Income Tax Appellate Tribunal - Bangalore
M/S. Tivo Tech Private Limited ... vs Assistant Commissioner Of Income Tax, ... on 30 March, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : BANGALORE
BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER
AND
MS. PADMAVATHY S, ACCOUNTANT MEMBER
IT(TP)A No. 862/Bang/2022
Assessment Year : 2018-19
M/s. TiVo Tech Pvt. Ltd.
(formerly known as
Veveo (India) Pvt. Ltd.), The Assistant
10 Floor, Primrose 7B,
th Commissioner of
Embassy Tech Village, Income Tax,
Outer Ring Road, Central Circle -
Devarabisanahalli 7(1)(1),
Vs.
village, Bangalore.
Bangalore - 560 103.
PAN: AABCV9504G
APPELLANT RESPONDENT
Smt. Tanmayee Rajkumar,
Assessee by :
Advocate
Revenue by : Shri D.K. Mishra, CIT (DR)
Date of Hearing : 29-03-2023
Date of Pronouncement : 30-03-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal is filed by the assessee against the assessment order dated 20.07.2022 passed u/s. 143(3) r.w.s. 144C(13) of the act for A.Y. 2018-19 on following grounds of appeal:
"The grounds mentioned herein by the Appellant are without prejudice to one another.
1. Ground No. 1: Assessment Order and reference to Transfer Pricing Officer are bad in law 1.1. The Final Assessment Order (`Order') of the Assistant Commissioner of Income Tax, Circle 7(1)(1), Bangalore [Id.Page 2 of 38
IT(TP)A No. 862/Bang/2022 AO'] dated 20 July 2022, passed under Section 143(3) read with section 144C of the Income Tax Act 1961 (`the Act'), pursuant to the directions of the Learned Dispute Resolution Panel-2, Bangalore (the `Ld. Panel') to the extent prejudicial to the Appellant, is bad in law and liable to be quashed;
1.2. The Ld. AO has erred in law in making a reference to the learned Deputy Commissioner of Income Tax (Transfer Pricing) -- 2(2)(2) [Id. TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. 1.3. The Ld. AO has erred in passing the Order under section 143(3) read with section 144C of the Act without having the appropriate jurisdiction since the appropriate authority to pass the Order was National Faceless Assessment Authority, Delhi (`NFAC') under section 144B(1)Xxxx) of the Act.
1.4. The Ld. AO has passed the final order without providing any reference to the procedure prescribed under the provisions of section 144B(8) of the Act being followed by the Principal Chief Commissioner or the Principal Director General, as the case may be, in-charge of National Faceless Assessment Centre and therefore, the final order is bad in law and hence, liable to be quashed. A. GROUNDS OF APPEAL ON TRANSFER PRICING ISSUES
2.Ground No. 2:Rejection of transfer pricing documentation
2.1.That on the facts and circumstances of the case, the Ld.AO/Ld.TPO erred in rejecting the value of international transaction of provision of Software Development services (`SWD'), Information Technology enabled services (`ITeS'/Technical Support services (`TSS') and Marketing Support services (`MSS'), as recorded in the books of account, as the arm's length price;
2.2.That on the facts and circumstances of the case, the Ld.AO/Ld.TPO erred in rejecting the transfer pricing ("TP") documentation maintained by the Appellant, in good faith, as required under section 92D of the Act read with rule 10 D of the Income-tax Rules, 1962 ("the Rules") on the basis that the Appellant did not apply appropriate filters and accordingly contended that the data used in computation of arm's length price is not reliable or correct; 2.3.The Ld.AO/Ld. TPO erred in law in rejecting the quantitative filters applied by the Appellant in its TP documentation such as: rejecting companies having other operating income (service income) / sales less than 5o% in latest available year.
3. Ground No. 3: Comparability analysis and determination of arm's length price Page 3 of 38 IT(TP)A No. 862/Bang/2022 3.1.That on the facts and in the circumstances of the case, the Ld. Panel erred in upholding the Ld.AO/ Ld. TPO's approach of determining the arm's length price for the provision of SWD, ITeS and MSS by applying the provisions of Rule 1oB(5) read with Rule 1oCA(2) and Rule 10 CA(4) of the Income-tax Rules, 1962 (`the Rules') while undertaking the fresh benchmarking analysis; 3.2.The Ld.AO/Ld.TPO erred in law in applying arbitrary filters as criteria for rejection of companies identified by the Appellant in the TP documentation such as (i) rejecting companies having different financial year ending (i.e. not March 2018) or data of the company which does not fall within 12 months period i.e. 01.04.2017 to 31.03.2018 (ii) rejecting companies having SWD, ITeS and MSS income of less than 75% of total operating income (iii) rejecting companies having export service income of less than 75%. (iv) method of computing related party filter of 25%. (v) application of employee cost filter of 25%. The Ld. Panel erred in upholding the same;
3.3.The Ld.AO/Ld.TPO grossly erred on facts in benchmarking the transactions of the captive software services of the Appellant with companies operating as full- fledged entrepreneurs without considering the differences in the functions performed, assets employed, and risk undertaken by the Appellant vis-a-vis comparable companies;
3.4.The Ld.AO/Ld.TPO erred in treating provision which was written back since it was longer required as non- operating income which has the effect of reducing the margins of the Appellant.
