TaxTMI 
TaxTMI 
2023 (4) TMI 58
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.... procedure prescribed in faceless assessment scheme under section 144B of the Act. 3. The learned AO has erred in making an addition of Rs. 5,18,74,725 to the total income of the Appellant, without appreciating that the learned TPO vide order dated 16.04.2021 had reduced the transfer pricing adjustment to Rs. 4,94,73,850 after giving effect to directions of DRP. 4. The learned AO has erred in making a reference to TPO for determining arm's length price without demonstrating as to why it was necessary and expedient to do so. 5. The lower income tax authorities have erred in (a) making transfer pricing adjustment of Rs. 4,82,08,643 (Software Development Segment) and Rs. 36,66,083 (Interest on delayed receivables); (b) not appreciating that there is no amendment to the definition of "income" and charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; and (c) passing the orders without considering all the submissions and/or without appreciating properly....
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....margin for R S Software Ltd even though the same fails the upper turnover limit of Rs. 200 crores for the above-mentioned years. 12. The lower income tax authorities have erred in law and in facts, by accepting the following companies as comparable even though the same did not fulfil one or more filters applied by the learned TPO or were not comparable to the Appellant on FAR analysis: (a) Inteq Software Private Limited (b) Infobeans Technologies Limited (c) CG-VAK Software and Export Limited 13. The lower income tax authorities have erred in law and in facts, in rejecting I2T2 India Limited forming part of Appellant's transfer pricing study, without providing any cogent reasons for the same. 14. The lower income tax authorities erred in facts and in law: (a) rejecting the filter of companies owning significant intellectual property, brand or developing proprietary products, as applied by the Appellant. (b) by not excluding the following comparable companies even though they fail the RPT filter of 15% of operating sales: - Persistent Systems Ltd - Aspire Systems (India) Pvt Ltd - ....
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....al interest adjustment with respect to outstanding receivables of the Appellant for FY 2015-16. 20. The lower income tax authorities erred in making the notional interest adjustment with respect to outstanding receivables of the appellant for FY 2015-16. The Learned TPO erred in (a) Re-characterisation of the net outstanding receivables as on 31st March 2016 as a deemed loan and benchmarking the same is not permissible in law. (b) Not appreciating that the outstanding receivables were a consequence to the principal international transaction and could not be considered as a separate international transaction. (c) the Appellant follows the same policy of not charging any interest on trade receivables from unrelated parties. 21. Assuming without admitting that interest on delayed receivables is added, the lower authorities have erred in: (a) adopting CUP method as the most appropriate method without justifying, how the same was the most appropriate method in the facts and circumstance of the case. (b) adopting the LIBOR rate for an average maturity period of three years and up to five years which is not applicable to the f....
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....ofit 4,02,51,431 Operating Margin on Operating Cost 25.62% 5. The TPO rejected the segmental profitability statement on the ground that adoption of head count as the basis of cost allocation chosen by the assessee is resulting in skewed results. The TPO therefore considered the entity level margin which is computed as under for the purpose of ALP: - Particulars Amount Total Income 20,66,35,603 Total Operating Income 20,66,35,603 Employee Benefit Expenses 16,85,66,279 Depreciation and Amortization Expenses 14,03,030 Other Expenses 3,17,11,797 Total expenses 20,16,81,106 Total Operating Profit 49,54,497 OP/CO 2.46% 6. Further, out of the 10 comparable companies chosen by the assessee the TPO rejected 7 and applied new filter to choose fresh set of comparable companies as listed below and arrived at the revised operating margin:- Sl.No. Comparable companies OP/TC 3 yr Weighted Unadjusted Average (OP/TC) 31-Mar-16 31-Mar-15 31-Mar-14 1 KALS Information Systems Limited 3.97% 5.77% 16.94% 8.60% 2 E-Zest Solutions Ltd 7.65% 11.80% 14.88% 10.87% 3 ....
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....financials of certain comparable companies Larsen & Toubro Infotech Ltd., Aspire Systems (India) Pvt. Ltd., Cybage Software Pvt Ltd., KALS Information Systems Limited., C G- V A K Software & Exports Ltd (iv) To re-compute the interest on delayed receivables based on the invoice details submitted by the assessee considering the actual period of delay 10. The TPO based on the directions of the DRP recomputed the TP adjustment in software segment as Rs.4,66,55,698 and interest on delayed receivable as Rs.28,18,152. In the final assessment order however the TP adjustment is retained as in the draft assessment order. In the detailed grounds of appeal raised by the assessee, the ground pertaining to the AO retaining the addition made towards TP adjustment as in draft assessment in the final assessment order was contended vide Ground 4.2. However during the course of hearing, the ld AR did not press this ground and proceeded to argue on merits relating to the TP adjustment contended through the concise grounds reproduced above. We therefore dismiss ground no. 4.2 as not pressed and proceed to adjudicate only the issue raised in the concise grounds in the following paras. Out o....
