TaxTMI 
TaxTMI 
2022 (11) TMI 960
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.... • Persistent Systems Ltd. • R S Software India Ltd. • Thirdware Solutions Ltd. 16. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in rejecting companies that ought to have been accepted as comparable: • Akshay Software Technologies Ltd. • KALS Information Systems Ltd. • Helios & Matheson Information Technologies Ltd. • Sasken Communication Technologies Ltd. • Daffodil Software Ltd. • I2T2 India Ltd. • Maveric Systems Ltd. 19. The learned AO/ learned TPO/ Hon'ble DRP erred in not considering the fact that receivables cannot be considered as an international transaction as it does not fall within the purview of capital financing as stated by Sec. 92B of the Act. 20. The learned AO/ learned TPO/ Hon'ble DRP erred in not appreciating the fact that TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. 21. The learned AO/ learned TPO/ Hon'ble DRP erred in charging notional interest on receiva....
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....2,77,700 11,84,200 36.13% 2 Larsen & Toubro Infotech Ltd. 4,54,360 3,64,619 89,741 24.61% 3 Mindtree Ltd. 2,99,010 2,48,290 5,072 20.43% 4 Persistent Systems Ltd. 1,18,412 87,649 3,07,625 35.10% 5 R S Software (India) Ltd. 35,188 28,321 6,867 24.25% 6 Cigniti Technologies Ltd. 5,563 4,359 1,204 27.62% 7 S Q S India B F S I Ltd. 20,061 16,394 3,667 22.37% 8 Thirdware Solution Ltd. 19,883 13,742 6,140 44.68% Average 29.40% 15. DETERMINATION OF ARMS LENGTH PRICE: Based on the detailed discussion held in various parts of this order, the arm's length price of the international transactions entered into by the taxpayer is computed as under: 15.1. Method Used: TNMM is used as the most appropriate method by the taxpayer as well as the TPO. 15.2. Comparable: The comparables are as discussed above. The computation of the PLI of the comparables is as per Annexure 'A' & `Annexure B'. 15.3. Data used Data pertaining to the FY ....
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....f Salesforce.com (supra) are one and the same and therefore there can be no question of the profile of the assessee being not identical to the profile of the assessee in Salesforce.com (supra). In the aforesaid decision, the Tribunal held in pages 12 to 14 of its order that Infosys Ltd., is functionally dissimilar to the assessee and has a huge brand value and cannot be compared with a small assessee such as the assessee in the present appeal whose turnover was only 116 Crores. In so far as L & T Infotech Ltd., is concerned, in pages 18-20 of its order, the Tribunal held that this company was functionally dissimilar, owns brand value and was engaged in R & D activities besides owning intangibles. In so far Mindtree Ltd., is concerned, in pages 16-18 of the order, it was held that Mindtree Ltd., was functionally dissimilar, owns intangibles and owns huge turnover and was giant company. In so far Persistent Systems Ltd., is concerned, in pages 14-15 of the aforesaid order, the Tribunal held that this company was functionally dissimilar and had investments in IP and undertook R & D activities and there was a lack of segmental information in the financial statements. In so far as Third....
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....nsactions during the year under consideration. Accordingly we do not agree with the reasoning given by Ld. DRP for excluding this company as a comparable. Accordingly we direct the Ld. AO/U.S. include this company." 22.7 Annual report of this comparable has been placed at page 593 of paper book volume 2. It is observed functionally it is providing export of software and services. Annual report placed in paper book does not contain functions performed by this comparable in order to ascertain whether this company is rendering SWD services or not. We therefore, set aside this issue to Ld.AO/TPO for verification. The Ld.AO/TPO shall call for requisite information from this company, a copy of which shall be provided to assessee also. Comparability of this company with assessee shall then be considered by giving proper opportunity to assessee." 8. Following the aforesaid order of the Tribunal, we remand the question of comparability of this company to the AO/TPO for consideration afresh, on the lines indicated by the order of tribunal referred to above. 9. The TPO is directed to compute the ALP in the SWD services segment after affording assessee opportunity of being heard....
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.... credit allowed to the AE and the late fee of 1.5% p.m. beyond 30 days was the agreed credit period and interest. The assessee has not charged any interest despite substantial delay in payment by the AE and therefore the action of the TPO was justified. The DRP also went further to hold that the libor rate adopted by the TPO was incorrect and substituted the short-term deposit rate of interest of SBI and directed the TPO to compute ALP accordingly which resulted in an enhancement of the addition made by the TPO. 13. Before us, learned Counsel for the assessee submitted that the TPO and the DRP have not adopted proper benchmarking analysis and further submitted that it is settled principle that no adjustment for interest receivables is warranted for debt - free companies. Reliance was placed on the decision of the Hon'ble Delhi Tribunal in case of the Bechtel India Pvt. Ltd., ITA No. 1478/Del/2015 (Del). This principle has been accepted by the Hon'ble High Court. The SLP filed before the Hon'ble Supreme Court was also dismissed on this point. Learned DR relied on the order of the DRP. Alternatively, it was submitted that the interest rate adopted by the DRP amounted t....