3.5. The Ld.AO/Ld.TPO grossly erred in not applying an upper turnover filter to reject companies having high turnover.
4. Ground No. 4: Comparability analysis - SWD segment 4.1.The Ld.AO/Ld.TPO erred in rejecting (i) Evoke Technologies Pvt Ltd (ii) Smartcloud Infoservices Pvt. Ltd
(iii) E-Zest Solutions Ltd., despite these companies being functionally comparable to the Assessee. The Ld. Panel erred in upholding the same;
4.2. The Ld.AO/Ld.TPO erred in not including (i) Happiest Mind Technologies Limited (ii) Kals Information Systems Ltd. and (iii) Yudiz Solutions Pvt Ltd (iv) Sasken Technologies Ltd as comparable, despite these companies being functionally comparable to the Assessee. The Ld. Panel erred in upholding the same;
4.3.The Ld.AO/Ld.TPO erred in including. (i) Exilant Technologies Pvt. Ltd. (ii) Larsen & Toubro Infotech Ltd. (iii) Great Software Laboratory Pvt. Ltd (iv) Elveego Circuits Pvt. Ltd. (v) Black Pepper Technologies Pvt. Ltd. (vi) Page 4 of 38 IT(TP)A No. 862/Bang/2022 Mindtree Ltd. (vii) Aptus Software Labs Pvt. Ltd. (viii) Acewin Agriteck Ltd. (ix) Persistent Systems Ltd. (x) Wipro Ltd. (xi) Tata Elxsi Ltd. (xii) Infobeans Technologies Ltd.
(xiii) Nihilent Ltd. (xiv) Threesixty Logica Testing Services Pvt. Ltd. (xv) Infosys Ltd. (xvi) Cybage Software Pvt. Ltd. and (xvii) Tech Mahindra Ltd. despite these companies being functionally dissimilar to the Assessee. The Ld. Panel erred in upholding the same.
5. Ground No. 5: Comparability analysis -- ITeS/ TSS segment 5.1. The Ld.AO/Ld.TPO erred in giving effect to the directions of the Ld. Panel, wherein the Ld. Panel directed the Ld. TPO to consider the segmental margins earned by the Appellant, the Ld. TPO erred in not following the said direction of the Ld. Panel, thereby making an adjustment to ITeS/TSS. Absent the error, there would not warrant any adjustment under ITeS/TSS since the margins earned by Appellant under ITeS/TSS segment higher than the 35th percentile of the Ld. TPO set;
5.2.Without prejudice to the above ground, the Ld.AO/Ld.TPO erred in rejecting the following companies
(i) Allsec Technologies Ltd. (ii) Cosmic Global Ltd and (iii) Bhilwara Info Technology Ltd. (iv) Informed Technologies India Ltd. and (v) Suprawin Technologies Ltd., despite these companies being functionally comparable to the Assessee. The Ld. Panel erred in upholding the same; 5.3.The Ld.AO/Ld.TPO erred in including (i) Fuzen Software Pvt. Ltd (ii) Infosys B P M Services Pvt. Ltd. (iii) Manipal Digital Systems Pvt. Ltd. (iv) Domex E Data Pvt Ltd (v) Vitae International Accounting Services Pvt Ltd (vi) Inteq BPO Services Pvt. Ltd. (vii) Tech Mahindra Business Services Ltd. (viii) Motif India Infotech Pvt. Ltd. (ix) Eclerx Services Limited (x) MPS Ltd and (xi) CES Ltd. despite these companies being functionally dissimilar to the Assessee. The Ld. Panel erred in upholding the same.
6.Ground No.6:bComparability analysis--MSS segment 6.1.The Ld.AO/Ld.TPO erred in giving effect to the directions of the Ld. Panel, wherein the Ld. Panel directed the Ld.TPO to consider the segmental margins earned by the Appellant, the Ld.TPO erred in not following the said direction of the Ld.Panel, thereby enhancing the the adjustment to MSS segment;
6.2.Without prejudice to the above ground, the Ld.AO/Ld.TPO erred in rejecting the following companies
(i) Honeycomb Relationship Management Services Pvt Ltd
(ii)Spectrum Business Solutions Ltd (iii) Hansa Research Group Pvt. Ltd. (iv) Netlink Solutions (India) Ltd. (v) Kestone Integrated Marketing Services Pvt Ltd and (vi) Technicom- Chemie (India) Ltd., despite these companies being Page 5 of 38 IT(TP)A No. 862/Bang/2022 functionally comparable to the Assessee. The Ld. Panel erred in upholding the same.
6.3.The Ld.AO/Ld.TPO erred in including (i) Axience Consulting Pvt.Ltd. (ii) Dun & Bradstreet Information Services India Pvt. Ltd. (iii) Pressman Advertising Ltd. (iv) Lintas India Pvt. Ltd. (v) Majestic Research Services & Solutions Ltd. and (vi) Cheil India Pvt. Ltd. despite these companies being functionally dissimilar to the Assessee. The Ld. Panel erred in upholding the same. 6.4.Without prejudice to the above ground, the LD.TPO erred in computing incorrect margins of Dun & Bradstreet Information Services India Pvt. Ltd, and further erred in not rectifying the same as directed by the Ld. Panel.
7.Ground No.7: Non-allowance of appropriate adjustments to the comparable companies, by the Ld.AO/Ld.TPO 7.1.The Ld.AO/Ld.TPO erred both in law and facts in not providing working capital adjustment for determining the arm's length price while relying on the judicial precedents based on a fact pattern which is not applicable to the Appellant. The Ld.Panel erred in upholding the same;
7.2.The Ld.AO/Ld.TPO erred in ignoring the limited risk nature of the services provided by the Appellant and thereafter selecting high profit-making entrepreneurial companies as comparables. In doing so, the Ld.AO/Ld.TPO has erred in not providing an appropriate adjustment towards the risk differential, even when the full-fledged entrepreneurial companies have been selected by the Ld.TPO as comparables. The Ld. Panel erred in upholding the same.
8.Ground No.8: Treatment of forex as operating in nature 8.1.The Ld AO/Ld.TPO erred in considering gain/loss on foreign currency fluctuation as operating in nature for the purposes of computation of operating mark-up on cost of the Appellant and the comparable companies. The Ld. Panel erred in upholding the same.
9. Ground No. 9: Interest on outstanding receivables 9.1.The Ld.AO/Ld.TPO erred in considering outstanding receivables from the AEs as an international transaction under the provisions of section 92B of the Act. In doing so, the Ld.AO/Ld.TPO erred in imputing an interest on such outstanding receivables. The Ld.AO/Ld.TPO has not considered the Appellant's contention that the said balances have been settled during the normal course of business, having regard to the economic and commercial factors.
