Income Tax Appellate Tribunal - Bangalore
M/S. Euronet Services India Private ... vs Deputy Commissioner Of Income Tax ... on 31 August, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
"A'' BENCH: BANGALORE
BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT
AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
IT(TP)A No.962/Bang/2022
Assessment Year: 2018-19
M/s Euronet Services India The Dy. Commissioner of
Pvt. Ltd., Income Tax,
No.48, Ashok Plaza, Gandhi Circle-2(1)(1),
Bazaar, Bengaluru.
BBMP Ward No.49, KG Nagar, Vs.
Basavangudi,
Bengaluru-560 004.
PAN No. - AABCE 0288 Q
APPELLANT RESPONDENT
Appellant by : Shri K.R Vasudevan, Advocate
Respondent by : Shri D.K Mishra, CIT (DR)
Date of Hearing : 08.08.2023
Date of Pronouncement : 31.08.2023
ORDER
PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the final assessment order dated 28.07.2022, DIN & Order No. ITBA/AST/S/143(3)/2022-23/104424297191) passed by the AO u/s 143(3) r.w.s 144(C)(13) of the Income-tax Act, 1961 on the following grounds of appeal:-
2 of page 27 IT(TP)A No.962/Bang/2022 "1. The assessment order passed by the learned Assessing Officer ("Ld AO") is contrary to law, facts and circumstances of the case.
2. The Hon'ble Dispute Resolution Panel ("DRP") / Ld AO and the learned Transfer Pricing Officer ("Ld TPO") have erred in law and facts in making transfer pricing adjustment to the SWD segment.
3. The Ld AO/ Ld TPO/ DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of subsection (3) of section 92C of the Act.
4. The Ld AO/ Ld TPO/ DRP have erred in not understanding the business model of the Appellant and have erred in not appreciating that the Services rendered by the Appellant under the SWD Segment were in relation to software development activities and not development of software.
5. The Ld AO/ Ld TPO/ DRP have erred in concluding the Appellant is into the business of provision of 'Software Testing and Implementation Services' without considering the submissions of the Appellant that it was merely rendering services in the nature of Job Work on already developed Software of its AE.
6. The Ld AO/ Ld TPO/ DRP erred in applying filter of "IT and ITES Services" in the search process without appreciating that the Appellant was rendering professional services in relation to modification, enhancement or improvement of already developed software of its AE which is in nature of Job Work/ Patch Work.
7. The Ld AO/ Ld TPO/ DRP erred in rejecting comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ("ALP") of the international transaction thereby following a non-transparent approach.
8. The Ld TPO has erred in passing the TP order without considering the submissions of the Appellant.
9. The Ld TPO and the Ld AO while adopting the new search process have erred in re-computing the margin of the companies comparable to the company without any basis and without providing an opportunity of hearing to the Appellant.
10. The Ld AO/ Ld TPO/ DRP grossly erred in not applying the upper limit for the turnover filter without appreciating that the companies having high turnover has the benefit of economies of scale.
11. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in not rejecting the following companies:
1. Exilant Technologies Pvt Ltd.
2. Tech Mahindra Ltd
3. Larsen & Toubro Infotech Ltd.
3 of page 27 IT(TP)A No.962/Bang/2022
4. Persistent Systems Ltd.
5. Tata Elxsi Ltd.
6. Infosys Ltd.
7. Mindtree Ltd.
8. Aptus Software Labs Pvt Ltd.
9. Acewin Agriteck Ltd (formerly OFS Technologies Ltd)
10. Nihilent Ltd.
11. Threesixty Logica Testing Services Pvt Ltd
12. Cybage Software Pvt Ltd.
12. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in rejecting companies that ought to have been accepted as comparable:
1. Kals Information Systems Ltd
2. Orangescape Technologies Ltd
3. CG-VAK Software and Exports Ltd
4. E-Zest Solutions Ltd
13. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in not providing an adjustment for difference in working capital between the Appellant and the comparable companies.
14. The learned AO erred in levying interest under section 234B and 234C of the Act, in the final assessment order.
The Appellant craves leave to add, alter, rescind, and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.
