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TMI Blog2022 (9) TMI 1473X X X X Extracts X X X X X X X X Extracts X X X X ..... sions made above were neither considered by the TPO nor by the DRP. We hold and direct accordingly. Adding Notional interest on outstanding receivables - HELD THAT:- The fact remains that the transaction with Non-AE is non-realization of receivables beyond the credit period and not charging interest on such delayed receivables becomes a comparable uncontrolled transaction. Hon ble Delhi High Court in the case of MC. Kinley Knowledge Centre (I) Pvt. Ltd.[ 2021 (10) TMI 751 - DELHI HIGH COURT] took the view that wherever payments are received in advance that cannot be ignored. By the same analogy, the outstanding payable that was paid beyond the due date should also be considered when determining ALP of extended / delayed realization of outstanding receivable. Without going into the question whether the delay in realization of outstanding receivables would be an international transaction or not, on which there are conflicting decisions prior to amendment of section 92B of the Act, we are of the view that the calculation of ALP has to be remanded to the AO/TPO to compute ALP, after considering (i) outstanding payable to AE which was paid belated by the assessee and (ii) delay in reali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1961 (hereinafter called 'the Act ') in relation to Assessment Year 2014-15. 2. Ground 1 to 16 raised by the assessee are in relation to determination of Arm's Length Price (ALP) in respect of an international transaction of rendering of Software Development Services (SWD services) by the assessee to its Associated Enterprise (AE). 3. The assessee is a company registered under the Companies Act 1956, and is engaged in the business of rendering software development and related services to its AEs. Symphony Teleca Corp. USA. is the ultimate holding company of the assessee. 4. During the previous year relevant to the assessment year 2014-15, one of the international transactions that took place between the assessee and its AEs was the provision of SWD services by the assessee at a price of Rs.462, 11,32,409/-, for which a TP adjustment was made by the TPO to an extent of Rs.44,17,80,037/-. There is no dispute that the aforesaid transaction was an international transaction and the income from the same had to be determined having regard to ALP in terms of section 92 of the Act. Initially, a draft assessment order dated 28.12.2017 came to be passed by the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions under section 144C of the Act before the Disputes Resolution Panel (DRP) against the Draft Order of Assessment wherein the AO added the shortfall in ALP as suggested by the TPO. The DRP directed the exclusion of Cigniti Technologies Ltd. and SQS India BPSI Ltd. All other contentions of the Assessee seeking inclusion and exclusion of companies carne to be rejected. 9. The AO passed the impugned final assessment order in which the TP adjustment made in respect of the SWD services segment was reworked to Rs. 53,30,88,819/-. Aggrieved by the same, the assessee has filed the present appeal raising grounds 1 to 16 before the Tribunal. 10. The grounds in the appeal which are being pressed are as follows: i. The lower authorities erred in not rejecting Infosys Ltd., Persistent Systems Ltd., Larsen and Toubro Infotech Ltd., and Thirdware Solutions Ltd. (Ground No.14) ii. The lower authorities erred in rejecting Akshay Software Technologies Ltd., Maveric Systems Ltd., and I2T2 India Ltd. (Ground No. 16) 11. In so far as ground No.14 raised by the assessee is concerned, the assessee is seeking the exclusion of Infosys Ltd., Persistent Systems Ltd., Larsen and Toubro Infotech Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are divided into service cluster, industrial cluster and telecom business, and the company has unallocable expenses to the tune of Rs. 2,05,80,17,445/- and therefore it is not possible to ascertain the segmental profit of the relevant business segment. The company owns proprietary software products which are developed in-house. Accordingly, the Assessee submits that L&T is a product company having significant intangibles and is thus not comparable to captive software development service providers such as the Assessee. The annual report of the company also discloses a significant amount of capital work-in-progress which indicates that the company is into development of products. 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, 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. Further, during the year under consideration, the product engineering services business of the company was transferred to its subsidiary and its wholly owned subsidiary G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Soft India Pvt. Ltd. v. DCIT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15) and in EMC Software and Services India Pvt. Ltd. v. JCIT [2020] 115 taxmann.com 293 (Bangalore - Trib) wherein in the cases of assessees placed similar to the Assessee, the company was directed to be excluded. Consequently, it is submitted that Persistent is incomparable to the Assessee and ought to be excluded from the list of comparables for the above reasons. (d) Thirdware Solutions Ltd. ("Thirdware"): It was submitted that this company 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. The company also purchased stock-in-trade during the year. The company 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. Due to this, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are India P Ltd (ITA No.1054/Bang/2011) was followed and it was held that Mis Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008- 09, we direct exclusion of Mis Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded Mis Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Lid (supra), where in it was held that Mis Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008- 09, we direct exclusion of Mis Persistent Systems Ltd. 8. We also notice that in A Y 2008-09, the co-ordinate bench has excluded