TaxTMI 
TaxTMI 
TaxTMI 
2019 (2) TMI 227
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....1 and 15 are concerned these grounds read as follows:- "9. The learned AO erred in adopting a threshold of 0% for applying the Related Party filter ('RPT") as per the directions of the Hon'ble DRP and thereby erred in rejecting the functional comparable companies. 11. The learned AO/learned TPO erred in including companies that do not satisfy the test of comparability. Specifically, the following company should have been rejected: 15. The learned AO/learned TPO erred in recharacterizing the debtors outstanding from the AE as loans extended to the AE and thereby erred in computing notional interest on the outstanding balance from the AE. While doing so, the learned AO/learned TPO erred: 15.1 By not appreciating that the debts were outstanding with the AE purely because of genuine business reasons and it was not with a malafide intention to extend indirect credit period to the debtors. 15.2 In computing the notional interest on the outstanding balances from the AE by adopting an adhoc threshold of 3 months as the arm's length benchmark for making the transfer pricing adjustment. 15.3 Without prejudice, by not computing notional interest only for the perio....
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....ed Trasnfer Pricing Analysis selecting 21 companies as comparable with the assessee in terms of Functions performed, Assets employed and Risks Assumed (FAR) and the arithmetic mean of profit margin of those companies was within the profit margins earned by the assessee in the international transaction. 8. The TPO to whom the determination of ALP was referred by the AO u/s 92CA of the Act, rejected 14 of those comparable companies chosen by the Assessee and accepted 7 comparable companies chosen by the assesee. The TPO on his own added 4 more comparable companies which resulted in final set of 11 comparable companies. The arithmetic mean of profit margin of 11 comparable companies after providing for working capital adjustment was as follows:- Sl. No Name Sales Cost PLI 1 I C R A Techno Analytics Ltd. (seg) 11,89,81,000 9,52,33,000 24.94% 2 Infosys Ltd. 2,11,40,00,00,000 1,45,81,00,00,000 44.98% 3 Kals Information Systems Ltd.(seg) 2,16,92,935 1,61,39,288 34.41% 4 Larsen & Toubro Infotech Ltd. 17,76,76,48,294 14,88,92,91,379 19.33% S Mindtree Ltd. (seg) 6,98,02,80,117 6,07,89,59,413 14.83% 6 Persistent Systems & Solutions Ltd. 6,67,28,828 5,....
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....sessee's own case for asst. year 2005-06, Bangalore ITAT, in the decision reported in (2015) 61 taxman.com 81 (Bangalore Trib.), took the view that thresh hold limit of Related Party Transaction for exclusion as not comparable should be 15% of the turnover of the comparable companies. In other words if the comparable company chosen had transactions of 15% of more of its sales with related parties, then those companies were to be regarded as not comparable companies. In the present case, the 3 companies excluded had RPT transaction which were ICRA Techno Analytics Ltd., 14.95% of Sales Persistent Systems and Solution Ltd., 5.39% of sales and Think Soft Global Services Ltd. 11.01% of its sales. It is the plea of the assessee in ground No. 9 that the aforesaid 3 companies should be considered as comparable companies because the RPT transactions are below the threshold limit of 15% of sales. 13. The ld. DR on the other hand submitted that in some of the decisions rendered by the Bangalore Bench of ITAT threshold limit of 25% of sales was applied to exclude companies on account of RPT Filter and therefore by exclusion of the aforesaid 3 companies should be applied in that event, the 3 ....
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.... for rejecting comparable companies. Consequently, it is held that companies having RPT upto 15% of the total revenues can be included." 15. We have considered the rival submission and we are of the view that application of RPT filer at 15% of the sales would be appropriate in the given facts and circumstances of the case and as laid down in the case of Auto Desk India Pvt. Ltd., (Supra), we hold accordingly and direct to inclusion of 3 companies which were excluded by application of RPT Filter by the DRP. 16. The 2 companies out of the 11 companies chosen as final comparable companies by the TPO which remain after the order of the DRP were Kals Information Systems Ltd., and RS Software (India) Ltd. The assessee seeks to exclude Kals Information - Systems Ltd., from the list of comparable companies on the grounds that this company was not functionally comparable as it was engaged in developing software products and was not a pure software development services company. On comparability of this company, the TPO has given the following finding in his order. 3 Kals Information Systems Ltd. (seg) Earns revenue from services and products. No breakup given. Relies on decisions of Ho....
