TaxTMI 
TaxTMI 
2022 (11) TMI 960
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..... 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 receivables without appreciating the fact that the Appellant does not have any cost of debt. 22. The learned AO/ learned TPO/ Hon'ble DRP erred in imputing interest on delayed receivables once the primary transaction has bee....
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....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 2013-14 as mandated under Rule 10B (4). 15.4. Computation of Arm's Length Price: 15.4.1 The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure 'A' for details of computation of PLI of the comparable. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under: SWD Segment Arm's Length Mea....
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....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 Thirdware Solution Ltd., is concerned, in pages 15-16 of the aforesaid order, Tribunal held that this company cannot be considered as a comparable company because of its high turnover, functional dissimilarity and happening of the extraordinary events during the previous year relevant to Assessment Year 2014-15. Following the aforesaid decisions, we direct exclusion of the above said 5 companies from the final list of comparable companies. 7. In so far as ground No.16 raised by the assess....
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.... 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 in the light of the directions as given above. 10. In so far as ground Nos.19 to 24 is concerned, the TPO computed interest on delayed receivables in his order as follows: "18. Computation of interest on delayed receivables 18.1 Vide showcause letter dated 05/10/2017, the tax payer was requested to provide the invoice wise details along with the delay, if any & other details, on/before 13/10/2017. However, the tax payer has not provided any details till the date of this order. In the absence of the same, ....
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....he 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 to enhancement and there was no notice to the Assessee given by the DRP before making enhancement. 14. We have carefully considered the rival submissions. We find that the Bench marking analysis adopting the rate of LIBOR at 6 months + 400 basis points adopted by the TPO is without any basis. The rate should be adopted after a proper benchmarking analysis. Interest computation if at all should be based on the delay of individual invoices, which has not been done. On the question whether delayed realization of trade receivables from the AE constitutes ....
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.... 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 character of capital financing and consequently, overdue outstanding is an "international transaction". The natural corollary would be of imputing interest on such "capital financing" if same is not charged at arm's length. The ITAT concluded that if outstanding receivables are within the terms of agreement, then it may be argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement does not specify the term of the payment, even then assessee must be given benefit of credit period which is accepted business practice in the trade. ....
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....nces 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 March, 2010 and the assessee ought to have charged interest on the delay in realizing such invoices along with the first three and a half pages in which there is an absolute and identified delay in realization of invoices beyond the stipulated period. When the interest for realization of trade advances up to 150 days is part and parcel of the price charged from the AE, then the delay up to this extent cannot give rise to a separate international transaction of interest uncharged. Rather interest for the period in excess of normally realizable period in an uncontrolled situation upto 150 days needs to be consider....
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.... 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 business in line with our above observations." 19. We are of the view that the issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down in the decision referred to in the earlier paragraph, after affording assessee opportunity of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest w....
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....t 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. The learned AO/ Hon'ble DRP erred in not placing reliance on judicial precedent which have held that the software license cost is allowed as a revenue expenditure for the following reasons: i. If the software acquired by the assessee was primarily in the nature of application software ii. The assessee has only limited right to use the software for the period of validity of the license which has no enduring benefit. iii. The payments made for maintenance and upgradation of the existing software is on account of newer version of the software required in a periodic manner to facilitate functioning. iv. If the advantage obtained by purchase of software was only to facilitate trading operations or....
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....ese 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 for a period more than one year, such expenditure may be capitalized and depreciation may be allowed on the same at the percentage relevant to block of assets under the category 'intangible assets" and in respect of software embedded to computer depreciation may be allowed' at 60%. 2.27.2 The assessee is directed to produce all the relevant Invoices within 10 days of receipt of this order. If the assessee fails to furnish the information as above, then no interference is called for in the AO's order. 2.27.3 The above direction is based on our view that payment towards renewal of license being in the nature of license fee' would fail within the category of "intangible assets" and depreciation may be accordingly allowed. In this regard, we like to poin....
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....oftware 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 existing software and hence, does not result in acquisition of an asset. The learned AO/ Hon'ble DRP ought to have observed that the Appellant does not own any intellectual property rights for the said software. The Appellant cannot sell the software to any third party. 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. 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. Further, the learned AO/ H....