Income Tax Appellate Tribunal - Bangalore
M/S. Sprinklr India Private Limited, ... vs Deputy Commissioner Of Income Tax, ... on 11 January, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH : BANGALORE
BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER
AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
IT(TP)A No. 713/Bang/2022
Assessment Year : 2018-19
M/s. Sprinklr India Pvt. Ltd. Deputy Commissioner of
3rd Floor, East Wing Income Tax,
Building No. 3, Block B, Circle 6(1)(1),
Divyashree 770 Town Bengaluru.
Centre, Off HAL Airport
Road, Yamlur PO,
Vs.
Bengaluru - 560 037.
PAN: AAQCS9370N
APPELLANT RESPONDENT
Assessee by : Shri Tata Krishna, Advocate
Revenue by : Shri Sunil Kumar Singh, CIT-DR
Date of Hearing : 20-10-2022
Date of Pronouncement : 11-01-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal is filed by assessee against the final assessment order dated 23/06/2022 passed by Ld. DCIT, Circle 6(1)(1), Bengaluru for A.Y. 2018-19 on following concise grounds of appeal:
Page 2 IT(TP)A No. 713/Bang/2022
1. The Final Assessment order of the DCIT-6(1)(1) and the Directions of the DRP not justified in law and on facts and circumstances of the case.
2. The entire assessment proceeding and the impugned order are bad and void ab initio as notice dated 22.09.2019 under section 143(2) issued is in defiance of instructions/scrutiny norms provided by the CBDT for the cases selected under CASS and is not in accordance with the format provided by CBDT.
3. Without prejudice to the above, the impugned final assessment order is invalid and bad as the same was passed by the DCIT-6(1)(1) when the jurisdiction to pass the same vested with National E-Assessment Centre (NeAC)/ National Faceless Assessment Centre (NaFAC) and finally with the Assessment Unit under section 144B(1)(xxix) of the IT Act as substituted by Finance Act, 2022 with effect from 01.04.2022.
4. Without prejudice to the above, the impugned final assessment order being passed with the prior approval of the Range Head vide letter in F. No./Scr/Addl.CIT/R-
6(1)/21-22, is invalid and bad in law when such approval is not required to be obtained as per the provisions of the Act.
5. Without prejudice to the above, the impugned final assessment order passed by the DCIT-6(1)(1) is invalid and bad as there is no transfer of case from the NeAC/NaFAC/Assessment Unit to the DCIT-6(1)(1) in accordance with the provisions of section 144B(8) and the transfer of case, if any, under section 144B(8) has not been communicated to the Appellant.
6. Without prejudice to the above, the transfer of case, if any, from NeAC/NaFAC/Assessment Unit to the DCIT-6(1)(1) is not a valid transfer under section 144B(8) as such transfer has been made to the latter who does not have jurisdiction over the Appellant and it is DCIT/ACIT, Circle - 6(1)(2), Bangalore, who has jurisdiction over the Appellant.
7. Without prejudice to the above, the impugned final assessment order is invalid and bad in law as the same was passed by the DCIT-6(1)(1) when the Jurisdictional AO of the Appellant is the DCIT/ACIT, Circle - 6(1)(2), Bangalore.
8. Without prejudice to the above, the impugned final assessment order being signed by the non-existent authority namely 'DC/ACIT, Circle 6(1)(1), Bangalore' is invalid and bad in law.
9. Without prejudice to the above, as regards the draft assessment order dated 18.08.2021 being bad and non-est thus rendering final assessment order dated 23.06.2022 invalid:
Page 3 IT(TP)A No. 713/Bang/2022 9.1. The impugned draft assessment order passed by the Learned Assessing Officer, NaFAC is invalid and bad in law as the same is passed without issuance of intimation under Rule 5(1)(iii) of the Faceless Assessment Scheme, 2019 / section 144B(1)(iii) as it stood prior to its substitution vide Finance Act, 2022.
9.2. Without prejudice to the above, the impugned draft assessment order passed in defiance of the provisions of section 144B(1)(xvi)(b)/(xviii)(b)/(xxi)(b) as it stood prior to its substitution vide Finance Act, 2022 with effect from 01.04.2022 is bad in law.
9.3. Without prejudice to the above, the impugned draft assessment order passed by the Learned Assessing Officer, NaFAC is invalid and bad in law as the same is in substance a final assessment order.
10. As regards the TPO proceedings:
10.1. The TPO's order dated 31.07.2021 is bad and non-est under section 144B(1) and para 3 of the CBDT order F No.187/3/2020-ITA-I dated 13.08.2020 read with the CBDT Order F. NO. 187/3/2020-ITA-I, dated 31.03.2021, as the same was not passed in accordance with the provisions of Faceless Assessment contained in section 144B. 10.2. Without prejudice to the above, the TPO's order is invalid and without jurisdiction as the reference made under section 92CA by the AO, Technical Unit on 23.06.2021 is bad as there was neither any office by name AO, Technical Unit nor was Technical Unit an Assessing Officer as per section 144B as it existed during the relevant time.
10.3. Without prejudice to the above, the TPO's order is invalid and without jurisdiction as the reference made under section 92CA by the AO, Technical Unit on 23.06.2021 is barred by limitation under section 153(1) read with section 3(1)(a) of the TOLA Act read with the Notifications issued thereunder, thus rendering the impugned assessment order time barred. 10.4. Without prejudice to the above, the TPO's order is invalid and without jurisdiction as the reference made under section 92CA by the AO, Technical Unit on 23.06.2021 is bad when the TP proceedings initiated as a result of earlier reference on 14.05.2020 was pending and was not taken to its' logical end.
10.5. Without prejudice to the above, the TPO's order is invalid and bad in law as the same has been signed by a non-existent authority namely 'DC/ACIT, Transfer Pricing - 2(1)(1), Bangalore'.
10.6. The TPO has erred in computing the incorrect margins of the Appellant company and the comparable companies.
11. As regards the DRP directions dated 06.05.2022:
Page 4 IT(TP)A No. 713/Bang/2022 11.1. The Honourable DRP is not justified in failing to consider 21 companies selected by the Appellant by recording a perverse finding in paragraph 3.3 in respect of objections noted in paragraph 1.3 and 1.4 at pages 12 and 13 that the Learned TPO has given reasons for rejection of each of the said companies.
11.2. The Honourable DRP has erred in upholding the selection of 16 companies by the TPO, without duly applying its' mind to the objections filed by the Appellant and without providing adequate reasons.
12. Without prejudice to the above, the TP adjustment of Rs. 14,43,81,747/- with respect to software development services provided is not tenable:
12.1. The DRP is not justified in upholding the action of the TPO in making transfer pricing adjustment of Rs. 14,43,81,747/-
with respect to software development services provided by the Appellant to its' AE.
12.2. The Lower authorities are not justified in recomputing the Appellant's margin incorrectly at 14.22% as against the correct margin of 16.21%.
12.3. The Lower authorities are not justified in considering the notional cost of Rs. 2,62,65,504/- towards ESOP issued by the parent entity as operating cost contrary to Rule 10B(e) of the IT Rules 1961, when the Appellant has not incurred the same and the same was not forming the part of the Appellant's profit and loss account for the FY 2017-18, more so when the same was not proposed in the show cause notice dated 16.07.2021.
