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TMI Blog2024 (1) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... under this segment should be computed by considering the entire revenue of INR 19,16,24,516. This computation is available in the order of the TPO and the margin works out to 35.71%. The median margin of the comparables which has been accepted by the TPO works out to 6.55% as available on page number 6 of the order of the TPO. Since the margin of the assessee is higher, the entire transfer pricing addition of INR 13,99,71,558 made by the TPO on account of provision of warranty services, is deleted. Provision of software development services - Comparable selection - assessee is providing software development services including identifying the bugs and debugging the software while the AEs are responsible for all other functions - HELD THAT:- Exclusion of companies as functionally dissimilar with that of assessee.-[ Deselect E-Infochip Limited, Dun Bradstreet Technologies Data Services Pvt. Ltd., Interglobe Technology Quotient Pvt. Ltd., Cybage Software Private Limited,Acewin Agriteck Ltd., Cadsys (India) Ltd., Cygnet Infotech Pvt. Ltd., InfoBeans Technologies Limited, Nihilent Analytics Ltd. and Nihilent Ltd. ] Arguments of the Ld. AR regarding the inclusion of 8 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed. It should be dependent upon (i) the terms and conditions of agreement with the AE and/or (ii) the terms and conditions of comparable business transactions with the Non-AEs. On being asked, the Ld. AR submitted that the assessee is a captive service provider and there are no comparable transactions with the Non-AEs. Thus, we are left with no choice but to remand this issue to the file of the TPO to examine if there are any agreements with the AE and what is the grace period in those agreements. If there are no agreements with the AEs, the TPO should consider the market practice in the relevant sector and then grant the grace period. We, however, clarify that in business world there is always a grace period and therefore non-granting of grace period is ignoring the business realities. Rate of interest we have considered the arguments of both the sides. Following various judicial precedents, we hold that the rate of interest of Libor + 200 bps should be applied. - Shri Amit Shukla, Judicial Member And Shri Gagan Goyal, Accountant Member For the Assessee : Shri Ajit Kumar Jain Shri Siddhesh Chaugule For the Revenue : Shri Manoj Kumar ORDER PER AMIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s liable to be quashed. 2. On the facts and in the circumstances of the case and in law, the Ld. Panel erred in upholding the action of the Ld. AO / Ld. TPO in carrying transfer pricing adjustments to the below international transactions: a. Provision of warranty services - INR 13,99,71,558; b. Provision of software development services- lNR 6,61,49, 166; c. Notional interest towards outstanding receivables from AEs - INR 2,04,33, 160 3. On the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Ld. Panel erred in: a. rejecting the transfer pricing documentation which was maintained in good faith and with due diligence by the Appellant; and b. rejecting the search process followed by the Appellant and carrying out fresh comparability analysis for determining the arm's length price for the international transaction pertaining to provision of software development services. With respect to provision of warranty services 4. On the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO / Ld. Panel has erred in: a. rejecting the profit margin computation of warranty segment of the Appellant maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in: a. considering deferred receivables as separate international transaction for arriving at an arm's length price; b. treating outstanding receivables from AEs as deferred when the realization of proceeds was done within 30 days; and c. not appreciating the fact that the working capital adjustment takes into account the impact of deferred receivables, if any, on the profitability of the international transaction pertaining to provision of software development service. 12. Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Ld. Panel has erred in: a. levying interest by adopting LIBOR + 400 basis points which is arbitrary in nature; and b. computing the interest for the entire year instead for the period for which the debt was outstanding. 13. On the facts and circumstances of the case and in law, the Ld. AO/ Ld. Panel erred in not granting the deduction for health and education cess amounting to INR 26,84,419 paid by the Appellant, for which additional claim was made by the Appellant during the course of assessment proceedings. 14. On the facts and in the circumstances of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te method to benchmark the international transaction. The assessee benchmarked the margin earned by it with the margins of the comparable companies selected based on a methodological and meticulous search strategy. 