9911796707
TMI Blog2022 (10) TMI 1153X X X X Extracts X X X X X X X X Extracts X X X X ..... ing an addition of INR 61.092,371/- to the total income of the Appellant on account of adjustment under section 92CA of the Act for the software development services transactions and outstanding receivables by the Appellant from its Associated Enterprise. 4. The Hon'ble DRP/Ld. AO/Ld. TPO erred in rejecting the Appellant's transfer pricing study and accordingly conducting fresh search for comparable companies. 5. The Hon'ble DRP/Ld. AO/Ld. TPO erred in rejecting the use of Comparable Uncontrolled Price (CUP') method for determining the arm's length price of the Appellants provision of software development services transactions 6. Without prejudice to the above grounds, the Hon'ble DRP/Ld. AO/Ld. TPO erred in rejecting the segmental profitability analysis computed by the Appellant while computing the arm's length price of Appellant's provision of software development services transactions using Transactional Net Margin Method (TNMM'). 7. Without prejudice to the above grounds, the Hon'ble DRP/Ld. AO/Ld. TPO has erred in not allowing an adjustment on account of difference in the level of risks assumed by the Appellant vis-a-vis the comparable c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in INR currency 18. Without prejudice to the above grounds, the Ld. AO/Ld TPO erred in not correctly applying the LIBOR rate for imputing notional interest on outstanding receivable balances. 19. While giving effect to the Hon'ble DRP directions, the Ld. AO/Ld. TPO erred in recomputing interest on outstanding receivables by considering credit period of 30 days instead of 90 days agreed by the Appellant with its Associated Enterprise. 20. Without any prejudice to the above grounds, the Ld. AO/Ld TPO erred in making an addition of INR 1,675.822 on account of interest on outstanding receivables as against INR. 1,192.909 while giving effect to the Hon'ble DRP directions. 21. The Hon'ble DRP/Ld. AO/Ld. TPO has erred in not considering the ruling of Hon'ble Supreme Court and jurisdictional Tribunal rulings while issuing the directions and passing the order. 22. The Hon'ble DRP/Ld. AO/Ld. TPO has erred in ignoring the principle of consistency by not following the directions of Hon'ble ITAT issued on similar issues in the Appellant's case for earlier years. 23. The Ld. AO has erred in levying interest under section 234B of the Income Tax Act, 1961. 24. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Reimbursements of expenses 82,690/- Accepted to be at arm's length Recovery of expenses 26,94,007/- Accepted to be at arm's length Payments made on behalf of nonresident director 22,522/- Accepted to be at arm's length ANALYSIS OF THE TP STUDY OF THE ASSESSEE AND THE TPO: Net mark-up on cost earned by the assessee as computed by the assessee: Operating Income Rs. 25,52,91,602/- Operating Cost Rs. 23,17,23,496/- Operating Profit (Op. Income - Op. Cost) Rs. 2,35,68,106/- Operating/Net mark-up (OP/OC) 10.2% Net mark-up on cost earned by the assessee as computed by the TPO: Operating Income Rs. 26,18,78,852/- Operating Cost Rs. 25,20,52,552/- Operating Profit (Op. Income - Op. Cost) Rs. 98,26,300/- Operating/Net mark-up (OP/OC) 3.90% Comparison of the TP studies done by the assessee and TPO: Assessee TPO Methodology adopted Primarily CUP Supplementary method TNMM TNMM Profit Level Indicator (PLI) OP/TC (TNMM) OP/OC Database used PROWESS & CAPITALINEPLUS (TNMM) PROWESS & Ace TP Comparables selected 7 (TNMM) 14 Period for which data used FYs 2013-14 to 201516 (TNMM) FYs 2013-14 to 201516 Filters applied by Assessee in its TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied alternately: Sl. No. Name of the company Weighted average (in %) 1. Akshay Software Technologies Ltd. 1.08 2. Sagarsoft (India) Ltd. 1.47 3. Sasken Communication Technologies Ltd. 6.89 4. CG-Vak Software Exports Ltd. 12.16 5. E-zest Solutions Ltd. 13.79 6. Cigniti Technologies Ltd. 19.44 7. R S Software India Ltd. 21.16 35th Percentile 6.89 Median 12.16 65th Percentile 13.79 3.7 Out of the 7 comparables selected by the assessee, the TPO accepted the 3 highlighted above, viz. CG-Vak Software & Exports Ltd., E-zest Solutions Ltd. and R S Software India Ltd. and rejected the other 4. Filters applied by the TPO: Step Description 1. Companies whose data is not available for FY 2015-16 - excluded. 2. Companies having different financial year ending (i.e., not March 31, 2016) or data of the company does not fall within 12 month period i.e., 01-04-2015 to 31-03-2016 - excluded. 3. Companies whose income was less than Rs. 1 Crore - excluded. 4. Companies whose software development service income is less than 75% of the total operating revenues - excluded. 5. Companies which have more than 25% related party transactions of the sales - exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Persistent Systems Ltd. 30.89 10. Infobeans Technologies Ltd. 32.42 11. Thirdware Solution Ltd. 36.90 12. Infosys Ltd. 38.61 13. Aspire Systems (India) Pvt. Ltd. 39.28 14. Cybage Software Pvt. Ltd. 66.45 35th Percentile 20.87 Median 27.28 65th Percentile 32.42 Final Assessment Order 3.10 The AO passed the final assessment order in line with the directions of the Ld. DRP, in terms of which, the TP adjustment stood at Rs. 6,10,92,371/-. 4. Ground Nos. 1 to 4 are general in nature. 5. Ground No.5 is not pressed. Hence, dismissed as not pressed. 