9911796707
TMI Blog2022 (6) TMI 1357X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed by the assessee. Hence we do not find any merit in the contention raised by the assessee on this issue.we see no reason to interfere with the decision of the lower authorities and hence these grounds of the assessee are dismissed. Comparability analysis adopted by TPO for determination of ALP - HELD THAT:- We direct the AO/TPO to apply 15% RPT filter in respect of all the comparables. Interest on the average outstanding trade receivables - TPO Rejected the contentions of the Assessee and computed the TP adjustment on the basis of average receivables and considered the interest rate at LIBOR+400 basis points - HELD THAT:- As relying on judgment of AMD (India) Pvt. Ltd [ 2018 (8) TMI 2094 - KARNATAKA HIGH COURT ] we hold that the treatment of interest on deferred receivables is rightly considered as an independent international transaction and benchmarked separately by the revenue authorities. Calculation of interest - Considering the fact that the average receivable days is 83 and that the TPO in assessment year 2018-19 has allowed 90 days credit for the assessee, we are of the view that it is reasonable to allow 90 days credit for the purpose of calculating interest on recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his appeal is against the final order of the Income Tax Officer Ward - 1 (1) (1) - Bengaluru (the AO) dated 30/10/2018 passed under section 143(3) r.w.s. 144(13) of Income-tax Act, 1961 [the Act] for the assessment year 2014-15. 2. The Assessee is a wholly owned subsidiary of Applied Materials Inc., USA, which is a supplier of products and services to the global semiconductor industry. The Assessee was incorporated on 11.07.2003 under the provisions of the Companies Act, 1956, and is engaged in the provision of SWD services and engineering services to Applied Inc., its AE, as a captive service provider. In terms of the provisions of Sec.92A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ("AEs"). 3. In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services is "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und No. 9 and 10 are relating to Corporate Tax issues. The assessee also raised an additional ground with regard to disallowance of education cess. However during the course of hearing the ld AR submitted that this ground is not pressed and hence dismissed. 9. We will first consider the issues pertaining to TP adjustments. As far as the provision of SWD services are concerned, the Assessee filed a Transfer Pricing [TP] Study to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method [TNMM] as the Most Appropriate Method [MAM] of determining ALP. The Assessee selected Operating Profit/Operating Cost [OP/OC] as the Profit Level Indicator [PLI] for the purpose of comparison. The PLI of the comparables is arrived at by considering the weighted average margin of the 3 years' data. The OP/OC of the Assessee was arrived at by the Assessee in its TP study as below:- Operating Income Rs.373,60,37,837 /- Operating Cost Rs.329,76,52,420 /- Operating Profit (Op. Income - Op. Cost) Rs. 43,83,85,417/- Operating/Net mark-up (OP/TC) 13.29% 10. The Assessee chose companies engaged in providing similar services such as the Assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up charges would lead to a duplication of mark-up, which would be wholly unreasonable. In that view of the matter, it was submitted that the said subcontracting charges were merely pass-through costs and thus ought to be excluded from both the Assessee's operating revenue and cost base while determining its effective NCP margin for provision of the software development services and if that were to be done, its effective NCP Margin would be as follows: Operating Income Rs. 267,16,13,558/- Operating Cost Rs. 223,08,72,451/- Operating Profit (Op. Income - Op. Cost) Rs. 44,07,41,107/- Operating/Net margin (OP/TC) 19.76% 13. The TPO was of the view that the sub-contracting charges formed part of the operating cost of the Assessee for provision of SWD services and thus cannot be excluded from either its cost base or operating revenues as it would not give a correct picture of the profit margin earned by it. The TPO therefore recomputed the ALP and made the TP adjustment as given below:- Arm's Length Mean Mark-up 29.40% Operating Cost Rs.3,29,76,52,420/- Arm's Length Price - 129.40% of Operating Cost Rs.4,26,71,62,231/- Price Received Rs.3,73,60,37,837/- Shortfall bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibutor of the AE but is a provider of services of its own. It is not the case of rendering services of an agent without any value addition but the assessee is providing software development services to the AE and charging margin on the same. Therefore the cost on the software development activity is incurred by the assessee and charging the AE on the said services with a mark up of 10% on cost. The cost of sub-contracting in software development services is also charged with 10% mark up to the AE. When the margin on the cost of subcontracting charges is part of the operating revenue of the assessee then only the cost of sub-contracting activity cannot be excluded as pass through. It would amount to artificially inflate the margins of the assessee on the other revenue from the services other than sub-contracting activity. In any case, pass through cost can be considered only when the activity of providing services to the AE does not involve value addition on the part of the AE. The decision of the Delhi Benches of the Tribunal in the case of DCIT Vs. Cheil Communications India Pvt. Ltd. (supra) would not help the case of the assessee as in the said case the activity of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies as well. The Ld. Panel also erred in confirming the same. 5.4 The Ld. AO/ Ld. TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables, rejecting the Assessee's ground for application of the related party transaction filter at a threshold of 10% or 15% of sales. The Ld. Panel also erred in confirming the same. Accordingly, basis application of 15% related party filter, Persistent Systems Ltd and Thirdware Solutions Ltd. ought to stand rejected. 