9911796707
TMI Blog2022 (11) TMI 1017X X X X Extracts X X X X X X X X Extracts X X X X ..... by INR 1,18,75,36,269/- with respect to the international transactions undertaken by the Appellant, under section 92CA of the Income Tax Act, 1961 ("the Act"). 1.2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act. 1.3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transactions thereby following a non-transparent approach. 1.4. The learned AO/ learned TPO/ Hon'ble DRP erred in selecting the companies only if the data pertaining to Financial Year ("FY") 2015-16 is available in the public databases. 1.5. The learned AO/ learned TPO/ Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned AO/ learned TPO/ Hon'ble DRP has grossly erred in computing the margin of the following companies: CG-Vak Software & Exports Ltd; kals Information Systems Ltd; Cybage Software Pvt. Ltd; Harbinger Systems Pvt. Ltd; and Orion India Systems Pvt. Ltd. INTEREST ON RECEIVABLES 1.17. The learned AO/ learned TPO/ Hon'ble DRP erred in treating a delay in receivables or deferred receivables as an international transaction. 1.18. 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. 1.19. The learned AO/ learned TPO/ Hon'ble DRP erred in disregarding the fact that the receivables are arising out of transactions that are being determined to -be at arm's length by application of Transactional Net Margin Method ("TNMM") and in separately adjusting the -receivables on account of excess credit period. 1.20. The learned AO/ learned TPO/ Hon'ble DRP erred in not4considering the fact that the outstanding amount from the money advanced by the Appellant would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of money resulting in an expense whereas the fact is that there is a clear outflow of economic resources/cash in the hands of the appellant, which is wholly and exclusively used for the purpose of business in India. 2.4 The learned AO and Honorable DRP has erred in law and on facts by not appreciating that the difference between the market value and the purchase price of shares is being taxed as perquisite in the hands of the employees. 2.5. The Learned AO and Honorable DRP has erred in law and on facts, in disregarding the sample debit note/invoices, Employee listing, sample Form 16 copies, cost reimbursement agreement, sample RSU agreement and scheme document submitted during the DRP proceedings by the Appellant. 2.6. The Learned AO and Honorable DRP has erred in law and on facts, in considering the ESOP expenditure as fictitious expenditure and making false allegation that the ESOP expenditure is a colorable device adopted for avoidance of tax which is totally inappropriate and misdirected. Further, Learned AO/Honorable DRP has considered the ESOP cross charge by the Ultimate holding company as fictional and notional in nature which is totally misplaced. 2.7. The Honor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w and on facts by contradicting his own statement by stating that in one hand there is an element of income included in the reimbursement made to the Ultimate Holding Company for the expenditure on ESOP whereas on the other hand the learned AO states that the said expenditure is notional/fictitious in nature. 3. Other Corporate Tax related grounds 3.1. The Learned AO, while assessing the total income of the Appellant for the year under consideration, have erred in not allowing a deduction for education cess and secondary & higher education cess (collectively known as "education cess") for the year under consideration, although not claimed as a deduction by the Appellant in the return of income. 3.2. The Learned AO, while assessing the total income of the Appellant for the year under consideration, have erred in not considering the depreciation claim on written down value of software which was purchased in preceding previous years and claimed as revenue expenditure, which the erstwhile AO had disallowed in the said years and allowed a claim towards depreciation. Thus, consequential depreciation of the said software ought to be provided in the year under consideration. 4. Oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd., AY 2013-14 Bangalore ITAT, IT(TP)A No. 2866/Bang/2017 4. Ld. D.R. submitted that the company is engaged in providing Application Maintenance and Development, Enterprise Resource Planning and specialized services like Data Warehousing and Business Intelligence, Testing Services and Infrastructure Management Services. The services offerings are focussed mainly towards four verticals namely manufacturing, utilities, financial services and telecom, For the period ended March 31, 2016, March 31, 2015 and March 31, 2014, as per the information in the annual reports, 100 percent of the operating revenues respectively were derived from software development services. The activities- Application maintenance and Development, Enterprise Resource Planning and Testing are all software development activities and fall within the umbrella IT services, as per NASSCOM. These activities are also functionally comparable to the assessee company, as evident from the nature of services rendered by it as stated in its TP study report. Taking into account the nature of industries, to which these services were rendered, the assessee has classified its business into Service Cluster and Industry