TaxTMI 
TaxTMI 
2019 (6) TMI 1567
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....es of the case and in law, the learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (AO) erred in proposing and the Hon'ble Dispute Resolution Panel ('DRP') further erred in confirming the proposed addition to the Appellant's total income of INR 3,64,56,910/- based oil provisions of Chapter X of the Income-tax Act, ('the Act'). Requisite Conditions under Section 92C(3) - Not Satisfied 2. On facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned AO and learned TPO in not stating any reasons to show that either of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied before making all to the income of the Appellant. Software Development Services (INR 3,55,82,325) Cherry picking of comparable companies 3. On facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRIP further erred in upholding / confirming the action of the learned AO and learned TPO in arbitrarily s....
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....es, which clearly brings out the inconsistency in the approach adopted by the learned TPO as well as the Hon'ble DRP. In view of the above, the Appellant prays that the aforesaid inconsistency in the approach of the learned TPO as well as the Hon'ble DRP lacks consistency and contains inherent contradictions being against the established principles of benchmarking exercise and is liable to be rejected/appropriately corrected. Incorrect application of an arbitrary filter to select functionally different companies 7. On the facts and in the circumstances of the case and in law, the Hon'ble DRP further erred in arbitrarily applying a filter of software development services more than 50 per cent to select two companies viz. e-lnfochips Limited and Wipro Technologies Limited to the final set thereby ignoring all the submissions of the Appellant with respect to deletion of the said companies and demonstrating a prejudicial mind-set to make an adjustment to the total income of the Appellant. In view of the above, the Appellant prays that action of the learned TPO and the Hon'ble DIZP of adopting an arbitrary filter without any basis is u....
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....ellant is a zero debt company and it does not have any borrowings / loans from external sources, therefore no actual interest cost borne by the Appellant, thereby disregarding the factual explanations submitted by the Appellant during the course of assessment proceedings. In view of the above, the Appellant prays that the addition of notional interest on account of the delay in receipts from the AEs made by the learned AO, learned TI'0 and confirmed by the Hon'ble DRP is erroneous, unwarranted and should be deleted. Initiation of Penalty Proceedings under section 271(1)(c) of the Act 13. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the learned AO be directed to drop the penalty proceedings initiated under section 271(1)(c) of the Act. Computation of Interest under Sections 234B, 234C and 2341) of the Act 14. On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under Section 234B, Section 234C and Section 234D of the Act. The Appella....
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.... AE is at ALP. The details of comparables with margin selected by the assessee are as under:- Sr. No. Company Name NCP 2011(%) 1 Akshay Software Technologies Ltd. 0.69 2 CG-Vak Software & Exports Ltd. 5.44 3 Evoke Technologies Pvt. Ltd. 8.11 4 Goldstone Technologies Ltd. 5.92 5 Helios & Matheson Information Technology Ltd. 15.16 6 LGS Global Ltd. 13.57 7 Mindtree Ltd. 8.86 8 Persistent systems Ltd. 25.88 9 Powersoft Global Solutions Ltd. NA 10 R S Software (India) Ltd. 16.18 11 R Systems International Ltd. 6.50 12 Sasken Communication Technologies Ltd. 27.22 13 Tata Elxsi Ltd. 8.59 14 Vama Industries Ltd. 14.59 Arithmetic Mean 12.05 5. For the year under consideration, the assessee had filed its return of income on 23/11/2011 declaring total income at Rs. 3,50,22,946/-. The case was selected for scrutiny and during the course of assessment proceedings, the AO referred the TP study to the TPO for computing Arm's Length Price in respect of international transactions of the assessee with its Associate Enterprises. The TPO, in the pro....
