TaxTMI 
TaxTMI 
TaxTMI 
2022 (6) TMI 1357
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....re Associated Enterprises ("AEs"). 3. In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services is "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the Assessee, the dispute is with regard to determination of Arm's Length Price [ALP] in respect of rendering SWD services to the AE and TP adjustment in respect of outstanding receivables on a notional basis. We shall ....
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....f comparison. The PLI of the comparables is arrived at by considering the weighted average margin of the 3 years' data. The OP/OC of the Assessee was arrived at by the Assessee in its TP study as below:- Operating Income Rs.373,60,37,837 /- Operating Cost Rs.329,76,52,420 /- Operating Profit (Op. Income - Op. Cost) Rs. 43,83,85,417/- Operating/Net mark-up (OP/TC) 13.29% 10. The Assessee chose companies engaged in providing similar services such as the Assessee. It identified the following companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the Assessee and claimed that the price charged in the international transaction is at Arm's Length:- Sl. No. Name of the company Average NPI (in %) 1 Akshay Software Technologies Ltd. 6.01 2 Evoke Technologies Pvt. Ltd. 7.86 3 Helios and Matheson Information Technology Ltd. 19.77 4 R S Software (India) Ltd. 19.60 5 R Systems International Ltd. 13.61 6 Sasken Communication Technologies Ltd. 17.44 7 Ybrant Digital Ltd. 9.52 Arithmetical Mean 13.37 11. Out of the 7 comparables selected by the Assessee, the TPO accepted R S Software (India) Ltd., and rejec....
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....of the operating cost of the Assessee for provision of SWD services and thus cannot be excluded from either its cost base or operating revenues as it would not give a correct picture of the profit margin earned by it. The TPO therefore recomputed the ALP and made the TP adjustment as given below:- Arm's Length Mean Mark-up 29.40% Operating Cost Rs.3,29,76,52,420/- Arm's Length Price - 129.40% of Operating Cost Rs.4,26,71,62,231/- Price Received Rs.3,73,60,37,837/- Shortfall being adjustment u/s. 92CA Rs.53,11,24,394 /- 14. The assessee raised objections before the DRP. The DRP rejected the contentions of the Assessee and upheld the inclusion of the following companies on the basis that they are functionally comparable:- (a) Infosys Ltd.; (b) Larsen and Toubro Infotech Ltd.; (c) Persistent Systems Limited.; and (d) Thirdware Solution Ltd. 15. The DRP accepted the contention of the Assessee and directed the inclusion of Sagarsoft (India) Limited and exclusion of Cigniti Technologies Ltd. and SQS India BFSI Ltd. in the final list of comparables. 16. The DRP rejected the contentions of the Assessee that the subcontracting charges incurred by it for provision of t....
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....artificially inflate the margins of the assessee on the other revenue from the services other than sub-contracting activity. In any case, pass through cost can be considered only when the activity of providing services to the AE does not involve value addition on the part of the AE. The decision of the Delhi Benches of the Tribunal in the case of DCIT Vs. Cheil Communications India Pvt. Ltd. (supra) would not help the case of the assessee as in the said case the activity of the assessee was only a distributor without any value addition. It is pertinent to note that outsourcing cost in software development services activity is part and parcel of cost of providing the service to the AE and cannot be separated from the operating cost and operating revenue of the said segment of services. Accordingly, the cost of software development services cannot be treated in this fashion as claimed by the assessee. Hence we do not find any merit in the contention raised by the assessee on this issue. 8. As regards the alternative plea raised by the ld. AR that the comparables should also have similar activity, we find that the TPO has applied a filter of cost of employee which subsumes the outso....
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....ware development services income less than 75% of total operating revenues. The Ld. Panel also erred in confirming the same. 5.6 The Ld. AO/ Ld. TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e. other than 31 March 2014) and in inconsistently applying such filter, and the Ld. Panel also erred in confirming the same. 5.7 The Ld. AO/ Ld. TPO also erred on facts in erroneously computing the margins of certain companies identified as comparable by the Ld. TPO such as Larsen & Toubro Infotech Limited, Mindtree Limited, R S Software (India) Limited, and Thirdware Solution Limited. The Ld. Panel erred in upholding the same. 5.8 The Ld. AO/ Ld. TPO/ Ld. Panel erred in arbitrarily rejecting Akshay Software Technologies Ltd, Sasken Communication Technologies Ltd. and Ybrant Digital Limited despite these companies being functionally comparable to the Assessee. The Ld. Panel also erred in confirming the same. 5.9 The Ld. AO/ Ld. TPO erred in selecting Infosys Limited, Larsen & Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, R S Software (India) Limited, and Thirdware Solution Limited as comparables, despite the....
