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TMI Blog2022 (11) TMI 960X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench in the case of Techbooks International (P.) Ltd [ 2015 (7) TMI 473 - ITAT DELHI] wherein the Tribunal laid down guidelines on the manner of determination of ALP. The issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down after affording assessee opportunity of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. We hold and direct accordingly. All issues on determination of ALP of the transaction are kept open. Nature of expenses - Disallowance of software expenditure b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble DRP erred in not considering the fact that receivables cannot be considered as an international transaction as it does not fall within the purview of capital financing as stated by Sec. 92B of the Act. 20. The learned AO/ learned TPO/ Hon'ble DRP erred in not appreciating the fact that TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. 21. The learned AO/ learned TPO/ Hon'ble DRP erred in charging notional interest on receivables without appreciating the fact that the Appellant does not have any cost of debt. 22. The learned AO/ learned TPO/ Hon'ble DRP erred in imputing interest on delayed receivables once the primary transaction has been tested. 23. The learned AO/ learned TPO/ Hon'ble DRP erred in enhancing the income of the Appellant by imputing interest on outstanding receivables from AEs on ad hoc basis. 24. The learned AO/ learned TPO/ Hon'ble DRP erred in selecting an ad hoc interest rate while selecting that Comparable Uncontrolled Price ( CUP ) Method as the Most Appropriate Method ( MAM ) for determining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,18,412 87,649 3,07,625 35.10% 5 R S Software (India) Ltd. 35,188 28,321 6,867 24.25% 6 Cigniti Technologies Ltd. 5,563 4,359 1,204 27.62% 7 S Q S India B F S I Ltd. 20,061 16,394 3,667 22.37% 8 Thirdware Solution Ltd. 19,883 13,742 6,140 44.68% Average 29.40% 15. DETERMINATION OF ARMS LENGTH PRICE: Based on the detailed discussion held in various parts of this order, the arm's length price of the international transactions entered into by the taxpayer is computed as under: 15.1. Method Used: TNMM is used as the most appropriate method by the taxpayer as well as the TPO. 15.2. Comparable: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT in IT(TP)A No.3286/Bang/2018, order dated 23.02.2021, for Assessment Year 2014-15. In the aforesaid case, in paragraphs 12 to 20 of the aforesaid order, the aforesaid 5 companies were held to be not comparable with the company engaged in software development services such as the assessee. It is significant to note that the very same 8 comparable companies chosen by the TPO in the case of the assessee in the present appeal and in the case of Salesforce.com (supra) are one and the same and therefore there can be no question of the profile of the assessee being not identical to the profile of the assessee in Salesforce.com (supra). In the aforesaid decision, the Tribunal held in pages 12 to 14 of its order that Infosys Ltd., is functionally dissimilar to the assessee and has a huge brand value and cannot be compared with a small assessee such as the assessee in the present appeal whose turnover was only 116 Crores. In so far as L T Infotech Ltd., is concerned, in pages 18-20 of its order, the Tribunal held that this company was functionally dissimilar, owns brand value and was engaged in R D activities besides owning intangibles. In so far Mindtree Ltd., is concerned, in page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt that the auditor in paragraph 5 (b) of Annexure to the auditors report has mentioned as under:-- There are no transactions that are made enterprises exceeding Rs. 5 Lacs in respect of any part who is covered under section 301 of the Act during the financial year. Hence, in the absence of any specific information, there is merit in the contentions of the assessee that the above said company might not have had related party transactions during the year under consideration. Accordingly we do not agree with the reasoning given by Ld. DRP for excluding this company as a comparable. Accordingly we direct the Ld. AO/U.S. include this company. 22.7 Annual report of this comparable has been placed at page 593 of paper book volume 2. It is observed functionally it is providing export of software and services. Annual report placed in paper book does not contain functions performed by this comparable in order to ascertain whether this company is rendering SWD services or not. We therefore, set aside this issue to Ld.AO/TPO for verification. The Ld.AO/TPO shall call for requisite information from this company, a copy of which shall be provided to assessee also. Comparability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate method in determining ALP. It was contended that the rate of interest was adhoc interest rate without brining on record any comparable uncontrolled transaction to compute the notional interest on receivables. Several judicial pronouncements were cited before the DRP in this regard. 12. The DRP in this regard following the decisions of ITAT Delhi Bench in the case of Bechtel India Pvt.Ltd. ITA No.6530/Del/2016 dated 16.5.2017 and Techbooks International Pvt. Ltd., in ITA No.240/Del/2015 dated 06.07.2015 rejected the contentions of the assessee. The DRP also held that 30 days was the period of credit allowed to the AE and the late fee of 1.5% p.m. beyond 30 days was the agreed credit period and interest. The assessee has not charged any interest despite substantial delay in payment by the AE and therefore the action of the TPO was justified. The DRP also went further to hold that the libor rate adopted by the TPO was incorrect and substituted the short-term deposit rate of interest of SBI and directed the TPO to compute ALP accordingly which resulted in an enhancement of the addition made by the TPO. 13. Before us, learned Counsel for the assessee submitted that the TPO an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Pvt Ltd (in ITA No.6530/De1/2016 dated 16 May 2017) . It is important to note that the Bench while arriving at the said conclusion distinguished its earlier order in the case of Kusum Healthcare Pvt. Ltd. (supra) and rejected the contention that interest gets subsumed in the working capital adjustment. The Hon`ble Bombay High court in the case of CIT vs. Patni Computer Systems Ltd, (2013) 215 Taxman 108 (Bom) dealt, inter alia, with the following question of law:- (c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any Other transaction having a bearing on the profits, income, losses or assets of such enterprises? 16. While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal laid down guidelines on the manner of determination of ALP, as follows: 13.11 Now, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. 