Clu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tributing to the revenue growth, the annual report recognizes, "Client relationships are at the core of our business. We have a history of high client retention and derive a significant proportion of our revenue from repeat business built on our successful execution of prior engagements"; and further states, "A principal component of our ability to compete effectively is our ability to attract and retain qualified employees: our employee benefit expenses constituted 57.5% and 57.7% for the year ended 31-3-2016 and 31-3-2015." (Ref: page 63-64 of the annual report). It is pertinent to note that brand was not recognized as the significant factor for revenue from operations. In other words, its operational efficiency has contributed to its revenue growth and brand name and not the other way. There is no information to indicate that the brand has impacted the revenue or profit of the company. Besides, the assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B. Hence, these pleas are rejected by Ld. DRP. 4.3 It was argued before Ld. DRP that this company owns intangible assets in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be Rs.27.35 million. For the current year, there is no impact as such, as the transferor company is also in the same line of business activity- namely software development services. Thus, there is no functional difference so as to affect comparability on account of the said acquisition. On further perusal of the financial reports for the three years, Ld. DRP noted that there is no impact on the profitability of the transferee company on account of such acquisition, as could be seen from the following information extracted from the annual report: Financial Year Operating 2012-13 22.7% 2013-14 21.19% 2014-15 21.6% 2015-16 21.7 % 4.6 Ld. DR stated that the above information clearly shows that the amalgamation has not impacted in increasing the profitability of the transferee company. Besides, it is also seen that the company has not reported amalgamation as a significant factor affecting its revenue growth or profitability. With regard to amalgamation of the company GDA Technologies, it is seen that the Scheme is awaiting approval; and hence there is no impact on profitability. In view of these, Ld. DRP rejected the plea that this company has to be excluded on account of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded. A threshold of 25% is being applied following the provisions of Section 92A(2)(a) which provides a limit of 26% of the equity capital carrying voting rights for treating an enterprise as Associated Enterprise. if the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. The Hon'ble ITAT has upheld the application of this filter by the TPO in its order in the case of M/s. Supporisoft India Pvt. Ltd for AY 2005-G6 in IT (TP)A 1372/B/11 & 20/2012 dated 28.03.2013 following its own decision in the case of M/s. Actis Advertisers Pvt. Ltd vide ITA No.5277/De1/2011 dated 12.10.2012. On perusal of the Annual Report of Persistent, we observe that the company has RPT in excess of 25% of the sales. The calculation of the same has been provided below for your ease of reference: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be seen as to what is the pricing structure of all the comparable for various projects cannot be accepted because the TPO has not chosen any other onsite software service provider with a revenue composition of more than 75% from onsite software services as comparable. As rightly observed by the TPO, the pricing is different in onsite when compared to offshore operations. The further observations of the TPO that the reasons for the same lie in the fact that while in the case of OFFSHORE projects most of the costs are incurred in India; an ONSITE project has to be carried out abroad significantly increasing the employee cost and other costs. 65. The next objection of the Assessee is with regard to Assets employed. The companies, which predominantly generate revenues from onsite activity, do not have significant assets as most of the work is carried on the site of customer outside India. The argument that the TPO has himself observed that software service providers do not require much assets cannot be basis to accept the Assessee's plea. Those observations are made by the TPO in the context of application of turnover filter and have been quoted out of context by the Assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Capegemini as quoted in para 16 in para 14 of the TPO's order, but that decision does not deal with a case of onsite revenue filter and the decision was rendered on the facts of its own case. 37. On the issue of RPT filter, we notice that the TPO in para 16 has accepted that the RPT filter should be @ 25%. In the case of Persistent Systems Ltd., the RPT is at 31.32% as extracted in the earlier part of this order and therefore this company should be excluded by application of RPT filter. In view of the above, we do not wish to go into other grounds on which this company is sought to be excluded viz., that it is a product company and there is no segmental data between product and services segment, presence of onsite activity and the impact of extra-ordinary event of acquisition during the relevant previous year. Therefore, this company is directed to be excluded from the list of comparable company. 