2019 (9) TMI 1200 - AT - Income Tax

TP Adjustment - adjustment to International transactions of software development services and marketing support services - comparable selection - HELD THAT - Thirdware Solutions Ltd. - The perusal of the pages of the annual report cited by the learned counsel of the assessee, it is evident that the company has shown revenue only from sale of product and no segment data in respect of the software services is available in annual report of the company. In view of the facts, we hold that the Learned AO/TPO is not justified in including the company in the set of the comparables in the final assessment order passed. Larsen and Toubro Infotech Ltd - As function of the assessee is concerned, the word service and products have been used interchangeably and it cannot be ascertained from the part of the annual reports filed before us, that the company was engaged only in providing software services. In the circumstances, we feel it appropriate to restore the issue of deciding functional comparability to the learned AO/TPO with the direction to the assessee to file the complete annual report of the company. If required, the TPO may gather information u/s 133(6) of the Act form the company. He shall provide a copy of the information to the assessee also. Infobeans Technologies Ltd.-Margin 48.97% - Annual report has provided details of earning in foreign exchange, which mentioned that export of goods/services amounting to ₹ 32,96,59,883/- have been calculated on FOB basis. The Note - 20 of the annual report mention revenue from operations earned on sale of software (export) amounting to ₹ 32,96,59,883/-. Thus, in view of the Note 27, the quantum of export of the goods and export of the services cannot be ascertained and thus in view of no segmental data of export of the goods and export of the services available separately, we are of the opinion that the company cannot we selected as comparable at entity level. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of the comparables. Persistent Systems Ltd. - As forming part of the financial restatement of the company, under the head segmental information, it is mentioned that the company operates predominantly for providing software products, services and technology innovation covering full life-cycle of products to its customers. The segmental information, however, has been provided for the verticals in the field of telecom and wireless , life science and healthcare and infrastructure and systems . No segmental data of software products and services are available in the annual report of the company. In the circumstances, we are of the opinion that the company cannot be selected as comparable at entity level in absence of any segmental data of software product and software services Mindtree Limited. - The various segments mentioned in the annual report comprises of manufacturing, BFSI, hi-tech, travel and transportation and others, but the assessee is primarily engaged in providing global software development in these areas. In the background to significant accounting policies, however, mention other services offered by the company which also include business process management, business technology consulting, cloud, digital businesses, independent testing, infrastructure management services, product engineering and SAP services. The company also own intellectual property rights as pointed out by the learned counsel as against no intellectual property rights owned by the assessee, and thus, assets of the company cannot be compared with the assessee. In view of functional dissimilarity as well as the difference in the assets owned by the company vis- a-vis the assessee, we direct the Learned AO/TPO to exclude the company from the set of the final comparables. Tata Elexi Ltd. - On perusal of the annual report of the company, we find that revenue from operations include sale of traded goods of ₹ 47 crore and revenue from rendering of the services comprises of product design (₹ 664 crore), graphic animation and gaming (₹ 18.43 crores) and system integration and support (₹ 42.39 crores). In our opinion, in absence of any segmental result of trading as well as services rendered, the company cannot be selected as comparable at entity level, accordingly, we direct the learned AO/TPO to exclude the company from the set of the comparables. Cigniti Technologies Ltd. - In view of extraordinary event during the year under consideration, we direct the Ld. AO/TPO to exclude the company from the set of the comparables. R. S. Software (India) Ltd. - We find that in case of on-site development and off-site developments services are rendered in different geographical locations. In case of on-site development, the company charge higher revenue from the customers in view of the expenses incurred in foreign currency and higher input costs on human resources, whereas in case of off-site development all expenses on human resources are incurred domestically and thus revenue or fee charge from the customer would be generally less than what would be charged in case of on-site customers. This business model difference makes difference in FAR analysis. As relying on MICROSOFT INDIA (R AND D) PVT. LTD. VERSUS DCIT, CIRCLE 16 (2) , NEW DELHI 2019 (1) TMI 1136 - ITAT DELHI the company becomes functionally dissimilar to the assessee CAT Technologies Ltd. - Revenue receipts also include consultancy fee received and there is no separate segment for consultancy in the annual accounts of the company. In our opinion, in absence of any separate segmental date of software development services, the company cannot be treated as comparable at entity level Mavrick Systems Ltd. - In view of no documentary evidence filed in support of its claim of functional similarity, we reject the request of the learned counsel for sending the matter of examining comparability of the company back to the learned DRP. Treating of foreign exchange gain/loss as non-operating items by the learned DRP while determining the ALP of international transactions - HELD THAT - We agree with the contention of the learned DR that there are no details, whether the foreign exchange gain/loss appearing in the annual reports of the comparable is related only to the revenue transactions. We also agree with the contention that the transaction of overseas purchase or sales in foreign currencies are booked in books of accounts in Indian rupees at relevant foreign exchange rate. So once, a transaction has been converted into Indian rupees, it becomes at par with other transaction, removing the effect of transaction made in other currency. Now, if subsequently, in the year under consideration or in subsequent year, the taxpayer gains or loss on account of those overseas transaction, such forex gain or loss is purely on account of subsequent financial forex market and should not impact the value of the overseas purchase or sale transaction for the purpose of comparability with the International transaction of the assessee - Decided against assessee. Risk Adjustment - HELD THAT - As assessee admitted that no comparative data to account for any risk adjustment was either provided before the lower authorities or provided before the Tribunal and hence, it was not possible to work out the risk adjustment. Accordingly, the ground of the appeal was dismissed. Transfer pricing adjustment in relation to notional interest on outstanding receivables - HELD THAT - On perusal of financial statements of the assessee placed on page 1 to 27 of the paper book, we find that assessee has not borrowed any money. We find that the Hon ble Delhi High Court in the case of Bechtel India 2016 (9) TMI 196 - DELHI HIGH COURT has observed that where the appellant is a debt free company, the question of receiving any interest in receivable did not arise. No adjustment on account of interest on outstanding receivable is warranted in the case of the assessee Reconciliation of the revenue/receipts corresponding to TDS statement in form No. 26AS and the receipt shown in TDS claimed by the assessee - HELD THAT - This is a matter of verification, whether the amount represented in in Form No. 26A-S, is income of the assessee for the year under consideration or advance or otherwise. We, therefore, direct the assessee to produce all necessary documents in support of its claim that receipt are not income taxable in the year under consideration. The Assessing Officer may decide the issue in dispute in accordance with law. The ground of the appeal is accordingly allowed for statistical purposes Allowing TDS credit - HELD THAT - The matter is only of verification at the level of the Assessing Officer, and accordingly, we direct the Assessing Officer to verify the claim of the assessee and decide the issue in accordance with law. The ground of the appeal is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Jurisdictional error in reference under Section 92CA(1).
3. Transfer pricing (TP) adjustment in relation to software services.
4. TP adjustment in relation to notional interest on outstanding receivables.
5. Corporate tax adjustment in relation to TDS reconciliation.
6. Non-grant of additional TDS credit.
7. Levy of interest under Section 234A and 234B.
8. Initiation of penalty proceedings under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contended that the final assessment order was vitiated due to violation of principles of natural justice and was arbitrary. The tribunal did not specifically adjudicate on this ground as it was considered general in nature.

