9911796707
TMI Blog2022 (11) TMI 1493X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment services to its customers including Global Logic Group entities. Additionally, the assessee also provides IT enables Services ("ITeS") to certain third party entities. For the services rendered to its AEs, it is remunerated on a cost plus mark-up basis. 4. During AY 2017-18, the assessee entered into the following international transactions with its AEs:- A. International Transactions Associated Enterprise Nature of transaction Total value of transaction (in Rs.) Global Logic Inc. Provision of software development services 3,38,12,46,071 Global Logic Israel Ltd. Provision of software development services 24,36,671 Global Logic Inc. Reimbursement of expenses paid to AE 7,57,357 Global Logic Inc. Reimbursement of expenses received from AE 11,99,27,155 B. Deemed International Transactions Associated Enterprise Deemed International Transaction Transfer Price (in Rs.) Oracle India Pvt. Ltd. Provision of software development services 17,12,280 5. In its transfer pricing report for the financial year ended 31.03.2017, the assessee has reported that in respect of international transactions pertaining to provision of software development services to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.09% 4. Evoke Technologies Pvt. Ltd. 10.48% 5. Sasken Communication Technologies Ltd. 11.66% 6. RS Software Ltd. 12.75% 7. Cg-Vak Software and Exports Ltd. 13.43% 8. Harbinger Systems Pvt Ltd. 13.90% 9. Jindal Intellicom Private Ltd. 16.54% 10. Infomile Technologies Ltd. 17.58% 11. SQS India BFSI Ltd. (consol) 23.77% 12. Puresoftware Pvt Ltd. 24.43% 13. R Systems International Ltd. 27.57% 35th Percentile 11.66% Median 13.43% 65th Percentile 16.54% 6.2 This is how the assessee demonstrated that since, assessee's operating profit margin of 14.72% on operating cost is within the range of the margins of the comparable companies of 11.66% to 16.54%, the said international transaction of provision of software development services is at ALP as required under the transfer pricing regulations. 7. The assessee's case was referred by the Ld. Assessing Officer ("AO") to the Ld. Transfer Pricing Officer ("TPO") for the determination of the ALP. 7.1 During the transfer pricing proceedings, the Ld. TPO accepted TNMM as the most appropriate method for benchmarking of international transaction of provision of software services. He proceeded to analyse the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of software development services for which equal amount of addition was made by the Ld. AO in his final order. 8. The assessee raised objections before the Hon'ble Dispute Resolution Panel ("DRP") against inclusion of 9 comparables, namely i) Mindtree ii) Xavient Software Solutions (India) Pvt. Ltd. iii) Great software Laboratory Pvt. Ltd iv) Larsen & Tourbro Infotech Ltd. v) Nihilent Ltd. vi) Tata Elxsi Ltd. vii) Infobeans Technologies Ltd. viii) Cybage Software Pvt. Ltd. ix) Cybercom Datamatics Information Solution Ltd. by the Ld. TPO alleging that these comparable companies are functionally dissimilar/lack segmental data/owns significant tangibles.. 8.1 The Hon'ble DRP vide its order dated 18.11.2021 under section 144C of the Act, after considering the submissions of the assessee, directed the Ld. TPO/AO to retain all the aforesaid 9 comparable companies holding them to be functionally similar to that of the assessee. 9. Aggrieved, the assessee is before us challenging the inclusion of the aforesaid 9 comparable companies by the Ld. TPO/AO/Hon'ble DRP out of the total 15 comparable companies which were considered as final set of comparable companies for benchmarking the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee. Larsen & Tourbro Infotech Ltd. 11.1 The Ld. AR submitted that this company is functionally dissimilar; lacks segmental data and is leveraging on the brand of "Larsen & Tourbro" or "L&T" which is a globally reputed brand having presence since 1938 and owns significant intangible in the form of software and intangible assets under development, which is evident from the annual report of the company which is placed on record in Paper Book-Annual Reports of Comparables. The Ld. AR relied on plethora of judicial pronouncement in support of its contention wherein this company has been directed to be excluded from the list of comparable companies. The Ld. AR further submitted that the Hon'ble Tribunal in assessee's own case for the AY 2014-15 in ITA No. 4740/Del/2018, AY 2015-16 in ITA No. 8726/Del/2019 and in AY 2016-17 in ITA No. 868/Del/2021 has directed this company to be excluded from the final set of comparable companies and that the department has not filed appeal against the decisions of the Hon'ble Tribunal (supra). 11.2 The Ld. CIT-DR in his written submission dated 14.06.2022 filed before us has objected to the exclusion of this company as a comparable an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets under development of Rs. 41,82,66,450/-, which makes the net intangibles owned by the company to Rs. 75,04,78,329/- at the end of the year. But no depreciation has been claimed on the under developed intangibles, therefore there is no effect on the profitability of the company on account of the underdeveloped intangibles. Thus, the objection of the assessee of non- comparability of the assets is rejected. 