Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No.3286/Bang/2018 Assessment Year : 2014-15
Salesforce.com India Pvt. The Dy. Commissioner of Ltd., Income-Tax, No.10, First Floor 12th Main Circle-6(1)(1), Palace Road, Vs. Bengaluru. Vasanthnagar, Bengaluru.
PAN – AAJCS 3582 R APPELLANT RESPONDENT
Assessee by : Shri Sumeet Khurana, C.A Revenue by : Shri Pradeep Kumar, CIT (DR)
Date of Hearing : 08-02-2021 Date of Pronouncement : 22-03-2021
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against final assessment order dated 23/10/2018 passed by Ld.ACIT Circle- 6(1)(1) under section 143(3) read with 144C(13) of the Act on following grounds of appeal: “The grounds mentioned herein by the Appellant are without prejudice to one another. Transfer Pricing Matters
Page 2 of 33 IT(TP)A No.3286/Bang/2018
On facts and in the circumstances of the case and in law, Dispute Resolution Panel ('learned DRP') erred in confirming the action of the Deputy Commissioner of Income-tax, Circle-6(i)(1), Bengaluru ('learned AO')/ Deputy Commissioner of Income-tax (Transfer Pricing), Circle 2(2)(1), Bengaluru ('learned TPO') in making an adjustment of Rs26,548,569 to the transfer price of the Appellant's international transactions in respect of software development services, Rs. 102,622,022 to the transfer price of the Appellant's international transactions in respect of marketing and sales support services and Rs. 113,123 in respect of notional interest on outstanding receivables. (Tax Effect: Rs. 43,943,534) 2. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services and marketing and sales support services, the learned DRP/ AO/TPO erred in: 2.1. Rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence. 2.2. Rejecting the comparability analysis carried out by the Assessee in the TP documentation and in conducting a fresh comparability analysis for the international transaction of software development services and marketing and sales support services based on the application of additional filters in determining the arm's length price. 2.3. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation. 2.4. Not considering the multiple year/prior year data of comparable companies while determining the arm's length price in relation to the Appellant's international transactions with its AEs. 2.5. Using information under section 133(6) of the Act, which tantamount to choosing secret comparable companies whose information was not available in public domain while preparing the transfer pricing documentation for the relevant financial year. 2.6. Disregarding certain filters applied by the Appellant in selection of the comparable companies at the time of TP documentation. 2.7. Applying/ modifying the following filters while undertaking comparability analysis 2.8. Including the following comparable companies even though they are functionally different from operational profile of the Appellant: Software development services a) Infosys Limited; b) Persistent Systems Limited; c) Thirdware Solutions Limited; d) Mindtree Limited; e) R S Software (India) Limited; S
Page 3 of 33 IT(TP)A No.3286/Bang/2018
f) Larsen & Tubro Infotech Ltd; and g) Cigniti Technologies Ltd. Marketing and sales support services a) I Media Corp Limited b) Irunway India Pvt. Limited c) Alia Creative Consultants Pvt. Limited d) Killick Agencies & Marketing Limited 2.9. Excluding the following companies even though they are functionally comparable to the Appellant and passes all the filters applied by the learned TPO in its order: Software development services a)Sasken Communication Technologies Limited; b) Akshay Software Technologies Limited; c) E-Zest Solutions Limite d) Sankhya InfoTech Limited; e) 12T2 India Limited; f) Daffodil Software Limited; g) Kireeti Soft Technologies Limited; h) Exiliaiit Technologies Private Limited; i) Celstream Technologies Limited; j) Maveric Systems Limited; and k) Evoke Technologies Limited. Marketing and sales support services a) Concept Public Relations India Limited; b) ICRA Management & Kestone Integrated; and c) MCI Management (India) Ltd. 2.10. Not considering certain expenses such as provision for doubtful debts, provision for warranties, provision of doubtful deposits, and miscellaneous expenditure written off, as part of operating cost for the computation of Appellant's Profit Level Indicator ('PU'). 2.11. Not providing adjustment for the differences in working capital of the Appellant and the comparable companies. 2.12. Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a- vis the comparable companies. 2.13. Computing incorrect operating mark-up of certain comparable companies. (Tax Effect: Rs. 43,905,084) Grounds for imputation of notional interest on outstanding receivables 3. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in: 3.1. Considering overdue receivables from Associated Enterprises ('AEs') as a separate international transaction under the provisions of Section 92B of the Act.
