TaxTMI 
TaxTMI 
2022 (5) TMI 1441
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....nt was selected for scrutiny and during the course of assessment proceedings, the matter was referred to the Transfer Pricing Officer (TPO) to determine Arm's Length Price (ALP) of the international transaction undertaken by the assessee with its AEs. The TPO passed the transfer pricing order dated 30.10.2019 determining the total TP adjustment of Rs.3,48,49,941 in respect of software development services transaction of the assessee and a sum of Rs.83,55,708 in respect of interest on delayed receipt of trade receivables from its AEs. Pursuant to the TPO's order, a draft assessment order dated 31.12.2019 was passed by the AO in which the aforesaid TP adjustment made by the TPO was incorporated. As regards corporate tax issue is concerned, the A.O. in draft assessment order proposed disallowance of Rs.50,20,109 by invoking the provisions of section 40(a)(i) of the I.T.Act. 3. Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 25.03.2021, partly allowed the objection raised by the assessee. Pursuant ot the directions of the DRP, final assessment order was passed dated 30.04.2021 in which the TP adjustment was worked....
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...." The learned AO/TPO have erred, in law and in facts, by rejecting certain comparable companies having different accounting year / financial year (i.e., companies having accounting year other that March 31 or companies whose financial statements were for a period other than 12 months) b)The learned AO/TPO have erred, in law and in facts, by using only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for turnover filter. 6.The learned DRP/AO /TPO erred, in law and in facts, by exercising his powers under Section 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 7.Without prejudice to the above grounds, the learned DRP/AO/TPO have erred in law and in facts, by accepting/rejecting companies based on unreasonable comparability criteria: a)The learned DRP/AO /TPO erred, in law and in facts, by accepting the following companies that cannot be considered as comparable to the Appellant in law and fact on one or more grounds: i. Larsen & Toubro Infotech Ltd. ii. Infobeans Technologies....
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...., while conducting comparability analysis. 12.Without prejudice to the ground 5 above, the learned DRP/AO/TPO erred in law and in facts by not giving due consideration to the Assessee's request to consider the internal comparable data for the purpose of application of TNMM in order to determine the ALP of the international transaction entered into by the Assessee with its AEs. 13.The learned DRP/TPO/ AO have erred in not restricting the transfer pricing adjustment only to the value of the international transactions under consideration (i.e. revenue earned from provision of software development services to AEs outside India) and not to the entire operating revenue of the Assessee from domestic AEs as well as foreign AEs. 14.The learned DRP/AO/TPO have erred in law and facts by determining a transfer pricing adjustment on account of interest on outstanding receivables amounting to INR 83,55,708. 15.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 and is to be considered as closely linked ....
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....ighted article are not taxable as royalty in India. 24. That on the facts and in the circumstances of the case and in law, the AO be directed to allow deduction for education cess (UEC") and higher and secondary education cess ("SHEC") paid on income-tax for computing the total income as per the provisions of the Act. Other Grounds 25.The learned AO has erred, in law and on facts, in levying the interest of INR 1,33,536 under Section 234A of the Act without appreciating that the original return of income was filed by the Appellant within the due date as specified under Section 139(1) of the Act. 26.The learned AO has erred, in law and on facts, in levying the interest of INR 40,72,848 under Section 2348 of the Act. 27.The learned AO has erred, in law and on facts, in computing interest under Section 234C of the Act, on the assessed income at INR 3,65,641 as against Nil computed on the returned income by the Appellant while filing its return of income. 28.The learned AO has erred, in law and on facts, by not appreciating that interest under Section 234C of the Act is to be calculated on returned income and not on assessed i....
