TaxTMI 
TaxTMI 
2023 (4) TMI 77
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....action, a reference was made to the TPO to determine the arm's length price of the international transaction with its AE. The TPO made an adjustment of Rs.12,01,05,614 based on which the AO passed a draft assessment order. Aggrieved, the assessee filed objections before the DRP whereby the TP adjustment was reduced to Rs.11,45,97,470. The assessee is in appeal against the final assessment order passed pursuant to the directions of the DRP. 3. Ground Nos.1 & 2 are general not warranting separate adjudication. Grounds 3 to 17 pertaining to TP adjustment are as extracted below - "Transfer Pricing grounds 3. The learned DRP/AO/TPO erred in making an addition of INR 4,14,21,224 to the total income of the Appellant on account of adjustment in the arm's length price ("ALP") of the provision of software development services transaction and adjustment on account of the interest income on loan amounting to INR 7,31,76,246 with respect to transactions entered into by the Appellant with its AEs. 4. The learned DRP/AOTTPO have erred in law and facts by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Incometa....
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....n Communication Technologies Limited iv. RS Software (India) Ltd v. Jindal Intellicom Pvt Ltd c) The learned AO/ TPO/ DRP erred, in law and in facts, in rejecting the following comparable companies selected by the Appellant as additional comparables even though the companies are functionally comparable to the Appellant: i. Celstream Technologies Limited ii. Akshay Software Technologies Limited iii. Sybrant Technologies Pvt Ltd iv. Isummation Technologies Limited 7. The learned DRP/AO/TPO erred, in law and in facts, by incorrectly computing the operating margin of certain comparable companies considered in the TP order: i. Rheal Software Private Limited ii. Kals Information Systems Limited iii. Harbinger Systems Private Limited iv. CG Vak Software & Exports Limited v. Great Software Laboratory Private Limited vi. Mindtree Limited vii. Tata Elxsi Limited viii. R Systems International Limited ix. Infobeans Technologies Limited x. Infosys Limited xi. Cybage Software Private Limited xii. Nihilent Limited xiii. OFS Technologies Limited xiv. Consilient Technologies Private Limited 8. The learned DRP/AO/TPO erred, in law ....
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....wing international transactions with its AE. International Transactions as per TP Report Particulars Paid/Payable Received/ Receivable Method Provision of software development services to AEs 322,496,874 TNMM Reimbursement of expenses to AEs 38,454,256 Other Method Trade receivables 108,307,282 Other Method Trade payables 38,731,604 Other Method Reimbursement related receivables 7,924,397 Other Method 5. The assessee applied TNM method as the most appropriate method for computing the ALP. Operating Profit/Operating Cost is considered as Profit Level Indicator. The margins computed as per the TP study of the assessee is given below:- Particulars Software Development Services (IN INR) Income: Revenue from operations 343,529,933 Provision for doubtful advances no longer required written back 4,155,821 Miscellaneous income 1,062,406 Total operating income 348,748,160 Expenses: Direct cost 191,309,625 Other indirect expenses 96,968,126 Foreign Exchange loss 13,015,509 Depreciation 8,153,007 Total operating expenses 309,446,268 Operating profit 39,301,892 Operating profit/Operat....
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.... below:- SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers Operating Revenue OR 343,529,933 Taxpayers Operating Cost OC 309,446,268 Taxpayers Operating Profit OP 34,083,665 Taxpayers PLI PLI=OP/OC 11.01% 35th Percentile Margin of comparable set 21.24% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 26.18% Arm's Length Price ALP=(1+M)*OC 390,459,301 Price Received OR 343,529,933 Shortfall being adjustment ALP-OR 4,69,29,368 9. The DRP after considering the objections of the assessee gave partial relief whereby the TP adjustment was reduced to Rs.11,45,97,470. 10. During the course of hearing the ld. AR submitted that Larsen & Toubro Infotech Limited., Persistent Systems Limited., Tata Elxsi Limited., Infosys Limited., Cybage Software Private Ltd., Nihilent Technologies Ltd., Mindtree Limited., R system International Limited., should be excluded based on upper turnover filter of Rs.200 crores. The ld. AR submitted that the turnover of the assessee is Rs.34.35 crores. The TPO while applying the turnover filter failed to apply the upper turnover filter of Rs.200 crores and abov....
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....that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever 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 Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), 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 7.4. It is also an admitted position that coordinate bench of this Tribunal in assessee's own case ....
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..... DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt. Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be p....
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....he action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 13. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obit....
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....ns follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that 7 companies listed in Sl.No.1,2,4,6,7, 10 and 11 of Grd.No.1 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores shoul....
