9911796707
TMI Blog2023 (4) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... section 144B of the Act. 3. The learned AO has erred in making an addition of Rs. 5,18,74,725 to the total income of the Appellant, without appreciating that the learned TPO vide order dated 16.04.2021 had reduced the transfer pricing adjustment to Rs. 4,94,73,850 after giving effect to directions of DRP. 4. The learned AO has erred in making a reference to TPO for determining arm's length price without demonstrating as to why it was necessary and expedient to do so. 5. The lower income tax authorities have erred in (a) making transfer pricing adjustment of Rs. 4,82,08,643 (Software Development Segment) and Rs. 36,66,083 (Interest on delayed receivables); (b) not appreciating that there is no amendment to the definition of "income" and charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; and (c) passing the orders without considering all the submissions and/or without appreciating properly the facts and circumstances of the case and the law applicable. (d) in not restricting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing companies as comparable even though the same did not fulfil one or more filters applied by the learned TPO or were not comparable to the Appellant on FAR analysis: (a) Inteq Software Private Limited (b) Infobeans Technologies Limited (c) CG-VAK Software and Export Limited 13. The lower income tax authorities have erred in law and in facts, in rejecting I2T2 India Limited forming part of Appellant's transfer pricing study, without providing any cogent reasons for the same. 14. The lower income tax authorities erred in facts and in law: (a) rejecting the filter of companies owning significant intellectual property, brand or developing proprietary products, as applied by the Appellant. (b) by not excluding the following comparable companies even though they fail the RPT filter of 15% of operating sales: - Persistent Systems Ltd - Aspire Systems (India) Pvt Ltd - Inteq Software Private Limited - Thirdware Solutions Ltd. - Rheal Software Private Limited - Larsen & Turbo Infotech Ltd 15. The lower income tax authorities erred in excluding the following companies, even though they are functionally comparable to the appellant: (a) Mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tstanding receivables were a consequence to the principal international transaction and could not be considered as a separate international transaction. (c) the Appellant follows the same policy of not charging any interest on trade receivables from unrelated parties. 21. Assuming without admitting that interest on delayed receivables is added, the lower authorities have erred in: (a) adopting CUP method as the most appropriate method without justifying, how the same was the most appropriate method in the facts and circumstance of the case. (b) adopting the LIBOR rate for an average maturity period of three years and up to five years which is not applicable to the facts of the case. 22. Without prejudice, no separate adjustment for interest on delayed receivables is required when (i) working capital adjustment is given; or (ii) where the margins of the international transaction is held to be at arms-length price." 3. The assessee is engaged in the business of providing software development, testing, infrastructure, application development services etc. to MFX US (AE). Further the assessee also provided IT support services in the nature of data migration from one so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,797 Total expenses 20,16,81,106 Total Operating Profit 49,54,497 OP/CO 2.46% 6. Further, out of the 10 comparable companies chosen by the assessee the TPO rejected 7 and applied new filter to choose fresh set of comparable companies as listed below and arrived at the revised operating margin:- Sl.No. Comparable companies OP/TC 3 yr Weighted Unadjusted Average (OP/TC) 31-Mar-16 31-Mar-15 31-Mar-14 1 KALS Information Systems Limited 3.97% 5.77% 16.94% 8.60% 2 E-Zest Solutions Ltd 7.65% 11.80% 14.88% 10.87% 3 Rheal Software Pvt. Ltd 3.20% 2.76% 36.64% 14.50% 4 Sybrant Technologies Pvt Ltd 16.10% 13.88% 15.26% 14.74% 5 C G- V A K Software & Exports Ltd. 19.60% 19.87% 13.81% 18.50% 6 R S Software (India) Ltd. -2.09% 32.75% 24.14% 20.87% 7 Larsen & Tourbo Infotech Ltd. 26.29% 24.22% 23.54% 24.83% 8 Nihilent Ltd 15.94% 29.19% 35.72% 26.36% 9 Inteq Software Pvt. Ltd 7.53% 32.14% 45.00% 28.20% 10 Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 11 Infobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 12 Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 13 Infosys Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... press this ground and proceeded to argue on merits relating to the TP adjustment contended through the concise grounds reproduced above. We therefore dismiss ground no. 4.2 as not pressed and proceed to adjudicate only the issue raised in the concise grounds in the following paras. Out of the concise grounds the ld AR argued only the following during the course of hearing and therefore the rest of the grounds are dismissed as not pressed (i) Computing the entity level margin ignoring the segmental margin computed by the assessee - Ground 7 (ii) Exclusion of companies based on turnover filter - Ground 10 (iii) Exclusion of margins of R S Software Ltd for FY 2014-15 & 2013-14 based on turnover filter - Ground 11 (iv) Exclusion of CG-VAK Software and Export Limited - Ground 12(c) & additional ground (v) Exclusion of I2T2 India Limited - Ground 13 (vi) Exclusion of Rheal Software Private Limited - Ground 14(b) 11. Before us the learned A.R. submitted that out of the 16 final list of comparable companies, 7 comparable companies, namely, L & T Infotech Ltd., Nihilent Ltd., Persistent Systems Ltd., Thirdware Solution Ltd., Infosys Ltd., Aspire Systems (India) Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: 10B . Determination of arm's length price under section 92C.-(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d)........ (e)transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e)(iii) of the Rules read with sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 10. