TaxTMI 
TaxTMI 
2022 (10) TMI 1153
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....refore, bad in law and liable to be set aside. 3. The. Hon'ble DRP/Ld. AO/Ld.TPO erred in making an addition of INR 61.092,371/- to the total income of the Appellant on account of adjustment under section 92CA of the Act for the software development services transactions and outstanding receivables by the Appellant from its Associated Enterprise. 4. The Hon'ble DRP/Ld. AO/Ld. TPO erred in rejecting the Appellant's transfer pricing study and accordingly conducting fresh search for comparable companies. 5. The Hon'ble DRP/Ld. AO/Ld. TPO erred in rejecting the use of Comparable Uncontrolled Price (CUP') method for determining the arm's length price of the Appellants provision of software development services transactions 6. Without prejudice to the above grounds, the Hon'ble DRP/Ld. AO/Ld. TPO erred in rejecting the segmental profitability analysis computed by the Appellant while computing the arm's length price of Appellant's provision of software development services transactions using Transactional Net Margin Method (TNMM'). 7. Without prejudice to the above grounds, the Hon'ble DRP/Ld. AO/Ld. TPO has ....
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....P erred in directing the Ld. TPO to use SBI shortterm deposit rate for computing notional interest on receivables without appreciating the fact that the Appellants receivables are realised in USD and not in INR currency 18. Without prejudice to the above grounds, the Ld. AO/Ld TPO erred in not correctly applying the LIBOR rate for imputing notional interest on outstanding receivable balances. 19. While giving effect to the Hon'ble DRP directions, the Ld. AO/Ld. TPO erred in recomputing interest on outstanding receivables by considering credit period of 30 days instead of 90 days agreed by the Appellant with its Associated Enterprise. 20. Without any prejudice to the above grounds, the Ld. AO/Ld TPO erred in making an addition of INR 1,675.822 on account of interest on outstanding receivables as against INR. 1,192.909 while giving effect to the Hon'ble DRP directions. 21. The Hon'ble DRP/Ld. AO/Ld. TPO has erred in not considering the ruling of Hon'ble Supreme Court and jurisdictional Tribunal rulings while issuing the directions and passing the order. 22. The Hon'ble DRP/Ld. AO/Ld. TPO has erred in ignoring the principle of c....
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....iculars Amount in Rs. Outcome of the TP Order Provision of software development services Rs. 25,52,91,602/- Adjustment of Rs. 5,89,33,636/- Unbilled revenue 44,50,512/- Accepted to be at arm's length Outstanding payables 17,24,868/- Accepted to be at arm's length Reimbursements of expenses 82,690/- Accepted to be at arm's length Recovery of expenses 26,94,007/- Accepted to be at arm's length Payments made on behalf of nonresident director 22,522/- Accepted to be at arm's length ANALYSIS OF THE TP STUDY OF THE ASSESSEE AND THE TPO: Net mark-up on cost earned by the assessee as computed by the assessee: Operating Income Rs. 25,52,91,602/- Operating Cost Rs. 23,17,23,496/- Operating Profit (Op. Income - Op. Cost) Rs. 2,35,68,106/- Operating/Net mark-up (OP/OC) 10.2% Net mark-up on cost earned by the assessee as computed by the TPO: Operating Income Rs. 26,18,78,852/- Operating Cost Rs. 25,20,52,552/- Operating Profit (Op. Income - Op. Cost) Rs. 98,26,300/- Operating/Net mark-up (OP/OC) 3.90% Comparison of the TP studies done by the assessee and TPO: Asse....
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.... Ld. A.R. submitted that the external CUP method cannot be applied even for the purpose of external comparison. 3.6 Therefore, since internal CUP is available for a price based comparability analysis, the CUP method was selected as the most appropriate method for determining the ALP of the international transaction. Comparables selected by assessee and the range of weighted average of OP/TC of comparable companies under TNMM applied alternately: Sl. No. Name of the company Weighted average (in %) 1. Akshay Software Technologies Ltd. 1.08 2. Sagarsoft (India) Ltd. 1.47 3. Sasken Communication Technologies Ltd. 6.89 4. CG-Vak Software Exports Ltd. 12.16 5. E-zest Solutions Ltd. 13.79 6. Cigniti Technologies Ltd. 19.44 7. R S Software India Ltd. 21.16 35th Percentile 6.89 Median 12.16 65th Percentile 13.79 3.7 Out of the 7 comparables selected by the assessee, the TPO accepted the 3 highlighted above, viz. CG-Vak Software & Exports Ltd., E-zest Solutions Ltd. and R S Software India Ltd. and rejected the other 4. Filters applied by the TPO: Step Description 1. Companies who....
