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2023 (1) TMI 401
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....d served on the assessee. The case was referred to the Transfer Pricing Officer (TPO) for computation of arm's length price (ALP) with regard to the international transactions of the assessee with its Associated Enterprise (AE). The TPO passed an order u/s. 92CA dated 23.10.2019 determining the total adjustment of Rs.39,73,04,165 which was subsequently rectified to Rs.38,89,77,407. The AO passed a draft assessment order incorporating the TP adjustment. Aggrieved, the assessee raised objections before the DRP. Based on directions of DRP, the TP adjustment was enhanced to Rs.40,32,45,354 and the AO passed the final assessment order in accordance with the directions of the DRP. The assessee is in appeal before the Tribunal against the final order of assessment. 3. The assessee raised 19 grounds with respect to the TP adjustment made by the TPO. The assessee also filed additional grounds with regard to certain inclusion of comparables. The effective grounds of appeal are listed as under:- (i) Exclusion of companies (Ground 9) Ground No.9.2 - Nihilent Ltd., Ground 9.3 - Persistent Systems Ltd. Ground 9.4 - Aspire Systems India Pvt. Ltd. Gr....
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....d. 8.60% 2 E-Zest Solutions Ltd. 10.87% 3 Rheal Software Pvt. Ltd. 14.50% 4 Harbinger Systems Pvt. Ltd. 14.74% 5* CG-Vak Software & Exports Ltd. 18.50% 6* R S Software India Ltd. 20.87% 7 Larsen & Toubro Infotech Ltd. 24.83% 8 Nihilent Technologies Ltd. 26.36% 9 R S Software (India) Ltd 20.87% 10 Persistent Systems Ltd. 28.20% 11 Infobeans Technologies Ltd. 32.42% 12 Thirdware Solution Ltd. 36.90% 13 Infosys Ltd. 38.61% 14 Aspire Systems India Pvt. Ltd. 39.28% 15 Cybage Software Pvt. Ltd. 66.45% 35th Percentile 20.87% Median 26.36% 65th Percentile 30.89% * the comparables at S No.1, 5 and 6 are TP study comparables accepted by the TPO. 9. The TP Officer did not grant any adjustment towards working capital. The TPO made revised the operating income of the assessee and re-computed the profit margin of the Assessee at 14.23% against the margin of 11.12% determined by the Assessee in the TP study. Based on the same the TPO arrived at the TP adjustment as per table below:- Particulars As per TP ....
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....resulted in enhanced adjustment of Rs.6,84,74,054/- against the adjustment of Rs.5,42,06,107/- as per the rectification order. 14. In relation to the software development segment, the TPO verified and rectified the margin of the comparable companies and determined the 35th to 65th percentile of 20.87% to 30.87% with a median of 26.36%. There was therefore no change to the adjustment determined by the TP Officer in the software development segment which is as follows:- Description Adjustment (Rs.) Software development segment 33,47,71,300 Interest on delayed receivables 6,84,74,054 Total TP adjustment 40,32,45,354 15. Aggrieved by the TP adjustment made in the final assessment order, the Assessee has filed the present appeal before the Tribunal. 16. With regard to the exclusion of Nihilent Ltd., Persistent Systems Ltd. Aspire Systems India Pvt. Ltd., Infosys Ltd., Thirdware Solutions Ltd., L&T Infotech Ltd., Infobeans Technologies Ltd, the ld. AR submitted that these companies are functionally different from the assessee and therefore need to be excluded. In this regard the ld. AR relied on the decision of the coordinate Bench of the Tribunal in the ....
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....s not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in AY 2008-09, we direct exclusion of M/s Persistent Systems Ltd. We also notice that in AY 2008-09, the co-ordinate bench has excluded M/s Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPL....
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.... benchmarking SDS segment on the ground that it fails Related Party Transaction (RPT) filters as its RPT/ sales ratio is more than 25%. The assessee computed the significant related party transactions at 37.58% whereas the Ld. TPO computed it at 23.55%. The TPO is directed to recalculate the RPT/sales ratio by providing opportunity of being heard to the assessee. So this comparable is remitted back to the Ld. TPO to decide afresh." ****** Nihilent Ltd. 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-à-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 & A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental f....
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....e company. The DRP confirmed the TPO's order to exclude the company on the basis that as per the financial results, the branch revenue is unaudited and therefore cannot be included in the revenue of the company. On this basis the DRP held that the company cannot be considered as a comparable in view of unreliable data provided in the annual report. 21. The ld. AR submitted that the company is functionally comparable and qualifies all filters of the TPO. The ld. AR submitted that the branch is a sub-set of an entity and the result of the branch are already included in the audited financial statement of the entity. He therefore submitted that the DRP's observation that the revenue of the branch is unaudited and cannot be relied on is not correct. The ld. AR placed reliance on the decision of coordinate Bench of Tribunal in the case of Mindteck India Ltd. IT(TP)A No.252/Bang/2021 dated 27.6.2022. 22. We heard both the parties. We notice that the coordinate Bench in the case of Mindteck India Ltd. (supra) has considered the issue of inclusion of Evoke Technologies P. Ltd. and held that - "21. As far as the plea of the assessee for inclusion of Evoke Technologies Pvt. Ltd....
