2024 (9) TMI 1369 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - E-Infochips Bangalore Ltd. - No reason to exclude this company as a comparable. We may point out that merely because this company has earned some extra ordinary profit is no reason to exclude this company as long as this company continues to be comparable with that of the assessee on FAR analysis. In view of the above, we do not find any reason to exclude this company and accordingly, the ground raised by the assessee is dismissed. Persistent Systems Ltd. - If we look into schedule 11 where bifurcation of sales and software services and products are mentioned, then we find that this company does not have any inventories showing software products and though this company has classified as sales of software products. In view of the above, it is difficult to accept the contention of the assessee that this company is into product development. Further, if we look at the revenue recognition, then only we find that the Revenue the assessee is recognizing the income from software services only and there is no reference of making development of any products. We do not agree with the contention of the assessee and accordingly, this ground is also dismissed. Mindtree - Assessee has not objected to the inclusion of this company in the list of comparable selected by the TPO while filing objection in response to the show cause notice before the TPO. Before the learned TPO, the assessee has only raised objection with respect to E-Infochips Bangalore Ltd, Infosys Technologies Ltd, Kal Infosystems Ltd, L T Infotech Ltd. No objection has been filed by the assessee with respect to any other comparables. In our view, once the assessee has forgone his right to raise objection before the TPO, it is not permissible in law to raise the objection before the Tribunal at this stage. Further, we are of the opinion that merely because the company is owning intangible and earned reasonable margin cannot be a ground to exclude this company if on FAR analysis, it is found to be otherwise comparable with that of the assessee. In view of the above, we do not find any reason to exclude this company. Accordingly, this ground is also dismissed. Interest on Trade Receivables - Admittedly, this Tribunal in the case of Satyam Ventures Engineering Services 2024 (6) TMI 147 - ITAT HYDERABAD , Zeta Interactive Systems India Private Limited 2022 (6) TMI 1383 - ITAT HYDERABAD , M/s. Apache Footware India Private Limited etc. 2023 (4) TMI 521 - ITAT HYDERABAD has decided the issue in favour of the Revenue by holding that the SBI bank rate of 6% with a credit period of 60 days is to be applied for determining the interest on delayed trade receivables. However, in the present case, the Revenue is not in appeal against the finding given by the DRP and the assessee cannot be worsened off in the appeal filed by the assessee. If we look into the order passed by the DRP where the DRP has decided the issue in favour of the assessee by restricting the interest to be paid at LIBOR Plus 250-point basis, though the said decision of the DRP is contrary to the decision of the Tribunal. However, since the Revenue is not in appeal against the decision of the DRP, therefore, we deem it proper to dismiss the ground raised by the assessee and sustain the order passed by the DRP by reiterating that the delay on trade receivable will be restricted to LIBOR Plus 250 point basis, as there is no appeal of the Revenue and the assessee cannot be worsened off in its appeal by following the decision in the case of Satyam Ventures 2024 (6) TMI 147 - ITAT HYDERABAD . Thus, this ground of appeal is dismissed. Set off of losses of the Hyderabad Unit against the profit of the Pune Unit - Since in the present case, the assessee has not raised ground before the learned DRP and therefore, the grievance of the assessee is not emanating from the final assessment order or from the direction of the DRP. Therefore, the assessee is not entitled to raise this ground before the Tribunal now. We may also point out that no deduction u/s 10A or 10B or under Chapter VI A is allowable in respect of income by which the total income of the assessee is enhanced after computation of income under sub section 92C, in view of 1st proviso to Section 92C(4) of the Act. Appeal raised by the assessee is dismissed.

Summary

Issues Involved:
1. Arm's length compensation for software development services.
2. Rejection of the assessee's transfer pricing study.
3. Selection of companies with extraordinary margins as comparables.
4. Inclusion of E-Infochips Bangalore Limited and Kals Information Systems Limited as comparables.
5. Inclusion of Persistent Systems Limited as a comparable.
6. Inclusion of Mind Tree Limited as a comparable.
7. Standard deduction of (+) or (-) 5% under section 92C(2).
8. Adjustment on account of interest on amounts due from associated entities.
9. Adjustment on account of reimbursement of expenses from associated enterprises.
10. Setting off profits of Pune STPI unit against losses of Hyderabad unit and denial of deduction under section 10A.
11. Any other grounds urged at the time of hearing.