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....er with respect to the adjustment made towards SWD segment and enhanced the adjustment in respect of interest on delayed receivables. List of comparables post the Ld. DRP's Directions: 3.9 On giving effect to the above directions issued by the Ld. DRP, the final list of comparables is as follows: Sl. No. Name of the Company Mark-up on Costs (WC-unadj) (in %) Total 1. Kals Information Systems Ltd. 8.60 2. E-Zest Solutions Ltd. 10.87 3. Rheal Software Pvt. Ltd. 14.50 4. CG-VAK Software & Exports Ltd. 18.50 5. R S Software (India) Ltd. 20.87 6. Larsen & Toubro Infotech Ltd. 24.83 7. Nihilent Technologies Ltd. 26.36 8. Inteq Software Pvt. Ltd. 28.20 9. Persistent Systems Ltd. 30.89 10. Infobeans Technologies Ltd. 32.42 11. Thirdware Solution Ltd. 36.90 12. Infosys Ltd. 38.61 13. Aspire Systems (India) Pvt. Ltd. 39.28 14. Cybage Software Pvt. Ltd. 66.45 35th Percentile 20.87 Median 27.28 65th Percentile 32.42 Final Assessment Order 3.10 The AO passed the final assessment order in line with the d....
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....ng the international transaction of software development to AE. In the present case, there was an agreement between the assessee and its AE for the purpose of developing software and designing services on man/material basis. However, while calculating the cost of services rendered by the assessee to the related parties, the head count method has been applied by the assessee by assigning the cost to the number of employees earmarked for related parties and unrelated parties. In our view, the authorities below are required to calculate the ALP on the basis of the operating profit of the assessee which was derived on the basis of the cost incurred by it with respect to the related parties i.e A.E and should not include the operating profit cost in respect to non-AE transactions. The learned AR has drawn our attention to the judgment in ITA No. 1878/M/2014 in the matter of MIs. Paradigm Geophysical (I) Pvt. re particularly to paragraph 10 and 13. In the said judgment, the coordinate bench relied upon the judgment of Hon'ble Delhi High Court in the matter of CIT Vs. Tara Jewels Exports Pvt. Ltd. In the conclusion, it was held as under: When the assessee has furnish....
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....nd hence these has to be included. 11. The Ld. D.R. relied on the order of Ld. DRP and submitted that this company was not there in the TPO's search matrix and there is no TP documentation. Hence, it was not considered by TPO. 12. We have heard the rival submissions and perused the materials available on record. These companies have not been included in the comparable on the reason that these companies were not appeared in TPO search matrix and documentation was available on this comparable. In our opinion, it is appropriate to remit this issue to the file of AO to consider it afresh to see whether all the filters applied by the TPO is satisfied. Accordingly, this ground is remitted back to the file of AO for fresh consideration. Accordingly, all three comparables are remitted to AO for fresh consideration on similar lines. 13. Ground No.11 in the appeal of the assessee is reproduced below:- 11. The Hon'ble DRP/Ld. AO/Ld. TPO erred in law and facts by accepting companies namely Persistent Systems Ltd. Aspire Systems (India) Pvt, Ltd. Infosys Ltd. Larsen & Toubro lnfotech Ltd. Thirdware Solutions Ltd, Nihilent Ltd, Inteq Software Pvt. Ltd. Infobeans Technologie....
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....e that where two views are available on an issue, the view favourable to the Assessee 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 Systems (I) (P.) Ltd. (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 Systems (I) (P.) Ltd. (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 Systems (I) (P.) Ltd. (supra) was the earliest d6cision rendered on the issue of comparability of companies on the basis of turnover in Trans....
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....sessee wants exclusion of Infobeans Technologies Ltd. from the list of comparable companies. 16.1 The Ld. A.R. submitted that this company is engaged in providing software engineering services primarily in Custom application development, Content Management Systems, Enterprise Mobility, big data analytics. Though the annual report of the company mentions that the company is earning 100% revenues from sale of software services, such services are in the nature of CAD,CMS etc., which are in the nature of KPO services. The above services rendered by the company are vastly different from the SWD services rendered by the assessee, and therefore the company ought to be excluded as being functionally different. Further, the segmental details for these diverse services are not available and therefore the company cannot be selected as a comparable. Significant intangible assets: 16.2 During the FYs 2013-14 to 2015-16, the company owned intangible assets representing around 7% of the total fixed assets held by the company. Expenses in foreign currency: 16.3 Ld. A.R. further submitted that it also incurred significant expenditure in foreign currency, in the nature of onsite activ....
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....and maintenance of computer software. The operational revenue stream is mainly from rendering of software services as could be seen from the profit & loss account and other information in the annual report. Therefore, the company is functionally comparable to the assessee and it should be included in the list of comparables. 18. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- 7. "Infobeans Technologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons: 1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year 3. Leading provider of consulting technology & next generation service. 4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore. 5. It is also i....
