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TMI Blog2022 (9) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... res, i.e. Larsen and Toubro Infotech Limited, Nihilent Technologies Limited, Persistent Systems Limited, Thirdware Solutions Limited, Infosys Limited, Aspire Systems (India) Private Limited and Cybage Software Private Limited. Sagarsoft (India) Limited and Evoke Technologies Limited - DRP has rejected the objection of the assessee for its inclusion by claiming that the same does not feature in the TPO s search matrix, thereby amounting to cherry-picking of companies with low margins - HELD THAT:- Since the learned AR has demonstrated that the same is appearing in the TPO s list of comparable companies and are deriving 100% of its revenue from software development services, we direct the AO / TPO to re-examine the compatibility of these two companies. We accordingly allow the grounds of the assessee for statistical purposes. Computing operating margins of certain companies considered comparables which are arising out of arithmetical inaccuracies - In the view of principles of natural justice, we deem it appropriate to remand the matter back to the files of the AO / TPO to examine the claims of the assessee with regard to erroneous computation of operating margin. We direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statistical purposes. - IT(TP)A No.291/Bang/2021 - - - Dated:- 21-7-2022 - Shri George George K, JM And Shri Laxmi Prasad Sahu, AM For the Appellant : Sri.Chavali Narayan, CA For the Respondent : Dr.Manjunath Karkihalli, CIT-DR ORDER PER GEORGE GEORGE K, JM : This appeal at the instance of the assessee is directed against final assessment order dated 30.04.2021 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2016-2017. 2. The issues raised in this appeal is with regard to Transfer Pricing Adjustment, namely - (i) Provision of software development services The adjustment amounts to INR 3,93,70,344; (ii) Interest on delayed receivables The adjustment amounts to INR 7,68,976. 3. The brief facts of the case are as follows: The assessee-company was incorporated on 16.12.2019 under the Companies Act, 1956. The assessee is engaged in the business of software development services. For the assessment year 2016-2017, the return of income was filed on 30.11.2016 declaring total income of Rs.5,85,64,250. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnologies Pvt. Ltd. 14.74 4. Harbinger Systems Pvt. Ltd. 15.06 5. C G Vak Software Exports Ltd. 18.50 6. R S Software (India) Ltd. 20.87 7. Larsen Toubro Infotech Ltd. 24.83 8. Orion India Systems Pvt. Ltd. 25.64 9. Nihilent Ltd. 26.36 10. Inteq Software Pvt. Ltd. 28.20 11. Persistent Systems Ltd. 30.89 12. Infobeans Technologies Ltd. 32.42 13. Thirdware Solution Ltd. 36.90 14. Infosys Ltd. 38.61 15. Aspire Systems (India) Pvt. Ltd. 39.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compute the adjustment on the basis of invoice-wise realization and period of delay. Based on the above directions of the DRP, the TPO reduced the adjustment on account of interest on receivables to Rs.7,68,976. 9. Though several grounds are raised, the learned AR during the course of hearing, had only pressed following grounds / issues:- 5.2 The ld.AO/TPO/DRP erred, in law and facts, by incorrectly applying the following quantitative and qualitative filters: (f) Applying only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for turnover filter. 5.4 The learned AO/TPO/DRP have erred, in law and facts, by accepting / rejecting the following comparables based on unreasonable comparability criteria: (a) Accepting the following companies that cannot be considered as comparable to the Appellant in law and facts, on one or more grounds: (i) Rheal Software Private Limited (ii) Larsen and Toubro Infotech Limited (iii) Nihilent Technologies Limited (iv) Inteq Software Private Limited (v) Persistent Systems Limited (vi) Infobeans Technologies Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess rationale of the transaction undertaken by the Appellant thereby questioning the commercial expediency of the transaction entered into by the Appellant. 6.5 Without prejudice to our ground of appeal no.6.1 above, the ld.AO/TPO/DRP have erred on facts, by not appreciating that the Appellant does not have a policy of charging interest from other unrelated parties nor has it paid any interest on its outstanding trade payable at year end to unrelated vendors. 6.6 Without prejudice to our ground of appeal no.6.1 above, the ld.AO/TPO/DRP have erred in law and facts, by not providing the basis for arriving at the arm s length interest rate of Libor plus 450 basis point for computing notional interest to be charged on the alleged delay in collection of receivables. Ground of appeal relating to other matters 7. The ld.AO grossly erred in computing the Total Income and Tax liability by considering TP adjustment as INR 4,58,98,195 instead of taking INR 4,01,39,320 which was proposed in the Final assessment order post giving effect to DRP Directions. Additional Ground That the learned AO/TPO has erred, in law and in fact, by adopting an inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Therefore, grounds 5.2(f) and 5.4(a) is partly allowed as indicated above. Grounds 5.4(b) and 5.4(c) 14. The assessee has sought for the inclusion of two comparable companies vide ground 5.4(b) and 5.4(c). The learned AR has submitted that Sagarsoft (India) Limited and Evoke Technologies Limited are comparable companies as they are operating in the business of software development and therefore liable to be included in the final list of comparables. 15. The DRP has rejected the objection of the assessee for its inclusion by claiming that the same does not feature in the TPO s search matrix, thereby amounting to cherry-picking of companies with low margins. Since the learned AR has demonstrated that the same is appearing in the TPO s list of comparable companies and are deriving 100% of its revenue from software development services, we direct the AO / TPO to re-examine the compatibility of these two companies. We accordingly allow the grounds of the assessee for statistical purposes. Ground 5.7 16. The learned AR has submitted that the TPO has erred in wrongly computing the operating margins of certain companies considered comparables which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 89/Bang/2021 order dated 31.05.2022], the learned AR submitted that the debtors were realized within the allowed credit period and therefore computation of interest on outstanding receivables does not arise. Further, the learned AR has provided computation of debtors holding period of the comparables which was 65.63 days (whereas that of assessee was 65 days as per Master Service Agreement). 23. The learned Departmental Representative supported the order of the DRP. 24. We have heard rival submissions and perused the material on record. The details with respect to the terms of the Master Service Agreement, credit period allowed thereunder, invoicing details, the realization data, and such other particulars as may be relevant to adjudicate on this issue, are not emanating from the DRP s directions / TPO s order. We accordingly direct the AO / TPO to examine the factual aspect. The AO / TPO is also directed to examine computation of debtors holding period of comparable vis- -vis that of the assessee. If the debtors holding period of comparable is higher than that of the assessee, then prima facie, no TP adjustment is required on the amounts outstanding from the AEs. We, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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