Detailed Analysis:

1. Arm's Length Compensation for Software Development Services:
The Tribunal addressed the issue of the sum of Rs. 3,69,58,189 being considered as arm's length compensation. The Assessing Officer's decision was upheld, confirming the sum as appropriate compensation for software development services provided to associated enterprises.

2. Rejection of the Assessee's Transfer Pricing Study:
The Tribunal upheld the TPO's rejection of the assessee's transfer pricing study, which had initially selected 13 comparables with an arithmetic mean PLI (OP/OC) at 9.67%. The TPO's selection of 19 comparables with an arm's length margin of 23.87% was deemed appropriate, although the DRP excluded Infosys Technologies Ltd. and L&T Infotech Ltd. from the final comparables.

3. Selection of Companies with Extraordinary Margins as Comparables:
The Tribunal dismissed the assessee's objections against the selection of companies with extraordinary margins as comparables. The TPO's selection was maintained as it was based on a functional analysis that aligned with the assessee's business profile.

4. Inclusion of E-Infochips Bangalore Limited and Kals Information Systems Limited as Comparables:
The Tribunal found that E-Infochips Bangalore Ltd was functionally comparable to the assessee, despite the latter's argument of diverse business interests and ownership of intangibles. Similarly, Kals Information Systems Ltd was retained as a comparable since it was engaged in software development, akin to the assessee's functions. The Tribunal rejected the argument that extraordinary profits alone warranted exclusion.

5. Inclusion of Persistent Systems Limited as a Comparable:
The Tribunal dismissed the assessee's contention that Persistent Systems Ltd should be excluded due to its involvement in product development. The revenue recognition practices indicated that the company primarily generated income from software services, making it a valid comparable.

6. Inclusion of Mind Tree Limited as a Comparable:
The Tribunal upheld the inclusion of Mind Tree Limited, noting that the assessee had not raised objections during the TPO's review. The presence of intangibles and reasonable margins were not sufficient grounds for exclusion. The Tribunal emphasized the importance of FAR analysis, which showed comparability with the assessee.

7. Standard Deduction of (+) or (-) 5% under Section 92C(2):
The Tribunal did not find merit in the assessee's claim for a standard deduction of (+) or (-) 5% under section 92C(2). The TPO's calculations and adjustments were upheld.

8. Adjustment on Account of Interest on Amounts Due from Associated Entities:
The Tribunal upheld the DRP's direction to adopt LIBOR Plus 250 basis points for charging interest on delayed receivables. The assessee's argument for a lower interest rate was rejected, and the Tribunal noted that the Revenue was not in appeal against the DRP's decision, thus maintaining the status quo.

9. Adjustment on Account of Reimbursement of Expenses from Associated Enterprises:
The Tribunal upheld the TPO's treatment of reimbursements as operating revenue and costs. The assessee's argument that these were purely recovery of expenses without markup was dismissed.

10. Setting off Profits of Pune STPI Unit against Losses of Hyderabad Unit and Denial of Deduction under Section 10A:
The Tribunal dismissed the assessee's ground regarding the set-off of profits and losses between units and the denial of section 10A deduction. The issue was not raised before the DRP, and thus, the Tribunal did not entertain it. The Tribunal cited the Supreme Court's decision in CIT vs. Yokogawa India Ltd but found it inapplicable due to procedural grounds.

11. Any Other Grounds Urged at the Time of Hearing:
No additional grounds were highlighted or considered during the hearing.

Conclusion:
The Tribunal dismissed the appeal raised by the assessee, upholding the decisions of the Assessing Officer, TPO, and DRP on all grounds. The order was pronounced in the Open Court on 23rd July, 2024.