AI Drafter 
TaxTMI 
TaxTMI 
2020 (12) TMI 458
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....development services undertaken by the Appellant Rejection of transfer pricing documentation maintained 1) Rejection of the transfer pricing documentation maintained by the assessee in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("Rules") and undertaking a fresh economic analysis during the course of assessment proceedings and accordingly making an adjustment of Rs. 1,93,66,256/- to the international transactions of providing software services to its AE; Rejection of use of multiple year data 2. Rejecting the use of multiple year data and using data for the FY 2012-13 only; Use of additional filters 3. Inter-alia use of the following additional/modified filters in undertaking the comparative analysis and rejecting comparable companies having: (a) Different financial year-end; and (b) Export sales less than 75% of the sales Selection of companies 4. Not undertaking an objective comparative analysis and inter-alia selecting the following companies without appreciating that the same are not functionally comparable to the Appellant: a) Infobeans Technologies Limited; ....
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....evenue earned by Appellant from third party customer and not from AEs; * Appellant carries out functions of distributor and also takes risks of a distributor including credit risks; * Appellant charges VAT / Sales Tax to third party customers in line with distributor and the service provider is not required to pay VAT / Sales Tax; 12. Disregarding the Inter-company Transfer Pricing methodology for recovery of losses incurred by the Appellant in the initial years of distribution. Rejection of use of multiple year data 13. Rejecting the use of multiple year data and using data for the FY 2012-13 only Selection of most appropriate method 14. Rejection of RPM and selection of TNMM as the most appropriate method for determination of ALP for distribution activity. Selection of companies 15. Not undertaking an objective comparative analysis and inter-alia selecting the following companies without appreciating mat the same are not functionally comparable to the Appellant: a) Integra Telecommunication and software Ltd b) Sonata Information Technology Ltd c) Unisys software & holding industries....
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....ault India, a wholly owned subsidiary of CommVault International B.V, Netherlands, Associated Enterprises (AE) is engaged in providing software development and related support services in the field of unified data storage solutions. 3.1. The company has the following two business segments: * STPI business: The Company provides software development and technical support services to AEs from its centre at Hyderabad. The company is remunerated at a cost plus mark-up of 15% for software development and 20% for technical support services. * Non STPI business: The Company imports and distributes the software licenses and maintenance contracts to third parties in India. During the year under consideration the company received the software license free of cost. 3.2. The Ld. TPO passed his order proposing transfer pricing adjustment to the price received by the assessee as below: * In relation to provision of software development services, the Ld. TPO has rejected the TP study maintained by the assessee stating that the information or the data used in the computation of the arm's length price in the TP Study is unreliable and incorrect and has conducted fres....
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....ions of the Act. In the said final assessment order, the ld. AO / TPO did not follow the directions of the ld. DRP to rectify the allocation of margin computation of Mind Tree Ltd., The summary of various adjustments made by the ld. TPO pursuant to the directions of the ld. DRP are as under:- Particulars Amount (INR) Transfer Pricing adjustments on software development services 1,93,66,256 Transfer Pricing adjustments on software distribution services 1,61,80,646 Transfer Pricing adjustments on receivables 72,20,996 Total TP adjustment to Income 4,27,67,898 3.7. The ld. AR before us prayed for exclusion of the three parties in software development (IT Sector) namely (a). L & T Infotech Ltd., (b)Persistent Systems Ltd., (c) CG-VAK Software and Exports Ltd., The ld. AR made arguments independently with regard to exclusion of the aforesaid comparables and placed reliance on various Tribunal orders in support of his contentions. The ld. AR argued that if the aforesaid three comparables alone are excluded then, the adjudication of other comparables in IT segment as raised in the grounds would become irrelevant as assessee would be through with the margin....
