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TMI Blog2020 (12) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing documentation maintained 1) Rejection of the transfer pricing documentation maintained by the assessee in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("Rules") and undertaking a fresh economic analysis during the course of assessment proceedings and accordingly making an adjustment of Rs. 1,93,66,256/- to the international transactions of providing software services to its AE; Rejection of use of multiple year data 2. Rejecting the use of multiple year data and using data for the FY 2012-13 only; Use of additional filters 3. Inter-alia use of the following additional/modified filters in undertaking the comparative analysis and rejecting comparable companies having: (a) Different financial year-end; and (b) Export sales less than 75% of the sales Selection of companies 4. Not undertaking an objective comparative analysis and inter-alia selecting the following companies without appreciating that the same are not functionally comparable to the Appellant: a) Infobeans Technologies Limited; b) Larsen & Toubro Infotech Ltd; c)Persistent Systems Ltd; Rejection of comparables 5. Not undertaking an objective comparative analy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay VAT / Sales Tax; 12. Disregarding the Inter-company Transfer Pricing methodology for recovery of losses incurred by the Appellant in the initial years of distribution. Rejection of use of multiple year data 13. Rejecting the use of multiple year data and using data for the FY 2012-13 only Selection of most appropriate method 14. Rejection of RPM and selection of TNMM as the most appropriate method for determination of ALP for distribution activity. Selection of companies 15. Not undertaking an objective comparative analysis and inter-alia selecting the following companies without appreciating mat the same are not functionally comparable to the Appellant: a) Integra Telecommunication and software Ltd b) Sonata Information Technology Ltd c) Unisys software & holding industries Ltd (Seg) Rejection of comparables 16. Without prejudice to the above grounds, not undertaking an objective comparative analysis and inter-alia rejecting the following comparables: a) Avance Technologies Ltd b) Empower industries India Ltd c) Tera Software Ltd (Seg) Adjustments for the differences in Risks 17. Not adjusting the net margins of comparable companies for the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 20% for technical support services. * Non STPI business: The Company imports and distributes the software licenses and maintenance contracts to third parties in India. During the year under consideration the company received the software license free of cost. 3.2. The Ld. TPO passed his order proposing transfer pricing adjustment to the price received by the assessee as below: * In relation to provision of software development services, the Ld. TPO has rejected the TP study maintained by the assessee stating that the information or the data used in the computation of the arm's length price in the TP Study is unreliable and incorrect and has conducted fresh search to determine arm's length price of the assessee's international transactions. * Thereafter, the Ld. TPO determined the arm's length margin at 19.78 % (post Working Capital Adjustment of 0.18%) vis-à-vis the assessee's margin at 15.21% and accordingly determined the differential adjustment to the price received by the assessee at INR 1,87,83,546. 3.3. In relation to Distribution Activity, the Ld. TPO has determined Arm's Length Price for the transaction stating that the arrangement is nothing but in the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 4,27,67,898 3.7. The ld. AR before us prayed for exclusion of the three parties in software development (IT Sector) namely (a). L & T Infotech Ltd., (b)Persistent Systems Ltd., (c) CG-VAK Software and Exports Ltd., The ld. AR made arguments independently with regard to exclusion of the aforesaid comparables and placed reliance on various Tribunal orders in support of his contentions. The ld. AR argued that if the aforesaid three comparables alone are excluded then, the adjudication of other comparables in IT segment as raised in the grounds would become irrelevant as assessee would be through with the margins after exclusion of the aforesaid three comparables. However, he reserved his right to argue the other comparables, if found necessary. 4. Per contra, the ld. DR vehemently objected to the fact that all the comparables raised in the grounds should have been argued by the ld. AR either for its inclusion or exclusion. However, the ld. DR vehemently argued only for inclusion of the aforesaid three comparables (i.e. L & T Infotech Ltd., Persistent Systems Ltd., (c) CG-VAK Software) and stated that he would make his arguments on the other comparables after hearing the ld. AR. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACIT in ITA No.2122/Hyd/2017 dated 20/11/2018 wherein it was held as under:- "17. As far as the L & T Infotech is concerned, the assessee's objections are that the it is a giant company with a turnover of Rs. 3613 Crs and has a significant brand value and in RPT schedule there is revenue from sale of services as well as products. Further, under operating expenses there are costs of bought-out items for resale of products and therefore, in the absence of segmental details, it cannot be considered as a comparable. In support of this contention, Learned Counsel for the Assessee placed reliance upon the following decisions:- (i) Saxo India (P) Ltd vs. ACIT - ITA No. 6148/Del/2015 (ii) Electronic Arts Games India (P) Ltd vs ACIT - ITA No.444/Hyd/2017 (iii) Agilis Information Technologies Intl. P. Ltd vs. ITO -ITA No. 1063/Del/2016 (iv) Alcatel-Lucent India Ltd vs. DCIT - ITA No.6856/De/2015 18. We have gone through the financial results of this company which are placed at 1116 of the paper book and find that the revenue from IT services of this company for the relevant assessment years is Rs. 3613 Crs and that it has huge intangibles. This company has been considered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., from the final list of comparables. 