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....f the annual report it is seen from disclosure in notes on additional information of statement of profit and loss account of the Annual Report for the F.Y. 2015-16 that earnings in foreign exchange is Rs. 4.54 crores (page 9) whereas the total revenue from operations is Rs. 11,8 crores (page 7). Therefore, it has export revenue of 38.47% of total revenue from operations. Therefore, this company is not functionally comparable as it fails the export revenue filter of 75% adopted by the TPO. As a result, this objection is found unacceptable." 25. The ld. AR submitted that the DRP has erroneously considered the earnings in foreign exchange instead of the export turnover which is the filter applied by the TPO. In this regard, the ld. AR drew our attention to page 2195 of PB No.4, wherein as per the annual report of the company, the export turnover is stated to be 11.8 crores. The ld DR relied on the decision of the lower authorities. 26. We heard the rival submissions and perused material on record. We notice that the DRP for the purpose of exclusion of the company has considered the earnings in foreign exchange during AY 2016-17 and concluded that the company fails the export tur....
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....mined afresh. It was submitted by the ld. counsel for the assessee that this company did not suffer losses in all the 3 years and submitted that in one of the 3 Financial Years, the assessee made profit. The ld. counsel placed reliance on the decision of the Bengaluru Bench of the Tribunal in the case of KBACE Technologies Pvt. Ltd. Vs. DCIT (2020) 118 taxmann.com 231 (Bengaluru) wherein it was held that for a company to be excluded on the ground that it was persistently making losses, the comparable company should have suffered losses in all the 3 previous Financial Years and even if in one Financial Year it makes a profit, then that company has to be regarded as a comparable company if it is otherwise a comparable company. In the light of the aforesaid decision and in the light of the facts brought to our notice, we are of the view that the comparability of this company has to be considered afresh by the AO/TPO in the light of the facts brought to our knowledge as above. The TPO will verify if this company suffered financial loss in all the earlier Financial Years and even if in one Financial Year, the company has made a profit, it has to be regarded as a comparable company. 3....
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.... adjustment of Rs.6,25,32,865/-. The DRP had directed the TPO to adopt the SBI short term deposit interest rate and directed the TP Officer to verify and compute interest on delayed receivables for the relevant financial year. The DRP did not give any show cause notice or opportunity of hearing, before proposing to adopt SBI short term deposit interest rate. The TPO on giving effect to the directions of the DRP has determined the adjustment for interest on delayed receivables at Rs.6,84,74,054/- against the adjustment of Rs.6,25,32,865/- made in the TP order. 35. The ld. AR submitted that it is a debt-free company and hence it is not required to pay any interest (Page 10 of Paper book-Vol I). The ld AR further submitted the Assessee there are payables to the AE and the AE had not charged interest from the assessee and hence interest could not be imputed on the receivables of the Appellant. It is further submitted that the DRP and the TPO has not appreciated that the Assessee is not charging interest to both AE's and non-AE's. The TPO and the DRP have selectively considered interest on trade receivables without considering the interest on payables. The ld AR without prejudice pra....
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........." The amendment is to the effect that "international transaction" would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business' and hence noncharging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. It was so held by the ITAT Delhi Bench in the case of Bechtel India Pvt Ltd (in ITA No.6530/De1/2016 dated 16 May 2017). It is important to note that the Bench while arriving at the said conclusion distinguished its earlier order in the case of Kusum Healthcare Pvt. Ltd. (supra) and rejected the contention that interest gets subsumed in the working capital adjustment. The Hon`ble Bombay High court in the case of CIT vs. Patni Computer Systems Ltd, (2013) 215 Taxman 108 (Bom) dealt, inter alia, with the following question of law:- "(c) Whether on the facts and circumstances of the case and in law, the Tribunal 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 p....
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....rnational transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench in the case of Techbooks International (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle-3, Noida [2015] 63 taxmann.com 114 (Delhi - Trib.), wherein the Tribunal laid down guidelines on the manner of determination of ALP, as follows: "13.11 Now, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. 13.12 In so far as the first aspect is concerned, we find that the TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing adjustment 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 6....
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....operating profit be computed. Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B stipulates that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged, inter alia, with reference to the : '(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions ...' . Then sub-rule (3) mandates that an uncontrolled transaction shall be comparable to an international transaction if 'reasonably accurate adjustments can be made to eliminate the material effects of such differences'. Applying the prescription of rule 10, it becomes vivid that difference on account of the 'contractual terms of the transactions', which also include the credit period allowed, needs to be adjusted in the profit of comparables. As the TPO has taken the entire delay beyond that normally allowed as a separate international transaction, which position is not correct, we hold that the effect of delay on interest 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 inte....