9911796707
TMI Blog2022 (11) TMI 1493X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. Perusal of the orders of the Hon ble ITAT for the preceding years (supra) shows that all these aspects have been duly considered in arriving at the conclusion for exclusion of this company from the final list of comparable companies. Department has not challenged the finding of the Hon ble Tribunal in any of the earlier years. In view of this, the objections raised by the Ld. CIT(DR) in our opinion are not sustainable. We, therefore, hold that this company is not a good comparable and accordingly direct the Ld. AO/TPO to exclude this company from the final set of comparable companies. Tata Elxsi Ltd. - As perusal of the order of the Hon ble Tribunal for AY 2014-15 shows that the Hon ble Tribunal has passed a well reasoned order holding this company to be functionally dissimilar and having ownership of internally generated intangibles and therefore, not a suitable comparable to that of the assessee company. Further, the finding of the Hon ble Tribunal in AY 2016-17 in favour of the assessee has not been controverted by the Ld. CIT-DR. Keeping in view order of the Hon ble Tribunal for preceding years (supra), we are of the considered view that this company is not functionall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company, there is no question of charging any interest or receivables. This issue has also been decided by Hon'ble Delhi High Court in case of Pr. CIT-1 vs. M/s. Bechtel India Pvt. Ltd. [ 2016 (9) TMI 196 - DELHI HIGH COURT] Thus we hold that the transfer pricing adjustment with respect to interest on delay in receipt of receivables from AEs ought to be deleted. Assessee appeal allowed. - SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND MS. ASTHA CHANDRA, JUDICIAL MEMBER For the Assessee : Shri Neeraj Jain, Advocate, Mr. Abhishek Aggarwal, CA, Ms. Shubhangi Jain, CA For the Department : Shri Mahesh Shah, CIT(DR) ORDER PER ASTHA CHANDRA, JM: The appeal of the assessee arises out of the order dated 30.12.2021 of the Ld. Addl./Joint/Dy./ACIT/ITO, National Faceless Assessment Centre, Delhi ( AO ) under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (the Act ) pertaining to the assessment year ( AY ) 2017-18. 2. The issue raised in the assessee s appeal is against the addition of Rs. 7,44,36,493/- on account of transfer pricing adjustment with respect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee on cost to cost basis. Accordingly, the subject transaction pertaining to reimbursement of expenses from the AE has been benchmarked using other method as prescribed under Rule 10AB of the Income Tax Rules, 1962 ( IT Rules ). 6. As can be seen from the table in para 4 above, the assesee has reported the international transactions of provision of software development services to its AEs totalling to Rs. 3,38,36,82,742 (Rs. 3,38,12,46,071 + Rs. 24,36,671) and deemed international transaction of provisions of software services to Oracle India Pvt. Ltd. amounting to Rs. 17,12,280/-. The assessee applied the TNMM as the most appropriate method to demonstrate that the international transaction of providing software development services was at ALP. As reported in the transfer pricing study the assessee used the Profit Level Indicator ( PLI ) of Operating Profit to Operating Cost ( OP/OC ). 6.1 The assessee, in its transfer pricing document, computed its segmental OP/OC margin earned from services rendered to the associated enterprises at 14.72%. For application of TNMM, the assessee considered the following 13 comparable companies in its transfer pricing document with their med ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84% 65th Percentile 21.02% Median 17.24% 7.1.1 In this way the Ld. TPO worked out median operating profit margin of the above 15 comparable companies at 17.24%. The Ld. TPO in his order under section 92CA(3) of the Act, observed that since margin of the assessee is not in range therefore median of the comparable is proposed as arms length margin. He proceeded to exclude certain items of income which were non operating in nature from operating revenues and certain items of expenses which were non operating from operating expenses and concluded that the ALP of the transaction related to rendering of software development services is proposed to be recast based on the above arms length mean margin. Accordingly, he computed the ALP of the international transaction related to software development services as below: Particulars Amount Operating Cost 3,37,46,17,168 Arm's length margin (%] 17.24% Arm s length margin [Rs.] ^ 58,17,84,000 Arm s length Price 3,95,64,01,168 Price charged by the assessee 3,87,12,43,299 Difference between ALP and Price charged by assessee 8,51,57,869 Total Transaction with AE related to software service 3,38,36,82,742 % of Transaction 87.41% Proportionate Adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oft India Ltd. 6.65% 4. Sankhya Infotech Ltd 7.58% 5. C G-V A K Software Exports Ltd. 14.18% 6. Mindtree Ltd. 15.84% 7. Xavient Software Solutions (India) Pvt. Ltd. 16.29% 8. Great Software Laboratory Pvt. Ltd. 17.24% 9. Puresoftware Pvt. Ltd. 21.02% 10. Nihilent Ltd. 22.03% 11. Cybage Software Pvt. Ltd. 67.91% 35th Percentile 7.58%' 65,h Percentile 17.24%- Appellant s Margin 14.72% 10.1 The Ld. CIT-DR on the other hand argued that the aforesaid 4 comparables are not covered by the decision of the Hon ble Tribunal in assessee s own case in the earlier years. He strongly relied on the orders of the Ld. TPO/Hon ble DRP and filed a detailed written submission dated 14.06.2022 in support of his arguments. 11. We have heard the rival submissions of the parties and perused the material available in the records. The assessee has prayed for the exclusion of the aforesaid 4 companies, namely i) Larsen Tourbro Infotech Ltd. ii) Tata Elxsi Ltd. iii) Infobeans Technologies Ltd. iv) Cybercom Datamatics Information Solution Ltd. which has strongly been opposed by the Ld. CITDR. We will now proceed to examine each of these 4 comparable companies in light of the submissions of the Ld. CIT-DR a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the intangibles held by the company as most of the intangibles were software. The Ld DRP also held that there is no revenue from the sale of the products. 