TaxTMI 
TaxTMI 
2019 (11) TMI 1550
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.... upholding the order of the Ld. TPO who had computed the Arm's Length Adjustment towards interest on delayed trade receivables at Rs. 2,51,31,511/-. 3. The brief facts of the case are that the assessee is a private limited company engaged in the business of Software Development services files its return for the AY 2014-15 on 30/11/2014. From the Form-3CEB report, it was observed that the assessee has entered into international transaction with its Associated Enterprises for Rs. 157,90,55,448/-. Therefore, the case was referred to the TPO. The TPO passed order U/s. 92CA (3) of the Act on 31/10/2017 recommending upward adjustment of profit by Rs. 19,75,16,812/-. Thereafter, draft assessment order was passed on 19/12/2017. Subsequently, the petition was filed in Form35A by the assessee raising objections regarding the draft assessment order passed on 04/09/2018 U/s. 143(3) r.w.s 92CA(3) r.w.s 144C of the Act however, the Ld. Members of the DRP upheld the entire upward adjustment of profit by Rs. 16,96,77,951/- and added to the income of the assessee based on which final assessment order was passed on 29/10/2018 aggrieved by which the assessee is in appeal before us. 4. The Ld....
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....d the profit by Rs. 19,75,16,812/-. The Ld. TPO further observed that the assessee company had not charged interest on trade receivables from its AE as per the agreement executed between the assessee-company and its AE since the realization period in the agreement was 90 days. The Ld. TPO was of the view that the realization period of 30 days was reasonable and for the balance period the assessee ought to have charged interest on the receivable from its AE and since it was an international transaction susceptible to Arm's Length adjustment, proposed to make adjustment by enhancing the profit by Rs. 2,51,31,511/-. However, the Ld. DRP though held that the trade receivables is an international transaction requiring TP adjustment, and the short term deposit rates of interest of State Bank of India prevailing in the previous year applied by the TPO as the ALP interest rate is in order, finally concluded by directing the Ld. TPO to compute the ALP interest rate taking into consideration of the credit period of 90 days as stipulated in the inter-company agreements and thereby reduced the TP adjustment on interest receivables from 2,51,31,511/- to Rs. 1,05,62,753/-. Accordingly, the Ld. T....
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....ed intangibles during the year. (iii) M/s. Infobeans Technologies Limited:- (a) The company is engaged in export of goods and services and no segmental details are available in the Annual Report. Hence, the company is not functionally similar. (b)It is apparent from the Annual Report that the company has MODVAT deposit amounting to Rs. 25,000 and sales tax deposit amounting to Rs. 10,000 which establishes the fact that the company is engaged in sale of goods. (iv) M/s. Infosys Limited: (a) The company underwent extraordinary events during the previous year such acquisition of M/s. Lodestone Holdings Space AG and merger of M/s. Infosys Consulting India P Ltd. These acquisitions had impact on the profitability of the company during the previous year. (b) The company's turnover of Rs. 42,531 Crs approximately during the previous year which cannot be compared with the appellant company's turnover as it is only Rs. 163 Crs approximately. (c) The company has also incurred expenditure of Rs. 59 crs towards development of Intellectual Property Rights. (d) The company spent huge amount on R & D Activities and had filed ....
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....ed in Software Development and IT Enable Services and products which is considered the only reportable business segment as per Accounting Standard-AS 17 Segment Reporting prescribed in Companies Accounting standards notified under Section 211(3C) (Which continues to be applicable in terms of General Circular 15/2013 dated September 13, 2013 of the Ministry of Corporate afairs in respect of Section 133 of the companies Act, 1961." (b) The company also manufactures products such as electronic boards and printer circuits by importing raw materials and holding inventory, as apparent from Page No. 119 of the PB-II. The assessee company is not engaged into any activity of producing physical goods. Page No. 119 of the PB-II. (c) The company has also incurred expenses in R & D and therefore generated intangible assets as apparent from page no. 65 & 121 of PB-II, while as the assessee company is not involved in any R & D activity. In the case of the assessee company neither such expenses are incurred, or any intangibles are acquired during the relevant period. Extraction from page no. 65 of PB-II Extraction from page No.121,....