5.5 The Ld. AO/ Ld. TPO grossly erred on facts in arbitrarily rejecting companies having software development services income less than 75% of total operating revenues. The Ld. Panel also erred in confirming the same. 5.6 The Ld. AO/ Ld. TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2014) and in inconsistently applying such filter, and the Ld. Panel also erred in confirming the same. 5.7 The Ld. AO/ Ld. TPO also erred on facts in erroneously computing the margins of certain companies identified as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hay Software Technologies, Sasken Communication Technologies Ltd., and Ybrant Digital Limited. 24. Hence only ground Nos.5.9 to 5.11 are contended for adjudication with regard to exclusion of the companies viz., Infosys Limited, Larsen & Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, R S Software (India) Limited, and Thirdware Solution Limited. 25. We have heard the rival submissions. The ld. AR did not press for the exclusion of R S Software (India) Ltd in the course of hearing. Accordingly this issue is dismissed as not pressed. The ld AR made a detailed written submission with regard to the inclusions which are reproduced below:- a) Regarding Infosys Ltd., it is submitted that this company is functionally dissimilar to the assessee company on various counts and therefore it ought to be rejected from the final list of comparables. Infosys Ltd. renders services like customer service experience, simplification of digital marketing etc., which are not part of routine IT services and therefore cannot be compared to the Assessee who renders routine IT services. While the TPO observed that the company provides business consulting, technology, engineering and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er when compared to the assessee, and hence it ought to be excluded from the list of comparables. b) Regarding Larsen & Toubro Infotech Ltd., it is submitted that it is functionally incomparable to the Assessee on various counts. The company is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. Also, in addition to the above, the company owns proprietary software products like Unitrax®, Accurusi and ScriptorTM which are developed in-house. During the relevant financial year, the company has added Rs.708 million worth of intangible assets. Also, the company is engaged in diversified activities including cloud computing, infrastructure management, analytics & information management etc. Further, L&T enjoys significant brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market. The company has also incurred significant expenses in foreign currency amounting to 44.03% of its total expenditure which suggests that is engaged in provision of onsite services. Hence, it operates on a business model different from that of the Assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the outset, the ld. AR submitted that the company is functionally dissimilar to the Assessee and ought to be excluded from the final list of comparables. It is engaged in rendering software development, implementation and support services. The company is also engaged in development of software products and earns revenues from sale of user licenses for software applications. These diverse services are reported under one segment without any details being available as regards these services. During the year, the company has liquidated the Singapore entity i.e. Thirdware Solutions Singapore Pte Ltd. due to solvency of business activities, constituting a peculiar economic circumstance. Further, a perusal of the annual report shows that the income from rendering services during the year was 'Nil' and therefore the company fails many of the filters applied by the TPO himself and therefore ought to be excluded. The company purchased stock-intrade during the year and also owns intangibles. Further, the margins of the company fluctuate on a year-on-year basis due to the different revenue recognition model that the company follows. Pertinently, the company was rejected by the TPO in the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables.' We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same cannot be considered as a good comparable. 64. On the other hand, the ld. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables.' In view of the above facts recorded by the DRP as well as the decision of the co-ordinate Bench, we do not find any reason to interfere with the directions of the DRP. 28. Following the aforesaid order of the Tribunal for the AY 201112 in assessee's own case (supra), we direct e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. and Infomile Technologies Ltd., the ld. AR made submissions with regard only to the former, hence the second company is not considered as not pressed. 32. With regard to Maverick Systems Ltd., the ld. AR submitted that this company appeared in the accept/reject matrix of the search conducted by the TPO and its inclusion was sought by the Assessee. However, it was rejected by the TPO without any basis. The DRP upheld the exclusion of the company on the basis that generally, companies with R&D expenditure of less than 3% alone were considered, and therefore Maverick which had incurred expenses of 6% ought to remain excluded. 