TaxTMI 
TaxTMI 
2022 (6) TMI 1357
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....ee and its wholly owned holding company were 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 outstandin....
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....ing Cost [OP/OC] as the Profit Level Indicator [PLI] for the purpose of 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 ....
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....erating Cost Rs. 223,08,72,451/- Operating Profit (Op. Income - Op. Cost) Rs. 44,07,41,107/- Operating/Net margin (OP/TC) 19.76% 13. The TPO was of the view that the sub-contracting charges formed part 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 di....
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....-contracting in software development services is also charged with 10% mark up to the AE. When the margin on the cost of subcontracting charges is part of the operating revenue of the assessee then only the cost of sub-contracting activity cannot be excluded as pass through. It would amount to 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 as....
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....ed party transaction filter at a threshold of 10% or 15% of sales. The Ld. Panel also erred in confirming the same. Accordingly, basis application of 15% related party filter, Persistent Systems Ltd and Thirdware Solutions Ltd. ought to stand rejected. 5.5 The Ld. AO/ Ld. TPO grossly erred on facts in arbitrarily rejecting companies having software 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. a....
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....ent Systems Limited, R S Software (India) Limited, and Thirdware Solution Limited. 25. We have heard the rival submissions. The ld. AR did not press for the exclusion of R S Software (India) Ltd in the course of hearing. Accordingly this issue is dismissed as not pressed. The ld AR made a detailed written submission with regard to the inclusions which are reproduced below:- a) Regarding Infosys Ltd., it is submitted 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 fro....
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....oys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. Also, in addition to the above, the company owns proprietary software products like Unitrax(r), Accurusi and ScriptorTM which are developed in-house. During the relevant financial year, the company has added Rs.708 million worth of intangible assets. Also, the company is engaged in diversified activities including 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 s....
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....gaged in development of software products and earns revenues from sale of user licenses for software applications. These diverse services are reported under one segment without any details being available as regards these services. During the year, the company has liquidated the Singapore entity i.e. Thirdware Solutions Singapore Pte Ltd. due to solvency of business activities, constituting a peculiar economic circumstance. Further, a perusal of 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 ....
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....enue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by the DRP has not been disputed before us. 26. Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. 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 ....
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....d that TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches 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 L....
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....e submissions with regard only to the former, hence the second company is not considered as not pressed. 32. With regard to Maverick Systems Ltd., the ld. AR submitted that this company appeared in the accept/reject matrix of the search conducted by the TPO and its inclusion was sought by the Assessee. However, it was rejected by the TPO without any basis. The DRP upheld the exclusion of the company on the basis that generally, companies with R&D expenditure of less than 3% alone were considered, and therefore Maverick which had incurred expenses of 6% ought to remain excluded. 33. In this regard it is submitted that the actions of the lower authorities 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 ....
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....delay pertained to the invoices mentioned above, adjustment if any ought to be restricted to the same. 37. The TPO however rejected the contentions of the Assessee and computed the TP adjustment on the basis of average receivables and considered the interest rate at LIBOR+400 basis points. While the considering the objections filed by the assessee DRP directed the TPO to allow 30 days credit period and compute interest by taking the short term deposit rate of State Bank of India. Aggrieved the assessee is in appeal before us. 38. The ld.AR submitted that :- a. The outstanding receivables are only in respect of the provision of software development services by the Assessee 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 [201....
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....terizing certain trade receivables as unsecured loans and computing notional interest on such trade receivables. The main contention of the ld. AR is that deferred receivables would not constitute a separate international transaction and need not be benchmarked while determining the ALP of the international transaction. In our opinion, this issue was considered by the Tribunal in assessee's own case for AY 2014-15 and in para 23 to 23.9 of the order dated 21.5.2020 this Tribunal held as under:- "23. Ground No. 14-17 alleged by assessee against adjustment of notional interest on outstanding receivables. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. 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 meth....
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....luding 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;. . . . ' 23.5. Ld.CIT.DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year 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. Referrin....
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....e are factually distinguishable and thus, we reject argument advanced by Ld.AR. 23.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the 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 A....
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....le computing the interest has taken the opening and closing balance of the receivables and calculated the interest adjustments. The assessee had submitted the invoice wise details before the DRP which is reproduced below. In respect of the services rendered by the Assessee to its AE, it raises invoices, under which the AE is granted 30 days' time to make payment. During the course of hearing the ld.AR brought to our attention that the TPO in assessee's own case for the assessment year 2018-19 has allowed the credit period of 90 days and prayed that the same may be allowed for the year under consideration. The ld AR also submitted that during the year under consideration, realizations in respect of certain invoices were made after the period of 30 days granted under the invoice, details of which are as under:- Sl No. Invoice No. Date of Invoice Amount of realisation 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-1....
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....sets as having been put to use for more than 180 days during the relevant previous year as against less than 180 days." 44. It is submitted that during the relevant year, the assessee had made additions to the block of assets 'Computer including computer software' of Rs.12,19,28,624/-. In the said block, it had added certain computer peripherals, and claimed depreciation on the entire block of assets including the peripherals at the rate of 60%. The peripherals were in the nature of battery, head set and external hard disk, all of which were incapable of functioning without the aid of computer systems and were always connected to, and accessible through the computer system alone. The AO restricted the depreciation to 15% on the basis that the assets were not computer software eligible for depreciation at 60% and were instead electronic items. The DRP upheld the AO's order that the assets are not integral part of the computer and were eligible for depreciation at 15%. 45. The ld AR submitted that the peripheral devices are integral part of the computer system and cannot operate independently and therefore, the same are eligible for depreciation at the rate of 60% as it applica....
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....thout a computer and is attachable to any other electrical appliances. Therefore these machines do not form part of computer peripherals. Insofar as the Xerox machine is concerned, it is an ascertained able at this stage whether these machines could be exclusively and independently used without being attached to a computer as such kinds of Xerox machines do exist. Assessee has also not been able to establish details of accessories that has been categorised to be forming part of computer peripherals. 13.4. Accordingly we set aside this issue back to Ld.AO/TPO for verifying the actual use and nature of Xerox machines and the accessories that has been considered as computer peripherals. In the event it is ascertained able that these accessories and Xerox machines could not be independently used but could only be used on being attached to computer 60% depreciation should be allowed. Insofar as racks, batteries and stabilisers are concerned these do not fall within the category of computer peripherals and we uphold the depreciation being allowed only at 15%. Accordingly this ground raised by assessee stands partly allowed. 49. In the year under consideration, the assessee ha....
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....ly during the year an addition of Rs.6,78,99,990/- was made towards leasehold improvements, falling within the block of 'Furniture and Fixtures' and consequent depreciation on the same was claimed. 53. The AO disallowed the claim on the ground that the claim is on the basis of date of bill and not on the basis of the asset being put to use. The AO disallowed the entire depreciation on leasehold improvement for Rs.25,31,31,220/-. 54. The DRP upheld the disallowance on the ground that the assessee failed to produce any document to show that the assets were ready to use/put to use. 55. Before us, the ld. AR submitted that the assessee had capitalised the leasehold improvements after receiving the invoices from the relevant vendor, which was after the asset was completed and was ready to be put to use. The ld AR brought to our attention that the date of put to use have been certified by the tax auditor in the tax audit report. The ld AR alternatively submitted that, in the event of depreciation claim is disallowed, the disallowance need to be reworked considering the date in which the relevant new premises started to function as the date of assets being put to use. The ld AR a....