TaxTMI 
TaxTMI 
2022 (11) TMI 1493
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....and is engaged in the provision of software development services to its customers including Global Logic Group entities. Additionally, the assessee also provides IT enables Services ("ITeS") to certain third party entities. For the services rendered to its AEs, it is remunerated on a cost plus mark-up basis. 4. During AY 2017-18, the assessee entered into the following international transactions with its AEs:- A. International Transactions Associated Enterprise Nature of transaction Total value of transaction (in Rs.) Global Logic Inc. Provision of software development services 3,38,12,46,071 Global Logic Israel Ltd. Provision of software development services 24,36,671 Global Logic Inc. Reimbursement of expenses paid to AE 7,57,357 Global Logic Inc. Reimbursement of expenses received from AE 11,99,27,155 B. Deemed International Transactions Associated Enterprise Deemed International Transaction Transfer Price (in Rs.) Oracle India Pvt. Ltd. Provision of software development services 17,12,280 5. In its transfer pricing report for the financial year ended 31.03.2017, the assessee has reported that....
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....djusted margin) 1- Sagar Soft India Limited 8.91% 2. Sankhya Infotech Ltd. 9.40% 3. Maveric Systems Ltd. 10.09% 4. Evoke Technologies Pvt. Ltd. 10.48% 5. Sasken Communication Technologies Ltd. 11.66% 6. RS Software Ltd. 12.75% 7. Cg-Vak Software and Exports Ltd. 13.43% 8. Harbinger Systems Pvt Ltd. 13.90% 9. Jindal Intellicom Private Ltd. 16.54% 10. Infomile Technologies Ltd. 17.58% 11. SQS India BFSI Ltd. (consol) 23.77% 12. Puresoftware Pvt Ltd. 24.43% 13. R Systems International Ltd. 27.57% 35th Percentile 11.66% Median 13.43% 65th Percentile 16.54% 6.2 This is how the assessee demonstrated that since, assessee's operating profit margin of 14.72% on operating cost is within the range of the margins of the comparable companies of 11.66% to 16.54%, the said international transaction of provision of software development services is at ALP as required under the transfer pricing regulations. 7. The assessee's case was referred by the Ld. Assessing Officer ("AO") to the Ld. Transfer Pricing Officer ("TPO") for the determination of the ALP. 7.1....
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....,168 Price charged by the assessee 3,87,12,43,299 Difference between ALP and Price charged by assessee 8,51,57,869 Total Transaction with AE related to software service 3,38,36,82,742 % of Transaction 87.41% Proportionate Adjustment 7,44,36,493 7.1.2 This resulted into the transfer pricing adjustment of Rs. 7,44,36,493/- on international transaction of provision of software development services for which equal amount of addition was made by the Ld. AO in his final order. 8. The assessee raised objections before the Hon'ble Dispute Resolution Panel ("DRP") against inclusion of 9 comparables, namely i) Mindtree ii) Xavient Software Solutions (India) Pvt. Ltd. iii) Great software Laboratory Pvt. Ltd iv) Larsen & Tourbro Infotech Ltd. v) Nihilent Ltd. vi) Tata Elxsi Ltd. vii) Infobeans Technologies Ltd. viii) Cybage Software Pvt. Ltd. ix) Cybercom Datamatics Information Solution Ltd. by the Ld. TPO alleging that these comparable companies are functionally dissimilar/lack segmental data/owns significant tangibles.. 8.1 The Hon'ble DRP vide its order dated 18.11.2021 under section 144C of the Act, after considering the submissions of the assessee, d....
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....rial available in the records. The assessee has prayed for the exclusion of the aforesaid 4 companies, namely i) Larsen & Tourbro Infotech Ltd. ii) Tata Elxsi Ltd. iii) Infobeans Technologies Ltd. & iv) Cybercom Datamatics Information Solution Ltd. which has strongly been opposed by the Ld. CITDR. We will now proceed to examine each of these 4 comparable companies in light of the submissions of the Ld. CIT-DR and the rejoinder to the submissions of the Ld. CIT- DR dated 15.06.2022 filed by the assessee. Larsen & Tourbro Infotech Ltd. 11.1 The Ld. AR submitted that this company is functionally dissimilar; lacks segmental data and is leveraging on the brand of "Larsen & Tourbro" or "L&T" which is a globally reputed brand having presence since 1938 and owns significant intangible in the form of software and intangible assets under development, which is evident from the annual report of the company which is placed on record in Paper Book-Annual Reports of Comparables. The Ld. AR relied on plethora of judicial pronouncement in support of its contention wherein this company has been directed to be excluded from the list of comparable companies. The Ld. AR further submitted that the....