6.2 Before us, the learned Counsel has sought to exclude the company on the ground of significant intangibles, expenses on cost of the bought-out items for resale, multiple segments and extraordinary event. 4.2 Hon'ble ITAT decided this issue against the revenue by holding as under: - 6.4 We have heard rival submission of the parties on the issue in dispute. The learned Counsel of the assessee submitted that the company owns significant intangibles (Rs. 75,04,78,329/-) in the form of the software and intangible assets under development. On perusal of fixed assets schedule, available on page S-1245 of the Annual Report (page 116 of PB-2), we find that at the beginning of the year the assessee owned intangible assets of Rs.153,42,45,196/- which included software of Rs.143,61,95.196 ( 93 % ), thus the intangible other then the software are insignificant. During the year, the company has sold/transferred the software and claimed depreciation, which resulted in net block of software at the end of the year to Rs.33,22,11,879 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng services (PES) which has been discontinued in this year. Regarding the PES, in Director s report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under: TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L T, L T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs.489.53 crs based on fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Annual Reports of Comparables wherein the segmental results have clearly been shown by the assessee company. It is also evident from the above page that the segmental results of these 2 segments have been computed by the assessee company clearly showing the profits earned from these segments. Therefore, there are no unallocable expenses in this year at all. In any case, since the assessee company is engaged in only 2 segments, both of which are in software development services, this issue will not have any impact in this year. 4.6 It is also seen from a perusal of the T'PSR filed by the assessee in Paper Book on merits, the assessee has given the details of assets employed by the assessee company on page no - 95 of this Paper Book. The total tangible assets used by the assessee company was Rs. 14,82,54,028/- which consists of computer and networking equipment of Rs. 10,37,69,470/-. The assessee has also used intangible assets to the tune of Rs. 2,43,97,704/-.Therefore, the assessee company has also used tangible as well as intangible assets in its business. Hence, the comparable company having tangible and intangible assets will not make a difference in the comparability. 4.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess, assets, liabilities, duties and obligations of GDA have been transferred to and vested in the Company with effect from April I, 2016. (ii) The company had acquired AugmentlQ Data Science P. Ltd. engaged in providing IP based big data and analytics solution. [Page 34/38-PB-AR| Amalgamation of AugmentlQ Data Sciences Private Limited ( Augment lQ*) with the Company: The Board of your Company and AugmentlQ in their meetings held on May 4, 2017 and May 3, 2017 respectively, approved the Scheme of Amalgamation ( Schemed) of AugmentlQ with the Company under section 230-232 of the Companies Act, 2013. The appointed date for the proposed Scheme is April 1,2017. LTI acquired AugmentlQ Data Sciences Private Limited ( Augment lQ), an innovative startup offering IP-based Big Data Analytics Solution that helps enterprises derive business benefits from Big Data in FY17 , In addition to acquisitions, the Company is also investing in partnering with startups to help enhance its digital offerings and in turn, give startups a platform and opportunity to scale-up. The Company is actively partnering with academic institutions such as Massachusetts Institute of Technology (MIT), Indian Institute of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. In view of the facts inter alia that L T is into various segments having no segmental financials, having huge brand value and intangibles is not a suitable comparable vis-a-vis taxpayer which was working as a captive entity and that contention raised by the Id. DR that under TNMM minor dissimilarities do not affect the overall comparability is not sustainable because though it is a taxpayer's own comparable but there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture cpia profit earned by the company front 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 vis-d-vis the taxpayer, hence ordered to be excluded. The decision of Hon ble ITAT rendered in appellant s case for AY 2016- 17 is sq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e earlier years viz a viz the relevant year under consideration, however perusal of the orders of the Hon ble Tribunal in preceding AYs shows that the Hon ble Tribunal has passed a well reasoned order directing exclusion of this company as a comparable company. Based on the submission of the Ld. CITDR, rejoinder of the assessee and the orders of the Hon ble Tribunal for preceding years (supra), we are of the considered view that this company is not functionally comparable to that of the assessee as there has been an extraordinary event that has occurred even during the relevant AY in the form of amalgamation of GDA Technologies Ltd. and AugmentIQ with the assessee company L T Infotech. Further, we tend to agree with the submission of the assessee that this company owns significant intangibles and no segmental data is available in respect of the revenue generated from provision of software development services. Perusal of the orders of the Hon ble ITAT for the preceding years (supra) shows that all these aspects have been duly considered by the Hon ble Bench in arriving at the conclusion for exclusion of this company from the final list of comparable companies. The Department has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development and testing services. The company also provide solutions and services for technologies such as Internet of things (IOT), big data analytics, cloud mobility, virtual reality and artificial intelligence. All these functions being different, from the assessee, the company should be excluded. The learned DRP, however held that under TNMM, the broad functional similarity is to be seen and thus upheld the action of the learned TPO. Before us the Learned Counsel of the assessee repeated the submissions made before the learned DRP and submitted that revenue from the operations include revenue from product design, graphics animation and gaming and system integration and support. According to him all these activities are functionally different from that of the assessee. He also submitted that the in Assessee s own case for assessment year 2007-08 and 2008-09, the Coordinate bench of the Tribunal in ITA No. 5809/Del/2011 and 122/De/2013 has directed to exclude the company from the set of the comparables. 