9.2.The Ld.AO/Ld.TPO has erred in not considering that, such differences should be adjusted through the appropriate mechanism of working capital adjustment and not looked at separately, being closely aligned to the Page 6 of 38 IT(TP)A No. 862/Bang/2022 primary international transactions of rendering of services to AEs. Thus, the outstanding receivables would not constitute an international transaction by itself. 9.3.Without prejudice to the above grounds, the Ld.AO/Ld. TPO erred in determining transfer pricing adjustment pertaining to interest on outstanding receivables, without taking into consideration that the weighted average collection period of the Assessee in respect of invoices raised during the assessment year was within the credit period agreed as per the inter-company agreement between the Assessee and its Associated Enterprises. 9.4.Without prejudice, the Ld.AO/Ld.TPO erred in determining an adjustment without applying any of the prescribed methods.
9.5.The Ld.Panel erred in upholding the same thereby erred in directing the Ld.AO/Ld.TPO to compute interest by applying SBI short term deposit rate.
9.6.Without prejudice to ground numbers 9.1 to 9.3 above, the Ld.AO/Ld.TPO erred in ignoring that, if at all transfer pricing adjustment has to be sustained with respect to notional interest on outstanding receivables, it has to be restricted at an interest rate based on LIBOR as against SBI short term deposit rate.
10.Ground No.10: Levy of interest under section 234B and 234D 10.1.That on the facts and in circumstances of the case, the Ld.AO has erred in levying interest under section 234B of the Act amounting to INR 2,54,39,804. 10.2.That on the facts and in circumstances of the case, the Ld.AO has erred in computing additional interest under section 234D of the Act of INR 2,95,755 on the assessed income.
11. Ground No. 11: Initiation of penalty proceedings 11.1.On the facts and in circumstances of the case, the Ld.AO has erred in serving notice under section 274 read with section 270A of the Act and initiating penalty proceedings for furnishing inaccurate particulars of such income.
The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. Each of the above objections is independent and without prejudice to the other grounds preferred by the Appellant."
2. Brief facts of the case are as under:
2.1 The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is a wholly owned subsidiary of Veveo Inc., USA. Subsequent to the acquisition of Veveo Inc., Page 7 of 38 IT(TP)A No. 862/Bang/2022 USA by Rovi Corporation, the Assessee also forms part of Rovi Group. The assessee provides IT, ITE and MS services to its Associated Enterprises.
2.2 The Ld.AO noted that assessee had earned revenue exceeding Rs. 15 crores out of the international transactions with its AE and therefore a reference was made to the TPO to compute arms length of such transactions. On receipt of the reference, the Ld.AO called for economic details of the assessee with its AE. In form 3CEB from the details filed by the assessee, the Ld.TPO noted that assessee had following international transactions.
Transaction Amount
Provision for Software Development
Rs. 1,13,02,97,729/-
Services ('SWD')
Provision for Information Technology Rs. 10,94,28,954/-
enabled services ('ITeS') Provision for Marketing Support Rs. 13,00,33,510/-
services ('MSS') Provision for Technical Support services Rs. 24,85,751/-
('TSS') External Commercial Borrowing ('ECB') Rs. 58,74,72,500/-
availed
Interest paid on ECB Rs. 76,89,888/-
Remittance of amount collected from
the employees on account of share- Rs. 12,27,90,108/-
based compensation plans
Reimbursement of expenses Rs. 3,30,98,468/-
Recovery of expenses Rs. 7,29,40,560/-
2.3 The Ld.TPO noted that under the three segments being SWD, ITeS and MSS segments, assessee had earned margins as under
by using OP/OC as the PLI and adopting TNMM as the most appropriate method.
SWD segment Operating Income Rs. 113,02,97,729/-
Operating Cost Rs. 100,34,34,406/-
Operating Profit (Op. Income - Op. Cost) Rs. 12,68,63,323/-
Operating/Net mark-up (OP/OC) 13%
Page 8 of 38
IT(TP)A No. 862/Bang/2022
ITeS segment
Operating Income Rs. 11,19,14,705/-
Operating Cost Rs. 9,93,53,527/-
Operating Profit (Op. Income -
Rs. 1,25,61,178/-
Op. Cost)
Operating/Net mark-up
13%
(OP/OC)
MSS segment
Operating Income Rs. 1,30,33,510/-
Operating Cost Rs. 1,15,70,644/-
Operating Profit (Op. Income -
Rs. 14,62,866/-
Op. Cost)
Operating/Net mark-up
13%
(OP/OC)
SWD segment:
2.4 For SWD segment, assessee used following 10 comparables with margin of 9.78% and thereby treated its transactin to be at arms length.
Sl. Weighted
Name of the company
No. average (in %)
1. Isummation Technologies Pvt. Ltd. 2.26
2. Smartcloud Infoservices Pvt. Ltd. 4.34
3. Evoke Technologies Pvt. Ltd. 4.36
Sasken Communication
4. 9.69
Technologies Ltd.
5. Infomile Technologies Ltd. 9.71
6. CG-VAK Software & Exports Ltd 9.85
7. Orangescape Technologies Ltd. 10.70
8. E-Zest Solutions Ltd 14.42
9. Mindtree Ltd. 15.19
10. R Systems International Ltd. 20.75
35 Percentile
th 9.69
Median 9.78
65 Percentile
th 10.70
2.5 Dissatisfied with the comparability analysis carried out by the assessee, the Ld.TPO adopted following filters and shortlisted Page 9 of 38 IT(TP)A No. 862/Bang/2022 the set of 20 comparables with a median of 23.6%. The details of which are as under:
Filters applied by the TPO:
Step Description
1. Companies whose data is not available for FY 2017-18 - excluded.
2. Companies having different financial year ending (i.e., not March 31, 2018) or data of the company does not fall within 12 month period i.e., 01-04-2017 to 31-03-2018 - excluded.