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....n perusal of fixed assets schedule, available on page S-1245 of the Annual Report (page 116 of PB-2), we find that at the beginning of the year the assessee owned intangible assets of Rs.153,42,45,196/- which included software of Rs.143,61,95.196 ( 93 %>), thus the intangible other then the software are insignificant. During the year, the company has sold/transferred the software and claimed depreciation, which resulted in net block of software at the end of the year to Rs.33,22,11,879/-. The assessee has also shown intangible assets under development of Rs. 41,82,66,450/-, which makes the net intangibles owned by the company to Rs. 75,04,78,329/- at the end of the year. But no depreciation has been claimed on the under developed intangibles, therefore there is no effect on the profitability of the company on account of the underdeveloped intangibles. Thus, the objection of the assessee of non- comparability of the assets is rejected. 6.5 Further, the learned Counsel submitted that operating expenses amounting to Rs. 34,91, 74,116/-and Rs. 54,82,74,109/- on cost of the software packages for own use and cost of the bought-out items for resale during the year under considera....
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.... 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs.489.53 crs based on fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year. " 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- (page 129 of PB-2), which has not been allocated into three segments, and thus the segmental results are distorted. 6.8 During ....
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....k on merits, the assessee has given the details of assets employed by the assessee company on page no - 95 of this Paper Book. The total tangible assets used by the assessee company was Rs. 14,82,54,028/- which consists of computer and networking equipment of Rs. 10,37,69,470/-. The assessee has also used intangible assets to the tune of Rs. 2,43,97,704/-.Therefore, the assessee company has also used tangible as well as intangible assets in its business. Hence, the comparable company having tangible and intangible assets will not make a difference in the comparability. 4.7 In view of the above, it is a good comparable and the coordinate Bench judgement in the earlier years will not have any impact in the current year." 11.3 The assessee in its rejoinder dated 15.06.2022 has rebutted the objections of the Ld. CIT-DR as under: "1. It is submitted that in the order passed by the Hon'ble ITAT for AY 2014-15, the company was excluded, inter alia, for the reason of extra-ordinary events: 6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014 which has also impacted the p....
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....lgamation ('Schemed) of AugmentlQ with the Company under section 230-232 of the Companies Act, 2013. The appointed date for the proposed Scheme is April 1,2017. LTI acquired AugmentlQ Data Sciences Private Limited ('Augment lQ), an innovative startup offering IP-based Big Data Analytics Solution that helps enterprises derive business benefits from Big Data in FY17, In addition to acquisitions, the Company is also investing in partnering with startups to help enhance its digital offerings and in turn, give startups a platform and opportunity to scale-up. The Company is actively partnering with academic institutions such as Massachusetts Institute of Technology (MIT), Indian Institute of Management Ahrnedahad (LIMA), Veermala Jijabai Technological Institute (V./T1) in order to provide though (-leadership to its clients for future digital solutions. 2. The Id. DR at Para 4.3 of his synopsis has concluded that "In the later ears i.e., A. Y 2015-16 and A. Y 2016-17, the Hon'ble HAT has followed - judgment for A. Y 2014-15 to exclude this company as a comparable. ". However, in the order passed for AY 2015-16bearing ITA No. S"26/Del/2019, the company was ex....
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....t there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture cpia profit earned by the company front provisions of SDS. L&T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the higher profitability. So, we are of the considered view that L&T is not a suitable comparable vis-d-vis the taxpayer, hence ordered to be excluded. The decision of Hon'ble ITAT rendered in appellant's case for AY 2016- 17 is squarely applicable for the year under consideration, in as much as: As per the annual report of the company, in addition to provision of application development and maintenance services ('ADM') which constitutes 39.2% of total revenue for the year under consideration, the company also provides infrastructure solutions, enterprise solutions, platform and digital solutions such as big data analyti....
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.... assessee and the orders of the Hon'ble Tribunal for preceding years (supra), we are of the considered view that this company is not functionally comparable to that of the assessee as there has been an extraordinary event that has occurred even during the relevant AY in the form of amalgamation of GDA Technologies Ltd. and AugmentIQ with the assessee company L&T Infotech. Further, we tend to agree with the submission of the assessee that this company owns significant intangibles and no segmental data is available in respect of the revenue generated from provision of software development services. Perusal of the orders of the Hon'ble ITAT for the preceding years (supra) shows that all these aspects have been duly considered by the Hon'ble Bench in arriving at the conclusion for exclusion of this company from the final list of comparable companies. The Department has not challenged the finding of the Hon'ble Tribunal in any of the earlier years. In view of this, the objections raised by the Ld. CIT(DR) in our opinion are not sustainable. We, therefore, hold that this company is not a good comparable and accordingly direct the Ld. AO/TPO to exclude this company from the final set of c....
