TaxTMI 
TaxTMI 
2021 (11) TMI 1090
X X X X Extracts X X X X
X X X X Extracts X X X X
....,64,20,330 as against returned income of Rs.48,14,53,110 after making transfer pricing adjustment of Rs.19,49,67,216 under section 92CA(3) of the Income Tax Act, 1961 ('the Act'). 1.1 That the assessing officer erred on facts and in law in making an adjustment of Rs.14,18,95,876 to the arm's length price of the 'international transactions' of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ('TPO')/ Dispute Resolution Panel ('DRP'). 1.2 That the DRP/ TPO erred on facts and in law in considering the following companies as comparable companies not appreciating that such companies are not passing the test of comparability provided under Rule 10B(2) of the Income Tax Rules, 1962: (i) Infobeans Technologies Limited (ii) Larsen & Tubro Infotech Limited (iii) Mindtree Limited (segmental) (iv) Thirdware Solution Limited (v) Tata Elxsi Ltd. (segmental) (vi) Cybercom Datmatics Information Solutions Ltd. (vii) Inteq Software Private Limited (viii) Cigniti Technologies Limit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... higher than the profit earned by comparable companies, no transfer pricing adjustment was even otherwise required to be made in this regard. 2.5 That the DRP/TPO erred on facts and in law in not appreciating that working capital adjustment is more appropriate measure to benchmark the realisation of trade receivables of the appellant instead of application of an interest rate. 2.6 That the DRPI TPO erred on facts and in law in not appreciating that similar adjustment made in the preceding year, i.e. assessment year 2010-11 and 2012-13 has been deleted by the Hon'ble Income Tax Appellate Tribunal in their order dated 12.12.2017 passed in ITA No. 1104IDe1l2015 and 11151De1l2017 and subsequently followed in order passed for assessment year 2013-14 and 2015-16. 2.7 That the DRP/TPO erred on facts and in law in adding an adhoc mark-up of 400 points on the Libor rate of interest, arbitrarily on account of credit rating risk, security risk, transaction cost etc. 2.8 That the DRP/TPO erred on facts and in law in not appreciating that the in terms of Master Direction No.16/201516, Reserve Bank of India allows a period of 12 months to all companies for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nies chosen by the taxpayer and introduced 6 new comparable companies to benchmark the international transactions and arrived at OP/OC of comparable companies at 24.37% and proposed the TP adjustment to the tune of Rs.14,18,95,876/-. 6. Ld. TPO also proposed addition of Rs.5,30,71,340/- on account of transfer pricing adjustment qua interest on delay against receipt of interest receivables from AEs and thereby made cumulative adjustment at Rs.19,49,67,216/- as under :- S.No. Nature of international transactions Adjustment u/s 92CA (Rs.) 1. Provision of software development services 141,894,876 2. Receivables 53,071,340 Total 194967216 7. The taxpayer carried the matter before the ld. DRP by way of filing the objections who has rejected all the objections. Consequently, in compliance to the order passed by the ld.TPO/ld. DRP, AO framed assessment u/s 143 (3) read with section 144C(13) of the Act as under :- Sl. No. Particulars Amount Amount 1 Total income shown by the assessee 48,14,53,110 Add : Upward adjustment on account of Arm's Length Price 19,49,67,216 Total in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Arm's Length Price 3,20,73,13,480 Price charged by assessee 3,04,13,53,391 Difference between ALP and price charged by assessee 16,59,60,089 Total Transaction with AE related to software service 2,60,02,47,347 % of Transaction 85.50 Proportionate Adjustment 14,18,95,876 12. Ld. AR for the taxpayer in order compress the controversy raised by filing the present appeal sought exclusion of 9 companies, namely, (i) Mindtree Ltd., (ii) Cigniti Technologies Ltd., (iii) Inteq Software Limited, (iv) Tata Elxsi Limited, (v) Larsen & Toubro Infotech Ltd., (vi) Infobeans Technologies Ltd., (vii) Kelton Tech Solutions Ltd., (viii) Thirdware Solutions Ltd. & (ix) Cybercom Datamatics Information Solutions Ltd. out of 13 companies chosen as comparables by the ld. TPO and sought to include 2 companies viz. E-Zest Solutions Ltd. & Evoke Technologies Ltd.. 13. Now, we would examine suitability of the aforesaid companies challenged by the taxpayer as comparable to benchmark its international transactions qua software development services rendered by the taxpayer to its AE during the year under assessment one by one. COMPARABLE COMPANIES SOUGHT TO BE EXCLUD....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vident from its financials at page 8 and 103 of the paper book. 18. Coordinate Bench of the Tribunal rejected L&T in taxpayer's own case for AY 2014-15 (supra), available at pages 61 to 63 of the case law paper book, by returning following findings :- "6.6 The next objection of the assessee is regarding multiple segments. From segment reporting on page S-1258 of the Annual Report (page 129 of PB-2) , we find that the assessee has reported three business segments. The first segment is service cluster which includes banking, financial services, insurance, media and entertainment, travel and logistics and healthcare. The second segment industry cluster which includes Hi Tech and consumer electronics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under: "TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....coordinate Bench of the Tribunal by returning following findings :- Para 20 available at pages 89-90 of the paper book "20. The Tribunal in assessee's own case in ITA No.4740/Del/2018 relating to Assessment Year 2014-15 vide order dated 01.05.2020 has directed the exclusion of the said concern from the final list of comparables while benchmarking the ALP of the international transaction by the assessee with its AE. Before parting, we may also refer to an extraordinary event under which Larsen & Toubro Infotech Ltd. initiated and completed transfer of its Product Engineering Services Business (PES) Unit to L&T Technology Services Ltd. w.e.f. January 1, 2014 as part of the business restructuring undertaken within the Larsen & Toubro group. Though the initiation started from 01.01.2014 but the whole effect of the transaction was during the year under consideration. Further, Larsen & Toubro Infotech Ltd. during the year under consideration acquired Information Systems Resource Centre Private limited ("ISRC") thereby making it wholly owned subsidiary and because of such extraordinary event of acquisition, the said concern cannot be held to be a valid comparable and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....evelopment services provider working on cost plus mark-up model. 