Income Tax Appellate Tribunal - Cochin
Us Technology International P. Ltd, ... vs The Acit, Trivandrum on 27 February, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH : COCHIN
BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER
AND
Ms. PADMAVATHY S., ACCOUNTANT MEMBER
IT(TP)A No.2/Coch/2021
Assessment Year : 2016-17
US Technology International Vs. The Assistant Commissioner
Private Limited, of Income Tax,
721, Nila, Technopark Campus, Circle 1(1),
Kariyavattom, Trivandrum.
Trivandrum - 695 581.
PAN : AAACU 5628B
APPELLANT RESPONDENT
Assessee by : Shri Raja Kannan, Advocate
Revenue by : Smt. M. Rajasekhar, CIT(DR)
Date of hearing : 10.01.2023
Date of Pronouncement : 27.02.2023
ORDER
Per Padmavathy S, Accountant Member
This appeal is against the final assessment order passed by the AO, National e-assessment Centre, Delhi u/s. 143(3) r.w.s. 144C(13) of the Act dated 29.3.2021 for the AY 2016-17.
2. The assessee is a subsidiary of UST Global Investment (Mauritius) P. Ltd. and part of UST group which provides end to end IT services to its Associated Enterprises [AEs]. The assessee filed the return of income for the AY 2016-17 on 30.11.2016 declaring a total IT(TP)A No.2/Coch/2021 Page 2 of 35 income of Rs.179,77,77,180. The case was selected for scrutiny by CASS and the relevant statutory notices were duly served on the assessee.
3. A reference was made to the TPO in connection with determination of ALP of the international transactions the assessee has entered into with its AE. The TPO made an adjustment of Rs.99,99,36,461. Accordingly, draft assessment order was passed by the AO.
4. Aggrieved, the assessee raised objections before the DRP whereby the TP adjustment was reduced to Rs.84,10,91,572. Pursuant to the directions of the DRP, the AO passed the final assessment order against which the assessee is in appeal before the Tribunal.
5. During the year under consideration, the assessee had entered into the following international transactions with its AEs:-
International Amount (INR) Most Appropriate Transactions Method Provision of Software 944,81,78,280 TNMM Development Service Reimbursement of 18,61,724 OM expenses (ESOP) Advance granted 21,35,33,768 OM Advance granted repaid 93,74,605 OM
6. The functions performed, Assets employed and the risks undertaken as per the TP study are as given below -
IT(TP)A No.2/Coch/2021
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Functions performed
Sr. Particulars USTIPL AE
No.
1 Conceptualisation and functional specification No Yes
2 Coding and documentation Yes Yes
3 Project management Limited Yes
4 Testing and quality control Yes Yes
Summary of Assets owned by USTIPL as on 31 March 2016 Particulars Amount in INR Tangible assets Land 99,110,165 Leasehold improvements 68,540,433 Computers 302,556,881 Furniture and fixtures 16,136,199 Office equipment 32,302,130 Total (A) 518,645,808 Intangible assets Computer software 299,911,906 Goodwill 33,250,672 Total (B) 333,162,578 Capital work in progress (C) 7,184,265 Total (A+B+C) 858,992,651
7. According to the assessee, any business requires assets (tangible or intangible) without which it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by USTIPL provides an insight into the resources deployed by USTIPL and its contribution to the business processes/economic activities. USTIPL does not own any non-routine valuable intangible assets.
IT(TP)A No.2/Coch/2021
Page 4 of 35
Summary of risk undertaken
Risks undertaken USTIPL AE
Market Risk Limited Yes
Foreign Exchange risk Yes No
Capacity utilization risk No Yes
Service liability risk Limited Yes
Credit risk No Yes
8. The assessee applied Transaction net margin method [TNMM] for the purpose of its Transfer Pricing study. Operating profit/Operating cost is considered as the Profit Level Indicator. As per the TP study, the margins of the assessee is arrived at 18.61% as per the below calculation:-
Particulars SWD
Revenue from Singapore 1200,12,40,137
Add: Foreign exchange gain 13,93,08,779
Operating Revenue 1214,05,48,916
Less:
Employee benefit expenses 714,03,76,142
Other expenses 264,34,58,855
Depreciation and
42,89,69,576
amortization expense
Finance costs - Bank
2,27,30,146
Charges
1023,55,34,719
Less: Government project expenses
IT(TP)A No.2/Coch/2021
Page 5 of 35
Net Operating Expenses 1023,55,34,719
Operating Profit 190,50,14,197
NCP Margin (OP/OC) 18.61%
OP/OR 15.69%
9. The TPO reworked the margins of the assessee at 18.88% as per below table:-
Particulars SWD
Total Revenue 1224,08,79,458
Less: Other income 23,96,39,321
Add: Foreign exchange gain 13,93,08,779
Operating Revenue (OR) 1214,05,48,916
Total Expenses 1041,84,25,287
Less: 42,89,69,576
Finance Costs (Bank Charges) 19,87,76,152
Provision for doubtful Advances 68,44,562
Operating Expense (OC) 1021,28,04,573
Operating Profit (OP) 192,77,44,343
OP/OC 18.88%
Op/OR 15.88%
10. The assessee has chosen 8 comparables as given below the 35th percentile of average margin is 7.04% and 65th percentile is 20.61% with a median of 12.67 % and accordingly the assessee concluded that the price charged for the international transactions are at arm's length.
