2020 (1) TMI 1433 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Transfer pricing study shows that assessee provides software development services and IT enabled services as a captive service provider. It has been recorded that assessee undertakes software development and sales as an enterprise providing services to the third-party customer located domestically. It has been submitted in TP study that operations of assessee can be broken down under 2 categories viz; export and domestic service segment. Under the export services development Centre performs contract software development for the group companies on several financial software products and is compensated on a cost plus markup basis. The group company has the required infrastructure with skilled resources in all areas of project management and development, resources with specialised skills to meet the project needs are recruited locally by assessee on a case to case basis. Companies functionally dissimilar with that of assessee need to be deselected from final list. Persistent Systems and Solutions Ltd company earned income from sale of software services and products and no segmental details are available in respect of the same. It is also observed that income generated under both these segments cumulatively amounts to tune of ₹ 6.67 crores and in schedule 11, entire revenue has been shown under one segment. It is also observed that this company is rendering software development services and licensing, and earns royalty of software products. Therefore in our considered opinion, in the absence of segmental details we cannot appreciate the view taken by authorities below. Sasken Communications Technologies Ltd - We are unable to appreciate arguments advanced by Ld.AR regarding segmental details not available. Further it is observed that Ld.TPO considered the consolidated figure appearing in profit and loss account, instead of considering segmental profits from software services of this company. We therefore set aside this comparable to Ld.AO/TPO to verify relevant observations recorded herein above and to recompute margins of this comparable. LGS global Ltd FCS software solutions Ltd - As observed that in case of Finestra software solutions (India) Pvt Ltd 2018 (5) TMI 1808 - ITAT BANGALORE it has been observed that both these companies have been held functionally similar with captive service provider like assessee. However since working capital adjustments are not provided these comparables have been held to be not included in the finalist. We do not subscribe to such observations of Ld. TPO/DRP. ITES segment - Accentia technologies Ltd - Though this company was into medical transcription and other services. It can neither be held to be a high-end activity, nor can be held to be low-end services. However it is observed that this company had undergone acquisition, which is an extraordinary event and can impact profits for year under consideration. Under such circumstances we are of the opinion that this company cannot be considered to be comparable with that of assessee for the year under consideration. ICRA Online Ltd - This Tribunal in case of Swiss Re Shared services (India) Pvt.Ltd 2016 (7) TMI 1359 - ITAT BANGALORE and M/s Zyme Solutions Pvt.Ltd 2019 (6) TMI 1397 - ITAT BANGALORE remanded this company for fresh consideration to Ld. AO/TPO. Following the same, we also direct this company to be setaside to Ld.AO/TPO for fresh consideration of comparability the lines indicated in these cases. Working capital adjustment being restricted at 1.63% - As noted that working capital adjustment has been restricted by Ld.TPO and upheld by DRP at 1.63% which is contrary to provisions of transfer pricing rules. As held by various decisions of coordinate benches of this Tribunal, we direct Ld.TPO to recompute working capital adjustment in actual, and to consider the same for purposes of computing arm s length margin as per the view expressed by this Tribunal in case of Huawei Technologies India Pvt. Ltd 2018 (10) TMI 1796 - ITAT BANGALORE Risk adjustment on ad hoc basis at 1% - As observed that there is no scientific manner which has been applied by DRP. Assessee is a low risk bearing company for ITES segment and bears certain amount of entrepreneurial risk under SWD segment. Therefore while computing risk adjustment risks assumed by the comparables for earning revenue under particular segment needs to be analysed. Assessee is directed to provide for necessary details in respect of all the comparables finally selected. If that information is insufficient, it is beyond the power of Assessee to produce correct information about comparable companies. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defense to say that Assessee has not furnished required details to deny any adjustment on account of working capital/risk differences. Ld.AO/TPO shall then compute risk as adjustment in accordance with law. International transaction or not - loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period - HELD THAT - As decided in INSTRUMENTARIUM CORPORATION LIMITED, 2016 (7) TMI 760 - ITAT KOLKATA 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 - In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 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 2018 (2) TMI 1151 - ITAT DELHI as held 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. 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 Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Computation of deduction u/s 10A/AA - excluding expenses incurred in foreign currency from export turnover while computing deduction - HELD THAT - DRP while considering the issue referred to view of Hon ble Karnataka High Court in case of Tata Elxsi Ltd vs CIT 2011 (8) TMI 782 - KARNATAKA HIGH COURT , directed Ld.AO to follow the view taken therein, while computing deduction under section 10 A of the Act. No infirmity in such directions. Ld.AO to recompute export turnover in the light of ratio laid down by Hon ble Karnataka High Court in case of Tata Elxsi Ltd vs CIT (supra). Allowable revenue expenses u/s 37 - expenses towards purchase of licenses for computer software used primarily as application software for various projects undertaken - HELD THAT - It is observed that DRP following the view taken by this Tribunal in preceding years in assessee s own case held the expenditure to be allowable in the hands of assessee. It has been submitted by Ld.AR that this view is supported by another decision of coordinate benches of this Tribunal in case of IBM India Pvt.Ltd. 2006 (3) TMI 196 - ITAT BANGALORE-B and Amway India Enterprises 2008 (2) TMI 454 - ITAT DELHI-C - Respectfully following the same, we direct Ld.AO to grant deduction claimed by assessee under section 37 of the Act. Exclusion of comparables on turnover filter by DRP - HELD THAT - Comparables selected are into different verticals and functional lines, though assessee is catering to software development and maintenance needs of the group and has been characterized as captive software development service provider. In facts of present case, assessee is doing part of software development cycle under the guidance of its AE s and therefore has been categorised as a captive software development service provider catering to needs of the group. Assessee in TP study held to be comprise of Software Engineers, who develop project based on inputs received from AE. Engineers employed by assessee designs functional specifications for the project identification of interfaces components coding and bug fixing. Ultimate approval and owner of project developed is the AE. In our view, by involving itself in process of Software development for AE, assessee cannot be held to be fulfledged Software Development Company. One has to look into transaction in regards to services rendered and FAR, which catagorises it to be a captive service provider, working on business model of cost plus margin. We have perused view of co-ordinate bench of this Tribunal in case of Mercedes-Benz research and development India private limited 2018 (2) TMI 1975 - ITAT BANGALORE in respect of Accropatel Technologies Ltd and L T Infotech Ltd. It is observed that these comparables were sent back to Ld.TPO. For the reason that DRP there in noted the comparables having segmental details which was opposed by assessee. We have perused annual reports of these comparables in detail and are of opinion that segmental informations are not available. We therefore do not find force in argument raised by Ld.CIT DR. Exclusion of Infosys BPO from the list of comparable companies chosen by the TPO as this company is functionally not comparable with captive service provider and hence deservs to be excluded. No infirmity in exclusion of these comparables for high turnover. However we have analysed the alledged comparable to be functionallt not comparable with that of assessee. Accordingly we direct Ld.AO/TPO to exclude, Acropetal Technologies Ltd, eZest Solutions Ltd., E-Infochips Ltd, Evoke Tech Pvt.Ltd, ICRA Techno Analytics Ltd, Larsen and Toubro Infotech Ltd, Persistent Systems and Solutions Ltd., in SWD segment. And Infosys BPO Ltd., Mindtree Ltd, iGate Global Soutions Ltd., in ITES Segment. RS software (India) Ltd has been excluded by DRP for high turnover. However we find that turnover of this company is less than 200 crores. Ld.AR did not object this comparable to be included and no submissions has been advanced for its exclusion.Under such circumstances, we direct Ld.AO/TPO to include this comparable in the final list.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Inclusion/Exclusion of Comparables
3. Working Capital and Risk Adjustments
4. Interest on Receivables
5. Deduction under Section 10A/AA
6. Treatment of Software Expenses
7. Credit of TDS
8. Charging of Interest under Sections 234B and 234C