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..... ITO (ITA no.1280/Bang/2012) as well as in the appellant's own matter in ITA No.1538/Bang/2012. Additionally, the discussion around this company in the case of NettHawk Networks India Private Ltd. Vs. ITO (ITA no.7633/M/2012) was also cited. 9.3 The objections and arguments of the taxpayer have been considered and the order of the Hon'ble ITAT Bangalore in the case of M/s Trilogy E Business Software India Pvt. Ltd (supra) perused. At Para-46 of this order, the Hon'ble ITAT considered the decision in the case of Bindview India Private Limited and in Para-47 held as follows "we have given a careful consideration to the submission made on behalf of the assessee, we find that the TPO has drawn conclusions on the basis of the information obtained by issue of notice u/s 133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of the company as highlighted by the assessee in its letter dated 21-06-2010 to the TPO. We also find that the decision referred by the Learned Counsel for the assessee, the Mumbai Bench of ITAT has held that the company was developing software ....
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.... services company. After affording opportunity of being herd to the assesee, the TPO will consider the comparability of this company with that of the assessee. 19. The next grievance of the assessee is reproduced in ground No.15. 20. As far as aforesaid grievance projected by the assessee is concerned, the TPO noticed that the assessee was allowing substantial credit period for payment to the AE. In these circumstances, the TPO made an addition of Rs. 52,73,0325/- treating the extended credit period given by the assessee to AE as international transaction. Following were relevant observations of the TPO in the order of assessment. Interest on Sundry debtors outstanding for more than 3 months: The taxpayer has shown receivables of Rs. 16,82 Crore from its AE. A notice was issued to the taxpayer to show cause why interest should not be charged on amount outstanding for more than 3 months as being in the nature of extended credit period. The taxpayer filed its response vide letter dated 31/10/13 the taxpayer has submitted that debts are outstanding with the AE purely because of business reasons and that this was a common business practice prevailing in the industry. The taxpayer....
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....cle-3(1) (ITA No. 7653/Mum./2011) where it was held that the T.P. adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income, it was also pointed out by the taxpayer that the TPO had not given any basis for arriving at a threshold of three month for computing the notional interest. 7.3 The taxpayer's objections as above have been considered along with the judicial decision cited. The decision was given in the context of the case where the taxpayer had no interest liability and no external borrowing. In the case of Mastek Ltd vs Addl. CIT (2012) 21 taxmann.com 173 the Hon'ble ITAT Ahmadabad required verification of whether the AEs are recovering interest from third parties for late recoveries before considering any levy of interest by the taxpayer for delayed payment. The TPO's rationale for the addition in her order as elaborated as page 29 is that once the normal period of credit of three months extended to a debtor lapses, then the extended period of credit takes on the color of a financial transaction and can no longer be treated as a mere debtor transaction. We a....
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....nd arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and clubbing of closely linked transaction are permitted under said rule. This concept of aggregation of the transaction which is closely liked is also supported by OCED transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely liked that determination of price of one transaction is dependent on the other transaction then for the purpose of determining the ALP, the closely linked transaction should be aggregated and clubbed together. When the transaction are influenced by each other and particularly in determining the price and profit involved in the transaction then those transactions can safely be regarded as closely lined tr....
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....he assessee and not the rate at which a loan is available. Accordingly, we direct the AO/TPO to re-do the exercise of determination of the ALP in terms of above observation". Respectfully following the above decision, we hold that there can be no separate international transaction of 'interest' in the international transaction of sale. Early or late realization of sale proceeds is only incidental to transaction of sale, but not a separate transaction in nature. Since we hold that the impugned transaction of interest on delayed realization of sale proceeds is not international transaction, it is not necessary to adjudicate upon the additional gr9inds raised by the assessee company. Hence, the appeal is treated as partly allowed for statistical purposes." 23. The ld. DR on the other hand relied on the order of the DRP. 24. We have considered rival submissions and are of the view that the plea of the assessee has to be accepted as held by the Bangalore Bench in the case of Avnet India Pvt. Ltd., (Supra) that giving a credit period cannot be considered as an independent transaction. It is a integral part of transaction of rendering of software development services by the ....
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....c. 40a(ia) of the Act will be attracted. He was of the view that depreciation claimed on purchase of software and license by the assessee should be disallowed u/s 40a(ia) of the Act. The AO accordingly disallowed the depreciation to the extent of Rs. 1,039,590/- and the DRP confirmed the action of the AO. 28. Aggrieved by the order of the DRP, the assessee has raised ground No.16 before of the Tribunal. 29. The issue raised by the assessee in the aforesaid ground of appeal is no longer res integra and has been decided by the ITAT, Bangalore in the case of M/s Wintac Ltd., Vs. DCIT in ITA No. 834/Bang/2016 order dated 13/4/2017. In the aforesaid decision, the Tribunal took the following view. "7. As it is clear from the above decision that the Tribunal has discussed and analysed the provisions of section 40(a)(i) in detail in the context of disallowance of depreciation. The learned D.R. has submitted that once the assessee has violated the provisions of section 195, then, even the expenditure is capitalized by the assessee, the provisions of section 40(a)(i) are applicable for disallowance of depreciation on such capitalized expenditure. We do not agree with the contention of th....