IT(TP)A No.2/Coch/2021
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Sr. Data Company Name NCP NCP NCP Weighted
No. Source 2014 2015 2016 Average
(%) (%) C/o) (%)
1 C Akshay Software
Technologies Ltd 1.84% 0.29% NA 1.08%
2 C Evoke Technologies
Pvt Ltd 6.49% 5.42% NA 5.90%
3 P Sasken Communication
Technologies Ltd. 7.81% 5.42% 7.04% 7.04%
4 P C G-V A K Software &
Exports Ltd. 9.55% 13.59% 13.25% 12.21%
Intense Technologies
5 P 30.82% 14.45% -1.76% 13.13%
Ltd.
6 P Mindtree Ltd. 21.64% 21.15% 19.49% 20.61%
R S Software (India)
7 P 24.33% 33.43% -1.95% 21.23%
Ltd.
R Systems International
Ltd. - Information
8 P-Seg 23.41% 22.31% 21.56% 22.40%
Technology Services &
Products
35' Percentile 7.04%
Median 12.67%
th
65 Percentile 20.61%
11. Out of the 8 comparables, the TPO accepted 2 comparables viz., CG-Vak Software & Exports Ltd. and R S Software India Ltd. The TPO conducted revised search and chose 11 more comparables and accordingly the final set of comparables is as given below:-
IT(TP)A No.2/Coch/2021 Page 7 of 35 S.No. Company Name Financial Year wise OP/OC (%) 2015-16 2014-15 2013-14 Weighted Average 1 Kals Information Systems Pvt. Ltd. 3.97% 5.77% 16.94% 8.60% 2 Rheal Software Pvt. Ltd. 3.20% 2.76% 36.64% 14.50% 3 C G-V A K Software & Exports 19.60% 19.87% 13.81% 18.50% Ltd.
4 R S Software (India) Ltd. -2.09% 32.75% 24.14% 20.87% 5 Larsen & Toubro Infotech Ltd. 26.29% 24.22% 23.54% 24.83% 6 Nihilent Ltd. 15.94% 29.19% 35.72% 26.36% 7 Inteq Software Pvt. Ltd. 7.53% 32.14% 45.00% 28.20% 8 Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 9 Infobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 10 Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 11 Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 12 Aspire Systems (India) Pvt. Ltd. 34.26% 47.56% 38.04% 39.28% 13 Cybage Software Pvt. Ltd. 62.90% 68.68% 68.82% 66.45% 35th Percentile 24.83% Median 28.20% 65th Percentile 32.42%
12. Accordingly the TPO computed the TP adjustment as per below computation:-
IT(TP)A No.2/Coch/2021 Page 8 of 35 SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 1214,05,48,916 Taxpayers operating cost OC 1021,28,04,573 Taxpayers operating profit OP 192,77,44,343 Taxpayers PLI PLI=OP/OC 18.88% 35th Percentile Margin of 24.83% comparable set Adjustment Required (if PLI< Yes 35th Percentile) Median Margin of M 28.20% comparable set ALP=(1+M) Arm's Length Price 1309,28,15,463 *OC Price Received OR 1214,05,48,916
13. The TPO computed the interest on delayed receivables at LIBOR + 400 basis points and made an adjustment of Rs.83,46,909. The TPO also computed interest on loans & advances to AE at 8.6% to arrive at an adjustment of Rs.39,32,305. The adjustment was subsequently enhanced by TPO whereby the total TP adjustment was enhanced to Rs.99,99,36,461.
14. The DRP gave partial relief to the assessee whereby the TP adjustment was reduced to Rs.84,10,91,572. The assessee is in appeal before the Tribunal against the final order of assessment passed pursuant to the directions of the DRP.
IT(TP)A No.2/Coch/2021 Page 9 of 35
15. Ground Nos.1 is general.
16. The assessee raised 11 sub-grounds in ground No.2 with regard to the TP adjustment in IT services. Out of the same, 2.1 & 2.2 and 2.4 are general grounds. During the course of hearing, the ld. AR submitted that ground Nos. 2.5 to 2.9 & 2.11 are with regard to the same contentions and accordingly can be considered together. The ld. AR also submitted that ground No.2.10 is not pressed.