8. Before us the Ld. Counsel, Shri Ajit Kumar Jain, referring to page number 295 of the paper book, pointed out that the assessee has a policy of receiving warranty income of 5 years in advance. Further referring to page number 271 of the paper book he submitted that for AY 2017-18, the assessee had received warranty income of INR 1,04,81,976 from the AE. Further, referring to page number 273 of the paper book he mentioned that an advance of INR 19,02,06,055 was received from the AEs. The said advance was booked in the Contract Deferred Revenue account in the balance sheet, which is demonstrated at page number 76 of the paper book. Further elaborating the contract deferred revenue, Mr. Jain referred to page number 295 of the paper book which is as under: 9. With the help of above table, it was explained by Mr. Jain that the assessee accrued warranty income of INR 18,11,42,540 for the year under consideration in the profit and loss account and the same is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. This approach has been consistently followed by the assessee in the earlier years, has been accepted by the tax authorities and is also in line with the matching principle as per Generally Accepted Accounting Principles (GAAPs) and revenue recognition guidelines (Accounting Standard - 9). 13. Mr. Jain further argued that the assessee had offered total revenue of INR 19,16,24,516 to tax. The same was demonstrated before us through the relevant pages from the paper book, viz., statement of Profit and Loss Account at page number 69 of paper book, segmental profitability statements in the Financial Statements at page number 94 of paper book and the Income Tax Return copy at page number 9 of the paper book. 14. In response to the above arguments of the Ld. AR, the CIT DR submitted that the Ld. TPO has correctly determined the arm s length price of the international transaction of provision of warranty services. Ld. DR vehemently submitted that none of the documents demonstrates that the warranty receipts pertain to different financial years. Ld. AR submitted that the adjustment made by the TPO be confirmed. 15. In rebuttal, Ld. AR submitted that it receives warranty income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Year-3) 12 Months FY 2019-20 (Year-4) 3 Months Since the services will be provided in Year-1, Year-2, Year-3 and Year-4, the expenses and revenue pertaining to this particular contract must be booked in each year. Since, provision of warranty services is an ongoing business, any particular financial year will be Year-1 for some contracts, while it could be Year-2/Year-3/Year-4 for various other contracts. Therefore, the revenue to be recognized in any particular financial year will be sum of; (a) the revenue received during that financial year and pertaining to the same financial year; and (b) the revenue received during earlier financial years but pertaining to this particular financial year. 18. We have examined the accounting policy of the assessee. The assessee has followed a scientific method to book the revenue which is demonstrated at page number 295 of the paper book. The assessee is recognizing the revenue in two parts as under: (a) Warranty service income recognized in the profit and loss account out of the contract deferred revenue account amounting to INR 18,11,42,54 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of the aforesaid profitability as provided at page number 430 of the paper book is reproduced below: 24. The assessee has selected 23 comparable companies for benchmarking the aforesaid international transaction in its T.P. Study Report. The list of companies as available at page number 461 of the paper book is as under: 25. The assessee submitted that from the above comparable list, the TPO has rejected following 15 companies on basis of Functional dissimilarity and Failure of turnover filter: Sr.No. Name of Comparable Rejection Reasons 1 Akshay Software Technologies Ltd Functionally dissimilar 2 Kireeti Soft Technologies Ltd Functionally dissimilar 3 Evoke Technologies Pvt Ltd Functionally dissimilar 4 Sagarsoft (India) Ltd. Functionally dissimilar 5 Sasken Technologies Ltd. (Seg) Functionally dissimilar 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Functionally comparable 11 Saven technologies Accepted by TPO in AY 2016-17 12 Dynamic Digital Technology Pvt. Ltd. Accepted by TPO in AY 2016-17 13 Tavant Technologies India Pvt. Ltd. Accepted by TPO in AY 2016-17 14 Sonata Software Accepted by TPO in AY 2016-17 27. Based on the above, the TPO used 22 companies as comparables and determined the Arm s Length range of 19.53% to 30.22% with a median of 23.99%. Accordingly, the TPO made an adjustment of INR 6,61,49,166. The assessee approached the DRP which confirmed the adjustment proposed by the Ld. TPO. 28. Before us the