Page 4 of 33 IT(TP)A No.3286/Bang/2018
3.2. Without prejudice to ground no 3.1, the learned DRP/AO/TPO erred in ignoring that, if at all transfer pricing adjustment to be sustained with respect to notional interest on overdue receivables, it should be restricted to AEs outstanding for more than 18o days. (Tax Effect: Rs. 38,451) Other than Transfer Pricing Related 4. Disallowance under section 40(a)(ia) of the Act 4.1. That on the facts and circumstances of the case, the Learned AO and the Learned Panel erred in holding that tax had not been deducted at source on expenditure amounting to INR 24,586,946 under section 194-I of the Act and disallowing the same under section 40(a)(ia) of the Act. 4.2. That on the facts and circumstances of the case, the Learned Panel failed to appreciate that the Appellant had duly deducted tax at source on INR 24,586,946, where ever applicable, under section 194C/ 194J of the Act depending on the nature of the expense and deposited the same to the Government Treasury. 4.3. That on the facts and circumstances of the case the Learned Panel failed to take cognizance of the submissions/ explanations and underlying documents furnished by the Appellant evidencing that tax had been deducted at source on INR 24,586,946. (Tax Effect: Rs. 8,357,103) That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein below or produce further documents before or at the time of hearing of this Appeal.” Brief facts of the case are as under: 2. The assessee filed its return of income for year under consideration on 28/11/2014 declaring total income of Rs.11,31,24,620/-. Subsequently, revised return was filed on 30/03/2016 declaring total income of Rs.11,32,46,170/-. The return was processed under section 143(1) of the Act and the case was selected for scrutiny. The Ld.AO observed that, the assessee had international transaction exceeding Rs.15 crores, and accordingly, the issue was referred to the transfer pricing officer to determine arm’s length price of international transaction entered by the assessee with its AE.
Page 5 of 33 IT(TP)A No.3286/Bang/2018
Upon receipt of the reference under section 92CA, the Ld.TPO called upon assessee to furnish economic details of international transactions entered by assessee. The Ld.TPO from the details filed observed that, the assessee had following international transactions with its AE: Particulars Amount (in INR) SI. No. 1. Receipts for SWD services 23,95,52,266 2. Receipts for MSS services 62,42,08,406 3. Cost reimbursements 9,67,50,260
The Ld.TPO noted that, assessee followed TNMM as most appropriate method with OP/OC as PLI. The Ld.TPO observed that, assessee computed its margin at 15.36% under software development segment and 10.91% under MSS segment. It has been submitted that, the assessee selected following 22 comparables under software development service segment with average margin of 13.08%: Sl. No Comparable Company Average Adjusted % Markup on Total Cost 1 Akshay Software Technologies Limit ed 5.97% Bluestar Infotech Limited (Consolidated ) 4.43% 2 3 Caliber Point Business Solutions Limited(Segmental) 4.19% Cat Technologies Limited 4 -11.91% 5 CG-VAK Software & Exports Limited (Seg) 3.29% 6 Cigniti Technologies Limited 19.81% 7 Evoke Technologies Private Limited 11.60% 8 Goldstone Technologies Limited 11.01% 9 Helios & Matheson Information Technology Limited 18.45% 10 Kellton Tech Solutions Ltd 24.19% 11 Larsen & Toubro Infotech Limited 24.74%
Page 6 of 33 IT(TP)A No.3286/Bang/2018
Lucid Software Limited 7.08% 12 13 Maveric systems Limited 9.96% 14 Mindtree Limited (seg) 17.40% 15 Persistent Systems Limited 30.16% 16 R S Software India Limited 19,56% 17 R Systems International Limited (Seg) 13.38% 18 Sasken Communications Technologies Limited (Segmental) 8.59% 19 Satyam Computer Services Limited 18.92% Spry Resources India Pvt Ltd 7.45% 20 Thinksoft Global services Limited 20.70% 21 Zylog Systems Limited 18.11% 22 5. Insofar as MSS segment is concerned, assessee selected following 7 comparables with an average margin of 5.10% S.NN Comparable Company Average Adjusted % Markup on Total Cost Concept Public Relations 1 11.44% EDCIL (India) Ltd. (Seg) 2.4% 2 ICRA Management India Ltd. 4.39% 3 Impresario Event -0.31% 4 India Tourism Development Corporation Ltd. (Seg) 2.08% 5 MCI Management (India) Ltd. 5.57% 6 Kestone Integrated Marketing Services Pvt. Ltd. (Seg) 10.15% 7 6. The assessee used following filters to select above comparables to determine the arm’s length of the international transactions under both the segments: Sl. As per TP Study No. 1. Companies for which sufficient financial or descriptive information is not available to undertake analysis. 2. Companies that had ceased business operations or were currently inactive.