17. Ground No.2.3 reads as follows:-
"2.3 The Ld. AO/ TPO erred on facts in arbitrarily rejecting the following comparable companies selected by the Appellant in the transfer pricing documentation without considering the functional and risk analysis of the Appellant. The Ld. TPO/AO erred in accepting the direction given by the Ld. Panel in this regard.
a) Akshay Software Technologies Limited
b) Evoke Technologies Private Limited
c) Sasken Communication Technologies Limited"
Evoke Technologies
18. The TPO rejected the inclusion of Evoke Technologies by stating that as per the annual report of the company, the stand alone financials reported for the year 2015-16 include revenue and net profit figure of one branch outside India also. Since the financials include figures from an outside branch which are unaudited and hence not reliable.
IT(TP)A No.2/Coch/2021 Page 10 of 35
19. The DRP confirmed the exclusion by stating that the export turnover filter fails in the case of the company which is only 5.71% as per the geographical segmental information whereas the Note 2.16 shows export revenue of 73.83 crores as against the total revenue of Rs.74.28 crores. Accordingly, the DRP held that the company cannot be considered as comparable in view of the unreliable data provided in the annual report. Aggrieved, the assessee is in appeal before the Tribunal.
20. The ld. AR submitted that the company has been accepted as a comparable in assessee's own case for AY 2014-15.
21. We heard the rival submissions and perused the material on record. As far as the plea of the assessee for inclusion of Evoke Technologies Pvt. Ltd. is concerned, this company was rejected by the TPO on the ground that the financials of this company includes figures from outside branches which are unconnected. The DRP agreed with the view of the TPO. The learned Counsel for the assessee placed reliance on the decision of the ITAT, Hyderabad Bench in the case of Infor India P. Ltd. Vs. DCIT (2019) 109 taxmann.com 435 (Hyderabad
- Tribunal ) wherein it was held that availability unaudited accounts cannot be the reason to reject the comparability of the company which satisfies all filters. Reliance was also placed on the decision of the ITAT, Bengaluru Bench in the case of Zynga Game Network India Pvt. Ltd. Vs. DCIT in IT(TP)A No.2573/Bang/2019, order dated IT(TP)A No.2/Coch/2021 Page 11 of 35 23.03.2021 for Assessment Year 2015-16 in which the comparability of this company was remanded to the TPO for fresh consideration.
22. We notice that the coordinate bench in assessee's own case has considered the inclusion of Evoke Technologies and held that -
8.4 We have heard the rival submissions and perused the material on record. M/s. Evoke Technologies P. Ltd. has been considered as functionally comparable in the assessment year 2011-12 by the TPO. How it is not passing the forex filter and the employee cost filter has not been explained by the TPO. We have gone through the forex filter and employee filter of this company which is as follows:
Forex filter Forex Calculation March 14 Particulars Amount in Forex income Rs.
361,891,528
Total Operating Income 456,330,307
Forex Income/Sales 79.32%
Employee Cost filter
Employee cost calculation March 14
Particulars Amount in
Personal Expenses Rs.
319,556,453
Total Operating Income 454,659,098
Employee Cost/Sales 70.38%
Therefore, the Assessing Officer has to appraise the above data after going through the annual report of the comparable. Hence, we remit this issue to the file of the Assessing Officer for TP study by the TPO and decide accordingly. Thus, this ground of appeal of the assessee is partly allowed for statistical purposes.
IT(TP)A No.2/Coch/2021 Page 12 of 35
23. Considering that the above facts have not been examined by the TPO for the year under consideration we are of the view that the comparability of this company has to be remanded to the TPO for fresh consideration in the light of the above decisions.
24. The Ld AR did not press for the inclusion of Akshay Software Technologies Limited and Sasken Communication Technologies Limited during the course of hearing.
25. Ground Nos.2.5 to 2.9 and 2.11 read as follows:-
2.5 The Ld. AO / TPO erred in law in applying an arbitrary filter to reject companies having relate party transactions greater than 25% of sales. The appellant seeks 0%- 15% RPT filter as judicial upheld in various appeals to consider any comparable as an "uncontrolled transaction" an accordingly seek rejection of the following companies;
Company Name FY 2013-14 FY 2014-15 FY 2015-16 Inteq Software Pvt. Ltd 92.11 % - -
Persistent Systems Ltd - 31.72% 32.52 %
Aspire Systems (India) Pvt. 30.34 % 34.80 % 41.62 %
Ltd
2.6 The Ld. AO/ TPO erred in including the following comparables, despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same.
a) R S Software (India) Limited
b) Larsen & Toubro Infotech Limited
c) Infobeans Technologies Limited
d) Persistent Systems Limited
e) Nihilent Limited
f) Aspire Systems (India) Private Limited IT(TP)A No.2/Coch/2021 Page 13 of 35
g) Inteq Software Private Limited
h) lnfosys Limited
i) Thirdware Solutions Limited
j) Cybage Software Private Limited 2.7 The Ld. TPO/DRP erred in considering the following companies with significant Intangibles.
