2023 (7) TMI 22 - AT - Income Tax

TP adjustment - comparable selection for software development segment - HELD THAT - Akshay Software Technologies Limited Akshay Software is engaged in providing professional services and procurement, implementation and support of ERP products and services in India and Dubai and total employee benefit expenses is 93.90% of the revenue from operations and as per Note No.25 expenditure in foreign currency which is 93.69% of the revenue from operations of Akshay Software - thus we remit this issue to the TPO/AO for fresh consideration following the decision of the Pune Tribunal in SAS Research Development India P. Ltd 2023 (1) TMI 1201 - ITAT PUNE after providing opportunity of hearing to the assessee and decide the issue in accordance with law. Evoke Technologies Private Ltd.- Assessee itself has submitted that Evoke Technologies P. Ltd. is engaged in diversified activities as mentioned supra. However, the ld. AR of the assessee submitted before us that this company is engaged only in software development services. Considering the submissions from both the sides, we think it fit to send the matter back to the AO/TPO for fresh consideration. If the above comparable companies passes the FAR analysis it can be considered as comparable. The assessee is directed to submit necessary documents along with the complete Director s report of the Evoke Technologies Ltd. to substantiate its claim. Sagarsoft India Limited and Sasken Communication Technologies Limited - As submitted that these companies pass all the filters applied by the TPO. Considering the arguments from both the sides, FAR analysis of these above two companies has not been done by the lower authorities. Therefore, this issue is remitted back to the TPO/AO for fresh consideration. Assessee is directed to produce necessary documents for substantiating its case. Adopting inappropriate filter like 15% RPT filter, in the process of selecting comparables - The coordinate Bench of the Tribunal in the case of JCIT, LTU (OSD) v. Circle-1, Bangalore vs M/s.Toyota Kirloskar Motors Private Limited ( 2021 (9) TMI 12 - ITAT BANGALORE ) has held that the RPT ratio has to be consistently calculated on an aggregate basis taking the ratio of RPT income plus RPT expenses by sales. Thus we direct the AO to calculate RPT ratio on aggregate basis considering the RPT income plus RPT expenses by sales for all the comparable companies. Exclusion of these 3 companies i.e., Larsen Toubro Ltd., Persistent Systems Ltd. Infosys Ltd. from the final list of comparables. Exclusion of Nihilent, Infobeans, Thirdware Solutions Ltd. and Aspire Systems (India) P. Ltd. from the comparables. As assessee has submitted that the revenue authorities have incorrectly computed the operating profit margin of Aspire Systems (India) Ltd. We remit this issue to the TPO/AO for proper computation of the operating profit margin and decide the issue only with regard to Aspire Systems (India) P. Ltd. in accordance with law in the light of the decision in SanDisk India Device Design Centre Pvt. Ltd. 2022 (6) TMI 1299 - ITAT BANGALORE which has been extracted above. Exclusion of Inteq Software Pvt. Ltd. from the comparables as is not a suitable comparable vis-avis the taxpayer which is a routine software development service provider working on costplus mark up model. Cybage Software Pvt. Ltd company is rendering software services as well as developing software products unlike the assessee. Following the above decision of the Pune Tribunal, we direct exclusion of Cybage Software Pvt. Ltd. from the comparables. Provision for doubtful debt - treatment of provision for doubtful debt as non-operating in nature - AR submitted that provision for bad or doubtful debt is to be treated as operating expenses and considered be as operating in nature while computing operating margins of comparables - HELD THAT - A query was raised to the ld. AR whether the provision for doubtful debts relate to the present assessment year or other year, but the ld. AR was unable to reply. Therefore, the case law relied by the ld. AR is not applicable. We remit this issue to the AO/TPO for verification of this issue afresh after providing opportunity to the assessee. If the doubtful debts is relating to the current assessment year, then it should be treated as operating expenditure. But if it relates to other years, then it cannot be allowed as operating expenses as held by the Tribunal in the case of Marvell India Pvt. Ltd. 2018 (4) TMI 1599 - ITAT BANGALORE . TPO considering the Fixed Assets written off as operating in nature while computing margins of the assessee - AR submitted that fixed assets written off should be excluded from the operating cost, while computing the margins of the assessee - HELD THAT - DRP has directed the AO/TPO to consider the fixed assets write off as non-operating as fixed assets being a balance sheet of item and write off of the same cannot have impact on operating profits of a particular year. Besides, the write off relate incomes/expense are in no way related to the operating revenue earned during the year, and hence cannot be taken into account in determining the operating profit for the year - we remit this issue to the AO/TPO to follow the directions of the DRP on this issue. Adoption of Cash PLI for computation of arm s length price confirmed. Risk adjustment - As relying on M/S. CAPCO TECHNOLOGIES P. LTD 2018 (3) TMI 1932 - ITAT BENGALURU we remit this issue to the AO/TPO for fresh examination and direct the assessee to provide the details of quantification of risk adjustment in above terms. Notional interest on receivable beyond the credit period - HELD THAT - Notional interest on receivable is an international transaction, therefore this argument of the assessee is rejected. The TPO has applied 6 months LIBOR 300 basis points whereas the ld. DRP has directed for applying SBI fixed deposit rate. During the course of hearing, it was brought to the notice of both the parties that while calculating the notional interest on receivables, 6 months LIBOR 300 basis points beyond the credit period shall be considered by the TPO for giving effect on this issue. Corporate tax adjustment towards depreciation on goodwill - depreciation on goodwill arising on account of amalgamation - HELD THAT - During the course of hearing on different dates, both the parties argued extensively and filed written synopsis which are stated hereinabove. In the written submissions filed by the assessee, it is stated that the goodwill has arisen for the excess consideration paid and it has been recorded as per the scheme approved by the Hon ble High Court. We note that the assessee has stated that goodwill is recorded in the books of accounts on the difference between the net assets (total assets liabilities) taken over by the assessee and consideration paid to the amalgamating company on the one hand, and on the other, it is stated that the intangibles are collectively reflected as goodwill. This aspect requires verification at the end of the AO. We also note that no separate value has been assigned to these intangibles of the rejoinder extracted above. It is also not clear whether the amalgamating company has claimed revenue expenditure or depreciation on these intangibles. We therefore remit this issue to the AO to verify the above aspects and also examine that no double benefit is given to the amalgamating/amalgamated company. Accordingly, the AO shall decide the issue afresh as per law, after giving proper opportunity of being heard to the assessee. This issue is allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustments.
2. Notional Interest on Trade Receivables.
3. Depreciation on Goodwill.
4. Incorrect Computation of Operating Profit Margins.
5. Adoption of Cash PLI.
6. Risk Adjustment.
7. Credit of Advance Tax.
8. Levy of Interest under Section 234B.