38. (B) LARSEN & TOUBRO INFOTECH LTD:- 39. As far as L&T Infotech Ltd. is concerned, the ld. counsel for the assessee brought to our notice the decision of ITAT Delhi Bench in the case of Saxo India Pvt. Ltd. v. ACIT, ITA No.6148/Del/2015 for AY 2011-12, order dated 5.2.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware services and the growth was not attributable to any brand value. Presence of onsite activity and the expenses on R&D have all been brushed aside. In our view, the difference pointed out by the ld. counsel for the assessee before us show that this company cannot be compared with that of the assessee basically because of its business model, presence of onsite revenue generation and other reasons cited before us. Besides, the reason that turnover of this company is huge and more than 10 times that of the assessee." 8. We notice that M/s. Infobeans Technologies Ltd. have been directed to be excluded by the coordinate bench in the case of Metric Stream Infotech (India) Pvt. Ltd. with the following observations: "14.3. Infobeans Technologies Ltd., Ld.AR submitted that this comparable was selected by authorities below as it passes all filters, based upon response received from this company under section 133 (6) of the act. He submitted that this observation is contrary to the facts and figures appearing in annual report. Referring to page 1015 Ld.ARsubmitted that this company is operating at CMMI Level 3 and-is a software service company specialising in business application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the financial statements of Larsen & Toubro Infotech Ltd., in particular at page Nos. 1249 of paper book - Volume - 3 disclosure under the Companies Act, 2013, we observe that the company information system resource centre Pvt. Ltd. (ISRC) was amalgamated with the company with effect from September, 21, 2015 and the appointed for the scheme was October, 17 2014, which reads as under: "Pursuant to the Scheme of Amalgamation sanctioned by the Hon'ble High Court of Bombay vide its order dated September 04, 2015, Information Systems Resource Centre Pvt. Ltd. (ISRC) was amalgamated with the Company with effect from September 21, 2015. The appointed date for the Scheme was October 17, 2014. Consequently, the entire business, assets, liabilities, duties and obligations of ISRC have been transferred to and vested in the Company with effect from October 17, 2014. ISRC was engaged in the business of software services with respect to application development, information technology support and maintenance service to OTIS Elevator Company, USA and other companies of UTC group and was acquired by the Company on October 16, 2014." 4.4 From the above observations, which were extrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, AY 2014-15, Bangalore ITAT IT(TP)A No 3122/Bang/2018 13) Hewlett Packard India Software Operation Pvt. Ltd., AY 2014-15 Bangalore ITAT 14) IT(TP)A No. 3400/Bang/2018, Hewlett Packard India Software Operation Pvt. Ltd., AY 2013-14, Bangalore ITAT, IT(TP)A No. 2866/Bang/2017 15) Hewlett Packard India Software Operation Pvt. Ltd., AY 2011-12, Bangalore ITAT, IT(TP)A No.668/B/2016, & IT(TP)A No.583/B/2016 7. Ld. D.R. relied on the order of Ld. DRP wherein he observed that on perusal of the annual report, Ld. DRP noted that the company's core activity was rendering product development services i.e., providing services to business enterprise to develop software products. As per the information at page 236 of the annual report, it has reported income from software services of Rs.14,232.56million and software licenses of Rs.238.8 million aggregating to Rs.14,471.36 million. Thus, the income from software licences constitute a meagre 1.65% of its operating revenue. It is also noted by the Ld. DRP that this company in response to the notice u/s 133(6) had given details of such license income as under:- Software product Category Revenue as per books of accounts (INR) Radia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns are made with reference to the consolidated results of the company, and which included the business profile and operations of its subsidiary companies and associate companies. A careful perusal of the annual report would indicate that the financial results of this stand-alone company is discussed only from page 208 onwards, and the discussion in the earlier pages related to the entire group. Ld. DRP also noted that the Information submitted under sec.133(6) is totally in consonance with the information stated in the financial statements of this company. Ld. DRP was of the view, it would be totally incorrect to consider the information pertaining to the entire group as such, when the comparability is to be seen with reference to the stand-alone financials of Persistent Systems Ltd, which was examined and considered by Ld. DRP for comparable analysis and accordingly, he found find that this company is functionally comparable to the assessee. 