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TMI Blog2024 (7) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... ging technologies. Also, the company is engaged in offering software products. Infosys Limited be excluded on the basis of functionality as well as on turnover basis. Adjustment on account of interest on outstanding receivables - HELD THAT:- This issue is remitted to the file of ld. AO/TPO with the rider that period of credit should be for 30 days only. - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. MADHUMITA ROY, JUDICIAL MEMBER For the Appellant : Shri Nageswar Rao, A.R. For the Respondent : Ms. Neera Malhotra, D.R. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against the assessment order passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, (in short The Act ) dated 30.7.2022 for the assessment year 2018-19. The assessee has raised following grounds of appeal: General grounds 1. The impugned order of the Ld. AO passed pursuant to the order of the Transfer Pricing Officer 1(3)(2), Bangalore ( Transfer Pricing Officer or Ld. TPO ) and the directions issued by the Hon'ble DRP are based on incorrect appreciation of facts and incorrect interpretation of law, and therefore erroneous, bad in law, and contrary to the facts and circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g accounting year other than March 31 or companies whose financial statements were fora period other than 12 months). e) Applying only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for turnover filter. f) Applying persistent loss filter incorrectly and thereby rejecting companies reporting loss in two out of three years as persistent loss makers. g) Accepting certain companies reporting abnormal profits as comparable to the Appellant. h) Applying incorrect modified related party transaction ( RPT ) filter to reject companies, which included application of the following filters separately: - An RPT filter for the revenue transactions only (RPT revenue greater than 25% of total revenue) - An RPT filter for the expense transactions only (RPT expenses greater than 25% of total expenses) 7.3 The Ld. AO/ TPO/ DRP erred, in law and in facts, by accepting following functionally non-comparable companies based on unreasonable comparability criteria: Aptus Software Labs Private Limited Black Pepper Technologies Private Limited Cybage Software Private Limited Great Software Laboratory Private Limited Infobeans Technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in law and in facts, by re-characterizing the outstanding receivables as advancement of interest free loan to the AES on 31 March 2018. 8.5 Without prejudice to above grounds, the Ld. TPO/ AO/ DRP erred in ignoring the fact that the Appellant invoices its AES in foreign currency and thereby erred in adopting SBI short terms deposit interest rate for computing the notional interest on outstanding receivables instead of LIBOR rate. 8.6 Without prejudice to the above, the Ld. DRP/TPO/ AO have erred in computing the period of 30 days as against the credit period allowed as per agreement with its associated enterprise Other qrounds: 9 The Ld. AO has erred in law and in fact, by levying an interest of INR 2,99,35,260 in the assessment order under Section 234B of the Act. 10 The Ld. AO has erred in law and in fact, by levying an interest of INR 8, 79,244 in the assessment order under Section 234C of the Act. 11 The Ld. AO has failed to appreciate that interest under section 234C is on the returned income and not on the assessed income and has erred in levying additional interest on the assessed income as against the interest on the returned income. 12 The Ld. AO has erred in law and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to ground Nos.5 to 7.8 and 8 on main grounds and additional ground Nos.1 to 3. As such we confine our adjudication to only these grounds and other grounds are dismissed as not pressed. 6. First, we consider ground Nos.5 to 7.8 along with additional ground No.3. However, the ld. A.R. made it clear that he is pressing the following comparables only in these grounds: a) Nihilent Limited b) Tata Elxsi Limited c) Larsen Toubro Infotech Limited d) Persistent Systems Limited e) Wipro Limited f) Infosys Limited 6.1 Facts of the case are that the assessee is a wholly owned subsidiary of Infineon Singapore. It provides software development services to Infineon group companies for application in Automotive, Chip card and Security (SWD Segment). It also provides making support services to Infineon group companies (MSS Segment). It is compensated at Net Cost Plus Mark Up of 15% for provision of software development services and Net Cost-Plus Mark up of 9% for the provision of marketing support services. International transactions undertaken by assessee in aforesaid segments were benchmarked using Transactional Net Margin Method (TNMM) using OP/OC-PLI. Post consideration of ld. DRP s directio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of M/s. SanDisk India Device Design Centre Pvt. Ltd. vs. JCIT (supra) observed and held following comparables to be excluded on functional dissimilarities: 17.3 At the outset, the Ld.AR submitted that the above comparables have been considered by Coordinate Bench of this Tribunal, Hon ble Hyderabad Tribunal as well as Hon ble Mumbai Tribunal in other cases having similar facts it is also been submitted by Ld.AR that these comparables do not satisfy the turnover filter that has been applied by the Ld.TPO and at the outset deserves to be eliminated. The Ld.AR referring to the annual reports, placed in the paper books filed before this Tribunal reveals that turnover is more than Rs.200 crores and does not match even 10 times the turnover of assessee. The Ld.AR thus submitted that applying either the turnover filter of Rs. 1 crore to Rs. 200 crores or 10 times the assessee s turnover to 1/10th , these comparables deserves to be excluded. 