Summary:

Transfer Pricing Adjustments:
The assessee challenged the rejection of certain comparables and the inclusion of others by the TPO and DRP. The Tribunal remitted several issues back to the TPO/AO for fresh consideration, including the inclusion of Akshay Software Technologies Limited, Evoke Technologies Private Limited, E-Zest Solutions Limited, Nitor Infotech Private Limited, Sasken Communication Technologies Limited, and Sankhya Infotech Ltd., following the decision in the case of MetricStream Infotech (India) Pvt. Ltd. For companies like Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Mindtree Ltd., the Tribunal directed their exclusion based on functional dissimilarity and other factors.

Notional Interest on Trade Receivables:
The Tribunal upheld that notional interest on receivables is an international transaction. However, it directed the TPO to apply 6 months LIBOR + 300 basis points beyond the credit period for calculating the notional interest on receivables.

Depreciation on Goodwill:
The issue of depreciation on goodwill was remitted back to the AO for fresh consideration. The Tribunal directed the AO to verify the aspects of goodwill arising from amalgamation and ensure no double benefit is given to the amalgamating/amalgamated company.

Incorrect Computation of Operating Profit Margins:
The Tribunal directed the AO/TPO to verify the correct margins of the comparables while computing the operating margin used for determining the ALP. The assessee was directed to furnish the relevant details before the authorities.

Adoption of Cash PLI:
The Tribunal directed the AO/TPO to adopt the Cash PLI for computation of the arm's length price, following the decisions in the case of PCIT v Novell Software Development India (P.) Ltd and the assessee's own case for previous assessment years.

Risk Adjustment:
The Tribunal remitted the issue to the AO/TPO for fresh examination and directed the assessee to provide the details of quantification of risk adjustment.

Credit of Advance Tax:
The Tribunal remitted the issue to the AO for verification and decision as per law regarding the credit of advance tax paid relating to the transferor company merged with the assessee.

Levy of Interest under Section 234B:
The Tribunal noted that the levy of interest under section 234B is consequential in nature and will depend on the final computation of tax liability.

Conclusion:
The appeals were partly allowed for statistical purposes, and the stay petitions were dismissed as infructuous.