TaxTMI 
TaxTMI 
2020 (4) TMI 883
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....ming the action of AO in making a reference for the determination of the Arm's Length Price of the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do so. 3. The Income Tax Authorities have erred in not appreciating that, the addition made to the income returned is bad in law as the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X. 4. The Income tax authorities have erred in passing the Order without demonstrating that the Assessee had any motive of tax evasion. Ground relating to computation of ALP for the software development segment 5. The Income Tax Authorities have erred in: a. Relying on information collected u/s 133(6) of the Act without providing the Assessee the complete information or providing an opportunity to cross examine the companies concerned or their authorized representative in case of following companies; i. Nihilent Technogies Limited ii. Infobeans Technologies Limited iii. Cybage Software Private Limited b.....
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.... l. Not making proper adjustment for enterprise level and transactional level differences between the Assessee and the comparable companies. m. Ignoring the business, commercial and industry realities and economic circumstances applicable to the Assessee vis a vis the comparables; n. Not recognizing that the Assessee was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account; and o. Not granting adjustment for working capital differential while computing the ALP. Ground relating to computation of ALP for the sales and marketing segment 6. The learned DRP has erred in confirming the action of the TPO in: a. Rejecting the transfer pricing analysis undertaken by the Assessee on unjustifiable grounds; b. Conducting a fresh transfer pricing analysis despite absence of any defects in the transfer pricing analysis submitted by the Assessee; c. Adopting inappropriate filterss like 25% RPT filter, one sided turnover filter, etc in the process of selecting comparables; d. Rejecting Priya International Limited as a compar....
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....terest rate at 4.3807%. The rate determined is excessive. * Without prejudice, not adopting only LIBOR as the basis for benchmarking. Ground relating to corporate tax 8. The learned DRP and AO have erred in: i. Disallowing a sum of Rs. 61,37,356/- towards service tax paid on expenses and debited to the profit & loss account during the year; ii. Concluding an amount of Rs. 61,37,356/- of service tax input written off cannot be claimed as business expenditure without appreciating the fact that, the input tax credit couldn't be utilize in the first quarter of FY 2014- 15 as Appellant's services are not liable for output tax; iii. Without appreciating the fact that, out of total service tax input written off of Rs. 61,37,356/- debited to the profit & loss account during the year, the Assessee received refund of Rs. 50,68,250/- on 10-Nov-17 and the same is offered to tax in the return of income for AY 2018-19 and refund of Rs. 716,171/- on 22-Oct-18 and same is offered to tax in AY 2019-20. iv. Without prejudice, the AU to be directed to exclude Service tax refund offered to tax in AY 2018-19 and AY 2019-20 from the ....
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....m's length margin of assessee at 13.03% for software development segment 11.03% for sales and marketing services. Assessee used 14 comparables with median margin of 13.03% for software development segment. Assessee used 9 comparables with median margin of 11.03% under sales and marketing segment. Following are the comparables selected by assessee in the TP study under both these segment: Software Development Service segment: S.No. Name of the Company Weighted Average of adjusted margins (OP/OC) 1 Sagar Soft India Limited -0.90% 2 TVS Infotech Limited 2.96% 3 Kals Information Systems Ltd 3.38% 4 Caliber Point Business Solutions Limited (Segmental) 3.65% 5 Akshay Software Technologies Limited 5.37% 6 Sasken Communication Technologies Limited (Segmental) 7.23% 7 Cigniti Technologies Ltd. 8.20% 8 CG-VAK Software a Exports Ltd 11.54% 9 Helios a Matheson Information Technology Limited 15.68% 10 R Systems International Limited (Segmental) 19.43% 11 SQS India BFSI Limited (formerly Thinksoft Global Services Ltd) (Consolidated) 19.63% 12 Larsen a Toubro Infotech Limi....