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....s are classified based on specific geographical segment's business. The company maintains separate books of account for the reported segments. Wherever the costs are directly identifiable with the reported segment, it has been booked to that segment. Wherever common expenses are incurred, those expenses have already been conside3red for allocation and relevant entries in the books of account have been passed. Hence there are no un-allocable expenses. Further, cash, investment (net of provision) and bank balances are reported at the enterprise level. Current assets and current liabilities relating to the specific business segments are identified and reported. Those, which are not identifiable, are reported as common assets / liabilities." (d) As disclosed in the annual account it is also apparent that the company has acquired intangibles during the year. Relevant portion of page 210 of PB-II is extracted hereinbelow for reference:- "d) Intangible Assets and Amortization Acquired intangible assets relating to software purchased for company's internal use are capitalised at the cost of acquisition and is amortised on the straigh....
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....VCL 140,850 73,150 Sales Tax Deposit (Kotak FDR) 10,000 - Deposit (M-VAT) 25,000 25,000 M.P.S.E.D.C. Ltd 10,121,460 - Total 10,325,863 121,050 11.1. Since, the company is functionally dissimilar it cannot be compared with the assessee company for the purpose of TP adjustment. (iv) M/s. Infosys Limited: (a) From the profitability reported in the P & L Account (Page No. 324, 349 and 357 of PB-II) it is evident that the company had undergone extraordinary events as stated by the Ld. AR and this acquisition had substantial impact on the profitability of the company during the previous year. Extraction from Page 324 "Lodestone Holding AG On October 22,2012. Infosys acquired 100%of the outstanding share capital of Lodestone Holding AG, a global management consultancy firm headquartered in Zurich, Switzerland. The acquisition was executed through a share purchase agreement for an upfront cash consideration of 1,187 crore and a deferred consideration of up to Rs. 608 crore. During the year, we invested in our subsidiaries, for the purpose of operations and expansion, as foll....
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.... Standard 14. Accounting for Amalgamation (AS-14). All the assets and liabilities of ICIL on an after the appointed date and prior to the effective date have been transferred to Infosys Limited on a going concern basis. As ICIL was a wholly-owned subsidiary of Infosys Limited, no shares have been allotted to the shareholders upon the scheme becoming effective. 11.2. However, in the case of the assessee company there are no such events leading to super profits. (b) The company has a bumper turnover of Rs. 42,531 Crs which cannot be compared with the turnover of the assessee company which is only Rs. 163 Crs. (c) The company has recognised Intellectual property rights (IPRs) for Rs. 59 Crs as evident from Page 348 of PB-II. Extraction from Page 348 of PB-II 2.8 Fixed assets in ` crore, except as otherwise stated Particulars Original cost Depreciation and amortization Net book value As at April 1, 2013 Additions / Adjustments during the year Deductions / Retirement during the year As at March 31, 2014 As at April 1, 2013 For the year Deductions / Adjustments during the year As at March 31, 20....
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....ectively In the case of assessee company there is no accretion of such kind of assets. (d) The company has spent huge amount on R & D Activities amounting to Rs. 261 Crs during the previous year and also have filed 79 patterns in its name as pointed by the Ld. AR and apparent from the PB-II, page No.304 and 311. Extraction from Page 304 of PB-II "Our research and development efforts focus on the twin goals of improving productivity and quality of our services, alongside working towards technology driven innovation and differentiation that will deliver greater value to our clients. At Infosys Labs, Service innovation is being achieved through enhanced automation, optimization, prevention and effective collaboration among described teams. Infosys Labs has established a set of service innovation groups focused on enhancing quality and productivity of six dominant Infosys services-Business Process Outsourcing; Infrastructure Management Services; Independent Validation Services; Application Development and Maintenance including Large Deals; Consulting and Systems Integration; and Modernization. These groups work on service platforms with a focus on automation, optimiza....