Page 7 of 33 IT(TP)A No.3286/Bang/2018
Companies that had been declared sick or had persistent negative net worth. 4. Companies that have turnover less than INR 1 Crore. 5 Companies undertaking significantly different functions Compared to SIPL. 6 Companies that do not have significant (less than 25 percent) foreign exchange earnings. 7 Companies that had substantial (in excess of 25 percent) transactions with related parties. 8 Companies that experienced persistent operating losses. 9 Companies that have exceptional year(s) of operations. 7. The Ld.TPO dissatisfied with the filters adopted and the comparables selected, carried out fresh search based on following filters under both the segments: filters adopted by the TPO: SWD Segment • Companies whose data is not available for the FY 2013-14 were excluded. • Companies whose service income Rs.1 Crore were excluded. • Companies whose Software Development Service is less than 75% of the total operating revenues were excluded. • Companies who more than 25% have related party transactions Of the sales were excluded. • Companies having different financial year ending (i.e. not March 31, 2013) or date of the company not available for the 12 month period i.e. 01-04-2013 to 31-03-2014, were rejected. / Companies whose employee cost to sales is less than 25% were excluded. • Companies whose export service income is less than 75% of the Sales were excluded. MSS Segment Companies whose data is not available for the FY 2013-14 were excluded. • Companies whose service income Rs.1 Crore were excluded. • Companies who more than 25% have related party transactions of the sales were excluded. • Companies having positive net worth. • Companies whose export service income is less than 75% of the Sales were excluded. • Companies having different financial year ending (i.e. not March 31, 2013) or date of the company not available for the 12 month period i.e. 01-04-2013 to 31-03-2014, were rejected.
Page 8 of 33 IT(TP)A No.3286/Bang/2018
• Companies that experienced persistent operating losses were excluded. 8. The Ld.TPO thus selected following comparables in the final list: 8.1 SWD Segment SI. No Comparable Company Markup on Total Cost 1 Infosys Ltd 36.13 % 2# Larsen & Toubro Infotech Limited 24.61 % Mindtree Ltd 3# 20.43 % Persistent Systems Ltd 35.10 % 4# 24.25 % R S Software India Ltd 5# 6# Cigniti Technologies Limited 27.62% SQS India BFSI Ltd 22.37 % 7 8 404.68 % Thirdware Solutions Ltd
8.2 MSS Segment Comparable Company Sl. Markup on Total Cost No
1 I Media Corp Ltd. 34.17% Irunway India Pvt. Ltd. 44.83% 2 Alia Creative Consultants Pvt. Ltd. 14.51% 3 Killick Agencies & Mktg. Ltd. 23.05% 4
The Ld.TPO computed proposed adjustment being shortfall under both the segments as under: Sl. Description Adjustment u/s No. 92CA (In Rs.) 1 Software development segment 2,91,65,138/- 2 MSS segment 10,26,22,022/-
Page 9 of 33 IT(TP)A No.3286/Bang/2018
3 Interest on delayed receivable 1,13,123/- Total 13,19,00,283/- 10. The Ld.TPO also computed interest on receivables as an independent international transaction thereby proposing an amount of Rs.1,13,123/- as transfer pricing adjustment on interest on trade receivables over the credit period for SWD segment. 11. On receipt of the Transfer Pricing order, the Ld.AO passed the draft assessment order on 29/12/2017. While passing the draft assessment order the Ld.AO disallowed sum of Rs.2,45 86,946/-under section 40(a)(ia) of the Act, being the difference in the rent declared in 3CD report and as per statement of computation of income, on which TDS was not deducted. 12. Aggrieved by the addition made by the Ld.AO, assessee raised objections before DRP. DRP upheld the action of the Ld.TPO in respect of most of the comparables. 13. On receipt of DRP direction the Ld.AO passed impugned order on 23/10/2018 by making addition in the hands of assessee without granting any relief. 14. Aggrieved by the order of Ld.AO, assessee is in appeal before us now. 15. At the outset the Ld.AR submitted that, assessee do not wish to argue Ground No.1-2.7 raised the grounds of appeal. 51.1 In Ground No.2.8, under the SWD, assessee do not wish to argue for excluding RS Software (India) Ltd.
Page 10 of 33 IT(TP)A No.3286/Bang/2018
Under MSS services assessee do not wish to argue for exclusion of Alia Creative Consultants Pvt Ltd. 15.2 In Ground No. 2.9 under software development service segment assessee do not wish to argue for inclusion of the Sasken Communication Technologies Ltd, Akshay Software Technologies Ltd., E-zest Solutions Ltd., Sankhya Infotech Ltd. and Daffodils Software Ltd. 15.3 Under MSS service segment assessee do not wish to argue for inclusion of ICRA management and Keystone Integrated. Assessee also do not press Ground 2.10-2.13 raised in the grounds of appeal. Accordingly, these comparables and issues raised in the respective grounds are dismissed as not argued. 16. We restrict our decision only in respect of the comparables sought for exclusion/inclusion by assessee in Ground No.2.8, - 2.9, along with Ground No. 3-3.2 and 4-4.3 as under. 17. Before we undertake the comparability analysis it is (sine qua non) to understand the functions performed, assets owned and risks assumed by assessee under both these segments.: Functions performed: 17.1 SWD Segment: The assessee has entered into an intercompany agreement with its AE according to which it shall perform contract SWD services for its AE and is compensated on a cost +15% markup basis. In the transfer prising study, it is stated that assessee
Page 11 of 33 IT(TP)A No.3286/Bang/2018
shall perform following are functions as per the service agreement: “Conceiving, proposing and developing new products under the directions and instructions of Salesforce Inc Analyzing competitive products, evaluating costs and benefits of competitive or alternative designs and reporting its findings to Salesforce Inc. and Providing such other services with respect to the products as Salesforce Inc. may request from time to time.”