8.2 We have heard the rival submission of the parties on the issue in dispute and perused the relevant material including annual report of the company. The details of revenue fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) PARTICULARS YEAR ENDED 31 MARCH, 2017 YEAR ENDED 31 MARCH, 2016 Revenue from operations Rendering of services 120,100.98 104,146.28 Sale of traded goods 3,202.99 3,374.33 Total 123,303.97 107,520.61 (i) Sale of traded goods include sales of computers, networking and storage systems. (ii) Rendering of services comprises: (a) Product design 114,413.53 99,734.06 (b) Graphics animation and gaming 2,231.60 1,083.02 (c) System integration and support 3,455.85 3,329.20 Total 120,100.98 104,146.28 5.3 The TPO has applied a filter that a comparable company must have income from rendering of services at least of 75% of the total revenues. Therefore, a comparable company can have 25% income from products, still, it would be a good comparable in view of the filter applied by the TPO. The assessee has not disputed the filter being applied by the TPO and there is no specific ground challenging the filters being applied by the TPO. 5.4 It is a fact that the assessee has earned income from sale of traded goods, graphics animation and gaming as well as system integration and support. However, the same is very minuscule to the extent of Rs 5687.45 which is 4.73 % of the total revenues which fallin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cteristics of the property transferred or services provided in the two transactions (controlled and uncontrolled) is to be taken into consideration. Also, analysis of functions performed, assets utilized and risks assumed by the transacting parties (alternatively termed as FAR analysis or functional analysis in the Transfer Pricing parlance) is another test of comparability, provided in clause (b) of rule 10B(2) of the Rules. Functional analysis, in fact, is the key for analyzing the nature of international transactions and to establish comparability of an uncontrolled and controlled transaction. The Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT 377 ITR 533, made a clear distinction between a BPO and KPO service provider and upheld them to be functionally dissimilar to each other, holding as under: 34. We have reservations as to the Tribunal s aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression BPO and KPO are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. Relying on the above decision in the case of Rampgreen, the co-ordinate bench of Delhi High Court in the case of Avaya India Pvt. Ltd. V. ACIT, (2019) 416 ITR 638 upheld exclusion of companies on account of difference in scale of operation and ownership of brand value. In a more recent decision dated 18.05.2020, the Hon ble High Court in the case of Pr. CIT vs. Open Solutions Software Services Pvt. Ltd. [ITA 201/2018], further clarified that even if a comparable passes the quantitative filters, it can be rejected as comparable on the basis of qualitative analysis: 34. In view of the above, it emerges that none of the comparables have been excluded on the ground of high turnover alone. The test functional similarity applied by the Tribunal is in consonance with the legal position discussed hereinabove. Therefore, we do not find merit in the contentions urged by the Revenue on this ground. Equally meritless is the contention of the Revenue regarding the bar to chal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt (Page 128 of Paper Book)]: Embedded Product Design The Embedded Product Design (EPD) division provides technology consulting, new product design, development, and testing services for the broadcast, consumer electronics, healthcare, telecom and transportation industries. Transportation We offer electronics, software development and system design services for the automotive, rail and aerospace industry. We leverage our cross-technology expertise in multimedia, imaging, connectivity technologies and wellestablished processes for automotive software development, to support both car manufacturers and system suppliers in product development and engineering. Broadcast and Communications We address the complete product development lifecycle from R D, new product development and testing to maintenance engineering for Broadcast, Consumer Electronics and Communications. Industrial Design and Visualization Tata Elxsi helps customers develop endearing brands and products by using design and technology as a strategic tool for business success. It has supported the launch of multiple brands and products across the world, winning various international awards for design and innovation. It is fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer is a routine software development services provider working on cost plus mark-up model. 23. Furthermore, when we examine Note 9 Fixed Assets forming part of the financial statement, available at page 643 of the annual reports paper book, it shows that Tata Elexi is having intangibles in the form of internally generated technical know-how and acquired intangibles computer software which certainly gives edge to Tata Elexi over other players operating in software development services provisions. 24. Moreover, when undisputedly taxpayer has not undergone any change in its business model vis-a-vis AYS, 2007-08, 2014-15 2015-16 in ITA Nos.5809/Del/2011, 4740/Del/2018 8726/Del/2019 respectively, Tata Elexi was held to be non comparable by the Tribunal. 