7.4 In this regard it is pertinent to note as per the consolidated annual report the revenue from software licence was Rs.764.84 million for the entire group whereas, such revenue in the case of M/s Persistent Systems Ltd was only Rs.238.8 mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software and licenses purchased for its business activity. There is no reference to. any IPR or patent owned or developed by the company, in the stand-alone annual report. There is also no acquisition of IPR during the year. Further as per note in page 171 of the annual report, 'research costs are expensed as incurred unless the technical and commercial feasibility of the project enable to use or sell the software, they are not capitalized'. Such a development is not reflected in the Asset schedule. Thus, it can be inferred that the R&D activities and intangible assets owned are routine and do not have impact on the revenue and profitability of the company. We also note that, the assessee has failed to establish that such differences, if any, on account of R&D, and the presence of these intangible assets have materially affected the comparability or profitability as required in clause (i) of sub-rule (3) of Rule 10B. The said company also clarified u/s 133(6) that its intangible assets are in the nature of software licences acquired for use in the operation of the company and it is seen that they are not in the nature of inbuilt IPR generating revenue for the company. Henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NG-TP) upheld the selection of the comparable Persistent Systems Limited. In view of the above discussion, Ld. DRP upheld the selection of this company as comparable. 8. We have heard the rival submissions and perused the materials available on record. We are of the opinion that in the case of ADP Pvt. Ltd. in the assessment year 2016-17 reported in [2022] 135 taxmann.com 44 the coordinate bench of Hyderabad has considered this company as not comparable by observing as under:- "6.2 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The co-ordinate bench in assessee's own case in ADP (P.) Ltd. (supra) directed the AO to exclude this company from the list of comparables for determining ALP by observing as under: "27. As regards Persistent Systems Ltd, the objections of the assessee are as under: (a) The Company is functionally not comparable. It is engaged in selling of the following: i. Software products (IP); . Platforms (Solutions & Integration); and iii. services (product engineering) b. There are no segmental details between software products and services. 28. In the case of Tata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) EIT Services India Pvt. Ltd., AY 2016-17; Bangalore ITAT IT(TP)A No.210/Bang/2021 2) LG Soft India Pvt. Ltd, AY 2016-17; Bangalore ITAT IT(TP)A No.266/Bang/2021 3) ADP Pvt. Ltd., AY 2016-17; Hyderabad ITAT, ITA Nos. 227 & 228 /H/2021 4) Yahoo Software Development India Private Limited, AY 2017-18 IT(TP)A No. 178/Bang/2022 5) Yahoo Software Development India P Ltd, AY 2015-16 IT(TP)ANo.2657/Bang/2018 & IT(TP)ANo.2365/Bang/2019 6) Goldman Sachs Services Private Limited, AY 2015-16; IT(TP)A No. 2355/Bang/2019 7) LG Soft India Pvt. Ltd, AY 2015-16; Bangalore ITAT, IT(TP)A No.2412/Bang/2019 8) Hewlett Packard India Software Operation Pvt. Ltd., AY 2014-15, Bangalore ITAT, IT(TP)A No. 3400/Bang/2018 10. Ld. D.R. submitted that Ld. D.R.P. on on perusal of the annual report of the company, noted that this company is engaged in providing IT technology services comprising Application Development services, Application Maintenance Services, Application Modernisation Services, independent validation solution, testing services, Business service management, consulting and systems integration services. All these activities fall within the gamut of 'software services'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the brand has a material impact on the profitability of the enterprise. It was also pleaded that this company has brand building expenses, however, on verification, it was seen that these expenses refer to the expenses incurred in participation in various seminar etc; and as such constituted meagre 0.33% of total revenue to materially affect comparability or profitability. Hence, these pleas are rejected by the Ld. DRP. 10.2 A plea was raised that this company also provides data analytic services which is high end and hence, cannot be compared to the assessee. Ld. DRP did not find merit in the plea, as undoubtedly, provision of data analytic services is not functionally different from software development activity. The data analytic services also use only certain software and tools, write codes to perform certain tasks. Like any other software application, these tools also facilitate and enable business enterprises for informed management and decision. Therefore, Ld. DRP did not find merit in the plea. Further, there cannot be any distinction between high end software activity and low end activity, so long as it falls within the purview of software development services. Besid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.4417 crores on the cost of technical subcontractors who have been employed for operational activities. It is not out of place to mention that this is a regular practice in almost all the software development companies to allocate a portion of the work to some other subcontractors for a variety of reasons. This may allow the company to focus on its core activities. These expenses are incurred in a routine course of business. Therefore, this cannot be held to be a criteria to affect the functional comparability of a company and more so in the facts of this case, wherein certain sub-contracting expenses are incurred. This objection is accordingly rejected by the Ld. DRP. 10.5 On the plea as to difference in the scale of operations and consequent abnormal profits, Ld. DRP noted that turnover does not influence the margins in the service sector. The fixed costs in the ITeS industry are insignificant when compared to the manufacturing industry. The major cost in the service sector is variable cost such as salary, travelling expenses, communication expenses, etc. In the absence of any significant fixed costs, the margins in the ITeS are not linked to the turnover of the company. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aling with the issue of Turnover Filter: "17. Ground Nos.2 and 3 challenge the direction of the DRP applying turnover filter of Rs,1 to Rs.200 crores. Though there are decisions to the effect that the companies with the turnover filter of Rs.1 to Rs.200 cores should alone be considered as comparables, this proposition was diluted by the Mumbai bench of IT(TP)A Nos.502 & 450/Bang/2015 Page 22 of 26 the Tribunal in the case of Willis. Processing Services (I) P. Ltd. vs, DCIT [75- 49-ITAT-2013(1klum)-Tel wherein it was held that the turnover band of Rs.1 to Rs.200 cores is bereft of any rationality as the application of this rule does not enable comparison of a company with Rs.200 crores with another company having a turnover of Rs.201 crores. It was further absented by the Hon'ble Tribunal that the turnover was also not a criteria prescribed under rule 105 for selection of comparables. We are also of the considered opinion that the turnover cannot be relevant criteria in a service sector where fixed overheads are nominal and the cost of service is in direct proportion to the services rendered. Following this reasoning we hold that the above companies cannot be excluded from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order". 26. Respectfully following the same, we direct the exclusion of this company from the final list of comparables.' 9.4 On perusal of the entire financial statements, we observe that the company is functionally not comparable and selling and marketing expenses are 5% of revenue and there were extraordinary events also noted i.e. transfer of product - financial & edge services as well as diversified activities like artificial intelligence, products services, platforms, consulting etc. Also onsite revenue was 52.7% and no segmental details like services, consulting products are available. In view of the above observations, the co-ordinate bench in assessee's own case for AY 2014-15 directed to exclude this company as comparable. Respectfully following the said decision, we direct the AO/TPO to exclude this company as comparable from the list of comparables. 11.1 In view of the above judgement of Tribunal, taking a consistent view, we direct the AO/TPO to exclude Infosys Ltd. from the list of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... miconductor industry. Also, TPO observed that Zinnov, a reputed and independent advisory and consulting firm, has rated Sasken as an established and niche player in their Global Service Providers Ratings - 2015 for Engineering R&D services. TPO observed the details of the company having applied 32 patents in India, out of which 8 are granted and 16 are pending. The company also derives revenue from assignment of IP rights and licensing. In view of the above, the TPO observed that the company is functionally different and hence rejected for inclusion. According to the TPO, the above activities of Sasken Communication Technologies Ltd. cannot be compared to the assessee's case. In this regard, Ld. A.R. relied on the following decisions of the coordinate benches of ITAT Bangalore & Hyderabad as mentioned below:- 1) EIT Services India Pvt. Ltd., AY 2016-17, Bangalore ITAT IT(TP)A No.210/Bang/2021 2) Infor (India) Private Limited, AY 2016-17, I.T.A-TP. No. 198/HYD/2021 3) ARM Embedded Technologies Private Limited, AY 2014-15 IT(TP)A No.3374/Bang/2018 15. The Ld. D.R. relied on the order of the lower authorities. 16. We have heard the rival submissions and perused the materials a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. The Ld. D.R. relied on the order of lower authorities. 19. We have heard the rival submissions and perused the materials available on record. This was considered in the case of Mindtek India Limited in assessment year 2016-17 in IT(TP)A No.252/Bang/2021 dated 27.6.2022, wherein the issue was remitted back to the file of AO/TPO with the following observations:- "As far as the plea of the assessee for inclusion of Evoke Technologies Pvt. Ltd. is concerned, this company was rejected by the TPO on the ground that the financials of this company include figures from outside branches which are unconnected. The DRP agreed with the view of the TPO. The learned Counsel for the assessee placed reliance on the decision of the ITAT, Hyderabad Bench in the case of Infor India Pvt. Ltd. Vs. Deputy Commissioner of Income-tax (2019) 109 taxmann.com 435 (Hyderabad Tribunal) wherein it was held that availability unaudited accounts cannot be the reason to reject the comparability of the company, which satisfies all filters. Reliance was also placed on the decision of the ITAT, Bangalore Bench in the cas of Zynga Game Network India Pvt. Ltd. Vs. Deputy Commissioner of Income-tax in IT(TP)A No.25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erused the materials