TaxTMI 
TaxTMI 
2023 (4) TMI 843
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....r scrutiny under CASS and a notice u/s. 143(2) was duly served on the assessee. The case was referred to the TPO for determination of ALP of the international transactions the assessee is having with its AE. The TPO made the following TP adjustments :- (i) Software development services - Rs.41,20,89,204 (ii) BPO Services (ITeS Services) - Rs.22,42,68,187 (iii) Interest on delayed receivables - Rs.53,92,838 3. Aggrieved, the assessee raised its objections before the DRP pursuant to which, the TP adjustments were modified as under:- (i) Software development services - Rs.33,47,10,065 (ii) BPO Services (ITeS Services) - Rs. 13,83,31,654 (iii) Interest on delayed receivables - Rs.53,92,838 4. Aggrieved the assessee is in appeal before the Tribunal raising the grounds with respect to the following issues:- I. Ground No.1 & 2 - general. II. Ground No.3 - Comparability analysis and determination of ALP. III. Ground No.4 - TP adjustment with regard to software development segment (SWD). IV. Ground No.5 - TP Adjustment with ITeS segment. V. Ground No.6 - Not providing working capital adj....
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.... lnfobeans Technologies Ltd. 26.53 14 Tata Elxsi Ltd. 26.71 15 Infosys Ltd. 36.30 16 Quick Heal Technologies Ltd. 39.70 17 Eclerx Services Ltd. 45.86 18 Xchange Technology Services India Pvt. Ltd. 55.78 19 E-Infochips Pvt. Ltd. 56.95 20 Cybage Software Pvt. Ltd. 57.62 21 Consilient Technologies P. Ltd. 59.44 22 Ginni Systems Ltd. 66.51 35th Percentile 16.46% Median 24.00% 65th Percentile 36.30% 8. Accordingly, the TPO computed the TP adjustment as below:- Appellant's PLI (OP / OC) 14.89% 35th Percentile 16.46% Adjustment required Yes Median Margin of comparable set (`M') 24.00% Operating Cost of the Appellant Rs. 452,50,95,852/- Arm's Length Price - (1 + M) * Operating Cost Rs.561,11,18,856/- Price Received , Rs. 519,90,29,652/- Shortfall being adjustment u/s. 92CA Rs. 41,20,89,204/- 9. On further objections by the assessee, the DRP upheld most of the comparables chosen by the TPO and directed the exclusion of two companies i.e., Quickseal Technologies Ltd. and E-Infochips P. Ltd. as being functionally dissimilar to....
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.... ld. AR drew our attention to the detailed submissions made before the DRP as given in page 787 to 795 of PB in this regard. The ld. AR also submitted that the DRP in assessee's own case for AY 2017-18, has excluded Wipro as comparable on the ground that the company is not functionally comparable to assessee. The ld. DR relied on the order of the lower authorities. 15. We heard the rival submission and perused the material on record. We notice that Wipro is having diversified business operations such as digital strategy advisory, global infrastructure services, application services, product engineering, analytical services, research & development, hardware & software design, etc. which is clear from the extract of annual report as given in page 787 of PB Vol. III. It is also noticed that the company has spent INR 3041 million during FY 2017-18 on R&D activities. It is also noticed that the DRP in assessee's own case for AY 2017-18 (PAGE 983 of caselaw compilation) has excluded Wipro on the ground that the FAR of the company is distinct and different from that of the assessee company. The FAR analysis in the light of the DRP's decision to exclude Wipro in assessee's own case has ....
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....rd. We notice that Infosys Ltd. is having diversified business operations such as consulting, technology, engineering and outsourcing services etc. which is clear from the extract of annual report as given in page 775 of PB Vol. III. It is also noticed that the company has spent INR 3740 million during FY 2017-18 on R&D activities. It is also noticed that the DRP in assessee's own case for AY 2017-18 (PAGE 983 of caselaw compilation) has excluded Infosys on the ground that the FAR of the company is distinct and different from that of the assessee company. The FAR analysis in the light of the DRP's decision to exclude Infosys in assessee's own case has not been considered by the TPO and the contention of the assessee that there is no segmental information available inspite of the diversified operations needs to be examined factually. Therefore we remit the issue back to the TPO for fresh consideration with a direction to keep in mind the directions issued by the DRP in assessee's own case for AY 2017-18. Needless to say that the assessee may be given a reasonable opportunity of being heard. Tally Solutions P. Ltd ("Tally") 21. The assessee submitted that the company is engaged....
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....l step of the value chain. * Software specification The AEs determine the exact scope of work to be performed by Wipro India and also provide the software module specifications, instructions of various tasks to be performed along with project content, delivery time, etc. for developing the particular software as a package. On a need basis, Wipro India provides its inputs in the requirement analysis phase of the software development process. * Architectural/ high-level designing The AEs are responsible to create core architectures/ high level technical designs which provides a roadmap for the development. * Development/ Coding Wipro India undertakes the preparation of detailed design based on the core architecture and then undertakes the coding function with respect to the software modules to be developed. These services only act as a support function to the overall software development activity being performed by the AEs. * Project management The project team of Wipro India works in close co-ordination with the project team of the AEs. This is to ensure that the software is available for use as per the prescrib....
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.... out its business activity. During FY 2017-18, Wipro India employed tangible assets such as furniture, fixtures, office equipment, and computer equipments. 5.4.2. Intangibles Wipro India does not own any non-routine intangible asset with respect to the services rendered by it to the related parties. Alight Solutions owns the key intangible assets utilized within the Alight group, including, but not limited to, proprietary technologies, processes, databases and trademarks. 5.5. Risks assumed The risk profile of Wipro India vis-à-vis its AEs is provided in the table below: Table 4: Risk Profile Risk Category and Description Wipro India AEs Market Risk: Market risk arises for a business due to increased competition and relative pricing pressures, change in demand patterns and needs of customers, inability to develop / penetrate in a market, etc. For the RPT under review, Wipro India is a captive service provider and is assured of a specified return on its costs. Wipro India is unaffected by the market conditions except to the extent that the service requests from related parties will decline. Hence Wi....