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....e excluded. The learned DRP, however held that under TNMM, the broad functional similarity is to be seen and thus upheld the action of the learned TPO. Before us the Learned Counsel of the assessee repeated the submissions made before the learned DRP and submitted that revenue from the operations include revenue from product design, graphics animation and gaming and system integration and support. According to him all these activities are functionally different from that of the assessee. He also submitted that the in Assessee's own case for assessment year 2007-08 and 2008-09, the Coordinate bench of the Tribunal in ITA No. 5809/Del/2011 and 122/De/2013 has directed to exclude the company from the set of the comparables. 8.2 We have heard the rival submission of the parties on the issue in dispute and perused the relevant material including annual report of the company. The details of revenue from operations available on page 51 of the Annual Report (page 394 of PB2), reproduced as under: 18. Revenue from Operations Year ended 31 March, 2014 Sale of traded goods [Refer None(i) below] 4,700.51 Rendering on services [Refer None(ii) below] 72,509.25 Total 77.209.76 (i) Sale o....
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....0.61 (i) Sale of traded goods include sales of computers, networking and storage systems. (ii) Rendering of services comprises: (a) Product design 114,413.53 99,734.06 (b) Graphics animation and gaming 2,231.60 1,083.02 (c) System integration and support 3,455.85 3,329.20 Total 120,100.98 104,146.28 5.3 The TPO has applied a filter that a comparable company must have income from rendering of services at least of 75% of the total revenues. Therefore, a comparable company can have 25% income from products, still, it would be a good comparable in view of the filter applied by the TPO. The assessee has not disputed the filter being applied by the TPO and there is no specific ground challenging the filters being applied by the TPO. 5.4 It is a fact that the assessee has earned income from sale of traded goods, graphics animation and gaming as well as system integration and support. However, the same is very minuscule to the extent of Rs 5687.45 which is 4.73 % of the total revenues which falling in the filter applied by the TPO. This company has also clearly mentioned that product design is in fact rendering of service....
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....ty transferred or services provided in the two transactions (controlled and uncontrolled) is to be taken into consideration. Also, analysis of functions performed, assets utilized and risks assumed by the transacting parties (alternatively termed as FAR analysis or functional analysis in the Transfer Pricing parlance) is another test of comparability, provided in clause (b) of rule 10B(2) of the Rules. Functional analysis, in fact, is the key for analyzing the nature of international transactions and to establish comparability of an uncontrolled and controlled transaction. The Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT 377 ITR 533, made a clear distinction between a BPO and KPO service provider and upheld them to be functionally dissimilar to each other, holding as under: "34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO ' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and k....
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.... such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold." Relying on the above decision in the case of Rampgreen, the co-ordinate bench of Delhi High Court in the case of Avaya India Pvt. Ltd. V. ACIT, (2019) 416 ITR 638 upheld exclusion of companies on account of difference in scale of operation and ownership of brand value. In a more recent decision dated 18.05.2020, the Hon'ble High Court in the case of Pr. CIT vs. Open Solutions Software Services Pvt. Ltd. [ITA 201/2018], further clarified that even if a comparable passes the quantitative filters, it can be rejected as comparable on the basis of qualitative analysis: 34. In view of the above, it emerges that none of the comparables have been excluded on the ground of high turnover alone. The test functional similarity applied by the Tribunal is in consonance with the legal position discussed hereinabove. Therefore, we do not find merit in the contentions urged by the Revenue on this ground. Equally meritless is the con....
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....DR, such software development services comprises of the following services [Refer Page 13 of the Annual Report (Page 128 of Paper Book)]: Embedded Product Design The Embedded Product Design (EPD) division provides technology consulting, new product design, development, and testing services for the broadcast, consumer electronics, healthcare, telecom and transportation industries. Transportation We offer electronics, software development and system design services for the automotive, rail and aerospace industry. We leverage our cross-technology expertise in multimedia, imaging, connectivity technologies and wellestablished processes for automotive software development, to support both car manufacturers and system suppliers in product development and engineering. Broadcast and Communications We address the complete product development lifecycle from R&D, new product development and testing to maintenance engineering for Broadcast, Consumer Electronics and Communications. Industrial Design and Visualization Tata Elxsi helps customers develop endearing brands and products by using design and technology as a strateg....
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....tem integration & support and software development services. Software development services segment further constitutes three major sub- segments viz. embedded product design, industrial design and visual computing labs whereas taxpayer is a routine software development services provider working on cost plus mark-up model. 23. Furthermore, when we examine Note 9 Fixed Assets forming part of the financial statement, available at page 643 of the annual reports paper book, it shows that Tata Elexi is having intangibles in the form of internally generated technical know-how and acquired intangibles computer software which certainly gives edge to Tata Elexi over other players operating in software development services provisions. 24. Moreover, when undisputedly taxpayer has not undergone any change in its business model vis-a-vis AYS, 2007-08, 2014-15 & 2015-16 in ITA Nos.5809/Del/2011, 4740/Del/2018 & 8726/Del/2019 respectively, Tata Elexi was held to be non comparable by the Tribunal. 25. In view of the matter, we are of the considered view that on account of functional dissimilarity and having ownership of internally generated intangibles in the form of tech....