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.... did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any Other transaction having a bearing on the profits, income, losses or assets of such enterprises?" 16. While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. In the case of BT e Serv (TS-849-ITAT-2017(DEL)-TP) the ITAT Delhi Bench held that undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the....
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....djustment for the period in excess of 60 days. In our considered opinion, transfer pricing adjustment on account of interest for the entire period of delay beyond 60 days cannot be treated as a separate international transaction of trading debt arising during the course of business. It is noticed that the assessee entered into an agreement with its AE for realization of invoices within a period of 150 days. This implies that the interest amount on non-realization of invoices up to 150 days was factored in the price charged for the services rendered. Annexure-1 to the TPO's order gives details of the instances of late realization or non-realization of advances up to the year ending. First three and a half pages of this Annexure indicate number of days for which there was delayed realization. Such delay ranges from 175 days to 217 days. The remaining pages disclose no realization of invoices up to 31st March, 2010. When we consider the dates of invoices in the remaining pages, it is manifested that in certain cases these invoices have been raised on 31st August, 30th or September or 31st October, 2009. In all such cases, the period of 150 days already stood expired as on 31st Mar....
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....terest up to 150 days over and above the normal period of realization in an uncontrolled situation, should be considered in the determination of the ALP of the international transaction of 'Provision of IT Enabled data conversion services' and the period of delay above 150 days, namely, 30 days in our above illustration (180 days minus 150 days) should be considered as a separate international transaction in terms of clause (c) of Explanation to section 92B. 13.13 In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in the case of Cotton Naturals (I) (P.) Ltd. (supra), in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of addition on account of transfer pricing adjustment towards interest not realized from its AE on the debts arising during the course of busi....
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....perty rights for the said software. The Appellant cannot sell the software to any third party. f. The learned AO/ Hon'ble DRP ought to have observed that the software purchased by the Appellant having enduring benefit is already capitalised in its books of accounts and only those which have short term license period were claimed as expense in profit & loss account. g. The learned AO/ Hon'ble DRP ought to have appreciated that the software purchased by the Appellant does not result in any enduring benefit, and hence, to be allowed as business expenditure under section 37 of the Act. h. Further, the learned AO/ Hon'ble DRP ought to have appreciated that these expenses are recurring in nature, expended either to upgrade the system or run the system and does not result in creation of fixed asset for the Appellant. Accordingly, such expenditure cannot be capitalized. i. The learned AO/ Hon'ble DRP erred in not placing reliance on judicial precedents which have held that the expenditure on purchase of software can be treated as revenue expenditure where the life of the acquired software was short, say less than two years. j. Th....
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....nly incurred for short term license ranging for a period of 6 months to 12 months. The amortized cost of such licenses falling in FY 2013-14 have been debited to the profit and loss account and have been claimed as an allowable expenditure under section 37 of the Act. We wish to submit that the above software expense is a revenue expense and is expended wholly and exclusively for the purpose of the business. The company does not receive any enduring benefit from such licenses and accordingly, has been claimed as a revenue expenditure." 22. The DRP in its order held as follows: "2.27.1 Having considered the submissions, we note that the complete details of these expenditure were not filed before the AO, and the AO could not examine the nature of these expenses. We consider it appropriate to direct the AO to examine the nature of the expenditure debited as software expenses; with reference to invoices, and on verification, if it is found that the expenses incurred were towards renewal of license for application software for a period less than one year, the same May be allowed as revenue expenditure; and in cases where such expenses relate to renewal of license fo....
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....are expenses are mainly incurred for short term license with respect to application software. Reliance was placed on the decision of the Hon'ble Karnataka High Court in the case of IBM India Ltd. ITA No.130/2007 order dated 10.4.2013 wherein it was held that (Para-9 of the judgment) payment for application software and not system software it has to be regarded as revenue expenditure. It was submitted that softwares are purchased to facilitate daily operations or management more efficiently. That the learned AO has erred by stating that some invoices are pertaining to AY 2013-14 and AY 2015-16 and thus should be capitalised. The learned AO failed to appreciate the fact that only proportionate cost of the softwares has been debited to profit & loss account of AY 2014-15. For e.g., if the software is purchased in October 2012 and the period of license is one year, then half of the price of the software will be charged in FY 2012-13 and balance half will be charged FY 2013-14. The learned AO/Hon'ble DRP ought to have observed that the software expenses charged to the profit & loss account are incurred towards application software, i.e., incurred towards upgradation and customization of....