2. Jurisdictional Error in Reference under Section 92CA(1):
The appellant argued that the reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) was made without recording any reasons or material basis. This ground was not pressed by the appellant during the hearing, and hence, it was dismissed as infructuous.

3. TP Adjustment in Relation to Software Services:
The appellant contested the TP adjustment of INR 20,55,61,108 made by the TPO/DRP. The tribunal examined the inclusion/exclusion of certain comparables:

Exclusion of Comparables:
- Thirdware Solutions Ltd.: Excluded due to lack of segment data.
- Larsen and Toubro Infotech Ltd.: Issue restored to AO/TPO for re-examination with complete annual reports.
- Infobeans Technologies Ltd.: Excluded due to insufficient segmental data.
- Persistent Systems Ltd.: Excluded due to the absence of segmental data for software products and services.
- Mindtree Limited: Excluded due to functional dissimilarity and ownership of intellectual property rights.
- Tata Elexi Ltd.: Excluded due to lack of segmental results for trading and services rendered.
- Cigniti Technologies Ltd.: Excluded due to extraordinary event of acquisition during the year.
- R. S. Software (India) Ltd.: Excluded due to functional dissimilarity and different business model.

Inclusion of Comparables:
- CAT Technologies Ltd.: Rejected due to functional dissimilarity and lack of segmental data.
- Mavrick Systems Ltd.: Rejected due to lack of complete annual report and functional similarity evidence.

Foreign Exchange Gain/Loss:
The tribunal upheld the DRP's finding that foreign exchange gain/loss should be treated as non-operating items while determining the ALP.

Risk Adjustment:
The appellant admitted that no comparative data was provided for risk adjustment, and hence, the ground was dismissed.

4. TP Adjustment in Relation to Notional Interest on Outstanding Receivables:
The tribunal found that the appellant was a debt-free entity and, following the Delhi High Court's decision in Bechtel India, held that no adjustment on account of interest on outstanding receivables was warranted. The relevant grounds were allowed.

5. Corporate Tax Adjustment in Relation to TDS Reconciliation:
The tribunal directed the AO to verify the appellant's claim that the receipt of INR 34,72,945 was not taxable income for the year under consideration. The ground was allowed for statistical purposes.

6. Non-Grant of Additional TDS Credit:
The tribunal directed the AO to verify the appellant's claim for additional TDS credit of INR 94,054 and decide the issue in accordance with the law. The ground was allowed for statistical purposes.

7. Levy of Interest under Section 234A and 234B:
The ground was dismissed as infructuous since it was consequential in nature.

8. Initiation of Penalty Proceedings under Section 271(1)(c):
The ground was dismissed as infructuous since it was premature at this stage.

Conclusion:
The appeal was allowed partly for statistical purposes, with specific directions for verification and re-examination of certain issues. The order was pronounced on 24th September 2019.