25. In view of the matter, we are of the considered view that on account of functional dissimilarity and having ownership of internally generated intangibles in the form of technical know-how for rendering services to its customers make Tata Elexi not a suitable comparable vis-a-vis the taxpayer who is a routine software development service provider working on cost plus mark-up model having no intangibles of its own, hence we direct t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in AY 2016-17 in favour of the assessee has not been controverted by the Ld. CIT-DR. Keeping in view the submission of the Ld. CIT-DR, rejoinder of the assessee and the order of the Hon ble Tribunal for preceding years (supra), we are of the considered view that this company is not functionally comparable to that of the assessee and therefore we direct the Ld. AO/TPO to exclude this company from the final list of comparable companies. Infobeans Technologies Ltd. 13. The Ld. AR submitted that this comparable is functionally dissimilar to that of the assessee in as much as per the annual report, this company along with provision of application development and maintenance services also provides services in the nature of Big Data Analytics Content Management System, Enterprise Mobility, Automation Engineering Services. This company is providing a wide range of services under 4 verticals i.e . Services, Automation, Enterprise and Industries. Under the Automation Services Verticals the company is providing advanced robotic process automation services. It was further submitted by the Ld AR that the Hon ble Tribunal following the decision of the Tribunal in the case of PubMatic India (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e range of the services mentioned by the assessee are not available in the Annual Report for the year under consideration and same are available on the website of the company. 10.5 But in our opinion automation engineering, Service now, UX and UI and customize software services are all part of software development or software services. The Automation information technology is focused on service automation and quality assurance testing of automated process. Under the automation the goal is to eliminate defects, errors and problems with products Software Development and with business or customer service processes. Example of automation are automated 'chatbots to help solve customer issues or to direct customer to the right person. Automation is also used to streamline IT help desk ticketing, service management and to deliver quality products and software faster, with fewer defects. Thus, automation engineering is part of the process of the software development services. 10.6 Further, the term 'service now' has been described on the website of the company as under: Service Now provides a framework that describes, organizes and automates the flow of work, and removes unnece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y 2016-17, the Hon ble ITAT relying on the judgment of PubMatic India (P) Ltd. vs. AC1T in ITA No.655/Pun/2017, decided this issue against the Revenue. The judgment of the Hon ble ITAT is being reproduced as under: - 44. The taxpayer sought exclusion of Infobeans as a comparable again on ground of functional dissimilarity, it also being into providing services viz. software engineering services primarily in Custom Application Development (CAD), Content Management Systems, Enterprise Mobility, Big Data Analytics, UX UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book. 45. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e., services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis- a-vis the taxpayer which is a routine sofhvare development services provider. Infobean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 2016-17, the Hon ble Tribunal has rejected the company as comparable after duly referring to the annual report of the company and also recording the same in their order, as under: 44. The taxpayer sought exclusion of Infoheuns as a comparable again on ground of functional dissimilarity, it also being into providing services, viz, software engineering services primarily in Custom Application Development (CAD) Content Management Systems. Enterprise Mobility, Big Data Analytics, UX UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book 45. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e., services automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis d- vis the taxpayer which is a routine software development services provider Infobeans has been excluded as a comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company were not available in the annual report for that year. However, in subsequent AY 2016-17 the Hon ble Tribunal has rejected this company as comparable after duly referring to the annual report of this company which indicates functional dissimilarity owing to provision of wide range of services by this company. The Tribunal in its order for AY 2016-17 has considered the decision of the Pune Bench of Tribunal in the case of Pubmatic India (supra) and several other cases wherein this company has been rejected as a comparable to that of a captive software development services provider. In light of the above, respectfully following the decision of the Coordinate Bench for AY 2016-17 we direct the Ld. AO/TPO to exclude it from the final set of comparables. Cybercom Datamatic Information Solutions Limited 14. The Ld. AR submitted that this comparable is functionally dissimilar as this company acts as consultants and advisors on information/internet system and surveyors, of information services. Further, it is engaged in the business of development, testing, implementation, migration of home grown and other applications, marketing and manufacturing of various information and technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts and services. The annual report of the said concern placed at page 918 of PB declares the said facts and it is undisputed that the said concern is engaged in sale of software products. Following our reasoning in the paras herein above in respect of Cybermate, we hold that Cybercom is also to be excluded from final set of comparables. 