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....er of the Hon'ble Tribunal for AY 2014-15 shows that the Hon'ble Tribunal has passed a well reasoned order holding this company to be functionally dissimilar and having ownership of internally generated intangibles and therefore, not a suitable comparable to that of the assessee company. Further, the finding of the Hon'ble Tribunal in AY 2016-17 in favour of the assessee has not been controverted by the Ld. CIT-DR. Keeping in view the submission of the Ld. CIT-DR, rejoinder of the assessee and the order of the Hon'ble Tribunal for preceding years (supra), we are of the considered view that this company is not functionally comparable to that of the assessee and therefore we direct the Ld. AO/TPO to exclude this company from the final list of comparable companies. Infobeans Technologies Ltd. 13. The Ld. AR submitted that this comparable is functionally dissimilar to that of the assessee in as much as per the annual report, this company along with provision of application development and maintenance services also provides services in the nature of Big Data Analytics Content Management System, Enterprise Mobility, Automation Engineering Services. This company is providing a wide ....
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.... Vs ACIT (ITA No 655/Pun/2017), where the company has been excluded on account offunctional dissimilarity with the assessee engaged in provision of software development services. 10.4 We have heard rival submission and perused relevant material on record. We find that main objection of the assessee for including the company is range of the services undertaken by the company. The range of the services mentioned by the assessee are not available in the Annual Report for the year under consideration and same are available on the website of the company. 10.5 But in our opinion automation engineering, Service now, UX and UI and customize software services are all part of software development or software services. The Automation information technology is focused on service automation and quality assurance testing of automated process. Under the automation the goal is to eliminate defects, errors and problems with products Software Development and with business or customer service processes. Example of automation are automated 'chatbots ' to help solve customer issues or to direct customer to the right person. Automation is also used to streamline IT help desk ticket....
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....n, the company is primarily in software development and there is no sale of the product. 10.13 Accordingly, we reject the contention of the assessee, and direct the Ld. AO/TPO to retain the company as valid comparable. " (emphasis supplied) 6.2 The Hon'ble ITAT in the year 2014-15 after giving detailed reasons has clearly held this company as a comparable as it is primarily engaged in software development services. The judgment is in favour of the Revenue. 6.3 However, in A.Y 2016-17, the Hon'ble ITAT relying on the judgment of PubMatic India (P) Ltd. vs. AC1T in ITA No.655/Pun/2017, decided this issue against the Revenue. The judgment of the Hon'ble ITAT is being reproduced as under: - "44. The taxpayer sought exclusion of Infobeans as a comparable again on ground of functional dissimilarity, it also being into providing services viz. software engineering services primarily in Custom Application Development (CAD), Content Management Systems, Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book. 45. The taxpayer....
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....comparable in the relevant AY 2017-18 is as under: "1. It is submitted that in the order passed for the AY 2014-15, the Hon'ble Tribunal rejected the exclusion of company, proceeding on the basis that: 10.4 We have heard rival submission and perused relevant material on record. We find the main objection of the assessee for including the company is range of the services undertaken by the company. The range of the services mentioned by the assessee are not available in the Annual Report for the year under consideration and same are available on the website of the company. However, in the order passed for the assessment year 2016-17, the Hon'ble Tribunal has rejected the company as comparable after duly referring to the annual report of the company and also recording the same in their order, as under: 44. The taxpayer sought exclusion of Infoheuns as a comparable again on ground of functional dissimilarity, it also being into providing services, viz, software engineering services primarily in Custom Application Development (CAD) Content Management Systems. Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evid....
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....s. ACIT (ITA NO. 6098/Mum/2018) - Metric Stream Infotech (India) Pvt. Ltd. (ITA No.2347/Bang/2019) - EIT Services India Pvt. Ltd. vs. ACIT (ITA No. 2498/Bang/2019) - Zynga Games Network India P. Ltd. vs. DCIT (ITA No. 2573 / Bang / 2019) In view of the aforesaid, following the Hon'ble ITAT in appellant's own case for the AY 201617, the company ought to be excluded from the final set of comparable companies." 13.3 We have carefully considered the submissions of the Ld. Representatives of the parties, perused the material on records. From the rejoinder of the Ld. AR we note that the Hon'ble Tribunal in AY 2014 rejected the exclusion of this company for the reason that the range of services undertaken by this company were not available in the annual report for that year. However, in subsequent AY 2016-17 the Hon'ble Tribunal has rejected this company as comparable after duly referring to the annual report of this company which indicates functional dissimilarity owing to provision of wide range of services by this company. The Tribunal in its order for AY 2016-17 has considered the decision of the Pune Bench of Tribunal in the case of Pubmatic Ind....