available on record. It was the contention of Ld. A.R. that in the year 2017-18, the Ld. DPR itself included this comparable while determining the ALP in that assessment year. In our opinion, there is no reason to not include this company as a comparable in the A.Y. 2016-17. Accordingly, we direct the AO/TPO to include Sagar Soft (India) Ltd. in the assessment year 2016-17 also." 22.1 In view of the above order of the Tribunal, we direct the AO/TPO to include this comparable. iv. Ace Software Exports Limited:- 23. The Ld. A.R. submitted that TPO observed in his order that this comparable fails SWD service revenue >75% filter and hence, it was rejected by him and requested to include this company in the list of comparables. The Ld. A.R. submitted that this company has been included in the case of EIT Services India Pvt. Ltd. cited (supra) in the A.Y. 2016-17 and the same may be followed. 24. The Ld. D.R. relied on the order of Ld. DRP. 25. We have heard the rival submissions and perused the materials available on record. This was considered as comparable in the case of EIT Services India Pvt. Ltd. cited (supra) in the AY 2016-17 wherein it was held as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial statements the company has reported Rs.2,20,11,325!- of revenue from export sales as against total sales of Rs. 220,84,825!- constituting 99.67% of the total revenue. Thus, the company satisfies the export turnover filter adopted by the TPO. In addition, the company as per the information in the annual report especially the segmental reporting the business activity of the company falls within the single primary business segment viz. Software development. As it is functionally similar and satisfies the export turnover filter, the TPO is directed to consider the company as comparable for the determination of ALP in the software development services." 7.7 In view of the above, we do not find any reason to exclude this company viz. Isummation Technologies Ltd. from the list of comparables in the assessment year 2016-17. Directed accordingly." 28.1 In view of the above, we direct the AO/TPO to include this company in the list of comparables. 29. No other comparables were pressed in this ground. 30. Ground No.1.16 is not pressed and hence dismissed as not pressed. 31. Ground No.1.17 is with regard to treating a delay in receivables or deferred receivables as an international t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the materials available on record. In this case, the main contention of the Ld. A.R. is that assessee has been granted only 24.5 days to the AE. As per agreement, it was 90 days and the payment has been received within this period and there cannot be any adjustment towards interest receivables. In our opinion, the argument of Ld. A.R. is justified. The provision for doubtful loans and advances cannot be considered for computation of interest on intra-group trade and advances as the recovery of the principal itself is doubtful. Hence, we direct the AO/TPO to consider net advances after deducting provision for doubtful loans and thereafter apply LIBOR+2% as held by Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. in IT(TP)A No.397/Bang/2021 dated 21.1.2022 for the AY 2016-17, wherein it was held as under:- "35. The only other issue that remains for adjudication is ground No.15 with regard to re-characterizing certain trade receivables as unsecured loans and computing notional interest on such trade receivables. The main contention of the ld. AR is that deferred receivables would not constitute a separate international transaction and need not be benchmar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 23.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include- . . . . . (c) capital financing, including any type of longterm 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;. . . . ' 23.5. Ld.CIT.DR submitted that expression 'debt arising duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Taxman 401 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing-up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 23.7. We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib.), held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per Explanation to section 92B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 23.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly." 33.1 Accordingly, this issue remitted to the file of AO/TPO for re-examine if the credit period is more than 90 days adjustment towards interest receivable to be made. Issue is accordingly remitted to AO/TPO. Ordered accordingly. Corporate Tax:- 34. Ground No.2 is regarding Corporate Tax. In ground Nos.2.1 & 2.9, the assessee has raised following grounds:- "2.1 The Learned AO and Honorable DRP has erred in law and on facts, in disallowing the expenditure on ESOP of INR 18,18,00,000 under section 37 of the Act without appreciating the submissions furnished by the Appellant. 2.9 The learned AO has erred in law and on facts by disregarding that the ESOP expense is liable to TDS under section 192 of the Act as perquisite in the hands of the employees and appropriate taxes are deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R. submitted that as explained in the notes to accounts, under the ESOP schemes the employees are eligible to purchase/get the shares of Ultimate Holding Company (through ESPP/ESIP scheme). The shares of ultimate Holding Company are issued under these schemes, as HPISO is not a listed entity and its shares are not traded in open market. 