23. Furthermore, when we examine Note 9 - Fixed Assets forming part of the financial statement, available at page 643 of the annual reports paper book, it shows that Tata Elexi is having intangibles in the form of internally generated technical know-how and acquired intangibles computer software which certainly gives edge to Tata Elexi over other players operating in software development services provisions. 24. Moreover, when undisputedly taxpayer has not undergone any change in its business model vis-à-vis AYs, 2007-08, 2014-15 & 2015-16 in ITA Nos.5809/Del/2011, 4740/Del/2018 & 8726/Del/2019 respectively, Tata Elexi was held to be noncomparable by the Tribunal. 25. In view of the matter, we are of the considered view that on account of functional dissimilarity and having ownership of internally generated intangibles in the form of technical know-how for rendering services to its customers make Tata Elexi not a suitable comparable vis-à-vis the taxpayer who is a routine software development service provider working on cost plus markup model having no intangibles of its own, hence we direct to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....viding software development to its associated enterprises and also selling developed software product whereas the taxpayer is a routine software development services provider working on a cost plus mark-up model and as such its margin cannot be compared with Cybercom Datamatics, hence Cybercom Datamatics is ordered to be deleted as a comparable. CIGNITI TECHNOLOGIES LTD. (CIGNITI) 31. The taxpayer sought exclusion of Cigniti on the grounds inter alia that it is functionally dissimilar; that it is owner of Cigniti generated intangibles and relied upon the decisions of M/s. FIS Solutions (India) Pvt. Ltd. vs. DCIT in ITA No.1695/Pun/2018, M/s. Microsoft Research Lab India Pvt. Ltd. vs. DCIT in ITA No.3131/Bang/2018, US Technology International Pvt. Ltd. vs. ACIT in ITA No.592/Coch/2018, M/s. Mercedes-Benz Research & Development India Pvt. Ltd. vs. DCIT in ITA No.1645/Bang/2016 & M/s. Advice America Software vs. ITO in ITA No.2531/Bang./2017. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable. 32. We have perused the profile of Cigniti and its financials, available at page 206 of annual reports pap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the annual reports paper book, it has no segmental financials qua its diversified services being provided under head digital transformation, enterprise solution and consulting. In these circumstances, the revenue earned from software services which is considered as comparable vis-à-vis the taxpayer, cannot have tangible results being income earned from each services segment not available in its financials. 38. Perusal of Note 13 - Fixed Assets, available at page 398.1 of the annual reports paper book, shows that Kelton is having goodwill amounting to Rs.973,687,128 along with software of Rs.29,742,247. 39. So we are of the considered view that as discussed in the preceding paras, Kelton is not a suitable comparable vis-à-vis the taxpayer being into diversified nature of services having no financial segmental to arrive at the proper margin, also being into development of various products and mobile apps and having own intangibles and softwares giving it edge over other players in the field as against the taxpayer who is a routine software development services provider working on cost plus mark-up, hence ordered to be excluded. THIRDWARE SOLUTION LTD. (THIRDWAR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....beans that it is providing wide range of services under four verticals i.e. services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis-à-vis the taxpayer which is a routine software development services provider. Infobeans has been excluded as a comparable on account of functional dissimilarity vis-à-vis routine software development service provider by the coordinate Bench of the Tribunal in case of PubMatic India (P) Ltd. vs. ACIT in ITA No.655/Pun/2017. So, in view of the matter, we order to exclude Infobeans from the final set of comparables. INTEQ SOFTWARE LTD. (INTEQ) 46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., every item of receivables appearing in the accounts of an entity, which may have dealing with foreign AE, would automatically be characterized as an international transaction and decided the issue in favour of the taxpayer by returning following findings :- "10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression 'receivables' does not mean that de hors the context every item of 'receivables' appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, 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 reflects an international transactio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e delay in realization of the sale proceeds is incidental to the transaction of sale and as such no notional interest can be levied by treating the same as unsecured loan. 18. Furthermore it is the case of the taxpayer that when the taxpayer is not charging interest from unrelated third party / non-AE, in case of such delay, no adjustment on interest in case of AE can be made and drew our attention towards the details of invoices raised qua unrelated parties available at page 183A of the paper book wherein delay in realization of the receivables is also up to 218 days for AY 2010-11 and up to 417 days qua AY 2012-13 as per detail of invoices raised on unrelated parties qua AY 2012-13, available at page 236 of the paper book." 52. Moreover, the interest can be charged only on loan and borrowing of money and not in case of sale, particularly when there is no penal provision in the agreement entered into between the taxpayer and its AE/non-AE to charge the interest on delayed receivables. Even otherwise, a transaction cannot be recharacterized merely on ground of delay in payment of receivables. 53. Following the order passed by the coordinate Bench of the Tribunal in t....