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.... 26- We find that the Pune Bench of the Tribunal in Pubmatic India Pvt. Ltd. Vs. ACIT in ITA No. 655/Pun/2017 vide order dated 09.03.2018 had directed the exclusion of the concern Cybercom Datamatics Information Solutions Ltd. on account of functional dissimilarity from the final list of comparables observing as under 15 "similarly, the concern Cybercom is also a product company and was providing software development to its associated enterprises and was also selling developed software products. Both the activities were clubbed under one software segment. As per the annual report of said company, it was engaged in providing consultancy and advisory services and was also carrying out the business of development, testing, marketing and manufacturing of information technology products and services. The annual report of the said concern placed at page 918 of PB declares the said facts and it is undisputed that the said concern is engaged in sale of software products. Following our reasoning in the paras herein above in respect of Cybermate, we hold that Cybercom is also to be excluded from final set of comparables. " 27- The assessee before us is solely engaged....
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.... The annual report of the said concern placed at page 918 of PB declares the said facts and it is undisputed that the said concern is engaged in sale of software products. Following our reasoning in the paras herein above in respect of Cybermate, we hold that Cyber com is also to be excluded from final set of comparables. The aforesaid reason on the basis of which the company was held to be incomparable to a captive software development service provider is also found in the annual report of the company for AY 2017-18: * The company acts as consultants and advisors on information / internet system and surveyors, of information services. Further, it is engaged in the business of development, testing, implementation, migration of home grown and other applications, marketing and manufacturing of various information and technology products and services. The same may also be corroborated from the annual financial statement of the company. [Pg. 228 of PB-AR] * Further, from the website of the company it can be noted that the company specializes in various fields such as digitalization, secure connectivity, internet things and cloud services. It follows a full li....
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....red with Cybercom Datamatics, hence Cybercom Datamatics is ordered to be deleted as a comparable. It is submitted that the above finding of the Hon'ble ITAT rendered in the order passed for AY 2016-17 has not been controverted by the Id. DR in his synopsis. Accordingly, in view of the consistency in facts, the company ought to be excluded following the order passed in the appellant's own case for the AY 2016-17. 3. It is submitted that along with the decision of Pune Bench of Tribunal in the case of PubMatic India (P.) Ltd. (supra) relied upon by the Hon'ble ITAT in appellant's case for AY 2015-16, the company has also been rejected as comparable to a captive software development services provider in the case of Principal Global Services (P.) Ltd vs. ACIT (ITA No. 482/Pun/2017). In view of the aforesaid cumulative reasons, following the Hon'ble ITAT in appellant's own case for the preceding years, the company ought to be excluded from the final set of comparable companies." 14.3 We have perused the submissions of the Ld. AR as well as the Ld. CITDR and the material available on records. In our considered view this comparable is functionally dissimilar ....
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....essee's own case for AY 2010-11 in ITA No. 1104/Del/2015 and AY 2012-13 in ITA No. 1115/Del/2017. The Hon'ble ITAT relying upon its decision for AY 2010-11 and 2012-13 decided this issue in favour of the assessee for subsequent AYs 2013-14 in ITA No. 7621/Del/2017, 2014-15 in ITA No. 4742/Del/2018, 2015-16 in ITA No. 8726/Del/2019 and 2016-17 in ITA No. 868/Del/2021. He further submitted that there is no change in the factual or legal position in the relevant AY under consideration viz. a viz AYs 2013-14 to 2016-17. For the year under consideration, the findings of the Hon'ble Tribunal in AY 2010-11 and 2012-13 are corroborated as under: i) the operating margin earned by the assessee at 14.72% is within the arm's length range of 11.66% to 16.54%. The assessee has undertaken working capital adjustment of margins in the transfer pricing study. ii) the assessee is not incurring any interest cost and has not availed any loan from AEs or unrelated third parties which is evident from the balance sheet and schedule on 'other long term liabilities forming part of financial statements' placed on page 18-19 of PB - merits (audited accounts). iii) there is similar d....
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....d as an international transaction. 15. So in view of the law laid down by Hon 'ble High Court in Pr. CIT-V Vs. Kusum Health Care Pvt. Ltd. (supra), we are of the considered view that no adjustment can be made on account of notional interest on receivables by relying upon explanation(i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover, when the taxpayer is debt free company, there is no question of charging any interest or receivables. This issue has also been decided by Hon 'ble Delhi High Court in case of Pr. CIT-1 Vs. M/s Bechtel India Pvt. Ltd. in ITA. no. 379/2016 order dated 21.07.2016. 16. furthermore when we examine the entity level margin of the taxpayer vis-a-vis comparable companies, the taxpayer has earned higher margin i.e. taxpayer earned. 38.39%) OP/OC margin vis-a-vis margin of comparable companies at 11.43%. In such circumstances, no separate adjustment on account of interest can be made. Because the credit period extended to AE cannot be considered as a standalone transaction without considering the main transaction of the sale. 17. Furthermore when the taxpayer is undisputedly a d....