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....arketing Services PvtLtd 13.30% 3 Irclass Systems & Solutions Pvt. Ltd 15.21% 4 Ugam Solutions Pvt. Ltd. 16.87% 5 Axience Consulting Pvt. Ltd. 18.03% 6 India Tourism Devp. Corpn. Ltd. (Seg) 21.80% 7 Killick Agencies Et Mktg. Ltd. 24.16% 8 Platinum Advetiising Pvt. Ltd. 34.07% 9 ICC International Agencies Ltd. (Seg) 42.04% 35th Percentile 16.87% Median 18.03% 65th Percentile 21.80% 6. Ld.TPO observed that there is a delay in receipt of payment for receivables and thus computed the outstanding receivables by granting a period of 60 days as per the agreement. Ld.TPO calculated interest at 4.3807% on the amount outstanding. Ld.TPO thus proposed total adjustment as under: Sl.No. Description Adjustment u/s 92 CA (In Rs.) 1. Software development segment 25,23,23,880 2 Marketing Support Services 2,26,02,390 3 Interest on delayed receivables 24,18,490 Total adjustment u/s 92CA 27,73,44,760 Ld.TPO did not grant working capital adjustment in the hands of assessee. Aggrieved by proposed adjustment, assessee raised objecti....
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....Isummation Technologies Pvt.Ltd and Maveric Systems Ltd. 11.2. Sales and Marketing Support service segment: For exclusion: Ugam Solutions Pvt.Ltd., Axience Consulting Pvt.Ltd., Platinum Advertising Pvt.Ltd. For inclusion: Priya International Ltd (Seg). 12. Before we undertake comparability analysis, it is sine qua non to understand functions performed, assets owned and risk assumed by assessee under both these segments. 12.1. Software development service segment: Ld.TPO observed as under: FUNCTIONAL ANALYSIS OF THE TAXPAYER 2.1 Metric Stream India is a wholly owned subsidiary of Metric Stream Inc. Metric Stream India is engaged in the business of providing software development services and sales & marketing services to Metric Stream Inc. Metric Stream India is remunerated on cost plus basis for the above services. Metric Stream Inc. ("Metric Stream") provides Enterprise-wide GRC and Quality solutions for global corporations. Metric Stream enterprise solutions are used in diverse industries such as pharmaceutical, medical device, high tech manufacturing, energy financial services, healthcare, manufacturing, food and beverages, and automot....
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....nts. The assets scheduled substantiates that the performance of functions are linked to the assets employed which are routine in nature and does not carry out any significant enterprise in real activities nor does it bears any significant risk associated with such services rendered by assessee. On the basis of above FAR analysis we shall undertake comparability of alleged comparables for exclusion/inclusion. 13. Software development service segment: 13.1. Exclusion alleged by assessee on turnover filter: Ld.AR argued that assessee seeks exclusion of Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. by applying turnover filter. 13.2. Ld.AR submitted that authorities below applied lower limit of turnover filter of Rs. 1 crore and ignored applying an upper turnover filter. It was submitted that, consistently revenue always took stand that turnover is not a relevant filter in software industry. It has been contended by revenue that in software industry size has no influence on the margins earned by a comparable company. What matters....
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.... turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Syste....
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....015-16 also and in this regard. Based upon above discussions we are of opinion that objection raised by revenue cannot withstand the test of law. Accordingly we direct Ld. AO/TPO to exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. for having high turnover as compared to a captive service provider like assessee. 14. Ld.AR submitted that assessee alleges exclusion of Rheal Software Pvt.Ltd., Aspire Systems (India) Pvt.Ltd., Infobeans Technologies Ltd., Inteq Software Pvt. Ltd. for functional dissimilarities. 14.1. Rheal Software Pvt.Ltd. Ld.AR submitted that DRP themselves note that this comparable is involved in a gamut of software development. He submitted that this company was selected by learnt TPO on the ground that it is only earning income from export of software development services. Referring to the annual reports placed at page 930-937 of paper book volume 2, Ld.AR submitted that this company earns income only from export of software development services. It has been submitted that this comparable has fluctua....
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.... with law. Accordingly we set aside this comparable back to Ld.AO/TPO. 14.2. Aspire Systems (India) Pvt.Ltd., Ld.AR submitted that, this company has been selected by Ld.TPO under the impression that it passes all filters. Ld.AR further submitted that this company should be rejected as it has substantial related party transaction. It has been submitted that for financial years 2013-14 and 2014-15 this company fails RPT filter of 25%. He referred to the statistics of related party transaction in the annual report at page 1087-1094 of paper book volume 2. Ld. A.R. has filed summary of related party transactions in immediately to preceding assessment years which has been reproduced as under: Revenue Operation Nature of transaction 1,56,52,92,158 1,79,11,27,395 Name of the Party Nature of Transaction 2012-13 2013-14 2014-15 Aspire Systems Inc., USA Rendering of Services NA 19,35,53,666 23,62,84,09 1 Aspire Systems Inc., USA Purchase of Service 16,91,3 1,960 18,39,98,056 Aspire Systems Inc., USA Expenses Reimbursed 96,35,388 2,58,04,908 Aspire Systems FZE, UAE Rendering of Services ....