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.... 1. Kals Information Systems Pvt. Ltd. 8.60% 2. E-Zest Solutions Limited 10.87% 3. Rheal Software Pvt. Ltd. 14.50% 4. Sybrant Technologies Pvt. Ltd. 14.74% 5. Harbinger Systems Pvt. Ltd. 15.06% 6. CG-VAK Software & Exports Ltd. 18.50% 7. R S Software (India) Ltd. 20.87% 8. Larsen & Toubro Infotech Ltd. 24.83% 9. Orion India Systems Pvt. Ltd. 25.64% 10 Nihilient Ltd. 26.36% 11 Inteq Software Pvt. Ltd. 28.20% 12 Persistent Systems Ltd. 30.89% 13 Infobeans Technologies Ltd. 32.42% 14 Thirdware Solutions Ltd. 36.90% 15 Infosys Ltd. 38.61% 16 Aspire Systems (India) Pvt. Ltd. 39.28% 17 Cybage Software Pvt. Ltd. 66.45% 35th Percentile 18.50% Median 25.64% 65th Percentile 30.89% 6.4 The computation of ALP by the TPO and the adjustment made are as follows:- Particulars Amount (INR) Arm's length median margin as per comparable set 25.64% Operating Cost (OC) 36,33,67,177 Arm's Length Price (ALP) = 125.64% of OC 45,65,34,522 Price Received 42,16,84,581 ....
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....chnologies Limited 251.22 3. Persistent Systems Limited 1,447.14 4. Thirdware Solutions Limited 221.36 5. Infosys Limited 53,983.00 6. Aspire Systems (India) Pvt.Ltd. 230.81 7. Cybage Software Private Limited 722.25 6.7 As regards R S Software (India) Limited is concerned, it was submitted that the assessee should not be considered as a comparable for assessment years 2015-2016 and 2014- 2015 since the company's turnover for the said years exceeds Rs.200 crore. Accordingly, it was contended that the margins earned by the company for assessment years 2015-2016 and 2014-2015 should not be considered. It was stated that the operating margin of R S Software (India) Limited for A.Y.2016- 2017 is -2.09%. In support of this contention, the learned AR relied on following ITAT orders of Bangalore Benches of the Tribunal:- (i) Aurigo Software Technologies Private Limited v. ITO Ward 1(1)(1), Bangalore IT (TP)A No.178/Bang/ 2021 (AY 2016-17) (order dated 03.02.2022) (ii) Barracuda Networks India Private Limited v. DCIT [IT(TP)A No.229/Bang/2021] AY 2016-17 (order dated 25.10.2021). 6.8 The learned Departme....
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....failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The Assessee has raised Grd.No.4 before the Tribunal challenging the aforesaid view of the DRP. 12. On the issue of application of turnover fil....
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....etter output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 42. The Assessee's turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having t....
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....e 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 (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR befor....
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....he Tribunal in the case of Barracuda Networks India Private Limited(supra) had held that R S Software (India) Limited, ought to be accepted as comparable for A.Y. 2016-2017, however, should not be considered as comparable for assessment years 2015-2016 and 2014-2015, since the said company's turnover for the period exceeded Rs.200 crore. Accordingly, it was concluded that the margin earned by the company for assessment years 2014-2015 and 2015-2016 was not to be considered. The relevant finding of the Bangalore Bench of the Tribunal in the case of Barracuda Networks India Private Limited(supra), reads as follows:- "15. As far as company listed at Sl.No.(h) of Grd.No.4 and Grd.No.5 i.e., R.S.Software (India) Ltd., is concerned, the turnover of this company in the current year is less than Rs.200 Crores but in the earlier two years its turnover was more than Rs.200 crores and was liable to be excluded in those earlier two years. The question raised in the aforesaid grounds is as to: whether this company should also be excluded on the application of turnover filter by reason of its turnover in the earlier two years being more than Rs.200 crores in the light of Rule 10CA of th....
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....far as it relates to choice of comparable companies, read as follows: "Computation of arm's length price in certain cases. 10CA. (1) Where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more than one price, then the arm's length price in respect of such international transaction or specified domestic transaction shall be computed in accordance with the provisions of this rule. (2) A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an ascending order and the arm's length price shall be determined on the basis of the dataset so constructed: Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two....
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....ransaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by such enterprise shall not be included in the dataset. (3) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year, then for the purposes of sub-rule (2) the weighted average of the prices of such transactions shall be computed in the following manner, namely:- (i) where the prices have been determined using the method referred to in clause (b) of subrule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of sales which has been considered for arriving at the respective prices; (ii) where the prices have been determined using the method referred to in clause (c) of subrule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs which has been considered for arriving at the respective prices; ....