12.4. Without prejudice to the above, the Lower Authorities are not justified in failing to allow deduction under section 37(1) in respect of the alleged ESOP cost of Rs. 2,62,65,504/- treated as a part of operating cost.
12.5 As regards rejection of companies selected by the appellant:
12.5.1. The Lower Authorities have erred in incorrectly rejecting certain companies selected by the Appellant on the basis of an alien TP study that does not pertain or relate to the Appellant.
12.5.2. The Lower Authorities have erred in rejecting 21 companies selected by the Assessee when the same satisfy the test of comparability without duly applying their mind to the submissions made by the Assessee.
12.5.3. The Lower Authorities have failed to consider Celstream Technologies Pvt. Ltd., Forgeahead Solutions Pvt. Ltd., Kireeti Soft Technologies Ltd., Yudiz Solutions Pvt. Ltd., M C T India Infotech Pvt. Ltd., SmartCloud Infoservices Pvt. Ltd., Intelligrape Software Pvt. Ltd., Ace Software exports Ltd., Enlighten Software Services Pvt. Ltd., Sagar Page 5 IT(TP)A No. 713/Bang/2022 soft India Ltd., CES Ltd. (segmental), 0 F S Technologies Ltd., and A S M Technologies Ltd., without any discussion whatsoever, selected by the Appellant vide the Fresh Study filed vide submissions dated 21.07.2021 vide response dated 21.07.2021, when the same meet the test of comparability.
12.5.4. The Lower Authorities have erred in rejecting CG-VAK Software & Exports Ltd. on the basis that the company is also earning revenue from ITeS Segment and that no segmental details are available, when the said company meets the test of comparability and without appreciating that the revenue from ITeS for FY 2017-18 is only 3.82% of the total revenue from operations.
12.5.5. The Lower Authorities are not justified in arbitrarily rejecting E-Zest Solutions Ltd. as a comparable without examining it's functionality contrary to proviso to Rule 108(5) of the IT Rules.
12.5.6. The Lower Authorities are not justified in arbitrarily rejecting the above company selected by the Appellant by adopting an illegal filter "Data not available in database", without raising any objection on Appellant's search criteria and keywords used for search in his order, thus taking the Appellant by surprise and denying him the opportunity of defending his search criteria and key-words.
12.5.7. The Lower Authorities are not justified in arbitrarily rejecting Inteq Software India Pvt. Ltd. and Orangescape Technologies Ltd. selected by the Appellant as "functionally different", when the same meet the test of comparability and without demonstrating as to how the said companies are not functionally comparable to the Appellant.
12.5.8. The Lower Authorities are not justified in incorrectly rejecting Rheal Software Pvt. Ltd. as a comparable on the basis that the same "Failed persistent loss filter"
contrary to facts of the case.
12.5.9. The Lower Authorities are not justified in arbitrarily rejecting Isummation Technologies Pvt. Ltd. selected by the Appellant by wrongly applying "positive net worth filter", when the said company meets the test of comparability and also satisfies the said filter. 12.5.10. The Lower Authorities are not justified in arbitrarily rejecting Evoke Technologies Pvt. Ltd. and Maveric Systems Ltd. selected by the Appellant as "Failed Export filter, hence rejected" without demonstrating the same and without proper verification of its annual reports, when the said companies satisfy the said filter.
Page 6 IT(TP)A No. 713/Bang/2022 12.6. As regards TPO's wrongful selection of certain companies 12.6.1. The Lower Authorities have erred in selecting 16 companies as comparable companies in Software Segment when the same fail the test of comparability.
12.6.2. The Learned TPO has erred in failing to deal with the objections of Appellant against the companies proposed by the Learned TPO and instead, he sought to deal with alien objections not at all raised by the assessee. 12.6.3. The Lower Authorities have erred in selecting companies on the basis of information allegedly collected under section 133(6) without confronting the Appellant with the same and without providing the Appellant and opportunity of cross-examining the companies.
12.6.4. The Lower Authorities are not justified in failing to adopt the upper turnover filter of Rs. 200 crores that resulted in wrongful selection of Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Nihilent Ltd., Persistent Systems Ltd., Wipro Ltd., Tata Elxsi Ltd., Thirdware Solutions Ltd., Infosys Ltd. and Cybage Software Pvt. Ltd., selected by the TPO. 12.6.5. The Lower Authorities have erred in wrongly selecting Tech Mahindra Ltd., Larsen & Toubro Infotech Ltd., Great Software Laboratory Pvt. Ltd., Elveego Circuits Pvt. Ltd., Mindtree Ltd., Nihilent Ltd., Aptus Software Labs Pvt. Ltd., Persistent Systems Ltd., Threesixty Logica Testing Services Pvt. Ltd., Infosys Ltd. and Cybage Software Pvt. Ltd. as comparable companies when the same fail the test of comparability. \12.6.6. The Lower Authorities have erred in wrongly selecting Tech Mahindra Ltd., Larsen & Toubro Infotech Ltd., Great Software Laboratory Pvt. Ltd., Black Pepper Technologies Pvt. Ltd., Mindtree Ltd., Aptus Software Labs Pvt. Ltd., Wipro Ltd., Tata Elxsi Ltd., Thirdware Solutions Ltd. and Infosys Ltd. as comparable companies when the same are engaged in multiple activities and segment information is not available.
12.6.7. Without prejudice, the Lower Authorities have erred in wrongly selecting Exilant Technologies Pvt. Ltd. as a comparable company when the same fails the different year end filter as adopted both by the Appellant and the Learned TPO.
12.6.8. Without prejudice, the Lower Authorities have erred in wrongly selecting Tech Mahindra Ltd. and Exilant Technologies Pvt. Ltd., when the same were excluded from the final list of comparable companies for the preceding AY 2017-18 by the Learned TPO after duly considering the objections of the Appellant.
Page 7 IT(TP)A No. 713/Bang/2022 12.6.9. Without prejudice, the Lower Authorities have erred in wrongly selecting Tech Mahindra Ltd., Persistent Systems Ltd. Thirdware Solutions Ltd. and Threesixty Logica Testing Services Pvt. Ltd. as comparable companies when the same fail the RPT filter of 25%.
12.6.10. Without prejudice to the above, the Lower Authorities have erred in wrongly selecting Threesixty Logica Testing Services Pvt. Ltd. as a comparable company when the same fails the export filter of 75% as adopted by the Appellant and accepted by the Learned TPO. 12.6.11. Without prejudice to the above, the Lower Authorities have erred in wrongly selecting Tech Mahindra Ltd, Larsen & Toubro Infotech Ltd., Infosys Ltd., Persistent Systems Ltd. and Mindtree Ltd. as comparable companies as they hold significant intangibles and claim significant brand value.