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....outstanding accounts receivable gets subsumed in the working capital adjustment and no separate adjustment is called for. For this proposition, the assessee relied on the judgement of Hon'ble Delhi court in the case of M/s Kusum Health-care Ltd. as well as the judgement of coordinate bench in the assessee own case for A.Y 2010-11, 2012-13, 2013-14, 2015-16 & 2016-17. For clarity's sake, the relevant para of Hon'ble Delhi High court is being reproduced as under: - "9. Mr. Raghvendra Singh, learned counsel appearing for the Revenue submitted that the ITAT overlooked the fact, that the expression "international transaction" as defined in Explanation (i)(c) tp Section 92B of the Act included payments or deferred payment or receivable or any other debt arising during the course of business", and therefore, the outstanding receivables could by themselves constitute an international transaction. He further referred to the OCED Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Paras 3.48 & 3.49 under Chapter III A. 6.1 of the said Guidelines titled ''Different types of comparability adjustments" spoke of the need to eliminate differences th....
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....e assessee margin was far higher than the margin of the comparable companies. Therefore, the finding has been given by the Hon'ble High court based on the facts of that case. The same is clear from para no. 5 of the same order which is being produced as under for clarity's sake. "5. As far as the assessee was concerned, it declared the following international transactions i.e. export of manufacture medicines and export of traded medicines. Both the transactions were benchmarked applying TNMM. The profitability of the Assessee from its manufacturing and trading segments was benchmarked with the average operating profit margin earned by comparable companies performing similar manufacturing and trading functions. In both sets of transactions. the profit indicators (PLIs) showed that operating profit margin of the assessee to be higher than that of the comparable companies. Accordingly, the international transactions were projected by the assessee as having been undertaken at the arm's length price ('ALPj. " (Emphasis Supplied) iii) A perusal of the summary of international transactions have been reproduced by the assessee on page no. 62 of the p....
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....ALP is separately determinable. On the ITA Nos.2010 & 25 75/Del/2014 other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per the Agreement. The amendment made by the Finance Act, 2012 in terms of insertion of Explanation to section 92B with retrospective effect from 1.4.2002 by considering any other debt arising during the course of business as a separate international transaction, impliedly disapproves the view canvassed by the DRP in obliterating the determination of the ALP of the separate international transaction of interest on allowing the working capital adjustment in the international transaction of rendering of services. In our considered opinion, both the transactions are separate and distinct from each other. Whereas the international transaction of rendering services contemplates comparison of the pr....
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....voices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering services has been held to have no impact on the determination of ALP of the international transaction of interest on receivables from. AEs beyond the stipulated period allowed as per the Agreement. In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/paid for such goods by impliedly including the interest for the period allowed for recdizcition of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable recovers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction ofpurchase/sale of goods. There is one more fallacy in the argument about the subsuming of interest income in the working capital adjustment. It is ITA No.l54/Del/2016 simple thcd working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inven....
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....xpression ''international transaction" shall include- (a) ...................... (b) ...................... (c) Capital dinning, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or advance, payments or deferred payment or receivable or any other debt arising during the course of business... '. (ii) A perusal of the relevant part of this Explanation which, although, has been inserted with retrospective effect from 01.04.2002, squarely applicable to the facts of this case as the assessment year involved in this case is A.Y 2017-18 which is much after the insertion of explanation by the Finance Act 2012. The above explanation leaves no doubt that apart from any long-term or short-term lending or borrowing etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly recognized as an international transaction, lhat being so, the payment/nonpayment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also b....
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....onal transaction and the ALP of such an international transaction is required to be determined." C) The assessee is a debt free company (i) A perusal of the balance sheet of the assessee shows that the assessee has shown lease equalization reserve under the head 'other long term liabilities' of Rs. 11070911/-as on 31.03.2017 (schedule '5' of balance sheet on page no. 18 of the paper book). In schedule '20' of the P&L account, the assessee has paid interest expense on Income Tax of Rs. 2829650/- (page no. 23 of the paper book). (ii) In any case, the fact whether the assessee company is debt free company or not would have no implication as far as imputation of interest on overdue receivables is concerned. The money which otherwise would have been collected by the appellant has been left to be used by the AE's without any corresponding compensation. The assessee also runs the risk of foreign exchange as any appreciation in the currency rate would adversely affect its collection. Reliance is also placed on the judgement of Hon'ble ITAT in Bechtel India Pvt. Ltd. Vs. ACT [2017] 85 taxmann.121 (Delhi-Trib) for A.Y 2012-13. Thus, post-amendment, the findings rec....