34.8 A.R's submissions on ESPP scheme :- * The ESPP scheme provide an opportunity for Employees of HPISO to purchase share of Ultimate Holding Company at defined concessional price and thereby to have an additional incentive. * Employees' are eligible to participate in this scheme and option is given to the employees to purchase defined number of shares at concessional price by way of exercising the options. The difference between the purchase price and market price of shares is cross-charged by the Ultimate holding Company to HPISO. * In this regard, Ld. A.R. has enclosed Annexure 2, copy of the cost reimbursement agreement entered by the Company with the Ultimate Holding Company. Para 2.3(b) of the agreement provides that the said expenses shall be that of HPISO as the same is incurred in respect of shares granted to the employees of HP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged amount is the expense incurred by HPISO and debited to its Profit and Loss account under the head Employee benefit expenses. The ESOP expenses in hands of HPISO is considered as a part of salary Income for the employees based on perquisite valuation rules. * HPE global ESIP plan document along with sample RSU Grant agreement and Stock Option Award Agreement are enclosed as Annexure 3, Annexure 4A and 4B respectively. Additionally, the cross-reimbursements agreement enclosed as Annexure 2, shall apply in respect of cross charges of expenses by Ultimate Holding Company to HPISO. ESOP schemes - Administration and Management 34.10 Ld. A.R submitted that as explained in the earlier paragraphs, the shares pertaining to Ultimate Holding Company are granted to eligible employees of HPISO under the above ESOP schemes. In this regard, Ld. A.R. submitted the following- * The ESOP schemes are managed and administered by the Ultimate Holding Company for all the employees across HPE group entities. * Employees of the Company are eligible to participate in these ESOP schemes, and accordingly, shares are granted based on their performance and certain other parameters. * HPISO recom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he paragraphs below provided detailed submission on the deductibility of ESOP charges and the reasons for which provisions of TDS under section 195 of the Act are not applicable. ESOP cross-charqes are deductible under Section 37(1) of the Act 34.15 Ld. A.R. submitted that as indicated earlier, the ESOP cross-charges represents the actual expenditure incurred by the Company in respect of its employees, who form part of the Company's business and are involved in carrying out day-to-day business operations/management. The said expenses are incurred wholly and exclusively for the business of the Company and therefore, eligible for deduction under section 37 of the Act. 34.16 These expenses are nothing but compensation paid to employees of HPISO and accordingly, taxed in the hands of employees as 'Perquisites'. The disallowance of these expenses under section 37 of the Act would imply that the AO believes that the compensation paid to its employees is not allowable under section 37 of the Act. 34.17 Provision of section 37(1) of the Act inter alia provides that "any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, wherein the Tribunal has held as under * "It follows that the discount on premium under ESOP is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, the contention of the Id. DR that by issuing shares to employees at a discounted premium, the company got a lower capital receipt, is bereft of an force. The sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted." 34.18 In addition to the above, various Courts have also upheld deductibility of ESOP expenses in the following cases: ING Vysya Bank Ltd. Vs: ACIT [2014] 39 ITR(T) 250 (Bangalore ITAT) Sterlite Technologies Ltd (ITA No.4841/Mum/2013) (Mumbai ITAT) CERA Sanitaryware Ltd (ITA No.2817/Ahd/2011) (Ahmedabad ITAT) Aditya Birla Nu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the said fact that expenditure incurred is in the nature of revenue expenditure. 34.26 Accordingly, Ld. A.R. submitted that said expense should be deductible in the hands of the employer. Additionally, Ld. A.R. submitted that the treatment cannot be different in the hands of the employee and in the hands of employer. Share based compensation under ESOP schemes is taxable in the hands of employees as "perquisite" under Salary income and TDS provision are applicable on such payment. 