3. Companies whose income was less than Rs. 1 Crore - excluded.
4. Companies whose software development service income is less than 75% of the total operating revenues - excluded.
5. Companies which have more than 25% related party transactions of the sales - excluded.
6. Companies which have export service income less than 75% of the sales - excluded.
7. Companies with employee cost less than 25% of turnover - excluded.
Comparables selected by the TPO Mark-up on Total Sl. Costs Name of the Company No. (WC-unadj) (in %)
1. Infomile Technologies Ltd. 9.69
2. Harbinger Systems Pvt Ltd. 11.65
3. Exilant Technologies Pvt. Ltd. 17.17
4. Tech Mahindra Ltd. 18.57
5. Larsen & Toubro Infotech Ltd. 18.94
6. Great Software Laboratory Pvt. Ltd 19.73
7. Elveego Circuits Pvt. Ltd. 20.19
8. Black Pepper Technologies Pvt. Ltd. 20.62
9. Mindtree Ltd. 21.21
10. Aptus Software Labs Pvt. Ltd. 22.70
11. Acewin Agriteck Ltd. 24.51
12. Persistent Systems Ltd. 24.98
13. Wipro Ltd. 26.83
14. Tata Elxsi Ltd. 28.24
15. Infobeans Technologies Ltd. 28.52
16. Nihilent Ltd. 30.17
17. Thirdware Solution Ltd. 30.94
18. Threesixty Logica Testing Services Pvt. Ltd. 36.58
19. Infosys Ltd. 37.38 Page 10 of 38 IT(TP)A No. 862/Bang/2022
20. Cybage Software Pvt. Ltd. 56.81 35th Percentile 20.19 Median 23.60 65 Percentile th 26.83 The Ld.TPO thus proposed the shortfall under SWD segment to be at Rs.10,99,47,197/-.
ITeS:
2.6. The Ld.TPO noted that assessee used following 8 comparables with a median of 9.66% and thus held the transaction to be at arms length.
Weighted average Sl. No. Name of the company (in %)
1. Informed Technologies India Ltd. -21.46
2. Cosmic Global Ltd. -3.00
3. Crystal Voxx Ltd. 6.35
4. R Systems International Ltd. 8.85
5. Bhilwara Infotechnology Ltd. 10.47
6. Jindal Intellicom Ltd. 14.17
7. Allsec Technologies Ltd. 14.37
8. A G S Health Pvt. Ltd. 35.19 35th Percentile 6.35 Median 9.66 65 Percentile th 14.17 2.7. Dissatisfied with the comparability analysis carried out by the assessee, the Ld.TPO adopted following filters and shortlisted a set of 17 comparables with a median of 23.34%. the details of which are as under:
Filters applied by the TPO:
Step Description Companies whose data is not available for FY 2017-18 -
1.
excluded.
Companies having different financial year ending (i.e., not March 31, 2018) or data of the company does not fall
2. within 12 month period i.e., 01-04-2017 to 31-03-2018 - excluded.
Companies whose income was less than Rs. 1 Crore -
3. excluded.
Companies whose ITE service income is less than 75% of
4. the total operating revenues - excluded. Companies which have more than 25% related party
5. transactions of the sales - excluded.
Page 11 of 38IT(TP)A No. 862/Bang/2022 Companies which have export service income less than
6. 75% of the sales - excluded.
Companies with employee cost less than 25% of turnover
7.
- excluded.
Comparables selected by the TPO
Mark-up on Total
Sl. Costs
Name of the Company
No. (WC-unadj)
(in %)
1. Jindal Intellicom Ltd. 7.41
2. Microland Ltd. 8.58
3. Datamatics Business Solutions Ltd. 13.41
4. Fuzen Software Pvt. Ltd. 15.75
Tech Mahindra Business Services
5. 18.85
Ltd.
6. Infosys BPM Services Pvt. Ltd. 20.95
7. CES Ltd. 21.77
8. Manipal Digital Systems Pvt. Ltd. 23.54
9. Domex E Data Pvt. Ltd. 26.34
Vitae International Accounting
10. 27.35
Services Pvt. Ltd.
11. AGS Health Pvt. Ltd. 27.64
12. Ultramarine and Pigment Ltd. 33.28
13. Access Healthcare Services Pvt. Ltd. 39.03
14. Inteq BPO Services Pvt. Ltd. 39.15
15. Motif India Services Pvt. Ltd. 45.72
16. Eclerx Services Ltd. 46.85
17. MPS Ltd. 61.83
35th Percentile 20.95
Median 26.34
65 Percentile
th 33.28
The Ld.TPO thus proposed shortfall under ITeS segment to be Rs.1,42,14,598/-.
MSS Segment:
2.8. The Ld.TPO noted that assessee used following 9 comparables with a median of 7.86% and thus held the transaction to be at arms length.
Weighted Sl. No. Name of the company average (in %) Honeycomb Relationship Management Services
1. 0.14 Pvt.
2. Spectrum Business Solutions Ltd. 2.91
3. Hansa Research Group Pvt. Ltd. 5.18 Page 12 of 38 IT(TP)A No. 862/Bang/2022
4. Netlink Solutions(India) Ltd. 7.76
5. Netscribes India Pvt. Ltd. 21.74 Kestone Integrated Marketing Services Pvt.
6. 7.86 Ltd.
7. Majestic Research Services and Solutions Ltd. 49.14
8. Focus Suites Solutions & Services Ltd. 24.31
9. TechnicomChemie India Ltd. 15.91 35th Percentile 7.76 Median 7.86 65th Percentile 15.91 2.9. Dissatisfied with the comparability analysis carried out by the assessee, the Ld.TPO adopted following filters and shortlisted a set of 13 comparables with a median of 19.94%, the details of which are as under:
Filters applied by the TPO:
Step Description Companies whose data is not available for FY 2017-18 -
1.
excluded.