27- The assessee before us is solely engaged in the provision of software development concern hence, where the concern was also a product company, margin of the said concern cannot be included for benchmarking the ALP of the international transaction undertaken by the assessee. Accordingly, we direct its exclusion from the final set of comparables. 7.2 The P L account of the assessee company is given on page no - 226 of paper book Annual Reports of Comparables . The sale of services has been shown at Rs. 7,78,76,993/-. The Note 22 to the account on page no- 236 is regarding Segment information. The same is reproduced as under: - Note 22 segment information The principal business of the company is of providing technical and software services. All other activities of the company revolve around its main business. Hence no additional disclosure under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oborated from the annual financial statement of the company. [Pg. 228 of PB-AR] Further, from the website of the company it can be noted that the company specializes in various fields such as digitalization, secure connectivity, internet things and cloud services. It follows a full life cycle approach which consists of various steps like advisory, innovation, creation, management, testing, etc. Moreover, it has provided expertise and solutions against the challenges faced in the aforesaid mentioned fields. In view of the aforesaid, following the Hon ble ITAT in appellant s own case for the AY 2015-16, the company ought to be excluded from the final set of comparable companies. 2. It is submitted that in the order passed for AY 2016-17 bearing ITA No. 868/Del/2021, the Hon ble ITAT has directed the exclusion of the company on account of following additional reasons: 27. We have perused the profile of Cyber com Datumatics in the Notes forming part of the financial statement for the year ending March 31, 2016 which shows that the company was originally incorporated as Innovative Internet Trading Private Limited on January 5, 2000 and thereafter pursuant to the joint venture agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable companies. 14.3 We have perused the submissions of the Ld. AR as well as the Ld. CITDR and the material available on records. In our considered view this comparable is functionally dissimilar to that of the assessee and the Hon ble Tribunal in its order for AY 2015-16 and AY 2016-17 held this comparable to be excluded owing to its functional dissimilarity with that of the assessee. The Ld. CIT-DR has not brought out any change in facts of the relevant assessment year under consideration viz. a viz AY 2015-16 and AY 2016-17. We, therefore, respectfully following the Hon ble Tribunal s orders (supra) for preceding AY 2015-16 and 2016-17 hold this company not to be a good comparable and accordingly direct the Ld. AO/TPO to exclude this company from the final set of comparable companies. 15. Having held the above, after excluding the four comparable companies, namely i) Larsen Tourbro Infotech Ltd. ii) Tata Elxsi Ltd. iii) Infobeans Technologies Ltd. and iv) Cybercom Datamatics Information Solutions Ltd. as per our direction, the assessee s margin in respect of international transaction of provision of software development services would fall within the arms length range and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... schedule on other long term liabilities forming part of financial statements placed on page 18-19 of PB merits (audited accounts). iii) there is similar delay in receipt of receivables from others and the assessee is not charging interest on delay in receipt of receivable from services rendered to unrelated third parties. (page 233-239 of PB merits) 16.3 The Ld. CIT-DR controverted the above submissions of the assessee by filing the detailed written submissions dated 21.07.2022 which is reproduced below: 3.4 The Hon'ble DRP on page no. 30 of the appeal set (internal page 9 of the DRP order) has summarized the facts of the case. The same is being reproduced as under: 1) In its TP documentation, the assessee had stated that receivables and payables were settled by with the AEs on an ongoing basis in the normal course of business in an arm s length condition having regard to the economic and commercial factors. The TPO charged interest on inter-Company receivables overdue beyond the credit period of 60 days, by treating it as advance of unsecured loan to the AE and accordingly imputed a national interest of Rs. 7,12,59,8912/- thereon. The assessee has contended that it is debt fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of the sale. 17. Furthermore when the taxpayer is undisputedly a debt free company, as it is not the case of the Ld. TPO that borrowed funds have been appropriated enabling the AE to made the delayed payment on receivables. So, when outstanding receivables is not a separate international transaction, the delay in realization of the sale proceed is incidental to the transaction of sale and as such no notional interest can be levied by treating the same as unsecured loan. 18. Furthermore, it is the case of the taxpayer that when the taxpayer is not charging interest from unrelated third party/non-AE, in case of such delay, no adjustment on interest in case of AE can be made and drew our attention towards the details f invoices raised qua unrelated parties available at page 183A of the paper book wherein delay in realization of the receivables is also up to 218 days for AY 2010-11 and up to 417 days qua AY 2012-13 as per detail of invoices raised on unrelated parties qua AY 2012-13, available at page 236 of the paper book. 3) The appellant has further argued that this decision was further relied by Hon ble ITAT Delhi in Assessee s cases for A. Y. 2013-14 and 2015-16. 4) The fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctices between controlled and uncontrolled transactions. In particular, it was noted under para 3.49 that a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further investigation of the comparability characteristics of the potential comparable. Mr. Singh submitted that the ITAT erred in disagreeing with the TPO, who had characterised the outstanding receivables as in international transactions by itself which required bench-marking. 