TaxTMI 
TaxTMI 
2023 (8) TMI 667
X X X X Extracts X X X X
X X X X Extracts X X X X
....rdingly the case was referred to the transfer pricing officer to determine the arms length price of such international transactions. On receipt of the reference, the Ld. TPO called for economic details of the international transaction between assessee and the AE. The details are as under: Particulars Amount in Rs. Receipt towards provision of software development support services Rs. 2,50,05,79,788/- Recovery of expenses Rs. 1,90,02,567/- Reimbursement of expenses Rs. 4,09,87,160/- OTHER TRANSACTIONS REFLECTED IN THE TP STUDY Other Payables Rs. 2,66,38,856/- Other Receivables Rs. 8,55,46,525/- Trade Receivables Rs. 56,29,06,887/- 2.3 The Ld. TPO noted that assessee had computed its margin at 15.02% by using OP/OC as the PLI. It was observed from the transfer pricing study that assessee had selected 12 comparables with median of 7.37% as under: Sl. No. Name of the company Weighted average (in %) 1. Evoke Technologies Pvt. Ltd. 4.77 2. Harbinger Systems Pvt. Ltd. 9.17 3. Three sixty Logica Testing Services Pvt. Ltd. 44.04 4. Maveric Systems Ltd. 0.37 5. CG-VAK Software and Exports Ltd. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 35^th Percentile 21.24 Median 26.18 65^th Percentile 26.46 2.6 The Ld.TPO thus computed the shortfall being Rs. 25,34,99,575/- as under: Taxpayers operating revenue Rs. 2,52,09,28,788/- Taxpayer operating cost Rs. 2,19,87,86,149/- Taxpayers operating profit Rs. 32,21,42,639/- Taxpayers PLI 14.65% 35th Percentile Margin of comparables set 21.24% Adjustment required (if PLI<35^th Percentile) Yes Median margin of comparable set 26.18% Arm's length price Rs. 2,77,44,28,363/- Price received Rs. 2,52,09,28,788/- Shortfall being adjustment u/s. 92CA Rs. 25,34,99,575/- 2.7 On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order on 02.06.2021 incorporating the proposed TP adjustment. On receipt of the draft assessment order, the assessee filed objections before the DRP. The DRP accepted the contentions of assessee in respect of inclusion of Sagarsoft India Ltd. and Isummation Technologies Ltd. And directed the TPO to reconsider the margins of certain companies. 2.8 The DRP however rejected the submissions of the assessee in respect ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tand the FAR of the assessee for the year under consideration, which is as under: 2.11 Based on the above, we shall carry out the comparability in respect of the comparables sought for inclusion / exclusion by the assessee. 3. Ground no. 1.5 raised by the assessee seeking the following comparables to be excluded. a) Larsen & Toubro Infotech Ltd., b) Great Software Laboratory Pvt. Ltd., c) Mindtree Ltd., d) R Systems International Ltd., e) Persistent Systems Ltd., f) Tata Elxsi Ltd., g) Infobeans Technologies Ltd., h) Aptus Software Labs Pvt. Ltd., i) Nihilent Ltd., j) OFS Technologies Ltd., k) Cygnet Infotech Pvt. Ltd., l) Infosys Ltd., Cybage Software Pvt. Ltd., and m) Consilient Technologies Pvt. Ltd. 3.1 The Ld.AR submitted that from the above list, if following six comparables are considered for exclusion, the assessee would be within the acceptable margin. She however prayed that the remaining comparables may be left open with the liberty to argue in an appropriate circumstances. The six comparables that has been argued by the assessee are i) L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d Bench of this Tribunal in the case of Infor (India) Pvt. Ltd. v. ACIT (order dated 25.08.2022 passed in ITA-TP No. 228/Hyd/2022) for the assessment year 2017-18. II. Infosys Ltd. (a) The Ld.AR submitted that this company earns income from both rendering software services and development of products. The company provides end-to-end business solutions like business consulting, technology, engineering and outsourcing services. In addition, the company offers software products and platforms. She submitted that despite rendering diverse services, there are no segmental details in respect of the services rendered. The company also heavily focuses on research and development activity for developing new functionalities and patenting innovative technologies and incurred significant expenditure for this account, amounting to around Rs. 351 Crore during FY 2016-17. The Ld.AR thus submitted that the services rendered by the company are not functionally comparable to the routine SWD services rendered by the assessee. (b) The Ld.AR submitted that Infosys owns significant brand value and focuses on immense brand building. For this purpose, it incurs significant brand building expenses,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....self prays the distinction between a software product company and a software service company and has concluded by observing that a product company should have off the shelf products which are commercially saleable. Further, the Ld.TPO himself has observed in page 41 that website is not a proper source of information and is only a tool being used by the company to attract new clients and customers. Further, the Ld.TPO referring to the annual reports of the comparables selected the companies that mentioned its activities to be in the nature of software development. We therefore do not find it appropriate to go by the website search carried out by the DR that is filed before us. (h) Coming to the decision of Coordinate Bench of this Tribunal in case of Blue Coat Network (India) Pvt. Ltd. vs. DCIT (supra), we note that L&T Infotech Ltd. was remanded to the Ld.TPO in the said decision by placing reliance on the decision of Goldman Sachs Pvt. Ltd. v. JCIT (Order dated 29.01.2020 passed in ITA No.3244/Bang/2018). (i) On perusal of the said decision, in case of Goldman Sachs Pvt. Ltd. v. JCIT (supra), we note that no argument in respect of letter of segmental details in case of L&T I....