Companies having different financial year ending (i.e., not
2. March 31, 2018) or data of the company does not fall within 12 month period i.e., 01-04-2017 to 31-03-2018 - excluded.
3. Companies whose income was less than Rs. 1 Crore - excluded.
Companies whose MSS income is less than 75% of the total
4. operating revenues - excluded.
Companies which have more than 25% related party
5. transactions of the sales - excluded.
Companies which have export service income less than 75% of
6. the sales - excluded.
Companies with employee cost less than 25% of turnover -
7. excluded.
Comparables selected by the TPO
Mark-up on
Sl. Total Costs
Name of the Company
No. (WC-unadj)
(in %)
1. Goldmine Advertising Ltd. 1.68
2. Scarecrow Communications Ltd. 10.80
3. Ugam Solutions Ltd. 15.59
4. Confluence Integrated Services Pvt. Ltd. 16.66
5. Axience Consulting Pvt. Ltd. 18.21
Dun & Bradstreet Information Services India
6. 19.42 Pvt. Ltd.
7. Pressman Advertising Ltd. 19.94
8. Focus Suites Solutions & Services Ltd. 25.77
9. Egon Zehnder International Pvt. Ltd. 27.74
10. Lintas India Pvt. Ltd. 27.25 Page 13 of 38 IT(TP)A No. 862/Bang/2022
11. Adfactors P R Pvt. Ltd. 33.29
12. Majestic Research Services and Solutions Ltd. 51.73
13. Cheil India Pvt. Ltd. 69.58 35th Percentile 17.11 Median 19.94 65 Percentile th 27.74 The Ld.TPO thus proposed shortfall under MSS segment to be Rs.8,44,320/-.
2.10. The Ld.TPO further proposed an adjustment by computing notional interest on outstanding receivables by only granting 30 days credit period based on the following formula:
INTEREST=A*WAIR*Days/36500;(A=Amount,WAIR=Weighted Average Interest Rate, Days = No. of days delayed) 2.11. The Ld.TPO thus proposed the total adjustment as under:
Adjustment u/s S.No. Description 92CA (In Rs.) 1 SWD Segment 10,99,47,197 2 ITeS segment 1,42,14,598 3 MSS Segment 8,44,320 Interest on delayed 4 6,53,67,190 receivables Total adjustment u/s 92CA 19,03,73,305 3, On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order by incorporating the proposed adjustment on 26.09.2021.
4. Against the draft assessment order, the assessee filed objections before the DRP. The DRP after considering the objections raised by assessee directed as under: 4.1. For SWD Segment The DRP directed the Ld.TPO to consider the segmental financial results as furnished by the Assessee;
(i) The DRP directed inclusion of CG-Vak Software and Exports Ltd. Isummation Technologies Pvt. Ltd., Orangescape Page 14 of 38 IT(TP)A No. 862/Bang/2022 Technologies Ltd., Extentia Information Technology Pvt. Ltd., DCIT Dot Com Solutions Pvt. Ltd. And Inteq Software Pvt. Ltd.
(ii) The DRP directed the exclusion of Thirdware Solutions Ltd.
(iii) The remaining contentions with respect to inclusion and exclusions of comparables were rejected. 4.2. ITeS
(i) The DRP directed the Ld.TPO to consider the segmental financial results as furnished by the Assessee;
(ii) The DRP directed the inclusion of the following companies, after verification by the TPO:
- Informed Technologies Ltd.
- Crystal Voxx Ltd.;
- ISN Global Solutions Ltd.;
- I Services India Pvt. Ltd.; and
- Suprawin Technologies Ltd.
(iv) The DRP directed exclusion of AGS Health Pvt. Ltd., Ultramarine and Pigment Ltd., Access Healthcare Pvt. Ltd.
(v) The remaining contentions with respect to inclusion and exclusions of comparables were rejected. 4.3. MSS Segment
(i) The DRP directed the Ld.TPO to consider the segmental financial results as furnished by the Assessee;
(ii) The DRP directed exclusion of Focus Suites Solutions & Services Ltd., Egon Zehnder International Pvt. Ltd. and Adfactors P R Pvt. Ltd.
(iii) The remaining contentions with respect to inclusion and exclusion of companies were rejected.
Page 15 of 38IT(TP)A No. 862/Bang/2022 4.4. The DRP upheld the interest computed by the TPO on delayed receivables.
5. On receipt of the DRP directions, the Ld.AO passed the final assessment order by making addition in the hands of the assessee of Rs.14,62,45,788/-.
Aggrieved by the final assessment order, the assessee has filed the present appeal before this Tribunal. 5.1. At the outset, the Ld.AR submitted that in respect of SWD and ITeS segment, assessee approximately earned turnover of 113 crores and 11 crores respectively. The comparables selected by the Ld.TPO do not satisfy the upper limit of turnover filter of 1 to 100 crores. The Ld.AR submitted that Ground no. 3.5 raised by assessee is challenging the comparables for exclusion on turnover filter.