17.2 MSS Services: The assessee is engaged in providing MSS services for its AE and is compensated on a cost +11% markup the basis. In the transfer pricing study, it is stated that assessee would be performing following services as per the service agreement: • SIPL shall perform following services as per the service agreement. • SIPL shall assist SSPL in marketing Salesforce Inc's products and services within India. • SIPL shall have full responsibility for the products and services and shall alone be responsible for any and all questions relating to the said products and services. • SIPL is permitted to use trademarks, trade names, service marks and similar Intellectual Properties ('IP's") belonging to SSPL or Salesforce Inc. solely providing services to SSPL. • SIPL identifies customers, generates customer leads, educates prospective customers about the solutions/services, compiles market information hr SSPL so that it ran prepare business plans. 18. Assets owned: The associated enterprise owns all the valuable IP rights another commercial or marketing intangibles, know-how copyrights except for undertaking the provision of SWD and MSS services. Assessee only owns that tangible assets like computers office spaces furniture fixtures etc which is required for its day-
Page 12 of 33 IT(TP)A No.3286/Bang/2018
to-day activities to carryout day to day activities under both segments. 18.1 Risks assumed: Under both the segments assessee do not assume any market risk foreign exchange risk product and service liability risk credit and collection risk or R&D risk. Assessee is thus a minimal risk bearing company rendering services to AE under a contract. 19. Based on the above we shall undertake the comparability analysis in respect of the comparables argued by the Ld.AR. 20. In Ground No. 2.8, assessee is seeking exclusion of following comparables under respective segments: SWD segment: Infosys Ltd. Persistent Systems Ltd. Thirdware Solutions Ltd. Mindtree Ltd. Larsen and Toubro Infotech Ltd. Cignity Technologies Ltd. MSS Segment I media Corp Ltd. Irunway India Pvt.Ltd Killick Agencies and Marketing Ltd. 1. Infosys Limited : 20.1 It is submitted that, this company is functionally dissimilar and provides end to end business solutions like business
Page 13 of 33 IT(TP)A No.3286/Bang/2018
consulting technology engineering and outsourcing services and no segmental details in respect of services are available. It is also submitted that this comparable made investments in products to establish as a tradable IPO owner. The Ld.AR submitted that this comparable owns significant brand value products and focus on brand building and incurred expenditure on R & D and that the company owns 7 Edge products / platforms, and six other product based solutions. The company leverages on its premium banking solution and during the year the company merged with its wholly owned subsidiary Infosys Consulting India Limited. 20.2 It is submitted that this company was excluded from the final list of comparables in assessee's own case for the Assessment Year 2011-12, which has been accepted by revenue. The Ld.AR relied on decision of co-ordinate Bench of the Tribunal in the case of LG Soft India (P.) Ltd. v. Dy. CIT in IT(TP)A No. 3122/Bang of 2018 for dated 28.5.2019 for Assessment Year 2014-15, the. The contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. 20.3 We have perused submissions advanced by both sides in light of records placed before us. 20.4 We support the view taken by this Tribunal in case of LG Soft India Pvt. Ltd. (supra), where this Tribunal observed as under: "6. We notice that the co-ordinate bench has excluded M/s.Infosys Ltd in A.Y 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd. (ITA
Page 14 of 33 IT(TP)A No.3286/Bang/2018
No.1054/Bang/2011) was followed and it was held that M/s. Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break up of revenue from software services and software product is not available.” 20.5 We note that this comparable has significant intangibles and huge revenues from software products and was considered by the co-ordinate Bench of the Tribunal for exclusion in the Assessment Year 2014-15. Based on the above observation we direct Ld.AO/TPO to exclude this comparable from final list. Persistent Systems Ltd.