12.6.12. Without prejudice to the above, the Lower Authorities are not justified in considering the financial data of Elveego Circuits Pvt. Ltd. for the FY 2016-17 in computing the weighted average margins of the said company, considering the abnormally high margin for the said FY. 12.6.13. Without prejudice to the above, the Lower Authorities have erred in computing higher margins in respect of Black Pepper Technologies Pvt. Ltd., Aptus Software Labs Pvt. Ltd., Infobeans Technologies Ltd., Nihilent Ltd., Thirdware Solutions Ltd. and Cybage Software Pvt. Ltd. as against the margins determined by the Learned TPO in the Show-Cause Notice dated 16.07.2021. 12.7. The Lower Authorities are not justified in considering the incorrect weighted average margins of the following 3 companies selected by the Appellant and the Learned TPO:
(1) Harbinger Systems Pvt Ltd (computed incorrect margin of 11.65% as against the correct margin of 7.07%) (2) Infobeans Technologies Ltd. (computed incorrect margin of 28.52% as against the correct margin of 26.52%) (3) Acewin Agriteck Ltd. [Formerly known as 0 F S Technologies Ltd.] (computed incorrect margin of 24.51% as against the correct margin of 21.34%) 12.8. The Lower Authorities have erred in not allowing risk adjustment considering that the Appellant works in a risk free environment as compared to the comparables.
12.9. The Lower Authorities have erred in not allowing adjustment towards marketing functions considering that the Appellant being a captive service provider does not Page 8 IT(TP)A No. 713/Bang/2022 carry out any marketing functions as compared to the other companies.
12.10. Without prejudice to the above the Lower Authorities have erred in incorrectly computing the margins of the companies selected by them.
13. The Learned Assessing Officer is not right in law and on facts in levying interest under section 234B.
14. Without prejudice to the above, the Learned Assessing Officer is not justified in levying the aforesaid interest under section 234B, when the impugned disallowance is not tenable."
2. Brief facts of the case are as under:
2.1 The assessee is a wholly owned subsidiary of Sprinklr US.
The assessee provides software development services including coding, documentation and quality assurance and testing of the software modules which are required to be developed as per the specifications discussed and provided by Sprinklr US's product management team who is responsible for contacting customers and understanding their requirements.
2.2 The assessee filed its return of income on 16/10/2018 declaring the total income of Rs.29,80,08,850/- for the impugned A.Y. 2018-19.
2.3 The assessee's case was selected for scrutiny through CASS for complete scrutiny and notice u/s.143(2). In response to the same, the assessee filed its reply on 03.10.2019. The Ld.AO noted that the assessee had international transaction with its Associated Enterprise. The Ld.AO, thus made reference u/s.92CA to the Ld.TPO, to determine the arm's length price and therefore reference was made to the Ld.TPO for determining the arms length price of the international transaction.
Page 9 IT(TP)A No. 713/Bang/2022 2.4 The Ld.TPO noted that assessee had following international transaction for the year under consideration.
International Amount (in Rs.) Transaction Provision of software 1,75,96,23,609/-
development services 2.5. The Ld.TPO from the TP study observed that the assessee used TNMM as the most appropriate method by using OP/OC as PLI computing its margin at 16.21%. It used following 18 comparables having median to be 14.82 %. The assessee treated its transaction to be at arm's length.
Weighted
SI. No. Name of the Company Average of
OP/OC(%)
1 Kals Information Systems Ltd. (11.95)
2 !summation Technologies Pvt Ltd 3.70
3 Evoke Technologies Pvt Ltd. 3.95
4 Lex Nimble Solutions Ltd 6.65
5 AXISCADES Engineering Technologies Ltd 7.75
6 Fractal Analytics Pvt Ltd 8.60
7 Harbinger Systems Pvt Ltd 10.27
8 Sven Technologies Ltd 14.76
9 Ness Technologies (India) Pvt Ltd. 14.87
10 ASM Technology Ltd 15.02
11 Cg-Vak Software and Exports Ltd 15.28
12 Sabre Travel Technologies Pvt Ltd. 15.76
Moodys Analytics Knowledge Services India Pvt 13 17.50 Ltd NetCracker Technology Solutions (India) Pvt 14 18.05 Ltd.
15 Sure IT Solutions India Pvt Ltd. 18.59 16 Exilant Technologies Pvt Ltd 21.42 17 AGS Health Pvt Ltd 26.11 18 E Care India Pvt Ltd 27.97 Page 10 IT(TP)A No. 713/Bang/2022 Data Range OP/OC place 7 35th percentile 10.27% th 12 65 percentile 15.76% Median 14.82% The Ld.TPO recomputed margin of the assessee at 0.65% by treating foreign exchange fluctuation as operating in nature. The Ld.TPO applied various filters and shortlisted the following comparables with a median of 20.19% being the median, thereby computed the shortfall at Rs.40,11,42,253/- as proposed adjustment.
F.Year wise OP/OC (%) Wt.
SI. No. Company Name
Average
2015-16 2016-17 2017-18
Infomile 9.69
1 9.86 11.06 8.64
Technologies Ltd. _
Harbinger Systems
2 12.69 12.80 9.46 11.65
Pvt. Ltd.
Exilant Technologies
3 25.82 17.27 8.50 17.17
Pvt. Ltd.
4 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57
Larsen & Toubro
5 20.78 19.21 17.14 18.94
Infotech Ltd.
i
Great Software
6 17.88 , 23.87 17.3 19.73
Laboratory Pvt. Ltd.
1
7 Elveego Circuits Pvt. 8.3 40.17 6.75 20.19
Ltd.
8 Black Pepper 9.63 13.84 24 83 20.62
Technologies Pvt. Ltd.
9 Mindtree Ltd. 26.11 20.12 18.41 21.21
Aptus Software Labs
10 27.67 24.83 15.16 22.70
Pvt. Ltd.
11 Acewin Agriteck Ltd. 26.54 23.23 22.73 24.51
12 Persistent Systems Ltd. 23.9 24.44 26.94 24.98
13 Wipro Ltd. 27.27 26.38 27.03 26.83
14 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24
Infobeans
15 34.98 23.89 27.82 28.52
Technologies Ltd.
Page 11
IT(TP)A No. 713/Bang/2022
16 Nihilent Ltd. 24.46 30.8 35.11 30.17
17 Thirdware Solution Ltd. 30.18 33.36 29.27 30.94
Threesixty Logica
18 Testing Services Pvt. 48.46 36.63 26.2 36.58
Ltd.
19 Infosys Ltd. 38.29 38.79 35.27 37.38
20 Cybage Software Pvt. 62.04 61.40 47.78 56.81
Ltd.
35th percentile 20.19
Median 23.60
65 percentile
th 26.83
2.6. The Ld.TPO further noted that the assessee treated the ESOP cost as non-operating. He accordingly called upon assessee to furnish the details in respect of the ESPPs received by its employee from the AE during the year. The assessee vide letter dated 06/07/2021 submitted that its employees received ESOPs from the parent company for which no details is possessed by the assessee. The Ld.TPO thus by based judgment computed the cost of ESOP in the hands of the assessee as under:
Sl.No. Particulars Amount
Employee benefit
1 Rs.1,17,00,02,709/-
expense
ESOPs equivalent to
Employee benefit
2 Rs.23,40,00,541/-
expense (Assumed to be
@20%)
2.7. On receipt on the transfer pricing order, draft assessment was passed by the Ld.AO on 18/08/2021 by proposing total addition in the hands of the assessee as per the transfer pricing order passed by the Ld.AO.