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.... Information Systems Ltd. (Seg) 14.11 DRP 4 LGS Global Ltd. 13.38 DRP 5 Mindtree Ltd. 25.87 DRP 6 Persistent Systems Ltd. 19.91 DRP 7 Thirdware solutions Ltd. 16.20 DRP 8 Acropetal technologies Ltd. 6.50 DRP 9 L & T Infotech Ltd. 29.36 DRP 10 Powersoft Global Solutions Ltd. 11.40 DRP 11 R S Software (India) Ltd. 62.60 DRP 12 Sasken Communication Technologies Ltd. 8.88 DRP 13. Tata Elsxi (seg) 17.45 DRP 14 Zylog Systems Ltd. 36.69 DRP 15 Wipro tech Ltd. 28.74 DRP 16 Sankhya infotech 54.42 DRP 17. Infosys Ltd. 26.20 DRP 18 E Zest solutions Ltd. 34.83 DRP Mean 23.07 DRP 7. The AO has passed final assessment order u/s 143(3) r.w.s. 144C(1) of the Act, dated 30/12/2015 and made TP adjustment as suggested by the DRP-3, Mumbai, at Rs. 3,55,82,325/-. The AO has also made adjustment towards interest on sundry debtors as suggested by the TPO at Rs. 8,74,585/-. 8. Aggrieved by the order of DRP-3, Mumbai, the assessee as well as the Revenue are in appeal before us. 9. The assessee ha....
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....ailable. He further submitted that various Tribunals have considered and held that when companies which are loss making are excluded from the final set of comparables, then the super profit making companies should also be excluded. Since, E-infochips Ltd. is functionally different from the assessee and also has abnormal profit of 62.60%, the same cannot be considered s comparable to the assessee. In this regard, he relied upon the decision of ITAT Delhi, in the case of Cadence Design Systems (I)(P.) Ltd. (2018) 93 taxmann.com 227(Del. Trib.). The assessee has also relied upon the following judgments: i. Alcatel Lucent India Pvt. Ltd. [2016] 74 taxmann.com 105 (Del. Trib.) ii. Adobe Systems India Pvt. Ltd. [2018] 96 taxmann.com 15 (Del. Trib.) iii. Radknee (India) P. Ltd. (2019] 102 taxmann.com 08 (Pune Trib.) iv. Ness Technologies India P. Ltd. [2016] 76 taxmann.com 209 (Mum. Trib.) v. Zynga Game Natework India P. Ltd. [2017] 85 taxmann.com 11 (Bang. Trib.) 11. The Ld. DR, on the other hand, strongly supported the order of the Ld. DRP and submitted that the Ld. DRP has brought out clear facts to the effect that Einfochips Ltd. is func....
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....f profile of the company which is providing software development services to its AE and by following the decision of ITAT, Mumbai Bench in the case of Ness Technologies India P. Ltd. [2017] 188 TTJ 8 (Mum. Trib.) held that this company is not a good comparable and deserves to be excluded from the final set of comparables for benchmarking the international transactions of Provision of software development services. The relevant findings of the Tribunal are as under:- "31. Assessee resisted the inclusion of this company in the list of comparables mainly contending that the company's revenue from software development services is less than 75% of its operating revenue and also that it is engaged into diversified activities as could be seen from the annual report of this company. Earning of super normal profits was also contended before the ld. TPO. However, ld. TPO observed that the assessee is also engaged in Semantics, under two heads of income i.e. income from software development and income from IT services which put together amounts to 86% of the total income, as such the assessee cannot insist on considering the income only from software development. He further obser....
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....old that the information technology consultancy service also falls under the head software development so as to bundle it under that head. 36. In Rampgreen Solutions (P.) Ltd.'s case (supra) on the aspect of employee cost it was held as under:- "38. ...even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said e....
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.... assessee in TP study stating that the company provides software development services alonwith other diversified activities, therefore, cannot be accepted as comparable, but when it comes to Wipro Ltd., the TPO has accepted as comparables ignoring all the submissions made by the assessee. The Ld. AR further submitted that this company provides diversified services comprising software development, software maintenance and technology infrastructure support services. There is no segmental data available in so far as revenue from each segment. It derives more than 64% revenue from software development and related services. The Ld. AR further submitted that it has abnormal high margin owing to huge brand value of its different economic scales. Wipro brand is amongst the top five Greenpeace International Ranking Guide which is one of the top position among Indian IT Brands. As per the annual report, the value of the brand as on 31St March 2011 is 839 million. Therefore, this company cannot be compared with assessee which is mainly providing software development services to its AE. 15. The Ld. DR, on the other hand, submitted that the Ld. DRP has brought out clear facts to the effect t....