20.6 The Ld.AR submitted that this company is functionally different, as it is engaged in rendering IT services and development of software products, without there being segmental information. It is submitted that this company is also engaged in IP led solutions and undertakes significant R & D activities, owns IP. It is submitted that during the year, the company made acquisitions. It was submitted that this company has made significant investment in IP and their solutions and has a dedicated team for Research and IP development. The company is functionally different as it provides complete life cycle services and has specialized software product and technology innovation. The Ld.AR also submitted that entire revenue of the comparable company is from outsourced product development and has presence of intangibles, brand ownership and provision of applied solutions and further holds proprietary products. A new business unit was established in the said year exclusively for the product
Page 15 of 33 IT(TP)A No.3286/Bang/2018
business engaged in R & D and also has onsite activities and no segmental information is available. During the year there are extraordinary events of acquisitions of cloud squads and fails the turnover filter of more than Rs. 200 Crores. The Ld.AR relied on decision of co-ordinate Bench of this Tribunal in case of LG Soft India(P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 3122 (Bang.) of 2018, dated 28-5-2019. 20.7 On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. 20.8 We have perused submissions advanced by both sides in light of records placed before us. 20.9 We support the view taken by this Tribunal in case of LG Soft India Pvt. Ltd., where this Tribunal observed as under : "7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd. also by following the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra), where in it was held that M/s Persistent Systems Ltd. is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Persistent Systems Ltd." Based on the above observation we direct Ld.AO/TPO to exclude this comparable from final list. Thirdware Solutions Ltd. 20.10 The Ld.AR submitted that this comparable is to be excluded for its huge turnover of Rs. 206.75 Crores and the margin is 44.68%. It is also submitted that this comparable is functionally different and has diversified activities and earns revenue from export of services, transcription and provides
Page 16 of 33 IT(TP)A No.3286/Bang/2018
consultancy services and there is no segmental data. Further delivery locations are outside India and has an extraordinary events and fails the turnover filter of more than Rs. 200 Crores. The Ld.AR relied on LG Soft India(P.) Ltd. (supra). 20.11 On the contrary Ld.CIT.DR placed reliance on orders passed by authorities below. 20.12 We have perused submissions advanced by both sides in light of records placed before us. 20.13 We found that the Tribunal in the case of LG Soft India(P.) Ltd. (supra) has observed at page 4 paras 8 & 8.1 as under "8. We also notice that in AY 2008-09, the co-ordinate bench has excluded M/s Thirdware Solutions Ltd. also by following the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra), where in it was held that M/s Thirdware solutions Ltd. is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Thirdware Solutions Ltd." Considering the facts, findings and judicial decisions, we are of the opinion that the following Three comparables are to be excluded from the list of comparables for determination of ALP by the TPO.” Based on the above observation we direct Ld.AO/TPO to exclude this comparable from final list. Mindtree Ltd.
Page 17 of 33 IT(TP)A No.3286/Bang/2018
20.14 The Ld.AR submitted that this company deserves to be excluded from the finalist list as it is functionally not similar with that of assessee. He submitted that, this company owns 19 patents and has huge scale of operation with turnover of Rs.3031 crores. It has been submitted that this comparable is engaged in sale of products like ‘VmUnify’ which is cloud management and ought orchestration platform etc. It is submitted that it also engages in IT consulting for high-end services and is rendering into an digital transformation and technology services to its clients the Ld.AR thus submitted that this comparable is functionally not similar with that of assessee and is a giant company with huge turnover thereby not fulfilling turnover criteria. 20.15 On the contrary Ld.CIT DR placed reliance on orders passed by authorities below. 20.16 We have perused submissions advanced by both sides in light of records placed before us. 20.17 The decision rendered in the case of Genisys Integrating (supra) by coordinat bench of this Tribunal had analysed the application of upper turnover filter in order to exclude companies whose turnover is more than that of assessee. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. Admittedly, the turnover of above said companies is more than
Page 18 of 33 IT(TP)A No.3286/Bang/2018
200 crores and hence cannot be considered as good comparable companies. We also observed that this company is functionally not similar with that of assessee as it is involved in diversified activities which is not comparable with a captive contract service provider like that of assessee. Accordingly we direct Ld.AO/TPO to exclude this comparable from finalist. Larsen and Toubro Infotech Ltd.
20.18 This comparable was upheld by authorities below and has been objected by assessee for its inclusion. Ld.AR submitted that this company is functionally not comparable with that of assessee and is engaged in providing consultancy and testing services. Further it has been submitted that there is no segmental information available in the annual reports of this company. Ld.AR submitted that this company owns its own brand and have products and are engaged in trading activity. This company also has R&D services and presence of huge intangibles and brands. 20.19 On the contrary Ld.CIT DR placed reliance on orders passed by authorities below. 20.20 We have perused submissions advanced by both sides in light of records placed before us. 20.21 We note that this comparable was excluded by coordinate bench of this tribunal in case of LG Soft India(P.) Ltd. (supra)
Page 19 of 33 IT(TP)A No.3286/Bang/2018
20.22 We note that in case of LG soft India Pvt.Litd (supra), this comparable was excluded on the ground that it is functionally incomparable to the assessee on various counts. The company deals with software products and renders aftermarket service management services, integrated IT service management solution, business process management implementation services, cloud computing, consulting, enterprise integration, geographical information system and infrastructure management services. Despite rendering these diverse services, the segmental details of the various services and products are not available. The company's business segments are divided into service cluster, industrial cluster and telecom business. In the absence of segmental data being made available as regards the diverse services, it is not possible to determine whether the company passes the filters applied by the TPO. Therefore, the company ought to be excluded. Further, the company is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. Also, in addition to the above, the company owns proprietary software products which are developed in-house. Accordingly, the Appellant submits that L&T is a product company having significant intangibles and is thus not comparable to captive software development service providers such as the Appellant who does not own any significant or non- routine intangibles. Further, L&T enjoys significant brand value.