6.5 Further, the learned Counsel submitted that operating expenses amounting to Rs. 34,91, 74,116/-and Rs. 54,82,74,109/- on cost of the software packages for own use and cost of the bought-out items for resale during the year under consideration. Thus, according to the learned Counsel, the company was engaged in sale of the product and accordingly not comparable. On perusal of the profit and loss account of the company on page S-1237 of the Annual Report (Page 108 of PB-2), we find that company has shown two revenue streams. First, as revenue from the operations of Rs.46,439,403,178/-from overseas and second as other income (loss of Rs. 81,09,17,799/-). No revenue from sale of product has been shoM'n. As regard to the objection of cost of software packages for own use u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by GDA Inc. were transferred to LTTSL, the Company was wound up during the year. " 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- (page 129 of PB-2), which has not been allocated into three segments, and thus the segmental results are distorted. 6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No. 1897/Del./2004), which has been approved the Hon'ble High Court in ITA No. 813/2015, the company is held to be not valid comparable on account of extraordinary events. Thus, In view of the extraordinary event in the year under consideration also, this comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, it is a good comparable and the coordinate Bench judgement in the earlier years will not have any impact in the current year." 11.3 The assessee in its rejoinder dated 15.06.2022 has rebutted the objections of the Ld. CIT-DR as under: "1. It is submitted that in the order passed by the Hon'ble ITAT for AY 2014-15, the company was excluded, inter alia, for the reason of extra-ordinary events: 6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014 which has also impacted the profits of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited ITA No. 1897/Del/2004), which has been approved the Hon'ble High Court in ITA No. 813/2015, the company is held to be not valid comparable on account of extraordinary events. Thus, in view of the extraordinary event in the year under consideration also, this company is liable to be excluded from the set of the comparable companies 6.9 Accordingly, in view of the functional dissimilarity at entity level and extraordinary event during the year, this company is directed to be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Institute of Management Ahrnedahad (LIMA), Veermala Jijabai Technological Institute (V./T1) in order to provide though (-leadership to its clients for future digital solutions. 2. The Id. DR at Para 4.3 of his synopsis has concluded that "In the later ears i.e., A. Y 2015-16 and A. Y 2016-17, the Hon'ble HAT has followed - judgment for A. Y 2014-15 to exclude this company as a comparable. ". However, in the order passed for AY 2015-16bearing ITA No. S"26/Del/2019, the company was excluded by the Hon'ble ITAT on account of extra ordinary event occurring during to acquisition of 'Information Systems Resource Centre Private limited ("ISRC")' and not demerger of Product Engineering Services segment, reproduced from the order as under: "20. The Tribunal in assessee's own case in ITA No.4740/Del/2018 relating to Assessment Year 2014-15 vide order dated 01.05.2020 has directed the exclusion of the said concern from the final list of comparables while benchmarking the ALP of the international transaction by the assessee with its AE. Before parting, we may also refer to an extraordinary event under which Larsen & Toubro Infotech Ltd. initiated and completed transfer of its Produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in appellant's case for AY 2016- 17 is squarely applicable for the year under consideration, in as much as: As per the annual report of the company, in addition to provision of application development and maintenance services ('ADM') which constitutes 39.2% of total revenue for the year under consideration, the company also provides infrastructure solutions, enterprise solutions, platform and digital solutions such as big data analytics, artificial intelligence and cognitive, Mobility, Intelligent automation, Cloud and Infrastructure services ('CIS'), Digital integration etc. |Page 27-PB-AR] The digital business and in house product development- Mosaic are further described in the annual report of the company [Page 40-PB-AR] Further, the company is also involved in sale of software products. The development and sale of various products are provided at Page 27, 6566 and 81 of the PB-AR. It is submitted that the Hon'ble Delhi Bench of Tribunal in the case of Sapient Corporation P. Ltd. vs. CIT [1TA No. 5263/Del/2010] has directed to exclude Zenith Infotech, a software product company as comparable to a captive software development service provider. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion of this company from the final list of comparable companies. The 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. 12. In respect of this comparable the main contention of the assessee is that this company is functionally not comparable to that of the assessee company as it provides product design and engineering services to the consumer electronics, communication and transportation industries and systems integration and support services for enterprise customers. It also provide digital content creation for media and entertain industry. The website of this company also shows that it is also providing solutions and services for technologies such IOT, bigdata analytics, cloud, mobility, virtual reality and artificial intelligence. The company has also generated intangible in the form of technical know-how for rendering services to its customers and offers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and perused the relevant material including annual report of the company. The details of revenue from operations available on page 51 of the Annual Report (page 394 of PB2), reproduced as under: 18. Revenue from Operations Year ended 31 March, 2014 Sale of traded goods [Refer None(i) below] 4,700.51 Rendering on services [Refer None(ii) below] 72,509.25 Total 77.209.76 (i) Sale of traded goods include sales of computers, networking and storage systems, (ii) Rendering of services comprises: (a)Product Design 66,427.07 (b) Graphics Animation and Gaming 1,843.15 (c) System Integration and Support 4,239.03 72,509.25 8.3 Out of the above revenue streams, we find that major revenue has been earned from rendering of product design services. Under Product design, the assessee has carried major project of design and developing of a complete electronic control unit (ECU) including hardware and software for hybrid electric vehicle, designed the control hardware for India's Mars arbiter Mission, worked with GVK to design the experiential services for various consumer touch points at Mumbai International Airport's new integrated terminal-2. The relevant part of the Annual Report has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 falling in the filter applied by the TPO. This company has also clearly mentioned that product design is in fact rendering of services and the same has been covered under the head 'rendering of services', therefore, the same is nothing but software development services. In view of the above, the facts of the earlier years are not applicable in the current year." In rebuttal to the Ld. CIT(DR)'s written submission, the assesee has filed the following rejoinder: "1. The Id. DR at Para 5.3 of his order has contended that "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. " In this regard, it is submitted that comparability is the cardinal principle under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule I OB (2) (a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 challenge the comparables after the acceptance of the filters. The filters are applied to narrow down the search to find the comparables that are closest to the assessee. The use of filters has to be necessarily validated from the annual reports. Since the TPO would have to do this exercise on the basis of the actual data in the report of the comparables, he would surely have the freedom to adopt or reject the comparables. We cannot hold that merely because a comparable clears the filters, its inclusion in the list of comparables is immune to challenge by the assessee. In view of the aforesaid, the contention of the Id. DR that since the comparable passes the filter of service income more than 75%, it cannot be challenged on account of functional dissimilarity is far stretched and erroneous. It is submitted that even if the income earned from provision of service by the company is more than 75% of its total revenue, in terms of Rule 10B(2) and the decision cited above, the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring 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 for these reasons that the Hon'ble IT AT in order passed for AY 2014-15 bearing ITA No. 4740/Del/2018 has excluded the company, holding that: 8.3 Out of the above revenue streams we find that major revenue has been earned from rendering of product design services. Under Product design, the assessee has carried major project of design and developing of a complete electronic control unit (ECU) including hardware and software for hybrid electric vehicle, designed the control hardware for India's Mars orbiter Mission, worked with GVK to design the experiential services for various consumer touch points at Mumbai International Airport's new integrated terminal-2. The relevant part of the Annual Report has been reproduced by the learned TPO in his order. From the various achievements of the company mentioned in the Annual Report, we are of the opinion that the company has earned revenue from designing using softwares rather than softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to exclude Tata Elxsi from the final set of