TaxTMI 
TaxTMI 
2023 (4) TMI 77
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....nce the assessee had international transaction, 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 acc....
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....es selected by the Appellant in its TP documentation even though the companies are functionally comparable to the Appellant: i. Evoke Technologies Limited ii. Sankhya Infotech Ltd iii. Sasken 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. Ta....
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....d because of an acquisition done by Appellant and did not constitute actual loan advanced to AEs. 17. Without prejudice to our ground of objection 16 above, the learned DRP/TPO/A0 have erred, in law and in facts, by not providing the basis for arriving at the arm's length interest rate of Libor plus 400 basis point for computing notional interest income on loan. 4. The assessee had the following 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 Developme....
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.... 67.11 30.80 21 Threesixty Logica Testing Services Pvt. Ltd. 36.64 48.46 42.03 36.64 22 Pagetraffic Web-Tech Pvt. Ltd. 43.96 45.69 24.19 38.31 23 Infosys Ltd. 39.24 38.51 41.46 39.74 24 Cybage Software Pvt. Ltd. 63.3 61.97 69.1 64.79 25 Consilient Technologies Pvt. Ltd. 54.85 71.83 69.51 65.14 26 Dun & Bradstreet Technologies & Data Services Pvt. Ltd. 110.36 83.42 76.69 90.18 27 E-Infochips Pvt. Ltd. 106.61 95.12 76.42 92.03 35th Percentile 21.24 Median 26.19 65th Percentile 29.84 8. The TPO also recomputed the margin of the assessee at 11.01% and accordingly arrived at the TP adjustment with respect to Software Development services as given 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 se....
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....oftware Private Ltd. - Rs.759 Cr. 6) Nihilent Technologies Ltd. - Rs.259 Cr. 7.4. It is also an admitted position that coordinate bench of this Tribunal in assessee's own case in IT(TP)A No.2482/Bang/2019 dated 22.2.2022 excluded comparables with high turnover and have been consistently following the turnover range of Rs.1 to 200 Crores and Rs.200 to Rs.2000 crores, so on and so forth. The coordinate bench of this Tribunal in assessee's own case cited (supra) has dealt with the applicability of turnover filter by observing as under: 11. As far as comparability of companies listed as (a) to (g) in Grd.No.4 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the Assessee's turnover is only Rs.1,21,34,35,876/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the DRP was 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 excludi....
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....arable 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 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 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. V....
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.... 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 said view, the 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....
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....e 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 coordinate 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 later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three de....
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....) in this regard. 15. We heard the rival submissions and perused the material on record. The Tribunal on this issue in the case of Radisys India Ltd. (supra) held as under:- "8.1. The two comparables that assessee seeks to exclude on functional dissimilarities are: (i) Infobeans Technologies Ltd. and (ii) Cygnet Infotech Pvt. Ltd. (i) Infobeans Technologies Ltd. 8.2 The Ld.AR submitted that, this company is engaged in Automation Engineering, Customized Software, Custom Application Development (CAD), Content Management Systems, Enterprise Mobility and Big data Analytics. It is the submission of the Ld.AR that this comparable is functionally not similar to the assessee. He also submitted that, there is no segmental details available in respect of the revenue generated by this company and that the content management, Analytic services are considered to be KPO as per safe harbour rules. This comparable was decided to be excluded from the list of comparables by the coordinate bench of Tribunal vide IT(TP)A No.210/Bang/2021 in the case of EIT Services India Pvt. Ltd. Vs. Deputy Commissioner of Income-tax for the AY 2016-17, wherein held as ....
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....consider this company as comparable in assessee's own case for AYs 2014-15 & 2015- 16. Respectfully following the decision of the co-ordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables." 5.8. In view of the above decision of the Tribunal, we are inclined to hold that Infobeans Technologies Ltd. cannot be considered as a comparable and to be excluded from the list of comparables." 8.3. On verification of the financials of this company for AY 2017-18, we note that in the Annual Report at page 2343 placed in paper book Volumes 4 of 6, this has been stated to be catering into vide range of segments as under: "INFOBEANS TECHNOLOGIES LIMITED Founded in 2000, InfoBeans Technologies is a leading player offering Customized Software, Digital, Transformation and Enterprise Mobility solutions for clients across the globe. With two state-of-the-art facilities in India, the CMMI level 3 certified Company caters to Fortune 100 clients in USA, Germany and Middle East markets. The Company caters to a wide range of segments in the industry, including distributed storage systems, multi-format multimodal content and e-commerce ....