2. The assessee filed additional ground on 19/06/2023, which is as under:-
"Your Petitioner humbly prays that Your Honours should admit the additional ground of appeal filed with this petition in the abovementioned appeal of Your Petitioner. The Petitioner vide the additional grounds of appeal is seeking exclusion of the following comparables:
a. Great Software Laboratory Private Limited b. Elveego Circuits Private Limited c. Infobeans Technologies Limited d. Thirdware Solutions Limited Your Petitioner is also seeking inclusion of the comparable 'I- summation Technologies Private Limited' as comparable to Your Petitioner.
1. Background During the assessment proceedings for the Assessment Year ("AY") 2018-19, the learned Assessing Officer ("AO") passed the final assessment order dated 28 July 2022 under section 4 of page 27 IT(TP)A No.962/Bang/2022 143(3) read with section 144C of the Income-tax Act, 1961 ("Act") in pursuance of the direction of the Hon'ble Dispute Resolution Panel ("DRP") making a Transfer Pricing ("TP") adjustment of Rs.1,54,77,728/characterizing the services rendered by the Petitioner under Software Development ("SWD") segment.
Aggrieved by the aforesaid assessment order, Your Petitioner has preferred this first appeal before Your Honours. Your Petitioner wishes to raise additional ground of appeal before Your Honours contending that the following companies fail the test of comparability and are functionally different to Your Petitioner:
a. Great Software Laboratory Private Limited b. Elveego Circuits Private Limited c. Infobeans Technologies Limited d. Thirdware Solutions Limited Your Petitioner submits that this Hon'ble Tribunal in the case of NTS Technology Services Private Limited IT(TP)A No.940/Bang/2022 ("NTS") has after examining the comparability of the companies, Great Software Laboratory Private Limited, Elveego Circuits Private Limited and Infobeans Technologies Limited, held the companies to functionally different and not comparable to SWD segment. The Hon'ble Tribunal has therefore directed the TP Officer to exclude the abovesaid 3 comparable from the final set. Your Petitioner submits that the finding of the Hon'ble Tribunal in the case of NTS (supra) is equally applicable to its case and hence, Your Petitioner has raised the ground for exclusion of the companies Great Software Laboratory Private Limited, Elveego Circuits Private Limited and Infobeans Technologies Limited for the first time before Your Honours.
Further with respect to the comparable 'Thirdware Solutions Limited', Your Petitioner submits that the said comparable fails the turnover filter and deserves to be excluded. Notwithstanding the above, the said company is also functionally different to Your Petitioner and hence, Your Petitioner has raised the ground for exclusion of the company for the first time before Your Honours.
Your Petitioner also wishes to raise additional ground contending that 'Isummation Technologies Private Limited' is comparable to Your Petitioner and hence should be included in the final set of comparables for determining the arm's length price.
Your Petitioner submits that this Hon'ble Tribunal in the case of MWYN Tech Private Limited IT(TP)A No.753/Bang/2022 ("MWYN Tech") has examined the comparability of the company and has held that the company is functionally comparable to the SWD segment and it qualifies all the filters 5 of page 27 IT(TP)A No.962/Bang/2022 of the TP Officer. The Hon'ble Tribunal has therefore directed the TP Officer to include the said comparable in the final set.
Your Petitioner submits that the finding of the Hon'ble Tribunal in the case of MWYN Tech (supra) is equally applicable to its case and hence, Your Petitioner has raised the ground for inclusion of the company 'Insummation Technologies Private Limited'for the first time before Your Honours. In this Petition, Your Petitioner humbly prays that the additional grounds of appeal should be admitted by Your Honours for reasons stated hereunder.
2. Reasons for raising additional grounds of appeal Your Petitioner further humbly submits that the Hon'ble Tribunal in the case of NTS (supra) has held that the companies Great Software Laboratory Private Limited, Elveego Circuits Private Limited and Infobeans Technologies Limited are not comparable to the SWD segment and has directed the exclusion of the said companies. Your Petitioner respectfully submits that the ruling in the case of NTS (supra) should equally apply to its case as well.
The comparable 'Third ware Solutions Private Limited' fails the turnover filter and is also functionally different to the Petitioner.