6. Ground No.6 of the assessee is reproduced below:- 6. Without prejudice to the above grounds, the Hon'ble DRP/Ld. AO/Ld. TPO erred in rejecting the segmental profitability analysis computed by the Appellant while computing the arm's length price of Appellant's provision of software development services transactions using Transactional Net Margin Method (TNMM'). 6.1 The Ld. A.R. submitted that the TPO has erred in computing the profitability of the assessee at entity level and arriving at a mark-up of 3.90% as against the profitability computed by the assessee at 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attention to the judgment in ITA No. 1878/M/2014 in the matter of MIs. Paradigm Geophysical (I) Pvt. re particularly to paragraph 10 and 13. In the said judgment, the coordinate bench relied upon the judgment of Hon'ble Delhi High Court in the matter of CIT Vs. Tara Jewels Exports Pvt. Ltd. In the conclusion, it was held as under: When the assessee has furnished segmental profits., the entity level profits cannot be considered for bench marking international transactions in view of the jurisdictional High Court decision. Therefore. respectfully following the said decisions, we hold that the ALP of the assessee should he determined only on the international transactions and not on the entire transactions at entity level. We also find from various decisions that the four comparables selected by the TPO out of 9 have been rejected for various reasons like high turnover, functionally different, abnormal profits etc. Taking the totality of the facts and circumstances, we are of the view that this matter has to go back to the TPO for denovo adjudication in view of the fact that no proper opportunity was given by the TPO. Therefore, we direct the TPO to complete the denovo assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee is reproduced below:- 11. The Hon'ble DRP/Ld. AO/Ld. TPO erred in law and facts by accepting companies namely Persistent Systems Ltd. Aspire Systems (India) Pvt, Ltd. Infosys Ltd. Larsen & Toubro lnfotech Ltd. Thirdware Solutions Ltd, Nihilent Ltd, Inteq Software Pvt. Ltd. Infobeans Technologies Ltd and Cybage Software Pvt Ltd from the Ld. TP0's search as being comparable to the Appellant despite being functionally dissimilar to the Appellant. 13.1 The assessee wants exclusion of following comparables on turnover filter on the reason that these comparables have high turnover i.e. more than Rs.200 crores. a) Infosys Ltd. b) L&T Infotech Ltd. - 24.83 c) Persistent Systems Ltd. d) Asper System India Pvt. Ltd. e) Thirdware Solutions Ltd. f) Cybage Pvt Ltd. g) Nihilent Technologies Ltd. 14. We have heard the rival submissions and perused the materials available on record. This Tribunal consistently holding that the turnover filter to be applied between Rs.1 crore to Rs.200 crores and if the comparable from the software development segment exceeds Rs.200 crores, the same to be excluded from the list of comparables. Accordingly, we direct the AO/T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest d6cision 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 (P.) 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 of the learned counsel for the Assessee. The decisions rendered in the case of NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts held by the company. Expenses in foreign currency: 16.3 Ld. A.R. further submitted that it also incurred significant expenditure in foreign currency, in the nature of onsite activities representing around 1.5% of the total sales and is thus not comparable to the assessee and ought to be excluded from the final list of comparables. Abnormal increase in revenue and fluctuation in margin: 16.4 The revenue increased from Rs. 35 crores (FY 2014-15) to Rs. 62 crores (FY 2015-16) in a period of 1 year (76%). Also, the company's profitability increased by 147%. Also, the company's margin fluctuates widely (34.98%- FY 2015-16, 20.78%- FY 2014-15, 41.95%-FY 201314) which demonstrates that there exists some factor having an impact on the margin, and therefore the company cannot be selected as a comparable. 16.5 The website of the company shows that the company is engaged in diverse dissimilar services, and therefore it ought to be excluded. Ld. A.R. made detailed submissions are made at pages 163-168 of the paperbook. He placed reliance on the decision of this Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Tribunal in IT(TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & next generation service. 4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore. 5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribunal in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: 21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. As per the website of the company, the company renders data warehousing services, consulting services, EI and EDI services, testing services healthcare BPO services, and in respect of the diverse services, no segmental details are available. Significant related party transactions: 19.2 Ld. A.R. submitted that 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. While the Ld. DRP had directed exclusion of the margin of the company for the financial year 2013-14, the TPO did not give effect to the same. Wide fluctuation in the margin: 19.3 Ld. A.R. further submitted that the company's margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company's margin stood at 47.21%, for the FY 2014-15 32.14% and for the FY 2015-16 7.56%. He stated that the detailed submissions are available at pages 158-162 of the paperbook and he placed reliance on the decision of this Hon'ble Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Tribunal in IT(TP)A No. 235/Bang/2021]), the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-a-vis the taxpayer which is a routine software development service provider working on costplus mark up model, hence ordered to be excluded from the final set of comparables." 