10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression receivables does not mean that the context every item of receivables appearing in the accounts of an entity, w hich may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case-to-case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studies. In other words, there has to be a proper inquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company during the year was 14.72% for software development services whereas the margin of the comparable companies was in the range of 11.66%-16.54%. A perusal of the above clearly demonstrates that the margin of the assessee company is not much higherduring the year as has been claimed by the assessee. It may also be pointed out clearly that the TPO has determined the ALP of this transaction with median of 17.24% having a range of 15.84% being the 35th percentile- 21.02% being 65th percentile. The total adjustments made by the TPO on this account is 7.44 Crores which forms part of the appeal set of TPO order on page no 179-180 of the appeal set. This clearly demonstrates that the margin of the assessee at entity level is less than the comparable companies and not more as has been claimed. Based on this factual analysis, the order of the coordinate Bench of earlier years would not apply to the facts of this year. iv) It may also be highlighted here that the working capital adjustment would not subsume the adjustments for outstanding receivables as in case of working capital adjustments, only the opening and closing balancing of the working capital are taken into account. The adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendering of services. There is one more f allacy in adjustment. Jt is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. The TP adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction-to-transaction basis. Months; and the invoice is actually realized on 31s' December. Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from Is' July to 3 Is' December), but the amount of invoice will not be receivable as at the end of the financial year on 31s1 March. As such, this receivable would not have an impact on the working IT A Nos. 2010 2575/Del/2014 capital adjustment in any manner, but would call for addition on account of the late the DRP in deleting the addition. However, in view of the fact that all the invoices were realized within the maximum period of 60 days allowed as per the Agreement, we hold that the charging of interest on receivables is not sustainable on the extan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing or opening values. It depends on the period of realization on transaction-to-transaction basis. To put it differently, suppose on invoice is raised on 1st May ; period allowed for realization is two months; and the invoice is actually realized on 31st December, Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from 1st July to 31st December), but the amount of invoice will not be receivable as at end of the financial year on 31st March. As such, this receivable would not have an impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of six months. Following the orders in Ameriprise (supra) and Techbooks (supra), we uphold the view taken the TPO on the issue. Interest on late realization of invoices is directed to charge in line ITA No.l54/Del/2016 with the directions given in the above orders of the Delhi Bench on the tribunal . (vi) A perusal of the above order, which have been passed by the coordinate Bench of the ITAT after the order of Hon ble Delhi High Court in the case of M/s Kusum HealthCare ltd. which has duly bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt arising during the course of business in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordinary by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the lower Authorities that it is not an international transaction, turns out to be bereft of any force. (iii) In this connection, reliance is also placed on the judgement of Hon ble Bombay High Court in the case of CIT v. Patni Computer systems Ltd. (2013) 215 Taxmann. 108 (bom.), the relevant portion of the same is being reproduced as under:- The Hon ble Bombay High Court in the case of CJT v. Patni Computer systems Ltd. (2013) 215 Taxmann. 108 (bom.) dealt, inter alia, with the following question of law: - (c) Whether on the facts and circumstances of the case and in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. (iv). The argument that just because the company was debt free fund company, no interest could be attributable on the late realization of receivables is not acceptable because interest on delayed realization of receivables is a separate international transaction and therefore, requires separate bench-marking. It has nothing to do with the operations of the assessee company being with the debt free funds only. (v). Thus, the post-amendment, it is the subsequent decision of 11 AT (reported in Bechtel India Pvt. Ltd. Vs. ACIT [2017] 85 taxmann.com 121 (Delhi-Trib.) for A.Y 2012-13 hold the field and not the earlier decision of A.Y 2010-11. (vi). The Assessee s reliance on the Delhi High Court s decision in PCIT Vs.Kusum Health Care Pvt. Ltd. [2018] 99 taxmann.com 431 (Delhi) is quite misplaced as in that case, the assessee had already factored in the impact of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices whereas the margin of the comparable companies was in the range of 11-66%o-16.54%o. A perusal of the above clearly demonstrates that the margin of the assessee company is not much higher during the year as has been claimed by the assessee. It may also be pointed out clearly that the TPO has determined the ALP of this transaction with median of 17.24% having a range of 15.84%) being the 35th percentile- 21.02% being 65th percentile. The total adjustments made by the TPO on this account is 7.44 crores which forms part of the appeal set of TPO order on page no 179-180 of the appeal set. This clearly demonstrates that the margin of the assessee at entity level is less than the comparable companies and not more as has been claimed. Based on this factual analysis, the