Your Petitioner further submits that the Hon'ble Tribunal in the case of MWYN Tech has held that the company 'I summation Technologies Private Limited' is functionally comparable to the SWD segment and it qualifies all the filters applied by the TP Officer. Your Petitioner respectfully submits that the ruling in the case of MWYN (supra) should equally apply to its case as well.
The Appellant relies on the decision of the Special Bench of the Hon'ble ITAT in the case of Quark Systems Private Limited 38 SOT 307 (SB) which has been affirmed by the High Court of Punjab & Haryana in (2011) 11 taxmann.com 427 (P&H), for admission of the additional grounds seeking exclusion / inclusion of comparables, since the same have been raised for the first time before Your Honours.
Your Petitioner submits to Your Honours that the appeal filed before Your Honours is the first appeal for the Petitioner, as this appeal has been filed against the final assessment order framed in pursuance to the DRP directions. Your Petitioner further humbly submits to Your Honours that the additional ground of appeal raised would be necessary to assess the appropriate Arm's Length Price of the international transactions undertaken by the Petitioner, being the subject matter of appeal and to render substantial justice. Therefore, Your Petitioner submits that the additional grounds No.15 and 16 seeking exclusion and inclusion of comparables respectively, should be admitted."
6 of page 27 IT(TP)A No.962/Bang/2022
3. The additional grounds are as under:-
"Based on the facts and circumstances of the case, Euronet Services India Private Limited ("the Appellant"), respectfully submits the following additional ground of appeal for admission before Your Honours:
15. The Hon'ble DRP has erred in upholding the fresh study of the learned TPO accepting / including the following companies as comparable to the Appellant despite the same failing the test of comparability and are functionally different to the Appellant:
a. Great Software Laboratory Private Limited b. Elveego Circuits Private Limited c. Infobeans Technologies Limited d. Thirdware Solutions Limited
16. The Hon'ble DRP has erred in upholding the fresh study of the learned TPO without accepting / including the following companies as comparable to the Appellant:
a. I summation Technologies Private Limited The above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law."
4. Considering the rival submissions, we note that the assessee has raised the additional grounds before the Tribunal which are legal in nature and relevant for deciding the issues. Therefore, the above additional grounds raised by the assessee are admitted.
5. The assessee has filed further additional ground No.17 dated 18.07.2023 stating that DRP has not quoted the valid computer generated DIN on the DRP directions dated 30.06.2022 issued u/s 144C(5) of the Act, in contravention of Circular No.19/2019 issued by the 7 of page 27 IT(TP)A No.962/Bang/2022 CBDT. The ld. AR further submitted that the DIN was intimated to the assessee by a separate letter dated 30.06.2022 i.e. the same date as the DRP order (dtd. 30.06.2022) and DIN was handwritten in the DRP order emailed to the assessee. In this regard he has filed letter dated 03.08.2023 before the Tribunal filed on 04.08.2023 along with copies of intimation letter and DRP order with handwritten DIN. Accordingly, he submitted that this additional ground No.17 is not pressed/withdrawn. The ld.DR has not objected and submitted that DIN was intimated to the assessee on the very same day as the date of DRP order. Therefore, considering the submissions of the both parties, we dismiss additional ground No.17 as withdrawn and not pressed by the assessee.
6. The brief facts of the case are that the assessee company was incorporated on 24.07.2002 and is a subsidiary of EFT Services Holding B.V Netherlands. The assessee is engaged in the business of processing secure electronic financial and payment transaction and it operates private ATM Shared Network in the country and provides mobile recharge services to customers through network of ATMs and retailers. The assessee also provides services to its AE in relation to software development such as tools development, software testing and implementation. The assessee e-filed its return of income on 29.11.2018 declaring the taxable income of 8 of page 27 IT(TP)A No.962/Bang/2022 Rs.35,57,01,260/- for the subject asst. year 2018-19. The return was processed under section 143(1) of the Act and was subsequently selected for scrutiny assessment & other statutory notices issued to the assessee time to time. In response the assessee filed information and it was noticed that the assessee had international transactions with its AEs. Accordingly, the AO referred the matter to the TPO for determination of the arms length price on the international transactions after obtaining approval from the appropriate authority. After receiving reference from the AO, the TPO issued notice to the assessee for filing the documents and in response, the assessee filed documents as called for.