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 13. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.8.7 raised by the Assessee whose turnover in the current year is more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after 1/04/2014 i.e. on and after PY 2014-15. The amended rules allow for introduction of a "range concept" for determination of ALP and "use of multiple year data" for undertaking comparability analysis in transfer pricing cases. The use of range concept being a statistical tool enhances the reliability of analysis undertaken for computation of ALP. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices. Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis. The Amended Income tax Rules, 1962 ('Rules') via Notification 83 of 2015 which is the 16th amendment to the originally drafted Indian Tax Rules, 1962, are applicable for transactions undertaken on or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the said financial year undertaken the same or similar comparable uncontrolled transaction then,- (i) the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately preceding the current year; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1) : Provided also that where the use of data relating to the current year in terms of the proviso to sub-rule (5) of rule 10B establishes that,- (i) the enterprise has not undertaken same or similar uncontrolled transaction during the current yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the same MAM has to be used to arrive at the price of the comparable uncontrolled transaction undertaken by R.S.Software (India) Ltd., in the financial years 2013-14 and 2014-15. As per clause (ii) of 1st proviso to Sec.10CA(2), weighted average of the prices of the 3 financial years have to be taken in accordance with Rule 10CA(3) and the weighted average so taken shall be included data set instead of the price arrived at by using current year data alone. In the present case, if one sees the chart of comparable companies of TPO given in paragraph-4 of this order, the profit margins of the Company R.S.Software (India) Ltd., for the three financial years were 2013- 14 to 2015-16 were 24.14%, 32.75% and -2.09% respectively and the weighted average margin of 24.83% has been considered by the TPO. 18. The second proviso to Sec.10CA(2) of the Rules provides for a situation where R.S.Software (India) Ltd., has undertaken comparable uncontrolled transaction only in Financial year 2014- 15 & 2015-16, then the weighted average of the two financial year 2014-15 and 2015-16 has to be computed in the manner laid down in Rule 10CA(3) of the Rules and the margin so arrived at has to be incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (iv) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparison of an uncontrolled transaction to an international transaction can be done only if differences, if any, between the transactions that are compared or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effects of such differences. A reading of Proviso to Rule 10B(4) would show that use of data relating to a period of two years prior to the current year may also be considered but with a rider that "if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared". If by application of any filter an enterprise undertaking uncontrolled transaction similar to an international transaction is regarded as not being comparable in the earlier two years immediately preceding the current year and thereby attracting the provisions of Rule 10B(2) or 10B(3) then the data for those years will not have any influence on the determination of transfer prices in relation to the transactions being compared f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 15%. We hold and direct accordingly. Accordingly, respectfully following the decision of the coordinate bench of the Tribunal we hold that Rheal Software Pvt. Ltd. cannot be excluded on the basis of RPT filter". 20. In view of the above we remit the issue back to the TPO with a direction to verify the RPT transaction of Rheal Software Pvt Ltd and decide the comparability of the company considering the decision of the coordinate bench of the Tribunal in the case of Barracuda Networks (supra). It is ordered accordingly. 21. With regard to the exclusion of CG VAK Software and Exports Ltd., the learned A.R. submitted that the company is not functionally comparable being a product company and is engaged in diversified activities. The ld AR also submitted that the company is into significant research and development activities and is an outsource software company. The learned A.R. in this regard drew our attention to the annual report of the company in page 2196 & 2197 of paper book. The ld AR relied on the decision of the coordinate bench of the Tribunal in the case of 3DPLM vs. DICT in [2014] 42 taxmann.com 333 (Bangalore-Trib). 22. The learned D.R. raised objection to the exclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty Transaction (RPT) in the annual report cannot be a reason for exclusion. It is also noticed that in the current year, the turnover of the company is less than Rs.1crore and fails the lower turnover filter. We therefore uphold the exclusion of I2T2. 27. Through ground No.7 of concise grounds, the assessee contended the computation of net margin at the entity level by the TPO. The assessee is rendering services to international AE, Indian AE and non-AE and has drawn financials segment wise which is certified by a Chartered Accountant (page 961 to 963 of paper book). For the purpose of transfer pricing, the assessee had considered the segmental financials relating to transactions with its AE. The TPO rejected the segmental financials of the assessee and worked out the entity level margins of the assessee while arriving at the TP adjustment. The TPO rejected the segmental financials on the by stating that "The taxpayer has contested the above margin computation of the TPO and has produced a segmental profitability statement certified by an Independent Chartered Accountant where a margin of 25.62% and 9.84% have been shown in the AE and non-AE segment respectively. The taxpayer