ground No. 1 is general in nature and therefore do not require any adjudication.
Ground No. 2-3 is in respect of exclusion of expenditure is incurred in foreign currency both from export turnover as well as from total turnover for the purpose of computation of deduction under section 10 A/10 AA of the Act. 4.1 The Ld.AR submitted that assessee has incurred for filling expenses in foreign currency in relation to STPI units: communication charges-Rs.50,67,621/- outsourced services-Rs.6,95,80,000/- recharge of international assignee cost-Rs.5,90,59,000/- 4.2 The Ld.AR submitted that, the issue stands settled by Hon’ble Supreme Court in case of CIT vs HCL technologies Ltd., in Civil appeal No. 8489-8490 of 2013, wherein by order dated 24/04/2018 Hon’ble Supreme Court put to rest the controversy in respect of computation of deduction under section 10 A of the act. Hon’ble Supreme Court held that while computing relief under section 10A the amount of communication expenses should be excluded from total turnover if the same is reduced from the export turnover.
Page 14 of 37 IT(TP)A No.309 & 426/Bang/2016 4.3 On the contrary the Ld.CIT.DR placed reliance on orders passed by the Ld. AO in draft assessment order. 4.4 We have perused submissions advanced by both sides in light of records placed before us. 4.5 We note that the Ld.AO followed the ratio laid down by Hon’ble Supreme Court in case of CIT vs HCL Technologies Ltd (supra) in computind deduction under section 10AA/10A of the Act. We therefore do not find any infirmity the view taken by the Ld.AO in respect of the communication charges incurred by assessee is to be excluded from the total turnover and export turnover. 4.6 In respect of recharge of international assignee cost and other costs, admittedly these have been incurred in foreign currency and that for the purpose of business of assessee. Under such circumstances these forms part of export turnover. However as Hon’ble Supreme Court in case of CIT vs HCL Technologies Ltd (supra) held that while computing relief under section 10A if an item has been eliminated from the total turnover, the same should also be eliminated from export turnover. Respectfully following the ratio laid down by Hon’ble Supreme Court in case of CIT vs HCL Technologies Ltd (supra) we do not find any infirmity in the view taken by the Ld.AO. Accordingly these grounds raised by revenue stands dismissed.
5. Ground No. 4 is in respect of holding foreign exchange transaction to be operating in nature.
Page 15 of 37 IT(TP)A No.309 & 426/Bang/2016 5.1 The Ld.AR of the outset submitted that this issue has been considered by coordinate bench of this Tribunal in assessee’s own case for assessment year 2009-10 reported in (2015)55 Taxmann.com 227. 5.2 The Ld.CIT.DR placed reliance on orders passed by the Ld.AO in draft assessment order. 5.3 We have perused submissions advanced by both sides in light of records placed before us. 5.4 On perusal of the order for assessment year 2009-10 we note that this Tribunal had followed another decision of assessee’s own case in Cisco Systems India Pvt.Ltd., vs DCIT reported in (2012) 49 SOT 108 wherein similar view was taken. Respectfully following the same we do not find any infirmity in the view taken by the Ld.AO in considering the foreign exchange transaction to be operating in nature. Accordingly this ground raised by revenue stands dismissed.
6. Ground No.5-10 is in respect of transfer pricing adjustment relating to software development service segment
7. Ground No.11-13 is in respect of transfer pricing adjustment relating to ITES service segment. 7.1 In these grounds revenue is challenging exclusion of comparables by the Ld.AO/DRP. 7.2 Before we undertake the comparability analysis, it is sine qua non to understand the functions performed by assessee, assets owned and risks assumed. Functions:
Page 16 of 37 IT(TP)A No.309 & 426/Bang/2016 7.3 It has been submitted that assessee is involved in provision of software support services for the purpose of development of software tools, applications and processes for Cisco groups internal use. Ltd. The Ld.AO observed that the services involved undertaking of development of software coding according to the required functional specifications and software requirement analysis, testing of software tools and applications developed to ensure that activity undertaken meets the required specifications of internal Cisco group companies. Further assessee also renders presale consulting services relating to network designed, planning and implementation. 7.4 In respect of advanced services, it has been observed by the Ld. TPO that assessee provides focused technical support, network optimisation support, technology application support, planning and designing, implementation, training. Assets owned 7.5 It is submitted before the Ld.TPO that assessee do not own any interest in the intangibles under both the segments and is a contract service provider with respect to technical services and cost plus markup basis for the provisions of advanced services. Risks owned: 7.6 Except for the foreign exchange risk, assessee do not own any other risks. 7.7 Thus the Ld.TPO has observed that all the activities carried on by assessee is with the specifications, directions and controlled by the AE’s and assessee do not obtain any proprietary
Page 17 of 37 IT(TP)A No.309 & 426/Bang/2016 interest in any of the intellectual property so developed. It was also observed that assessee is remunerated on a cost plus markup basis for the provisions of technical services. Assessee has thus been characterised to be a contract service provider undertaking to provide technical services to its overseas affiliates.