7. From the documents filed the TPO noted that the assessee had international transactions and method used for determination of ALP on the International Transactions as under:-
International transaction Amount (Rs.) Method Provision of services related to software development and 13,52,59,985 TNMM allied services Provision of ATM outsourcing 1,70,66,764 TNMM and Maintenance Services Provision of support services 3,45,55,587 TNMM Switch, AMC and Professional 15,35,42,880 TNMM services Cost allocation for licenses 82,51,130 Other method Recovery of expense 33,12,991 Other method Reimbursement of expenses 2,45,03,087 Other method 9 of page 27 IT(TP)A No.962/Bang/2022
8. From the TP study it was observed that the assessee had applied certain filters and selected nine companies as comparable with the assessee company for the SWD segments and arm length price was computed on the international transactions. However, the TPO did not accept TP study filed by the assessee and rejected the TP study after observing some defects and thereafter he applied certain filters for selection of new comparables which is as under:-
S No Filters used for Software development segment
1. Use of current year data Companies having different financial year ending (i.e., not
2. 31.03.2018) or data of the company which did not fall within 12- month period i.e., 01.04.2017 to 31.03.2018, were rejected
3. Companies whose income was less than Rs 1 crore were excluded Companies whose software development service income was less
4.
than 75 percent of the total operating revenues were excluded Companies who have more than 25 percent related party
5. transactions were excluded Companies who have export service income less than 75 percent
6. of the sales were excluded Companies with employee cost less than 25 percent of turnover
7. were excluded
9. The ld.TPO rejected all nine comparable companies selected by the assessee and after applying the above filters, the TPO selected 26 companies and 35th percentile was calculated at 20.61% and median was calculated at 23.60%. Accordingly, the assessee was issued show cause notice. The assessee filed objection before the TPO. The TPO after considering the objections selected 20 companies which is as under :
10 of page 27 IT(TP)A No.962/Bang/2022 Average of 3 years S No. Company Name (OP/OC) 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% Threesixty Logica Testing Services Pvt 18 36.58% Ltd 19 Infosys Ltd 37.38% 20 Cybage Software Pvt Ltd 56.81% 35th Percentile 20.19% Median 23.60% 65th Percentile 26.83%
10. The assessee claimed for the working capital adjustment which was not granted by the TPO. The TPO suggested for adjustments for Rs. 1,54,77,728/- and passed order on 29/07/2021. Accordingly, the AO passed draft assessment order further making disallowance of Rs.
74,32,27,645/- towards disallowance of foreign out ward remittance incorporating the T.P. adjustment on 22.09.2021 u/s 144C of the I. T. Act. 1961.
11 of page 27 IT(TP)A No.962/Bang/2022
11. Aggrieved from the draft assessment order, the assessee filed objections before the DRP. The DRP upheld the order passed by the TPO for adjustments towards the international transactions and other additions in draft assessment order was accepted. The AO passed final assessment order on 28/07/2022 assessing the income at Rs. 37,11,79,000/-.
12. Aggrieved from the final assessment order, the assessee filed appeal before the Income Tax Appellate Tribunal.
13. The ld.AR of the assessee reiterated the submissions made before the lower authorities and he submitted that the following 11 companies fail upper turn over limit of Rs. 1 to 200 crores. The AO has fixed the lower level of the turnover and he has not fixed the upper turnover filter limit looking to the turnover of the assessee. In this regard, it is submitted that application of turnover filter is a relevant criterion in choosing comparable companies. The difference in the scale of operations has a direct impact on the profitability. The concept of economics 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, the 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 12 of page 27 IT(TP)A No.962/Bang/2022 size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the turnover of the assessee from rendering SWD services is Rs. 13.52 crores/-. This being so, the TPO ought to have applied the upper turnover filter while selecting companies comparable to the assessee, therefore, comparable companies with turnover more than Rs. 200/- crores should be excluded. In this regard, the ld.AR of the assessee relied on the judgment of the co-ordinate bench of the Tribunal in the case MWYN Tech Pvt. Ltd., in IT(TP)A No.753/Bang/2022.
