TaxTMI 
TaxTMI 
2023 (3) TMI 1218
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....come of Rs.85,57,77,213. The case was selected for scrutiny under CASS and notice u/s. 143(2) was duly served on the assessee. Since the assessee had international transactions, the case was referred to the TPO for determination of arm's length price (ALP) with respect to the international transaction the assessee had with its AE. The TPO ignored the segmental financials of the assessee and considered the entire operations as SWD services. Accordingly, the AO arrived at TP adjustment of Rs.82,58,40,327 in the SWD services segment. The TPO further calculated the notional interest on delayed receivables at LIBOR + 450 basis points to arrive at an adjustment of Rs.6,89,46,372. The AO passed the draft assessment based on the order passed by the TPO. Aggrieved the assessee filed its objections before the DRP. 3. The DRP gave partial relief to the assessee whereby the TP adjustment in SWD segment was reduced to Rs.55,69,83,890. With respect to interest on receivables, the DRP directed the TPO to use the short term deposit rate of SBI to recomputed the adjustment, according to which the interest was reworked at Rs.6,49,06,385. The assessee is in appeal before the Tribunal against the f....
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....ilant Technologies Private Limited 17.17% 4 Tech Mahindra Limited 18.57% 5 Larsen & Toubro Infotech Limited 18.94% 6 Great Software Laboratory Private Limited 19.73% 7 Elveego Circuits Private Limited 20.19% 8 Black Pepper Technologies Private Limited 20.62% 9 Mindtree Limited 21.21% 10 Aptus Software Labs Private Limited 22.70% 11 Acewin Agriteck Limited 24.51% 12 Persistent Systems Limited 24.98% 13 Wipro Limited 26.83% 14 Tata Elxsi Limited 28.24% 15 Infobeans Technologies Limited 28.52% 16 Nihilent Limited 30.17% 17 Thirdware Solution Limited 30.94% 18 Threesixty Logica Testing Services Private Limited 36.58% 19 Infosys Limited 37.38% 20 Cybage Software Private Limited 56.81% 35th Percentile 20.19% Median 23.60% 65th Percentile 28.83% 7. Accordingly, the TPO arrived at the TP adjustment as per working below:- Particulars Amount (INR) Arm's length median margin as per comparable set 23.60% Operating Cost (OC) 7,88,43,53,002 Arm's Length Price ('ALP') = 123.60% of OC 9,74,50,60,310 ....
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.... rendered by the Appellant. (Page 2032 of Paperbook II - Annual report - Part 1) 3. Brand value The brand name empowers better negotiation position for Infosys and accordingly helps in optimisation of cost and margins. The Appellant renders services exclusively to its AE and therefore the impact of the brand name of the parent (if any) will not have an impact on the sales of the Appellant as entire sales are made to the AE on a cost-plus basis. However, the operations/ sales undertaken by Infosys are impacted hugely by its brand name. The same has also been recognised by Infosys: "Infosys" brand is one of the most important intangible assets owned by the company. (Page 1882 of Paperbook II - Annual report - Part 1). 4. Engaged in research and development activities Expenditure in R&D will lead to increased productivity, modernization, operational synergies etc. (Page 1880, 1938 of Paperbook II - Annual report - Part 1) 5. Size and scale of operations The turnover of Infosys is more than 50 times of that of the Appellant. Accordingly, the size and scale of operations of Infosys are much significant than that of the Appel....
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.... The company had revenue from software services of RS.61,910 crores and that from software products was only Rs.31 cores. As such, the product revenue constituted a meagre 0.05% of total operating revenue. It passed the filter of 'Revenue from Core services greater than 75% and functionally comparable to assessee. The meagre revenue from software products does not impact the margins of company from software development and segmental data is not required to be considered. 15. With regard to the contention that Infosys Ltd has a huge brand value, the ld DR submitted that the growth in revenue was on account of various business initiatives taken to accelerate the growth and not because of just the brand value. Further the ld DR submitted that on perusal of the annual report page 41, 98.5% of the revenue is from repeat business from the top clients and the brand building spends is meagre 0.39% of the total revenue. To counter the argument that Infosys Ltd has huge selling and marketing expenditure the Ld DR submitted that expenditure as a percentage of total revenue works out Rs.4.46% only and therefore will have no effect on profit margin of the company. 16. On the contention of....
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.... 2019 at page 20 para 4.2 (b) which read as under: "4.2 (b). Infosys Ltd: It has been submitted by Ld. Counsel that this comparable has been included by Ld.TPO in finalist. It has been submitted that this comparable is not comparable due to high turnover and intangibles owned by this company. It has been submitted that Hon'ble Delhi High Court in case of CIT v. Agnity IndiaTechnologies reported in (2013) 36 Taxmann.com 289 has held this company to be bad comparable to a company which is captive service provider under the segment. It has been submitted that this company provides end to end business solutions that leverage technology to enable clients to enhance business performance. Ld. CIT DR placed reliance upon the order passed by authorities below. We have perused submissions advanced by both sides in the light of the records placed before us. Admittedly this company owns huge intangibles and is an entrepreneur in the field of software service development service segment. At page-1100 of paper book, Vol. III it is observed that this company primarily derives revenue from software development and related services and from licensing....
