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TMI Blog2023 (4) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... o not find any merit in the contention raised by the assessee on this issue. Decided against assessee. Comparable selection - Functionally dissimilar companies cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE. Interest on receivables - We note that in assessee s own case TPO has considered a credit period of 90 days. Accordingly, we direct the Ld.AO/TPO to compute the notional interest if any that falls out of this credit period for the year under consideration by considering LIBOR + 300 basis points. Disallowance u/s. 40(a)(i) towards the salary cost reimbursed by assessee to AE on cost to cost basis - HELD THAT:- We remand this issue to the Ld.AO to consider the claim in accordance with the decision of Hon ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. [ 2022 (6) TMI 1251 - KARNATAKA HIGH COURT ] and M/s. Toyota Boshoku Automotive India Pvt. Ltd. [ 2022 (4) TMI 1443 - ITAT BANGALORE ], Goldman Sachs Services Pvt. Ltd. [ 2022 (4) TMI 1444 - ITAT BANGALORE ] having regard to the evidences filed by the assessee. We also direct that in the event, TDS has been deducted u/s. 192 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nchmarking the transaction. In the TP study, assessee had used 7 comparables with an average margin of 10.91% and thus held its transaction to be at arms length. Sl.No. Name of the Company Weighted Average (%) 1. Lycos Internet Ltd. (Formerly known as ybrant Digital Ltd.) 3.49 2. Sasken Communication Technologies Ltd. 8.50 3. Evoke Technologies Pvt.Ltd. 5.25 4. E-Zest Technologies Ltd. 11.02 5. Akshay Software Technologies Ltd. 2.11 6. R Systems International Ltd. 23.51 7. OFS Technologies Ltd. 26.74 2.5 Dissatisfied with the companies selected by assessee, the Ld.TPO finalised following comparables after giving an opportunity to the assessee under the SWD segment. 2.6 These comparables had an average margin of 24.83% and thus the Ld.TPO computed proposed adjustment being the shortfall at Rs.72,08,74,173/-. 2.7 The Ld.TPO observed that assessee had outstanding trade receivables for the year under consideration. After calling for various details and submissions in respect of the same, the Ld.TPO computed the notional interest on the outstanding receivables based on 6 month LIBOR + 450 basis points. The rate thus computed was at 4.4985% by allowing a period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n case for the AY 2011-12 in IT(TP)A No.17/Bang/2016 dated 21.09.2016 (page 2265 to 2269 of PB, para 4 to 8 of the order). The relevant observations of the Tribunal are as follows:- "7. We have considered the rival submissions as well as the relevant material on record. Undisputedly, the assessee is charging a mark up on the software development services provided to the AE being captive service provider. Therefore the assessee is not acting as an agent or distributor 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 subcontracting in software development services is also charged with 10% mark up to the AE. When the margin on the cost of sub- contracting 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 infla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icated herein. 6. Before we undertake the comparability analysis, it is sinequa non to understand the FAR analysis of assessee under the SWD segment. FAR Characterisation Based on the FAR analysis it may be concluded that Applied India is an IT service provider who is insulated from a majority of the business risks and is engaged in rendering services as per the requirements of, and specifications provided by AEs. Based on such a FAR profile, it may be appropriate to characterize Applied India as a limited risk captive service provider. 7. Based on the above facts, as presented in the FAR analysis, the assessee cannot be characterised as a full-fledged software service provider. Assessee is thus a captive service provider rendering service only to its associated enterprises and assuming limited risk. 8. It is submitted by the Ld.AR that in the similar circumstances, in case of ARM Embedded Technologies Pvt. Ltd. vs. DCIT in IT(TP)A No. 2353/Bang/2021, Coordinate Bench of this Tribunal vide order dated 30/08/2022 had analysed all the above alleged comparables on functionality and had excluded them from being compared with a captive service provider. "12. Inteq Software Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is specialised in business applications development for web and mobile. This company provides software engineering services primarily in Custom Application Development, Content Management Systems, Enterprise Mobility, Big Data Analytics. He placed reliance on page 1668 of annual report paper book. The services rendered by this company are different from the routine low end software development services rendered by the assessee as a captive service provider to its AE. The Ld.AR further submitted that, segmental details of such diverse activities carried on by this company are not available. He thus prayed for exclusion of this company from