comparables. It is submitted that the above finding of the Hon'ble ITAT rendered in the order passed for AY 2016-17, has not been controverted by the Id. DR in his synopsis. Further, the finding rendered by the Hon'ble ITAT equally applies to the facts for the year under consideration, in as much as: * As per the annual report of the company, the company provides product design and engineering services to the consumer electronics, communications & transportation industries and systems integration and support services for enterprise customers. It also provides digital content creation for media and entertainment industry. [Page I22/128-PB-AR]. * As per the segment reporting made in annual report of the company, the company has two main business segments, namely, (i) System integration & Support and (ii) software development services. [164-PB-AR]. Even if 'Software de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.) Ltd. vs. ACIT ITA No. 655/Pun/2017 directed this company to be excluded from the final set of comparable companies in assessee's own case for AY 2016-17 in ITA No. 868/Del/2021. 13.1 The Ld. CIT-DR relying on the order of the Hon'ble Tribunal for AY 2014-15 wherein this comparable was held to be a good comparable made the following submission: "6.1 The Hon'ble Tribunal has decided that this is a good comparable and therefore it was retained A.Y 2014-15. The judgment of the Hon'ble Tribunal is being reproduced as under: - "10. Before the learned TPO, the assessee sought exclusion of the company on the ground of insufficient data/segmental information and functional dissimilarity. The learned TPO, however, referred to website and Annual Report of the company to highlight that the company is mainly engaged in providing software development services. 10.1 Before the Ld. DRP, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 unnecessary emails and spreadsheets from the process to streamline the delivery of services. There is no denying the fact that Service Now has myriad benefits for an enterprise besides replacing manual transactions with consumerised and fast speed services ", 10.7 In view of the above description, the 'service now ' is a tool of automation process, which a software development service activity. 10.8 The term UX design refers to the term "user experience design ", while UI stands for "user interface design The user experience and user interface design are to be kept in mind while designing or developing the software, thus these range of services are part of software development services. 10.9 The three verticals in which company is doing business, is not making it functionally different. The prime function in all the three verticals remain the software development. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Infobeans has been excluded as a comparable on account of functional dissimilarity vis-a-vis routine software 24 ITA No.868/Del./2021 development service provider by the coordinate Bench of the Tribunal in case of PubMatic India (P) Ltd. vs. ACIT in ITA No.655/Pun/2017. So, in view of the matter, we order to exclude Infobeans from the final set of comparables. " 6.4 The order of Hon'ble ITAT in the Assessee's own case is in favour of the revenue in A.Y 2014-15 which have not been taken into account while passing the order by the coordinate bench in A.Y 2016-17 wherein the Assessee's appeal was allowed by relying on the case of PubMatic India (P) Ltd. vs. ACIT in ITA No.655/Pun/2017. 6.5 There is a judgment of Hon'ble coordinate bench in the Assessee's own case and admittedly there is no change in the FAR analysis of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 comparable on account of functional dissimilarity vis-a-vis routine software 24 ITA No.868/Del/2021 development service provider by the coordinate Bench of the Tribunal in case of PubMatic India (P) Ltd. vs. A CIT in ITA No. 655/Pun 2017. So, in view of the matter, we order to exclude Infobeans from the final set of comparables. For the year under consideration, the business description of the company is provided at Page 72 of the annual report [Page 199 of Paper book- Annual Reports], which states: I Info Beans Technologies Ltd (the "company''), operating at CMMI level 3, is a public limited company domiciled in India, and has also got listed on the National Stock Exchange -- SME Emerge Platform on 02nd May, 2017. The Company is specialized in software services. Our business is pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bercom 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 technology products and services which is evident from the annual financial statement of this company available on records. Further, from the website of the company it can be noted that this company specialises 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 challenge faced in the aforesaid mentioned fields. He placed reliance on the decisions the Hon'ble Tribunal in the case of PubMatic India (P.) Ltd.