Page 20 of 33 IT(TP)A No.3286/Bang/2018
As a result of this high brand value, the company enjoys a high bargaining power in the market. Based on the above observation we direct Ld.AO/TPO to exclude this comparable from final list. 2. Cignity Technologies Ltd. 20.23 The Ld.AR submitted that turnover of this company is Rs. 54.63 Crores and margin is 27.62%. It is also submitted that this company is functionally dissimilar and offers publication network services and solutions and has expanded the business operations in Australia and UK .This Company has extraordinary events with acquisition of Two Companies. The Ld.AR relied on decision of LG Soft India(P.) Ltd. (supra). 20.24 On the contrary the Ld. CIT DR placed reliance on orders passed by authorities below. 20.25 We have perused submissions advanced by both sides in light of records placed before us. 20.26 We note that coordinate bench of Tribunal in case of LG soft India (P.) Ltd (supra) observed as under : “9. We have noticed that the assessee seeks exclusion of M/s Cigniti Technologies Ltd. It is pertinent to note that the assessee itself had selected this company as a comparable and it has urged for exclusion of the same only before Ld DRP. The Ld A.R. submitted that the Ld DRP did not address the same. The Ld A.R submitted that M/s Cigniti Technologies Ltd is a Testing company and hence it cannot be considered as a comparable. However, we notice that this contention has been
Page 21 of 33 IT(TP)A No.3286/Bang/2018
raised by the assessee for the first time before Ld DRP and there was no occasion for the TPO to examine the same. Accordingly we restore this comparable to the file of AO/TPO for examining it afresh." Based on the above observation we direct Ld.TPO to exclude this comparable from final list. MSS Segment 1. I media Corp Ltd. 21. The Ld.AR submitted that this comparable is not functionally similar with that of assessee. It has been submitted that this comparable had an extraordinary event of entering into a scheme of amalgamation with synergy media entertainment Ltd. during the previous year relevant to year under consideration. The Ld.AR submitted that during the year this comparable has earned revenue from event management which is not akin to marketing support services. It has also been submitted that this company has also not incurred any employee cost for the year under consideration which is evident from page 3933 of paper book. 21.1 On the contrary the Ld. CIT DR placed reliance on orders passed by authorities below. 21.1 We have perused submissions advanced by both sides in light of records placed before us. 21.3 From the relevant page relied by Ld.AR, it is clear that for year under consideration this comparable has earned revenue from event management and categorically there is no income that
Page 22 of 33 IT(TP)A No.3286/Bang/2018
has earned from advertisements which is akin to marketing support services. It also cannot be ignored that there is an extraordinary event of amalgamation that has effectuated by the order of the Jurisdictional High Court which cannot be ignored of having an impact. Under such circumstances we do not find this comparable to be fit to be included in the finalist. Accordingly Ld. AO/TPO is directed to exclude this comparable from the finalist. IRunway India Pvt.Ltd
21.4 The Ld.AR has submitted that this comparable is functionally dissimilar as it provides technology analysis and research services to corporations, law firms and other leading technology investment and licensing firms worldwide. It is also submitted that related party transaction of this comparable for the year under consideration is 30.89%. It has been submitted that these services rendered by this comparable are not discernible from the annual report however from the website of the company the details have been ascertained. It is also submitted that from the balance sheet it is clear that this comparable owns huge intangibles and is into some kind of research and development as every year there is an addition to the intangible asset which is clear from page 3954 of paper book. On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below.