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....for rendering such services is generally high, and therefore the application of the employees cost filter is appropriate to eliminate companies which are rendering services through sub-contracts. The Hon'ble Delhi bench of ITAT in the case of Navisite India Pvt. Ltd. in ITA no. ITA No.5329/D/2012, the Hon'ble 1TAT upheld the application of the above filter. The view has also been upheld by the Hon'ble Delhi High Court, in the case of Rampgreen Solutions Pvt. Ltd. (ITA.102/2015) in paragraph 38 of the decision. wherein it is held that "plainly, a business model where services are rendered by own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing services by would have no bearing on the profitability of the said entity." Hence, we do not find any infirmity in application of above filter. 9.5.6 Also, the Hon'ble ITAT Bangalore Bench in the case of DCIT v. Misys Software Solutions (I) P. Ltd. (2017) 87 taxmann.com 170 (Bang.)/IT(TP)A No. 1086/Bang/2013 & CO No.159/Bang/2015 Trib.) took the vie....
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....n record, the FAR analysis and the information in the annual report for each year and not on the basis of judicial precedent. The ld. AR submitted that the company is providing professional services, procurement, implementation support and maintenance of ERP products and services which is a category of business management software and therefore would come under the purview of software related services . It is also submitted that 97.54% of the revenue is from these services which are comparable to that of the assessee (page 4768 of PB). The ld. AR further submitted that the company passes all filters applied by the TPO. The ld. AR relied on the decision of Radisys IndiaLtd. (supra) in this regard. Evoke Technologies 22. The DRP upheld the exclusion of this company on the ground that the export revenue constitutes only 18.19%of the total revenue. The DRP considered Note No.2.16 which shows an export revenue of Rs.87.58 crores and domestic sales ofRs.61.93 lakhs which is contradictory to the geographical segment information given in Note 2.26. The DRP therefore concluded that the company should be excluded in view of the unreliable data provided in the annual report with regard ....
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....ervices and 100% of its revenue is from rendering of such services [pg 5332 and 5342 of PB]. In this regard, the ld. AR relied on the decision of the coordinate Bench in the case of EIT Services India P. Ltd v. PCIT, IT(TP)A No.210/Bang/2021 dated 22.8.2022. 26. We heard the ld. DR. We notice that the coordinate Bench in the case of EIT Services India P. Ltd (supra) has considered the issue of inclusion of Insummation Technologies and held that - "7.6. We have heard the rival submissions and perused the materials available on record. It has been submitted by Ld. A.R. that this comparable has been accepted by the Ld. DRP in assessment year 2017-18 in assessee's own case. As seen from the direction in para 2.11.7.1 of the order, wherein observed as under:- "2.11.7.1 Having considered the submissions, and on perusal of the annual report, it is seen that the TPO has rejected the comparable for the reason that it fails export revenue filter. However, on examination of the financials of the company as per Note 13 forming part of financial statements the company has reported Rs.2,20,11,325/- of revenue from export sales as against total sales of Rs.220,84,825/- consti....
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....ng capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the bur....
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....g in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and t....
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....mic and accordingly left open. 33. Ground No.13 is with regard to adjustment made by the TPO towards notional interest on loans advanced to AE. The assessee has reported in the financial statements an amount of Rs.172.83 crores as loans advanced to the AEs which consists of Rs. 74.21 Crore which was inherited by the assessee through merger of SSI Ltd India in the year 2004 and the balance amount of Rs.98.62 advanced by the assessee to its AE Xchanging Solutions Ltd, USA between 2004-07. The assessee had created a provision for the entire amount in the books in earlier years since according to the assessee there was no economic interest / benefit is expected to be realised from these loans in the future years and accordingly in the statement of accounts as of 31.03.2017 the loan amount is reflected net of the provision amount as Rs.NIL. The TPO treated the loan as a separate international transaction by stating that the assessee has provided benefit to its AE by way of advancement of interest free loan and accordingly proposed a TP adjustment by computing a notional interest of Rs.7,31,76,246 at the rate of 6 months LIBOR + 400 basis points. On objections filed the DRP confirmed ....