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....ted that this company is functionally dissimilar to the assessee company on various counts and therefore it ought to be rejected from the final list of comparables. Infosys Ltd. renders services like customer service experience, simplification of digital marketing etc., which are not part of routine IT services and therefore cannot be compared to the Assessee who renders routine IT services. While the TPO observed that the company provides business consulting, technology, engineering and outsourcing services and operates in three business segments which correspond to vertical line of business in SWD and therefore is comparable. Apart from rendering diverse dissimilar services, the company offers software products and platforms. However, the TPO observed that from the annual report of the company, under the segmental break-up does not disclose revenue from sale of products. It was submitted that while the company earns income from both rendering software services and development of products, there are no segmental details in respect of the services rendered. Further, the services rendered by the company are not functionally comparable to the routine SWD services rendered by the Asse....
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....uding cloud computing, infrastructure management, analytics & information management etc. Further, L&T enjoys significant brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market. The company has also incurred significant expenses in foreign currency amounting to 44.03% of its total expenditure which suggests that is engaged in provision of onsite services. Hence, it operates on a business model different from that of the Assessee and is thus incomparable to it. Further, during the year under consideration, the company has undertaken major restructuring, whereby the company decided to consolidate engineering services businesses under a separate subsidiary of L&T. Pursuant to this the product engineering services business of the company was transferred to its subsidiary L&T Technology Services Ltd., and thereafter its wholly owned subsidiary GDA Technologies Inc. which was a part of the aforesaid business was wound up. It is submitted that no reasonably accurate adjustments can be made to eliminate the material effects of the said differences between the company and the Assessee. The annual report of the company also discloses signi....
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.... the annual report shows that the income from rendering services during the year was 'Nil' and therefore the company fails many of the filters applied by the TPO himself and therefore ought to be excluded. The company purchased stock-intrade during the year and also owns intangibles. Further, the margins of the company fluctuate on a year-on-year basis due to the different revenue recognition model that the company follows. Pertinently, the company was rejected by the TPO in the assessment year 2013-14 on the basis that the segmental financials are unavailable, which position continues in the present year. Therefore even in the year under consideration, the company ought to be rejected. e) The exclusion of comparability of above companies were considered by the Tribunal in assessee's own case for AYs 2010-11 in IT(TP)A No.180(Bang)/2015, order dated 26.8.2016 and for AY 2011-12 by order dated 21.9.2016 (supra) and were directed to be excluded from the final list of comparables. Further reliance is placed on the decisions of this Tribunal in the cases of LG Soft India Pvt. Ltd. v. DCIT (Order dated 28.05.2019 in IT(TP)A No. 3122/Bang/2018), EMC Software and Services India (P.) L....
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....ee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables.' We further find from the Annual Report that there is no change in the activity and functions of these companies during the year under consideration in comparison to the Assessment Year 2010-11. Accordingly, following the decisions of the co-ordinate benches of this Tribunal (supra), we direct the A.O./TPO to exclude these companies from the set of comparables." **** (iii) Infosys Ltd. 18. We have heard the learned DR as well as the learned A.R. and considered the relevant material on record. At the outset, we note that the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in para 17 as under: '(2) Infosys Ltd. 17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining p....
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....s of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables.' In view of the above facts recorded by the DRP as well as the decision of the co-ordinate Bench, we do not find any reason to interfere with the directions of the DRP. 28. Following the aforesaid order of the Tribunal for the AY 201112 in assessee's own case (supra), we direct exclusion of Infosys Ltd., Larsen and Toubro Infotech Ltd., and Persistent Systems Ltd. from the list of comparables. 29. As far as Thirdware Solutions Ltd., is concerned, this Tribunal in EMC Software and Services India (P.) Ltd. v. JCIT ([2020] 115 taxmann.com 293 (Bangalore - Trib.) considered this issue and excluded this company with the following observations:- "(iv) Thirdware Solutions Ltd. the company is functionally dissimilar and is engaged in rendering software development implementation and support services and engaged in the development of software products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the marg....
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....are erroneous and wholly inconsistent. Excluding companies on an adhoc and arbitrary basis without applying a filter at a specific threshold is erroneous. It is submitted that once companies pass the filters applied by the TPO, they cannot be excluded on any other arbitrary basis, as the same would amount to cherry picking companies which is impermissible. Further, consistently across all assessees, the TPO and the DRP reject the application of R&D expenses > 3% of total turnover filter. While so, in the present case, the DRP has rejected Maveric for having R&D expenses greater than 3%. It is submitted that the company is functionally comparable and passes all filters applied by the TPO, which is not disputed by the lower authorities. Therefore this company ought to be included in the final list of comparables. Reliance is placed on the decisions of this Hon'ble Tribunal in the cases of EMC Software and Services India (P.) Ltd. (supra). and Brocade Communications Systems (P.) Ltd. (supra), wherein in the cases of similarly placed assessees, for the assessment year 2014-15, the company came to be remanded for fresh verification. 34. We find that in EMC Software and Services India (....