order of the coordinate Bench of earlier years would not apply to the facts of this year. (v) In view of the above facts, it is humbly submitted that the findings of the coordinate Bench in the earlier years would not have application to this year in view of the low margin of the assessee company. E) It has also been held by the Tribunal that when the tax payer is not charging interest from unrelated third party/non-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant from preceding years, will not apply for the year under consideration. Before submitting on the margin of the appellant vis-a-vis comparable companies, at the outset it is submitted that the Hon ble High Court in the case of Kusum Healthcare (supra), after considering the amendment made in Explanation to Section 92B of the Act, held that not every item of receivables' appearing in the accounts of an entity, which may have dealings with foreign AES would automatically be characterised as an international transaction, as under: 10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92 B of the Act of the expression 'receivables' does not mean that the context every item of receivables' appearing in the accounts of an entity, which may have dealings with foreign AES would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case-to-case basis Further, in the said decision, the Hon ble High Court, in Para 10 or Para 11 of their decision has he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he years in which the issue of receivable was decided by the Hon ble ITAT and the margin of the appellant and comparable companies identified in the transfer pricing study is tabulated as under: Assessment Year Appellant s margin (TPR) Comparable margin (TPR) Comparable margin computed by TPO Remarks 2010-11 15.68% 15.39% 25.96% Adjustment proposed in relation to SWD segment was deleted by DRP 2012-13 17.05% 14.25% - No adjustment by TPO in relation to SWD segment 2013-14 28.22% 14.50% - 2014-15 13.17% 14.32% 22.60% Adjustment proposed in relation to SWD segment was deleted by ITAT 2015-16 14.30% 4.83% - 19.62% 19.36% - 28.81 % (Median 22.78%) 2016-17 14.37% 13.76% - 24.90% 21,25% - 27.65% (Median 24.37%) 2017-18 14.72% 11.66% - 16.54% 15.84% - 21.02% (Median 17.42%) Present appeal From perusal of the above table, it would be noted that the margin of the appellant has remained the same for being charged on the basis of cost plus mark-up of 15% and has always been within the range of the working capital adjusted margin of comparable companies. Further, in the all the preceding years, the margin earned by the appellant was found to be at arm s length price. Accordingly, the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP of the international transaction of interest on receivables from AEs. The Hon ble Delhi I ribunal in the case of McKinsey Knowledge Centre Pvt. Ltd. vs. DCII [IIA No. 154/Del/2016] (order dated 15.12.2016) followed their finding in the case of Ameriprise India (supra). The Hon ble Delhi High Court, vide order dated 25.04.2017 in the case of Kusum Healthcare, dismissed the appeal of the revenue against the decision of Hon ble Tribunal and that (i) The inclusion in the Explanation to Section 92B of the Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction and (ii) With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability visa-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. In the appeal filed by the assessee in the case of Mckinsey Knowledge, the Hon ble High Court vide order dated 07.02 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT in appellant s own case for the assessment year 2010- 11 (ITA No. 1104/Del/2015), 2012-13 (ITA No. 1115/Del/2017), 2013-14 [ITA No. 7621/Del/2017], 2015-16 [ITA No. 8726/Del/2019] and 2016-17 [ITA No. 868/Del/2021] and therefore, ought to be followed in the year under consideration too.^ B) Overdue outstanding receivable is not an international transaction. 1 At the outset it is submitted that whether the outstanding receivables from the associated enterprise is an international transaction in terms of section 92B of the Act is not disputed by the appellant and therefore, the above submission of the Id. DR is academic in the present appeal. 2. liven otherwise, it is respectfully submitted that in the decision of Patni Computers, the Hon ble Bombay High Court has merely set aside the matter to the file of ITAT to pass a fresh decision in light of the amendment made in Explanation to Section 92B, without dealing with the issue on merits. From perusal of the direction of the Hon ble Court, it cannot, in any manner, be assumed that the Hon ble Court has held that the alleged transaction of outstanding receivable is a separate international transaction in terms of section 92B of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant, the Hon ble Tribunal in the preceding years has decided the issue in favour of appellant on the basis of following proposition- 1. The operating profit margin earned by the appellant is within the arm s length range of working capital adjusted margin of comparable companies and therefore, a separate benchmarking of receivables is unwarranted. 2. The appellant is a debt free company, i.e. it is not incurring any interest cost and has not availed any loan from AEs or unrelated third parties. 3. There is similar delay in receipt of receivables from unrelated third parties and the appellant is not charging interest on delay in receipt of receivable from services rendered to such parties. Accordingly, the question whether alleged transaction of delay in receipt of outstanding receivables can be construed as a separate international transaction is academic and inconsequential in the present case as in the preceding years, the Hon ble Tribunal has decided the issue on the facts of the case of appellant and applicable precedents. C) The assessee is a debt free company 1. It is submitted that Lease equalization reserve is not an interest bearing debt availed by the appellant from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missed by the Hon ble Supreme Court. 5. It would also be noted that the subsequent decision of Hon ble Tribunal rendered for AY 2012-13 in the case of Bechtel was decided without considering the its own decision of Hon ble High Court and Supreme Court and therefore, is per incuriam. 