the final list. 15. Thirdware Solutions Limited It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is engaged software and consultancy. The Ld.AR submitted that this company has significant competencies in transaction systems, Analytics and Cloud applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the international transactions minor dissimilarities are not to be taken into account; that the taxpayer cannot be taken as a captive entity as its spectrum is much more and it is also a global brand having presence in many countries and relied upon the order passed by the ld. TPO/ld. DRP. 16. When we examine profile of L&T from its financials, available at pages 6, 7 & 11 of the paper book, it is into providing application development and maintenance services providing digital solutions such as big data analytics, enterprise computing, cognitive computing, infrastructure management services and enterprise solutions. It has also been awarded and recognized by various forums for providing such niche services in the field of innovation in information technology category, analytics solutions/services etc., explained at page 11 of the paper book. 17. When we examine Notes forming Parts of Accounts at page 116 of the paper book, it is evident that L&T is having two segment accounts, namely, (i) Services Cluster Segment which includes Banking and Financial Services, Insurance, Media & Entertainment, Travel & Logistics and Healthcare, and (ii) Industrial Cluster Segments which cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year." 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- ( page 129 of PB-2) , which has not been allocated into three segments, and thus the segmental result are distorted. 6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No. 1897/Del./2004), which has been approved the Hon'ble High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company from provisions of SDS. L&T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the higher profitability. So, we are of the considered view that L&T is not a suitable comparable visà- vis the taxpayer, hence ordered to be excluded. THIRDWARE SOLUTION LTD. (THIRDWARE) 40. The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis-à-vis the taxpayer. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable. 41. Perusal of Notes - Additional Information and Profit & Loss account, available at page 570 of the annual reports paper book, shows that it has income earned from sale of licence and provision of training services also under the head 'software services from local unit', 'export of software services', 'revenue from subscription & training' and 'sale of licence' to the tune of Rs. 2809.62 lakhs, Rs. 19285.11 lakhs, Rs. 32.59 lakhs & Rs. 8.77 lakhs respectively. The tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables. INTEQ SOFTWARE LTD. (INTEQ) 46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report 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-à-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. 17. We note that the assessee in Global Logic India Ltd. (supra) was a captive serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r book. The Ld.AR submitted that as a part of Aepona acquisition, this company acquired development centers in Belfast, UK and in Colombo, Sri Lanka during the year under consideration. He placed reliance on page 1420, 1421 of the annual report paper book. He thus prayed for exclusion of this company from the final list. The Ld.AR submitted thus submitted that Persistant Systems Ltd, is not functionally similar with that of assessee who is a captive service provider to its AE. 20. Infosys Ltd.: It is submitted that this company is functionally dissimilar to the assessee on various counts, and therefore, it ought to be rejected from the final list of comparables. It is submitted that the Ld.TPO erred rejected contentions of the assessee and upheld the inclusion of the company in the final list of comparables. It is submitted that this company renders services like business IT services comprising of application development and maintenance, independent validation, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; Consulting and systems integration services comprising consulting, enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 21. Before us, the Ld.DR has not been able to place anything on record contrary to the above submissions by the Ld.AR. We of the view that with such varied functions, these companies cannot be compared with assessee before us, which is a captive service provider. We accordingly direct the Ld.AO/TPO to exclude Persistent Systems Ltd., and Infosys Ltd. from the final list. 22. Aspire Systems (India) Pvt. It is submitted that, this company is functionally not comparable with the assessee as it earns income from power generation. The Ld.AR placed reliance on page 127 of Annual Report. The Ld.AR submitted that, the company owns significant intangibles in form of goodwill, customer contracts. He placed reliance on page 2077 & 2087 of annual report paper book in support. It is submitted that Applied Development Software (India) Pvt.Ltd., and