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.... of operations as compared to the assessee which is providing mainly software development services to its AE as routine captive service provider cannot be compared. The Co-ordinate Bench of ITAT Delhi in the case of Clear 2 Pay India Pvt. Ltd. vs ITO(2018) 95 taxmann.com 284 (Del. Trib.) had considered Wipro Technology Ltd. in the light of facts of the assessee which is providing captive software services provide to its AE and held the Wipro Technology Ltd. cannot be compared for benchmarking the ALP of international transactions. The relevant findings of the Tribunal are as under:- "7. The ld. DR challenged the inclusion of Wipro by ld. CIT (A) on the ground that abnormally high margin and assuming entrepreneurial risk and marketing risk cannot be a ground to exclude any comparable and in such circumstances, only captive subsidiaries can be used as comparables which is not possible and relied upon findings returned by TPO. 38. However, on the other hand, ld. AR for the taxpayer supported the order passed by the ld. CIT (A) on the ground that the Wipro is functionally not comparable being into technology infrastructure; support products; and software related suppo....
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....ware development services and software product development. It has super normal profits leading to high margins. Further, E-Zest solutions Ltd. is into various business segments and an ISO 9001:2008 certified Product Engineering and Software Development Company, having special expertise in emerging technologies such as Cloud computing business intelligence, etc. Therefore, the same cannot be compared with the assessee company. In this regard, he relied upon number of judicial precedence including the decision of ITAT, Delhi in the case of Clear 2 Pay India Pvt. Ltd. vs ITO (2018) 95 taxmann.com 284 (Del. Trib.). 19. The Ld. DR, on the other hand, strongly supported the order of the Ld. DRP and submitted that the TPO as well as DRP has brought out clear facts to the effect that this is a best comparable for the purpose of determination of Arm's Length Price of international transaction of the assessee with its AE by negating the arguments of the assessee that super normal profit companies cannot be considered for benchmarking of international transaction unless it is demonstrated that some exceptional circumstances during the year let to super normal rate of profits. 20. We ha....
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....ices India (P.) Ltd. v. Dy. CIT [2017] 79 taxmann.com 208 (Chennai) examined comparability of the taxpayer with routine software service provider and ordered to exclude the same on the ground that it is providing high end technical services and as such, is a KPO and not a software development company. So, in view of the matter, we order to exclude E-Zest from final set of comparables." 21. In this view of the matter and by following the decision of ITAT, Delhi Bench in the case of Clear 2 Pay India Pvt. Ltd. vs ITO (supra), we direct the AO/TPO to exclude E-Zest Solutions Ltd. from the list of final set of comparables. (iv) C G VAK Software & Exports Ltd. ('CG VAK') 22. The assessee has included C G VAK Software & Exports Ltd. in the final set of comparables on the ground that the software services segment is comparable to the functions carried out by the assessee. The assessee further stated that as per financial of this company, 90% revenue is generated from software services and 10% from BPO. The TPO excluded CG WAK Software and Exports Ltd. on the ground that it is into both IT and ITeS services with IT forming a major part. The TPO further observed that it is persiste....
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....ll as DRP has accepted the fact that this company is into software development services alongwith BPO services and training. Further, this company has segmental information as per which the revenue derived from software development services is clearly identifiable. The TPO as well as DRP has excluded this company only on the ground that it is persistent loss making company which is evident from financial statement for relevant year. Further, although this company is into profit if FOREX foreign exchange gain is considered as part of operational revenue, but such FOREX gain or loss cannot be considered as part of operating revenue to determine the operating margins. We find that the issue of foreign exchange gain is whether part of operating revenue has been considered by the Hon'ble Delhi High Court in the case of Pr. CIT vs B.C. Management Services Pvt. Ltd. (2018) 403 ITR 45 (Del.). and by following its earlier order in the case of Pr. CIT vs Cashedge India Pvt. Ltd. in ITA NO.279 of 2016 held that as far as the question of foreign exchange fluctuation element is concerned, the records clearly indicate that the safe Harbour rules came into force later, whereas the facts of the ca....