M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elected by the assessee and came to be rejected by the TPO for the reason that the company is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services. The exclusion of this company came to be upheld by the DRP on the basis that the company incurred expenditure to the tune of 85% on foreign branches, which suggested that the business model adopted by the company was different from that of the assessee. (ii) In this regard, it was submitted that firstly, perusal of the functions of the company listed in its annual report shows that the company is functionally similar to the Assessee. The website of the company states that the company is engaged in rendering IT services, which are in the nature of SWD and caters to the needs of corporate bodies, banks and financial institutions. Further, it was submitted that the income from commission and sale of software licenses constitutes a meagre 1.45% of the total revenue, which fact is noted by the DRP, and therefore the same would not have any impact on the profitability of the company. It was submitted that the action of the DRP in upholding the exclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the schedule to the revenue from operation reflected in the statement of profit and loss makes it clear that the company is rendering SWD services and there is no other service rendered by the Company. Further, it was submitted that in terms of Accounting Standard - 18 on "Related Party Disclosures" issued by the Institute of Chartered Accountants of India, related party transactions are to be disclosed. In case there is a non-disclosure of such related party transactions by the company, there would have been a note/ qualification in report issued by the statutory auditors inviting attention to such non-disclosure. (iii) However, as per the annual report of I2T2 Limited, there is no adverse note/ qualification made by the statutory auditors which implies that the adequately disclosure was made. Therefore, by implication, it can be concluded that I2T2 does not have any related party transactions. Therefore this company is comparable and ought to be included in the final list of comparables. (iv) Reliance was placed on the decisions of this Hon'ble Tribunal in the case of LG Soft India Pvt. Ltd. v. DCII (Order dated 28.05.2019 passed by this Hon'ble Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings at a future point in time if required. The prayer so sought is accepted. The TPOIAO is directed to compute ALP of the SWD segment after affording assessee opportunity of being heard and on the lines indicated in this order. 16. Ground Nos. 17 to 24 and additional ground No. 20A raised by the assessee are in relation to adding Notional interest on outstanding receivables. The AO/TPO called upon the assessee to show cause as to why notional interest on delayed receivables from the AE be not computed and addition made to the total income. In reply, the assessee submitted that: • It has not charged interest on delayed receipt from third party customers, and the same ought to considered as comparable, whereby the TPO ought not to have computed interest on delayed receipt of trade receivables from the AEs. • Trade payables for capital goods purchased by the Assessee ought to have been considered for computing the net receivables from the AEs as the same was agreed between the parties to be set of with the trade receivables • A credit period of 90 days was provided by the Assessee to the AEs • Details of invoices raised during FY 2013-14, subsequent r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs, the impact of which the lower authorities failed to consider. It was submitted that the interest on delayed receivables, if any, ought to be computed after taking into consideration the outstanding payables. Reliance in this regard is placed on the decision of the Hon'ble High Court of Delhi in the case of Pt.Tf v. McKinsey Knowledge Centre India Pvt. Ltd. (Order dated 12.10.2021 passed in ITA No. 146/2020). Without prejudice and in any event, it was submitted that the interest if at all, ought to be computed after giving credit of 90 as directed by the DRP, and the applicable interest ought to be adopted at LIBOR+2%. Reliance in this regard is placed on the decision in Applied Materials India Pvt. Ltd. v. ITO (Order dated 08.06.2022 passed by this Hon'ble Tribunal m IT(TP)A No. 3403/Bang/2018). The learned DR relied on the order of the DRP. 19. We have considered the rival submissions. It is seen that the assessee in a letter dated 24.10.2017 addressed to the TPO submitted that the assessee had to make payments to its AE for use of software license to the tune of Rs.194,38,64,718/- and for this outstanding payable to its AE, the AE did not charge any interest. In fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard was placed on the following decisions: - PCIT v. Mphasis Ltd. (reported in (2021) 128 taxmann.com l38 (Kar.)); - CIT v. BSES Yamuna Powers Ltd. (reported III (2013) 40 taxmann.com 108 (Delhi)); and - OnMobile Global Limited v. ACIT (reported in (2014) 45 taxmann.com 346 (Bangalore-Trib), which was affirmed by the Hon'ble High Court in /2021J 129 taxmann.com 254 (Karnataka). The learned counsel for Assessee according prayed that depreciation ought to be granted at 60%. The learned DR relied on the order of the DRP. 22. We have considered the rival submissions. We find that the issue raised in Ground No.25 is no longer res-integra and has been decided by the Hon'ble Karnataka High Court in the case of Mphasis Ltd., (supra) wherein the Hon'ble Karnataka High Court held that computer accessories such as switches and routers form part of peripherals of computer system and hence entitled to depreciation at 60%. Following the same, we allow ground No.25 raised by the assessee. 23. In Ground No. 26 the Assessee has projected grievance regarding Short credit of TDS. It was submitted that the AO erred in not granting appropriate credit of tax deducted at source am ..... X X X X Extracts X X X X X X X X Extracts X X X X
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