TaxTMI 
TaxTMI 
2020 (7) TMI 621
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....The Ld. TPO erred on the facts and in the circumstances of the case and in law in framing the order u/s 92CA of the Income Tax Act, 1961 ('the Act') on findings which are erroneous in law, contrary to the facts and based on mere conjectures and surmises. 2.2. The Ld. TPO failed to appreciate the submissions made/ contentions raised by the Appellant and further erred in making several allegations, observations, assertions and inferences in the order, which were both factually incorrect as well as legally untenable. 3. The Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition of Rs. 3,17,63,342/- to the income of the Appellant proposed by the Ld. TPO by holding that its international transactions pertaining to' provision of software development services do not satisfy the arm's length principle envisaged under the Act and in doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action of: 3.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 3.2. disregarding the Arm's Length Price (,ALP....
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....ion pertaining to provision of software development services by using internal Comparable Uncontrolled Price as the most appropriate method to determine the arm's length price; 3.13. disregarding the analysis and documentation submitted by the Appellant to benchmark the international transaction pertaining to provision of software development services by using internal Transactional Net Margin Method as the most appropriate method to determine the arm's length price; 3.14. disregarding the fact that internal comparable analysis is preferable over external comparable analysis; and 3.15. disregarding judicial pronouncements in India in undertaking the TP adjustment. 4. The Ld. AO/Ld. TPO erred in facts and in law in enhancing the income of the Appellant by Rs. 28,96,869/- by treating the receivables outstanding beyond 30 days from associated enterprises as deemed loan and charging notional interest; 5. The Ld. DRP erred in disregarding the detailed arguments/ submissions put forth by the Appellant during the course of the DRP 1 assessment proceedings while passing its direction section 144C of the Act; 6. The Ld. AO has grossly erred by proposing to compute intere....
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....k Soft Global Services Ltd. The DRP also directed that working capital adjustment is to be allowed. The DRP directed application of LIBOR rates instead of SBI PLR lending rates for the adjustment to be made on account of interest on Receivable. Consequent to the directions of DRP, the AO/TPO drew up final list of comparable totaling 17, whose mean margins worked to 19.04% and made upward adjustment of Rs. 3,46,60,211/-. The AO/TPO also reworked the adjustment to be made on account of interest on Receivables. The Assessing Officer passed the consequent order making upward adjustment of Rs. 3,46,60,211/- against which the assessee is in appeal before us. 5. The ground of appeal nos. 1 and 2 are general in nature and does not require any adjudication. The issue raised in ground of appeal no. 3 is against the transfer pricing adjustment made on account of provision of Software Development Services by the assessee to its AE totaling Rs. 3,17,63,342/- . By way of ground of appeal no. 4, the assessee is aggrieved by the adjustment of Rs. 28,96,869/- made on account of interest due on receivable from AE. The ground of appeal no. 5 raised by the assessee is general in nature and does not r....
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....s that the said concern was providing the services onsite. Our attention was brought to the note at page 48 of the paper book wherein the expenditure on onsite development incurred on technical sub-contractor was debited. The learned AR further stated that the said technical sub-contractors cannot be the employees of the concern. He placed reliance on the decision of Delhi Tribunal in Bechtel India (P.) Ltd. vs. DCIT [2019] 101 taxmann.com 385 (Delhi-Trib). He also placed reliance on the decision of the Hon'ble Delhi High Court in Rampgreen Solutions vs. CIT [2015] 377 ITR 533 (Delhi) 2015. 10. The learned DR for the Revenue from the profile of the assessee in the TP study report placed at pages 36 & 37 of the Paperbook pointed out that the assessee was providing array of services, which included Software Development Services and Infra Management Services. He further stated that the assessee was delivering end to end solutions. The assessee was providing variety of services and there was whole range of services. His contention was that while applying TNMM method exact matching concerns would not be available and TPO selected companies keeping in mind comparability margin of 75%. A....
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....ule 10B(2) of the Income Tax Rules, 1962. Comparability analysis by TNMM method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PLI must trigger further investigations/analysis. 44. Consideration for a transaction would reflect the functions performed, the significant activities undertaken, the assets or resources used/consumed, the risks assumed. Thus, comparison of activities undertaken/functions performed is important for determining the comparability between controlled and uncontrolled transactions/entity. It would not be apposite to ignore functional dissimilarity only for the reason that its impact may be reduced on account of using arithmetical mean of the PLI. The DRP had noted that eClerx was functionally dissimilar, but ignored the same relying on an assump....
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.... the TPO, the learned AR for the assessee pointed out that TPO himself had applied the filter of 75% and in case concern fails the said filter, then the same has to be excluded. The learned AR for the assessee referred to the order of TPO at page 42, para 11.3 and pointed out that the TPO had wrongly observed that services filter in case of the said concern was 74%. 15. The learned DR for the Revenue strongly objected to the submissions of the learned AR and pointed out that the same come to 84.93%. He pointed out that 74% is wrongly mentioned. The learned AR in re-joinder for the assessee in rejoinder pointed out that the service revenue filter may be verified by the AO / TPO. 16. The limited issue raised before us is 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 at page 42 in para 11.3 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 lear....
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....evenue was 10%. Further TPO had applied filter of 75%. 21. On hearing the rival contentions, we are of the view that first step which has to be seen is functional comparability. The concerns are providing variety of services and application of service filter of 75% would come in the next rung of comparability. M/s Sasken Communication Technologies Limited was developing mobile enterprise applications and solutions across various mobile platforms including iOS, Android, Blackberry, RIM and Symbiam platform; which are clearly mentioned in the annual report of the said concern. The assessee on the other hand was only providing Software Development Services to its AE. Hence the concern Sasken Communication Technologies Limited is not functionally comparables to the assessee and same needs to be excluded from the final list of comparable. Accordingly, we hold so. 22. The last concern which the assessee wants to exclude from the list of comparables is Thirdware Solutions Limited. The TPO had compared the margins of the assessee with segmental details of the said concern. The objection of the learned AR for the assessee is that the said concern was functionally different and it was enga....
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....by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company, there is no question of charging any interest on Receivables. This issue has also been decided by Hon'ble Delhi high Court in case of Pr. CIT-1 vs M/s. Bechtel India Pvt. Ltd. in ITA 379/2016 (supra) order dated 21.07.2016. The relevant findings of the order of the Tribunal are in paras 14 to 18 which read as under:- 14. Provisions contained under Explanation (i), (a) & (c) of section 92B have been analyzed 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 me....
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.... we examine the entity level margin of the taxpayer vis-à-vis comparable companies, the taxpayer has earned higher margin i.e. taxpayer earned 38.39% OP/OC margin vis-à-vis margin of comparable companies at 11.43%. In such circumstances, no separate adjustment on account of interest can be made. Because the credit period extended to AE cannot be considered as a standalone transaction without considering the main transaction of the sale. 17. Furthermore when the taxpayer is undisputedly a debt free company, as it is not the case of the ld. 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 unrela....