h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ials for the reason that the cost allocated are not proportionate to the revenue reported in each of the segments. It is submitted by the ld.AR that though the assessee has allocated a sum of Rs.3,17,87,219 to the Indian AE segment, there was no billing done as the contract did not go through with the Indian AE. We notice that the coordinate Bench of the Tribunal in the case of Cisco Systems India Pvt. Ltd. v. DCIT, (2014) 50 taxmann.com 280 (Bang.Trib.) has considered similar issue and held that- "9. At the time of hearing, it was brought to our notice that in assessee's own case for the A.Y. 2008-09 in ITA No.1510/Bang/2012, by order dated 31.10.2013, has upheld the use of headcount method followed by the assessee as appropriate method for allocation of common expenses between its various business units. The following were the relevant observations of the Tribunal:- "6. Having heard both the parties and having considered the rival contentions and also the material on record, we find that the dispute revolves around the allocation of indirect and common expenses relating to various units and the expenditure allocated to STPI unit, income from which is eligible for deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that where alternative methods of apportioning of expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness and if such is the endeavour, it can hardly be said that there is an attempt to distort the profits. Thus it can be seen that where two basis of apportionment are available, following one of the basis consistently is to be accepted. As the claim of deduction u/s 10A during the relevant assessment year is the 9th year in which the assessee is claiming the deduction u/s 10A and the revenue has accepted the method of allocation of expenses in all the earlier assessment years, we are of the opinion that the same method should be adopted for the relevant assessment year also. However, with regard to the discrepancy pointed out by the AO to the effect that there were more employees in the STPI unit while only 27 crores was allocated towards such unit, whereas there were less employees in SEZ unit but more than 53 crores was allocated to such division, we are of the opinion that this needs verification by the AO. The assessee has given detailed explanation as to how it is allocating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... economic factors. The ld. AR also submitted that the ALP determination for the said receivable is subsumed within the ALP determination of the software development services and therefore the TPO should not have considered the interest on receivables as a separate international transaction. The ld. AR further submitted that the assessee is not charging any interest on the receivable from non-AE transactions and the profit margin earned from AE transactions is higher than the profit from non-AE transactions, thereby no adjustment could be done on account of notional interest on the receivable from AE. The ld. AR drew our attention that the actual debtors turnover period for the assessee is 131 days (page 1284 of PB) as against 335 days considered by the TPO. Without prejudice, the ld.AR also drew our attention to the fact that the average period of realisation of third party debtors is 81 days (page 1371, 1372 of PB) and prayed that the period of 90 days credit shall be considered while computing the notional interest on receivables. 34. We notice that the coordinate bench of the Tribunal in the case of Barracuda (supra) has considered the issue of charging notional interest on rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. In the case of BT e Serv (TS-849-ITAT-2017(DEL)-TP) the ITAT Delhi Bench held that undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an "international transaction". The natural corollary would be of imputing interest on such "capital financing" if same is not charged at arm's length. The ITAT concluded that if outstanding receivables are within the terms of agreement, then it may be argued that interest on such outstanding is already covered in the sale price of the goods. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest amount on non-realization of invoices up to 150 days was factored in the price charged for the services rendered. Annexure-1 to the TPO's order gives details of the instances of late realization or non-realization of advances up to the year ending. First three and a half pages of this Annexure indicate number of days for which there was delayed realization. Such delay ranges from 175 days to 217 days. The remaining pages disclose no realization of invoices up to 31st March, 2010. When we consider the dates of invoices in the remaining pages, it is manifested that in certain cases these invoices have been raised on 31st August, 30th or September or 31st October, 2009. In all such cases, the period of 150 days already stood expired as on 31st March, 2010 and the assessee ought to have charged interest on the delay in realizing such invoices along with the first three and a half pages in which there is an absolute and identified delay in realization of invoices beyond the stipulated period. When the interest for realization of trade advances up to 150 days is part and parcel of the price charged from the AE, then the delay up to this extent cannot give rise to a separate i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (c) of Explanation to section 92B. 13.13 In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in the case of Cotton Naturals (I) (P.) Ltd. (supra), in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of addition on account of transfer pricing adjustment towards interest not realized from its AE on the debts arising during the course of business in line with our above observations." 44. We are of the view that the issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down in the decision referred to in the earlier paragraph, after affording Assessee opportunity of being heard. As held in the aforesaid decision the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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