TaxTMI 
TaxTMI 
2020 (12) TMI 235
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....red to as the Ld. TPO') and the Ld. AO under the directions issued by Hon'ble DRP, erred in making an addition to the Appellant's total income of INR 4,60,53,538 (based on the provisions of Chapter X of the Income-Tax Act, ('the Act') and the said additions being wholly unjustified are liable to be deleted. 2. On the facts and in the circumstances of the case and in law, the Ld. TPO erred and the Hon'ble DRP further erred in upholding/ confirming the action of the Ld. TPO in incorrectly including / selecting the following companies as comparables, without appreciating that the said companies were functionally dissimilar to the Appellant, which ought to have been excluded for the following reasons which are independent of and without prejudice to one another i.e. the said companies were engaged in product development, do not have required segmental Information, have huge turnover, presence of brand and intangibles, have incurred huge R & D Expenditure, have significant Onsite Expenses, hold significant inventory, have abnormal profits, have insufficient information in public domain, have significant Related Party Transactions, peculiar economic circu....
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.... the facts and in the circumstances of the case and in law, the Ld TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld TPO in not allowing risk adjustment in accordance with the provisions of Rule 10B of the Income-tax Rules, 1962 to account for differences between the international transactions undertaken by the Appellant, being a captive unit, and those undertaken by the comparables. 7. On the facts and in the circumstances of the case and in law, the Ld TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in considering bad debts, provision for bad and doubtful debts and provision for warranty as non operating expenditure while computing the PLI of the comparables. 8. On the facts and in the circumstances of the case and in law, the Ld TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Learned TPO in not allowing Working Capital Adjustment in accordance with the provisions of Rule 10B of the Income-tax Rules. 9. On the facts and in the circumstances of the case and in law, the Ld TPO erred in and the Hon&#....
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....ide this appeal according to law. 3. Ground No.1, 5 and 13 are general in nature, hence no separate adjudication is considered necessary. 4. Ground No.6, 7 and 8 are not pressed by the Ld.A.R during the appeal hearing and hence ground No.6,7 and 8 are dismissed as not pressed. 5. Brief facts of the case are that the assessee-company is engaged in the business of sale of user license of enterprise application software, software development and rendering software related services to the group companies and external parties. For the A.Y.2015-16, the assesseecompany filed its return of income on 27.11.2015 admitting total income of Rs. 8,63,65,260/-. The case was selected for scrutiny and from the audit report in Form 3CEB, the AO found that the assessee had entered into international transactions with the Associated Enterprises (AE) to the extent of Rs. 267,28,58,059/-, hence, referred the issue to the Transfer Pricing Officer (TPO) for determining the arm's length price(ALP) of the international transactions. The TPO proposed for adjustment of Rs. 9,82,73,154/- in respect of the following segments of the assesseecompany:- S.No. Description Amount (INR) 1 Provi....
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....ricing study in respect of software development services due to defects in filters as discussed in para 7.1.1 of the TPO's order which reads as under: "7.1.1. Rejection of TP Study In the case of tax payer, the TPO is mainly concerned about whether the information or data used in the computation of the arm's length price is reliable and correct. It is clear from the provisions of Sec.92C(3)(c) read with Sec.92CA that on the basis of material or information or documents in the possession of TPO, if he is of the opinion that the information or data used in computation of the arm's length price is not reliable or correct, the TPO may proceed to determine the arm's length price in relation to the international transactions in accordance with Sec.92C(1) and 92C(2) on the basis of such material or information or document available with him. The search criteria and the acceptance / rejection matrix applied by the company for screening the initially identified cases for arriving at a final comparable set are as under : S.No. Particulars Remarks of the TPO 1. Companies with Net sales more than 1 Cr. This is an appropriate filter....
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.... Ltd., 31.11 35.44 28.20 31.69 11 Nihilent Technologies Ltd., 29.19 35.72 - 32.21 12 Aspire Systems (India) Pvt. Ltd., 30.98 38.04 - 34.18 13 Inteq Software Pvt. Ltd., 31.16 45.00 - 37.90 14 Infosys Ltd., 40.29 36.28 29.25 38.59 15 Thirdware Solutions Ltd., 43.69 44.68 32.65 41.12 16 Cybage Software Pvt. Ltd., 68.17 68.82 60.81 66.27 35th Percentile 20.55% Median 27.37% 65th Percentile 37.90% 5.7. The TPO computed the ALP adopting the median margin of 27.37% as under: SOFTWARE DEVELOPMENT SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 46,44,04,588 Taxpayers operating cost OC 40,42,15,932 Taxpayers operating profit OP 6,23,88,656 Taxpayers PLI PLI = OP/OC 15.43% 35th Percentile Margin of Comparable set 20.55% Adjustment Required (if PLI < 35th Percentile Yes ....