5.2. It is submitted that the Ld.TPO erred in not applying a cap on upper limit on the turnover while selecting the companies comparable to the assessee. In this regard, it is submitted that application of turnover filter is a relevant criterion in choosing comparable companies. It is submitted that the difference in the scale of operations has a direct impact on the profitability. The concept of economies of scale wherein, an increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered. Therefore, per unit fixed cost of a small-scale company would be much higher than that of a medium/large size organisation. Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the Page 16 of 38 IT(TP)A No. 862/Bang/2022 turnover of the assessee from rendering SWD services is Rs.113,02,97,729/-. This being so, the Ld.TPO ought to have applied the upper turnover filter while selecting companies comparable to the assessee. In this regard, the Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Autodesk India (P) Ltd. V. DCIT reported in (2018) 96 taxmann.com 263. Further reliance is placed on the decision of this Hon'ble Tribunal in MWYN Tech Private Ltd. by order dated 31.10.2022 passed in IT(TP)A No. 753/Bang/2022. On application of the turnover filter of 1-200 crores, the Ld.AR submitted that, following comparables deserves to be excluded for having high turnover as against assessee under SWD and ITeS segments:
SWD segment Turnover S.No. Name of the comparables (in crores)
1. Exilant Technologies Pvt. Ltd.,
2. Tech Mahindra Ltd.,
3. Larsen & Toubro Infotech Ltd.,
4. Mindtree Ltd.
5. Wipro Ltd.
6. Tata Elxsi Ltd.
7. Nihilent Ltd.
8. Persistent Systems Ltd.
9. Infosys Ltd.
10. Cybage Software Pvt. Ltd.
ITeS segment Turnover S.No. Name of the comparables (in crores)
1. Microland Ltd., Datamatics Business Solutions
2. Ltd., Tech Mahindra Business Services
3. Ltd.,
4. Infosys B P M Services Pvt. Ltd.
5. Motif India Infotech Pvt. Ltd.,
6. Eclerx Services Limited
7. MPS Ltd.
Page 17 of 38IT(TP)A No. 862/Bang/2022 We have perused the submissions advanced by both sides in the light of records placed before us.
5.3. On the contrary, the Ld.DR relied on the orders of the authorities below.
5.4. The assessee seeks exclusion of above listed comparable companies on failing the turnover filter. It is submitted that the Ld.TPO in selecting comparables applied filter of companies with turnover of more that one Crore however failed to apply the upper turnover limit. This Tribunal has been consistently applying the turnover filter for the purpose of choosing comparable companies.
5.5. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of coordinate bench of this Tribunal in the case of Dell International Services India (P) Ltd. Vs. DCIT reported in (2018) 89 Taxmann.com 44, wherein this Tribunal took note of the decision of the another decision of coordinate bench of this Tribunal in the case of Sysarris Software Pvt.Ltd. Vs. DCIT reported in (2016) 67 Taxmann.com 243. This Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015, wherein, it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. Following were the Page 18 of 38 IT(TP)A No. 862/Bang/2022 conclusions of the Tribunal in the case of Dell International (supra):
"41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:-
"9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study."
42. The Assessee's turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Page 19 of 38 IT(TP)A No. 862/Bang/2022 Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non- jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 5.6. This Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT reported in (2018) 96 Taxmann.com 263, took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7 of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. Following were the relevant observations:
17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 Page 20 of 38 IT(TP)A No. 862/Bang/2022 companies turnover was much higher compared to that the Assessee.
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). In view of the above, the aforesaid companies under SWD & ITeS segment are directed to be excluded for failing turnover filter.
Page 21 of 38IT(TP)A No. 862/Bang/2022 Accordingly, ground no. 3.5 raised by assessee stands allowed.
6. The Ld.AR submitted that Ground nos. 4.1, 4.3 and 5.3 has been raised by assessee seeking inclusion of certain comparables. She submitted that in the event the comparables sought for exclusion on turnover filter is upheld under SWD & ITeS segment, the comparables alleged by assessee in Ground nos. 4.1, 4.3 and 5.3 need not be adjudicated. We accordingly leave these comparables open and grant liberty to the assessee to argue in an appropriate circumstances.
7. Ground nos. 5.1 and 6.1 raised by assessee for correction of segmental margins in respect of the comparables that would remain. She submitted that the DRP directed the Ld.AO to accept the segmental financials of the assessee and had directed to consider the provisions, interest to be non-operating in nature. For the sake of convenience, we reproduce para 4.2 of the directions issued by the DRP.
"4.2 On the issue of the segmental computation- The TPO has contended in the TP order that bifurcation of the Expenditure between different segments have not been provided by the assessee and hence he has recasted the financials on the basis of revenue. On perusal of the segmental financials of the assessee we are of the opinion that the assessee allocated the expenditure on the basis of actual costs . Hence we are hereby directing the TPO to accept the segmental financials of the assessee. However items like provisions, interest which were being treated as non --operating will be held so as we have consistently upheld these items as non operating in nature."
It is submitted that the above directions has not been followed by the Ld.AO/TPO while computing assessee's margin. We direct the Ld.AO/TPO to follow the directions of the DRP as indicated in para 4.2.
Page 22 of 38IT(TP)A No. 862/Bang/2022 Accordingly, ground nos. 5.1 and 6.1 raised by assessee stands allowed for statistical purposes.
8. Ground no.6.2: The assessee is seeking inclusion of only two comparables being Honeycomb Relationship Management Services Pvt. Ltd. and Kestone Integrated Marketing Services Pvt. Ltd.
8.1. She submitted that these comparables were rejected as they did not fall under the search matrix by the Ld.TPO. In this regard, it is submitted that the companies cannot be rejected solely on the ground that the same were not featuring in the search matrix of the Ld.TPO. It is submitted that above companies are functionally comparable to the assessee and passes all filter applied by the assessee. Reliance in this regard is placed on the decision of Coordinate Bench of this Tribunal in case of Prism Networks Private Limited reported in (2022) 141 taxmann.com 163.
8.2. We thus remand the comparables to the Ld.TPO to consider it based on FAR analysis in accordance with law. The Ld.AR is directed to file the annual reports of the above comparables to the Ld.AO/TPO to assessee in considering them as per the directions hereinabove.
Accordingly Ground no.6.2 raised by the assessee stands allowed for statistical purposes.
9. Ground no. 6.3 is in respect of following comparables sought for exclusion.
Before we undertake the comparability analysis, it is sine qua non to understand the FAR of the assessee under MSS segment.
Page 23 of 38IT(TP)A No. 862/Bang/2022 Page 24 of 38 IT(TP)A No. 862/Bang/2022 Page 25 of 38 IT(TP)A No. 862/Bang/2022 Page 26 of 38 IT(TP)A No. 862/Bang/2022
(i) Axience Consulting Pvt. Ltd.