assessee furnished a chart and sought exclusion of 14 companies and inclusion of 8 companies. The chart furnished by the assessee contains the arguments on the aforesaid inclusion and exclusion of comparable companies and also case laws relied upon for the same. The Ld. AR submitted that out of 14 companies, there are 4 companies which fails RPT filter of 25% and therefore the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded in the final set of comparables for determination of the ALP. 29.3 Interglobe Technology Quotient Pvt. Ltd.: The assessee has argued that company is not functionally comparable considering it is engaged in data processing export services travel technologies, and other support services. Further as per website, the company also has its business unit Interglobe Technology Quotient which is an official distributor of Travelport in 6 different markets. Further the assessee submitted that the employee cost to total sales ratio of this company is less than 25% which shows that the business mode of this company is entirely different. Considering the aforesaid submission, the assessee prays that Interglobe Technology Quotient Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP. 29.4 Cybage Software Private Limited: The assessee has argued that this company is not functionally comparable considering it is a technology consulting organization specializing in outsourced product engineering services. More specifically the company performs data analytics, marketing and advertising activities, etc. Further as per the website, Cybage Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... digital media Project management services and balancing Cognitive strength of human mind and computing power of Machine to its clients. Further the company also has Significant Job work charges indicating outsourcing of work. Considering the aforesaid submission, the assessee prays that Cadsys India Ltd. ought to be excluded in the final set of comparables for determination of the ALP. 29.9 Cygnet Infotech Pvt. Ltd.: The assessee has submitted that this Company is not functionally comparable as it is engaged in the business of providing enterprise solutions, Application, Content Management services and IT enabled services. However no separate segmentare reported by the Company. The list of services provided by Cygnet pertains to blockchain, Artificial Intelligence, Robotic process Automation, Cloud, Internet of Things, Tax Technology, Augmented / Virtual Reality, Digital Transformation, Content Management, Microsoft, etc. Considering the aforesaid submission, the assessee prays that Cygnet Infotech Pvt. Ltd.ought to be excluded in the final set of comparables for determination of the ALP. 29.10 InfoBeans Technologies Limited (Formerly Known as InfoBeans Systems India Privat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally comparable as it is engaged in providing solutions such as web application development, telecom services, porting applications to its clients. Considering the aforesaid submission, the Assessee prays that Dynamic Digital Technology Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP. 29.14 Saven Technologies Ltd.: The assessee has argued that Saven Technologies Ltd fails RPT Filter (i.e. RPT Sales to Total Sales amounts to 99.66%, 100%, 100% for FY 2016-17, FY 2015-16 and FY 2014-15 respectively. Further the company is not functionally comparable as it is engaged in providing end to end services such as development of new software, web solutions, enterprise application services, re-engineering and enhancements, application integration and maintenance. The Assessee also submitted that Saven Technologies Ltd. Also holds significant Intangible Assets which is not similar to the software development services provided by the Assessee on Contract basis. Considering the aforesaid submission, the Assessee prays that Saven Technologies Limited ought to be excluded in the final set of comparables for determination of the ALP. 30. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (Software Service Segment) is engaged in Software development services; The Revenue from operation has Sale of software service as major item. The Company has reported Segment reporting between 'Software service' and ' Software Product' and the relevant Segment 'Software Service' Selected by the Assessee. As per the website the company is engaged in software development for various industries including semiconductors, consumer electronics, Enterprise devices, satcom, telecom, etc. Hence, Sasken Technologies Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. Considering the aforesaid submission, the Assessee prays that Sasken Technologies Ltd. ought to be included in the final set of comparables for determination of the ALP. 30.4 Sagarsoft (India) Ltd.: The Assessee sought inclusion of the company Sagarsoft (India) Ltd. as the Company passes all the quantitative filters adopted by the Assessee