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....nutilized resources. Wipro India is not exposed to this risk. AEs bear this risk as they compensate Wipro India on all costs incurred by them. 26. We also notice that the functional profile of Tally as given in the annual report is extracted as below:- "Corporate information Tally Solutions Private Limited ('the Company' or 'TOL') and its subsidiaries and associates are hereinafter collectively referred to as 'the Gray'. The Company and its subsidiaries are mainly engaged in the business of development and sale of accounting and business management software and incidental services. The associates of the Company are engaged in the business of imparting trainings on the job-oriented courses from strategic partnerships with the developer community to co-create applications, products for businesses, creating a platform that can process vast amounts of diverse data from various sources and analyse the data of businesses. (Page 64 of the annual report for FY 2017-18) Sale of products Revenue front sale of software is recognised when all the significant risks and rewards of ownership of the goods have been passed to the buy....
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....essee and given the fact that the company is into sale of software products and services, the assets employed and the risk profile would also be dissimilar to the assessee. Therefore, in our considered view, Tally is not comparable to the assessee and it is directed that the company be excluded from the list of comparables. Eclrex Services Ltd. 28. The assessee submitted that the company is mainly engaged in ITeS services i.e., KPO & BPO services such as data management and analytics solutions, therefore the company is not comparable. The TPO rejected the contentions and held that the company is a comparable since it provides software support services. On further objections, the DRP upheld the inclusion of the comparable. 29. Before us, the ld. AR submitted that the same company has been included as a comparable for ITeS segment also by the TPO and the DRP has upheld the inclusion on the ground that there should not be any distinction between KPO and BPO services. The ld. AR therefore submitted that it is clear from the findings of the DRP that the company is into ITeS services and therefore cannot be a comparable for software development segment. The ld. AR also drew our ....
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....0 (Del) b) Telcordia Technologies India P. Ltd. v. ACIT, ITA No.7821/Mum/2021 34. We heard the rival submission and perused the material on record. We notice that the main contention of the assessee with regard to exclusion of the company is that the company is functionally dissimilar having diversified activities including ITeS and BPO services. On perusal of records, it is noticed that the segmental information is not available though it is mentioned as per the website of the company that it is involved in various other activities including order management, research & analysis, social media management and monitoring, etc. (page 761 & 762 of paper book Vol III) It is further noticed that the functionality of the company is not coming out clearly from the financials. In view of this discussion, we are of the considered view that the issue should go back to the AO/TPO for a fresh examination of facts. The AO/TPO is directed to verify the nature of activity of the company and the availability of segmental details and decide the inclusion in accordance with law. Consilient Technologies P. Ltd. 35. The assessee submitted that this company is functionally dissimilar a....
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....by there will not be any TP adjustments. Accordingly it is submitted that rest of the issues contended towards the TP adjustment in ITeS segment will become academic. 39. The ld. DR did not have any objection to the submissions of the ld. AR. 40. We heard the parties and perused the material on record. We notice that in the order giving effect (pg.961 to 968 of PB Vol.III) to the DRP directions, the TPO had considered 14 comparables, the 35th percentile of the average margin of which is 10.43% and the 65th percentile is 19.54%. We also notice that the operating margin of the assessee as has been considered by the TPO (page 967 of PB Vol.III) works out to 15.16% (refer rectification petition filed u/s. 154 on page 971 of PB Vol.III). Therefore, we see merit in the submission of the ld. AR that the assessee's margin is within the arm's length even as per the TPO's order. We also notice that the TPO in spite of the fact that the assessee's margin is within the range, has proceeded to make a TP adjustment which, in our view, is not warranted. We therefore direct the TPO to consider the submissions made by the assessee in the rectification petition dated 22.8.2022 and pass the ord....
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....as to whether it arises from transactions relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and an intermixing is generally possible. (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. 21. The learned counsel for the assessee submitted that the conclusions of the DRP are identical to the conclusions arrived at by the revenue authorities in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). In the aforesaid decision on an identical issue, the Tribunal held that working capital adjustment has to be given. The tribunal reasoned in the aforesaid decision that a reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly show that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could mat....
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....tential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: ♦ A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 22. The tribunal observed that examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use.....
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....adjustment for interest on delayed receivables by ignoring the fact that outstanding receivables and notional interest on the same cannot be considered as separate international transactions. Further, the Ld. AO/ TPO erred in 14ot acknowledging the fact the Appellant is a debt free entity and accordingly no adjustment on receivables is warranted. 7.2. The Ld. AO/Ld. TPO has erred in not considering that, such differences should be adjusted through the appropriate mechanism of working capital adjustment and not looked at separately, being closely aligned to the primary international transactions of rendering of services to AEs. Thus, the outstanding receivables would not constitute an international transaction by itself. 7.3. Without prejudice to the above grounds, the Ld. AO/Ld. TPO erred in determining transfer pricing adjustment pertaining to interest on outstanding receivables, without taking into consideration that the weighted average collection period of the Appellant is 39 days in respect of invoices raised during the assessment year was within the credit period agreed as per the inter-company agreement between the Appellant and its Associated Enterprises."....
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....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] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Sup....
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....gth 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 enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?" 23.6. Ld.CIT.DR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in lig....
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.... 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 in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions." 23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law." 36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international....