5.6. Exclusion of Persistent Systems Ltd., The assessee had sought for exclusion of this comparable on the primary ground that the said company is engaged in development of products whereas assessee is engaged in software development. The ld. DRP however, held that the said comparable is engaged in provision of software development services. From the perusal of the annual report of the said comparable, we find that it is engaged in three business activities i.e. product engineering services, platforms and solutions and IP and related business. The annual report also mentions that it is a global company engaged in software products, services and technology innovation and also offers complete project life cycle services. We also find from the perusal of the segmental data of the said comparable, segmental reporting is available only in respect of telecom and wireless division, life science and healthcare division and infrastructure and systems division. The revenue generated exclusively from the software development segment could not be deciphered from the segmental data so as to make it comparable with the financials of the assessee herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in software development. Respectfully following the same, we direct the ld. TPO to exclude CG-VAK Software and Exports Ltd. from the final list of comparables. 5.8. Computation Error in Segmental Margin in the case of Mind Tree Ltd.,:- The ld. TPO had computed the margin of Mind Tree Ltd., (segmental data alone) at 20.23%. The ld. AR before us submitted that the correct margin of the said company is 18.18% and the difference arose on account of non-allocation of unallocable expenses to the segments. This point was also pointed out by the assessee before the ld. DRP and the ld. DRP directed the ld. TPO to examine above segment and allocate the unallocable expenses, if it was not already allocated. The ld. TPO erroneously applied the incorrect margin computation in the case of Mind Tree Ltd., while passing the order pursuant to the directions of the ld. DRP. The ld. AR before us furnished the workings of the correct net margins to be adopted for Mind Tree Ltd., after allocating unallocated expenses and pleaded that the said working be restored to the file of the ld. TPO for his verification. The ld. DR also fairly agreed for restoration of the same. Hence, we deem it fit and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse fee to Commvault India during the year under consideration. 6.2. In relation to activity of purchase of software for distribution, the Ld. TPO has held that the company is not acting as a distributor but rendering service to its AE by selling licenses on behalf of the AEs. The ld. TPO observed that the AE has supplied products free of cost to assessee for sale in India. This transaction was not reported in TP document as the receipt of products was free of cost and the sales were made to domestic parties. Accordingly, the assessee had treated the same as not falling within the definition of international transaction. The ld. TPO examined the distribution and license agreement dated 01/04/2010 and the terms and conditions agreed upon thereon. From the same, he concluded that even though the cost price as nil, but the product has a price. Therefore, the transaction of purchase is an international transaction with the AE in which the purchase cost is nil. He observed that if no cost is paid towards the licenses, then it can also be assumed that sales are made on behalf of the AE. The ld. TPO observed that the licenses are given free of cost to the company and the percentage of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried out by the assessee with regard to the software distribution activity as against the Transaction Net Margin Method (TNMM) adopted by the ld. TPO and upheld by the ld. DRP. The ld. DR also agreed for adoption of resale price method in the instant case. We find as per 10B(1)(b) of the Income Tax Rules, re-sale price method could be applied where the property or service purchased from Associated Enterprises are resold to an unrelated enterprise. The facts of the assessee's case squarely fit into this parameter as assessee herein has purchased the software free of cost from its AE and had sold it to unrelated parties in India. Hence, we hold re-sale price method should be the most appropriate method in the instant case. Moreover, the re-sale price method is traditional transaction method which would always be preferable to transactional profit method like profit split method and TNMM. 6.6. Yet another excruciating fact which is relevant to be addressed in the instant case is that the arm's length price adjustment should be restricted only to the value of international transaction. Admittedly, the international transaction involved in the distribution segment is purchase of so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness was also sought to be included as part of capital financing and thereby constituting a separate international transaction warranting imputation of interest for the delayed period. The ld. TPO applied the interest rate of 14.45% and calculated interest for the delayed period beyond 30 days till the date of realization of the invoices which even went beyond the end of financial year relevant to assessment year under consideration and made an adjustment of Rs. 1,81,65,019/-. 