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....se for the A.Ys. 2013-14 &2014-15 in ITA Nos. 161 & 2307/HYD /2018 dated 06/08/2019 which reads as under:- "7.4 As regards exclusion of Infosys Ltd, Larsen & Toubro Infotech Ltd and Mindtree Ltd, the common ground of the assessee is that they have huge turnover of Rs. 42,531 crores, Rs. 4,648.38 crores and Rs. 3,031.6 crores respectively as against the assessee's turnover of Rs. 116.00 crores only. The learned Counsel for the assessee also argued that they are functionally dissimilar and own intangibles etc. 7.5. The learned DR argued that unless the assessee demonstrates as to how the huge turnover impacts the margin of the said companies, they should not be excluded from the final list of comparables. 7.6. Having regard to the rival contentions and the material on record, we find that the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies (P) Ltd(2013) 36 Taxmann.com 289 (Delhi H.C) has held Infosys Ltd as not comparable as it is a giant company in the area of development of software. The same ratio applied to both L&T and Mindtree as well. Thus, we direct exclusion of all these three companies on account of huge turnover." ....
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....arned Authorised Representative. Since, many of these decisions pertain to the impugned assessment year, respectfully following the aforesaid decisions of the Tribunal, we direct the Assessing Officer to exclude this company from the list of comparables. 35. We have considered rival submissions and perused materials on record. On a perusal of the documents placed in the paper book it appears that this company is engaged in various activities including development of niche product and development services. Thus, the company is functionally different from the assessee. Considering the aforesaid aspect, the Coordinate Bench in case of Telcordia Technologies India (P.) Ltd. (supra), which is for the very same assessment year, has excluded this company as a comparable. Similar view has also been expressed in the other decisions cited by the learned Authorised Representative. Thus, keeping in view the decisions of the Tribunal referred to above, we hold that this company cannot be a comparable to the assessee. 38. We have considered rival submissions and perused materials on record. Though, it may be a fact that the assessee may not have objected to selection of this co....
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....he final list of comparables selected by TPO and average of Cybage Software Pvt. Ltd. worked out to 66.27% which is more than 1/3rd average of the rest of the companies. Therefore, argued that Cybage Software Pvt. Ltd. is not a comparable in view of highest margins. The assessee also objected before the AO for taking Cybage Software Pvt. Ltd. as comparable stating that it is functionally dissimilar and diversified activities engaged in product development and insufficient information available in the public domain. Both the Ld.TPO and the Ld.DRP rejected the contentions of the assessee. The Ld.DR supported the orders of the lower authorities. 6.4.1. We have considered the rival submissions and observe that Cybage Software Pvt. Ltd., though comparable company, the margin declared by the Cybage Software Pvt. Ltd. is abnormally high which is as much as 68.17% in the year under consideration and average margin is at 66.27%. The Ld. TPO has excluded the loss companies and also the companies which are with lowest margins as argued by the Ld.AR and which was not disputed by the department. Following the same analogy Cybage Software Pvt. Ltd. required to be excluded. The TPO or DRP has ....
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....ince, the margin of Cybage Software Pvt. Ltd. is persistently abnormal and very high which is considered in favour of the assessee in this order. Following the same reason, since, SagarSoft India Ltd,. is persistent loss company, the assessee's request for inclusion of SagarSoft India Ltd. as comparable company deserves to be rejected. Therefore, following the reason given in the case, Cybage Software Pvt. Ltd., the assessee's ground for inclusion of SagarSoft India Ltd. being persistent loss company is dismissed. 8. Ground No.4 is in respect of incorrect computation of margins in respect of Nihilent Technologies Ltd., Thirdware Solution Ltd. and Sasken Communication Technologies Ltd. 8.1. We have heard both the parties. We have directed the AO to delete the Thirdware Solution Ltd. from the final list of comparables in ground No 2 in this order, therefore, no separate adjudication is necessary in respect of margin of Thirdware Solution Ltd. With regard to computing the correct margin in respect of Nihilent Technologies Ltd. and Sasken Communication Technologies Ltd. The issue is remitted back to the file of the TPO (AO) to compute correct margins of comparable companies after....
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....to be made. The assessee's contention that it has not paid any interest on outstanding payables and therefore, the interest should not be charged on the trade receivables is not sustainable for these A.Ys. The argument that it is a debt free company and therefore, no interest is also to be charged is not acceptable. 87. The learned Counsel for the assessee has placed reliance upon various case law. However, we find that they are relating to the A.Ys prior to the amendment of section 92B of the Act. However, the interest on trade receivables should be calculated at the interest rate applicable for the relevant period as is charged by SBI on the short term deposits. The AO has allowed the credit period of 60 to 90 days as per the agreement for A.Y 2013-14 but for the A.Y 2014-15 he has allowed only 30 days as credit period. This action of the AO cannot be upheld. If there is a clause in the agreement about credit period, the interest should be calculated only on the period exceeding such credit period in the agreement, but if there is no credit period specified in the agreement, then the credit period of 90 days or the industry average credit period should be considered with....