AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (7) TMI 1372
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....In response to the statutory notices, the assessee filed requisite details. On perusal of the details filed, the Ld.AO noted that the assessee had international transaction exceeding Rs.15 crores and therefore a reference was made to the transfer pricing officer u/s. 92CA of the Act. 2.2 On receipt of the reference, the Ld.TPO called upon assessee to furnish the economic details in respect of the international transactions entered into by the assessee with its AE. The Ld.TPO from the details filed observed that following were the international transactions: International Transactions Particulars Receivables / Received Payables / Paid Method Software development services 1352,43,252 TNMM Extended credit period for receivable (lending) 1352,43,252 TNMM Withholding from employees and payment on their behalf for purchase of stock under ESPP Scheme 37,52,919 TNMM Total 2704,86,504 37,52,919 2742,39,423 2.3 The Ld.TPO noted that assessee computed its margin at 11.69% by using OP/OC as the PLI and TNMM as the most appropriate method. 2.4 The Ld.TPO noted that assessee selected 16 comparables with ....
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.... - 9 assessee is seeking Working Capital Adjustment is to be granted to assessee in respect of deferred receivables. We therefore restrict to the adjudication of Ground nos. 1, 2 (partly), 6-9 only. 9. Before we undertake the comparability analysis, it is sinequa non to understand the functions performed, assets owned, risks assumed by assessee under the software development segment. From the order passed u/s. 92CA, we note that Ld.TPO has regarded the functions performed by assessee as under: Assets employed Risks assumed Assessee is found to be undertaking foreign exchange risk as the AE remunerates the assessee for the services rendered in foreign currency. Apart from that all major risks are being borne by the AE. Assessee is thus held to be a captive service provider who is remunerated on cost plus basis for the services rendered. 10. Based on the above, we shall carry out the comparability of the comparables sought for inclusion / exclusion by the assessee in Ground nos. 1,2 (partly). 11. Ground no. 1 - The Ld.AR submitted that following are the turnover of the comparables sought for exclusion in ground no.1. 1. L&T Infotech Ltd. - Rs. 6183 crore....
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....the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd v. Dy. CIT [2017] 82 taxmann.com 167(Delhi - Trib), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The Assessee has raised Grd.No.4 before the Tribunal ch....
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.... more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 42. The Assessee's turnover was around....
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....ee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5- 8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before....
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....nwards or whether in computing the weighted average profit margin of this company, the earlier two years profit margins have to be ignored because they fail the test of comparability in those two earlier years by reason of the application of the Rs. 200 Crore turnover filter. 16. To answer the above question, we need to look at the amendment to the rules that allow for introduction of a "range concept" for determination of ALP and "use of multiple year data" for undertaking comparability analysis in transfer pricing cases. The provisions of the Income-tax Act were amended through the Finance (No.2) Act, 2014 to facilitate alignment of Indian transfer regime with international best practices. The manner of computation of ALP is laid down under the Income-tax Rules. The Government has notified the amended Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after 1/04/2014 i.e. on and after PY 2014-15. The amended rules allow for introduction of a "range concept" for determination of ALP and "use of mu....
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....wo financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,- (i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price referred to in sub-rule (1): Provided further that in a case referred to in clause (ii) of subrule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding ....
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....; (iii) where the prices have been determined using the method referred to in clause (e) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices " ** 17. Let us apply the above rules to the comparable company R.S. Software (India) Ltd. As per Rule 10CA(2), the dataset of comparable companies chosen has to be arranged in ascending order. As per the 1st proviso to Rule 10CA(2), R.S. Software (India) Ltd., was chosen as a comparable company based on the data relating to the current year and in the earlier two financial years immediately preceding the current financial year. In all the financial years the said company has undertaken similar comparable uncontrolled transaction. Clause (i) to 1st proviso to section 10CA(2) mandates that the same MAM has to be used to arrive at the price of the comparable uncontrolled transaction undertaken by R.S. Software (India) Ltd., in the financial years 2013-14 and 2014-15. As per ....
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....ansaction") undertaking uncontrolled transaction during the relevant previous year and if this condition is satisfied then the profit margin of R.S. Software for the 2 financial years immediately prior to the current financial year has to be taken. A plain reading of the 1st proviso would show that the question of comparability is not to be seen while applying the 1st and 2nd proviso to Rule 10CA(2) of the Rules. The provisions of Rule 10CA(2) have to be read harmoniously with the other provisions of Rule 10B: "Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d). ** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or....
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....action] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction [or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared:" A reading of Rule 10B(3) shows that comparison of an uncontrolled transaction to an international tr....