(supra) and Principal Global Services (P.) Ltd. vs. ACIT ITA No. 482/Pun/2017 for exclusion of this comparable. He further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accounting standard 17, "Segment Reporting" are required in these financial statements. " 7.3 In this note, it has clearly been provided that the principal business of the company is of providing of technical and software services. All other activities of the company revolve around its main business. Since the main business of the assessee company is providing software services as is clearly been written in the above note, it is a good comparable. These facts have not been considered by Hon'ble ITAT while passing the order for A.Y 2015-16 and therefore the same would not be applicable." 14.2 In its rejoinder to the arguments of the Ld. CIT-DR, the Ld. AR has submitted as under: "1. It is submitted that in the order pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 between Cybercom Group AB and Datamatics Global Services Ltd. w.e.f June 1, 2006, it started working as consultants and advisors on information/internet system and surveyors of information services and to carry on the business of development, testing, implementation, migration of home grown and other applications, marketing and manufacturing of information technology products and services, software and hardware systems to enterprise and embedded technologies in the telecom and other industries. 28. The taxpayer also traced from the website of Cybercom Datamatics that it specializes in various fields such as, digitalization, secure connectivity, internet of things and cloud services. It also follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 transfer pricing adjustment would thus be required. We have therefore not examined and adjudicated upon the remaining comparables challenged by the assessee as the same has become academic in nature. 16. The second grievance of the assessee relates to transfer pricing addition of Rs. 7,12,59,891/- with respect to interest on delay in receipt of receivables from AEs. Brief facts on this issue are that from perusal of the invoice wise details of services rendered to the AE, it was noted that in certain cases, the remittance were received by the assessee after some time lag than the period agreed between the parties. Similar delay in receipt of receivables was also reported in transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 free and thus, no interest or overdue receivables is warranted. He has also assailed the TPO's action of delinking the inter-company receivables arising from main international transactions and proceedings to bench mark the same as a separate transaction and applying 6 months IJBOR Plus 400 basis points and inputting 4.485% national interest. He has also contended that, the judgment passed by the Hon'ble IT AT in its own case in ITA No. 1104/D/2015 and 1115/D/2017 has not been followed by the TPO. " 2) "The Ld. AR of the assessee relied upon the orders of the Coordinate Bench of Delhi in the Assessee's on case in support of its contention. The findings of Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 findings of the Hon'ble Tribunal for A.Y 2010-11 which have also been followed in A.Y 2013-14 & 2015-16 are summarized as under: - (a) The working capital adjustment would subsume the adjustments to be made on account of overdue receivables in view of Hon'ble Delhi High Court judgements in the case of Kusum Health Care Ltd. (b) Overdue outstanding receivable is not an international transaction. (c) The assessee is a debt free company. (d) On examination of the entity level margin of the assessee company, it was found by Hon'ble ITAT that the tax payer has earned margin of 38.39% OP/OC margin vis-a-vis margin of comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 inquiry by the TPO by analysing the statistics over a period of lime to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was just one A. Y. and the figure of receivables in relation to that A. Y. can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself With the Assessee having already factored in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 adjustments on account of addition and subtraction during the year from these balances do not form part of working capital adjustment and therefore would not be sufficient to subsume the adjustment. The reliance for this proposition is made on the judgment of Hon'ble Delhi tribunal in the case of Ameriprise India Pvt. Ltd ITA No 2010/Del/2014. The relevant portion of this judgement is being reproduced as under: - "28. We do not approve the reasoning given by the DRP about the subsuming of such interest in the working capital adjustment. It is axiomatic that the working capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 extant facts". (v) The similar view has also been taken in the case of Mckinsey Knowledge Centre Pvt. Ltd. by Hon'ble Delhi ITAT. The same is being reproduced as under for clarity's sake: "63. The Delhi Bench in Ameriprise (supra) and Techbooks (supra) did not approve the reasoning about such interest subsuming in working capital adjustment. It found that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for the credit period allowed as per the Agreement is factored in the price charged for the render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 been considered by the Hon'ble ITAT while passing these judgements. In view of the above it is humbly submitted that the working capital adjustment would not subsume the adjustments on account of outstanding receivables. B) Overdue outstanding receivable is not an international transaction. (i) The assessee argued before the TPO that interest on receivables is not an international transaction. In this connection, kind attention of the Hon'ble Bench is drawn to the explanation inserted by the Finance Act, 2012 to section 92B with retrospective effect from 01.04 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged. 