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....rs namely service cluster, industrials cluster and telecom cluster and also develops products like Unitrax, AccuRASI. From the perusal of the annual report of the said comparable, we also find that the said company has got high risk profile, intangibles and huge brand value unlike the assessee company. 5.4. We find the exclusion of this comparable to a software development service provider was a subject matter of adjudication by the Co-ordinate Bench of this Tribunal for A.Y.2013-14 on functional comparability itself , among others, in the case of EPAM Systems India Pvt. Ltd., vs. ACIT in ITA No.2122/Hyd/2017 dated 20/11/2018 wherein it was held as under:- "17. As far as the L & T Infotech is concerned, the assessee's objections are that the it is a giant company with a turnover of Rs. 3613 Crs and has a significant brand value and in RPT schedule there is revenue from sale of services as well as products. Further, under operating expenses there are costs of bought-out items for resale of products and therefore, in the absence of segmental details, it cannot be considered as a comparable. In support of this contention, Learned Counsel for the Assessee placed reliance up....
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....cannot lead to an assumption that segmental data for relevant facts was available to determine the profitability of the concerned comparable." 19. Respectfully following the same, we direct the TPO / A.O. to exclude L & T Infotech from the final list of comparables." 5.5. We also find that the said comparable is having huge turnover of Rs. 3613 Crores. Even on this aspect, the said comparable cannot be held to a valid comparable with that of the assessee engaged in software development having turnover of Rs. 29.84 crores. Respectfully following the aforesaid decision of this Tribunal referred to supra, we direct the ld. TPO to exclude L & T Infotech Ltd., from the final list of comparables. 5.6. Exclusion of Persistent Systems Ltd., The assessee had sought for exclusion of this comparable on the primary ground that the said company is engaged in development of products whereas assessee is engaged in software development. The ld. DRP however, held that the said comparable is engaged in provision of software development services. From the perusal of the annual report of the said comparable, we find that it is engaged in three business activities i.e. product enginee....
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.... and rest of the world. We find what is required for the purpose of comparability is that segmental revenue, segmental profits, segmental expenses should be available for software development services. In the absence of such segmental data of the said comparable, it could be safely concluded that the said comparable is not a valid comparable. We also find that the Co-ordinate Bench decision of this Tribunal for A.Y.2013-14 itself in the case of EPAM Systems India Pvt. Ltd., vs. ACIT in ITA No.2122/Hyd/2017 dated 20/11/2018 had also held that the said comparable is to be excluded due to non-availability of segmental information and hence, not comparable to the assessee engaged in software development. Respectfully following the same, we direct the ld. TPO to exclude CG-VAK Software and Exports Ltd. from the final list of comparables. 5.8. Computation Error in Segmental Margin in the case of Mind Tree Ltd.,:- The ld. TPO had computed the margin of Mind Tree Ltd., (segmental data alone) at 20.23%. The ld. AR before us submitted that the correct margin of the said company is 18.18% and the difference arose on account of non-allocation of unallocable expenses to the segments. This....
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....isposed off in the aforesaid manner. 6. The ground No. B raised by the assessee is with regard to arm's length pricing adjustment made in the software distribution activity undertaken by the assessee. 6.1. The Company has started distribution of software products of CommVault Inc from 1st April 2010. Since this year being one of the initial years of distribution activity, the Company has incurred losses. As per the agreement entered between Commvault India and the AE, the AE shall not charge any amount towards cost of license if the operating cost of Commvault India is more than the revenue earned from distribution of software products. Accordingly, the AE has not charged any amount towards the license fee to Commvault India during the year under consideration. 6.2. In relation to activity of purchase of software for distribution, the Ld. TPO has held that the company is not acting as a distributor but rendering service to its AE by selling licenses on behalf of the AEs. The ld. TPO observed that the AE has supplied products free of cost to assessee for sale in India. This transaction was not reported in TP document as the receipt of products was free of cost and the sales we....
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....t the arithmetic mean of the comparables at 1.37% of revenue by adopting Profit Level Indicator (PLI) as operating profit divided by operating revenue (OP/OR). The assessee had shown margin at -22.70% in respect of this segment. Accordingly, the ld. TPO made adjustment of Rs. 1,66,53,598/- by working out as under:- Operating Cost - Rs. 6,94,16,582/- Arm's length Margin - 1.37% Arm's length Price (100 + AALM x OC) - Rs. 7,03,67,589/- Price received - 5,37,13,991/- Adjustment - Rs. 1,66,53,598/- The aforesaid working and the action of the ld. TPO was upheld by the ld. DRP. 6.5. The ld. AR vehemently argued that adoption of re-sale price method (RPM) would be ideal to benchmark the transactions carried out by the assessee with regard to the software distribution activity as against the Transaction Net Margin Method (TNMM) adopted by the ld. TPO and upheld by the ld. DRP. The ld. DR also agreed for adoption of resale price method in the instant case. We find as per 10B(1)(b) of the Income Tax Rules, re-sale price method could be applied where the property or service purchased from Associated Enterprises are resold to an unrelated enter....
