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TMI Blog2022 (5) TMI 1441X X X X Extracts X X X X X X X X Extracts X X X X ..... fosys Limited, Aspire Systems (India) Private Limited and Cybage Software Private Limited, from the list of comparables. Also we direct the AO / TPO to include R S Software (India) Limited as a comparable company. However, the margins of the said company for assessment years 2014-2015 and 2015-2016 have to be ignored since the turnover exceeded Rs.200 crore for the said period. It is ordered accordingly. Adjustment on Interest on delayed receivables - We direct the AO / TPO to redo the transfer pricing analysis in respect of interest on outstanding receivables by taking into account the directions of the Tribunal in assessee s own case for assessment year 2008-2009 [ 2016 (10) TMI 1211 - ITAT BANGALORE] TDS u/s 195 - Disallowance u/s 40(a)(i) - HELD THAT:- The assessee has produced End Users License Agreement (EULA) - AR has taken us through various clauses, especially, clause 9, wherein he emphasized that the assessee does not acquire any right, title or interest in any IPR - Hon ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. [ 2021 (3) TMI 138 - SUPREME COURT] had clearly held that amounts paid by the resident end users to non-r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance of Rs.50,20,109 by invoking the provisions of section 40(a)(i) of the I.T.Act. 3. Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 25.03.2021, partly allowed the objection raised by the assessee. Pursuant ot the directions of the DRP, final assessment order was passed dated 30.04.2021 in which the TP adjustment was worked out to Rs.4,30,60,301 and adjustment pertaining to the Corporate Tax remained unchanged at Rs.50,20,109. 4. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal, raising following grounds:- Based on the facts and circumstances of the case and in law, Xchanging Solutions Limited (hereinafter referred to as the Company or the Appellant ), respectfully craves leave to prefer an appeal against the order passed by the learned Additional / Joint / Deputy / Assistant Commissioner, Income-tax Officer, National e-Assessment Centre, Delhi [hereinafter referred to as the learned AO ] dated 30 April 2021 under Section 143(3) read with Section 144C(13) and Section 144B of the Income-tax Act, 1961 ( the Act ) pursuant to the directions issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting companies based on unreasonable comparability criteria: a)The learned DRP/AO /TPO erred, in law and in facts, by accepting the following companies that cannot be considered as comparable to the Appellant in law and fact on one or more grounds: i. Larsen Toubro Infotech Ltd. ii. Infobeans Technologies Limited iii. Persistent Systems Limited iv. Nihilent Technologies private Limited v. Inteq Software Private Limited vi. Infosys Limited vii. Thirdware Solution Limited viii.Cybage Software Private Limited ix. Aspire Systems (India) Private Limited b)The learned AO/ TPO / DRP erred, in law and in facts, in rejecting the following comparable companies selected by the Appellant in its TP documentation even though the companies are functionally comparable to the Appellant: i. Akshay Software Technologies Limited ii. R Systems International Limited iii. Mudunuru Limited iv. Sasken Communication Technologies Limited v. Maveric Systems Limited vi. Infomile Technologies Limited c)The learned AO/ TPO / DRP erred, in law and in facts, in rejecting the following comparable companies selected by the Appellant as additional comparables e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of software development services transaction and is to be considered as closely linked to such transaction and should not be tested separately from arm's length perspective. 16.The learned DRP/AO /TPO have erred, in law and in facts, by re-characterizing the outstanding receivables as on 31 March 2016 as a separate loan transaction. 17.Without prejudice to our grounds above, the learned DRP/AO /TPO have erred, in law and in facts, by adopting the SBI short term deposit interest rate to compute the notional interest on outstanding receivable as on 31 March 2016. 18.Without prejudice to our grounds above, the learned DRP/AO/TPO have erred, in law and in facts, by not considering that working capital adjustment will appropriately take into account the delayed /outstanding receivable and separate TP adjustment thus will be unwarranted. 19.Without prejudice to our grounds above, the learned DRP/AO /TPO have erred, in law and in facts, by making a separate TP adjustment on account of interest on outstanding receivables rather than adjusting the operating margin earned in the software development service segment by the appellant, for testing the arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessed income. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law. 5. Though the assessee has raised several grounds on TP adjustment and on Corporate Tax issues, broadly, the issues argued by the learned AR are as follows:- (i) TP adjustment on provision for software development services (adjustment of Rs.3,47,04,593) (ii) Interest on delayed receivables (adjustment amounting to Rs.83,55,708) (iii) Corporate Tax Issues Disallowance of software expenses due to non-deduction of TDS. We shall adjudicate the above issues as under: Provision for software development services (TP Adjustment of Rs.3,47,04,593) 6. The net margin on cost earned by the assessee as per TP study and as computed by the TPO in the TP order are as follows:- Particulars TPO order TP Study ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24.83% 9. Orion India Systems Pvt. Ltd. 25.64% 10 Nihilient Ltd. 26.36% 11 Inteq Software Pvt. Ltd. 28.20% 12 Persistent Systems Ltd. 30.89% 13 Infobeans Technologies Ltd. 32.42% 14 Thirdware Solutions Ltd. 36.90% 15 Infosys Ltd. 38.61% 16 Aspire Systems (India) Pvt. Ltd. 39.28% 17 Cybage