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 Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B (1) of the Income lax Act 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? " (iv) While answering the above question, the Hon'ble High Court notices that an amendment to section 92B has been carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause 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 receivables on its pricing/profitability by way ol undertaking working capital adjustment to comparable companies' profit margin and any further adjustment for outstanding receivables would have distorted the picture and recharacterized the transaction. Further, the Assessee's pattern of sales realization in that case did not indicate any arrangement of parking receivables with the A.E. In the case at hand, no such analysis of pattern of receivables of different years have been given and unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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-AE, in case of such delay, no adjustment on interest in case of AE can be made. (i) A perusal of schedule 12 of the balance sheet (page no. 22 of paper book) deals with trade receivables. Out of the total trade receivable of 100 crores, approx. 85 crores are due to the AEs. Therefore, 85% of the total outstanding is towards AEs. It is also seen on a perusal of page 62 of PB regarding international transaction that the assessee has also shown deemed international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 held that since the assessee have already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables is impermissible, as under: 10 ..................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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 rendered by the Hon'ble ITAT in appellant's own case of the all the preceding years, i.e. AY 2010-11, 2012-13, 2013-14, 2014-15, 2015-16, 2016- 17, following the decision of Hon'ble High Court in the case of Kusum Healthcare, is applicable to the year under consideration as well and since the margin earned by the appellant falls within the range of working capital adjusted ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 07.02.2018, while admitting the appeal on the other issue, remitted the issue of interest charged on outstanding receivables to ITAT, following their decision in the case of Kusum Healthcare. However, vide order dated 09.08.2018, the Hon'ble High Court in the case of Mckinsey Knowledge, while deciding the appeal of the assessee on other issue, also referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal 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 Act. In fact, the Hon'ble jurisdictional High Court in the case of Kusum Healthcare, after noting the amendment made in Explanation to section 92B of the Act has held - 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 any bank/ financial institution. The interest paid by the appellant is also interest paid to the Government for late deposit of advance tax/ withholding tax and is not interest paid on any loan/ debt. Other than the above two items, the Id. DR could not provide details of any expenses been incurred by the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 account of interest due on receivables outstanding. The said issue stands covered in favour of the assessee by the decision of the Tribunal in assessee's own case for Assessment Year 2010-11 in ITA No. 1104/Del/2015 and for Assessment Year 2012-13 in ITA No.l 115/Del/2017 vide order dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered 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: Related Party disclosure of the audited accounts. Further, in terms of section 92E of the Act, the international transactions undertaken by the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onditions. 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. Similar view was taken by the Hon'ble Delhi Bench of Tribunal in the case of Interra Information T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 characterised as an international transaction. There may be a delay in collection of monies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest 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 parties qua AY 2012-13, available at page 236 of the paper book." In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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