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.... Rs. 2,390 Crs. Extraction from Page 326 of PB-II III Results of operations The function-wise classification of the Standalone Statement of Profit and Loss is as follows: in ` crore Year ended March 31 2014 % 2013 % Income from software services and products 44,341 100.0 36,765 100.0 Software development expenses 26,738 60.3 21,662 58.9 Gross profit 17,603 39.7 15,103 41.1 Selling and marketing expenses 2,390 5.4 1,870 5.1 General and administration expenses 2,686 6.0 2,218 6.0 5.076 11.4 4,088 11.1 Operating profit before depreciation 12,527 28.3 11,015 30.0 While as in the case of the assessee company no such expenses have been incurred as it is catering only to its parent company. 12. Considering the above-mentioned factors, we are of the considered view that M/s. Infosys Limited is not a comparable company with respect to the assessee company for TP Adjustments. (v) M/s. Persistent Systems Ltd:-....
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....e & systems. Thus, the segmental details in the annual report is absent. Extraction from Page 675 of PB-II "(m) Segment reporting (i) Identification of Segment The Company's operations predominantly relate to providing software products, services and technology innovation covering full life cycle of product to its customers. (ii) Allocation of income and direct expenses Income and direct expenses allocable to segments are classified based on items that we individually identifiable to that segment such as salaries and project related travel expenses. The remainder is considered as un-allocable expense and is charged against the total income. (i) Un allocated item Un allocated items include general corporate income and expense items which are not allocated to any business segment. Segregation of assets, liabilities, depreciation and other non-cash expenses into various reportable segments have not been presented except for trade receivables as these items are used interchangeably between segments and the company is of the view that it is not practical to reasonable allocate these items to individual segm....
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....ng receivables with advance received towards certain other transaction with AE, we agree with the Ld. AR's argument that primarily the advance received has to be adjusted against any advance received and thereafter, the interest has to be charged on the outstanding receivables. This methodology shall result in the exact outstanding invoices against which payment is not received. Accordingly, we remit the issue back to the file of Ld. TPO to consider the issue afresh in the light of the observations made by us hereinabove. The assessee is also hereby directed to furnish the computation of interest in the afore-stated manner before the Ld. TPO in order to facilitate the proceedings. Since all other grounds raised in the appeal are not pressed, they have not been considered. 17. In the result, appeal of the assessee is partly allowed for statistical purposes as indicated hereinabove. Pronounced in the open Court on 20th November, 2019. ============= Document 1 Subclassification and notes on income and expense explanatory [TextBlock] Disclosure of revenue from sale of products [Abstract] Revenue from sale of products [Abstract] Unless otherwise specified, all moneta....
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....dditional information on profit and loss account explanatory [TextBlock] Changes in inventories of finished goods Total changes in inventories of finished goods, work-in-progress and stock-in-trade Revenue information technology consultancy Revenue information technology services Total gross income from services rendered Value of imports of raw materials Value of imports of capital goods Total value of imports calculated on CIF basis Expenditure on other matters Total expenditure in foreign currency Final dividend remitted in foreign currency Interim dividend remitted in foreign currency Total amount of dividend remitted in foreign currency Total number of non-resident shareholders Total number of shares held by non-resident shareholders on which dividends were due Unless otherwise specified, all monetary values are in INR 01/04/2013 to 31/03/2014 01/04/2012 to 31/03/2013 24.47,636 19,00,411 2447,636 19,00,411 29,70,74,153 35,70,87,748 170,77,98,168 102,98,70,604 200,48,72,321 138,69,58,352 3,35,87,489 4,31,64,414 1,49,89,361 1,81,32,492 4,85,76,850 6,12,96,906 ....