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..... (Pg 3005 of Paperbook II - Annual report - Part 3). As evident for above, varied nature of services have been included and termed as 'IT services' which are not comparable to the routine software development services rendered by the Appellant. 2. Cost of Bought out items for resale The company is engaged in trading of goods/ products also and the same is apparent from its annual report. (Pg 3024 of Paperbook II - Annual report - Part 3) 3. Insufficient segmental information While L&T Infotech is engaged in providing host of services and also in sale of products (as discussed above), there is no segmental break-up for such services/ products and accordingly comparability cannot be assessed relying on the overall services rendered by L&T Infotech. (Pg 3041 of Paperbook II - Annual report - Part 3) 4. Brand value L&T Infotech deals with third party customers enjoying market dominion and an enhanced brand image would allow it to command or negotiate better price deals with its customers thereby aiding in securing improved margins for the company. (Pg 2956 of Paperbook II - Annual report - Part 3) 5. Acquisitions ....
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....dent that L&T follows a different operating model (which also impacts the profitability) and hence, could not be compared with the Appellant. (Pg 2992 of Paperbook II - Annual report - Part 3) 20. The ld. AR relied on the following cases in this regard:- * Appellant's own case [ITA No.339/Bang/2019] and [IT(TP)A No.370/Bang/2019] - AY 2014-15 - Para 35, Page no. 3945 - Paperbook III - Caselaw * Appellant's own case [IT(TP)A No.1939/Bang/2017] - AY 2012- 13 - Para 30, Page no. 4016 - Paperbook III - Caselaw * Appellant's own case [IT(TP)A No.1940/Bang/2017] and [ITA Nos.2140, 2051/Bang/2017] - AY 2010-11 - Para 31, Page no. 3993 - Paperbook III - Caselaw * M/s. Yahoo Software Development India Pvt. Ltd. [IT(TP)A No. 178/Bang/2022] - AY 2017-18 - Para 5, Page no. 4038 - Paperbook III - Caselaw * M/s. Mandiant Cyber Security Pvt. Ltd. [IT(TP)A No. 292/Bang/2021] - AY 2016-17 - Para 7.7, Page no. 4068 - Paperbook III - Caselaw 21. The ld. DR submitted that as per the information in the annual reports, 100 percent of the operating revenues respectively were derived from software development services. The activities- Applicat....
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....he company. 23. The next contention of the assessee is that the company has invested huge amounts technology absorption and owns significant intangibles. In this regard the ld DR submitted that as per page 88 of the annual report, the intangible assets reported in the balance sheet comprises of only computer software. There is no information as to any intellectual property rights developed or license owned by the company. The computer software referred to were normal software used by any software company and hence it cannot be construed as a unique or non-routine asset. The reference to intangibles under development also indicates that as at the end of the year, it does not possess its own intellectual property rights; and does not have any revenue stream on account of IPR. Thus, there is no material difference as to the intangibles owned by the assessee company and the comparable company. In connection with the submission that this company has incurred substantial expenditure of Rs,302 million towards R&D the ld DR submitted that on perusal of the information in the annual report show that the expenses incurred towards R&D was only 0.43% of total revenue, and which is quiet mea....
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.... and direct the TPO/A.O. to exclude the comparable from the final list for determination of ALP.' 35. In view of the above decision, we direct exclusion of Larsen & Toubro Infotech Ltd. from the comparables." 27. The nature of activity performed by this company is given at page 83 of the annual report, as under: "Larsen & Toubro Infotech Limited (`the Company') offers extensive range of IT services like application development, maintenance and outsourcing, enterprise solutions, infrastructure management services, testing, digital solutions and platform based solutions to the clients in diverse industries." 28. From the above it is clear that L&T is providing varied services under the umbrella of SWD services whereas the assessee is a captive service provider of routine software development. It is the submission of the ld AR that the L&T is engaged in trading of goods and there is no segmental break-up for such services/ products. We also notice that the company has made several acquisitions during the year under consideration. In view of these discussion and considering that there is no change to facts for the year under consideration also, we respec....
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....nciple of aggregation is well established rule in the transfer pricing analysis. This principle seeks to combine all functionally similar transactions wherein arm's length price can be conducted for a number of transactions taken together. The said principle is enshrined in the transfer pricing regulation itself. Fully funded by AEs with no working capital risk The Appellant wishes to highlight that the Company (being a captive service provider to group entities) does not bear any working capital risk since it has been fully funded by its AEs and has no working capital contingencies. There have been some instances where there has been delay in making the payments by the AEs beyond the agreed credit period; however, no interest has been charged for the reason that on account of alleged delayed payment in collection of receivables from AEs, the Appellant has no additional burden for managing its working capital life cycle. Outstanding receivables from AEs cannot be re-characterised as loan advanced to AEs It needs to be appreciated that in the instant case, since outstanding balances arise in the course of regular business with its AEs....
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....ove the average receivable days of comparables and not in respect of cases where actual credit period allowed is less than the normal credit period extended in the similar industry. Account receivables arising from an international transaction are closely linked to the main transaction and should be benchmarked using a combined transaction approach Without prejudice to the contention that outstanding receivables is not an international transaction, it is submitted that if outstanding receivables is treated as a separate international transaction by the learned TPO, the same should be benchmarked using a combined transaction approach, by combining the outstanding receivables with the main international transaction of provision of services due to the fact that receivables are a result of the international transactions of the Appellant. LIBOR rate to be applied in case of delayed receivable collection The ld. AR submitted that while the TPO adopted LIBOR 6 months + 450 bps, the DRP on the other hand, directed TPO to adopt short term lending rate prescribed by SBI. Without prejudice to the fact that no interest should be computed, the ld. AR....
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....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 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] 6....
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....ing 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. 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 ....
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....at: "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 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 i....