Ground 5-10: The Revenue seeks inclusion of following comparables under software development service segment: M/s R S Software Pvt.Ltd M/s Acropetal Technologies Ltd. M/s L&T Infotech Ltd. M/s E Infochips Ltd. M/s.ICRA Techno analytics Ltd. M/s Infosys Technology Ltd. M/s Tata Elxsi Ltd. M/s E-zest Solutions Ltd. 8.1 We have heard the rival submissions of both the sides in the light of the records placed before us. RS software (India) Ltd. 8.2 It was submitted by the Ld.AR that, assessee do not have any objection in inclusion of this comparable. Accordingly this comparable is directed to be retained in the final list. Acropetal Technologies Ltd. (SEG).
Page 18 of 37 IT(TP)A No.309 & 426/Bang/2016 8.3 Assessee seeks exclusion of this comparable as there is no proper segmental breakup and it is difficult to understand whether the company passes employee cost filter and export earning filter. It is also submitted that the company is engaged in the development of software predominantly on-site. The Ld.AR submitted that this company is functionally not similar with that of assessee as it is engaged in providing wide array of services like engineering design services, healthcare, enterprise solutions and IT Infrastructure solutions. It is also engaged in software product development. 8.4 From the annual report we note that revenue from software development service of this company was Rs.81.40 crores out of the total operating revenue of Rs.141 crores. Thus revenue from software development is admittedly less than 75% of the total operating revenue of this company. We further note that the assessee referred to in the decisions relied upon by the Ld. ar are also engaged in providing software development services to its associated enterprises as a captive service provider. There is nothing on record that has been brought by the Ld. CIT DR in order to deviate from the aforesaid view taken by the coordinate bench for excluding this comparable. The decisions relied upon by Ld.AR considered all these aspects to exclude this comparable in case of a captive service provider like assessee. Accordingly, we do not find any infirmity in exclusion of this company from final list. 8.5 E-zest solutions Ltd.
Page 19 of 37 IT(TP)A No.309 & 426/Bang/2016 The assessee is seeking exclusion of this comparable from the finalist on the ground that it is functionally different. It has been submitted that this company is engaged in product engineering and software development. It is also been submitted that this company owns inventories and the segmental details are not available.. 8.6 On the contrary the Ld.CIT.DR submitted that Ld.TPO is observed that this company was engaged in software development and that company had only one reportable segment in accordance with AS 17. Such view of the Ld.TPO has been upheld by the DRP. 8.7 We have perused submissions advanced by both sides in light of records placed before us. 8.8 We note that the decision of coordinate bench of this Tribunal in case of Applied Materials Pvt.Ltd., in IT(TP)A Nos17&39/Bang/2016 by order dated 21/09/2016 remanded this comparable back to Ld.AO/TPO for fresh consideration for the reasons cited by the Ld.CIT.DR. Respectfully following the same we also remand this comparable back to Ld.AO/TPO to be considered afresh in accordance with the observations laid down by this Tribunal in case of Applied Materials Pvt.Ltd., (supra). Accordingly this comparable stands remanded for fresh consideration. 8.9 It has been submitted by Ld.CIT.DR that, DRP erred in directing exclusion of ICRA Techno Analytics Ltd on the ground that it is into diversified activity and no segmental details are Page 20 of 37 IT(TP)A No.309 & 426/Bang/2016 available. In respect of E-Zhest Solutions Ltd., M/s.Infosys Technologies Ltd. and M/s.Tata Elxsi Ltd., Ld.CIT DR submitted that DRP excluded them for functionally not comparable. He submitted supporting order of Ld.TPO that they are predominantly into Software development. Ld.CIT.DR thus submitted that, these comparables are into SWD and is functionally similar with assessee and deserves to be included. 8.10 On the contrary, Ld.AR relied on decisions of coordinate bench of this Tribunal in following case for same assessment years, which is followed in plethora of other decisions of this Tribunal for exclusion of these comparables. He submitted that all these comparables have been excluded: Applied Material India Pvt.Ltd in IT(TP)A Nos.17 & 39/Bang/2016 by order dated 21/09/2016; GT Nexus Software Pvt.Ltd., in IT(TP)A Nos.31 &409/Bang/2016 by order dated 21/09/2016 DCIT vs. LSI India Research Pvt.Ltd reported in (2017) 83 taxmann.com 357 for assessment year 2011-12. 