14. The ld. DR. relied on the order of the lower authorities and submitted that if the company passes all the filters as applied by the TPO, in such case the comparable companies should not be excluded from the list of comparable. The assessee is not disputing the FAR analysis carried out by the TPO for comparable companies. The comparable companies passes all the filters applied by the TPO, merely because of high turnover it should not be excluded.
15. Considering the rival submissions the upper turnover filters has been decided by the co-ordinate bench in the case of MWYN Tech Pvt. Ltd. vs ITO in IT(TP)A No.753/Bang/2022, the relevant portion of the order is as under:-
13 of page 27 IT(TP)A No.962/Bang/2022
16. We have considered the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case of Autodesk India Pvt Limited (supra) has considered the issue of application of turnover filter and has held that -
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 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 14 of page 27 IT(TP)A No.962/Bang/2022 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).
17. During the course of hearing the ld AR drew our attention to the table with details of the turnover of the companies, for which the exclusion is sought based on upper turnover filter and submitted that the turnover of the assessee is Rs. 9,13,63,594 and therefore these companies need to be excluded. On perusal of the same, we notice that the turnover of the companies are as listed below -
S No. as per
Company Name Rs/Cr
Chart
Turnover of the Appellant in software
13.52
development segment
3 Exilant Technologies Pvt Ltd 332.43
4 Tech Mahindra Ltd 23,661.20
5 Larsen & Toubro Infotech Ltd 6,906.40
9 Mindtree Ltd 5,325.00
12 Persistent Systems Ltd 1,732.00
13 Wipro Ltd 44,710.00
14 Tata Elxsi Ltd 318.67
16 Nihilent Ltd 280.06
17 Thirdware Solution Ltd 204.38
19 Infosys Ltd 61,941.00
20 Cybage Software Pvt Ltd 737.16
18. Considering the facts and respectfully following the decision of the coordinate bench of the Tribunal in the case of Autodesk India Pvt Ltd., (supra) we hold that the companies whose turnover in the current year is more than Rs.200 crores should be excluded from the list of comparable companies.
16. Respectfully following the above judgement we direct AO/TPO for exclusion of the above eleven comparable 15 of page 27 IT(TP)A No.962/Bang/2022 companies from the list of comparables. Accordingly, the ground No.10 is allowed.
Ground No.11 & 15 - Exclusion of companies
17. The ld.AR of the assessee submitted that five companies i.e., Acewin Agriteck Ltd. (formerly OFS Technologies Ltd.), Threesixty Logica Testing Services Pvt. Ltd.,, Great Software Laboratory Pvt. Ltd., Elveego Circuits Pvt. Ltd. & Infobeans Technologies Ltd. should be excluded from the list of the comparables because these are functionally not comparable to the assessee and fails test of comparability. The ld. AR submitted that in the case of NTS Technology Services Pvt. Ltd. fort AY 2018-19 (IT(TP)A No.940/Bang/2023) the coordinate Bench of the Tribunal held that the above companies are not comparable to software development segment and directed exclusion from the final set, which is equally applicable to assessee's case.
18. The ld. DR relied on the orders of the lower authorities.
19. After hearing rival contentions and perusal of record, we note that in the case of NTS Technology Services Pvt. Ltd. (supra) in regard to these companies it was held as under:-
11.1 Great software Laboratory Pvt. Ltd. 11.1.1 The Ld.AR submitted that this company is engaged in the business of design and development services of software 16 of page 27 IT(TP)A No.962/Bang/2022 applications including customisation and packaged software.
She further submitted that the primary service of the Company are cloud products and operations management, IDM and connected experience practice, big data analytics and support services. The Company has also earned revenue from sale of products. The company is engaged in diverse activities for which no segmental details is available. It is further submitted that the company owns significant intangibles and that this company earned significant onsite revenue which demonstrates that it operates on a different model and therefore functionally not comparable with the assessee.