13.12 In so far as the first aspect is concerned, we find that the TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing adjustment for the period in excess of 60 days. In our considered opinion, transfer pricing adjustment on account of interest for the entire period of delay beyond 60 days cannot be treated as a separate international transaction of trading debt arising during the course of business. It is noticed that the assessee entered into an agreement with its AE for realization of invoices within a period of 150 days. This implies that the interest amount on non-realization of invoices up to 150 days was factored in the price charged for the services rendered. Annexure-1 to the TPO's order gives details of the instances of late realization or non-real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transaction if 'reasonably accurate adjustments can be made to eliminate the material effects of such differences'. Applying the prescription of rule 10, it becomes vivid that difference on account of the 'contractual terms of the transactions', which also include the credit period allowed, needs to be adjusted in the profit of comparables. As the TPO has taken the entire delay beyond that normally allowed as a separate international transaction, which position is not correct, we hold that the effect of delay on interest up to 150 days over and above the normal period of realization in an uncontrolled situation, should be considered in the determination of the ALP of the international transaction of 'Provision of IT Enabled data conversion services' and the period of delay above 150 days, namely, 30 days in our above illustration (180 days minus 150 days) should be considered as a separate international transaction in terms of clause (c) of Explanation to section 92B. 13.13 In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the price of the software will be charged in FY 2012-13 and balance half will be charged FY 2013-14. d. The learned AO/Hon ble DRP ought to have observed that the software expenses charged to the profit loss account are incurred towards application software, i.e., incurred towards upgradation and customization of existing software and hence, does not result in acquisition of an asset. e. The learned AO/ Hon'ble DRP ought to have observed that the Appellant does not own any intellectual property rights for the said software. The Appellant cannot sell the software to any third party. f. The learned AO/ Hon'ble DRP ought to have observed that the software purchased by the Appellant having enduring benefit is already capitalised in its books of accounts and only those which have short term license period were claimed as expense in profit loss account. g. The learned AO/ Hon'ble DRP ought to have appreciated that the software purchased by the Appellant does not result in any enduring benefit, and hence, to be allowed as business expenditure under section 37 of the Act. h. Further, the learned AO/ Hon'ble DRP ought to have appreciated tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company has made certain payments towards purchase and maintenance of software during FY 2013-14. The software charges amounting to Rs.3,02,17,150 which are paid for purchase of software which have enduring value have been capitalised in assessee's books for FY 2013-14 - please refer note 9.B of financial statements. Further, expenses amounting to Rs. 13,75,18,000 which is debited in the profit and loss account relating to software expenses are mainly incurred for short term license ranging for a period of 6 months to 12 months. The amortized cost of such licenses falling in FY 2013-14 have been debited to the profit and loss account and have been claimed as an allowable expenditure under section 37 of the Act. We wish to submit that the above software expense is a revenue expense and is expended wholly and exclusively for the purpose of the business. The company does not receive any enduring benefit from such licenses and accordingly, has been claimed as a revenue expenditure. 22. The DRP in its order held as follows: 2.27.1 Having considered the submissions, we note that the complete details of these expenditure were not filed before the AO, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses, a sum of Rs.4,45,39,896 had to be regarded as revenue expenditure and the remaining sum of Rs.9,29,78,104 was regarded as capital expenditure and depreciation of Rs.5,57,86,862 was allowed on the software expenses treated as capital expenditure. Therefore the disallowance ultimately stood reduced to Rs.3,71,91,242/-. 25. The learned counsel for the assessee submitted that the revenue authorities ought to have appreciated that these software expenses are mainly incurred for short term license with respect to application software. Reliance was placed on the decision of the Hon ble Karnataka High Court in the case of IBM India Ltd. ITA No.130/2007 order dated 10.4.2013 wherein it was held that (Para-9 of the judgment) payment for application software and not system software it has to be regarded as revenue expenditure. It was submitted that softwares are purchased to facilitate daily operations or management more efficiently. That the learned AO has erred by stating that some invoices are pertaining to AY 2013-14 and AY 2015-16 and thus should be capitalised. The learned AO failed to appreciate the fact that only proportionate cost of the softwares has been debited to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) If the advantage obtained by purchase of software was only to facilitate trading operations or management more efficiently, leaving the fixed capital untouched, it would be revenue expenditure even if advantage may endure for a long or indefinite period. 26. The learned DR relied on the order of the AO. We have considered the rival submissions. We find that the directions of the DRP was to examine as to whether the software in question were application software or renewal of license for application software for a period less than one year, the same May be allowed as revenue expenditure; and in cases where such expenses relate to renewal of license for a period more than one year, such expenditure may be capitalized and depreciation may be allowed on the same. There has been no finding by the TPO/AO on whether the software were application software or not. In the decision rendered by the Hon ble Karnataka High Court in the case of IBM Corporation (Supra), the payment for acquisition of application software were held to be revenue expenditure. Apart from the above, the period of license cannot be the basis to decide whether the expenditure is capital or revenue expenditure. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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