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....d comparable transaction then that company can never be considered for inclusion in the dataset. 20. The submission of the learned Counsel for the Assessee was that as per the proviso to Rule 10CA(2) of the Rules, R.S.Software (India) Ltd., cannot be regarded as comparable company for Financial Year 2013-14 and 2014- 15 because in those years, the turnover of this company was more than Rs.200 crores. Therefore as per the first and second proviso to Rule 10CA(2) of the Rules, the profit margin of this company for Financial year 2013-14 & 2014-15 has to be ignored and the profit margin of the financial year 2015-16 alone should be taken. If one looks at Rule 10CA(2) in isolation, we have to reject this argument because the 1st and 2nd proviso to Rule 10CA(2) of the Rules refers to only R.S.Software (India) Ltd., (i.e., "where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction") undertaking uncontrolle....
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....ty of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- ....
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....the provisions of Rule 10CA, 10B(3) (4) of the Rules, we agree with the stand taken by the learned counsel for the Assessee. Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We hold accordingly." 6.9.4 In the light of the ITAT order in the case of Barracuda Networks India Private Limited(supra), we direct the AO / TPO to include R S Software (India) Limited as a comparable company. However, the margins of the said company for assessment years 2014-2015 and 2015-2016 have to be ignored since the turnover exceeded Rs.200 crore for the said period. It is ordered accordingly. 6.9.5 By excluding the seven companies from the comparable list and by taking the margin of R S Software (India) Limited only for assessment year 2016-2017, prima facie, the margin of comparable company is below the assessee's margin. Therefore, the other grounds raised by the assessee as regards TP adjustment for provision for software development services are left open. Interest on delayed receivables (Grounds 14 to 19) (TP Adju....
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....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 transaction of providing software development services by the assessee to its AEs. There are series of decisions wherein the Tribunal has considered this transaction as part of the main international transaction between the assessee and its AE and therefore the treatment of the same at the time of determining the arm's length of the international transaction has to be given in the shape of allowing the necessary adjustment in the comparable prices on account of working capital adjustment. We find that the Mumbai Bench of the Tribunal in the case of Goldstar Jewellery Ltd. in ITA No.6570/Mum/2012 vide order dt.14.1.2015 as well as the Delhi Bench of ....
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....see 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 certainly falls in the ambit of international transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sa....
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....d 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 outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm's length in comparison to the average period of realization and multiplied by the outstanding from non AEs then no adjustment can be made being the transaction is at arm's length. The third aspect of the issue is that the arm's length interest for making the adjustment. Both the TPO and DRP has taken into consideration the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's le....
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.... * 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 receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted. 9. The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted with the Ld. TPO. A snapshot of the result is provided below: Segment Name Appellant's Margin (OP/TC) Working capital adjusted m....
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....then there is no question of separate adjustment on account of allowing credit period on receivable from the AE." 7.2.1 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 9 to 14 are allowed for statistical purposes. Corporate Tax Issues : Disallowance u/s 40(a)(i) of the I.T.Act amounting to Rs.50,20,109 8. The assessee had made payment to Xchanging Global Insurance Solutions Limited (XGISL) UK amounting to Rs.50,20,109. It is claimed by the assessee that these payments are made towards reimbursement of expenses. It was submitted that charges are towards use of cloud based applications / tools like Leapfrog, Sales force etc. which are procured centrally by XGISL for usage of Xchanging group entities worldwide. It was stated that the cost with respect to these charges are cross charged to the Xchanging group entities on cost to cost basis without any markup. However, the Assessing Officer held that the payments are ma....
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....ISL (placed at Page No. 599 of the Factual Paper book) which states that the Company shall not acquire any right, title or interest in any IP of XGISL. * Without prejudice, the Company further submits that the payments to XGISL are in the nature of reimbursements at cost and there is no income element (please do refer to Schedule 1 to the Agreement placed at Page No. 575 of the Factual Paper book). Accordingly, the subject payments by the Company should not attract withholding tax provisions under Section 195 of the Act in absence of element of income embedded therein. 8.2 The learned Departmental Representative supported the orders of the Assessing Officer and the DRP. 8.3 We have heard rival submissions and perused the material on record. The assessee has produced End Users License Agreement (EULA) from pages 572 to 603 of the paper book. The learned AR has taken us through various clauses, especially, clause 9, wherein he emphasized that the assessee does not acquire any right, title or interest in any IPR (refer page 599 of the paper book). The Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT reported in 432 ITR 471 had....