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....see and since the arm's length price of the said transaction is subsumed in the principal transaction of rendering SWD services, the outstanding receivable cannot be made subject matter of a TP adjustment. b. Reliance in this regard is placed on the case of Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 (Bangalore-Trib) (para 8) which was upheld by the Hon'ble High Court of Karnataka in ITA No. 358/2016) and the decision in Goldstar Jewellery Ltd. v. JCIT (reported in [2015] 53 taxmann.com 353 (Mumbai-Trib). c. The delayed receivables, if at all, would have to be aggregated with the principal transaction of rendering SWD services. On aggregation, if a working capital adjustment is determined, it would take into account the impact of the delayed receivables on the margin of company, and therefore a separate adjustment on that count is not warranted. Reliance in this regard is placed on Kusum Healthcare Pvt. Ltd. v. ACIT ([2015] 62 taxmann.com 79 (Delhi - Trib.), upheld by the Hon'ble Delhi Court in PCIT v. Kusum Healthcare Pvt. Ltd. ([2017] 398 ITR 66 (Delhi). d. The TPO determined the adjustment without applying any method as prescribed under Rule 10B of....
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....tomers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent 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 tr....
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.... under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with 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?" 23.6. Ld.CIT.DR submitted that, while answering abov....
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....e TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions." 23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred ju....
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....lisation Due date for receipt of payments Actual date/ date of receipt of payments No. of days delayed A B C D=C-B 1. AMIND 115/ FY 2014 17-Dec-13 68,860,000 15-Jan-14 15-Apr-14 90 140,146,834 15-Jan-14 28-Apr-14 103 2. AMIND C73/FY 2013 21-Jan-14 6,078,765 19-Feb-14 29-Apr-14 69 3. AMIND 116/ FY 2014 21-Jan-14 139,934,408 19-Feb-14 28-Apr-14 68 68,090,000 19-Feb-14 13-May-14 83 84,459,945 19-Feb-14 27-May-14 97 4. AMIND 117/ FY 2014 14-Feb-14 150,760,055 15-Mar-14 27-May-14 73 99,040,000 15-Mar-14 9-Jun-14 86 33,105,105 15-Mar-14 23-Jun-14 100 5. AMIND C74/FY 2013 19-Feb-14 11,266,914 20-Mar-14 29-Apr-14 40 6. AMIND 118/ FY 2014 14-Mar-14 240,027,931 12-Apr-14 23-Jun-14 72 65,205,000 12-Apr-14 14-Jul-14 93 75,344,908 12-Apr-14 31-Jul-14 110 Total 1,182,319,866 Average days 83 Forex Loss adjustment (22,024,749) Balance as on 31.03.2014 1,160,295,117 Balance as per Financial Statements 1,160,295,117 Difference Interest Receivables @ 4.38% 11,610,091 42....
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....same are eligible for depreciation at the rate of 60% as it applicable to 'computers and computer software'. The ld AR placed reliance in this regard is placed on the following decisions:- i. Expeditors International (India) (P.) Ltd. v. ACIT ([2008] 118 TTJ 652 (Delhi)); ii. ITO v. Samiran Majumdar ([2006] 98 ITD 119 (Kolkata)); iii. CIT v. BSES Yamuna Powers Ltd. [2013] 358 ITR 47 (Delhi); iv. DCIT v. Datacraft India Ltd. ([2010] 133 TTJ 377 (Mumbai) (SB)); v. DCIT v. UAE Exchange & Financial Services Ltd. ([2016] 69 taxmann.com 84 (Bangalore - Trib.)); and vi. CIT v. Sony India (P.) Ltd. ([2012] 26 taxmann.com 237 (Delhi)). 46. The ld AR also submitted, without prejudice, that the AO has erroneously computed the depreciation by treating all the assets as having been put to use for more than 180 days and that the disallowance if at all has to be computed considering the fact that the assets amounting to Rs. 2,96,676/- were put to use for more than 180 days and the assets amounting to Rs. 2,46,828/- were put to use for less than 180 days. 47. The ld. DR supported the orders of the lower authorities. 48. We have considered the rival submissions and perused the materi....
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....the list of assets with the details of date of purchase. We notice that the AO while computing the disallowance had not taken into consideration the date of put to use of the asset. We also notice that in assessee's own case cited supra, the coordinate bench of the Tribunal has allowed the rate of depreciation based on the nature of assets. Given this, we remit the issue back to the AO to verify the nature of asset and allow depreciation considering the principle laid down by the coordinate bench of the Tribunal in assessee's own case (supra) and the date of asset being put to use. This ground is allowed in favour of the assessee for statistical purposes. 50. Ground No.10 reads as follows:- "10 Erroneous denial of depreciation on leasehold improvements included in the block of 'furniture and fixtures' of Rs. 25,313,220. 10.1 The Ld. Panel and Ld. AO erred in law and on facts in disallowing income-tax depreciation amounting to Rs.25,313,220 claimed on lease hold improvements included in the block of 'furniture and fixtures' by alleging failure to submit documentary proof/ evidences substantiating the date of put to use of assets for leasehold improvements acquir....