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TMI Blog2022 (11) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. During the previous year relevant to the assessment year 2016-17, the relevant international transactions that took place between the assessee and its AE was the provision of SWD services by the assessee at a price of Rs.192,08,08,541/- and the provision of ITESservices at a price of Rs. 19,98,81,854/-. The assessee was compensated on a cost plus mark up basis, and in the TP study maintained by the assessee, the assessee concluded the international transactions as being at arm's length. On a reference being made by the Assessing Officer, the TPO passed an order dated 29.10.2019 determining the following TP adjustment (i) SWD services segment - Rs. 20,53,36,725/- (ii) ITES segment - Rs.1,60,93,297/- (iii) Notional interest in respect of the delayed receivables - Rs. 7,29,62,864/- 3. Initially, a draft assessment order dated 26.11.2019 came to be passed by the Assessing Officer, in which the aforesaid TP adjustments were incorporated. Further, the Assessing Officer proposed a disallowance of the claim made by the assessee under Section 80G, on the ground that the expenses incurred were in furtherance of CSR activities. 4. Aggrieved, the assessee filed its objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Information Systems Ltd., E-Zest Solutions Ltd., CG-Vak Software & Exports Ltd.and RS Software (India) Ltd. and rejected the other 7. The TPO applied fresh filters and arrived at the below comparables. Sl. No. Name of the Company Mark-up on Total Costs (WC-unadj) (in %) 1. Kals Information Systems Ltd. 8.60 2. E-Zest Solutions Ltd. 10.87 3. Rheal Software Pvt. Ltd. 14.50 4. Sybrant Technologies Pvt. Ltd. 14.74 5. CG-VAK Software & Exports Ltd. 18.50 6. R S Software (India) Ltd. 20.87 7. Larsen & Toubro Infotech Ltd. 24.83 8. Nihilent Technologies Ltd. 26.36 9. Inteq Software Pvt. Ltd. 28.20 10. Persistent Systems Ltd. 30.89 11. Infobeans Technologies Ltd. 32.42 12. Thirdware Solution Ltd. 36.90 13. Infosys Ltd. 38.61 14. Aspire Systems (India) Pvt. Ltd. 39.28 15. Cybage Software Pvt. Ltd. 66.45 35th Percentile 20.87 Median 26.36 65th Percentile 30.89 10. Accordingly the TPO arrived the TP adjustment as under Taxpayers operating revenue 1,98,79,89,853/- Taxpayer operating cost 1,73,57,76,019/- Taxpayers operating profit 25,22,13,834/- Taxpayers PLI 14.53% 35th Percentile Margin of comparables set 20.87% Adjustment req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the Appellant. (Ground No. 11) f. The TPO erred in computing the margins of CG-Vak Software&Exports Ltd., Kals Information Systems Ltd. and Cybage Software Pvt. Ltd. in the Order Giving Effect to DRP directions. (Ground No. 14) Ground - 5 13. The learned A.R. submitted that out of the final list of comparables post-DRP directions Sr. Nos. 8, 9, 11, 13 to 16 should be excluded based on the upper turnover filter. In this regard the learned A.R. submitted that the TPO erred in not applying a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the assessee. In this regard, it is submitted that application of turnover filter is a relevant criteria in choosing comparable companies. It is submitted that the difference in the scale of operations have a direct impact on the profitability. An increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered, and therefore, the per unit fixed cost of a small scale company would be much higher than that of a medium/large size organisation. Further, it is submitted that medium/large size organisation operating in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technologies Ltd. on the basis that these companies are functionally dissimilar to the assessee. In this regard the learned A.R. submitted that Inteq Software Pvt. Ltd. ("Inteq") The company is functionally dissimilar to the assessee. The company is engaged in diversified business lines such as Microsoft dynamics, data warehousing, EI & EDI services, Healthcare BPO and consulting services including provision of end-to-end solutions to clients in the nature of back office services, transaction-based services, MIS and analytical reporting services. Thus, Inteq is not comparable to the software development functions of the assessee. It is further submitted that the segmental details attributable to the various services rendered by the company is not available and is instead shown as "software development and service charges" under one head. Detailed submissions are available at pages 1911-1914 of the paper book. Significant related party transactions: The company's related party transactions (sales) for the FY 2013-14 stand at 79.49% of sales, and therefore the company ought to be excluded. Wide fluctuation in the margin: It is submitted that the company's margin fluctua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. DCIT(Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 (v) Red Hat India Pvt. Ltd. v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021) 20. The ld DR relied on the order of the lower authorities. 