7.2. The ld. DRP upheld the observations made by the ld. TPO in principle. The assessee had pleaded before the ld. DRP that since working capital adjustment has been granted to the assessee on its core software development segment, aspect of outstanding receivables and the imputation of interest thereon gets subsumed in the working capital adjustment itself and no separate adjustment need to be made thereon. The ld. DRP rejected the plea of the assessee that working capital adjustment would take into account the impact of outstanding receivables. 7.3. With regard to another argument made by the assessee that it has no borrowings on which interest is payable, hence, there cannot be any imputation of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissal under the transfer pricing provisions. Chapter X of the Act had been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties. It means that if an income is not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independent parties, then such under charged or uncharged income needs to be brought to tax by determining the ALP of the international transaction giving raise to such income. 7.6. With regard to objection raised by the assessee before the ld. DRP that the ld. TPO erred in applying the domestic prime lending rate of 14.45% for the purpose of imputation of interest on outstanding receivables, the ld. DRP observed that the short term fixed deposit rate given by the State Bank of India for various periods shall be applicable ALP interest rate to be applied on the deferred receivables from AE. The ld. DRP also directed the ld. TPO to calculate the interest for the delayed period up to the end of the year only i.e. up to 31/03/2013 only. 7.7. Pursuant to the directions of the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adoption of interest rate for imputation of interest on deferred receivables by applying LIBOR rate + 200 basis points instead of short term deposit granted by SBI directed by the ld. DRP. 7.11. We have heard rival submissions and perused the materials available on record. It is not in dispute that assessee in the instant case had realized invoices on its AEs beyond the agreed credit period as per the service agreement. The realization of invoices were made with abnormal delay. This, in our considered opinion, tantamount to indirect funding made by the assessee to its AEs by allowing the AE to utilize funds of the assessee as per its whims and fancies. Merely because the assessee is a debt free company, it cannot allow its funds to be utilized by its AE for an indefinite period of time beyond the agreed credit period. We find that Clause-C of Explanation to Section 92B of the Act has been introduced in the statute by the Finance Act 2012. For the sake of convenience, Clause C of relevant explanation is reproduced hereunder:- " (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any typ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he invoice and the same is to be charged till the date of realization of debts. We hold that the decision of the Hon'ble Delhi High Court in Kusum Healthcare talks about only outstanding receivables at the end of the year i.e. to say when working capital adjustment is given to the assessee, no separate adjustment need to be made on the outstanding receivables at the end of the year. In our considered opinion, the decision of Hon'ble Delhi High Court does not speak about the invoices that were realized from the AE beyond the agreed credit period during the year. Hence, it could be safely concluded that the decision of the Hon'ble Delhi High Court in Kusum Healthcare does not give any finding with regard to invoices realized during the year from AE. To that extent alone, we are giving our independent finding by treating that as a separate international transaction and directing the ld. TPO to charge interest by applying LIBOR + 200 basis points in the aforesaid manner. 7.15. With regard to argument advanced by the ld. AR that as per the consistent policy adopted by the assessee that he does not charge any interest from its AEs on outstanding receivables and similarly does not pay an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing LIBOR + 200 basis points as under:- a. In respect of invoices raised in earlier years by the assessee on its AEs, where the amounts were realized during the year under consideration but beyond the agreed credit period, imputation of interest is to be made from first day of April till the date of realization of debts. b. In respect of invoices raised during the year on its AEs, where the amounts were realized during the year itself but beyond the agreed credit period, imputation of interest is to be made from the date of expiry of agreed credit period till the date of realization of debts. 7.18. Ground 'C' raised by the assessee on the aspect of transfer pricing adjustment on account of imputing interest of outstanding receivables are disposed off in the aforesaid manner. 8. Ground No.20 raised by the assessee is with regard to chargeability of interest u/s.234B of the Act which is consequential in nature. 9. Ground No.21 raised by the assessee is with regard to initiation of penalty proceedings u/s.271(1)(c), 272BA and 271AA of the Act which would be premature for adjudication at this stage. 10. In the result, appeal of the assessee is partly allowed for statistical pur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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