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....tified in upholding the selection of the following companies by the Learned TPO by refusing to adopt the upper turnover filter: (a) Larsen & Toubro Infotech Ltd. (b) Nihilent Ltd. (c) Persistent Systems Ltd. (d) Aspire Systems (India) Pvt. Ltd. (e) Infosys Ltd. (f) Thirdware Solution Ltd. (g) Cybage Software Pvt. Ltd. (ii) exclusion of R.S.Software (India) Ltd., on the ground that the related party transaction is more than 15%; or in the alternative prayer for excluding the operating income and operating expense of FY 2014-15 and FY 2013-14 in computing the weighted average margin for RS Software Ltd, even though the same fails the upper turnover limit of Rs. 200 crores for the above-mentioned years. (iii) non acceptance of Assessee's claim regarding non inclusion of certain companies comparable company. Inteq Software Pvt.Ltd., and Infobeans Software Ltd. 8. As far as Ground No. 8.7 is concerned, the relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: ....
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....rms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] 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. 9. A reading of rule 10B(1)(e)(iii) of the Rules read with sec.92CA of the Act, would clearly....
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....herever 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 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 challenging the aforesaid view of the DRP. 12. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 4....
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....asis 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 Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are nonjurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the ....
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.... 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 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 co-ordinate 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 late....
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.... two years its turnover was more than Rs.200 crores and was liable to be excluded in those earlier two years. The question raised in the aforesaid grounds is as to: whether this company should also be excluded on the application of turnover filter by reason of its turnover in the earlier two years being more than Rs.200 crores in the light of Rule 10CA of the rules which were applicable from AY 2014-15 onwards 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 Govern....
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.... where the comparable uncontrolled transaction has been identified on the basis of data relating to 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 either or both of the two 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): further that in a case referred to in clause (ii) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis o....
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....respective prices; (ii) where the prices have been determined using the method referred to in clause (c) of subrule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs which has been considered for arriving at the respective prices; (iii) where the prices have been determined using the method referred to in clause (e) of subrule (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 ....
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....ontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction") 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)....
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.... of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] 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 bein....
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.... in custom software/application development and maintenance, data base solutions and outsourcing services. The learned A.R. also submitted that the segmental information is not available with respect to this company and that the margins of the company is highly fluctuating (For year ended 2014 -36.64% and for year ended 2015 - 2.76%). It was further argued that the company has significant related party transaction for AY 2015-16 and AY 2016-17 and would fail the RPT filter of > 15% as laid down in the decision of the coordinate bench of the Tribunal in the case of Barracuda Networks (supra). For these reasons the ld AR prayed for exclusion of the company. 19. We notice that the coordinate bench of the Tribunal in the case of Barracuda Network India Pvt. Ltd. (supra) has considered exclusion of companies on the ground that related party transactions are more than 15% and has also held that the RPT filter is to be considered on the upper threshold limit of 15% by relying on the decision of the Hon'ble Karnataka High Court in the case of PCIT and Anr. Vs. M.s Yahoo Infotech Pvt. Ltd. The ITAT has made the following observations in this regard: - "22. We are of the view....
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....we remit the issue back to the TPO/AO with a direction to consider the issue of exclusion of C G VAK Software and Exports Ltd., afresh, keeping in mind the decision of the Tribunal in the case of 3DPLM (supra). 25. With regard to inclusion of I2T2 India Limited, the TPO rejected the company stating that the company fails the turnover filter. The DRP upheld the same by stating that the turnover of the company for the year ended 31.03.2006 is less than Rs.1 crore and as per the provisions of Rule 10CA of Income Tax Rules, if the company is not found to be a comparable for the current year it cannot be selected as a comparable even if found as comparable in earlier years. The ld AR submitted that the company is functionally similar to the assessee. The ld AR also submitted that the company passes Rs.1 crore turnover filter for last 2 years and hence the last 2 years margins should be considered for computation purpose. The Ld AR further submitted that the company passes the RPT and export revenue filter and prayed for inclusion of the same. In this regard the ld AR placed reliance on the decision of the coordinate bench of the Tribunal in the case of Huawei Technologies India (P.) ....