2.8. Aggrieved by the draft assessment order, the assessee field objections before the DRP. The DRP in respect of the various comparables sought for exclusion, upheld the order of the Page 12 IT(TP)A No. 713/Bang/2022 Ld.TPO and in respect of ESOP cost added to the operating margin held as under:
"4.1 Panel: In a software industry, the major backbone is the employees. They directly contribute to the software development-part and thus to the revenue so earned by the company. Any expenditure incurred on employees is therefore part of operating cost only and we have no hesitation in confirming the stance taken by the TPO. Even the taxpayer is saying that the ESOPs are provided to' the employees to boost their morale and motivation . Thus, the taxpayer is also affirming the stand taken by the TPO that is ESOP is nothing but the cost incurred by the employees of the company. As we already discussed that the employee's cost constitute the major cost of any software development company, thus, the view adopted by the TPO to consider the ESOP cost as operating cost is absolutely correct and accordingly, we reject the contention of the taxpayer in this regard.
Further, the TPO is also right' in stating that ESOP is nothing but the perquisite in the hands of the employees and hence the tax deduction at the source should have been made by the taxpayer."
2.9. On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition in the hands of assessee at Rs.70,01,89,706/-.
Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal.
3. At the outset, the Ld.AR submitted that Ground nos.1& 2 are general in nature and therefore do not require adjudication.
4. The Ld.AR submitted that, in Ground no.3, the assessee is raising legal issue regarding the validity of the assessment order passed by the assessment unit. He submitted that, the jurisdiction to pass the assessment vested with National e- Assessment Centre / National Faceless Assessment Centre w.e.f.
Page 13 IT(TP)A No. 713/Bang/2022 01/04/2022. The Ld. AR argued that the present assessment order passed by the Ld. DCIT, Circle 6(1)(1) is bad in law.
4.1. On the contrary, the Ld. DR filed a report from the field wherein there is a change of jurisdiction and certain posts were diverted / abolished for creation of the e-assessment hierarchy. The Ld.DR submitted that, this objection of the Ld.AR cannot be entertained due to this technical reason. For the sake of convenience, the report filed by the Ld. DR dated 18/10/2022 is scanned and reproduced herein below.
//This space is left vacant intentionally// Page 14 IT(TP)A No. 713/Bang/2022 Page 15 IT(TP)A No. 713/Bang/2022 Page 16 IT(TP)A No. 713/Bang/2022 On perusal of the above report, we do not find any strength in the argument of the Ld.AR and therefore Ground no.3 raised by assessee stands dismissed.
Page 17 IT(TP)A No. 713/Bang/2022
7. The Ld.AR then submitted that the Ground nos. 4-10 are also on similar issues. As we have already considered the report, these issues raised by the assessee stands dismissed.
7.1. Ground no.11-11.2 are general in nature and therefore need not be adjudicated.
8. Ground no.12 -12.4 is in respect of re computing the margin by treating ESOP expenses as operating in nature.
8.1 It was submitted by the Ld. AR that, considering the ESOP coast as operating is contrary to Rule 10B(e). It is the submission of the assessee that assessee has not incurred any cost and nothing has been debited to the profit & loss account of the assessee.
8.2 The Ld. AR submitted that the parent company has issued ESOPs/RSUs to the employees of Spinklr India Pvt. Ltd. However the parent entity has not recovered the cost of such benefits from the company. Accordingly no cost has been incurred by the company relating to ESOPs/RSU benefits and therefore has not considered the same as part of operating cost. The prevailing Accounting Standards also does not mandate the company to account such benefits in its books of accounts as there is no contractual liability nor any financial transaction took place.
(a) As stated above the company has not reimbursed any cost of ESOP/RSU benefit provided to employees.
(b) Since the company has not incurred any expenditure towards ESOP/RSU issued to the employees by Sprinklr Inc., such cost Page 18 IT(TP)A No. 713/Bang/2022 has not been considered into the operating cost. The perquisite value of issuing ESOP/RSU benefit has been calculated while deducting TDS on salaries paid to employees as per the provisions of Income Tax Act.
8.2. He also referred to the financial of the assessee for the year under consideration at page 444 to 452. It was submitted that the assessee has not incurred the ESOP cost of Rs.2,62,65,504/-.
8.3. The Ld. DR on the contrary relied on the observation of authorities below.
9. We have perused the submissions advanced by both sides in light of records placed before us.
9.1 We note that the Ld. AO/TPO has not considered the ESOP agreement between the employees and the AE. Unless the expenditure has been incurred by the assessee, it cannot form part of margin computation. What we understand from the submission of the assessee is that the assessee before us has only played the role of deducting the TDS on the discount the employees have received in the ESOP scheme of the AE. However this needs verification of the ESOP agreement. We therefore remand this issue back to the Ld. AO to verify the agreement and the ESOP scheme having regards to the financials of the assessee. The Ld. AO/TPO is directed to consider the issue in accordance with the view taken by this Tribunal in case of Radysis India vs. DCIT reported in (2022) 145 taxmann.com 294.
Page 19 IT(TP)A No. 713/Bang/2022 Accordingly this issue raised by the assessee stands allowed for statistical purposes.
10. The assessee in grounds 12.5 & 12.6 is seeking inclusion/ exclusion of certain comparables.
10.1 Before we undertake the comparability analysis it is sine qua non to understand the FAR of the assessee under the SWD segment for the year under consideration, which is as under:
Functions Performed:
Services Provided Sprinklr India provides the following two types of services to Sprinklr Inc., USA:
• Software Development services Sprinklr India has entered into a Master Agreement with Sprinklr US as per which, Sprinklr India is remunerated on a cost plus 16 percent mark-up for the services rendered.
Some of the features of the said agreement are enumerated below: • The agreement is effective from April 1, 2016, and shall continue until One Hundred & Twenty (120) months after the Effective Date ("Initial Term"). Thereafter, this Agreement may be renewed at CLIENT's election for additional periods unless either party gives written notice of termination 'at least ninety (90) days before any anniversary of the Effective Date. • The contract involves provision of advice, consultancy or technical assistance services in the areas of Software Development & Applications in the areas of Social Media Management Services and business consultancy services by Sprinklr India to Sprinklr US.
• Pricing will be based on a Cost plus Formula which shall be Cost + mark-up as agreed upon for the services rendered. • Cost means all revenue expenses including foreign exchange gain/losses, depreciation and overhead costs, provision for gratuity, but excluding any service tax (of which input credit is taken or refund is claimed), income tax, wealth tax, gift tax and corporate dividend tax. For the purpose of calculation of costs, any foreign exchange losses would be considered for the purpose of mark-up while any foreign exchange fluctuation gain would be netted off from expenses while arriving at the cost base. Any service tax refund received for earlier periods which was part of the operating cost during such earlier period shall be reduced from the operating cost of Page 20 IT(TP)A No. 713/Bang/2022 the year of receipt of refund while arriving at the cost for the purpose of mark-up.
• The full compensation and consideration for the Services and other obligations of Sprinklr India set forth shall be made in US Dollars.