a) R S Software (India) Limited
b) Larsen & Toubro Infotech Limited
c) Inteq Software Private Limited
d) Aspire Systems (India) Private Limited 2.8 The Ld. TPO/DRP erred in considering the following companies which operate under different business model with significant onsite activities.
a) R S Software (India) Limited
b) Larsen & Toubro Infotech Limited
c) Nihilent Limited
d) Persistent Systems Limited
e) Thirdware Solutions Limited
f) Infosys Limited
g) Aspire Systems (India) Private Limited 2.9 The TPO/AO has erred on facts in wrongly computing the margins of certain companies identified as comparable by the TPO.
a) Kals Information Systems Pvt Ltd
b) CG VAK Software & Exports Ltd
c) Rheal Software Pvt Limited
d) R S Software Pvt Ltd
e) Larsen & Toubro Infotech Ltd
f) Nihilent Analytics Ltd
g) Inteq Software Pvt Ltd
h) Persistent Systems Ltd
i) Infobeans Technologies Ltd
j) Aspire Systems (India)Pvt Ltd
k) Thirdware Solutions Ltd
1) Infosys Ltd IT(TP)A No.2/Coch/2021 Page 14 of 35
m) Cybage Software Pvt Ltd 2.11.The TPO/AO erred in selecting the following companies having exceptional year of operation/Abnormal Margins/peculiar economic circumstances. AO erred in accepting the action of TPO.
a) Aspire Systems (India) Pvt Ltd
b) Cybage Software Pvt Ltd
c) Inteq Software Private Limited
d) Larsen & Toubro Infotech Ltd
e) Persistent Systems Ltd.
f) Infosys Ltd.
Inteq Software Pvt. Ltd.:
26. It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, and that, the segmental data is not available in respect of diverse activities carried on by it. He relied the annual report of the company in this regard which part of paper book. He thus prayed for this comparable to be excluded from the final list due to lack of segmental data.
Larsen and Toubro Infotech Ltd.:
27. It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it renders application development maintenance, IT(TP)A No.2/Coch/2021 Page 15 of 35 enterprise solutions, testing and validation, digital solutions, infrastructure management services, platform-based service which cannot be equated to the routine software service provider like the assessee. The Ld.AR submitted that this company is also engaged in activities such as cloud computing, infrastructure management, analytics & information management, etc., and that No segmental details are available. The Ld AR submitted that this company is also engaged in trading IT related products has cost of brought out items and has won awards and recognitions for innovative products. The Ld.AR submitted that this company is a market leader and enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights and brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market. The Ld.AR submitted that this company has significant onsite activities. Further, he submitted that during the year under consideration, this company has extraordinary event, whereby Information Systems Resources Centre Private Limited amalgamated with the Company. He thus prayed for exclusion of this company from the final list Thirdware Solutions Limited
28. It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is engaged software and consultancy. The Ld.AR IT(TP)A No.2/Coch/2021 Page 16 of 35 submitted that this company has significant competencies in transaction systems, Analytics and Cloud applications. Further, the company has earned revenue from software development, implementation services, application management services, and other related services and from sale the sale of license and subscription for software application, which are not akin to the captive services rendered by the assessee. The Ld.AR submitted that this company deals in product also and segmental details of diverse services are not available. He thus prayed for exclusion of this company from the final list.
Infosys Ltd.:
29. It is submitted that this company is functionally dissimilar to the assessee on various counts, and therefore, it ought to be rejected from the final list of comparables. It is submitted that the Ld.TPO erred rejected contentions of the assessee and upheld the inclusion of the company in the final list of comparables.
30. It is submitted that this company renders services like business IT services comprising of application development and maintenance, independent validation, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; Consulting and systems integration services comprising consulting, enterprise solutions, systems integration and advanced technologies; Products, business platforms IT(TP)A No.2/Coch/2021 Page 17 of 35 and solutions to accelerate intellectual property-led innovation including Financial, and banking solution; and offerings in the areas of Analytics, Cloud, and Digital Transformation. It is submitted that this company is a full-fledged risk bearing entrepreneur who cannot be compared to the assessee that renders routine software services. It is submitted that the company owns seven Edge products/platforms and six other product based solutions.
31. The Ld.AR submitted that, this company does not have segmental data in respect of rendering software services and development of products. It is submitted that this company has significant intangibles as a part of its fixed assets in the nature of intellectual property. The company owns significant brand value and focuses immensely on brand building. The Ld.AR submitted that, this company heavily focuses on research and development activity and incurs significant expenditure for this account and for the financial year relevant to assessment year under consideration, the company incurred research and development expenses of Rs. 415 crores. The Ld.AR submitted that, this company for the year under consideration has earned abnormally high profit with margin of 38.61%, which makes it incomparable with the assessee.