17.4 It is also submitted that these comparables are not functionally similar with that of the assessee as has been observed by Coordinate Bench of this Tribunal in following cases: 1. Decision of Hon ble Mumbai Tribunal in case of Red Hat Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008- 09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008- 09, we direct exclusion of M/s Persistent Systems Ltd. We also notice that in AY 2008-09, the co-ordinate bench has excluded M/s Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh. Nihilent Analytics Ltd. (Nihilent) 44. The assessee sought exclusion of Nihilent on ground of its functional dissimilarity vis- -vis assessee. We have examined the website information of Nihilent, made available by the assessee at page No.405 of the paper book, wherein it is mentioned that it is engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data science, cloud services etc. 45. Perusal of the disclosure of enterprise s reportable segment explanatory available at page No.A406 of the paper book shows that Nihilent is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing and financials of Nihilent available at page No.A304, A405-A4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparables. (b) Tata Elxsi Limited: 9 . The ld. A.R. submitted that Tata Elxsi Limited is functionally dissimilar to the assessee company. It was the software segment comprising of hardware, software and animation services. The company is under the software development unit, is engaged in diversified activities i.e. Product design services, Innovation design engineering, Visual computing labs, etc. He drew our attention to the annual report placed in page Nos.2504, 2524, 2556, 2490 of PB Part III for the FY 2017-18 and pages Nos.4734, 4766 of annual report of PB Part V for the FY 2016-17. He submitted that product development cannot be considered comparable to software development since there was no proper bifurcation of various services provided under software development and services segment and same should be rejected. 9.1 The ld. D.R. relied on the order of lower authorities. 10 . We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration in the case of Wipro GE Healthcare Pvt. Ltd. in IT(TP)A 803/Bang/2022 for the AY 2018-19 the Tribunal vide order dated 17.5.2023 has held as under: 14.8 Regarding the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28. In the case of Tata Elxsi , the assessee has taken the following objections: a) It is not functionally comparable to the assessee. In the financial statements of the company, the nature of business carried out by Tata Elxsi is given below: i) Corpoprate Information Tata Elxsi Ltd was incorporated in 1989. The Company provides product design and engineering services to the consumer electronics, communications and transportation industries and systems integration and support services for enterprise customers. It also provides digital content creation for media and entertainment industry 29. We find that in the case of Infor (India) (P) Ltd vs. ACIT in ITA No.2307/Hyd/2018, the Coordinate Bench of the Tribunal has considered similar objections of the assessee therein and has held that these two companies along with Thirdware Solutions Ltd is not comparable to the software development company like the assessee before us. The relevant portions has been reproduced by us in the above paras. Respectfully following the same, these two companies are also directed to be excluded from the final list of ITA No 2233 of 2018 ADP Private Ltd Hyderabad comparables. Thus, assessee's ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., Mindtree Ltd. and L T Infotech Ltd . He brought to our notice that as far as Persistent Systems Ltd. is concerned, the reasoning given for excluding this company for AY 2014-15 will equally hold good for the present year as well. In this regard, our attention was drawn to page 601 of the assessee's PB wherein in the annual report of this company, Notes forming part of financial statement in Note (i) which gives the description of income from software services, there is a reference to revenue from licensing software, which sufficiently indicates that the assessee is not a pure SWD services provider. It was also brought to our notice that the profit loss account which is at page 596 read with Notes forming part of the financial statement at page 604 wherein the segmental reporting is not based on different segments and the statement presents a consolidated financial statement without any segmental reporting. This company has also significant RPT transaction of 25% on sales. He pointed out that the TPO DRP on the application of RPT filter has not expressed any opinion. The ld. DR relied on the order of DRP wherein the DRP has made extensive reference to each of the objections r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal Sales (B) 12,424.98 RPT % of Sales (A/B) 31.32% From the above computation, it is clear that the controlled transactions of Persistent constitutes 31.32% of sales. Based on the above, it can be seen that Persistent fails the `RPT to sales ratio' filter applied by the learned TPO and should therefore not be considered as a comparable. 34. This argument has been addressed by the DRP in its order as follows:- 4.4.9 We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction is logical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that onsite expenses do not adversely affect comparability and hence, such plea is rejected. 35. Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this company should not be regarded as a comparable company with a company which does not have any onsite revenue. In this regard, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there can be no functional comparability, if the assets employed and risks assumed are taken into consideration. It is in that context the TPO has referred to the margins. 67. The companies who generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee's PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee's PB that this company as part of its operating profit in Schedule- O of profit loss account contains expenditure for 'cost of bought out items for resale' and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit loss account, there is no break- up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon'ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon'ble Delhi High Court. 