33. In this regard it is submitted that the actions of the lower authorities are erroneous and wholly inconsistent. Excluding companies on an adhoc and arbitrary basis without applying a filter at a specific threshold is erroneous. It is submitted that once companies pass the filters applied by the TPO, they cannot be excluded on any other arbitrary basis, as the same would amount to cherry picking companies which is impermissible. Further, consistently across all assessees, the TPO and the DRP reject the application of R&D expenses > 3% of total turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Without prejudice, since the delay pertained to the invoices mentioned above, adjustment if any ought to be restricted to the same. 37. The TPO however rejected the contentions of the Assessee and computed the TP adjustment on the basis of average receivables and considered the interest rate at LIBOR+400 basis points. While the considering the objections filed by the assessee DRP directed the TPO to allow 30 days credit period and compute interest by taking the short term deposit rate of State Bank of India. Aggrieved the assessee is in appeal before us. 38. The ld.AR submitted that :- a. The outstanding receivables are only in respect of the provision of software development services by the Assessee and since the arm's length price of the said transaction is subsumed in the principal transaction of rendering SWD services, the outstanding receivable cannot be made subject matter of a TP adjustment. b. Reliance in this regard is placed on the case of Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 (Bangalore-Trib) (para 8) which was upheld by the Hon'ble High Court of Karnataka in ITA No. 358/2016) and the decision in Goldstar Jewellery Ltd. v. JCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivables 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 submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase 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 which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee had submitted the invoice wise details before the DRP which is reproduced below. In respect of the services rendered by the Assessee to its AE, it raises invoices, under which the AE is granted 30 days' time to make payment. During the course of hearing the ld.AR brought to our attention that the TPO in assessee's own case for the assessment year 2018-19 has allowed the credit period of 90 days and prayed that the same may be allowed for the year under consideration. The ld AR also submitted that during the year under consideration, realizations in respect of certain invoices were made after the period of 30 days granted under the invoice, details of which are as under:- Sl No. Invoice No. Date of Invoice Amount of realisation Due date for receipt of payments Actual date/ date of receipt of payments No. of days delayed A B C D=C-B 1. AMIND 115/ FY 2014 17-Dec-13 68,860,000 15-Jan-14 15-Apr-14 90 140,146,834 15-Jan-14 28-Apr-14 103 2. AMIND C73/FY 2013 21-Jan-14 6,078,765 19-Feb-14 29-Apr-14 69 3. AMIND 116/ FY 2014 21-Jan-14 139,934,408 19-Feb-14 28-Apr-14 68 68,090,000 19-Feb-14 13-May-14 83 84,459,945 19-Feb-14 27-May-14 97 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of which were incapable of functioning without the aid of computer systems and were always connected to, and accessible through the computer system alone. The AO restricted the depreciation to 15% on the basis that the assets were not computer software eligible for depreciation at 60% and were instead electronic items. The DRP upheld the AO's order that the assets are not integral part of the computer and were eligible for depreciation at 15%. 45. The ld AR submitted that the peripheral devices are integral part of the computer system and cannot operate independently and therefore, the same are eligible for depreciation at the rate of 60% as it applicable to 'computers and computer software'. The ld AR placed reliance in this regard is placed on the following decisions:- i. Expeditors International (India) (P.) Ltd. v. ACIT ([2008] 118 TTJ 652 (Delhi)); ii. ITO v. Samiran Majumdar ([2006] 98 ITD 119 (Kolkata)); iii. CIT v. BSES Yamuna Powers Ltd. [2013] 358 ITR 47 (Delhi); iv. DCIT v. Datacraft India Ltd. ([2010] 133 TTJ 377 (Mumbai) (SB)); v. DCIT v. UAE Exchange & Financial Services Ltd. ([2016] 69 taxmann.com 84 (Bangalore - Trib.)); and vi. CIT v. Sony India (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Xerox machines and the accessories that has been considered as computer peripherals. In the event it is ascertained able that these accessories and Xerox machines could not be independently used but could only be used on being attached to computer 60% depreciation should be allowed. Insofar as racks, batteries and stabilisers are concerned these do not fall within the category of computer peripherals and we uphold the depreciation being allowed only at 15%. Accordingly this ground raised by assessee stands partly allowed. 49. In the year under consideration, the assessee has produced the list of assets with the details of date of purchase. We notice that the AO while computing the disallowance had not taken into consideration the date of put to use of the asset. We also notice that in assessee's own case cited supra, the coordinate bench of the Tribunal has allowed the rate of depreciation based on the nature of assets. Given this, we remit the issue back to the AO to verify the nature of asset and allow depreciation considering the principle laid down by the coordinate bench of the Tribunal in assessee's own case (supra) and the date of asset being put to use. This ground is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld improvements after receiving the invoices from the relevant vendor, which was after the asset was completed and was ready to be put to use. The ld AR brought to our attention that the date of put to use have been certified by the tax auditor in the tax audit report. The ld AR alternatively submitted that, in the event of depreciation claim is disallowed, the disallowance need to be reworked considering the date in which the relevant new premises started to function as the date of assets being put to use. The ld AR also contended that the depreciation disallowance should be restricted to the additions made during the year under consideration and not on the opening written down value (WDV) on which depreciation is allowed in the earlier years. 56. We have heard the ld. DR and perused the material on record. The AO has denied the depreciation on leasehold improvement since, according to AO, the assessee had not furnished the invoices & bills supporting the expenditure and that the assessee had not provided evidence for completion of the work. The break-up of disallowance of depreciation of Rs.25,31,31,220/- is as under which is worked out as per date put to use as certified in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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