11.1.2 The Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. in IT(TP)A No. 713/Bang/2022 by order dated 11.01.2023.
The Ld.DR on the contrary, relied on the observations of the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
11.1.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was remanded for want of complete annual reports. However in the present case, the Ld.AR has filed the necessary details and complete annual report to verify the arguments advanced. On perusal of the detailed submissions, filed by the assessee at pages 141-145 of the appeal set as well as 820-822 of the paper book, we note that admittedly the TPO accepts that this comparable provides various services using the same platform of SWD. It is also an admitted fact that this company works in a different horizontal and this company has been retained by the Ld.TPO only because it renders services under the category SWD. It is also noted by the Ld.TPO that the operations of this comparable is from SWD segment without there being any segmental details, which according to the Ld.TPO is irrelevant. In our considered opinion, this Tribunal has been consistently rejecting the comparables whether there are no segmental information available in order to compare "an apple with an apple". Therefore the services rendered by the assessee under a contract with its AE cannot be compared with a company that renders various services under SWD segment. We do not find any reason to include this comparable in the final list. Accordingly we direct the Ld.AO/TPO to exclude Great software Laboratory Pvt. Ltd.
17 of page 27 IT(TP)A No.962/Bang/2022 11.2 Elveego Circuits Pvt. Ltd.
11.2.1 The Ld.AR submitted that this company is engaged in the business of electronics and semiconductor design services which is no way comparable to the captive software development activities as provided by the assessee. It is submitted that the company specialises in the design of Analog, Mixed-Signal and RF Integrated Circuits, and that no segmental details are available.
11.2.2 It is also submitted that, this company invested significantly in intangible assets, during the financial years 2016- 16, 2016-17 and 2017-18. She thus submitted that this comparable is functionally not similar with that of the assessee. Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. (supra).
The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
11.2.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was excluded by observing as under:
"C.3. We note that this company is in the business of Chip and semiconductor design services where as the assessee before us is into basic SWD services of coding an documentation, Testing and quality assurance, software patches and maintenance. There is no similarity between the functions performed by the assessee vis-à-vis that of this company. We therefore at the threshold reject this company being functionally not similar with that of the assessee. Accordingly, the Ld.TPO is directed to exclude this company from the final list of comparables."
Respectfully following the same, we direct the Ld.AO/TPO to exclude this company from the final list.
11.5 Acewin Agritech Ltd.
11.5.1 The Ld.AR submitted that this company is engaged in software development and information technology outsourcing company, wherein the core business of this company is Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development and DevOps Implementation. In addition, she submitted that this company is developing on the leading Blockchain platforms and widening its service offerings and domains more specifically in Healthcare, Media, and Financial Services. The Ld.AR also submitted that in terms of product offerings, the company enhanced the Food processing ERP product with predictive analytics. No segmental details are available.
18 of page 27 IT(TP)A No.962/Bang/2022 11.5.2 She further submitted that, in the software services outsourcing business, this company does designing, building, testing and maintaining commercial products and digital solutions. Further, she submitted that, this company has significant R&D expenses.
11.5.3 She thus prayed for exclusion of this comparable as it is into varied activities for which there is no segmental details. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 11.5.4 In the annual report of this comparable at page 2854 of the paper book, we note that the NIC code is 8920 at the description of the project / services is software development. At page 2879, the business overview of the company has been described to be as under:
"OFS Technologies is a leading software development and information technology outsourcing company. In the last financial year, we intensified our technology expertise with latest technologies in our core business - Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development and DevOps Implementation. In addition, we are technically developing on the leading Blockchain platforms, widening our service offerings and domains more specifically in Healthcare, Media, and Financial Services. In terms of product offerings, we enhanced the Food processing ERP product with predictive analytics."
11.5.5 It is also revealed at page 2881 that this company has invested in enlarging its business development team and also has the product development vertical the income recognition is only from the sale of services being export and therefore this company does not have a segmental details of the variety of services rendered by it. Moreover, the company is a leading software development and information technology outsourcing company and therefore as the entire revenue is categorised under one single segment, it is not comparable with the captive service provider like that of assessee before us that renders its services on a cost plus model with its AE. We accordingly reject this comparable and direct the Ld.AO/TPO to exclude from the final list.