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....ted that the loan was extended to meet the working capital needs and to ensure the survival of AE which was in a fragile financial position because of certain lossmaking contracts which it couldn't get out of and thus, at risk of financial breakdown. It is further submitted that subsequently, from the year ended 31 March 2011 onwards, recognizing that there are no future economic benefits expected to arise from the loan, the entity has recorded the provision for the above-mentioned amount of loan advanced to it AEs and consequently, disclosed in the books as set off against the loans and advances balance i.e. net balance of loans advanced to AEs is shown as NIL. The next argument of the ld AR is that the assessee being parent company, the funds provided per se, is an arrangement enabling the subsidiary to avail funding other than shareholder equity and hence the same partakes the character of 'quasiequity. In this regard reliance is placed on the decisions in the case of Vijay Electricals (ITA 842 / Hyd / 2012) and SGS India Private Limited Vs Addl. Commissioner of Income-tax (ITA No. 2406/Mum/2006). The next line of argument of the ld AR is that the investment by the assessee in t....
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.... economic benefit was expected must be supported by the action. But the action of the assessee is contrary to the claim. It is not written off.Only provision is made. The reason for making provision without complete write off is that the provision can be reversed at any point on recovery of the debt. This shows that the debt is not mere fictitious asset. The AR borrowed support from AS 10 which talks about certainty of cost involved to recognise the cost of the asset as an asset (as evident form the AS 10 extract provided by the Ld. AR in page no 5 of his submission). However, in the case of appellant the cost of asset is not in question. The asset was taken over from the erstwhile company without encumbrances and uncertainty through a scheme of merger. Hence there is no substance in the statement of the assessee that the provision was created as per the AS 10. In addition, the AR relied on the Judgement of Hon'ble SC in the case of UCO Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal [Civil Appeal No 235 of 1996] and decision of Hon'ble Mumbai Tribunal in the case of Bombay Dyeing &Mfg Co Limited Vs. Addl. CIT / DCIT in ITA 928/M/2020 and 3299 & 2779/M/....
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....s also answered yes. In such a circumstance the argument of the assessee that the loan transaction was nil in the books of the appellant holds no water. Loans issued to XSL USA Rs. 98.61 Crore In support of the above arguments the assessee relied on the cases of TRF Ltd VCIT 323 ITR 397 (SC) and Vijaya Bank Vs CIT 166 (SC). As stated in the case of Instrumentarium Corporation (supra) the ratio laid down in these cases are not relevant to determination of ALP and taxability of international transaction which is covered under Chapter X of IT Act 1961. There is no substance in the argument of the assessee that the loan given to its AE is in the nature of informal capital or quasi equity or a shareholder activity. In the following cases the loan given to AEs are clearly made as international transaction and the interest needs to be charged at LIBOR Plus rate. a. [2014] 50 taxmann.com 272 (Mumbai - Trib.)/[2014] PMP Auto Components (P.) Ltd. v. Deputy Commissioner of Income-tax - 7(1), Mumbai b. [2018] 91 taxmann.com 357 (Bombay) Tooltech Global Engineering (P.) Ltd. v.Assistant Commissioner of Income-tax, Circle-7, Pune c. [2015] 56....
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.... regard to the loan lent directly by the assessee to its AE for Rs.98.61 crores, the argument of the ld AR is that loan transaction is in the nature of informal capital or quasi-equity and was merely a shareholder activity and does not fall within the purview of international transaction as defined in section 92 as there is no income arising on account of the transaction. We are unable to agree with this contention of the assessee for the reason that in a quasi equity or in a share holder activity the reward or benefit is not interest but an opportunity to own capital on certain favourable terms and at favourable prices and accordingly such transaction cannot be compared with a simple loan transaction where sole motivation and consideration for the lender is to earn interest on such loans. The fact that the assessee has not charged any interest on the loan does not change the character of the loan and the resultant ALP adjustment towards interest since the point of dispute is whether zero interest, or no interest , is good enough for computing the income where an arm's length interest must substitute this zero interest. Accordingly in our view, the submissions with regard to th....