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....s been incurred in the Quess (Indian AE) segment against NIL revenue. The revenue recognition policy of the company clearly states that Revenue from contracts 'priced on a time and material basis are recognized when services are rendered and related costs are incurred.' Clearly adoption of employee head count as the cost allocation basis has resulted in skewed results in each segment. Further the taxpayer has not furnished details of nature of employees under each segment. Revenue from non-AE segment being merely 3.8%, the TPO proceeds to take the entity level margin of the taxpayer for computing the ALP margin." 28. The DRP upheld the decision of the TPO. 29. Before us, the ld. AR argued that the billing for services rendered by the assessee is done on the basis of time sheets i.e. the time spent by the manpower / employees on services rendered to AEs, non-AEs (pg. 996 of Paper Book). The ld. AR also submitted that the direct expenses attributable to these segments are allocated directly and only expenses that are not identifiable are allocated based on head count since the revenue is based on manpower. The ld. AR further submitted that the segmental financi....
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....unication cost and its employees who are involved in such IT and communication are considered for allocation of the expenditure. The AO, in the draft assessment order, has considered number of employees in STPI and SEZ division and has come to the conclusion that the assessee is not following head-count method for division of allocable expenses. Before giving a finding as to whether the assessee is following the head-count method for division of allocable expenses, we would like to examine whether the method adopted by the assessee is correct. Similar question had arisen before the Hon'ble Delhi High Court in the case of M/s. EHTP India Pvt. Ltd. (cited supra) wherein apportionment of expenses between 10A and non-10A units was considered. In the said case also, the assessee was following allocation of common expenses on the head-count basis. After considering the facts of the said case, the Hon'ble High Court held that the assessee's contention therein that in the service industry head-count method would be more proper is a plausible view though it could possibly be a debatable view. It was held that merely because there can be more than one method of apportioning commo....
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....d purpose of verification of the number of employees and expenses allocated to such employees, as was done in the A.Y. 2008-09." 31. The TPO had stated that the head count of cost allocation basis has resulted in skewed results and that the assessee has not furnished the details of nature of employees under each segment. Considering the decision of the coordinate Bench and the facts of the present case, we remit the issue back to the TPO/AO for considering the issue afresh keeping in mind the ratio laid down by the coordinate Bench in the case of Cisco Systems India Pvt. Ltd. (supra). The assessee is directed to furnish required details and cooperate with the proceedings. Interest on delayed receivables 32. The TPO considered the outstanding receivable as a separate international transaction and charged notional interest using 6 months LIBOR + 450 basis points which worked out to 5.386% and arrived at TP adjustment of Rs.36,66,083. The assessee raised objections before the DRP contending the levy of notional interest. The DRP confirmed the levy of interest by the TPO. However, the DRP directed the assessee to submit the invoice wise details of realisation and period of del....
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....or sale of marketable securities or any type of advance, payments or deferred payment of receivable or any other debt arising during the course of business: ............" The amendment is to the effect that "international transaction" would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business' and hence noncharging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. It was so held by the ITAT Delhi Bench in the case of Bechtel India Pvt Ltd (in ITA No.6530/De1/2016 dated 16 May 2017). It is important to note that the Bench while arriving at the said conclusion distinguished its earlier order in the case of Kusum Healthcare Pvt. Ltd. (supra) and rejected the contention that interest gets subsumed in the working capital adjustment. The Hon`ble Bombay High court in the case of CIT vs. Patni Computer Systems Ltd, (2013) 215 Taxman 108 (Bom) dealt, inter alia, with the following question of law:- "(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err i....
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....l transaction. 43. Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench in the case of Techbooks International (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle- 3, Noida [2015] 63 taxmann.com 114 (Delhi - Trib.), wherein the Tribunal laid down guidelines on the manner of determination of ALP, as follows: "13.11 Now, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. 13.12 In so far as the first aspect is concerned, we find that the TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing ....
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....s in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B stipulates that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged, inter alia, with reference to the : '(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions ...' . Then sub-rule (3) mandates that an uncontrolled transaction shall be comparable to an international transaction if 'reasonably accurate adjustments can be made to eliminate the material effects of such differences'. Applying the prescription of rule 10, it becomes vivid that difference on account of the 'contractual terms of the transactions', which also include the credit period allowed, needs to be adjusted in the profit of comparables. As the TPO has taken the entire delay beyond that normally allowed as a separate international transaction, which position is not correct, we hold that the effect of delay on i....