11.6 Infobeans Technologies Ltd.
11.6.1 The Ld.AR submitted that this company is engaged in providing software engineering services primarily in product engineering, digital transformation, automation and devOps. Though the annual report of the company mentions that the company is earning 100% revenues from sale of software 19 of page 27 IT(TP)A No.962/Bang/2022 services, such services are in the nature of CAD,CMS etc., which are in the nature of KPO services. The above services rendered by the company are vastly different from the SWD services rendered by the assessee, and therefore the company ought to be excluded as being functionally different. Further, the segmental details for these diverse services are not available and therefore the company cannot be selected as a comparable.
11.6.2 She submitted that the company has huge inventory and allied inventory risk whereas the assessee is a mere captive service provider who is engaged routine software development services. Further, it is submitted that Infobeans has employed significant intangibles during the financial years 2016-17 and 2017-18.
11.6.3 Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of NTT data FA Insurance Systems (India) Pvt. Ltd. in IT(TP)A No. 261/Bang/2021 for the AY 2016-17 by order dated 03.10.2022.
11.6.4 She placed reliance on the decision of this Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Tribunal in IT(TP)A No. 235/Bang/2021]), the decision of this Tribunal in the case of SanDisk India Device Design Centre Pvt. Ltd. v. JCIT (order dated 30.06.2022 passed in IT(TP)A No. 288/Bang/2021) and the decision of the Tribunal at Hyderabad in ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 at para 7] where, in the case of a similarly placed assessee, the Tribunal directed the exclusion of Infobeans from the list of comparables for assessment year 2016-17 on the ground that it is not functionally comparable and no segmental details were available for the said year and the decision of the Delhi Bench of the Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17. He also placed reliance on the decision of this Tribunal in para-11 in the case of Airlinq Technology Pvt. Ltd. In IT(TP)A No.231/Bang/2021 dated 28.7.2022. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
11.6.5 In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:-
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7. "Infobeans Technologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons:
1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year
3. Leading provider of consulting technology & next generation service.
4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore.
5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce
6. No segmental details are available.
7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable.
7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribunal in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under:
21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below: Page 25 IT(TP)A No. 940/Bang/2022 "18. We have heard the rival contentions and perused the record.
The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two activities carried on by the said concern were not available and in the absence of the 21 of page 27 IT(TP)A No.962/Bang/2022 same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee ".
22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee's own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables."
11.6.6 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgment, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Respectfully following the above view, we direct the Ld.AO/TPO to exclude this company from the final list.
11.7 Threesixty Logica Testing Services Pvt. Ltd. 11.7.1 The Ld.AR submitted that this company derives revenue primarily from software testing, quality assurance and related services. Further, the company also earns revenue from sale of third party software products and hardware. No segmental details are not available.
11.7.2 She submitted that this company has invested significantly in intangible assets during the financial years 2015- 16, 2016-17 and 2017-18.
11.7.3 It is submitted that this company has incurred significant marketing expenditure and this company has significant RPT transactions during the year. It was thus submitted that the comparable may be excluded.
11.7.4 The Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Altair Engineering India Pvt. Ltd. vs. ACIT in IT(TP)A No. 1025/Bang/2022 by order dated 09.01.2023. The Ld.DR on the contrary relied on the orders passed by the authorities below. We have perused the 22 of page 27 IT(TP)A No.962/Bang/2022 submissions advanced by both sides in the light of records placed before us.
11.7.5 From the annual reports filed by the Ld.AR in the paper book, we note that this company derives 100% income from writing, modifying, testing of computer program to meet the needs of a particular client excluding webgage and designing. In the annual report, the revenue recognition by this company is stated to be primarily from software testing, QA and related services which is also supported from the notes to account being note 1 wherein the company overview also states that it is primarily engaged in providing information technology services being software testing and QA services and it also stated in the segmental report and operating segmental details that there are no other reportable segments. We therefore see merit in the arguments of the Ld.AR that this company is not comparable functionally since the assessee is a contract service provider rendering limited services to its AE alone. Accordingly, this comparable is directed to be excluded."
20. Respectfully following the above decision of the coordinate bench in the case of NTS Technology Services Pvt. Ltd., we direct exclusion of the above companies.