Persistent Systems Ltd. :
32. It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The IT(TP)A No.2/Coch/2021 Page 18 of 35 Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is engaged in, rendering Enterprise Digital Transformation, product engineering and solutioning for Internet of Things (IoT), product engineering and professional services to ISVs and enterprises, IP products, IT services, development of software products and offers complete product life cycle services without there being separate segmental information disclosed in its Annual Report for such activities . It is submitted that Persistent Systems made significant investments towards research and development activities in the relevant previous year. Persistent has collaborated with researchers from IGIB, JNU, IISER-Pune and NCL to develop SanGeniX - an DNA sequencing using Next Generation Sequencing (NGS) technology), eSkIN-will help discovery of new pharmaceutical and cosmetic products to empower pharmaceuticals and cosmetic companies to predict the effects of their products on human skin).
Persistent has established "persistent labs" which focuses on latest technologies viz., gesture computing, machine learning etc. Using the innovations of Persistent labs. The Ld.AR further submitted that this company partnered with IBM and have added an engineering team that is building products and tools for continuous lifecycle management and for digital transformation and has partnerships with various leading platform providers in Analytics, Big Data, Cloud, Mobile, Machine Learning, and IoT. The Ld.AR submitted that as a part of Aepona acquisition, this company acquired development centers in Belfast, UK IT(TP)A No.2/Coch/2021 Page 19 of 35 and in Colombo, Sri Lanka during the year under consideration. He thus prayed for exclusion of this company from the final list.
Nihilent Technologies Limited
33. It is submitted that, this company is functionally dissimilar to the assessee and therefore ought to be rejected from the final list of comparables. It is submitted that, services rendered by this company are wide in range and diversified. The Ld.AR submitted that, the company is engaged in diversified activities. It is submitted that, it renders services in the nature of consulting, software development and product development, provision of business consulting in the area of the enterprise transformation, change and performance management, digital transformation, business intelligence and data science services and also providing related IT services. The Ld.AR submitted that, software-consulting services include end-to-end solutions, onsite management and IT functions, and planning & system designing, which are in no way comparable to the captive software development activities as provided by the assessee.
34. The Ld.AR further submitted that, this company has incurred significant expenses in foreign currency of 37.68%, 33.27% and 37.47% of its total expenditure during the FYs 2015-16, 2014-15 and 2013-14, respectively, which suggests that is engaged in provision of onsite services. And that, during the FY relevant to assessment year under consideration, this company acquired GNet Group LLC, a IT(TP)A No.2/Coch/2021 Page 20 of 35 business intelligence and analytical company, and Intellect Bizware Services Pvt. Ltd., specialising in ERP and enterprise innovation. The Ld.AR submitted that, these acquisitions are bound to have a significant impact on the financials of the company. The Ld.AR thus submitted that, for all the above reasons this company cannot be considered to be comparable with. He relied on the decision of Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. v. ACIT (supra) India Ltd., reported in (2022) 134 taxmann.com 35 for functional dissimilarities.
Infobeans Technologies Ltd.:
35. It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is specialised in business applications development for web and mobile. This company provides software engineering services primarily in Custom Application Development, Content Management Systems, Enterprise Mobility, Big Data Analytics. He placed reliance on page 1668 of annual report paper book. The services rendered by this company are different from the routine low end software development services rendered by the assessee as a captive service provider to its AE. The Ld.AR further submitted that, segmental details of such diverse activities carried on by this company are not available. He thus prayed for exclusion of this company from the final list.
IT(TP)A No.2/Coch/2021 Page 21 of 35
36. On the contrary, the Ld. DR relied on the orders passed by the authorities below.
Cybage Software Pvt.Ltd.
37. It is submitted that this company is engaged in the provision of diversified services which include product engineering, testing & quality assurance services, specialized services, support services, etc. It is submitted that this company is engaged in product development and has developed a product called 'excelshore' apart from providing spectrum of services including ITeS and BPO services and that segmental information of the diverse business functions undertaken by the company is not available.
R.S Software (I) Pvt.Ltd:
38. It is submitted that, this company is engaged in diversified activities, which are not similar to the services rendered by the assessee. The company is into custom application development, quality assurance and testing, application maintenance and support, strategic consulting, in respect of which, segmental details are unavailable. The company is engaged in development of platform services and is rendering data analytics services, which are different from the routine SWD services rendered by the assessee. The data analytics services rendered by the company will fall within the definition of KPO services, which IT(TP)A No.2/Coch/2021 Page 22 of 35 are incomparable to the services rendered by the assessee. It is submitted that this company conducts research and development work in the areas of real time analytics, MDM, proximity, payments, digital commerce, mobile payments, testing, automation, personalised loyalty in payments and merchant management in payments laboratory.