34.27 In view of the above, he submitted that the incurrence of expenditure towards ESOP for employees is a clear and explicit expenditure incurred for the employees and directly affects the performance of employees, which in-turn is critical for the Company's business and its long-term growth. Accordingly, we wish to submit that the expenditure incurred is deductible under section 37(1) of the Act. 34.28 While the learned AO failed to evaluate the facts of the case and made an unwarranted disallowance by wrongful application of section 37(1) of the Act. The learned AO had also erred in stating that the subject cross-charges were subject to withholding under Section 195 of the Act. In the paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be read as an integrated Code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 312 ITR 225 (SC) the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the Income-tax Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are "chargeable to tax" under the Income-tax Act." 34.31 The above view has also been upheld by various other courts - − Principal Commissioner of Income Tax vs Nova Technocast (P.) Ltd [2018] 94 taxmann.com 322 (Gujarat HC) − Commissioner of Income-tax vs Prism Cement Unit [2015] 61 taxmann.com 273 (Madhya Pradesh HC) − Commissioner of Income-tax -IV vs Himalya International Ltd. [2014] 51 taxmann.com 213 (Delhi HC) − Indo Overseas Films vs Income Tax Officer, International Taxation [2017] 81 taxmann.com 378 (Chennai - Trib.) 34.32 While the AO has considered the decision of GE India Technology Cen.(P.). Ltd in the DAO but without examining the facts of the case, has proceeded to conclude tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which those shares were issued by the assessee to its employees, was reimbursed by the assessee to its parent company. This sum so reimbursed was claimed as expenditure in the profit & loss account of the assessee as an employee cost. The law by now is well settled by the decision of the Special Bench of the ITAT Bangalore in the case of Biocon Ltd. in ITA No.248/Bang/2010, A.Y. 2004-05 and other connected appeals, by order dated 16.07.2013, wherein it was held that expenditure on account of ESOP is a revenue expenditure and had to be allowed as deduction while computing income. The Special Bench held that the sole object of issuing shares to employees at a discounted premium is to compensate them for the continuity of their services to the company. By no stretch of imagination, we can describe such discount as either a short capital receipt or a capital expenditure. It is nothing but the employees cost incurred by the company. The substance of this transaction is disbursing compensation to the employees for their services, for which the form of issuing shares at a discounted premium is adopted. 19. In the present case, there is no dispute that the liability has accrued to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assessee as laid down by the Hon'ble Supreme Court in the case of Sassoon J.David (supra). 21. The reference by the CIT(A) to the provisions of Sec.40A(2)(b) of the Act is again without any basis. The price of the shares of NNAS is arrived at by applying the average market price for the period 3rd October, - 17the October, 2005 in the Copenhagen Stock Exchange. The price so arrived at and the price at which shares are issued to the employees of the Assessee is the benefit which the employees get under the ESOP. The Assessee or its parent company can never influence the stock market prices on a particular date. There is no evidence or even a suggestion made by the CIT(A) in his order. There is no basis to apply the provisions of Sec.40A(2)(b) of the Act. 22. With regard to the decision of the ITAT in the case of Accenture (supra), we find that the facts of the case of Accenture (supra) are identical. In the case of Accenture (supra), the facts were that the assessee company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly the parent company, we are of the view that the expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act. The decision of the Hon'ble Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. (supra) and the Hon'ble Karnataka High Court decision in the case of Mysore Kirloskar Ltd. (supra) clearly support the plea of the assessee in this regard. 24. We are of the view that in the facts and circumstances of the present case, the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be allowed as deduction as a revenue expenditure. 25. For the reasons given above, we direct the expenditure be allowed as deduction." 36.1. Further, the Tribunal in the case of Global e-Business Operations (P) Ltd. in IT(TP)A No.212/Bang/2021 dated 27.09.2022 has held as under:- "20. We have heard rival submissions and perused the material on record. In as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee absorbs the difference between the price at which they are issued and the market value of the shares would be expenditure incurred for the purposes of section 37(1). The primary object of the exercise is not to waste capital but to earn profits by securing consistent services of the employees and therefore, it cannot be construed as short receipt of capital. Held, dismissing the appeal, that the deduction of the discount on the employees stock option plan over the vesting period was in accordance with the accounting in the books of account, which had been prepared in accordance with Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999. For assessment year 2009-10 onwards the Assessing Officer had permitted the deduction of the employees stock option plan expenses. The Revenue could not be permitted to take a different stand with regard to the assessment year 200405. The expenses were deductible." 21. In view of the above judgement of Hon'ble Karnataka High Court in the case of Biocon Ltd., we are in agreement with the contention of assessee's counsel in principle on this issue. However, we make it clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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