Software Pvt. Ltd. 66.45% 35th Percentile 18.50% Median 25.64% 65th Percentile 30.89% 6.4 The computation of ALP by the TPO and the adjustment made are as follows:- Particulars Amount (INR) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36.90% 15 Infosys Ltd. 38.61% 16 Aspire Systems (India) Pvt. Ltd. 39.28% 17 Cybage Software Pvt. Ltd. 66.45% 35th Percentile 18.50% Median 25.60% 65th Percentile 30.87% 6.6 Aggrieved by the final assessment order, the assessee has filed appeal before the ITAT. The assessee has raised several grounds with regard to the TP adjustment made on provision for software development services. However, the learned AR candidly admits that if seven comparables are excluded on the basis of turnover filters and margin for R S Software (India) Ltd. is only taken for assessment year 2016- 2017, the other grounds / issues raised on TP adjustment may be left open. The list of seven comparable companies sought to be excluded for the reason that they are having turnover exceeding Rs.200 crore, are as follows:_ Sl. No. Compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bage Software Private Limited, since the turnover of the above companies had exceeded Rs.200 crore. The relevant ground, namely, ground 4 raised in the case of Barracuda Networks India Private Limited (supra), reads as follows:- Ground 4 The lower authorities erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter: (a) Infosys Ltd. (b) Larsen Toubro Infotech Ltd (c) Persistent Systems Ltd (d) Aspire Systems (India) Pvt Ltd (e) Thirdware Solution Ltd. (f) Cybage Software Pvt Ltd. (g) Nihilent Ltd. (h) R S Software Ltd. ( for FY 2013-14. FY 2014-15) 6.9.1 In deciding the above ground, the Tribunal in the case of Barracuda Networks India Private Limited (supra), considered various judicial pronouncements and held that companies whose turnover is exceeding Rs.200 crore has to be excluded. The relevant finding of the ITAT in the case of Barracuda Networks India Private Limited(supra), reads as follows:- 11. As far as comparability of companies listed as (a) to (g) in Grd.No.4 raised by the Assessee is concerned, the admitted factual position is that the turnover of these co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): 41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.4 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. 6.9.2 In this case, the assessee s turnover is Rs.40.87 crore and the assessee cannot be compared to the companies having high turnover exceeding Rs.200 crore. Therefore, in view of the order of the ITAT in the case of Barracuda Networks India Private Limited(supra), we direct the AO / TPO to exclude Larsen Toubro Infotech Limited, Nihilient Technologies Limited, Persistent Systems Limited, Thirdware Solutions Limited, Infosys Limited, Aspire Systems (India) Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied domestic transactions undertaken on or after 1/04/2014 i.e. on and after PY 2014-15. The amended rules allow for introduction of a range concept for determination of ALP and use of multiple year data for undertaking comparability analysis in transfer pricing cases. The use of range concept being a statistical tool enhances the reliability of analysis undertaken for computation of ALP. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices. Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis. The Amended Income tax Rules, 1962 ( Rules ) via Notification 83 of 2015 which is the 16th amendment to the originally drafted Indian Tax Rules, 1962, are applicable for transactions undertaken on or after 1 April 2014 (i.e. from FY 2014-15 and onwards). These amended provisions are applicable only when the determination of ALP is done under the MAM being resale price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the said financial year undertaken the same or similar comparable uncontrolled transaction then,- (i) the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately preceding the current year; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1) : Provided also that where the use of data relating to the current year in terms of the proviso to sub-rule (5) of rule 10B establishes that,- (i) the enterprise has not undertaken same or similar uncontrolled transaction during the current year; or (ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction, then, irrespective of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 2014-15. As per clause (ii) of 1st proviso to Sec.10CA(2), weighted average of the prices of the 3 financial years have to be taken in accordance with Rule 10CA(3) and the weighted average so taken shall be included data set instead of the price arrived at by using current year data alone. In the present case, if one sees the chart of comparables of TPO given in paragraph-4 of this order, the profit margins of the Company R.S.Software (India) Ltd., for the three financial years were 2013-14 to 2015-16 were 24.14%, 32.75% and -2.09% respectively and the weighted average margin of 24.83% has been considered by the TPO. 18. The second proviso to Sec.10CA(2) of the Rules provides for a situation where R.S.Software (India) Ltd., has undertaken comparable uncontrolled transaction only in Financial year 2014-15 2015-16, then the weighted average of the two financial year 2014-15 and 2015-16 has to be computed in the manner laid down in Rule 10CA(3) of the Rules and the margin so arrived at has to be included in the dataset. 