Pure Apps Consulting Services Pvt. Ltd., amalgamated with the company that lead to acquisition of assets. He placed reliance on page 2056 of annual report paper book. The Ld.AR placed reliance on fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incurred significant expenses in foreign currency of 37.68%, 33.27% and 37.47% of its total expenditure during the FYs 2015-16, 2014-15 and 2013-14, respectively, which suggests that is engaged in provision of onsite services. And that, during the FY relevant to assessment year under consideration, this company acquired GNet Group LLC, a business intelligence and analytical company, and Intellect Bizware Services Pvt. Ltd., specialising in ERP and enterprise innovation. The Ld.AR submitted that, these acquisitions are bound to have a significant impact on the financials of the company. The Ld.AR thus submitted that, for all the above reasons this company cannot be considered to be comparable with. He relied on the decision of Hon'ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. v. ACIT (supra) On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis-à-vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No. 405 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e functions performed by this company as submitted by the Ld.AR and the observations of Hon'ble Mumbai Tribunal, this comparable deserves to be excluded from the final list. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Nihilent Technologies Ltd from the final list. 24. Cybage Software Pvt.Ltd. It is submitted that this company is engaged in the provision of diversified services which include product engineering, testing & quality assurance services, specialized services, support services, etc. It is submitted that this company is engaged in product development and has developed a product called 'excelshore' apart from providing spectrum of services including ITeS and BPO services and that segmental information of the diverse business functions undertaken by the company is not available. The Ld.AR submitted that this company is making super normal profits and that it is not reflective of the performance of the industry in which it operates. Particulars FY 2013-14 FY 2014-15 FY 2015-16 OP/OC 68.82% 67.75% 62.04% Reliance in this regard is placed on the decision of the Hon'ble Hyderabad Tribunal in Infor (India) Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee stands allowed." Before us, the Ld.DR has not brought out any distinguishing factor in order to take a different view. Respectfully following the above view, we direct the Ld.AO/TPO to exclude all the above 10 comparables from the final list. 9. Ground no. 6 is in respect of interest on receivables. 9.1 The Ld.AR submitted that interest on receivables were computed at Rs.1,30,90,069/- on the average net receivables amounting to Rs.28,63,91,854/-. The Ld.AR submitted that the outstanding receivables are in respect of provision of software development services by assessee and that since arms length price has been computed by TNMM as the most appropriate method, it subsumes the principle transaction of rendering of SWD services and therefore the outstanding receivables cannot be considered as an independent international transaction. 9.2 Reliance was placed in support of this submission on following decisions. 1) Avnet India Pvt. Ltd. vs. DCIT reported in (2016) 65 taxmann.com 187. 2) Kusum Healthcare Pvt. Ltd. vs. ACIT reported in (2015) 62 taxmann.com 79 which has been upheld by Hon'ble Delhi High Court reported in (2017) 398 ITR 66. 9.3 Alternatively, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 noted a decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), dealt with question of law: (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' 9.7 The Ld.AR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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-à-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. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions.& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce and has indicated that the traditional control test to indicate who the employer is may not be the sole test to be applied. The Apex Court while construing a contract whereby employees were seconded to the assessee by foreign group of Companies, had upheld the demand for service tax holding that in a secondment arrangement, a secondee would continue to be employed by the original employer. (ix) The Apex Court in the particular facts of the case had held that the Overseas Co., had a pool of highly skilled employees and having regard to their expertise were seconded to the assessee and upon cessation of the term of secondment would return to their overseas employees, while returning Civil Appeal Nos.2289-2293/2021 such finding on facts, the assessee was held liable to pay service tax for the period as mentioned in the show cause notice. (x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of man power was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires ..... X X X X Extracts X X X X X X X X Extracts X X X X
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