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....her services. 27. We have heard both parties, perused the material available on record and gone through orders of the authorities below. The DRP has brought out clear facts to the effect that this company is functionally comparable to the assessee company because of availability of segmental data in respect of software development and customisation service segment in its annual report. We further noted that the TPO himself accepted the fact that this company is a captive service provider and is comparable to the assessee which is also captive service provider. Further, the TPO has accepted this company as comparable in earlier AY 2010-11 and later AY 201213. Therefore, we are of the considered view that when functions carried out by this company are similar to the functions carried out by the assessee and also the TPO accepted this company in earlier years and subsequent years, there is no reason for the TPO to exclude this company for the year under consideration without their being any change in facts and circumstances. The DRP after considering relevant facts has rightly directed the TPO to include R Systems International Ltd. in the final set of comparables for determination....
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....al and hypothetical manners. The Ld. DRP further observed that although he AO was right in benchmarking interest on delay of sundry debtors, but the rate applied by the TPO on the basis of SBI PLR with a markup of 3% as ALP is incorrect, because it has been held in various decisions of the Tribunals and the Hon'ble Delhi High Court that benchmarking of international transactions of interest on loans and advances in foreign currency to AE shall be made in LIBOR rate. The issue regarding quantum of spread over LIBOR is to be decided on the basis of peculiar facts of each case after evaluating terms of the loans i.e. period of loans, quantum of loans and creditworthiness of the borrower and the nature of collateral. The delay in realisation of debtors from the AE is akin to a transaction of advancing of a interest free loan to the AE, hence, the principle of benchmarking applicable and accordingly by taking note of the period of delay in realisation of sundry debtors wherein between 30 days to 183 days as per the data furnished in the order of the TPO, the AO was right in considering reasonable period of 60 days but while applying the SBI PLR, the AO has ignored the fact that when loa....
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....ng the Arm's Length Price of the international transaction is mandatory regardless of these factors. 7.5 As regards the reliance placed by the assessee on the decision of the Hon'ble ITAT, Mumbai Bench, it is seen that though the said decision was rendered on 21.11.2012, the insertion of Explanation to Section 92B by the Finance Act 2012 with retrospective effect from 01.04.2002 has not been brought to the notice of the Hon'ble Tribunal. 7.6 In view of the discussion above, we hold that the transfer pricing adjustment made by the TPO by way of computing interest income with regard to the delayed recovery of sundry debtors from the AEs is in accordance with the transfer pricing provisions of the I.T.Act and is in order. 7.7 However, we do not agree with the benchmarking carried out by the TPO with regard to this international transaction by considering the PLR of SBI along with a mark up of 3% as the Arm's Length Price, it has been held in various decisions of the Hon'ble Tribunals and the Hon'ble Delhi High Court (in the case of M/s. Cotton Natural (India) Pvt. Ltd.) that benchmarking of international transactions of interest on lo....
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....ent proceedings. The Ld. AR further submitted that extension of credit period to customers is a business decision which AO/TPO cannot interfere with, unless there is finding as to the fact that the assessee has given undue benefit to the AE by extending credit period over and above credit period given to the NonAE, In absence of any finding in this regard, no adjustment could be made on hypothetical or notional basis. 32. The Ld. DR on the other hand, submitted that although the DRP has upheld the findings of the TPO in benchmarking interest receivables on sundry debtors for delay in remittance from the AE, but while adopting rate of interest erred in considering LIBOR plus 2% as against SBIPLR + 3% considered by the TPO without assigning any reason as to why LIBOR rate is applicable for benchmarking interest receivables from sundry debtors. 33. We have heard both parties, perused the material available on record and gone through the orders of authorities below. There is no dispute with regard to the fact that the assessee has not charged any interest receivables from both AE as well as non-AE for delay in receipt of sale proceeds. Further, there is complete uniformity in not....