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.... new explanation to section 92B was specifically inserted to reiterate the fact that the items enumerated in the explanation will ipso-facto partake the character of an international transaction and will be subjected to transfer pricing provisions irrespective of whether they have any bearing on profit/loss of the relevant year or their impact on profit/loss account is determinable under normal computation procedures other than the transfer pricing regulations. D) On examination of the entity level margin of the assessee company, it was found by Hon'ble ITAT that the tax payer has earned margin of 38.39% OP/OC margin vis-a-vis margin of comparable companies at 11.43% (i) This is a factual finding given by the Hon'ble ITAT as per the facts of the case in the relevant assessment year. While applying this principle, the facts of the case and the margin of the assessee in each year is required to be compared. The decision would be based on the actual margins as per the facts of each assessment year and can't be applied across all assessments without verifying the facts. The facts in the present assessment year regarding the margin of the assessee have already been ana....
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....cts entered into by GL Inc. has been considered as closely linked to the main international transaction pertaining to 'provision of Software development services' while determining arm's length price of the said international transaction. (ii) The above note clearly shows that the transactions which are being claimed by the assessee as entered into with third independent parties/non AEs may not be with the non AEs in view of the above note. This fact is also fortified with the business model of the assessee wherein the software development services are primarily being rendered to the AEs only. Therefore, the finding of the Hon'ble ITAT in the earlier years that since the assessee has not charged interest from non AEs may not be based on the facts of the case in this year. " 16.4 The assessee, in reply to the above submission of the Ld. CIT-DR filed its rejoinder on 23.07.2022 rebutting each argument taken by the Ld. CITDR. The relevant extract of the assessee's rejoinder is reproduced below: "A) The working capital adjustment would subsume the adjustments to be made on account of overdue receivables in view of Hon'ble Delhi High Court judgment in the case of Ku....
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....n intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was just one A. Y. and the figure of receivables in relation to that A. Y. can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in Commissioner of Income Tax v. EKL Ltd. (2012) 345 ITR 241 (Delhi)." Accordingly, the conclusion drawn by the Id. DR that the margin of the appellant ought to be far higher than the working capital adjusted margin of comparable companies, in order to apply the ratio laid down by the Hon'ble High Court in the case of Kusum Healthcare, is farfetched and erroneous. In the following case, the adjustment on account of receivables was deleted on the basis th....
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....t to be made. 2. It is submitted that in Point (iv) and (v) above, the Id. DR has sought to submit that working capital adjustment would not subsume the adjustments for outstanding receivables as in case of working capital adjustments, only the opening and closing balancing of the working capital are taken into account. The Id. DR, in this regard, has referred to the decision of Delhi Tribunal in the case of Ameriprise India Pvt. Ltd ITA No 2010/Del/2014 and Mckinsey Knowledge Centre Pvt. Ltd. The Id. DR further held that the above decision of the coordinate Bench of the ITAT (Ameriprise and McKinsey) was after the order of Hon'ble Delhi High Court in the case of M/s Kusum Healthcare Ltd., which has duly been considered by the Hon'ble ITAT while passing these judgements and therefore, the working capital adjustment would not subsume the adjustments on account of outstanding receivables. It is respectfully submitted that the decision of Hon'ble ITAT relied on by the Id. DR (Ameriprise and McKinsey) are either passed before the decision of Hon'ble High Court in the case of Kusum Healthcare or was overturned by the Hon'ble High Court in their respect....
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....Delhi Tribunal in case of Ameriprise India P. Ltd. vs. ACIT (ITA No. 2010/Del/2014) on issue of interest charged on outstanding receivable and concluded that 'the assessee's contention that the ITAT erred in concluding that charging of interest on delayed receipt of receivables is a separate international transaction which requires to be benchmarked independently, is incorrect. " Aggrieved, the taxpayer (Mckinsey Knowledge) filed Review Petition before the Hon'ble High Court against the order dated 09.08.2018 and the Hon'ble High Court, vide order dated 16.04.2019 in Review Pet. No. 360/2018, was pleased to recall/correct their order dated 09.08.2018, holding as under: "9. As far as the first argument by the review petitioner, i.e., the answer to the question of bringing to tax the interest amounts goes, this Court is of the opinion that the fact that the order of 07.02.2018 referred to Kusum Health Care had expressly remitted the matter for consideration to the IT AT supports the assessee's submission. All that the court had stated on 07.02.2018 was that the matter required re-examination by the ITAT in the light of the Kusum Health Care (supra). For these re....