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.... made by imputing interest on outstanding receivables. 7.1. The ld. TPO observed in his order that assessee had shown outstanding receivables from its AE's at Rs. 14,51,64,506/-. The ld. TPO directed the assessee to submit details of invoices raised and its corresponding realization with dates. The ld. TPO observed that assessee had realized its receivables from its AE beyond the grace period of 30 days allowed as per the service agreement. This tantamounted to capital financing by the assessee to its AE as substantial amount of funds of the assessee were blocked with its AE. The ld. TPO also referred to introduction of Clause C of Explanation in Section 92B(2) wherein under the category of "Capital Financing" , debt arising during the course of business was also sought to be included as part of capital financing and thereby constituting a separate international transaction warranting imputation of interest for the delayed period. The ld. TPO applied the interest rate of 14.45% and calculated interest for the delayed period beyond 30 days till the date of realization of the invoices which even went beyond the end of financial year relevant to assessment year under consideration ....
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....hat it had not charged any interest on the outstanding receivables from its AE and it had not paid any interest on the outstanding payables to its AEs and that service agreement does not provide for charging of any interest for the delayed realization, is concerned, the ld. DRP placed reliance on the Co-ordinate Bench decision of the Delhi Tribunal in the case of Tech Books International (P) Ltd., vs. DCIT reported in 63 Taxmann.com 114 for A.Y.2010-11 dated 06/07/2015 and dismissed the said argument of the assessee. The said decision of the Delhi Tribunal categorically held that in para 13.3 of its order that the agreement does not provide for charging any interest on late realization of invoice value and hence no interest can be charged, deserves the fate of dismissal under the transfer pricing provisions. Chapter X of the Act had been enshrined to determine the income from an international transaction at ALP, being in the same manner as is determined between two independent parties. It means that if an income is not charged or under charged by an Indian entity from its foreign AE, which ought to have been properly charged if the transaction had been between two independent parti....
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.... Delhi High Court in the case of Kusum Healthcare had only held that once working capital adjustment is given, the aspect of outstanding receivables has been taken care and accordingly it gets subsumed. The said decision does not talk about the delayed realization of invoices by the assessee from its AEs during the year. Hence, imputation of interest need to be made for the said delay in respect of invoices realized during the year beyond the agreed credit period. The ld. DR also argued that the submission made by the ld. AR that assessee is not charging any interest from its non-AEs requires to be rejected in view of the fact that assessee herein is only a captive service provider and has got absolutely no non-AEs to cater or having any transactions thereon. 7.10. The ld. DR fairly agreed that adoption of interest rate for imputation of interest on deferred receivables by applying LIBOR rate + 200 basis points instead of short term deposit granted by SBI directed by the ld. DRP. 7.11. We have heard rival submissions and perused the materials available on record. It is not in dispute that assessee in the instant case had realized invoices on its AEs beyond the agreed credit p....
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....ng working capital adjustment in para 4.1 thereon. Hence, by applying the ratio of the Hon'ble Delhi High Court in the case of Kusum Healthcare referred to supra, no imputation of interest on outstanding receivables could be made thereon. However, in respect of invoices raised in earlier years, where the amounts were realized during the year under consideration but beyond the agreed credit period, imputation of interest by applying LIBOR + 200 basis points is to be made from 1st of April 2012 till the date of realization of debts. In respect of invoices raised during the year, where the amounts were realized during the year itself, but beyond the agreed credit period, imputation of interest by applying LIBOR +200 basis points is to be made from the date of expiry of agreed credit period from the date of raising the invoice and the same is to be charged till the date of realization of debts. We hold that the decision of the Hon'ble Delhi High Court in Kusum Healthcare talks about only outstanding receivables at the end of the year i.e. to say when working capital adjustment is given to the assessee, no separate adjustment need to be made on the outstanding receivables at the end of ....