21.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. 22. Ground No.12 in the appeal of the assessee is reproduced below:- 12. The Hon'ble DRP/Ld. AO/Ld. TPO erred in law and facts by accepting R S Software (India) Ltd as a comparable which was rejected by the Appellant during the course of assessment proceedings as being functionally dissimilar to the Appellant. 22.1 Assessee wants exclusion of R.S. Software Ltd. from the list of comparables. Ld. A.R. submitted that this company is engaged in diversified activities, which are not similar to the services rendered by the assessee. This company renders custom application development, quality assurance and testing, application maintenance and support, strategic consulting, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. Significant foreign branch expenses. 22.7 Ld. A.R. submitted that the company has significant onsite operations. The company incurred expenses in respect of its foreign branch of 81.64% of operating cost during the FY 2013-14, 68.82% during the FY 2014-15 and 57.41% during the FY 2015-16, which demonstrates that the company operates in a different business model. He placed the detailed submissions in this regard at pages 79-84 of the paperbook. 22.8 Ld. A.R. placed reliance in this regard on the decision of this Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Tribunal in IT(TP)A No. 235/Bang/2021]). 22.9 Without prejudice, if the company were to be retained in the final list of comparables, the company's turnover for the financial years 201314 and 2014-15 is in excess of Rs. 200 crores, and therefore the margins for the said years ought to be excluded, and the margin of the company for FY 2015-16 alone ought to be considered. 23. Ld. D.R. submitted that the Ld. DRP after having considered the submissions, on perusal of the annual report, noted that this company is engaged in rendering services relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar and fall within the same domain of software development. Accordingly, the pleas raised are rejected by Ld. DRP. 23.3 Further, Ld. D.R. argued that the Ld. DRP noted in his order that R&D activities are in the nature of routine activities to improve service delivery and there is no specific debit towards R&D in the P & L account. These indicate that the R&D activities are towards routine business activity. The company does not own intangibles except for computer software licenses and ERP implementation. Therefore, Ld. DRP was of the view that this company is comparable to the assessee company. The assessee has failed to establish that such differences, if any, on account of R & D/Intangibles, have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas are rejected by Ld. DRP. As the company is primarily engaged in software dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. Reliance in this regard is placed on the decision of this Tribunal in the case of Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 (Bangalore - Trib.)) which was upheld by the Hon'ble High Court of Karnataka in ITA No. 358/2016. 25.2 Further, Ld. A.R. submitted that the credit period agreed between the assessee and its AE was 90 days. However, the TPO has without any basis considered the credit period to be 30 days to impute notional interest. Detailed submissions in this regard are placed at pages 180-197 of the paperbook by the Ld. A.R. Without prejudice and in any event, the interest rate, if at all ought to be LIBOR plus, as computed by the TPO, as against SBI short term deposit interest rate which the Ld. DRP has erroneously applied. Reliance in this regard is placed by the Ld. A.R. on the decision of this Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. v. The Addl./Jt./Dy./Asst.Commissioner of Income Tax/ITO, National Faceless Assessment Centre (Order dated 21.01.2022 passed in IT(TP)A No. 397/Bang/2021). Without prejudice, Ld. A.R. submitted that TPO erred in making an addition of Rs. 16,75,822/- on account of interest on o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended. As the assessee failed to prove that on identical comparable transaction with non-AEs also, it had not charged interest, and failed to demonstrate CUP with documentation & evidence, accordingly, this plea was rejected by the Ld. DRP. 27. We have heard the rival submissions and perused the materials available on record. The Tribunal consistently taking a view that if the credit period granted to the AE is more than 90 days that should be a TP adjustment towards notional interest @ LIBOR+2%. Accordingly, same view was taken by the 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 A.Y. 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 benchmarked while determining the ALP of the international transaction. In our opinion, this issue was considered by the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment 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 during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 has observed that: ..... X X X X Extracts X X X X X X X X Extracts X X X X
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