21. We have heard the rival contentions and perused the material on record. We notice that the coordinate bench in the case of NTT Data FA Insurance Systems (India) Pvt. Ltd (supra) has considered the issue of exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. and held as under: - "18. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- 7. "Infobeans Technologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons: 1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year 3. Leading provider of consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case also. 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee's own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables." IT(TP)A No.261/Bang/2021 NTT Data FA Insurance Systems (India) Pvt. Ltd., Bangalore Page 21 of 37 18.1 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgement, we are inclined to direct the AO/TPO to exclude this company from the list of comparables." 19.**** 20.**** 21. We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. Vs. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it follows a different financial year ending. Reliance in this regard is placed on the decision of the hon'ble Punjab and Haryana High Court in the case of CIT v. Mercer Consulting India Pvt. Ltd. [2017] (390 ITR 615). 25. The learned D.R. submitted that the ratio laid down in the case of Mercer Consulting India Pvt. Ltd. (supra) cannot be applied as it is since if there are enough number of comparables are available then the inclusion by extrapolating the data for the financial year need not entertained. 26. We have heard the rival contentions and perused the material on record. We notice that the Hon'ble P & H High Court in the case of Mercer Consulting India Pvt. Ltd. has dealt with the issue of exclusion of comparables on failure of different financial year end filters wherein it was held as under: - 28. We are unable to agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of hearing submitted that the financial data are available in pages 2066, 2067 and 2075 of the paper book. We therefore remit the issue back to the AO/TPO to examine the relevant financial data from which the details can be extrapolated for the purpose of comparison and accordingly decide the inclusion of the company after giving a reasonable opportunity of being heard to the assessee. Ground No. 11 28. This ground is with regard to the inclusion of Sagar Soft (India) Ltd. and Evoke Technologies Pvt. Ltd. The assessee sought inclusion of these companies before the TPO which were not accepted by the TPO. The TPO rejected the inclusion of Evoke Technologies Pvt. Ltd., by stating that the annual report of the company include the unaudited revenue and net profit from a foreign branch which is not reliable and therefore the company cannot be included. With regard to Sagar Soft (India) ltd., the TPO held that the company fails SWD service revenue filter and hence rejected. 29. On the objections raised by the assessee, the DRP did not accept the inclusion by stating that these companies are not there in the TPO's search matrix and selection of these companies by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... While so, the TPO erroneously held that the company fails the SWD service filter. The DRP upheld its rejection on an altogether different ground that the company was not there in the search matrix of the TPO. It is submitted that undisputedly, the company is functionally comparable to the Assessee. The entire service income of the company is from rendering SWD services, and therefore it clearly passes the service revenue filter applied by the TPO. Submissions in this regard are placed at pages 2009-2011 of the paperbook. It is submitted that this company is consistently included in the final list of companies in cases of similarly placed assessees. Reliance in this regard is placed on the decision of the Mumbai Bench of this Hon'ble Tribunal in Red Hat India Pvt. Ltd. v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021). 