It is submitted that Axience is engaged in providing consultancy and advisory services in the field of Finance, Market Research and Business Administration which are different from the services provided by the assessee under the MSS segment. Further, from the Company's website, it is clear that it is engaged in financial analytics and research, business intelligence, business and market research and strategic human capital services, which services are more in the nature of knowledge Page 27 of 38 IT(TP)A No. 862/Bang/2022 process outsourcing services ('KPO') rather than marketing services.
Reliance in this regard is placed on the decision of coordinat bench of this Tribunal in the case of Lloyds Offshore Global Services (P.) Ltd. v. DCIT reported in (2023) 146 taxmann.com 226, wherein on functional dissimilarly for the assessment year 2015- 16 and 2016-17, this company came to be excluded. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
We note that the background of the company as described in the annual report at page 4548 of paper book under note 26 reveals that this company is in the business of providing consultancy and advisory services in the field of finance, market research and business administration to corporate and non-corporates. Further the revenue from operations have been segmented under one heading at page 4540 without giving any segmental details. The only bifurcation of revenue in schedule 20 at page 4546 gives is service charges (local) and service charge (export). From the above it is clear that all the revenue earned by this company from consultancy and advisory charges in the field of market research, business administration and finance are clubbed together. The assessee before us is only providing marketing services to its AEs in respect of the presales activities as per the functions reproduced hereinabove which has not been disputed by the Ld.TPO as observed from para 10 of the 92CA order. The DRP included this comparable by observing that assessee also undertakes similar services in advertising, marketing, consulting Page 28 of 38 IT(TP)A No. 862/Bang/2022 in creating awareness of the product and therefore is functionally similar with the company. This observation of the DRP is contrary to the functions described at page 761 of the paper book carried out by assessee under the marketing support service segment. We therefore hold this comparable to be not functionally similar with that of assessee. Accordingly, this comparable is directed to be excluded from the final list.
(ii) Dun & Bradstreet Information Services India Pvt. Ltd. It is submitted that Dun & Bradstreet is engaged in providing services in the nature of credit reporting, risk management, learning and economic insights, etc. The company provides credit risk and financial analysis data insights for businesses, which are different from that of the functions performed by the Assessee in its MSS segment. Further, the company is also not a pure service provider as it also offers technology products. It has earned revenue from sale of products during FY 2017-18 and as per the revenue recognition policy, the company earns revenue from subscription or retainership arrangements as well as royalty income which is not comparable to the services rendered by the Assessee. It is submitted that no segmental details are available as regards the varied services provided by the Company. It is evident from the Company's website that the company is engaged in providing varied products/ services such as Business Information Report, Credibility & Business Insights Solutions, Supply Management Solutions, etc. These suites of services are in the nature of credit risk solutions and trading exchange solutions, which are not comparable to the activities undertaken Page 29 of 38 IT(TP)A No. 862/Bang/2022 by a routine MSS provider. Therefore, the company ought to be excluded from the final list of comparables. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
We note that as per the annual report placed at page 4556, the description of the project or services provided by this company is mentioned to be credit reporting services. At page 4662, we note that this company is engaged primarily in the business of providing risk management and sales and marketing solutions. The background of the company also describes to be providing learning and economic insight services. The company offers a wide suite of information solutions and its services are used extensively by banks, financial institutions, multi nationals, corporate entities, public sector undertaking, exporters and importers. It also describes itself to be in the field of market analysis, locate prospects and incurs revenue from new and existing customers. The sales and marketing solutions offered by this company also include sale of data and related services. In our considered opinion, these functions cannot be compared with the limited services rendered by assessee to its AEs. We accordingly direct this comparable to be excluded.
(iii) Pressman Advertising Ltd.
It is submitted that the primary business activity of Pressman is providing advertising services, selling of space for advertisement in print media. It has earned revenue solely from advertising services (such as corporate advertising, brand advertising, financial advertising, social advertising, government advertising, Page 30 of 38 IT(TP)A No. 862/Bang/2022 media buying). This being the case, the company cannot be comparable to marketing support functions provided by the Assessee.
Reliance in this regard is placed on the decisions of coordinate bench of this Tribunal in case of Radisys India Ltd. v. DCIT reported in (2022) 145 taxmann.com 294 for the AY 2017-18. The assessee therein was engaged in providing similar service as the assessee before us. This Tribunal directed exclusion of this company from the final list of comparables. It is submitted that since the profile for the assessment year 2018-19 is same, the company ought to be excluded from the final list of comparables. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
At page 4818 of the annual report placed in the paper book, we note that this company is providing services in the field of advertising, PR and allied services. Further in the notes to the financial statements at page 4843, this company is said to be engaged in selling of space for advertisement in print media and public relations business. At page 4844, income from services has been said to be recognised from advertising, public relations and allied services however in the profit and loss account at page 4840, the entire income has been categorised to be under revenue from operations with the segmental details available as advertising services and other operating income under schedule
18. In note 28 at page 4855, it has been stated that the company's business activity falls within a single business segment i.e. advertising, selling of space for advertisement in Page 31 of 38 IT(TP)A No. 862/Bang/2022 print media and public relations and hence no additional disclosure other than those made in the financial statements are required under indas 108 "operating segments". Thus it is clear that under the advertising services, this company also earns revenue from selling of space for advertisement in print media and public relations for which no bifurcation has been provided. In any event, advertisement services provided by this company also cannot be compared to the services rendered by assessee to its AE under the marketing support services which is limited to presale support activities.
Accordingly, we direct this comparable to be excluded from the final list.
(iv) Lintas India Pvt. Ltd.
It is submitted that Lintas is engaged in providing advertising services and as per its revenue recognition policy, the company earns revenue from advertisement published or displayed or aired, retainer fees, client agency commission, etc. which are different from the services rendered by the Assessee. Therefore, this company ought to be excluded from the final list of the comparables.