• Sprinklr US shall own all right, title and interest including copyrights, intellectual property rights and other rights throughout the world relating to all Deliverables, any and all works of information and authorship assimilated and accumulated by CONTRACTOR during the term of this Agreement.
We also note that, the Ld.TPO recorded the functions of the assessee by observing as under:
"2.1 Sprinklr India was incorporated on 30th January, 2012 and is a wholly owned subsidiary of Sprinklr US.
Sprinklr India provides software development services including coding, documentation, and quality assurance and testing of the software modules which are required to be developed as per the specifications discussed and provided by Sprinklr US's product management team who are responsible for contacting customers and understanding their requirements. Sprinklr India has two units -- one in Gurgaon, where the development of the software is undertaken, and the other unit in Bengaluru, which handles all other functions such as quality control & assurance, monitoring, maintenance, administration etc." Assets employed The assets employed by Spinklr as on 31 March 2018 (after depreciation) are as follows:
Nature of assets Cost (Rs.)WDV (Rs.)
Tangible Assets
Motor Vehicles 15,81,433 Nil
Leasehold 8,03,59,793 1,47,83,091
Improvements
Furniture & 2,52,20,026 85,87,629
Fixtures
Office Equipment 1,46,05,820 45,38,501
Computers 15,66,78,226 3,30,00,800
'
Intangible Assets
Page 21
IT(TP)A No. 713/Bang/2022
Software 1,70,268 24,166
Total 27,86,15,5666,09,34,188
Sprinklr India does not own any significant intangible assets as on 31.3.2018.
Risk Assessment Business Risks Briefly summarized below are some of the key business risks, which are applicable to Sprinklr and its Group Companies in relation to the provision and receipt of services undertaken by Sprinklr:
Business/ Market risk Market risk arises when a company is subject to adverse sales conditions due to either increased competition in the marketplace, demand supply, etc. Sprinklr US is responsible for approaching and marketing the products/ solutions to final customers. It bears significant risks of the customer contracts, faces the competition and is responsible for penetrating newer markets and introducing new products/technology to widen its customer base. Accordingly, Sprinklr US bears the market/ business risks. Sprinklr India bears market risk to a limited extent, since it provides services only to Sprinklr US and does not approach third pdrties to render services. Sprinklr India is compensated for work done even if the final product is unsuccessful, or if substantial re working is required to make the final product to meet market requirements. Nevertheless, Sprinklr India bears the market risk to an extent, associated with the IT industry.
Foreign exchange risk Exchange rate risk relates to the potential variability of profits that can arise because of changes in foreign exchange rates and arises whenever the transacting currency of an entity is different from its functional currency.
Sprinklr raises invoices on Sprinklr US for the provision of services in its operational currency itself which is the Indian Rupee. Therefore, Sprinklr India does not bear any risk of foreign exchange fluctuation Credit and collection risk The credit and collection risks arise when a firm supplies products or services to a customer in advance of the payment. In such a scenario the firm runs the risk that the customer will fail to make payment.
As the AE directly transacts with the end customers, it bears the risks in relation to late or non-receipt of payments from customers. Sprinklr India renders software development services only to Sprinklr US and therefore does not bear significant credit and collection risks as compared to the risk that independent Indian third party service providers may bear in relation to receivables from customers.9
Page 22 IT(TP)A No. 713/Bang/2022 Service liability risk Service liability risk is borne by a company when its service offerings fail to perform at accepted or advertised standards and the company is required to compensate the customer or undertake defect resolution at its own cost.
Sprinklr US transacts with final customers and therefore is responsible for any defective quality, etc. that could arise in connection with the product/solution.
Sprinklr India provides services exclusively to Sprinklr US. Sprinklr India undertakes the software development services based on the instructions received from Sprinklr US. Sprinklr India is compensated for work done even if there are any defects, or if substantial re-work is required. Therefore, Sprinklr India does not bear the service liability risk.
Product liability risk Product liability risk refers to the risk associated with failure of a product or the possibility of facing legal action from customers due to defects in the products provided.
All the IPR in the products are owned by Sprinklr US and bears the product liability risk of the nonperformance of the product/solution sold to the customer.
Risk summary Briefly tabulated below are the risks assumed by Sprinklr and its AEs in relation to the activities undertaken by Sprinklr:
Type of risks Level of risk
Business/ Market risk Limited
Foreign exchange fluctuation risk No
Credit and collection risk No
Service liability risk No
Product liability risk No
From the above, it is clear that the assessee is a captive service provider that renders technical assistance services in the areas of software development and application to its AEs. Based on the above, we under the functional comparability of the following comparables with assessee.
11. In Ground no.12.5 the assessee seeks inclusion of the following comparables.
a) Celstream Technologies Pvt. Ltd.
Page 23 IT(TP)A No. 713/Bang/2022
b) Forgeahead Solutions Pvt. Ltd.
c) Kireeti Soft Technologies Ltd.
d) Yudiz Solutions Pvt. Ltd.
e) MCT India Infotech Pvt. Ltd.
f) SmartCloud Infoservices Pvt. Ltd.
g) Intelligrape Software Pvt. Ltd.
h) Ace Software exports Ltd.
i) Enlighten Software Services Pvt. Ltd.
j) Sagar soft India Ltd.,
k) CES Ltd. (segmental)
l) O F S Technologies Ltd. and
m) A S M Technologies Ltd.
11.1. It is submitted that the comparables sought for inclusion, were not considered by the Ld.TPO/AO. We therefore deem it appropriate to remit them to the Ld. AO/TPO. The Ld. AO/TPO shall look into the functional profile of these comparables and verify the same with that of the assessee. If they are functionally found to be similar with that of assessee, the same may be considered in accordance with law, considering the turnover limit of Rs.1 to 200 Crores.
Accordingly, this ground raised by the assessee stands partly allowed
12. Grounds 12.6.1 to Grounds 12.6.3 are general in nature and do not require adjudication.
12.1. Ground no.12.6.4 raised by assessee seeking exclusion of certain comparables. The Ld.AR submitted that, following comparables do not fulfil the criteria of turnover filter of less than 200 crores and therefore deserves to be excluded.
1) Exilant Technologies Pvt. Ltd. -Rs.332.51 Crs.
2) Tech Mahindra Ltd. -Rs.23,661 Crs.
Page 24 IT(TP)A No. 713/Bang/2022
3) Larsen & Toubro Infotech Ltd. -Rs. 6,906.40Crs.
4) Mindtree Ltd. -Rs.5,325 Crs. 5) Nihilent Ltd. -Rs.280 Crs. 6) Persistent Systems Ltd. -Rs.1,733Crs. 7) Wipro Ltd. -Rs.44,710Crs. 8) Tata Elxsi Ltd. -Rs.1,386Crs. 9) Thirdware Solutions Ltd. -Rs.204.38 Crs. 10)Cybage Software Pvt. Ltd. -Rs.737Crs. 11)Infosys Ltd. -Rs.61,941Crs.