31. We heard both the parties. We notice that the coordinate Bench in the case of Mindteck India Ltd. IT(TP)A No.252/Bang/2021 dated 27.6.2022.has considered the issue of inclusion of Evoke Technologies P. Ltd. and held that- "21. As far as the plea of the assessee for inclusion of Evoke Technologies Pvt. Ltd. is concerned, this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue afresh after giving a reasonable opportunity of being heard to the assessee. Ground 14 34. The assessee is seeking recomputation of margins of certain comparables vide this ground. In this regard we direct the AO/TPO to consider the correct margins with respect to the final list of comparables after giving effect to the directions in this order. It is ordered accordingly. IT Enabled Services 35. Net mark-up on cost earned by the Assessee as computed by the TPO: Operating Income Rs. 20,68,72,829/- Operating Cost Rs. 18,06,27,127/- Operating Profit (Op. Income - Op. Cost) Rs. 2,62,45,702/- Operating/Net mark-up (OP/TC) 14.53% 36. The Assessee selected the following comparables and the range of weighted average of OP/TC of comparable companies: Sl. No. Name of the company Weighted average (in %) 1. Sundaram Business Services Ltd. -5.20 2. Informed Technologies India Ltd. -3.13 3. ACE BPO Services Pvt. Ltd. 0.89 4. Allsec Technologies Ltd. 4.79 5. Digicall Global Pvt. Ltd. 5.20 6. e4e Healthcare Business Services Pvt. Ltd. 8.48 7. Jindal Intellicom Ltd. 9.72 8. Cosmic Global Ltd. 14.15 9. Microland Ltd. 17.19 10. Tech Mahindra Busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable to the Assessee. (Ground No. 11) e. That without prejudice, the TPO erred in computing the margin of Eclerx Services Ltd.in the Order Giving Effect to the DRP directions. (Ground No. 14) 41. Ground No. 5 is with regard to application of upper turnover filter while selecting the comparables. The learned A.R. reiterated the same submission made with regard to application of upper turnover filter in Software Development segment. It is submitted that if the upper turnover filter is applied the following companies would stand excluded: - i.Tech Mahindra Business Services Ltd. ii.Infosys BPM Ltd. iii. SPI Technologies India Pvt. Ltd. iv.Eclerx Services Ltd. 42. After hearing both the parties and respectfully following the ratio laid down by the coordinate bench of the Tribunal in the case of Autodesk (supra) we hold that the companies whose turnover is more than Rs.200 crores should be excluded from the comparables. In the given case it is noticed that the turnover of the above company is more than Rs.200 crores and therefore we direct the A/TPO to exclude these companies by applying the upper turnover filter of Rs.200 crores. 43. Through Ground No. 9 without preju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the other hand, if the loss is only in one assessment year out of 3 immediate previous assessment years, this company is to be considered as comparable. In assessee's has it is submitted by the ld AR that the company has not made persistent loss and has in fact earned profits in two out of the three previous years. This needs to be examined factually before deciding the inclusion and therefore this issue is remitted to the AO/TPO for verification of afresh. The AO/TPO is directed to keep in mind the decisions of the coordinate bench with respect to persistent loss while considering the issue. It is ordered accordingly. Microgenetic Systems Ltd. 50. The company came to be rejected on the grounds of non-availability of data and failing different financial year ending filter. In this regard, the learned AR submitted that as per Rule 10B(5)(i) of the Income Tax Rules, 1962 read with second proviso to Rule 10CA(2), it is mentioned that in case of a comparable company for which data relating to the current year is unavailable, then for the purpose of comparability analysis, the data for the immediately preceding two financial years preceding to the current year shall be adopted fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for current year is not available at the time of furnishing the return of income, data of 2 preceding years out of 3 years would be used. Therefore we see merit in the argument that the company cannot be rejected merely for the reason that the current year data is not available. In the given case the company is excluded also for the reason that the financial year end is different. We have in earlier part of the order had considered the issue of comparable failing different financial year filter and by relying on the decision of the Hon'ble P&H High Court in the case Mercer Consulting India Pvt. Ltd (supra) had remitted the issue to TPO for examining the financial data for determining the comparability of the company. According the issue of inclusion of Microgenetic Systems Ltd is also remitted back to the TPO to examine the financial data from which the details can be extrapolated for the purpose of comparison and accordingly decide the inclusion of the company after giving a reasonable opportunity of being heard to the assessee. R Systems International Ltd 54. This company was excluded by the TPO for the reason that it did not appear in the search matrix. The DRP upheld the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red accordingly. 