39. On the contrary, the Ld.DR relied on the orders passed by the authorities below.
40. We heard the rival submissions and perused the material on record. We notice that the exclusion of the above companies has been considered by the coordinate bench of the Tribunal in the case of ARM Embedded Technologies, IT(TP)A 235/Bang/2021 dated 30.8.2022 and the relevant extract is as given below -
"16. We note that the decision of Hon'ble Delhi Tribunal in case of Global Logic India Ltd. (supra) considered these comparables for assessment year 2016-17 and has held them to be functionally not similar with a captive service provider like that of the assessee before us. Further The assessee in Global Logic India Ltd. (supra) is also as captive service provider as observed by Hon'ble Delhi Tribunal therein. Hon'ble Tribunal observed as under:
COMPARABLE COMPANIES SOUGHTTO BE EXCLUDED BY THE TAXPAYER LARSEN & TOUBRO INFOTECH LTD. (L&T)
14. The taxpayer sought to exclude L&T from the final set of comparables chosen by the ld. TPO for the purpose of benchmarking its international transactions qua SDS on the IT(TP)A No.2/Coch/2021 Page 23 of 35 grounds inter alia that it is functionally dissimilar; that its segmental data is not available; that L&T is a huge brand with ownership of intangibles and on account of extra ordinary event;
and on the ground that this company was rejected in taxpayer's own case in Global Logic India Ltd. v. Dy. CIT [2020] 117 taxmann.com 39 (Delhi - Trib.).
15. However, on the other hand, ld. DR for the Revenue opposed the contentions raised by the taxpayer to exclude L&T as a comparable on the grounds inter alia that this comparable was chosen by the taxpayer itself and in case of TNMM applied for benchmarking the international transactions minor dissimilarities are not to be taken into account; that the taxpayer cannot be taken as a captive entity as its spectrum is much more and it is also a global brand having presence in many countries and relied upon the order passed by the ld. TPO/ld. DRP.
16. When we examine profile of L&T from its financials, available at pages 6, 7 & 11 of the paper book, it is into providing application development and maintenance services providing digital solutions such as big data analytics, enterprise computing, cognitive computing, infrastructure management services and enterprise solutions. It has also been awarded and recognized by various forums for providing such niche services in the field of innovation in information technology category, analytics solutions/services etc., explained at page 11 of the paper book.
17. When we examine Notes forming Parts of Accounts at page 116 of the paper book, it is evident that L&T is having two segment accounts, namely, (i) Services Cluster Segment which includes Banking and Financial Services, Insurance, Media & Entertainment, Travel & Logistics and Healthcare, and (ii) Industrial Cluster Segments which consists of Hi Tech and Consumer Electronics, Consumer Retail & Pharma, Energy & Process, Automobile & Aerospace, Plant Equipment & Industrial Machinery, Utilities and E&C. But aforesaid various segments do not indicate profit earned from provisions of SDS. Apart from it, L&T is a huge brand having ownership of significant intangibles to the tune of Rs. 7.42 millions, as is evident from its financials at pages 8 and 103 of the paper book.
IT(TP)A No.2/Coch/2021 Page 24 of 35
18. Coordinate Bench of the Tribunal rejected L&T in taxpayer's own case for AY 2014-15 (supra), available at pages 61 to 63 of the case law paper book, by returning following findings :--
"6.6 The next objection of the assessee is regarding multiple segments. From segment reporting on page S-1258 of the Annual Report (page 129 of PB-2), we find that the assessee has reported three business segments. The first segment is service cluster which includes banking, financial services, insurance, media and entertainment, travel and logistics and healthcare. The second segment industry cluster which includes Hi Tech and consumer electronics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under :
"TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL).
Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs. 489.53 crs based on ITA No. 4740/Del./2018 fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year."
IT(TP)A No.2/Coch/2021 Page 25 of 35 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- (page 129 of PB-2), which has not been allocated into three segments, and thus the segmental result are distorted.
6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No. 1897/Del./2004), which has been approved the Hon'ble High Court in ITA No. 813/2015, the company is held to be not valid comparable on account of extraordinary events. Thus, In view of the extraordinary event in the year under consideration also, this company is liable to be excluded from the set of the comparable."
19. In taxpayer's own case in Global Logic India (P.) Ltd. v. DCIT [IT Appeal No. 8726 (Delhi) of 2019, dated 29-6-2020] L&T was excluded by the coordinate Bench of the Tribunal by returning following findings :--
"20. The Tribunal in assessee's own case in ITA No. 4740/Del/2018 relating to Assessment Year 2014-15 vide order dated 1-5-2020 has directed the exclusion of the said concern from the final list of comparables while benchmarking the ALP of the international transaction by the assessee with its AE. Before parting, we may also refer to an extraordinary event under which Larsen & Toubro Infotech Ltd. initiated and completed transfer of its Product Engineering Services Business (PES) Unit to L&T Technology Services Ltd. w.e.f. January 1, 2014 as part of the business restructuring undertaken within the Larsen & Toubro group. Though the initiation started from 1-1-2014 but the whole effect of the transaction was during the year under consideration. Further, Larsen & Toubro Infotech Ltd. during the IT(TP)A No.2/Coch/2021 Page 26 of 35 year under consideration acquired Information Systems Resource Centre Private limited ("ISRC") thereby making it wholly owned subsidiary and because of such extraordinary event of acquisition, the said concern cannot be held to be a valid comparable and thus has to be excluded from the final set of comparable. Accordingly, we hold so."
