TaxTMI 
TaxTMI 
2023 (1) TMI 401
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....ed 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. Ground 9.5 - Infosys Ltd. Ground 9.6 - Thirdware Solutions Ltd. Ground 9.8 - L&T....
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....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 Officer Total Operating Revenue (Rs) 3,15,26,48,699 Total Operating Expenses (Rs) 2,75,99,08,198 Operating Profit (Rs) 39,27,40,501 OP/ OC (percent) 14.23 Median (percent) 26.36 Arm's length price 3,48,74,19,999 TP adjustment (Rs) 33,47,71,300 10. The TPO ther....
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....as 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 case of Sandisk India Device Design Centre P. Ltd., IT(TP)A No.288/Bang/2021. 17. The ld. DR, on the other hand, supported the order of the lower authorities. 18. We have considered the rival submissions and perused the material on record. This Tribunal in the case of Sandisk India Device Design Centre P. Ltd. (supra) had considered the comparability of Persisten....
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....s 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 3DPLM Software Solutions Ltd. (supra), where in it was held that M/s Thirdware solutions Ltd is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 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 Thirdware Solutions Ltd. 17.....
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....ght 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 financials are not available as is apparent from its financials available at page A305, A412 & A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-à-vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded." "Infobeans Technologies Ltd. (Infobeans) 49. The assessee sought exclusion of Infobeans on the ground that it is also ....
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.... 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. is concerned, this company was rejected by the TPO on the ground that the financials of this company includes figures from outside branches which are unconnected. The DRP agreed with the view of the TPO. The learned Counsel for the assessee placed reliance on the decision of the ITAT, Hyderabad Bench in the case of Infor India P. Ltd. Vs. DCIT (2019) 109 taxmann.com 435 (Hyderabad - Tribunal ) wherein it was held that availability unaudited accounts cannot be the reason to reject the comparability of the company which satisfies all filters....
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....e 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 turnover filter of 75%. This in our view is not correct since it is not the earnings in foreign exchange that needs to be considered while applying the export turnover filter. The ld. AR contended that the company is functionally comparable to assessee. Since the exclusion of the company is done based on mistaken fact of foreign exchange earning as export turnover, we are of the considered view that the issue should be remitted back to the TPO to consider the issue afresh. We therefore remand this issue back to the TPO with a direction to consider the export turnover of the compa....
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.... 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. 31. Respectfully following the decision of the coordinate Bench, we remit the issue to the AO/TPO with similar directions. It is ordered accordingly. 32. With regard to inclusion of Insummation Technologies, we notice that the coordinate Bench in the case of Prism Network P. Ltd. (supra) has held that the companies cannot be excluded merely because they did not figure in the search matrix of the TPO. The relevant observations of the Tribunal in this regard is extracted below:- "18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea ....
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....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 prayed that the interest on payables to the AE required to be netted-off while computing the notional interest on receivables. The ld AR placed reliance on the decision of the Delhi Tribunal in the case of Bechtel India Pvt Ltd (ITA No.1478/Del/2015) and this order of the Tribunal is accepted by the Hon'ble Delhi High Court and the SLP filed in this regard before the Supreme Court is dismissed. 36. The ld. AR further submitted that DRP revised the interest rate by adopting the SBI short term deposit interest rate, resulting in enhancement of the adjustment without giving an opportunity to the Assessee to explain....
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....td. (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 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?" 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 tha....
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....; 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 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 ....
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....f 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 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 ....