Page 23 of 33 IT(TP)A No.3286/Bang/2018
21.5 We have perused submissions advanced by both sides in light of records placed before us. 21.6 Is on perusal of the annual accounts placed in the paper book, we note that the functions carried out by this company is not very clear the notes to the financial statements only refers to service income without mentioning the nature of services rendered by this comparable also from the profit and loss account it is not discernible the kind of services rendered by this company that has been considered by the Ld.TPO akin to MSA services rendered by assessee. We owe note that the Ld.TPO has included this into the final list only by mentioning that the functions performed by this company are similar to assessee and under TNMM only similarities to be seen and not exact comparability. The Ld.TPO also note that the RPT of this comparable is only 3.7% however from page 3959 of paper book transactions with related party have been recorded and it does not tally with the rate computed by the Ld.TPO. Under such circumstances we do not find this comparable to be fit to be included in the finalist. Accordingly we direct Ld.AO/TPO to exclude this comparable from final list. Killick Agencies and Marketing Ltd. 21.7 This comparable has been argued by the Ld.AR to be having diversify activities. It is stated that this company earns income from commission, sales, dredgers, dredging equipment, propellers, maritime and aviation lighting, a caustic
Page 24 of 33 IT(TP)A No.3286/Bang/2018
communication equipment and also does after sales services for the same. It has been submitted that this comparable is not at all involved in marketing support service. On the contrary, the Ld.CIT.DR sub placed reliance on orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. The annual accounts of this comparable has been placed at page 04/07/2006 of paper book wherein we note that the submission made by the Ld.AR appears to be correct. We do not find any income earned by this comparable which is akin to marketing support services and therefore deserves to be rejected at the threshold. Accordingly, we direct Ld.AO/TPO to exclude this comparable from the finalist. 22. In Ground 2.9 assessee is seeking inclusion of following comparables under SWD and MSS Segments: SWD segment I2T2 India Ltd. Kireeti soft technologies Ltd. Exiliant Technologies Pvt.Ltd Celstream Technologies Ltd. Evoke Technologies Ltd. MSS Segment Concept Public Relation India Ltd. MCI management India Ltd. 1. I2T2 India Ltd.
Page 25 of 33 IT(TP)A No.3286/Bang/2018
22.1 The Ld.AR submitted that this company is functionally similar as it is engaged in software development services. It is also submitted that this comparable satisfies all the filters applied by the Ld.TPO. However the Ld.TPO rejected this comparable as it does not have related party transaction details in the annual report. 22.2 The Ld.CIT.DR placed reliance on orders passed by authorities below. 22.3 We have perused submissions advanced by both sides in regards records placed before us. 22.4 The Ld.AR had submitted that, this comparable has been considered to be a good comparable by coordinate bench of this Tribunal in case of LG Soft India Pvt.Lltd. (supra) On the contrary, Ld.CIT.DR placed reliance upon orders of authorities below. 22.5 We have perused submissions advanced by both sides in the light of the records placed before us. 22.6 The only reason for excluding this comparable by the authorities below is for the reason that RPT transactions have not been reported in the annual report. We have perused the decision of this Tribunal in case of LG Soft India (P.) Ltd. (supra) wherein on similar reasoning the Ld.TPO excluded this comparable therein and this Tribunal observed as under: "12. We find force in the contentions of Ld. ar. If the annual report of this company does not mention about related party transactions, then the assessee cannot be held responsible to prove a fact relating to a 3rd party, which may or may not exist. We notice from auditors report that the auditor
Page 26 of 33 IT(TP)A No.3286/Bang/2018
in paragraph 5 (b) of Annexure to the auditors report has mentioned as under:— "There are no transactions that are made enterprises exceeding Rs. 5 Lacs in respect of any part who is covered under section 301 of the Act during the financial year." Hence, in the absence of any specific information, there is merit in the contentions of the assessee that the above said company might not have had related party transactions during the year under consideration. Accordingly we do not agree with the reasoning given by Ld. DRP for excluding this company as a comparable. Accordingly we direct the Ld. AO/U.S. include this company." 22.7 Annual report of this comparable has been placed at page 593 of paper book volume 2. It is observed functionally it is providing export of software and services. Annual report placed in paper book does not contain functions performed by this comparable in order to ascertain whether this company is rendering SWD services or not. We therefore, set aside this issue to Ld.AO/TPO for verification. The Ld.AO/TPO shall call for requisite information from this company, a copy of which shall be provided to assessee also. Comparability of this company with assessee shall then be considered by giving proper opportunity to assessee. Accordingly, this comparable is set aside to Ld.AO/TPO 2. Kireeti soft technologies Ltd. 22.8 The Ld.AR submitted that this comparable is engaged in software development operations and all its revenues pertains to this segment only he placed reliance on page 3678, 3679 and 3863 of paper book. The Ld.TPO has not relied on any basis to hold that this company is functionally not similar. Exiliant Technologies Pvt.Ltd
Page 27 of 33 IT(TP)A No.3286/Bang/2018
22.9 Ld.AR submitted that the assessee prayed for inclusion of this company before DRP. However, DRP rejected the prayer of the assessee for the reason that financial result of this company is not available in public domain. Celstream Technologies Ltd.