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.... Vs. Deputy Commissioner of Income-tax for the AY 2016-17, wherein held as under: "5.7 We have heard the rival submissions and perused the materials available on record. Infobeans Techonologies Ltd. was considered as comparable in the case of ADP Pvt. Ltd. by the coordinate bench of Hyderabad cited (supra) wherein it was held as under:- "7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The co-ordinate bench of this Tribunal in ADP (P.) Ltd. (supra), directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: "21. Having regard to the rival contentions and the material on record, we find that the Co-ordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below: " 18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparabl....
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....ntent and e-commerce web and mobile platforms for diverse sectors. The Company's transparent operations, professional team of over 700 employees and high customer focus has enabled it to grow a blue-chip client base with over 90% repeat business." 8.4. Further, at page 2320 of the paper book, this company is said to be providing computer programming, consultancy and related activities as per NIC code. A combined reading of this makes it clear that this company is engaged in not only SWD service but other allied services to various industrial segments. Whereas on perusal of financial statement at page 12367 of the paper book and Note 20 at page 2378 of the paper book, we note the revenue recognition is only under one head being "Expert" amounting to Rs.66,12,31,773/-. We also notice that at page 2408, in Related Party Transaction details this company has earned revenue of Rs.8,00,53,350/- from it's AE. From this it is clear that this company is rendering services to non-AE customers also, whereas the assessee before us is a captive service provider only catering to the requirements of its AE. Under such circumstances we do not deem it fit to be considered in the final set of ....
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....companies having less than 25% employee cost cannot be considered as a good comparable to software development service provider. 9.5.7 The rationale for this filter is that companies that are engaged in providing similar services will require a minimum level of expenditure as personnel expense. Employees cost constitutes the major component of cost in any service sector. Very low employee cost, viz., less than 25% of total cost, indicates that company is either engaged in some other business or it has outsourced the service functions to a third party, i.e., it is not rendering services on its own. Such companies cannot be treated as functionally comparable to the assessee. Hence, we do not find any infirmity in application of above filter. The objection is accordingly rejected. In view of the above discussion, the selection of this company is upheld." 18. The ld. AR therefore submitted that the DRP has accepted the contentions of the assessee, however, has erroneously concluded that the objections are rejected. 19. After hearing both the parties, we notice that the DRP has agreed with the various contentions of the assessee which is supported by the relevant extract given ....
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....e company derives income from software development services and therefore functionally comparable to the assessee (page 4793 of PB). It is also submitted that it passes all filters applied by the TPO and accordingly needs to be included. The ld. AR relied on the decision of Radisys India Ltd (supra) in this regard. 23. We have heard the rival submissions and perused the material on record. We notice that the above two comparables are considered in the decision of the coordinate Bench in the case of Radisys India Ltd. (supra) where it is held that - "6. Ground No.6 is raised by assessee seeking inclusion of following comparables under SWD segment: (i) Akshay Software Technologies Ltd (ii) Batchmaster Software Private Ltd (iii) DCIS DOT COM Solutions India Pvt Ltd (iv) Evoke Technologies Private Ltd (v) Sagarsoft (India) td (vi) Sasken Technologies Limited (vii) E-Zest Solutions Limited 6.1 *** It is submitted that the remaining 5 comparables sought for inclusion, were not considered by the Ld.TPO/AO. We therefore deem it appropriate to remit them to the Ld. AO/TPO. The Ld. AO/TPO shall look into the functional profile of these comparables and verify the....
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....as per the information in the annual report especially the segmental reporting the business activity of the company falls within the single primary business segment viz. Software development. As it is functionally similar and satisfies the export turnover filter, the TPO is directed to consider the company as comparable for the determination of ALP in the software development services." 7.7 In view of the above, we do not find any reason to exclude this company viz. Isummation Technologies Ltd. from the list of comparables in the assessment year 2016-17. Directed accordingly." 27. We notice that in the above decision, the Tribunal has allowed the inclusion of the company in the AY 2016-17 based on the fact that the DRP in AY 2017-18 has accepted the inclusion of the company. Accordingly, respectfully following the decision of the coordinate Bench, we hold that the company be included for AY 2017-18 in assessee's case. Working capital adjustment 28. The TPO did not give working capital adjustment to the assessee. The DRP while upholding the decision of TPO, held that it was not demonstrated with any data or information there exists a difference in price because of the workin....
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....of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based o....
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.... the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international 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 to 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." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 30. Respectfully following the above decision of the Tribunal, we direct the....