6. In fact, in the appellant s own case, the Hon ble Tribunal in their recent decision passed for the AY 201415 dated 16.03.2022, has rightly followed their earlier decision for AY 2010-11 and 2012-13, wherein, the Hon ble ITAT has relied on the decision of Bechtel (supra), as under: 3. The only issue contested during the hearing pertains to adjustment of interest on receivables At the outset, it was brought to our notice that the issue of interest on receivables stands adjudicated by the orders of the Co-ordinate Bench of ITAT in assessee s own case in ITA No. 8726/Del/2019 for A. Y. 2015- 16 vide order dated 29.06.2020 and in ITA No. 868/Del/2021 for A. Y. 2016-17. For the sake of ready reference, the relevant part of the order is reproduced as under: ITA No. 8726/Del/2019 for A. Y. 2015-16 32. Now coming to the next issue raised in the present appeal against the transfer pricing adjustment made on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Delhi High Court in case of Pr. CIT-1 vs. M/s. Bechtel India Pvt. Ltd. in ITA 379/2016 order dated 21.07.2016. 53. Following the order passed by the coordinate Bench of the Tribunal in taxpayer s own case (supra), we are of the considered view that since the taxpayer has not incurred any interest cost nor has avai led of any loan from AE or unrelated third parties, as is evident from audited financials at pages 57 66 of the paper book, proposed adjustment on account of delay in receipt of receivables by the TPO/DRP is not sustainable, hence ordered to be deleted. Consequently, grounds no. 2 to 2.8 are determined in favour of the taxpayer. 4. Decided cases must be put to rest, unless otherwise. In the absence of any material change in the factual matrix and the legal proposition, we direct that the addition made of adjustment on interest due receivables be deleted. 7. Regarding submission made by the Id. DR in point (vii) above, it is submitted that the Hon ble High Court in the case of Kusum Healthcare, in Para 10 of their order, has duly noted the amendment made by insertion of Explanation to Section 92B and its import and held as under: 10. The Court is unable to agree w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t issued in prescribed Form 3CEB. 2. Further, even considering the deemed international transaction of Rs. 17,12,280, the total value of services rendered to the associated enterprise/ related parties works out to Rs. 338,53,95,022 (Rs. 338,36,82,742 + 17,12,280) which constitutes 87.45% of the total sales (Rs. 3385395022 / 3871243299). Accordingly, the balance of sales of services of Rs. 48,58,48,277 represents the sales made to unrelated third parties. 3. The Id. DR on the basis of one of the deemed international transaction of Rs. 17,12,280 undertaken by the appellant with one entity, namely, Oracle India P. Ltd. which is also duly reported as such in the certificate issued in Form 3CEB, is seeking to content that the entire sales of Rs. 48,58,48,277 made to unrelated third parties, may not be with third parties/ nonAEs. 4. It would be appreciated that the books of accounts of the appellant are prepared in accordance with the prescribed Accounting Standards and audited by independent firm of Chartered Accountants. Such Accounting Standard duly prescribe reporting of transactions undertaken by the appellant with related parties and the same is duly been provided in Note 24: Relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maller, by itself, does not make these transactions incomparable with the transactions in controlled conditions. Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee's transactions with non AEs, on the ground that the volume of business with non AEs was too small vis-a-vis business with AEs. 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal in subsequent AY 2013-14, AY 2014-15 and 2016-17 indicates that the Hon ble Tribunal has given its finding on this issue in the similar set of facts and on legal position. The finding of the Hon ble Tribunal s order for AY 2010-11 and 2012-13 is reproduced below: 14. Provisions contained under Explanation (i), (a) (c) of section 92B have been analysed by Hon ble Delhi High Court in case cited as Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. in ITA 765/2016 order dated 25.04.2017, wherein it is held that the expression added in Explanation to section 92B does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealing with foreign AE, would automatically be characterized as an international transaction and decided the issue in favour of the taxpayer by returning following findings:- 10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression 'receivables does not mean that de hors the context every item of 'receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characteris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.43%. In such circumstances, no separate adjustment on account of interest can be made. Because the credit period extended to AE cannot be considered as a standalone transaction without considering the main transaction of the sale. 17. Furthermore when the taxpayer is undisputedly a debt free company, as it is not the case of the Id. TPO that borrowed funds have been appropriated enabling the AE to make the delayed payment on receivables. So when outstanding receivables is not a separate international transaction, the delay in realization of the sale proceeds is incidental to the transaction of sale and as such no notional interest can be levied by treating the same as unsecured loan. 18. Furthermore it is the case of the taxpayer that when the taxpayer is not charging interest from unrelated third party / non-AE, in case of such delay, no adjustment on interest in case of AE can be made and drew our attention towards the details of invoices raised qua unrelated parties available at page 183 A of the paper book wherein delay in realization of the receivables is also up to 218 days for AY 2010-11 and up to 417 days qua AY 2012-13 as per detail of invoices raised on unrelated parti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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