8.11 We note that in the recent decision by coordinate bench of this Tribunal in case of DCIT vs. LSI India Research Pvt.Ltd reported in (2021) 126 taxmann.com 80 for assessment year 2011-12 these comparables were excluded by considering all the above decisions as under: “Ground 6-10: 41 …………… “9. Now we decide about the remaining six comparables excluded by the DRP and other four comparables retained by the DRP for which the assessee is seeking exclusion. We find that out of these six comparables excluded by the Page 21 of 37 IT(TP)A No.309 & 426/Bang/2016 DRP, one comparable i.e. ICRA Techno Analytics Ltd. is having RPT in excess of 15% and therefore, for this reason alone this company has to be excluded although, the DRP has excluded it for a different reason that it is having various activities and the segmental data are not available. We hold this exclusion on account of RPT filter. In fact, we find that para-8 & 9 of the Tribunal order rendered in the case Commscope Networks (India) (P.) Ltd. (Supra) is relevant in respect of inclusion/exclusion of nine companies directed to be excluded by DRP and also in respect of exclusion of four companies which were retained by DRP but it was the contention of the assessee for exclusion thereof. We therefore, re-produce para-8 & 9 of the Tribunal order for the sake of ready reference; "8. We decide the issue of various exclusions and inclusions in these cross appeals. Regarding inclusion of 3 comparables out of 9 comparables excluded by DRP, we find that when both sides are seeking inclusion of these 3 comparables being 1 (Evoke Technologies Pvt Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. and their inclusion is proper as per the tribunal order rendered in the case of Applied Materials India Pvt. Ltd. v. ACIT as reported in TS-815- ITAT - 2016, we reverse the order; of DRP; about exclusion of these 3 '' comparables and 'direct the AO/TPO to include these three in final list of comparables.
9. Now we decide about the remaining 6 comparables excluded by DRP and 4 comparables retained by DRP but for which the assessee is seeking exclusion. Out of these 6 comparables excluded by DRP, one comparable ICRA Techno Analytics Ltd. is having RPT in excess of 15% and therefore, for this reason alone, this comparable has to be excluded although DRP has excluded it for a different reason that it is having various activities and segmental data are not available. We uphold its exclusion on account of RPT filter. Exclusion of Acropetal Technologies Ltd. (Seg) is covered in favour of the assessee by the same tribunal order rendered in the case of Applied materials India Pvt. Ltd. v. ACIT (Supra). Respectfully following the same, we uphold its exclusion. Exclusion of 1) e - Zest Solutions Ltd., 2) Infosys Ltd., 3) Larsen & Toubro Infotech Ltd., 4) Persistent Systems & Solutions Ltd., 5) Persistent Systems Ltd., 6) Sasken Communication Technologies Ltd. and 7) Tata Ebcsi Ltd. are also covered in favour of the assessee by the same tribunal order rendered in the case of Applied Materials India Pvt. Ltd. v. ACIT (Supra). Respectfully following the same, we uphold the exclusion of these Seven comparables also. Exclusion of E - Infochips Ltd. is covered in favour of the assessee by the tribunal order rendered in the case of Saxo India Pvt. Ltd. v. ACIT in ITA No, 6148/Del/2015 dated 05.02.2016 Para 10.1 & 10.2 available at pages 221 to 223. Respectfully following the same, we uphold its Page 22 of 37 IT(TP)A No.309 & 426/Bang/2016 exclusion. In this manner, we uphold the exclusion of six comparables excluded by DRP out of 9 comparables excluded by DRP and exclude 4 comparables retained by DRP and we have already held that out of 9 comparables excluded by DRP, 3 have to come back being 1.) Evoke Technologies Pvt, Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. Now, we decide about LGS Global Ltd. As per the tribunal order rendered in the case of Applied materials India Pvt. Ltd. v. ACIT (Supra), this is a good comparable and therefore, we direct the A.O. and TPO to include this comparable. So, there should be 4 comparables in the final list of comparable and on the basis of that, the AO/TPO should work out the ALP".