59. The rest of the grounds with regard to the TP adjustments are dismissed as not pressed. 60. Ground Nos. 16 to 21 is with regard to the interest on delayed receivables. During the year under consideration, realizations in respect of certain invoices were made after the period of 30 days. The TPO equated the outstanding receivables from AEs to loans and accordingly proposed a notional interest on the outstanding balances (exceeding 30 days) amounting to Rs. 7,29,62,864/- taking Prime Lending Rate of SBI at 5.39% as arm's length interest rate. The TPO computed the notional interest as given below Particulars Amounts (in Rs.) Receivables from AE 222,30,18,112 ALP Interest rate 5.39 TP Adjustment (interest chargeable for 335 days) 7,29,62,864 61. In this regard, the learned AR made the following submissions in this regard - (i) The inclusion in the Explanation to Section 92B of the Act of the expression 'receivables' does not mean that every item of 'receivables' appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an unsecured loan leading to benefit the AEs. (ii) The intent behind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons India Pvt. Ltd. (Order dated 21.01.2022 passed in IT(TP)A No. 397/Bang/2021). 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 benchmarked while determining the ALP of the international transaction. In our opinion, this issue was considered by the Tribunal in assessee's own case for AY 2014-15 and in para 23 to 23.9 of the order dated 21.5.2020 this Tribunal held as under:- "23. Ground No. 14-17 alleged by assessee against adjustment of notional interest on outstanding receivables. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include- . . . . . (c) capital financing, including any type of long-term or shortterm 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 during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered for determining the interest rate. 65. The learned AR during the course of hearing drew our attention to the fact that the average debtor turnover ratio in the case of comparable companies as given below are 90 days and prayed that the similar credit period may be granted to the assessee. Companies Sales (A) Average receivables (B) Debtors turnover ratio C=(B/A) Debtors turnover ratio in days D= 365/C AspireSystems (India)Private Limited 232,48,80,277 78,08,89,086 3.0 123 CG-VAK Software & Exports Ltd 10,24,66,848 2,83,50,698 3.6 101 Cybage Software Pvt Ltd 726,68,79,946 117,47,34,134 6.2 59 e-Zest Solutions Ltd 57,66,95,306 15,00,48,640 3.8 95 InfoBeans Technologies Ltd 61,93,29,688 11,54,20,642 5.4 68 Infosys Ltd 54,153 11,761 4.6 79 Inteq Software Pvt Ltd 17,47,55,743 3,29,87,716 5.3 69 Kals Information Systems Ltd 2,88,98,627 92,71,704 3.1 117 Larsen and Toubro Infotech Ltd 5847,24,10,000 1317,23,20,000 4.4 82 Nihilent Ltd. 252,08,10,000 69,19,55,000 3.6 100 Persistent Systems Ltd 14,638 3,374 4.3 84 Rheal Software Ltd 6,27,92,149 93,78,964 6.7 55 RS Software India Ltd 17,142 5,309 3.2 113 Thirdware So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee for the purposes of the business or profession. 12. This amendment will take effect from 1/04/2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years. 13. Thus, CSR expenditure is to be disallowed by new Explanation 2 to section 37(1), while computing Income under the Head 'Income form Business and Profession'. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income Tax Act in Explanatory Memorandum to The Finance (No.2) Bill, 2014 is as under: "The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Illness Assistance Fund etc., specified under section 80G(1)(i) b) Donations with 50% deduction are also available under Section 80G for all those sums that do not fall under section 80G(1)(i). Under Section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part of CSR responsibility, not eligible for deduction u/s80G. 15. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, 'Income form Business and Profession", where as monies spent under section 80G are claimed while computing "Total Taxable income" in the hands of assessee. The point of claim under these provisions are different. 16. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, "Income from Business and Profession". 17. For claiming bene ..... X X X X Extracts X X X X X X X X Extracts X X X X
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