Detailed Analysis:

1. Transfer Pricing Adjustments:
The assessee challenged the adjustments made by the AO/TPO/DRP regarding the transfer pricing documentation, use of current year data, fresh benchmarking analysis, rejection of comparability analysis, computation of operating revenues and costs, and the adjustment amounting to INR 496,406,627. The tribunal noted that the assessee had prepared its TP documentation in good faith and bona fide. The AO/TPO/DRP's rejection of multiple year data, fresh benchmarking, and comparability analysis was contested. The tribunal directed the AO/TPO to recompute working capital adjustments and provide risk adjustments based on actual data without any upper limit.

2. Inclusion/Exclusion of Comparables:
The tribunal analyzed the comparables used by the AO/TPO and the assessee under both Software Development Services (SWD) and IT Enabled Services (ITES) segments. Specific comparables like Persistent Systems Ltd and Sasken Communications Technologies Ltd were excluded due to the absence of segmental details and functional dissimilarities. The tribunal also directed the AO/TPO to reconsider comparables like LGS Global Ltd and FCS Software Solutions Ltd with proper working capital adjustments. For ITES segment, comparables such as Accentia Technologies Ltd, ICRA Online Ltd, and Jeevan Scientific Technology Ltd were set aside for fresh consideration due to functional dissimilarities and lack of segmental details.

3. Working Capital and Risk Adjustments:
The tribunal noted that the working capital adjustment was restricted to 1.63% by the AO/TPO, which was contrary to the transfer pricing rules. The tribunal directed the AO/TPO to recompute the working capital adjustment based on actual data. Regarding risk adjustment, the tribunal observed that the DRP provided a 1% risk adjustment on an ad hoc basis without a scientific approach. The tribunal directed the AO/TPO to compute the risk adjustment in accordance with the law, taking into account the risks assumed by the comparables.

4. Interest on Receivables:
The tribunal addressed the issue of notional interest levied on outstanding receivables by the AO/TPO. The tribunal referred to various judicial precedents and noted that the working capital adjustment subsumes sundry creditors, and computing interest on outstanding receivables would amount to double taxation. The tribunal set aside the issue to the AO/TPO for fresh consideration in light of the judgments cited.

5. Deduction under Section 10A/AA:
The tribunal upheld the DRP's direction to exclude expenses incurred in foreign currency from export turnover while computing the deduction under Section 10A/AA, following the decision of the Hon’ble Karnataka High Court in Tata Elxsi Ltd vs CIT.

6. Treatment of Software Expenses:
The tribunal noted that the DRP directed the AO to grant deduction of software expenses as revenue in nature, following the view taken in the assessee's own case for previous years. The tribunal directed the AO to grant the deduction claimed by the assessee under Section 37 of the Act.

7. Credit of TDS:
The tribunal directed the AO/TPO to verify and grant the TDS credit claimed by the assessee while filing its return of income, after furnishing requisite information/details by the assessee.

8. Charging of Interest under Sections 234B and 234C:
The tribunal noted that these grounds raised by the assessee were consequential in nature and did not require adjudication.

Conclusion:
The tribunal allowed the appeal and cross-objection filed by the assessee as indicated, and dismissed the appeal filed by the revenue. The tribunal directed the AO/TPO to recompute adjustments, verify comparables, and grant deductions and credits as per the guidelines provided.