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the paperbook. (c) Pertinently, it is submitted that the extrapolated details of the company are not available, and therefore the margin of the company cannot be computed for the financial year ending March 31, and therefore the company ought to be excluded from the final list of comparables (d) Reliance in this regard is placed on the decision of this Hon'ble Tribunal in the case of ACI Worldwide Solutions Pvt. Ltd. v. ACIT reported in [2022] 140 taxmann.com 594. (e) The Ld.DR on the contrary relied on the observations of the DRP. We have perused the submissions advanced by both sides in the light of records placed before us. (f) This Tribunal in the above referred decision has restored R Systems International Ltd. with the direction to verify if the said company has prepared the financials for financial year ending on March 31 or if it could be reasonably extrapolated. We accordingly remand this comparable to the Ld.AO/TPO for reverification based on similar direction. IV. Persistent Systems Ltd. (a) It is submitted that Persistent is functionally dissimilar to the Appellant and hence cannot be considered as a comparable. The company is engaged in licensing ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t development and 3D animation services for media and entertainment industry. It is submitted that the services rendered in the SWD segment are in the nature of embedded product design, industrial design and visual computing labs, which are not comparable to the services rendered by the Appellant. Further, it is submitted that the company renders services in niche areas as opposed to routine SWD services rendered by the Appellant. (b) Further, it is submitted that Tata Elxsi is focused on research and development activities and incurs expenses for developing new functionalities and patenting innovative technologies. (c) Detailed submissions are placed at pages 188-190 of the appeal set and 260-261 of the paperbook. (d) Reliance was placed on the decision of the Hon'ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. v. ACIT by order dated 25.08.2022 passed in ITA-TP No. 228/Hyd/2022 for the assessment year 2017-18. We have perused the submissions advanced by both sides in the light of records placed before us. Admittedly this company is into research and development activities and has developed various product design, industrial design etc. It is also noted tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sed by this Hon'ble Tribunal in IT(TP)A No. 231/Bang/2021); iv) Hyderabad Bench of the Hon'ble in ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 at para 7]; v) of the Delhi Bench of the Hon'ble Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17, and vi) the decision of the Mumbai Bench of this Hon'ble Tribunal in Red Hat India Pvt. Ltd.g v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021). (e) We note that for the above submitted objections by the Ld.AR, this company has been excluded by Coordinate Bench of this Tribunal in case of Airlinq (supra) by observing as under: Accordingly, we direct the Ld.AO/TPO to exclude this company from the final list. In respect of the remaining comparables, we grant liberty to the assessee to argue in an appropriate circumstances as submitted by the Ld.AR. Accordingly, ground no. 1.5 raised by the assessee stands partly allowed. 4. Ground no. 1.6 is in respect of the following three comparables sought for inclusion. a) Maveric Systems Ltd. b) Evoke Technologies Pvt. Ltd. and c) Sasken Commun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent by the assessee. However, assessee submitted that only two invoices payment were delayed to be paid by the AE with respect to 15 days and one day. In any event, if at all any interest is to be computed, LIBOR rate is to be applied as submitted by the Ld.AR. The Ld.DR relied on the order passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. Admittedly attributing interest to the delayed payment is an international transaction. 6.1 The Ld.AR submitted that the Ld.TPO proposed transfer pricing adjustment in respect of outstanding receivables in respect of trade creditors being the AEs by using 6 months LIBOR rate and CUP as the most appropriate method. The Ld.TPO thus proposed adjustment at 5.8749% amounting to Rs. 3,37,183/-. 