as well as the TPO. Further Sagarsoft (India) Ltd. is engaged in Software development services, as per the Company overview Sagarsoft is engaged in business of providing IT services, consulting, techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further as per website, the company is engaged in providing customized software solutions and offshore software development activities. Hence, Kireeti Soft Technologies Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. In addition to above, the aforesaid comparable company is accepted by the TPO as a comparable company in AY 2016-17 as a valid comparable company. Considering the aforesaid submission, the Assessee prays that Kireeti Soft Technologies Ltd ought to be included in the final set of comparables for determination of the ALP. 30.7 Maveric Systems Limited: The Assessee sought inclusion of the company Maveric Systems Limited as the Company passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. As per the Annual Report, Maveric Systems Ltd. is engaged in Software development services and earns Revenue from Sale of Services. The company is engaged in 'Computer programming activities and software testing activites'. As per the segmental analysis and nature of operations mentioned, the company is engaged in software testing activities. Hence, Maveric Systems Ltd. is functiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have examined the transfer pricing study report at page number 486-488. The assessee while selecting the comparables had applied the RPT of more than 25% filter. The TPO at page number 14 of his order has also applied the filter of RPT more than 25%. Despite application of this filter, the TPO has selected the companies having RPT 25% which is against the well settled position. We, therefore, hold that companies (1) Sonata Software Limited, (2) Tavant Technologies Limited, (3) Dynamic Digital Technology Pvt. Ltd. and (4) Saven Technologies be excluded from the comparables set. The TPO is however direct to verify the numbers of RPT submitted by the assessee and if the RPT is more than 25% to exclude these 4 companies. We hold accordingly. 33. Now we turn to the other 10 companies argued by the Ld. AR for exclusion. Each company is discussed herein below: 33.1 We noticed that E-Infochip Limited is not functionally comparable company since it is engaged in embedded research and development activity, it holds Inventory and there are no separate segments available in the annual report. 33.2 Dun Bradstreet Technologies Data Services Pvt. Ltd. is not functionally comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. 34. We have considered the functional profile of the assessee and the functional profile of 10 companies as discussed above. We find that all these companies are not comparable to the assessee for the reasons recorded above. We direct the TPO to exclude all the 10 companies mentioned above. We hold accordingly. 35. Now we turn to the other arguments of the Ld. AR regarding the inclusion of 8 companies. We notice that the primary argument of the Ld. AR is that there are 7 companies which have been accepted as a good comparable by the TPO either in AY 2016-17 being the earlier assessment year or AY 2018-19 being the subsequent assessment year. Further, on page number 19-21 of his order, the TPO has given only a general comment against the name of each company Based on the perusal of the business profile, the TPO is of the view that the company is functionally dissimilar. Hence rejected. It has been argued before us that the TPO or DRP have not pointed out any specific reason for rejection of these 7 companies. Ld. AR has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of receivables from AE as indirect advance which benefitted the AE. The TPO in his order has observed that the Assessee has not submitted the required details in relation with the outstanding receivables. The TPO imputed interest on the entire outstanding receivables of INR 55,58,90,618 considering the interest rate of respective LIBOR rates plus 400 bps and proposed an adjustment of INR 2,04,33,160. 39. Before us Ld. AR invited our attention to paper book page no. 632 to 634, whereby details of the outstanding receivables from the AEs were submitted on sample basis; such as invoice details (date of invoice, due date for payment), details of payment received, actual credit period granted by the Assessee to the AE, etc. Ld. AR submitted that the TPO ignored the above submission and proceeded to compute the interest on outstanding receivables for the entire year. 40. Ld. AR pleaded before us that the interest if any, on outstanding balances should be computed considering actual outstanding days of the receivable balance.Further, the Assessee prays that interest if any, is only to be charged on period exceeding 90 days (i.e. as per the credit period followed by the Varian Group) ..... 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