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....usal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee's own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables." 18.1 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgement, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. 19. The assessee wants exclusion of Inteq Software Pvt. Ltd. 19.1 Ld. A.R. submitted that this company is engaged in outsourced product development for small, medium corporation and emerging technology businesses. The company undertakes all the process of product development life cycles, which is a high end product development, which is incomparable to the SWD services rendered by the assessee. As per the website of the company, the company renders data ware....
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....essee's pleas. As he finds that this company is engaged in software development services, he held that it is functionally comparable to the assessee and accordingly, the objection was rejected by the Ld. DRP. 21. We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. Vs. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:- 46. "The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service c....
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....TPO is provided hereunder: *figures in crores FY 2015-16 FY 2014-15 FY 2013-14 Operating revenue 171.41 345.50 351.89 Operating cost 175.07 260.26 283.47 Operating profit -3.66 85.24 68.42 OP/OC -2.09% 32.75% 24.14% 22.5 Ld. A.R. submitted that the reason for decline in margin is attributable to the strategic shift made by the company as it is making substantial investments in a) developing tools and platforms and b) sales and marketing to enhance its customer base. Further, there is a significant drop in revenue (51 percent) vis-à-vis the previous year. Further, the company recognizes that this shift has impact on the margin of the company. In view of the same, he requested that the company ought to be excluded. Presence of intangibles. 22.6 Ld. A.R. further submitted that the company owns significant intangible assets. The company is also developing further intangible assets. The total value of intangible assets as a percentage of fixed assets is 17.3%, which is significantly higher than the intangible assets owned by the assessee, which is 0.04% of its fixed assets. Further, the company also owns stock i....
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....rate and different activities. They from part of the application maintenance and testing services provided as software solution to electronic payment industry. There is no information in the annual report to take a view that these are different from software development services. 23.2 A plea was raised by Ld. D.R. that this company also provides data analytic services which is high end and hence, cannot be compared to the assessee. Ld. DRP did not find merit in the plea, as undoubtedly, provision of data analytic services is not functionally different from software development activity. The data analytic services also use only certain software and tools, write codes to perform certain tasks. Like any other software application, these tools also facilitate and enables business enterprises for informed management and decision. Therefore. we do not find merit in the plea. Further, there cannot be any distinction between high end software activity and low-end activity, so long as it falls within the purview of software development services. Besides, under the TNMM, such differences are tolerable and there is no requirement that the services / activities performed arc identical. It i....
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....mined by the TPO in respect of interest on outstanding receivables. Ld. A.R. submitted that the assessee is a debt free company and did not have any borrowings from external sources and hence was not required to pay any interest. The assessee has not charged any interest from its AE as well as non AEs customers for the extended period of credit as there is no interest or borrowing cost borne by the assessee during the year. He placed reliance on the decision of CIT v. Indo American Jewellery Ltd (order dated 08.01.2013 passed by the Hon'ble High Court of Bombay in ITA(L)No. 1053/2012), and the decision of the Hon'ble Delhi High Court in the case of PCIT v. Bechtel India Pvt. Ltd. (Order dated 21.07.2016 in ITA No. 379/2016). 25.1 The Ld. A.R. for the assessee submitted that the outstanding receivables are only in respect of the provision of software development services by the assessee. Since the outstanding receivables related to the SWD services rendered by the assessee, Ld. A.R. submitted that the determination of ALP of the outstanding receivables is not warranted as the same is subsumed in the ALP of the principal transaction. The outstanding receivables cannot be treated a....
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....at the actual credit period allowed by the assessee has to be compared to the average receivable days of the comparable companies taken for comparable analysis. The period of credit allowed by the comparables is not a relevant factor or justification for the extended credit period allowed by the assessee. Such a plea has no merit, and loses its relevance, in the light of the various judicial decisions, wherein, it has been categorically held that the amount not realized beyond the agreed credit period would constitute a separate international transaction and is in the nature of debt arising during the course of business, liable to be visited with TP adjustment on account of interest income short charged or uncharged. Hence, Ld. DRP rejected these pleas. 26.2 Ld. D.R further stated that the assessee has raised another plea before Ld. DRP that it has not charged interest on the receivables from non- AEs, and by way of CUP, interest cannot be imputed on the AEs transaction also. In this regard, Ld.D.R. opined that the assessee has failed to furnish before Ld. DRP, the details of non-AE transactions, the terms of credit period agreed, the relevant agreements & invoices to the transa....
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....ndependent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working....
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....nces 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?" 23.6. Ld.CIT.DR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 t....