39. The next company which the assessee seeks to exclude is Infosys Ltd. As far as this company is concerned, it is seen that the following are the funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate of Florida in relation to the development center located overseas. Lack of segmental data - Does not maintain segmental information in respect of profitability reported from business activities in the nature of infrastructure management services, technology consulting and SAP services. - Acquisition of subsidiary - Discoverture Solutions LLC. 42. The DRP while dealing with the aforesaid objections has merely taken the view that the presence of IPR revenue was insignificant and so also expenses of brand value, R D intangibles. More importantly, the DRP did not dispute the presence of 46% of revenue from onsite model, but went on to hold that the presence of revenue is not sufficient to exclude a company, when it is otherwise functionally comparable. On this aspect, we have already referred to the decision of the ITAT Bangalore Bench in the case of Trilogy e-business Software India P. Ltd. (supra) and in the light of this decision and the admitted factual position regarding presence of onsite revenue over and above the threshold limit of 25% of total revenue, we are of the view that this company should be excluded from the list of comparable companies. We hold and direct accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the FY 2017-18. 15.1 The ld. D.R. relied on the orders of lower authorities. 16. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration in assessee s own case for the AY 2008-09 in IT(TP)A No.1670/Bang/2012 dated 6.11.2015 wherein held as under: 12. Wipro Ltd. 12.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables on several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons :- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 16.1 Being so, we direct the ld. AO/TPO to exclude this company M/s. Wipro Ltd. from the list of comparables. (f) Infosys Limited: 17. The ld. A.R. submitted that M /s. Infosys Limited is functionally dissimilar to the assessee company since the turnover of this company is 61941 crores against the turnover of assessee company at Rs. 192.81 crores for the assessment year under consideration. Further , M/s. Infosys Ltd. provides business consulting, technology, outsourcing, next generation services and software. The company also provides products business platforms and solutions to accelerate intellectual property led innovation. Also, the company s new service offering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctionality as well as on turnover basis. 19. In the result, the main ground Nos.5 to 7.8 and additional ground No.3 are allowed. 20 . Regarding the next main ground No.8 and additional ground Nos.1 2 the ld. A.R. submitted that the Ld. TPO vide order dated 21.07.2022 while giving effect to DRP directions proceeded to make an adjustment of INR 3,25,19,952/-. The ld. A.R. submitted that receivables in the present assessment year arose from international transaction pertaining to SWD and MSS services. Thus, the same are not just closely linked but are a part of the said transactions. He prayed for deletion of this adjustment on account of interest on receivables on the following grounds: (a) Upon exclusion of 6 comparables from the final set of comparbales in SWD segment, the Appellant would have earned excess margin of 1.63% (15% - 13.37%) which would amount to INR 2,73,29,126 of excess income earned over ALP by the assessee in this segment. Further since the assessee has earned excess margin of 5.76% (9% - 3.24%) in the MSS segment, an excess income of INR 1,30,48,116 has been earned. The total excess income earned by the Appellant in MSS and SWD is INR 4,03,77,243 being greater t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of M/s. Thought Focus Information Technologies Pvt. Ltd. in IT(TP)A No.742/Bang/2022 dated 11.1.2023 for the AY 2018-19 wherein the ld. DRP referred to the decision of jurisdictional High Court in the case of DCIT Vs. AMD India Pvt. Ltd. in ITA No.274/2018 dated 31.8.2018 wherein held that the deferred receivables would constitute an independent international transaction and hence, separate bench marking has to be done and TP adjustment is to be made as per law . Therefore, interest imputation is not hypothetical as per the requirement of TP regulation. Further, she submitted that the credit period is only 30 days. As such, credit period is to be restricted to the actual period of 30 days only. 21.1 We have heard the rival submissions and perused the materials available on record. In our opinion, this issue came for consideration before this Tribunal in the case of M/s. Huawei Technologies India Pvt. Ltd. in IT(TP)A No.731/Bang/2022 for the AY 2018-19 the Tribunal vide order dated 5.12.2022 held as under: 32. We heard the rival submissions and perused the material on record. In our opinion, the impugned issues of whether the interest on receivable is a separate internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7- 16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 23.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 wherein it is held that, interest on receivables is an international transaction and the transfer pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing-up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 23.7. We have perused the submissions advanced by both the sides in the light of the records placed before us . This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib.), held that outst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018. 33. In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon'ble Delhi High Court in the case of Cotton Naturals (I) (P.) Ltd (supra) in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. 34. During the course of hearing the ld AR drew our attention to the the invoice- wise receivable collection of the assessee with with the average receivable days computed for the comparable companies proposed by the assessee where, it is observed that the weighted average number of days for which the invoices remained overdue during the year worked out to 43 days (Page 1096 and 1097 of Paper Book I - Factual Document - Part 2 ) and that of the comparable companies average came to 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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