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....Business Solutions Ltd vs DCIT reported in (2018) 99 taxman.com 359, held that RPT filter can be in the range of 25% to 15% of total receipts from software development services depending on availability of comparable companies. As there are comparables under this segment, there would be no infirmity in considering comparables having RPT up to 15% of total revenues. This view is supported by decision of this Tribunal in case of 24/7 customer (P) Ltd vs DCIT reported in (2012) 28 Taxmann.com 258. Considering the fact that authorities below has not verified the statistics advanced by Ld.AR in respect of the percentage of related party sales this company had, it would be just and proper to direct Ld.AO/TPO to examine submissions advanced in this regard. We also direct that if RPT is found to be more than 15% of the total revenues, then this comparable should be excluded from the finalist. Accordingly we set aside this comparable back to Ld.AO/TPO 14.3. Infobeans Technologies Ltd., Ld.AR submitted that this comparable was selected by authorities below as it passes all filters, based upon response received from this company under section 133 (6) of the act. He submitted that thi....
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.... years 2012-13 and 2013-14 respectively. For the sake of convenience the said table is reproduced herein below: Description FY 2012 -13 FY 2013 -14 Sale of Software Development and service Charges 16,19,48,588 18,50,43,097 Total Related party Transaction 16,19,48,588 18,50,43,097 Operating Revenue 19,78,25,530 23,28,50,688 RPT/Operating Revenue 81.86% 79.47% 14.4.1. On the contrary, Ld.CIT.DR submitted that Ld.AR does not dispute functional similarity of this company with assessee. Ld.CIT DR submitted that this comparable may be set aside to Ld.AO/TPO for verification of submissions advanced by Ld.AR. 14.4.2. We have perused submissions advanced by both sides in light of records placed before us. It is noted that DRP did not verified this aspect having regard to the annual report filed by assessee. In fact DRP notes that this company fulfils RPT filter adopted by Ld.TPO. We refer to our observations while deciding the comparability of aspire systems (India) private limited in preceding paragraphs. Applying the same observation mutatis mutandis in the present comparable, we direct Ld. AO/TPO to verify the RPT filter hav....
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....e perused submissions advanced by both sides on the basis of records placed before us. Admittedly this company is into managed analytical services and provides solutions to global market research firms, retailers, leading brands as has been observed by DRP in para 8.2.1. A fit comparable the functions rendered by assessee to the associated enterprise this company cannot be a fit comparable due to functional dissimilarities and risk assumed by this company. Accordingly we direct this comparable to be excluded from the final list. 16.2. Axience Consulting Pvt.Ltd. Ld.AR submitted that this company is also functionally not similar with assessee's as it is providing services to financial indulged service industry by combining high-end financial analytics, modelling and Tata services with high-quality business intelligence. Referring to page 14 to 5 of annual report Ld.AR submitted that main service provided by this company is in the field of market research and public opinion polling which is very different from sales and marketing support services provided by assessee to its associated enterprises. 16.2.1. On the contrary, Ld. CIT DR placed reliance upon orders passed by a....
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....ng the submissions advanced by assessee. It has been submitted by both sides that these comparables could be set aside to Ld.AO/TPO for reconsidering on the basis of far analysis. Based upon the above submissions by both sides, we set aside this issue back to Ld.AO/TPO for reconsideration of Priya International Ltd (Seg.) Accordingly, Ground No.5-6 stands allowed as indicated hereinabove. 17. Ground No.7 alleged by assessee against adjustment of notional interest on outstanding receivables. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 17.1. Ld.TPO computed interest on outstanding receivables at the rate equal to 4.3087% on receivables that exceeded 60 days. It has been argued by Ld.AR that authorities below disregarded business/commerci....
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....sing during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), which dealt with question of law: "(c) `Whether on the facts and circumstances of the case and in ....
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....ces India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum ....