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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 ..... development services. We also find that the turnover of the assessee company is ₹ 29.84 Crores which is very low when compared to that of Persistent Systems. We find that the turnover of Persistent Systems is more than 10 times higher than the turnover of the assessee company, so even on the aspect of huge turnover, this comparable cannot be held as valid comparable and hence not comparable with the assessee. Exclusion of CG-VAK Software and Exports Ltd.- Said comparable is to be excluded due to non-availability of segmental information and hence, not comparable to the assessee engaged in software development. Computation Error in Segmental Margin in the case of Mind Tree Ltd. - 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 appropriate to remand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utstanding receivables from its AE in foreign currency, it would be just and fair to adopt LIBOR rate + 200 basis points for the purpose of imputation of interest beyond the agreed credit period as per the agreement till the date of realization or till the end of the Financial year, whichever is earlier. Any understanding or arrangement between the assessee and its AE which is detrimental to revenue or against the principles of scheme of Chapter X of the Income Tax Act, 1961, cannot come to the rescue of the assessee. Hence, merely because, there is no provision for chargeability of interest in the agreement entered with AEs for delayed realization and merely because assessee does not pay any interest to its AEs on the payables, the revenue cannot be deprived of its legitimate share in accordance with the scheme of Chapter X of the Act and the purpose behind the provisions of Chapter X. Outstanding receivables from AEs would constitute a separate international transaction on which imputation of interest is to be made by applying LIBOR + 200 basis points - ITA No.2280/Hyd/2017 - - - Dated:- 26-11-2020 - Shri C.N. Prasad, JM And Shri M. Balaganesh, AM For the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d) Cigniti Technologies Limited e) Evoke Technologies Private Limited f) Helios Matheson Information Technology Limited g) Maveric Systems Limited h) R Systems International Limited (Segmental) i) Sasken Communication Technologies Limited (Seg) j) Zylog Systems India Ltd Provision for doubtful debts 6. Considering the provision for doubtful debts in the comparable companies as non-operating in nature while computing the operating margins of comparables. Error in margin computation 7. Erred in not incorporating the Hon'ble DRP directions to consider the correct segmental margins of the following companies: a) Mindtree Ltd. Adjustment for risk differences 8. Not adjusting the net margins of the comparable companies selected taking into account the functional and risk differences between the international transaction of the Appellant and the comparable companies in accordance with the provisions of Rule 10B(l)(e) of the Rules; Negative Working Capital Adjustment 9. Without prejudice to the above, making a negative working capital adjustment to the arm's length margin determined without appreciating the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Rules. C. Imputing interest on outstanding receivables 18. Erred in making TP adjustment by imputing interest at rate charged by SBI on short term fixed deposits on outstanding receivables relating to provision of software services to Associated Enterprise's (AE's) as on March 31st 2013. (i) Not appreciating that the instant transaction is not covered in the definition of international transaction as defined u/s 92B of the Act in the facts and circumstances of the case. (ii) Not appreciating the facts and circumstances surrounding the receivables and re-characterising the outstanding receivables as unsecured loans advanced to AEs. (iii) Not appreciating the fact that the receivables are consequential/ closely linked to the principle transaction of provision of software services and hence have been aggregated for determination of ALP under TNMM. (iv) Not appreciating the fact that under TNMM, the impact of outstanding receivables on the working capital adjustments have already been taken into account in determining the arm's length margin hence there is no need of imputing interest on outstanding receivables again. 19. Withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived at arm s length margin as 1.37 % vis- -vis the assessee s margin at -22.62% and accordingly, determined the differential adjustment to the price received by the assessee at INR 1,66,53,598. 3.4. Further, the Ld. TPO computed interest at the rate of 14.45% on outstanding receivables from AE and made adjustment of INR 1,81,65,019. 3.5. The assessee preferred objections before the ld. DRP against the draft assessment order dated 13/12/2016 passed by the ld. AO. The ld. DRP vide its directions dated 14/09/2017 directed the ld. TPO as under:- A. In respect of Software Development Segment:- To exclude CTIL Limited from provision of software development segment and for Mindtree Ltd, the Hon ble DRP has directed to verify the allocation of unallocable expenditure on proportionate basis. The Hon ble DRP directed the TPO to undertake appropriate working capital adjustment. B. In respect of Distribution Segment To exclude (i) M/s. Dynacon Technologies Ltd, (ii) M/s. Adtech Systems, (iii) M/s. Trijal Industrial Limited, (iv) M/s. Avarice Technologies Limited, (v) M/s. Tera Software and (vi) M/s. Empower Industries India Limited from Distribution activity. C: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 5. We have heard rival submissions and perused the materials available on record. In respect of arguments advanced by both the parties on the transfer pricing adjustment made in the IT segment. With regard to stand taken by the ld. AR that if three comparables i.e. Persistent Systems, L T and CG VAK alone are excluded from the list of comparables, the assessee would be through with its margin even after including the various comparables and after rejecting various comparables chosen by the assessee is concerned, we hold that once these three comparables alone are excluded if the assessee would be through with its margin, then there is no need to adjudicate the other comparables as it would be waste of time and the entire adjudication would be only academic in nature. Hence, we are inclined to reject the argument advanced by the ld. DR in this regard and take up the aspect of exclusion of these three comparables alone for our adjudication at this stage. 