The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
We note that this company is providing advertising services and the principle business activity has been described at page 4868 of the paper book in the annual report to be advertising and marketing communications. The revenue recognition by this company has been mentioned to be an advertising agency Page 32 of 38 IT(TP)A No. 862/Bang/2022 catering services to much number of clientele. We therefore do not find this comparable to be functionally similar with that of assessee who is a captive service provider. Accordingly, this comparable is directed to be excluded from the final list.
(v) Majestic Research Services & Solutions Ltd. It is submitted that Majestic is engaged in market research services. It offers customer service evaluation, mobile analytics, eye tracking, agricultural research etc. It offers a suite of customized solutions that cater to business at various stages of product development or launch across the product life cycle. It offers a wide range of qualitative and quantitative research services. It is involved in high-end services like research services, data analytics, product development and testing, etc. market scoping etc. It also focuses on market research, advertising research, and brand research and to deliver powerful insights into the effectiveness of branding, advertising and consumer choices relies on high level technologies such as eye tracking, mobile analytics, video analysis, facial recognition, digital tracking, online communities, neuroscience, emotional analysis, automated audience measurement, sensory sciences, etc., which is functionally different as compared to the Assessee. Reliance is placed on following decisions of coordinate bench of this Tribunal:
- Lloyds (supra), wherein for the assessment year 2016-17, this company was excluded;
- Epson India Pvt. Ltd. v. DCIT reported in (2022) 144 taxmann.com 63, wherein for the assessment year 2016-17, this company was excluded; and Page 33 of 38 IT(TP)A No. 862/Bang/2022
- Radisys India Ltd. (supra), wherein for the assessment year 2017-18, this company was excluded.
Therefore, it is submitted that the company ought to be excluded from the final list of comparables.
The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
The annual report of the company placed at page 5353 reveals this company is engaged in digital marketing research. At page 5391 in the company overview, we note that this company deliver critical media and marketing information, analytics. Further, it is noted that this company is also doing significant investments in resource and associates all over India supported by strength of Majestic MRSS. In the notes forming part to financial statements at page 5401, under the head corporate information, this company is said to be first Indian market research company to be listed on BSE on SME platform and is engaged in providing market research services offering a wide range of qualitative and quantitative research services. The only segment under which the revenue is revealed is under sale of services in note 17 at page 5409 of the paper book. In our view this company cannot be held to be functionally similar with that of assessee. Accordingly, we direct this comparable to be excluded from the final list.
(vi) Cheil India Pvt. Ltd.
It is submitted that Cheil is engaged in providing digital solutions, analytical solutions (data analytics) which are not akin to the services rendered by the Assessee. It derives its income primarily from advertising, communication, publicity and Page 34 of 38 IT(TP)A No. 862/Bang/2022 merchandising and undertakes consultancy services and training. It is submitted that an advertising agency undertakes functions such as attracting clients who are advertisers, developing an advertising strategy, creation of advertisements by a creative team consisting of writers, designers and copy writers. They also undertake research activities to understand a client's market situation, competition, customers in the process of planning an advertisement campaign etc. Therefore, the aforementioned activities are not similar to the functions performed by the Assessee in the nature of product marketing, targeted campaign creation and management, public relations, customer and associate lead generation and distribution, etc. Further, it also uses a separate charging mechanism for services rendered by it to its customers, and revenue is recognised based on such charging mechanism (outsourcing in nature). The company has also entered into an agreement with its customers under which it procures advertising services on behalf of the customers and bills the customers on cost-to-cost basis without charging any mark-up. The company earns revenue from commission income, fee from production job, transaction processing job, etc. which is different from the services rendered by the assessee.
The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
From the annual report placed at page 5447 of the paper book, this company is described to be a full-fledged advertising service company. It is only the entire revenue earned by this company is Page 35 of 38 IT(TP)A No. 862/Bang/2022 from advertising services as observed at page 5485. The general information provided at page 5582 of the paper book reveals that this company is engaged in the business of advertising, communication, publicity and merchandising including undertaking market research, planning and providing consultancy services and training in the same field. There is no segmental details available and the entire revenue is disclosed as revenue from sale of services. In light of the above, we do not find this company to be functionally similar with that of assessee. Accordingly, we direct this comparable to be excluded. Accordingly Ground no.6.3 raised by the assessee stands allowed
10. Interest on receivables.
It is submitted that the amounts outstanding have been settled by the AE on an on-going basis in the normal course of business having regard to economic and commercial factors. Since the outstanding receivables related to the primary services rendered, the assessee submits that, the determination of ALP of the outstanding receivables is not warranted as the same is subsumed in the ALP of the principal transaction. The Assessee also contends the outstanding receivables could not be made subject matter of TP adjustment as the same is not covered under the provisions of Section 92B of the Act. Also, it is submitted that the Assessee is a debt free company and does not bear any working capital risk since it is fully funded by its AEs. The Assessee has not incurred any interest expenses for its working capital requirement. Hence, the Assessee does not have any interest cost in the funds blocked on deferred receivables Page 36 of 38 IT(TP)A No. 862/Bang/2022 from AEs as it is entirely funded by its AEs for its working capital requirements.
10.1. The Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
10.2. This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15/07/2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 observed that:
"There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in Page 37 of 38 IT(TP)A No. 862/Bang/2022 the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions."
10.3. In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR + 300 basis points which is in accordance with the principles laid down by Hon'ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly, this ground raised by assessee stands partly allowed for statistical purposes.
In the result, the appeal filed by the assessee stands partly allowed.
Order pronounced in the open court on 30th March, 2023.
Sd/- Sd/-
(PADMAVATHY S) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 30th March, 2023.
/MS /
Page 38 of 38
IT(TP)A No. 862/Bang/2022
Copy to:
1. Appellant 2. Respondent
3. CIT 4. DR, ITAT, Bangalore
5. Guard file
By order
Assistant Registrar,
ITAT, Bangalore