20. In view of the facts inter alia that L&T is into various segments having no segmental financials, having huge brand value and intangibles is not a suitable comparable vis-à-vis taxpayer which was working as a captive entity and that contention raised by the ld. DR that under TNMM minor dissimilarities do not affect the overall comparability is not sustainable because though it is a taxpayer's own comparable but there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture qua profit earned by the company from provisions of SDS. L&T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the higher profitability. So, we are of the considered view that L&T is not a suitable comparable vis- à-vis the taxpayer, hence ordered to be excluded.
THIRDWARE SOLUTION LTD. (THIRDWARE)
40. The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis-à-vis the taxpayer. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable.
41. Perusal of Notes - Additional Information and Profit & Loss account, available at page 570 of the annual reports paper book, shows that it has income earned from sale of licence and provision of training services also under the head 'software services from local unit', 'export of software services', 'revenue from subscription & training' and 'sale of licence' to the tune of Rs. 2809.62 lakhs, Rs. 19285.11 lakhs, Rs. 32.59 lakhs & Rs.
IT(TP)A No.2/Coch/2021 Page 27 of 35 8.77 lakhs respectively. The taxpayer has also brought on record website of the company, available at pages 71 to 73 of the appeal memo, which shows that Thirdware is having competency in providing services in most advanced and niche area of technologies such as Robotic Process Automation, Big Data Analytics& Cloud Computing.
42. From the profile of Thirdware it has come on record that Thirdware is functionally dissimilar vis-à-vis the taxpayer as it has been deriving income from sale of licence and software services export from SEZ unit and revenue from subscription and training etc. and it is also into sale of licence and its segmental financials are not available.
43. Thirdware has been ordered to be excluded by the coordinate Bench of the Tribunal in case of Fiserve India (P.) Ltd. v. ITO [2015] 60 taxmann.com 48 (Delhi - Trib.) on ground of dissimilarity to routine software development service provider which has been affirmed by Hon'ble Delhi High Court in ITA 17/2016 order dated 6-1-2016. So, we order to exclude Thirdware from the final set of comparables.
INFOBEANS TECHNOLOGIESLTD. (INFOBEANS)
44. The taxpayer sought exclusion of Infobeans as a comparable again on ground of functional dissimilarity, it also being into providing services viz. software engineering services primarily in Custom Application Development (CAD), Content Management Systems, Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book.
45. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e. services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis-à- vis the taxpayer which is a routine software development services provider. Infobeans has been excluded as a comparable on IT(TP)A No.2/Coch/2021 Page 28 of 35 account of functional dissimilarity vis-à-vis routine software development service provider by the coordinate Bench of the Tribunal in case of Pub Matic India (P.) Ltd. (supra). So, in view of the matter, we order to exclude Infobeans from the final set of comparables.
INTEQ SOFTWARE LTD. (INTEQ)
46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services.
47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-à-vis the taxpayer which is a routine software development service provider working on cost-plus mark up model, hence ordered to be excluded from the final set of comparables.
17. We note that the assessee in Global Logic India Ltd. (supra) was a captive service provider to its AE for assessment year 2016-17. Nothing has been placed by the Revenue to deviate from the above view taken by the coordinate bench of this Tribunal in Global Logic India Ltd. (supra).
18. Respectfully following the view taken by the coordinate bench of this Tribunal in Global Logic India Ltd. (supra), we direct Ld. AO/TPO to exclude Inteq Software Pvt. Ltd., L&T Infotech Ltd., Infobean Technologies Ltd., Thirdware Solutions Ltd. from the final list of comparable for SWD segment."
***** IT(TP)A No.2/Coch/2021 Page 29 of 35 "21. Before us, the Ld.DR has not been able to place anything on record contrary to the above submissions by the Ld.AR. We of the view that with such varied functions, these companies cannot be compared with assessee before us, which is a captive service provider. We accordingly direct the Ld.AO/TPO to exclude Persistent Systems Ltd., and Infosys Ltd. from the final list."
**** "We have perused the submissions of both sides in light of records placed before us.
The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No. 405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc.
45. Perusal of the disclosure of enterprise's reportable segment explanatory available at page No. A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No. A304, A405-A406 of the paper book shows that Nihilent has only one business segment and in the absence of segmental financials, as it is into diversified business, this company cannot be a valid comparable vis-à-vis assessee, who is a low risk entity working on cost + markup model. Hence, Nihilent is ordered to be excluded as a comparable. Nihilent Ltd.
46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à- vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A 412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this IT(TP)A No.2/Coch/2021 Page 30 of 35 company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded.