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.... (i) Autodesk India (P) Ltd. v. DCIT, Circle 11(1), Bangalore (2018) 96 taxmann.com 263 (Bangalore Trib.) (ii) Cenduit (India) Services Pvt. Ltd. v. DCIT, Circle 2(1)(1), Banglaore (TS-19-ITAT-2022 Bang-TP). (iii) M/s.Software Paradigms Infotech Pvt. Ltd. v. ACIT, Circle 1(1), Mysuru (TS-676-ITAT-2021 Bang-TP) 4.1 The learned Departmental Representative was duly heard. 4.2 We have heard rival submissions and perused the material on record. Admittedly, the assessee's turnover in the software development segment is Rs.45.35 crore. The turnover of for Larsen & Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, Tata Elxsi Limited, Nihilent Limited, Infosys Limited and Cybage Software Private Limited, are far exceeding Rs.200 crore for the relevant assessment year. The TPO/DRP has excluded the companies having turnover of less than Rs.1 crore, however, the TPO / DRP has not put upper limit of the turnover for exclusion of comparables having high turnover. The Bangalore Bench of the Tribunal in the case of Autodesk India (P) Ltd. v DCIT, Circle 11(1), Bangalore (supra) has held as follows:- "17.7. We have considered t....
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....ecisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold t....
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....ed the comparables without going through the actual functions and annual reports. We are therefore directing these comparables to be reconsidered by the Ld.AO/TPO based on the annual reports. 13.3 The Ld.TPO shall consider these comparables after verifying the FAR of these comparables with that of assessee. Accordingly, Batchmaster Software Pvt. Ltd., DCIS DOT COM Solutions India Pvt. Ltd. and Evoke Technologies Ltd. for denovo consideration to Ld.AO/TPO. 13.4 In respect of Sagarsoft (India) Ltd., the company has been rejected by the Ld.TPO as he found to be engaged in providing system administration, human resources and training and facilities. The Ld.AR submitted that, the company is engaged in the business of software development service segment along with system administration and that this fact has been not considered by the Ld.TPO. 13.5 In respect of Akshay Software Technologies Ltd., the Ld.TPO rejected it as he found this company to be a persistent loss making company. The Ld.AR on the contrary submitted that this comparable has incurred losses only for two out of 3 years and is not a persistent loss making company placing reliance on the decision of Coordinate ....
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....nt takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 14.4 On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Hon'ble Delhi Tribunal order in case of Ameriprise India Pvt. Ltd. vs. ACIT (2015- TII-347-ITAT-DEL-TP) wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include- (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....'. 14.5 Ld.CIT.DR submitted that expression 'debt arising during the course of business' refers to trading de....
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.... is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 14.7 We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case of Hon'ble Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15-7-2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it also argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables as loans and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 observed that: "There may be a delay in collection of monies for supplies made, ....
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.... In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in open court on 27th July, 2022. ============= Document 1 REVISED GROUNDS OF APPEAL Ground No. 1: The ld. TPO erred in facts and law by comparing the Appellant with the following companies having turnover greater than Rs. 200 Crore, despite the same failing the legally accepted criteria of turnover being lesser than Rs. 200 crores and the ld. AO and the Hon'ble DRP have erred in upholding the same: (i) Larsen & Toubro Infotech Limited (ii) R Systems International Limited (iii) Persistent Systems Limited (iv) Tata Elxsi Limited (V) Nihilent Technologies Limited 33 (vi) Infosys Limited (vii) Cybage Software Private Limited Page 1 of 5 Quick Logic Software Undia) 1) Pvt. Ltd BANGALORE . Document 2 Ground No. 2: The Id. TPO erred in fact and law by rejecting the following functionally similar companies available on public databases as proper comparables to the Appellant, on unjustifiable grounds even though they are functionally comparable to the Appellant: (i) Batchmaster Software Pvt. Ltd. Ground No.2 ....
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....'International Transaction' within the purview of Section 92B of the Income Tax Act, 1961. The Id. TPO has further erred in holding that the Appellant must charge notional interest income on such receivables and the ld. AO and the Hon'ble DRP have erred in upholding all of the above. Ground No. 8: The ld. TPO has erred in facts and law by not considering working capital adjustment made by the Appellant, which eliminates the need for a separate benchmarking of deferred receivables and thereby computing notional interest separately and the ld. AO and the Hon'ble DRP have erred in upholding the same. Ground No. 9: The Id. TPO has erred in computing notional interest using the incorrect and the ld. AO and the Hon'ble DRP have erred in upholding the same: a. Rate of 6-month LIBOR, in the currency in which the transaction was carried out between the Appellant and its Associated enterprise. b. Additional interest rate over and above the LIBOR including additional rate accounting for currency risk. Logic Soft Software F India) Pvt. Ltd PANGALORE Document 5 The Appellant prays that each of the above grounds be considered discrete....