6.2 The Assessee wishes to submit that the delayed/ outstanding receivables should not be considered as a separate international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of inter- company transactions of provision of services has been already determined an....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case referred to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 108, which dealt with question of law: (c) `Whether on the fact....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. 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), th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion 92C(3) of the Act are satisfied in the present case and disregarding the arm's length price (ALP) as determined by the Appellant in the TP documentation maintained by it in terms of Section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ('the Rules'), 1.2. rejecting certain filters applied by the Appellant in the TP documentation maintained as per the section 92D of the Act read with Rule 10D of Rules, 1.3. modifying comparability analysis in the TP documentation and in conducting a fresh comparability analysis based on application of the additional/ revised filters in determining the ALP 1.4. not providing the search strategy and accept-reject reasons of the fresh economic analysis conducted by Ld. TPO which tantamount to choosing adhoc companies as comparable. 1.5 including certain companies in the final comparable set that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed Pot DRP'S a. R Systems International Ltd:✓ b. Threesixty Logica Testing Services Pvt. Ltd.; N.P c. OFS Technologies Ltd: d Larsen & Toubro Infotech Ltd. e Nihilent Ltd.: ✓ ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pellant is acting under arm's length conditions, and 2.5. disregarding the fact that no interest was charged by the AEs on the delay in payment by the Appellant 3. That on the facts and circumstances of the case, and in law the Ld. AO has grossly erred in proposing to initiate penalty proceedings under section 270A of the Act. All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. For Mavenir Systems Private Limited SPVT BANGALORE Designation: Managing Director Document 3Traceback (most recent call last): File "C:\inetpub\vhosts\taxmanagementindia.com\httpdocs\python_image_text_project\google\direct_extract_text.py", line 19, in from google_doc_api import process_single_document File "C:\inetpub\vhosts\taxmanagementindia.com\httpdocs\python_image_text_project\google\google_doc_api.py", line 345 elif mime_type in ["image/gif"]: IndentationError: expected an indented block after 'if' statement on line 341 Document 4 Development or Coding Once the software to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....les developed by Mavenir India, it is the responsibility of Mavenir India to fix the same. However, Mavenir India is remunerated for all the rework undertaken. Quality Assurance The quality control and quality assurance activities involve performing services as per accepted quality standards. Quality control can be pursued by employing a combination of quality control processes and tools and specially trained and qualified professionals. Mavenir India is responsible for the quality of work undertaken by it based on the quality control procedures and standards defined by the AE. The AE reviews work performed by Mavenir India. Thus, the AE has the ultimate responsibility for quality control of the software solutions delivered to the end customer. Document 5Traceback (most recent call last): File "C:\inetpub\vhosts\taxmanagementindia.com\httpdocs\python_image_text_project\google\direct_extract_text.py", line 19, in from google_doc_api import process_single_document File "C:\inetpub\vhosts\taxmanagementindia.com\httpdocs\python_image_text_project\google\google_doc_api.py", line 345 elif mime_type in ["image/gif"]: IndentationError: expected ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....k arises when a company fails to perform its services or supplies goods that do not adhere to the standards, terms and conditions agreed with its customers. The AE enters into contract with customers directly. Therefore, the contract risk vests with the AE. The services provided by Mavenir India are to its AE and any costs incurred by Mavenir India are reimbursed by its AE with a mark-up. Therefore, Mavenir India does not bear any contract risk. Service Liability Risk Service liability risk arises when a company's services fail to perform at the accepted or stated standards, and, in extreme cases, may even cause its user bodily harm. The AE bears the ultimate responsibility for the all the software development and support services provided by Mavenir India. However, Mavenir India is responsible for the quality of services to be delivered to its AE. Mavenir India has to meet the specific requirements of the work orders provided by its AE and abide by the quality control measures as required by its AE. While Mavenir India has to ensure quality of work to its AE, the ultimate risk of delivering quality services vests only with the AE. In case ....