22.10 The Ld.AR submitted that this company is also engaged in software development service segment and is providing services in the field of data and analytics, cloud and mobile computing. He submitted that the company was rejected by the Ld. TPO as annual accounts were not available on the public domain. Evoke Technologies Ltd. 22.11 Ld.AR submitted that the assessee prayed for inclusion of this company before DRP. However, DRP rejected the prayer of the assessee for the reason that financial results incorporated branch revenue and profit, which was based on unaudited financial statements of bralnch outside India. It was also observed by the DRP that export revenue constituted only 20.34% which did not fulfill filter applied by the Ld.TPO. The Ld.AR placed reliance upon annual reports of this company placed at page 3439 of paper book wherein income from software services and products by this company has been shown to be at Rs.3621.72 lakhs. 22.12 In respect of above, comparables being Kireeti, Exliant, Ulstream and Evoke the Ld.CIT DR submitted that these
Page 28 of 33 IT(TP)A No.3286/Bang/2018
companies may be sent back to the Ld.AO/TPO for due verification due to contradictions in respect of annual report. 22.13 We have considered the submissions advanced by both sides in light of records placed before us. 22.14 In our opinion the Ld.AO/TPO shall verify annual reports filed by assessee in respect of these comparables and then ascertain the functional comparability with that of assessee. If the segmental details could be ascertained in respect of software services then these comparables may be considered afresh for purposes comparability with that of assessee in accordance with law, keeping in mind that assessee is a captive service provider that operates at low risk levels.
Accordingly these comparables are remanded to the Ld.AO/TPO for verification afresh. MSS Segment 1. Concept Public Relation India Ltd. 2. MCI management India Ltd. 23. We note that per se, the authorities below have not disputed of functionality, however rejects them without any cogent reasons. We note that both the above comparables have been excluded by authorities below without verifying FAR with that of assessee. Under such circumstances we deem it fit to remand these comparables to Ld.TPO/AO for considering it afresh. Assessee is directed to furnish all relevant details to carry out the functional similarity with that of assessee. In the event they are
Page 29 of 33 IT(TP)A No.3286/Bang/2018
found to be carrying out similar functions, these comparables may be included in the final list. Accordingly, we remand these comparables to Ld.TPO/AO. Accordingly ground No. 2.8-2.9 stands allowed as indicated hereinabove. 24. Ground No. 3 is in respect of interest on receivables computed by the Ld.AO/TPO. 24.1 The Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 24.2 We have perused the submissions advanced by both the sides in the light of the records placed before us.
24.3 From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. 24.4 24.4 Alternatively, he submitted that under TNMM, working
Page 30 of 33 IT(TP)A No.3286/Bang/2018
capital subsumes sundry creditors and therefore separate addition is not called for.
24.5 This Bench referred to decision of Special Bench of this Tribunal in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in [IT Appeal No. 1548 and 1549 (Kol.) of 2009, dated 15- 7-2016], held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. It has been argued that, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lone and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT reported in [2018] 91 taxmann.com 286 has observed that:
"There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables
Page 31 of 33 IT(TP)A No.3286/Bang/2018
and also as to whether the said transactions can be characterized as international transactions." 24.6 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. The Ld.AO shall also consider the alternate argument taken by the Ld.AR and carryout necessary verification and then to decide the issues in accordance with law. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly these ground raised by assessee stands allowed for statistical purposes.
Ground No.4 is in respect of disallowance under section 40(a)(ia) of the Act. 25.1 The Ld.AR submitted that assessee had deducted tax under relevant provisions of the act. It has been also deposited with the government Treasury. However the same has not been verified. The Ld.AR submitted that assessee has all the evidences of payments having been made and deposited. 25.2 The Ld. CIT DR under such circumstances submitted that the issue may be remanded to the Ld. AO for verification of the evidences. 25.3 We have perused submissions advanced by both sides in light of records placed before us. 25.4 We remand this issue to Ld.AO for due verification of the TDS deducted in the light of records and documents filed by
Page 32 of 33 IT(TP)A No.3286/Bang/2018
assessee. The Ld.AO shall verify the same and grant credit to the TDS against which tax has been deducted and deposited. Accordingly this ground raised by assessee stands allowed for statistical purposes. Order pronounced in the open court on 22nd March, 2021 Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 22nd March, 2021. /Vms/
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order
Assistant Registrar, ITAT, Bangalore
Page 33 of 33 IT(TP)A No.3286/Bang/2018
Date Initial On Dragon 1. Draft dictated on Sr.PS 2. Draft placed before -3-2021 Sr.PS author -3-2021 3. Draft proposed & placed JM/AM before the second member -3-2021 4. Draft discussed/approved JM/AM by Second Member. -3-2021 5. Approved Draft comes to Sr.PS/PS the Sr.PS/PS 6. -3-2021 Sr.PS Kept for pronouncement on 7. -3-2021 Sr.PS Date of uploading the order on Website 8. If not uploaded, furnish -3-2021 Sr.PS the reason 9. File sent to the Bench -3-2021 Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order. 13. Draft dictation sheets are No Sr.PS attached