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....of INR 74,21,40,000 resulting out of merger scheme, the ld AR submits that this asset is appearing in the books of the company because of adoption of pooling of interest method to give effect to the amalgamation. The assessee had not paid any consideration to acquire this asset as the same was not expected to be realised even by the erstwhile company. Accordingly, it was accounted in the books at the time of acquisition as asset brought in and the entire amount is provided for. It is further submitted that the loan issued by erstwhile Company not forming part of consideration paid on account of merger and is adjusted from the general reserve and hence the consideration paid was only for the net amount. The ld AR submitted that the loan should not be treated as an asset in the books of the assessee as there is not it is probable that future economic benefits associated with the item that will flow in future. Thus, the ld AR contended the loan is a fictitious asset having no substance, appearing in the books only due to the accounting entry as mandated but in reality, no economic benefit is expected to be realized. The reason for creating the provision reflects the management expecta....
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....gatory on part of the assessee, being the parent company and the company desirous of expanding its business in US Market, to provide the funds required for the expansion. Thus, it is argued that any support granted to its subsidiary is in the business interest of the assessee and represents a shareholder activity. In addition to the above, the ld AR submitted that the assessee has similar amount outstanding for the previous years as well in relation to which the TPO has consistently accepted the position of the assessee and has not imposed any transfer pricing adjustment, i.e., has not imputed any notional interest in respect of such irrecoverable loan amount. 37. Without prejudice to the above contentions, the ld AR would submit that even if the TPO imputes notional interest income on the aforementioned irrecoverable debt, it also requires corresponding deduction u/s 36(1)(vii) as the loan stands irrecoverable. Further, even the income relating to the aforementioned debt is hypothetical and also irrecoverable. Hence, the hypothetical income is not required to be explicitly accounted for in the books of accounts. In a scenario wherein notional interest is imputed on the loan amoun....
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....ting. Whereas the transaction of appellant in question involves international transaction and related party transaction with scope for profit shifting and the adjustment was made by the TPO with respect to interest under Chapter X which contains special provisions relating to Avoidance of tax through international transactions with Associated Enterprises. The Special bench decision in the case of Instrumentarium Corporation Ltd.v.Assistant Director of Income-tax, International Taxation-I, Kolkata reported in [2016] 71 taxmann.com 193 (Kolkata - Trib.) (SB) made it clear that the principle of commercial expediency which is applicable in the case of domestic transaction as approved in the case of SA Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 is not applicable to international transactions. Applying the same ratio, the decision of Hon'ble SC rendered in the context of unrelated party domestic transaction is not applicable to the international transaction with the AEs. Moreover, the assessee is not in the banking business. The question involved in the case of Bombay Dyeing (supra) is whether the Outstanding receivables with respect to guarantee fees and technical fee ....
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.... of the Chapter X of the IT Act 1961. 39. We heard the rival submissions and perused the material on record. The loan amount on which the notional interest is imputed consists of two parts. Rs.74.21 crores inherited from a SSI Ltd as part of merger and an amount of Rs.98.61 crores which the assessee has lent to its AE. As per the financial statements of the assessee a provision is created and adjusted against these loans and the net amount is shown as NIL. The common submission of the ld AR with regard to the amount recoverable being shown as NIL in the books of accounts is that there is no future economic benefit is expected from these loans. 40. With regard to the amount inherited as part of merger, the contention of the TPO was that though the assessee has not given the loan, the assessee is compensated for adjusted during the acquisition process and technically the amount is receivable for the assessee on which interest adjustment is warranted. In this regard we notice on perusal of records that the loan is recorded as an asset since the assessee has adopted pooling of interest method whereby the assets and liabilities of the two companies are summed together and then netted....
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....rived and there is no possibility of recovery in future. The provision thus created is adjusted against the loan amount and the net figure of NIL is shown in financial statements of the assessee. It should be mentioned here that the provision is created and adjusted against the loan for the year ended 31.03.2011 and the status remains the same till the financial year of the year consideration. The contention of the ld DR is that there is no actual write off since it is only a provision that is created in this case and therefore the interest adjustment towards loan receivable is justified. With regard to the question of whether the provision adjusted against the loan whether amounts to actual write off is settled by the Hon'ble Supreme Court in the case of Vijaya Bank v. CIT, [2010[ 323 ITR 166 (SC) where in it was held that the provision for doubtful debt debited to the P&L account constitutes an actual write off if the same is simultaneously reduced from the loans & advances/debtors and is shown as net of such provision. Accordingly in the year in which the provision is created by debiting to the P&L account would result in actual write off if the loan amount is shown net of provi....