2020 (7) TMI 621 - AT - Income Tax

Assessee wins appeal, comparables excluded, no interest adjustment. Tribunal supports key contentions.

M/s Motherson Sumi Infotech& Designs Ltd. Versus The DCIT, Circle-17 (1), New Delhi.

The appeal was allowed in favor of the assessee, with specific directions to exclude certain comparables and no adjustment on account of interest on ... TP Adjustment - addition on account of provision of Software Development Services by the assessee to its AE - Comparability selection - HELD THAT:- Assessee is engaged in provision of Software Development Services to its AE. For benchmarking aforesaid international transaction, Transactional Net Margin Method (in short TNMM) is applied. Where TNMM method is applied, it takes care of certain marginal differences between the functioning of the tested party and the finally selected comparables. However, if the module of working is different, then such a concern cannot be held to be functionally comparable and cannot be selected in the final list of comparables. The Hon’ble Delhi High Court in Rampgreen Solutions vs. CIT [2015 (8) TMI 931 - DELHI HIGH COURT] while adjudicating similar issue of application of TNMM method and whether functionality being same was sufficient held that the comparable transaction/entities must be selected on the basis of similarity with the control transaction/entity. The comparability of controlled and uncontrolled transactions had to be judged inter alia, with reference to comparability factors as indicated under Rule 10B(2) of I.T. Rules. Whether a concern which fails service revenue filter applied by the TPO, can this be excluded from final list of comparable? - We find that the TPO had mentioned the same to be at 74% whereas the learned AR for the assessee claims that it is 75% and on the other hand the learned DR for the Revenue points out that the employee service revenue filter comes to 84.93%. In view of the dis-similarity in the figures proposed by the AO / TPO, the learned AR for the assessee and learned DR for the Revenue, we remit this issue to the file of AO / TPO to verify the stand of the assessee and in case it fails to service revenue filter, which is proposed by the TPO himself then the said concern is to be excluded from the final list of comparable. Exclusion of Persistent Systems Limited - As in assessee’s own case, relating to assessment year 2007-08 and pointed out that the said concern was held to be functionally similar to the assessee. The learned AR for the assessee fairly pointed out that the issue was decided against the assessee by the Tribunal. Accordingly, we find no merit in the plea of the assessee and the said concern i.e. Persistent Systems Limited is to be included in the final list of comparable. Wipro Technology Services Limited concern having such huge brand value and owning intangibles cannot be compared with the concern providing BPO services. The Delhi Bench of the Tribunal in Bechtel India (P.) Ltd.[2016 (9) TMI 196 - DELHI HIGH COURT]had excluded Wipro Technology Services Limited on the ground of high related party transaction. We further find that the said concern was also engaged in sale of software products. In these facts and circumstances, we direct the exclusion of Wipro Technology Services Ltd,. Sasken Communication Technologies Limited is not functionally comparables to the assessee and same needs to be excluded from the final list of comparable. Thirdware Solutions Limited - we look at the annual report of the concern i.e. Thirdware Solutions Limited, we find that it was engaged in implementation and consulting services of software and business intelligence. It has also declared Revenue from sale of license, Software Services, export from SEZ and STPI. However, the segmental details are not available and the same is to be excluded from the final list of comparable. Adjustment made on account of receivables from AE - case of the Revenue is that as the assessee has not received the amount due from the AEs, within the stipulated period then interest adjustment needs to be made on account of interest due on Receivables, as this was an International Transaction - HELD THAT:-The assessee during the year under consideration had not avail any loan from AEs or unrelated third parties and was not incurring any interest cost. There was similar delay in receipt of receivables from others and the assessee was not charging any interest on delay in receipt of receivables against services rendered to unrelated third parties. Following the ratio laid down in Kusum Healthcare Ltd.. [2017 (4) TMI 1254 - DELHI HIGH COURT] and also in line with the findings of the Tribunal in M/s. Global Logic India Ltd. (supra), we find no merit in making any adjustment on account of interest due on receivables from its AE. Appeal of assessee allowed. Issues Involved:1. Validity of the assessment order.2. Transfer pricing adjustments on Software Development Services.3. Adjustment on account of interest on receivables.4. Charging of interest under sections 234A, 234B, 234C, and 234D.5. Initiation of penalty proceedings under section 271(1)(C).Detailed Analysis:1. Validity of the Assessment Order:The assessee challenged the assessment order passed by the Learned Assessing Officer (Ld. AO) pursuant to the directions of the Learned Dispute Resolution Panel (Ld. DRP), claiming it to be bad in law and void ab initio. However, this issue was not adjudicated as it was considered general in nature.2. Transfer Pricing Adjustments on Software Development Services:The primary issue was the transfer pricing adjustment of Rs. 3,46,60,211/- made on account of international transactions of rendering Software Development Services to the Associated Enterprises (AE). The assessee used the Transactional Net Margin Method (TNMM) with OP/TC as the Profit Level Indicator (PLI) at 10.01% and selected 16 functionally comparable companies with a mean margin of 13.08%. The TPO, however, revised the filters and selected 18 comparables with a mean margin of 22.32%, leading to an upward adjustment. The DRP directed the exclusion of Infosys Ltd. and eZest Solutions Ltd., inclusion of Think Soft Global Services Ltd., and allowed working capital adjustment. The final list of 17 comparables had a mean margin of 19.04%, resulting in an adjustment of Rs. 3,46,60,211/-.Exclusion of Comparables:- Acropetal Technologies Limited (Seg): Excluded due to failing the employee cost/sale filter and providing onsite services.- E-Infochips Limited: Remitted to AO/TPO for verification of service revenue filter.- Persistent Systems Limited: Included as it was functionally similar based on past Tribunal decisions.- Wipro Technology Services Limited: Excluded due to high brand value, high related party transactions, and engagement in software product sales.- Sasken Communication Technologies Limited: Excluded as it was developing mobile enterprise applications, making it functionally dissimilar.- Thirdware Solutions Limited: Excluded due to lack of segmental details and engagement in various activities.3. Adjustment on Account of Interest on Receivables:The Revenue proposed an adjustment of Rs. 28,96,869/- on account of interest on receivables from AE, treating it as a deemed loan. The Tribunal found this issue covered in favor of the assessee by previous decisions, including the Delhi High Court ruling in Kusum Healthcare Pvt. Ltd., which held that not all receivables constitute an international transaction. The Tribunal noted that the assessee was debt-free and did not charge interest on receivables from unrelated third parties. Hence, no adjustment was warranted.4. Charging of Interest under Sections 234A, 234B, 234C, and 234D:The assessee's challenge to the computation of interest under these sections was dismissed as being consequential.5. Initiation of Penalty Proceedings under Section 271(1)(C):The challenge to the initiation of penalty proceedings was dismissed as premature.Conclusion:The appeal was allowed in favor of the assessee, with specific directions to exclude certain comparables and no adjustment on account of interest on receivables. The Tribunal upheld the assessee's contentions on key issues, providing a detailed rationale for each decision.