5.1. Ld. TPO included L T Infotech as compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at 1116 of the paper book and find that the revenue from IT services of this company for the relevant assessment years is ₹ 3613 Crs and that it has huge intangibles. This company has been considered by the coordinate Bench of the Tribunal at Delhi and also the Hon ble High Court in various decisions and in the case of PCIT vs. Saxo India (P) Ltd (supra), the Hon ble High Court has held that this company cannot be compared to the assessee therein, particularly when its segmental data was not available. The relevant para of Delhi High Court judgment is reproduced here under for ready reference: 10. On a comparison with the data available and made available, undoubtedly, the object of the statute is to pull in transactions which otherwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology - shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ . The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealthcare 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. We find that the Co-ordinate Bench of this Tribunal in the case of EPAM Systems India Pvt. Ltd., vs. ACIT in ITA No.2122/Hyd/2017 dated 20/11/2018 for A.Y.2013-14 had held that the said comparable is into both the software products, services and technology innovation and the segmental details are not available. The said decision also states that on perusal of the annual report of the Persistent Systems Ltd., it is evident that the said comparable possesses huge intangibles. It has been categorically held in the aforesaid co-ordinate bench decision of this Tribunal, that the said comparable is functionally not comparable with the assessee engaged in software development services. We also find that the turnover of the assessee company is ₹ 29.84 Crores which is very low when compared to that of Persistent Systems. We find that the turnover of Persistent Systems is more than 10 times higher than the turnover of the assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect 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 appropriate to remand inclusion of Mind Tree Ltd., in the list of comparable for the limited purpose of verification of the margins. The workings furnished by the assessee before us should be placed before the ld. TPO for his verification and the ld. TPO is hereby directed to examine the same and arrive at the correct margins thereon. 5.9. After exclusion of the aforesaid three comparables i.e. Persistent Systems Ltd., to L T Infotech Ltd., and CG-VAK Software and Exports Ltd., from the final list of comparables and after considering the correct margins of Mind Tree Ltd., the ld. AR pleaded before us that the adjudication of other comparables (both on inclusion and exclusion) would be academic in nature as the arithmetic mean of comparables would work out to 15.19% as against assessee s margin at 15.21% and therefore, the entire transactions would be at arm s length. We find lot of force in the said argument of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction 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 profits are to be shared after absorption of the losses for the assessee. He concluded that this arrangement is nothing but in the nature of services rendered. He also observed that if cost of software is nil, the assessee is losing a mark up on such cost and thereby double benefit is accruing to the AE i.e. one being not compensating the assessee on the cost incurred and the other being not owning up the losses and allowing it to remain in India. 6.3. Assessee in response to show-cause notice replied that no cost has been paid for supply of software by the AE and that assessee is only acting as a captive distributor and not distributing on behalf of its AE. It was stated that assessee company has started distribution of software products of Commvault INC for which there is a separate team of 6 employees and the office is located in Mumbai. It was also stated that this being the second year of distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 software by the assessee from the AE. Since the assessee is not making any payment to its AE for the software supplied to it, the value of international transaction had to be concluded as zero and consequently the transfer pricing adjustment thereon also would be only zero. The arm s length price adjustment should be restricted only to the value of international transactions and cannot be done at entity level is no longer res integra in view of the decision of the Hon ble Bombay High Court in the case of CIT vs. Phoenix Mecano (India) Pvt. Ltd., reported in 414 ITR 704 and in the case of CIT vs. Thyssen Krupp Industries Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interest of its outstanding receivables, is concerned, the ld. DRP placed reliance on the decision of the Co-ordinate Bench of Delhi Tribunal in the case of Bechtel India Pvt.Ltd., in ITA No.6530/Del/2016 dated 16/05/2017 reported in 85 Taxmann.com 121 for A.Y.2012-13 wherein it was categorically held that interest on delayed realization of receivables is a separate international transaction and therefore, requires separate benchmarking and it has nothing to do with the operations of the assessee company involving debt free funds. The ld. DRP placed reliance on this decision and rejected the plea of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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. DRP, the ld. AO passed a final assessment order on 26/10/2017 reducing the adjustment on account of deferred receivables to ₹ 72,20,996/-. 7.8. Before us, the ld. AR reiterated the same arguments that were advanced by the assessee before the ld. DRP by placing reliance on the Co-ordinate Bench decision of this Tribunal in the case of Value Labs LLP vs. ACIT in ITA Nos. 1909 and 1910/Hyd/2017 dated 09/07/2020 and also the decision of the Hon ble Delhi High Court in the case of CIT vs. Kusum Healthcare Pvt. Ltd., in ITA No.765 of 2016 dated 25/04/2017. The crux of the argument of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; 7.12. The aforesaid clause C states capital financing to include debt arising during the course of business . Manifestly, in the instant case, the deferred receivables falls squarely within the ambit of debt arising during the course of business which is included in the category of expression capital financing under clause C of Explanation of Section 92B of the Act. Hence, we hold that the outstanding receivables from AE constitute a separate interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, 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 any interest on outstanding payables to AE is concerned, and also on the point of the service agreement not providing for any clause on the chargeability of interest for delayed realization is concerned, we hold that the parties i.e. assessee and its AE cannot have any clause specifically or by conveniently not providing for any clause in the agreement, which act detrimental to the interests of the revenue. In other words, any understanding or arrangement between the assessee and its AE which is detrimental to revenue or against the principles of scheme of Chapter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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