19. The third proviso to Sec.10CA(2) of the rules provides that if in the current year i.e., financial year 2015-16 if R.S.Software (India) Ltd., has not u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in subclause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; .. (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effects of such differences. A reading of Proviso to Rule 10B(4) would show that use of data relating to a period of two years prior to the current year may also be considered but with a rider that if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared . If by application of any filter an enterprise undertaking uncontrolled transaction similar to an international transaction is regarded as not being comparable in the earlier two years immediately preceding the current year and thereby attracting the provisions of Rule 10B(2) or 10B(3) then the data for those years will not have any influence on the determination of transfer prices in relation to the transactions being compared for the current year and hence have to be ignored. On a harmonious reading of the provisions of Rule 10CA, 10B(3) (4) of the Rules, we agree with the stand taken by the learned counsel for the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own case for assessment year 2014-2015 in IT(TP)A No.3358/Bang/2011 (order dated 01.11.2021). The relevant finding of the Tribunal in assessee s own case for assessment year 2014-2015 reads as follows:- 7.4 We have heard rival submissions and perused the material on record. The Tribunal in assessee s own case for assessment year 2008-2009 (supra) had directed AO / TPO to determine afresh the ALP in respect of providing SWD services by considering the proper working capital adjustment in comparable prices. It was held by the Tribunal that in case after giving necessary adjustment, the international transaction of the assessee is found to be at arm s length, then there is no question of separate adjustment on account of allowing credit period from receivables from AE. The relevant finding of the Tribunal in assessee s own case for assessment year 2008-2009 reads as follows:- 23. We have heard the learned Counsel for the assessee as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that this issue has been considered and decided by this Tribunal in a series of decisions including the decision in the case of M/s. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the co ordinate bench of the Tribunal, Mumbai Benches, in Goldstar Jewellery Ltd. (supra), vide Para 8, held as under: 8. We have considered the rival submissions and relevant material on record. The assessee has reported international transaction in its TP report regarding sale to its AE from manufacture of jewellery units and diamond trading unit. The TPO accepted the price charged by the assessee from AE at arm s length. However, the TPO has made the adjustment on account of notional interest for the excess period allowed by the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm s length on the over due amounts of AE and proposed adjustment of Rs. 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the nonAE would constitute international transaction. We are of the view that after the insertion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE is a direct result of sale transaction. Therefore no question of credit period allowed to the AE for realization of sale proceeds without having sale to AE. The credit period extended to the AE cannot be treated as a transaction stand alone without considering the main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereby necessitating appropriate adjustment. The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon ble Tribunals : Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] Mentor Graphics (Noida) Private Limited [109 ITD 101] Egain communication (P) Ltd. [ITA No. 1685/PN/2007] Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vable from AE. We further clarify that the normal credit period allowed for the receivable from the AE shall be the credit period prevailing in the industry and therefore we are of the view that two months credit period should be taken as a normal business practice in the industry. The TPO/A.O shall also consider the benchmark interest rate as LIBOR/PLR in the light of various precedents on this issue. A similar view has been taken by this Tribunal in a series of other decisions as referred in the earlier decisions as well as relied upon by the ld. AR of the assessee. Accordingly, taking a consistent view we set aside this issue to the record of the A.O./TPO with the direction to redo the determination of ALP in respect of providing software development services by considering the proper working capital adjustment in comparable price. In case after giving the necessary adjustment the international transaction of the assessee is found at arm s length then there is no question of separate adjustment on account of allowing credit period on receivable from the AE. 7.2.1 Taking a consistent stand, we direct the AO / TPO to redo the transfer pricing analysis in respect of interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ify, alter, exploit the process/software/IP etc, the payment is not taxable in India under the beneficial provisions of the India-UK DTAA and therefore, the same should not be disallowed under the provisions of Section 40(a)(i) of the Act. * The copyright in the software is being used by the service provider and not the Company. All that the Company is doing is availing a standard service for a fee. * It is not a case of purchase of software but a case of availing standard services which is available to anyone, willing to pay, for a fee. The arrangement involves enjoyment of services rather than use of copyright of a software. * The Company does not acquire any right in the Intellectual Property ( IP ) owned by the service provider in the application tools since there is no transfer or grant of license to use the IP. In this regard, reference is made to Para 9.2 of Schedule 5 of the agreement between the Company and XGISL (placed at Page No. 599 of the Factual Paper book) which states that the Company shall not acquire any right, title or interest in any IP of XGISL. * Without prejudice, the Company further submits that the payments to XGISL are in the nature of reimbur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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