TaxTMI 
TaxTMI 
2021 (4) TMI 208
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....spect to the international transaction rendered by the Appellant in the software development segment; 1.2. The lower Authorities erred in invoking provisions of section 92C(3) of the Income-tax Act, 1961 ("Act") and rejecting comparability analysis undertaken by the Appellant in the TP documentation maintained under section 92D of the Act; 1.3. The lower Authorities have acted in an arbitrary manner in selecting comparable companies only if the data pertaining to FY 2014-15 was available; 1.4. The lower Authorities erred in not considering companies having different financial year ending (i.e., not March 31) without appreciating that the relevant data for the concerned financial year could be deduced from the corresponding quarterly financials. 1.5. The lower Authorities erred in facts and in law in considering foreign exchange gain/loss as operating in nature; 1.6. The lower Authorities erred in not considering provision of bad and doubtful debts as operating in nature while computing the operating margin of the Appellant and the comparable companies; 1.7. The lower Authorities erred in applying the following filters for the co....
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.... (9) Orion India Systems Private Limited (10) DCIS Dot Corn Solutions Private Limited (11) Harbinger Private Limited 2. GROUNDS IN RELATION TO ADJUSTMENT OF NOTIONAL INTEREST ON OUTSTANDING DEBTORS: 2.1 The lower Authorities have erred in facts and in law in imputing notional interest with regard to the trade receivables by the Appellant from its Associated Enterprises ("AE") outside India when the Appellant has received all trade receipts for FY 2014-15 from its AE within the mutually agreed credit period of 90 days; 2.2 Without prejudice to the above, the lower authorities have erred in facts in not appreciating that no adjustment is warranted on account of notional interest even by adopting the credit period 60 days as considered by the TPO, as Appellant has received all trade receivables for FY 2014-15, within a maximum period of 37 days from the date of invoice; 2.3 The learned TPO has erred in computing the adjustment at Rs. 121,372 post the DRP directions, by considering the credit period of 30 days despite himself having adopted a credit period of 60 days while passing the initial TP order which has not been modified b....
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....nue 6.173,066 TNMM Total 1,117,892,237 17,514,685 1,135,406,92 2 5. The Ld. TPO noted that assessee renders software development services for the games to its ultimate parent company being Zyngo US and not to any other independent 3rd parties in India or outside India. He noted that assessee computed its margin at 15.54% by using TNMM as most appropriate method and OP/OC as PLI. Assessee used 9 comparables with median margin of 10.06%. Following were the comparables were selected by assessee in the TP study: S No Comparable Weighted average OP/OC 1 Ingenuity Gaming Private Limited 23.14 2 Indiagames Ltd 5.28 3 TVS Infotech Ltd 3.26 4 Akshay Software Technologies Ltd 3.28 5 Evoke Technologies Limited 6.13 6 CG-VAK Software & Exports Ltd 10.06 7 KALS Information Systems Limited 14.72 8 Ideavate Solutions Private Limited 19.24 9 R S stems International Ltd 21.67 Data place Range 35th Percentile OP/OC 6.13 Median 10.06 65th Percentile 14.72 6. The Ld. TPO accepted the MAM used by assessee, however he rejected the T....
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....n Rs.) 1 Software development 9,89,92,432/- 2 Interest on delayed 37,24,095/- Total adjustment Ws 92CA 10,27,16,527/- 13. Aggrieved by proposed adjustment, assessee raised objections before DRP. 14. DRP rejected assessee's arguments with respect to the comparable companies. It is submitted that the DRP excluded one comparable, being Daffodil software Ltd. that was proposed as an additional comparable by assessee in the transfer pricing study which the Ld. TPO did not consider. The Ld. TPO rejected this comparable as it failed export filter of 75%. The DRP observed from the annual reports that the export revenue of this comparable was 24.63 crores out of total revenue of Rs. 30.16 crore which amounts to 81.65%. 15. In respect of notional interest computed by the Ld. TPO, the DRP upheld the reasoning given by the Ld. TPO by holding that the deferred revenue receivables is a separate international transaction. The DRP upheld the action of the Ld. TPO as a justified, examining short charging or non-charging of interest on deferred receivables from AE. 16. It also did not consider the claim of assessee for working capital adjustment and ....
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....s to be reworked by considering the provision for doubtful debts as operating expenditure. The Ld. AO is directed to recompute the margin of assessee as well as comparables based upon the observations of this Tribunal in case of Brocade Communications Systems Pvt. Ltd. (supra) and decision of Hon'ble Delhi Tribunal in the case of Rolls-Royce India (P.) Ltd. (supra). 26. In terms of risk, we note that assessee is a no risk company and therefore risk adjustment should be provided to comparables is any. We direct the assessee to file all necessary details in respect of the same. In respect of the companies for which details could not be filed, the Ld. AO/TPO shall call for necessary information under section 133(6) in order to compute necessary adjustment. Accordingly this ground raised by assessee stands allowed. 27. Ground No. 1.10 & 1.13 is raised for not applying the upper limit of turnover on sales filter and for in appropriate inclusion/exclusion of comparables by Ld. AO/TPO in the final list. 28. He submitted that 9 comparables is sought to be excluded on turnover filter which are as under: 29. Tata Elxsi Ltd.(Seg.), mind tree Ltd., RS Software (India) Ltd., ....
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....egments. 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. 34. On the basis of above FAR analysis we shall undertake comparability of alleged comparables for inclusion/exclusion. Ground No. 1.10 & 1.13 35. The 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. The 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 is a human capital. It was under these circumstances that The Ld....
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....n-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 Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correct....
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....at 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. Infobeans Technologies Ltd. 41. The 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 this observation is contrary to the facts and figures appearing in annual report. Referring to page 1364 the Ld. AR submitted that this company is engaged in software engineering services. In the company overview this company has been stated to be primarily engaged in providing custom developed services to offshore clients and it provides software engineering services primarily in custom application development, content management systems, enterprise mobility, Big Data analytics. Ld. AR thus submitted that this company is functionally not at all similar with a captive se....
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.... Ltd., the same was rejected for the reason that it did not appear in the prowess database. It was submitted that assessee had filed all relevant details in regards to the same in order to verify the filters considered by the Ld. TPO however the authorities below have summarily rejected these comparables. Based upon the above submissions by both sides, we set aside this issue back to Ld. AO/TPO for reconsideration of Evoke Technologies Ltd., I2T2 India Ltd., Indiagames Ltd., FCS Software Solutions Ltd., DCIS DOT COM Pvt. Ltd. Accordingly ground 1.14 stands allowed for statistical purposes. 49. Ground No. 2 is in respect of proposed adjustment of notional interest on outstanding debtors. 50. The Ld. AR submitted that the Ld. TPO imputed note additional interest with regard to trade receivables from the AE even when assessee has received all the trade receipts for year under consideration from its AE is within the mutually agreed period of 90 days. The Ld. AR submitted that, authorities below upheld the computation of notional interest at LIBOR +400 basis points that is 4.3836%, by using CUP as most appropriate method. 51. The Ld. AR submitted that assessee has actuall....