As per the above two paras, reproduced from the order of the Tribunal rendered in the case Commscope Networks (India) (P.) Ltd. (Supra), we find that in that case, the Tribunal held that out of 9 comparables excluded by DRP, 3 have to come back being 1) Evoke Technologies Pvt. Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. Out of remaining 10 comparable companies selected by TPO, the tribunal in that case excluded. 9 companies being 1) ICRA Techno Analytics Ltd., 2) Acropetal Technologies Ltd. (Seg), 3) e - Zest Solutions Ltd., 4) Infosys Ltd., 5) Larsen & Toubro Infotech Ltd., 6) Persistent Systems & Solutions Ltd., 7) Persistent Systems Ltd., 8) Sasken Communication Technologies Ltd, and 9) Tata Elxsi Ltd. Hence, in that case, only four companies were left in the final list of comparables being J) 1) Evoke Technologies Pvt. Ltd., 2) Mindtree Ltd. (Seg) and 3) R S Software (India) Ltd. and 4) Larsen & Toubro Infotech Ltd. 8.12 From the above, it is observed that ICRA Techno Analytics Ltd., E-Zhest Solutions Ltd., M/s.Infosys Technologies Ltd. and M/s.Tata Elxsi Ltd., have been consistently excluded by this Tribunal in case of captive service provider like assessee. Further Ld.CIT DR could not establish anything contrary to observations of this Tribunal reproduced hereinabove. 8.13 Respectfully following aforestated view, we do not find any infirmity in exclusion of these comparables by DRP. Accordingly these Grounds raised by revenue stands dismissed E Infochips Ltd.
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The Ld.CIT DR submitted that Ld.TPO while analysing comparables observed that, this company has revenue from software development up to 88%. Submitted that per contra, DRP observes that revenue earned by this company is less than 75%, and therefore cannot be included. She submitted that basis of DRP to hold that revenue is less than 75% has not been demonstrated and therefore needs to be reconsidered. Ld.AR placed reliance upon decision of coordinate bench of this Tribunal in case of Electronics for Imaging India Pvt.Ltd (supra) wherein, E- Infochips Ltd is excluded for failing in service income filter. 9.1 We have perused submissions advanced by both sides in light of records placed before us. 9.2 We note that in the recent decision by coordinate bench of this Tribunal in case of DCIT vs. LSI India Research Pvt.Ltd reported in (2021) 126 taxmann.com 80 for assessment year 2011-12 these comparables were excluded by considering all the above decisions as under: “39. It is observed that this Tribunal in case of Autodesk India Pvt Ltd. vs ACIT (supra) excluded E- Infochips Ltd., by following view taken by this Tribunal in case of Comscop Network (India) Pvt.Ltd. Limited vs ITO in IT (TP) A/Bang/2016 dated 22/02/17 wherein, this company was excluded for reason that, there is no segmental information regarding diverse functions performed by this company and that there was major fluctuation in its profits, which influenced turnover of this company. We also note that this Tribunal in case of DCIT vs CGI Information Systems (supra) had encountered with an Page 24 of 37 IT(TP)A No.309 & 426/Bang/2016 identical situation for year under consideration. This tribunal observed as under: “24. As far as ground No. 4 raised by revenue is concerned, the said ground of appeal is weak and any event comparability of companies that were excluded by the DRP were on valid grounds contemplated by the relevant statutory provisions of the act and rules. As far as ground No. 5 in revenue’s appeal is concerned, the revenue seeks to challenge the exclusion of AE Infotech Ltd. On the ground that it failed direct software service income filter at 75%. At the outset, the assessee submits that E Infotech Ltd was excluded by the DRP on the ground that: (i) no segmental information is regarding its diverse functions is available; (ii) it failed the software service income filter and 75%; (iii) there were major fluctuations in profit and turnover every years which seems to be influenced by extraordinary/peculiar circumstances; and (iv) there is a presence of inventory (page 10 and 11 of the DRP’s directions). The revenue, in its appeal has challenged its exclusion only on the 2nd ground. In other words, the revenue has not challenged its exclusion on the other grounds stated hereinabove and thus its exclusion on these grounds have attained finality and cannot be disturbed by this Hon’ble Tribunal. Even otherwise, we are of the view that the DRP rightly arrived at the finding that companies software development service revenue for FY 2010-11 was less than 75% of its total operating revenue for the year. Thus the above action of the DRP in rejecting the above companies correct.” From the above, it is observed by this Tribunal consistently in various decisions for A.Y: 2011-12 held that, this company does not satisfy service income filter being 75%. We therefore, do not see any reason to set aside this company to Ld.TPO. Therefore, respectfully following view taken by coordinate bench of this Tribunal in DCIT vs M/s CGI Information Systems and Management Consultations Pvt.Ltd. (supra), we direct Ld. TPO to exclude this company. 9.3 From the above, it is observed that E Infochips has been consistently excluded by this Tribunal in case of captive service provider like assessee. Further Ld.CIT DR could not establish anything contrary to observations of this Tribunal reproduced hereinabove.