21. Further, the ld. AR sought exclusion of Aptus Software Labs Pvt. Ltd. However, we note that in the case of NTS Technology Services Pvt. Ltd. (supra) this company is held to be comparable. The relevant observations are as under:-
11.4 Aptus Software Labs Pvt. Ltd.
11.4.1 The Ld.AR submitted that, the nature of business of this company is not available in the public domain. It is submitted that from the annual report of the company, the NIC code of the product/ service is mentioned to be 6201 which includes computer programming, consultancy and related activities. 11.4.2 Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. (supra). The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 11.4.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was remanded for want of sufficient information in annual 23 of page 27 IT(TP)A No.962/Bang/2022 reports filed by the assessee therein before this Tribunal. However, in the present case, the Ld.AR has filed complete annual report. 11.4.4 We notice that this company is deriving revenue from both domestic as well as foreign company. The notes to the account being note 24 reveals the revenue is recognised by this comparable from service transactions. The NIC code being 6201 as appearing at page 3383 of paper book reveals the description Page 21 IT(TP)A No. 940/Bang/2022 to be information technology services as against computer programming, consultancy and related activities as submitted by the assessee in the synopsis. We therefore do not find any reason to exclude this company from the final list. We direct the Ld.AO/TPO to retain this company in the list.
22. Respectfully following the above decision, we reject the argument of the assessee for exclusion of Aptus Software Labs Pvt. Ltd.
Ground Nos.12 & 16 [inclusion of the company)
23. The ld.AR of the assessee submitted that the ld.TPO rejected the following companies except the Isummation Technologies Pvt. Ltd which was not taken before the TPO as well as DRP :-
1. Kals Information Systems Ltd.
2. Oranescape Technologies Ltd.
3. CG-Vak Software & Exports Ltd.
4. E-Zest Solutions Ltd.
5. Isummation Technologies Pvt. Ltd.
24. The ld.DRP upheld the order of the TPO without giving any findings. He submitted that these companies are functionally comparable with the assessee's company.
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25. He further submitted that Isumation Technologies Pvt. Ltd., has been included as a comparable company in the decision of the coordinate bench of this Tribunal in the case of MWYN Technologies Pvt. Ltd. In IT(TP) No.753/Bang/2022 for the assessment year 2018-19.
26. The ld.DR submitted as per the TPO these companies did not pass the FAR, therefore, he has rightly rejected the companies and therefore, it does not require further discussion and the order of the TPO should be accepted.
27. Considering the rival submissions we note that companies at Sl.No. 1 to 4 were considered by the assessee in its TP study. However, the ld.TPO rejected the same. The assessee raised objections before the DRP, but the DRP has not considered this issue. As far as Isummation Technologies Pvt. Ltd. (sl.no.5) is concerned, the same is covered by the decision of the coordinate Bench in the case of MWYN Technologies Pvt. Ltd. (supra) where it was held to be functionally comparable. Since the other issues in the appeal are remitted to the file of AO, therefore this issue is also remitted to the TPO for fresh consideration to avoid multiple proceedings before the different authorities. The TPO will decide the issue in the light of decision of MWYN Technologies Pvt. Ltd. (supra) as per law, wherever applicable. The assessee is directed to substantiate its case before the TPO.
25 of page 27 IT(TP)A No.962/Bang/2022
28. Ground No.13: Considering the arguments from both the sides and also case law relied by the ld.AR of the assessee in the case of Huawei Technologies India (P) Ltd. [2019] 101 taxmann.com 313 (Bang) and Altimetrix India Pvt Ltd [IT(TP)A No.477/Bang/2021]. In these decisions, it has been held that working capital adjustment is directed to be considered. Respectfully following the same, we direct the AO/TPO to allow the appropriate working capital adjustment. The assessee is directed to produce the necessary documents.
29. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 31st August, 2023.
Sd/- Sd/-
(George George K) (Laxmi Prasad Sahu)
Vice President Accountant Member
Bangalore,
Dated 31st August, 2023
Vms
Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DRP/TPO/AO
By order
Asst. Registrar/ITAT, Bangalore