We note that the assessee in Red Hat India (P.) Ltd. (supra) was a captive service provider to its AE for assessment year 2016-17. Nothing has been placed by the Revenue to deviate from the above view taken by the coordinate bench of this Tribunal in Red Hat India (P.) Ltd. (supra). We are of the view that, based on the functions performed by this company as submitted by the Ld.AR and the observations of Hon'ble Mumbai Tribunal, this comparable deserves to be excluded from the final list.
We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Nihilent TechnologiesLtd from the final list.
24. Cybage Software Pvt. Ltd.
***** We have perused the submissions of both sides in light of records placed before us.
Primarily we note that this company is a product company and has diversified business segments. We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE.
Respectfully following the above view, we direct the Ld.AO/TPO to exclude Cybage Software Pvt. Ltd., from the final list.
IT(TP)A No.2/Coch/2021 Page 31 of 35
25. R.S Software (I) Pvt. Ltd.
***** We have perused the submissions of both sides in light of records placed before us.
We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE.
We therefore direct the Ld.AO/TPO to exclude R.S Software (I) Pvt. Ltd., from the final list."
41. From the functions performed as per the TP study, we notice that the assessee is a captive service provider providing SWD services to its AE which is similar to the profile of ARM Embedded Technologies. Hence in our view the exclusions as has been held in the decision of ARM Embedded Technologies (supra) is applicable to assessee's case also. We respectfully follow the above decision and remit the issue to TPO with similar directions. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.
Aspire Software
42. The assessee submitted for the exclusion of the comparable on the ground that Aspire Software is having significant related party transactions and accordingly fails the RPT filter. The assessee also submitted that Aspire is not functionally comparable with the assessee and there is lack of segmental information. The TPO did not accept IT(TP)A No.2/Coch/2021 Page 32 of 35 the contentions and held that the company satisfies all the filters and accordingly needs to be included. The DRP upheld the inclusion.
43. The ld AR reiterated the submissions made before the lower authorities. The ld. AR further submitted that the Bangalore Bench of the Tribunal in the case of Sandisk India Device Design Centre P. Ltd., IT(TP)A No.288/Bang/2021 had considered the issue of exclusion of Aspire and held that the company is not functionally comparable.
44. We heard the parties we notice that the coordinate bench in the case of Sandisk India (supra) has considered exclusion of Aspire Systems (India) Pvt Ltd and held that -
17.9 In respect of Nihilent Ltd., Infobeans Technologies Ltd. and Aspire Systems (India) Pvt. Ltd., Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT (supra) observed as under:
"Comparable Sought to be excluded by the assessee Aspire System India Pvt. Ltd. (Aspire)
40. The assessee sought exclusion of Aspire from the final set of comparables for benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh."
45. Respectfully following the above decision of the coordinate bench we remit the issue back to the AO/TPO for fresh consideration.
IT(TP)A No.2/Coch/2021 Page 33 of 35 Interest on loans & advances
46. The assessee in this regard submitted that the amount classified as loans & advances are in the nature of recovery of expenses and mainly pertain to recovery of travel expenses incurred by the assessee on behalf of its AE. The assessee submitted that using average internal borrowing cost plus spread of 300 basis points @ 14.13% by the TPO is not correct and submitted that for imputing interest on a balance receivable from AE is to be adopted at LIBOR rate with suitable benchmarking. The DRP gave partial relief to the assessee by stating that the average domestic cost of borrowing i.e., at 11.13% should be adopted.
47. The ld. AR during the course of hearing reiterated the submissions made before the lower authorities.
48. We heard the rival submissions and perused the material on record. We notice that the assessee has incurred expenses on behalf of the AE towards employee travel and has shown the amount recoverable as receivable against the assessee. The TPO considered this as an international transaction and proceeded to apply interest @ 14.13% being domestic cost of borrowing. The DRP did not accept the contention of the assessee that the amount outstanding is recoverable in foreign currency and therefore LIBOR rate should be applied. The DRP however gave partial relief by reducing the rate of interest to 11.13%. The reason for rejecting the LIBOR rate is that the advances IT(TP)A No.2/Coch/2021 Page 34 of 35 / spend is done by the assessee in Indian currency and the invoices submitted are also in Indian currency. However, we see merit in the argument of the assessee that the amount is recoverable in foreign currency and therefore in our considered view, the LIBOR rate should be applied. Accordingly, we hold that interest @ LIBOR + 200 basis points should be applied For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly.
49. Ground Nos.3 & 4 are not pressed and dismissed accordingly. Ground Nos.6 & 7 are consequential not warranting separate adjudication.
50. In the result, the appeal of the assessee is partly allowed.
Pronounced in the open court on this 27th day of February, 2023.
Sd/- Sd/-
( BEENA PILLAI ) ( PADMAVATHY S )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Bangalore,
Dated, the 27th February, 2023.
/Desai S Murthy /
IT(TP)A No.2/Coch/2021
Page 35 of 35
Copy to:
1. Appellant 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore.
By order
Assistant Registrar,
ITAT, Bangalore/Cochin.