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....9;receivables' does not mean that the context every item of receivables' appearing in the accounts of an entity, which may have dealings with foreign AES would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case- to-case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studies. In other words, 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-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. It was held similarly by the Hon'ble Delhi High Court in the case of Avenue Asia Advisors Pvt. Ltd. vs. DCIT reported at 398 ITR 120, wherein, the High Court too held that: "On the question of notional interest, it was incorrect on the part of the Incometax Appellate Tribunal to hold that the entire outstanding receivables constitute an international t....
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....wo items, the Id. DR could not provide details of any expenses been incurred by the appellant in relation to any financial debt availed during the year. This proves beyond that the appellant is a debt free company and is undertaking its business activity on the revenue earned from provision of services to associated enterprise and third party customers. 2. It is further submitted that the appellant is a wholly owned subsidiary of Global Logic Inc. and all software development export services are rendered to the group entities. From perusal of the audited accounts of the appellant, it would be noted that the appellant is enjoying interest free reserves and surplus of Rs. 268,72,15,683 which otherwise is the income of the shareholder, i.e. associated enterprise. The aforesaid reserves and surplus of Rs. 268.72 crores is much higher than the outstanding receivables due to the associated enterprise, at any point of time in the year. It would be incorrect/ improper to suggest to utilize interest free funds of the associated enterprise in provision of services and on the other hand charge interest on the outstanding receivables due from them. 3. With regard to submissio....
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.... assessee's own case for Assessment Year 2010-11 in ITA No. 1104/Del/2015 and for Assessment Year 2012-13 in ITA No.l 115/Del/2017 vide order dated 12.12.2017. The Tribunal has relied on the decision of Hon 'ble Delhi High Court in Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. in ITA No.765/2016, judgment dated 25.04.2017 and held that no adjustment is to be made on account of notional interest on receivables by relying upon Explanation (i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company, there is no question of charging any interest on receivables. This issue has also been decided by Hon 'ble Delhi high Court in case of Pr.CIT-1 vs. M/s. Bechtel India Pvt. ltd. in ITA 379/2016 order dated 21.07.2016. The relevant findings of the order of the Tribunal in assessee's own case (supra) in paras 14 to 18 which are being reference but not being reproduced for the sake of brevity. 33. The assessee during the year under consideration had not avail any loan from AEs or unrelated third party and was not incurring any interest cost. Further, there was similar delay in receipt of receivables ....
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....d as under: 10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression 'receivables' does not mean that the context every item of receivables' appearing in the accounts of an entity, which may have dealings with foreign AES would automatically he characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case-to-case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studies. In other words, 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-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit. the AE in some way. D) On examination of the entity level margin of the assessee company, it was found by Hon'ble ITAT that the tax payer has earned margin of 38.39% OP/OC margin vis- a-vis margin of comparable companies ....
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....ng of transactions undertaken by the appellant with related parties and the same is duly been provided in Note 24: Related Party disclosure of the audited accounts. Further, in terms of section 92E of the Act, the international transactions undertaken by the appellant is also audited by an independent firm of Chartered Accountants and report is issued in prescribed Form 3CEB. The said Form 3CEB issued and filed for the year under consideration too provides that the total sales made to the associated enterprise is Rs. 338,53,95,022. 5. In view of the aforesaid, the contention of the Id. DR that the entire sales made by the appellant during the year under consideration could be made to associated enterprise/ related parties is baseless, without merit and erroneous. 6. Further, in response to the observation of the Id. DR that 85% of the total outstanding is towards the AEs, it is submitted that Rule 10B(l)(a) of the Rules, providing for application of CUP method itself provides that for applying CUP, the price charged in a comparable uncontrolled transaction, or a number of such transactions, is identified, as under: Determination of arm's length price ....
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....thorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee's transactions with non AEs, on the ground that the volume of business with non AEs was too small vis-a-vis business with AEs. 9. Similar view was taken by the Hon'ble Delhi Bench of Tribunal in the case of Interra Information Technologies (India) Pvt. Ltd. vs. DCIT, wherein, the Hon'ble Tribunal accepted 15% of total uncontrolled transaction as appropriate comparable for applying TNMM: 82 .................. The argument of the TPO for both the years is that the comparable is miniscule in nature and fails on the comparability of volumes or scale of operation. This argument and finding of the TPO is factually incorrect for the A.Y. 2007-08. 15% of the total turnover, in our opinion is sufficient sample which can be used for the purpose of benchmarking, provided the transactions are functionally comparable. Even domestic uncontrolled transactions are about 10%. In case the transactions are functionally comparable these transactions can be used for benchmarking. 19. In view of the aforesaid, it would be appreciated that contention of the Id. DR in r....
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....ve submissions. The inclusion in the Explanation to Section 92B of the Act of the expression 'receivables ' does not mean that de hors the context every item of 'receivables ' appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, 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-a-vis the receivables for the supplies made to an API, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an internati....