12.2. The Ld.AR submitted that consistently above comparables have been excluded for having turnover more than Rs.200 Crs. For assessment year 2018-19. The Ld.AR relied on the decision of Coordinate Bench of this Tribunal in assessee's own case for A.Y. 2017-18 in IT(TP)A No. 250/Bang/2022 by order dated 15/07/2022, wherein comparables Larsen & Toubro Infotech Ltd., Mindtree Ltd., Nihilent Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., Infosys Ltd., and Cybage Software Pvt.Ltd., have been excluded for failing the turnover filter. The Ld.AR submitted that, the assessee has turnover of Rs.175 crores, whereas, the above comparables have a turnover of more than 200 crores. This Coordinate Bench of this Tribunal in assessee's own case observed as under:
7. In the above ground, the assessee is seeking application of upper turnover filter and thereby exclusion of following seven companies:-
(i) Larsen & Toubro Infotech Ltd.
(ii) Nihilent Ltd.
(iii) Persistent Systems Ltd.
(iv) Tata Elxsi Ltd.
(v) Infosys Ltd.
(vi) Mindtree Ltd.
(vii) Cybage Software Pvt.Ltd.
Page 25 IT(TP)A No. 713/Bang/2022
8. According to the learned AR, since a lower turnover filter has been applied, the TPO/DRP ought to have applied a higher turnover filter to exclude the above seven companies. The DRP has rejected the objections of the assessee by observing that turnover does not have an influence on the margins of the company. The learned AR has placed reliance on the order of the Bangalore Bench of the Tribunal in the case of BORQS Software Solutions (P.) Ltd. v. Asstt. CIT [2022] 135 taxmann.com 337 and Dy. CIT v. Northern Operating Services [2019] 108 taxmann.com 451 (Bang. - Trib.).
9. The learned Departmental Representative supported the orders of the Income-tax Authorities. It was submitted by the learned DR that if the turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company.
10. In the rejoinder, it was submitted that the DR's plea for application of multiplier of 10 times the turnover was rejected by the ITAT in case of Northern Operating Services (supra) and Autodesk India (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263 (Bang. - Trib.). It was further submitted that in several cases where turnover was between Rs. 100 crore and 200 crore, the ITAT had directed the companies having turnover exceeding Rs. 200 crore to be excluded from comparable list on account of turnover filter. The details of the said case are as follows:--
Sl. No. Citation Turnover of the
tested party (Rs.)
1. Autodesk India (P.) Ltd. v. DCIT (2018) 96
taxmann.com 263 (Bang-Trib.)
2. Tavant Technologies India (P.) Ltd. v. DCIT (2020) 100,18,13,973 120 taxmann.com 122 (Bang-Trib.)
3. Micro Focus Software India (P.) Ltd. v. 154,06,39,918 ACIT (2020) 113 taxmann.com 244 (Bang-Trib.)
4. Dell International Services India (P.) Ltd. v. 109,98,69,000 DCIT (2018) 89 taxmann.com 44 (Bang-Trib)
5. Zynga Game Network India (P.) Ltd. v. 109,99,71,917 DCIT (2020) 119 taxmann.com 403 (Bang-Trib)
6. Sami - Sabinsa Group Ltd. (TS-183-ITAT-2022 165,58,22,100 (Bang)-TP)
11. We have heard rival submissions and perused the material on record. At the outset, we notice that the TPO/DRP have erred in not applying the upper turnover filter to reject high turnover companies, while on the other hand, he has rejected companies with lower turnover of less than one (1) Crore. As per the Dun & Bradstreet classification of software industry, the companies could be classified under three major heads depending on the turnover of the company viz.,
(a) Less than Rs. 200 crores categorized as small size companies;
(b) Rs 200 crores to Rs. 2000 crores categorized as medium size companies;
(c ) More than Rs. 2,000 crores categorized as large size companies.
Page 26 IT(TP)A No. 713/Bang/2022
12. The turnover of the assessee for the relevant assessment year is Rs. 134 crores and therefore would fall under the category of small size company having turnover in the range of Rs. 1 crore to Rs. 200 crores. Therefore, the companies not falling within the range, i.e, companies having turnover less than Rs. 1 crore or turnover more than Rs. 200 crores deserves to be excluded. The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions (P.) Ltd. (supra) has considered various judicial pronouncements on this issue including that of the Hon'ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that application of turnover filter is justified on the basis of classification of companies as per the report of Dun and Bradstreet. As regards the specific plea of the learned DR that if turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company, we find this plea was rejected by the Bangalore Bench of the Tribunal in the case of Northern Operating Services (supra). The relevant submission of the parties and the finding of the Tribunal in case of Northern Operating Services (supra) read as follows:-
'15. The ld. DR submitted that the Hon'ble High Court of Karnataka in the case of M/s. Acusis Software (I) P. Ltd. v. ITO in ITA No. 223/2017, judgment dated 14-8-2018, has taken the view that if the turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company. The ld. DR drew our attention to the turnover of 10 comparable companies which is as follows:--
Sl. No. Name of the case Operating Income Operating cost OP/OC 1 Accentia 1,069,026,524 82,93,91,898 28.98% Technologies Ltd.
2 Acropetal Technologies 494,399,332 389706574 26.86%
3. Cosmic Global Ltd. 62,496,615 5,69,15,360 9.81%
4. e4e Healthcare 613,160,587 54,56,25,872 12.38% (capitaline)
5. ICRA Online Ltd. (seg) 156,691,000 11,67,49,267 34.21% 6 Jeevan scientific 1,721,400,000 1,00,86,52,592 70.66% Technology Ltd.
7 Infosys B PO Ltd. 11,291,147,909 9,57,73,24,546 17.89%
8. Jindal Intellicom 390,358,799 35,12,69,641 11.13% (capitaline)
9. Mindtree Ltd. (seg.) 5,653,000,000 5,10,39,05,999 10.76% 10 iGate Global 11,845,540,000 9,47,11,65,000 25.07% Solutions Ltd.
He submitted that if such criterion is applied, then that would be the proper basis for excluding companies for the purpose of comparability based on turnover.
16. The ld. Counsel for the assessee, on the other hand, submitted that the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) merely dismissed the appeal of assessee on the ground that no substantial question of law arises for consideration. In Page 27 IT(TP)A No. 713/Bang/2022 particular, he drew our attention to the following paragraphs of the judgment of Hon'ble High Court:-
"14. The findings of the learned Tribunal as regards the comparable namely, Mercury Outsourcing Management Ltd., which too have been excluded by the Tribunal are quoted below for ready reference:--
"(ii) Mercury Outsourcing Management Ltd.
13.1 The learned Authorised Representative has submitted that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost.
13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than Rs. 1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO. 13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is only Rs. 45.33 lakhs which is any case does not satisfy any filter of turnover in comparison to the assessee's turnover more than Rs. 27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee's turnover then the company which is having less than Rs. 2.7 Crores of turnover will be outside the said range of 10 times. Accordingly, we are of the view that this company which is having only Rs. 45.33 lakhs turnover cannot be considered as a good comparable to the assessee".
15. From the aforesaid findings of the learned Tribunal, we are satisfied that the reasons assigned by the learned Tribunal in excluding the aforesaid company as comparable is also reasonable and the same deserves to be accepted by us. It is analysed by the learned Tribunal in extenso which arrived at a decision that the company which is having only Rs. 45.33 lakhs turnover cannot be considered as comparable to the Assessee- company whose turnover is more than Rs. 27 Crores.
16. The decision of the learned Tribunal in the other cases referred to by the learned counsel for the Appellant-Assessee would not render the findings of the learned Tribunal in the present case nugatory or perverse for the reason that analyzing of the comparables may be in a different context and the same need not be blindly or generally adopted in all cases, irrespective of the context or the circumstances calling upon for the inclusion/exclusion of the comparables which absolutely is a decision to be taken by the learned Tribunal as last fact finding authority. This view is supported by our judgment dated 25-8- 2018 on Softbrands case (supra), which we find it appropriate to quote hereunder to its relevant extent:-"
17. He submitted that the question of law which the assessee sought to raise before the Hon'ble High Court was justification for excluding Mercury Outsourcing Management Ltd. as a comparable company. It is in that context that the aforesaid Page 28 IT(TP)A No. 713/Bang/2022 decision was rendered by the Hon'ble High Court. He pointed out that the Tribunal in excluding Mercury Outsourcing Management Ltd., had taken a view that its turnover was small compared to the assessee's turnover and therefore not comparable, even if the tolerance range of turnover of 10 times on both the sides of assessee's turnover is applied. There is no positive finding by the Tribunal that the company can be excluded for the purpose of comparability on the basis of turnover, only if the turnover is 10 times on both the sides of assessee's turnover. On the conclusions of the Tribunal, the Hon'ble High Court only held that it is reasonable and deserves to be accepted. In para 16, the Hon'ble High Court has clearly observed that the decisions rendered in other cases referred to by the ld. Counsel for the assessee would not render the findings of the Tribunal in the case before the High Court as negatory or perverse for the reason that analysing of the comparables may be in a different context. The same need not be blindly or generally adopted in all the cases, irrespective of the context or circumstances calling for exclusion/inclusion of the comparables. The finding in each case is therefore a finding of fact. He pointed out that the Tribunal in the case of Autodesk (I) P. Ltd. v. DCIT [2018] 96 taxmann.com 263 [Bang. Trib.] after analysing the entire cases on the point, came to the conclusion that the decision rendered by the Tribunal in the case of Genesis Integrated Systems (I) P. Ltd. [2012] 53 SOT 159 lays down the correct law on the application of turnover filter and that decision has to be followed. He pointed out that the DRP in the present case has followed the ruling in the case of Genesis Integrated Systems (I) P. Ltd. (supra) and therefore the order of DRP has to be upheld.
18. We have given a careful consideration to the rival submissions and are of the view that as rightly submitted by the ld. Counsel for the assessee, the decision rendered by the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) does not positively say that for a company to be excluded on the basis of high turnover, the tolerance range of turnover of 10 times on both the sides of assessee's turnover has to be seen. Even the Tribunal in the order against which the appeal was filed, did not proceed on application of turnover filter with any such condition. Therefore, it is not correct to say that for application of turnover filter, tolerance range of turnover of 10 times on both the sides of assessee's turnover has been laid down by the Hon'ble High Court. The Hon'ble High Court held that the order of Tribunal is correct and calls for no interference and further held that no question of law arose for consideration. The decision rendered in the case of Autodesk (I) P. Ltd. (supra) of the Tribunal after analysing every conflicting views has ultimately concluded that the law laid down in the case of Genesis Integrated Systems (I) P. Ltd. (supra) has to be Page 29 IT(TP)A No. 713/Bang/2022 followed. The following were the relevant observations of the Tribunal:-
"17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. 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. The decision was rendered as early as 5-8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co- ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S. NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)."
19. In the given facts and circumstances of the case, we find no grounds to interfere with the order of DRP on this issue. Consequently, ground Nos.4 & 5 raised by the revenue are dismissed as without any merit.
Page 30 IT(TP)A No. 713/Bang/2022
20. In the result, the appeal by the revenue is dismissed.'
13. Accordingly, by following the above orders of the Tribunal, we direct the AO/TPO to apply appropriate upper turnover filter and exclude above mentioned seven companies from the list of comparables. It is ordered accordingly.
12.3. We also not that in respect of Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Wipro Ltd., Tata Elxsi Ltd., the above ratio would be applicable as these comparables also has a turnover of more that Rs.200 Crores.
Accordingly, following the above view, we direct the Ld.AO/TPO to exclude Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Nihilent Ltd., Persistent Systems Ltd., Wipro Ltd., Tata Elxsi Ltd., for exceeding turnover limit of Rs.200 crores.
12.4. Thirdware Solutions Ltd.:
It is submitted by the Ld.AR that this company has multiple activities and segmental financials are not available. The Ld.AR submitted that, in the absence of segmental details, this company cannot be selected. He relied on the decision of coordinate bench of this Tribunal in case of Yahoo Software Development India Pvt. Ltd vs. JCIT reported in (2020) 115 taxmann.com and 3DPLM Software Solutions Ltd. vs. DCIT reported in (2014) 42 taxmann.com 333.
12.4.1. The Ld.DR placed reliance on the observations of the authorities below.
We have perused the submission advanced by both sides in light of records placed before us.
Page 31 IT(TP)A No. 713/Bang/2022 12.4.2. We note that the revenue recognition of this company is from consulting, design, implementation and support of Enterprise Application and Cloud Applications and other related serviced. It is noted that this company also earns revenue from sale of licence and subscription for software products. These details are available at page 614 of paper book in the Annual report of this company. The Present assessee before us is a captive service provider catering to the needs and at the direction its AE under the SWD segment. As there is no segmental details available, we cannot consider this company to be a good comparable as the entire revenue is catagorised under one head i.e., 'Revenue from Operation'. Even on RPT filter we note that this company has RPT of more that 25% which does fails the filter applied by the Ld.TPO.
We therefore direct Thirdware Solutions Ltd., to be excluded from the final list.
Accordingly, Ground no. 12.6.4 stands allowed.
12.5. In Grounds 12.6.5 to Ground 12.6.13, the Ld.AR submitted that only following comparables to be considered on functionality with assessee:
a) Exilant Technologies Ltd.
b) Tech Mahindra Ltd.
c) Elveego Circuits Pvt. Ltd.
d) ThreeSixty Logica Testing Services Pvt.Ltd
e) Black Pepper Technologies Pvt.Ltd
f) Aptus Software Labs Pvt.Ltd
g) Great Software Laboratory Pvt.Ltd.
Page 32 IT(TP)A No. 713/Bang/2022 12.6. He submitted that, other comparables not considered herein above though raised in the grounds may be left academic at this stage. We are therefore restricting our view only in respect of the above three comparables.
A. Exilant Technologies Pvt. Ltd.
A.1. The Ld.AR at the outset submitted that this company was not considered by the Ld.TPO for A.Y. 2017-18. It is submitted that this company has a total turnover of Rs.332.43 crores and is involved in diversified business activities. It is submitted that this comparable is also into sale of products and there is no segmental data available in respect of the same.
A.2. On the contrary, the Ld.DR submitted that this company is primarily into software development segment and therefore deserves to be retained.
We have perused the submissions advanced by both sides in the light of records placed before us.
A.3. We note that this company has been granted patents in various jurisdiction including India. This reveals that this company is into research and development in the process of delivering the software development services. We also note that the Ld.TPO while considering the objections has recorded that the segmental details are available. However in the paper book filed before us at pages 619 & 620, only have the P&L account without any annexure. We are therefore not able to appreciate the arguments of the Ld.AR regarding no segmental details available. It is also not possible to ascertain the expenditure Page 33 IT(TP)A No. 713/Bang/2022 incurred by this comparable on research and development as the schedules to the account is not there. We therefore remand this company back to the Ld.TPO to verify the above details. Admittedly this comparable has not been considered during A.Y 2017-18. In the event, there are any new materials obtained by the Ld.TPO, the same must be shared with the assessee. After considering the objections and scrutinising the functional similarities, the Ld.TPO shall then consider this comparable if at all it fits into all the necessary criteria.
We also note that, merely because this company is into software development, cannot be a reason to consider its inclusion. Needless to say that proper opportunity of being heard must be granted to assessee.
B. Tech Mahindra Ltd.
This company has been held to be not functional with that of assessee as its RPT filter is 33.84%. The Ld.AR submitted that, this comparable has been selected by the Ld.TPO, only for the reason that it is into software development. The Ld.AR further submitted that, this comparable is into sale of products as well as sale of services which is evident from page 574 of the paper book and it has a turnover of more than 1000 crores. It is submitted that this comparable fails the turnover filter and deserves to be excluded from the final list.
B.1.The Ld.DR relied on the orders passed by authorities below.
B.2. Admittedly, the turnover of this comparable is more than 200 crores. We have already considered and excluded Page 34 IT(TP)A No. 713/Bang/2022 comparables for failing the turnover filter by following the observations of Coordinate Bench of this Tribunal in assessee's own case(supra). Following same principles, we direct the exclusion of Tech Mahindra Ltd. from the final list.
C. Elveego Circuits Pvt. Ltd.
C.1. The Ld.AR submitted that this comparable has abnormally high margin for the year under consideration. He also contended that this company was considered by the Ld.TPO without furnishing the annual report. He also submitted that this company is engaged in the business of electronics and semiconductor design services, which is not similar to the SWD services rendered by the assessee. He submitted that this company is into chip and semiconductor designing services where as the assessee before this Tribunal is a captive service provider rendering limited SWD services to its AE. The Ld.AR thus submitted that this company is functionally not at all similar with that of the assessee.
C.2. On the contrary, the Ld.DR relied on the observations of the authorities below.
We have perused the submission advanced by both sides in light of records placed before us.
C.3. We note that this company is in the business of Chip and semiconductor design services where as the assessee before us is into basic SWD services of coding an documentation, Testing and quality assurance, software patches and maintenance. There is no similarity between the functions performed by the assessee Page 35 IT(TP)A No. 713/Bang/2022 vis-à-vis that of this company. We therefore at the threshold reject this company being functionally not similar with that of the assessee.
Accordingly, the Ld.TPO is directed to exclude this company from the final list of comparables.
D. ThreeSixty Logica Testing Services Pvt.Ltd D.1.The Ld.AR submitted that this company earns revenue for Information technology services and Software development services for which segmental details not available. He referred to Annexure 59 placed at page 597-598 of the paper book.
D.2. On verification of the above pages we note that the, annexure is only Notes forming part of the financial statement. No other details from the annual report has been filed in respect of this company.
D.3. We therefore remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to consider the same in accordance with law.
Accordingly this company is remanded to the Ld.AO for re adjudication.
E. Black Pepper Technologies Pvt.Ltd E.1. The Ld.AR submitted that this company earns revenue for Information technology services and Software development services for which segmental details not available. He referred to Annexure 62 placed at page 607-608 of the paper book.
Page 36 IT(TP)A No. 713/Bang/2022 E.2. On verification of the above pages we note that the, annexure is only Note No.18 forming part of the financial statement. No other details from the annual report has been filed in respect of this company.
E.3. We therefore remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to consider the same in accordance with law.
Accordingly this company is remanded to the Ld.AO for re adjudication.
F. Aptus Software Labs Pvt.Ltd F.1. The Ld.AR submitted that this company earns revenue for Information technology services. He referred to Annexure 57 placed at page 591 of the paper book.
F.1. On verification of the above pages we note that the, annexure is only NIC details. No other details from the annual report have been filed in respect of this company.
F.2. We therefore remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to comsider the same in accordance with law.
Accordingly this company is remanded to the Ld.AO for re adjudication.
G. Great Software Laboratory Pvt.Ltd.
Page 37 IT(TP)A No. 713/Bang/2022 G.1. The Ld.AR submitted that this company earns revenue for Information technology services and Software development services for which segmental details not available. He referred to Annexure 53 placed at page 576-578 of the paper book.
G.2. On verification of the above pages we note that the, annexure is only some portion of the annual report. No other details from the annual report has been filed in respect of this company.
G.3. We therefore remand this company to the Ld.AO/TPO to consider the objections raised by the assessee against its inclusion and to comsider the same in accordance with law.
Accordingly this company is remanded to the Ld.AO for re adjudication.
Accordingly Ground No.12.6 stands partly allowed.
13. Ground no.12.7 is in respect of correcting the margins of following three comparables:
(a) Harbinger systems Pvt.Ltd
(b) Acwein Agritek Ltd.
We direct the Ld.AO/TPO to compute the correct margin of the comparables that are retained in the final list in accordance with law.
Accordingly Ground No.12.7 stands allowed.
14. Ground no.12.8 is in respect of non granting of WCA and risk adjustment to the assessee.
Page 38 IT(TP)A No. 713/Bang/2022 14.1. At the time of hearing, the Ld.AR pressed for providing working capital adjustment. Identical issue was considerd by co- ordinate bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT (2019) 101 taxmann.com 313, wherein this Tribunal, directed the Ld.AO to grant WCA as it is necessary to iron out the differences between the assessee and the comparables that are finally retained.
14.2. Respectfully following the above decision, we are of the view that, the Ld.AO was not justified in denying adjustment on account of working capital adjustment. In the light of the decision referred to above, the assessee is entitled to working capital adjustment. The assessee is directed to provide the working capital adjustment for year under consideration The TPO is accordingly directed to allow the same as per law.
14.3. In respect of the risk adjustment, sought by the assessee, the details will have to be furnished before the Ld.AO/TPO by the assessee itself establishing the differences in the risk. Only then the same could be computed. We are therefore of the view that in the event the assessee is able to file documents/evidences to establish the differences in the risk, the Ld.TPO may consider it and compute is accordance with law.
Accordingly this ground raised by the assessee stands partly allowed for statistical purposes.
15. The Ld. AR did not argue Grounds 12.9.-12.10 and accordingly not adjudicated.
Page 39 IT(TP)A No. 713/Bang/2022
16. In Grounds 13-14, assessee is challenging the levy of interest under section234B which is consequential.
In the result, the appeal filed by the assessee stands partly allowed.
Order pronounced in the open court on 11th January, 2023.
Sd/- Sd/-
(LAXMI PRASAD SAHU) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 11th January, 2023.
/MS /
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore