TaxTMI 
TaxTMI 
2022 (6) TMI 1232
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....account of interest on outstanding receivables amounting to INR 1,20,83,994. 4.12 Without prejudice to our ground of objection 4.11 above, the learned DRP/AO/TPO have erred in law and in facts by not appreciating that the outstanding trade receivables from its AE's is arising from the provision of software development services transaction which is to be considered as closely linked to such transaction and should not be tested separately from arm's length perspective. 4.13 Without prejudice to our ground of objection 4.11 above, the learned DRP/AO/TPO have erred in law and in facts by re-characterizing the outstanding receivables as on 31 March 2014 as a separate international transaction. 4.14 Without prejudice to our ground of objection 4.11 above, the learned DRP/AO/TPO have erred in law and in facts, by not considering that once the working capital adjustment is granted, if appropriately takes into account the delayed / outstanding receivable and separate TP adjustment is unwarranted. Corporate Tax Issue : 5.1 The learned DRP/AO has erred in law and on facts in disallowing advances written off aggregating to INR 74,70,129 by holding that the advances were not for the p....
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.... first adjudicate the transfer pricing issue. Software Development Services to AE [Ground No.4.6(d)] 6. The net margin on cost earned by the assessee and the comparison of the TP analysis undertaken by the assessee and the TPO are as follows:- Net margin on cost earned by the assessee as computed by the TPO in the TP order: Particulars Amount (INR) Operating income 59,69,92,471 Operating cost 52,12,95,618 Operating profit (op. income - op. cost) 7,56,96,853 Operating / Net margin (OP/OC) 14.52 Comparison of the TP analysis undertaken by the assessee and the TPO: Particulars Assessee TPO Methodology adopted TNMM TNMM Profit level indicator (PLI) OP/OC OP/OC Database used PROWESS, CAPITALINE AND ACE-TP PROWESS & Ace-TP Comparables selected 22 8 6.1 In the TP study, the assessee applied various filters and based on the above search process, the assessee arrived at 22 comparables with arithmetical mean of 10.72%. Since the assessee's margin was 14.2% and the comparable was at 10.52%, the assessee sought to justify the ALP of SWD segment with its AEs. The TPO, however, rejected the TP study of the assessee and conducted fresh TP analysis. The TPO applied va....
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....25% 6 Cigniti Technologies Limited 27.62% 7 Thirdware Solutions Limited 44.68% 8 CG-VAK Software & Exports Limited 12.33% 9 Sagarsoft India Limited 1.44% Arithmetical Mean 25.18% 6.3 Aggrieved by the TP adjustment made under the SWD segment, assessee has raised the issue before the ITAT. The learned AR limited the contention to ground No.4.6(d) mentioned above. It was submitted that the AO / TPO had excluded companies having turnover less than Rs.1 crore, however, the TPO has not put an upper limit to the turnover for exclusion of companies having higher turnover. The learned AR relied on the following judicial pronouncements, in which the companies having high turnover (more than Rs.200 crore) were rejected :- (i) Arista Networks India Private Limited [IT(TPA) No.2440/Bang/2019 (order dated 05.10.2021)] (ii) Zynga Game Network India Pvt. Ltd. [IT(TPA) No.36/Bang/2019 6.4 The learned AR submitted that if the above proposition is accepted, the following six companies has to be excluded from the list of comparables, namely, (i) Larsen & Toubro Infotech Limited, (ii) Mindtree Limited, (iii) Persistent Systems Limited, (iv) R S Software (India) Limited, (v) ....
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....ng turnover less than 200 crore. This Tribunal held as under: "17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to 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 ci....
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....followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)." 40. Ld.AR submitted that though this decision was rendered with reference to AY 2005-06 and 2006-07, same reasoning would apply to AY 2015-16 also and in this regard. Based upon above discussions and the decision relied by Ld.AR herein above. 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." 6.7 As mentioned earlier, the assessee's turnover is Rs.56.11 cr....
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....t of providing SWD services by considering the proper working capital adjustment in comparable prices. It was held by the Tribunal that in case after giving necessary adjustment, the international transaction of the assessee is found to be at arm's length, then there is no question of separate adjustment on account of allowing credit period from receivables from AE. The relevant finding of the Tribunal in assessee's own case for assessment year 2008-2009 reads as follows:- "23. We have heard the learned Counsel for the assessee as well as learned Departmental Representative and considered the relevant material on record. At the outset we note that this issue has been considered and decided by this Tribunal in a series of decisions including the decision in the case of M/s. Dell International Services India Pvt. Ltd. Vs. JCIT in ITA No.308/Bang/2015 Dt.17.6.2016 wherein the Tribunal has considered this issue in para 7 as under : "7. We have considered the rival submissions and relevant material on record. At the outset, we note that allowing a credit period on receivable from AE is not an independent international transaction however, it is part of the main international transac....
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....arm's length. However, the TPO has made the adjustment on account of notional interest for the excess period allowed by the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm's length on the over due amounts of AE and proposed adjustment of Rs. 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the nonAE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business fall under the expression international transaction as per explanation. Therefore, in view of the expanded meaning of the international transaction as contemplated under clause (i) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would cer....
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....e seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as nonAE then the only difference between the two can be considered is the average period allowed along with outstandi....
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....te adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon'ble Tribunals : * Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] * Mentor Graphics (Noida) Private Limited [109 ITD 101] * Egain communication (P) Ltd. [ITA No. 1685/PN/2007] * Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] * Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding re....
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....taken by this Tribunal in a series of other decisions as referred in the earlier decisions as well as relied upon by the ld. AR of the assessee. Accordingly, taking a consistent view we set aside this issue to the record of the A.O./TPO with the direction to redo the determination of ALP in respect of providing software development services by considering the proper working capital adjustment in comparable price. In case after giving the necessary adjustment the international transaction of the assessee is found at arm's length then there is no question of separate adjustment on account of allowing credit period on receivable from the AE." 7.5 Taking a consistent stand, we direct the AO / TPO to redo the transfer pricing analysis in respect of interest on outstanding receivables by taking into account the directions of the Tribunal in assessee's own case for assessment year 2008-2009 (supra). It is ordered accordingly. 7.6 In the result, Grounds No.4.11 to 4.14 are allowed for statistical purposes. Corporate Tax Issues (Ground No.5.1) 8. The assessee had given advances to the employees against their salary for meeting expenses on food and travel while working on clients deliver....
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....able as business loss. This proposition has also been upheld by the Hon'ble Apex Court in the case of Mysore Sugar Co. Ltd. (1962) 46 ITR 649. Since the A.O. has not examined the claim of deduction u/s 37(1) r.w.s. 28 of the I.T.Act, we deem it appropriate to restore the issue to the files of the A.O. for de novo consideration. The assessee is directed to furnish necessary evidences before the A.O. The A.O. is directed to dispose of the matter expeditiously after affording a reasonable opportunity of hearing to the assessee. 8.5 Hence, ground No.5.1 is allowed for statistical purposes. Ground No.5.2 9. The company paid aggregate amount of Rs.79,74,715 as per diem to the employees travelling for business / official purposes outside India to cover actual expenses of meals, travel, laundry and miscellaneous expenses etc. The Assessing Officer disallowed on an adhoc basis 10% of the per diem allowance granted to the employees, thereby making a disallowance of Rs.7,97,471. The relevant observation of the A.O. in the draft assessment order in making adhoc disallowance of 10% of the per diem reads as follows:- "7. The assessee has granted per diem allowance to its directors and emplo....