Page 25 of 37 IT(TP)A No.309 & 426/Bang/2016 9.4 Respectfully following aforestated view, we do not find any infirmity in exclusion of these comparables by DRP. Accordingly this ground raised by revenue stands dismissed.
10. Ground 11-13 The revenue seeks exclusion of following comparables under ITES segment: Jeevan scientific technology Ltd. 10.1 It has been submitted that this comparable was considered by coordinate bench of this Tribunal under similar circumstances in case of ACIT vs 24/7 Customers (P.) Ltd., reported in (2019)111 taxmann.com 439, wherein following comparables have been considered under similar circumstances:
23. As far as ground No.6 is concerned, the DRP applied the Related Party Transaction (RPT) filter i.e., it excluded companies which had transactions with related parties. The threshold limit applied by the DRP on account of RPT filer was 0%. By applying the aforesaid filter, the DRP excluded Accentia Technologies Ltd., Acropetal Technologies Ltd., Cosmic Global Ltd. and Jeevan Scientific Technology Ltd. from the list of comparables.
24. The ld. DR submitted that in some of the decisions rendered by the Bangalore Bench of ITAT threshold limit of 25% of sales was applied to exclude companies on account of RPT Filter and therefore the decision of the DRP should be modified by holding that the threshold limit for applying RPT filter should be 25% of sales. We find that the Bangalore ITAT in the case of AutodeskIndia (P.) Ltd. (supra) after considering the application of RPT Filter at 15% and 28% held as follows:— "In Ground No.4 (e) of the grounds of appeal, the Assessee seeks exclusion of Geometric Software solutions Co. Ltd; and Foursoft Ltd. from the list of comparable companies as these companies have Related Party Transaction (RPT) of more than 15%. learned DR drew our attention to the decision of the Hon'ble ITAT Bangalore 'B' Bench in the case of Robert Bosch Engineering and Business Solutions Ltd. (supra) wherein the Tribunal in paragraph 8 has observed 25% to 15% RPT filter has to be applied depending on availability of comparables. His
Page 26 of 37 IT(TP)A No.309 & 426/Bang/2016 submission was therefore that companies with RPT of 25% or more alone should be excluded from the list of comparable companies chosen by the TPO and the action of the CIT(A) in excluding comparable companies even in a case where there are single and insignificant RPT was not correct. The learned counsel for the Assessee, on the other hand, pointed out that this Tribunal, in the eases of 2417 Customer (P.) Ltd. v. Dy. CIT [2012] 28 taxrnann.com 258/[2013] 140 ITD 344 (Punj.)Sony India (F) Ltd. v. Dy. CIT [2008] 114 LTD 448 (Delhi) and various other cases, has taken a view that comparables having RPT of upto 15% of total revenues can be considered as comparable company. We have considered the rival submission. It is no doubt true that in the case of Robert Bosch (supra) this Tribunal has held that RPT filter can be in the range of 25% to 15% of the total receipts from software development services, depending on availability of comparable companies. It is no body's ease that there is dearth of comparable companies in software development services industry. Therefore it would be safe to follow the ruling of this Tribunal in the cases of 2417 Customer (P.) Ltd. (supra), Sony India (P.) Ltd. (supra) wherein a view has been taken that comparable companies having RPT of upto 15% of total revenues can be considered as comparable companies. In view thereof, the plea of the Assessee requires to be accepted. The TPO/AO are directed to adopt a threshold limit of 15% of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently, it is held that companies having RPT upto 15% of the total revenues can be included."
We have considered the submission of the learned DR in the light of the decision referred to above and we are of the view that application of RPT filer at 15% of the sales would be appropriate in the given facts and circumstances of the case and as laid down in the case of AutodeskIndia (P.) Ltd., (supra). We hold accordingly and direct the TPO to exclude companies whose related party transactions are 15% or more of the sales.
10.2 Nothing contrary to the above observations have been brought to our notice by the Ld.CIT.DR. Respectfully following the same we do not find any infirmity in exclusion of Jeevan scientific technology Ltd. from the final list.
Page 27 of 37 IT(TP)A No.309 & 426/Bang/2016 M/s iGate global solutions Ltd. & Infosys BPO Ltd. 10.3 These comparable were under consideration by coordinate bench of this Tribunal by order dated 07/01/2021 in case of ITO vs Digicaptions India Pvt.Ltd., in IT(TP) No.193/B/2016 and 48/B/2016 on similar circumstances as under: 12. As far as exclusion of iGate Global Solutions Ltd. ("iGate") is concerned, the finding of the DRP is that i-Gate is engaged in provision of varied services and no segmental breakup of the same is available in its Annual Report. Further. the company's' software services segment is clubbed with its ITEs segment and there is no breakup between the revenues generated from the two segments. During the year under consideration, this company had acquired majority equity interest in Patni Computer Systems Ltd. rendering it incomparable due to it failing the TPO's own filter of having peculiar economic circumstances. In addition, the company owns significant intangibles in its name, which is evident from the balance sheet of the company for the Financial Year 2010-11. We are of the view that the above reasons given by the DRP for excluding this company as a comparable company is right and does not call for any interference.
14. As far as exclusion of Infosys BPO Ltd., and Mindtree Ltd., is concerned, we find that the DRP was of the view that Infosys BPO Ltd., was a giant in the field and had huge brand value and diversified activities and therefore excluded it from the list of comparable companies. Similarly Mindtree Ltd., was excluded for the reason that this company was not functionally same as ITeS company and there were extraordinary events that took place during the relevant previous year which had effect on its margin. We find the reasoning of the DRP to be acceptable and find no grounds to take a different view.
10.4 Revenue has not been able to point out any profile difference between this assessee that was considered by coordinate bench of this tribunal with present assessee before us is. Nothing has been brought on record to take any contrary view. Respectfully following the same we do not find any infirmity in this company to be excluded. Assessee’s Appeal
Page 28 of 37 IT(TP)A No.309 & 426/Bang/2016 10.5 Coming to assessee’s appeal, Ld.AR submitted that assessee is seeking exclusion of following comparables under software development service segment. It has been submitted that all these comparables alleged by assessee for inclusion/exclusion under both the segments have been tabulated in the brief synopsis and solutions. 10.6 The Ld.AR submitted that assessee also seeks working capital adjustment under both the segments which was denied by authorities below. We place reliance on various decisions in support of the argument that negative working capital Is not required in a case of captive service provider as it is fully insulated with the AE against all the risks.
Comparables sought for exclusion under software development service segment by assessee Persistent Systems and Solutions Ltd. Sasken Communications Technologies Ltd. Persistent Systems Ltd. 10.7 It was submitted that these comparables have been considered by coordinate bench of this Tribunal under similar circumstances in case of DCIT vs.Electronics for Imaging reported in (2016)70 taxmann.com 299, wherein following comparables have been considered under similar circumstances: (4) Persistent Systems Ltd.
We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the Page 29 of 37 IT(TP)A No.309 & 426/Bang/2016 assessee has also pointed out that there was an acquisition and restructuring during the year under consideration.
25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us.
Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables. Persistent Systems & Solutions Ltd.
The assessee has the grievance against rejection of this company by the DRP. The ld. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables.
Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of Rs. 6.67 crores. We further note that as per Schedule 11, the entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. This ground of CO is dismissed.
Page 30 of 37 IT(TP)A No.309 & 426/Bang/2016 (5) Sasken Communication Technologies Ltd.
The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables.
We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. lakhs Year ended March Year ended 31, 2010 March 31, 2019
Software Services 37,736.22 40,531.20
Software products 2,041.00 6,146.43 Other services 372.77 1297.05 Total revenues 40,150.89 47,974.68
Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. Nothing has been brought on record by the Ld. CIT DR to take a diversion view from a consistent approach by this Tribunal. Respectfully following the same, we direct these comparables to be excluded from the final list 12. Assessee is seeking inclusion of following comparables under soft ware development service segment being: Evoke Technologies Pvt.Ltd & Mindtree Ltd. 12.1 These comparables were considered by coordinate bench of this Tribunal under similar circumstances in case of DCIT
Page 31 of 37 IT(TP)A No.309 & 426/Bang/2016 vs.Electronics for Imaging reported in (2017) 85 taxmann.com 124, as under: “We note that the assessee did not raise any objection against two companies viz. Evoke Technologies Pvt. Ltd. and R.S. Software (India) Limited before the DRP. However, the DRP rejected these two companies on its own. Now the assessee has no objection if these two companies are restored to the set of comparables. Further the assessee is also not raising any objection in respect of the company Mindtree Limited if the same is restored to the set of comparables. Hence in view of the submission of ld. AR these three companies namely Evoke Technologies Pvt. Ltd., Mindtree Limited (Seg) & R S Software (India) Limited are restored to the set of comparables and to that extent the grounds of the revenue's appeal are allowed.”
12.2 In the present facts, we note that the authorities below have not liked into the FAR of assessee with that of these comparables. We therefore remand these comparables back to the Ld. AO/TPO for due verification of FAR analysis of this comparables with that of assessee and to consider them in accordance with law. Accordingly Evoke and Mindtree are remanded to the Ld.AO/TPO for fresh consideration.
13. Assessee seeks exclusion of following comparables under ITES service segment: ICRA Online Ltd. Accentia Technologies Ltd. Acropetal Technologies Ltd. 13.1 These comparable were considered by coordinate bench of this Tribunal under similar circumstances in case of DCIT vs. Tesco Hindustan service Centre Pvt.Ltd., reported in (2017)79
Page 32 of 37 IT(TP)A No.309 & 426/Bang/2016 taxmann.com 259, wherein following comparables have been considered under similar circumstances: 10. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The ld. AR of the assessee has stated that the functional comparability of these four companies have been examined by this Tribunal in assessee's own case for the Assessment Year 2008- 09 and there is no material difference in the functions of the assessee or in the comparable companies for the year under consideration. He has further pointed out that in case of Accentia Technologies Ltd., the company has undergone business restricting as this company is amalgamated with Accentia Technologies Ltd. Apart from that the company is also engaged in medical transcription and coding. This company also develops in software products for business process outsourcing. Further this company is having 'on site' service as well as intangibles. Similarly, the other companies are also functionally not comparable as providing high end services. As regards the Fortune Infotech Ltd., the RPT of this company is 25% which is more than 15% filter applied by this Tribunal in assessee's own case for the Assessment Year 2008-09.
11. On the other hand, the learned Departmental Representative has relied upon the orders of the TPO and submitted that TPO has considered the functional comparability of all these companies and further it has applied the RPT filter of 25%.
We have considered the rival submissions as well as the relevant material on record. We find that the co-ordinate bench of this Tribunal in assessee's own case for the Assessment Year 2006-07 vide order dt.18.10.2016 in IT(TP)A No.l633/Bang/2012 has considered the comparability of these four companies and rejected these companies by considering the RPT at 15% as well as functional comparability. We find that the DRP has given the details of RPT of all the 10 companies at page 11 and therefore the following three companies will be excluded as not satisfying the tolerance range of 15% RPT filter. (i) Fortune Infotech Ltd. RPT 25% (ii) Icra Online Ltd. RPT 19.16% (iii) Sundaram Business Services RPT 29.44% Ltd.
13. As regards Accentia Technologies Ltd. and ICRA Online Ltd. this Tribunal in the assessee's own case for the Assessment Year 2008-09 has excluded these two companies from the set of comparables in para 5 as under:
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"5. Thereafter he submitted that the following companies should be excluded on the basis of functional dissimilarity and in support of his contention, he placed reliance on the Tribunal order rendered in the case of M/s.Flextronics Tech. (India) Pvt. Ltd. v. DCIT in IT(TP)A No.l559(B)/2012 dated 23.10,2015, copy available on page Nos.17 to 38 of compilation of case laws submitted before the Tribunal. (a) Accential Tech. Ltd. (Seg.) (b) Acropetal Tech. Ltd. (Seg.) (c) Coral Hubs Ltd. (d) Crossdomain Solutions Ltd. (e) Eclerx Services Ltd (f) Genesis international Corporation Ltd. (g) Mould Tek technologies Ltd. We further note that the functional comparability has been examined in detailed by the co-ordinate bench of this Tribunal in the case of Equant Solutions India (P.) Ltd. v. Dy. CIT [2016] 157 ITD 292/66 taxmann.com 192 (Delhi - Trib.) as well as in the case of ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bang. - Trib.). Further in the case of Acropetal Technologies Ltd. (Seg.), the co-ordinate bench of this Tribunal in the case of Kodiak Networks (India) Pvt. Ltd. v. Dy. CIT [IT(TP)A No.l540 (Bang) of 2012] has considered the functional comparability and found that this company is not comparable with a captive service provider. Accordingly we direct the Assessing Officer/TPO to exclude these companies from set of comparables. 13.2 Nothing has been brought on record by the Ld.CIT.DR to take a diversion view from a consistent approach by this Tribunal. Respectfully following the same, we direct these comparables are to be excluded from the final list. 13.3 In respect of negative working capital adjustment, the Ld.AR placed reliance on the decision of coordinate bench of this Tribunal in case of M/s ITA Software Solutions India Pvt.Ltd vs ACIT in ITA (TP) A No. 84/Bang/2017 by order dated 11/03/2021. It has been submitted that coordinate bench has observed and held as under: “7. The next issue urged by the assessee relates to consideration of negative working capital while making Transfer Pricing adjustment.
Page 34 of 37 IT(TP)A No.309 & 426/Bang/2016 It is the plea of the assessee that the negative working capital should be ignored. We notice that the issue relating to negative working capital has been examined by the co-ordinate bench of Tribunal in the case of ACIT vs. M/s e4e Business Solutions India P Ltd (ITA No. 2900/ Bang/ 2018) and it was held that negative working capital adjustment is not required in the case of a captive service provider, since it is fully insulated by its AE against working capital risks. The relevant observations made by the co-ordinate bench are extracted below:- "12. The third issue is with regard to grant of negative working capital adjustment. Working capital adjustment is made for the time value of money lost when credit period is given to customers. It is the submission of the id. counsel for the assessee in this case that the assessee is a captive unit which is entirely funded by the AE. The assessee has no borrowings and is filly compensated by the parent on a total cost plus. The assessee has no working capital risk - in other words, it is a risk-insulated service provider to the parent. The only customer of the company is its parent company. The Id. counsel for the assessee has relied on a host of ITAT decisions, the main decision being that of MIS. Software AG Bangalore Technologies Pit. Ltd.(supra) which in turn has relied on the decision of ITAT Hyderabad in the case of Adaptec (India) Private Limited and contended that no negative working capital adjustment is called for. The ld.DR's reliance is on the decision in the case of Technoiree Convergence P. Ltd. (supra) wherein it was held that negative working capital adjustment has to be allowed.
Comparables chosen operate under varied economic conditions. Therefore, while comparing a company to that of similar companies, it is necessary to undertake comparability adjustments. Balance sheet adjustments are intended to account for different levels of inventories, receivables, payables, interest rates etc. The most common balance sheet adjustments made to reflect different levels of accounts receivable, account payable and inventory are known as working capital adjustments. As mentioned by the OECD, comparability adjustments should not be performed on a routine or mandatory basis but rather on a case by case basis depending on the facts and circumstances. Economic rationale of Working capital of a business is the capital used in its day-to- day trading operations. Working capital is affected by numerous business incidences. it is very common for tested party and each of the potential comparables to differ materially in the amount of working capital (inventory, accounts receivables and payable). Such differences are mainly caused due to differences in the terms of purchase and sale, levels of inventory etc. For example: if the business advances a trade credit of (say) 60 days, its cash gets locked up for 60 days and reduces the working capital, it will have to borrow
Page 35 of 37 IT(TP)A No.309 & 426/Bang/2016 from open market to meet its working capital requirement, and hence incur expenses. Similarly, if it avails of trade credit of 60 days, it has surplus cash at its disposal. It will need to borrow less money to fund operational requirements. Hence, working capital position affects the additional cost incurred by a business by way of interest on borrowing front the open market. Working capital adjustments seeks to adjust for the differences in time value of money between tested parties and potential comparables with an assumption that differences should be reflected in profits Working capital adjustment has a strong rationale in economic theory. It facilitates to increase the comparability between the tested party and comparables working in an industry which is competitive. Working capital adjustment can work out to be positive or negative. A positive working capital adjustment (WCA) will tend to reduce the arm's length PLI while a negative WCA will tend to increase the arm's length PLI.
We find that the facts of the Assessee 's case are similar to that of the case of the Bangalore ITAT in the case of M/S.Software AG Bangalore Technologies Pvt.Ltd., and, therefore, we are inclined to delete the negative working capital adjustment. In determining ALP under TNMM, the correct approach would be to look at the costs incurred by the assessee only and should not impute any additional cost as done by TPO, which indirectly enhances the ALP artificially. The contrary view expressed in decision cited by the learned DR takes the view that Working capital adjustment is required in all cases as any credit extended to customers will result in cash locked up and will result in the assessee borrowing money from the banks and incur additional cost towards interest on these borrowings which cost will have effect on the price charged. It is the reasoning in these decisions that under TNM method that every ingredient of profit margins of comparable companies are analysed, whether it is positive or negative. The decision proceeds on the basis of effect on price owing to working capital requirement. We are of the view that working capital adjustment itself is computed on the basis of outstanding current assets and liabilities at the year end. It means that other things being equal, an entity having higher working capital will incur more interest cost which will reduce profitability. Hence no importance shall be given to pricing aspect. Since the assessee does not have any working capital risk, the question of negative working capital does not arise." Following the above said decision, we direct the AO/TPO not to make negative working capital adjustment.”
13.4 Respectfully following the aforesaid view, we direct the Ld.AO/TPO to grant working capital adjustment on actual.
Page 36 of 37 IT(TP)A No.309 & 426/Bang/2016 13.5 Except for the above issues no other issues raised in the grounds of appeal or the written submissions has argued by the Ld.AR. In the result appeal filed by revenue stands partly allowed and appeal filed by assessee stands allowed. Order pronounced in the open court on 30th August, 2021 Sd/- Sd/- (BR BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 30th Aug, 2021. /Vms/ Copy to: