TaxTMI 
TaxTMI 
2025 (6) TMI 1531
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....1962 ('Rules') and undertaking a fresh economic analysis during the course assessment proceedings and thereby making an adjustment of Rs. 16,21,20,521 towards the international transactions with AEs. 2. Rejection of use of multiple year data: Rejecting the use of multiple and using data for the FY 2013-14 only in determining the arm's length price. 3. Use of additional filters : Inter-alia use of the following additional / modified filters in undertaking the comparative analysis and rejecting comparable companies : (a) 75% Export Revenue Filter. (b) Different Financial Year Filter; and (c) Using one sided turnover filter. 4. Selection of additional companies : Not undertaking an objective and consistent comparative analysis and interalia selecting the following companies as comparable to the services of the assessee ignoring the fact that the same are not functionally comparable to the assessee. (a) Tata Elxsi Limited (Seg.) (b) Mindtree Limited (c) R S Software (India) Limited (d) E-Infochips Ltd. (e) Larsen & Toubro Infotech Limited (f) Infosys Ltd. (g) Persistent Systems Limited (h) Infobeans Technologies Limited (i) Thirdware Solution....
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....ts have already been taken into account in determining the arm's length margin hence there is no need of imputing interest on outstanding receivables again. d) Not appreciating the fact that the receivables are consequential/ closely linked to the principle transaction of provision of IT services and hence have been aggregated for determination of ALP under TNMM. e) Without prejudice to the above, not netting off the outstanding payable of Rs. 23,19,05,520 against outstanding receivables from its AE while determining the interest amount. 11. Without prejudice, not undertaking an objective economic analysis and determining the arm's length interest rate on outstanding receivables at SBI term deposit rates by: a) Not appreciating that the receivables due from overseas AE's are in foreign currency and hence interest, if any, is to be benchmarked with the rates prevalent in the international market for foreign currency loans. b) Determining the arm's length credit period as 30 days without any basis and imputing interest on credit period provided for the invoices raised relating to provision of services. 12. Not following the directions of Hon'ble DRP ....
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.... Ld. TPO vide his order dt. 30.10.2017 suggested upward adjustment of Rs. 14,75,16,275/- on account of Provision of Software Development Service ("SDS") and Rs. 1,65,98,428/- on account of outstanding trade receivables. Accordingly, the Ld. AO passed draft assessment order on 30.11.2017. Aggrieved with the draft assessment order passed by the Ld. AO, the assessee preferred objections before the Ld. DRP. In pursuance to the directions of Ld. DRP dated 27.08.2018, the Ld. AO finalized the assessment on 29.10.2018 by making total addition of Rs. 16,21,20,521/- on account of upward adjustment of ALP. 6. Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before us. 7. At the outset, Ld. AR submitted that they are not pressing ground Nos.1 to 3, 6, 7, 9 and 10 of the grounds of appeal and ground nos.14 to 16 are consequential in nature. Therefore, the Ld. AR submitted that these grounds do not need separate adjudication. Accordingly, ground nos. 1 to 3, 6, 7, 9, 10 and 14 to 16 of the grounds of appeal are dismissed being not pressed. 8. Ground no.4 of the assessee is related to the seeking of exclusion of nine companies from the set of comparables namely, ....
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....case of M/s. Wave Crest Payment Technology Pvt. Ltd. Vs. DCIT (supra), which is to the following effect: "2. The assessee is engaged in the Software Development Services and filed its return of income for the year under consideration on 25.11.2014 declaring total income of Rs. 05,70,83,190/-. The case was selected for scrutiny through CASS and since the assessee has entered into international transactions during the previous year relevant to the year under consideration. Therefore, the case was referred to the TPO for determination of the Arm's Length price (ALP). The profile of the assessee as taken from the transfer pricing study document and recorded by the TPO in para 3 is as under:- "3. WaveCrest India is a wholly owned subsidiary of WaveCrest Group Ltd. Gibraltor ("WaveCrest Group Ltd. along with its subsidiaries is collectively referred to as "WaveCrest Group"). WaveCrest India provides backend software development and support services to tis associated enterprise (AE in singular and AE's in aggregate). WaveCrest India has responsibility to develop & test new applications/enhancements and provide maintenance support for existing applications. The services are rendered on....
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.... fulfil filters applied by the TPO. The TPO as well as DRP considers the segmental data only in respect of the Software Development Services and not in respect of product sales. He has referred to the directions of the DRP and submitted that the business of this company is primarily Software Development and Services and system integration and support. The Software Development and Services segment comprises of three divisions (a) Embedded Product Design (b) Industrial Design (c) Visual computing lab. Once the segmental financial data is available in the annual report then the other business activity of the company becomes irrelevant. He has relied upon the directions of the DRP. 8.3 We have considered the rival submissions as well as relevant material on record. Undisputedly, the Tata ELXSI Ltd., is a market leader in its field of services and having various segments of services as well as product sales. Even in the segment of Software Development and Services, there are various divisions comprising of a services provided for industrial design, visual computing labs and embedded product design. This company is also having R&D to the tune of 2.7% of the total turnover which was not....
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....e award and the star Guild Award 2014 for Best visual effects for it works in film " Dhoom 3". The company also carried out visual effects for the film "Bhag Milka Bhag". The services under the revenue from graphics animation and gaming are also different from services of software development." The Tribunal has noted that the company has earned Revenue from the designing using software than Software Development Services and software maintenance services. The other services of graphic animation and gaming includes major project for animation and visual effects for two feature films which are different from the services of the Software Development. These finding of the Tribunal are based on the factual details and financial data available in the annual report. Similarly, the Co- ordinate Bench of this Tribunal in the case of M/s Infor (India) P. Ltd. vs. DCIT (supra) for the assessment year 2014-15 vide order dated 6.8.2019 in para 77 to 78 has analyzed the functional comparability of this company as under:- "77. As regards Tata Elxsi Ltd, Thirdware Solutions Ltd and Persistent Systems Ltd are concerned, we find that their comparability to the assessee has been considered in the ....
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.... that this company cannot be a comparable to the assessee. 38. We have considered rival submissions and perused materials on record. Though, it may be a fact that the assessee may not have objected to selection of this company before the Transfer Pricing Officer, however, the assessee raised objections against selection of this company before the DRP as well as before us. The grievance of the assessee is, the company being involved in development of products and since no segmental details are available in the annual report, it cannot be treated as comparable. The Co-ordinate Bench in Tech Mahindra Ltd. (supra) having found this company to be involved in development of software product and trading in software licenses has held that it cannot be a comparable to a software development service provider. Similar view has been expressed in the other decisions cited before us by the learned Authorised Representative. Since, many of these decisions relate to very same assessment year, following the ratio laid down in these decisions, we hold that this company cannot be a comparable to the assessee". 8.4 Hence, in view of the facts and circumstances of the case and particularly the busi....
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.... co-ordinate Bench of this Tribunal in the case of M/s. Infor India Pvt. Ltd. vs. DCIT (supra) has considered the functional comparability of this company in para 85 as under: "As regards E-Infochips Ltd is concerned, the contention of the assessee is that it is functionally different as it is engaged to software develop ent of software products and ITeS and that there no segmental data. The TPO &DRP have rejected the objections of the assessee. The learned Counsel for the assessee has referred to the disclosure of segments explanatory wherein the company has disclosed itself as primarily engaged in software development and ITeS services and products, as reportable as per AS17. Further, at page 897, there is an inventory in the balance sheet and at page 899, there is classification of inventories. However, we do not find any revenue from sale of products. Therefore, it cannot be accepted that this company is into product development. The other objection of the assessee is that it has abnormal profit 79.76% during the relevant A.Y. and therefore, it has witnessed super normal profit of 38% on a year on year basis. This objection of the assessee is acceptable because, in the other ....
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....ule, 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 than 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 consideration. Thus, according to the learned ....
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....s Unit was transferred by way of slump sale for total sales consideration of Rs.489.53 crs based on ITA No.4740/Del./2018 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 result are distorted. The Tribunal has noted tha....
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....e company has developmental products. The comparable was excluded from the final list of comparable in assessee's own case for the Assessment Year 2011-12 by the DRP and further the comparable company was excluded by the co-ordinate Bench of Delhi Tribunal in the case of Pitney Bowes Software India Pvt. Ltd. Vs. ACIT 101 Taxman.com 350. The learned Authorised Representative also relied on CGI Information Systems & Management Consultants (P) Ltd. Vs. ACIT (2018) 94 taxman.com 97 and DCIT Vs. Taxman India Pvt. Ltd. (2016) 74 Taxmann.com 88 (Del). We found that the co-ordinate Bench of Tribunal in M.P. No.95/Bang/2019 in IT(TP)A No.3122/Bang/2018 for the Assessment Year 2014-15 has dealt on the issue at page 2 para 4 as under : "4. We heard Ld D.R and perused the record. We find merit in the miscellaneous petition filed by the assessee. Accordingly following paragraph is inserted after IT(TP)A No.3374/Bang/2018 paragraph 10 in the impugned order of the Tribunal, which will adjudicate the issue relating to "L & T Infotech Ltd":- "10A The assessee has sought exclusion of M/s L & T Infotech Ltd on the ground that there were extraordinary events during the year, it possesses brand....
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....mitted that the company has created a brand name for it, in the market and this 'brand value' has significant impact on the profits of the company. He has relied upon the following two decisions as under:- i. M/s Kony IT Services Private Limited, I.T.A.T. Hyderabad, ITA No. 2304/Hyd/2018, for A.Y. 2014-15. ii. M/s Infor (India) P. Ltd., I.T.A.T., Hyderabad, ITA Nos. 161 and 2307/Hyd/2018 A.Y. 2014-15. 16. On the other hand, learned DR has relied upon the order of the DRP and submitted that the objections raised by the assessee regarding R & D expenditure and brand value are not having any impact on the operating profit of this company being insignificant so far as the quantum of the expenditure is concerned, therefore, this company is functionally comparable. 17. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that the co-ordinate Bench of this Tribunal in the case of M/s Kony IT Services Private Limited (supra) has considered the functional comparability of this company at page 16 to 22 as under:- " (iv) M/s. Infosys Limited: (a) From the profitability reported in the P & L Account (Page No. 324, 349 and 357 o....
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....eration of Rs. 1, 87 crore and a deferred consideration of up to Rs. 608 Cr. The deferred consideration is payable to the selling shareholders of Lodestone on the third anniversary of the acquisition date and is contingent upon their continued employment for a period of three years. The investment in Lodestone has been recorded at the acquisition cost and the deferred consideration is being recognized on a proportionate basis over a period of three years from the date of acquisition. An amount of Rs. 228 Crore and Rs. 85 Cr representing the proportionate charge of the deferred consideration has been recognized as an expense during the years ended March 31, 2014 and March 31, 2013 respectively." Extraction from Page 357 of PB-II 2.26 Merger of Infosys Consulting India Limited The Honorable High Court of Karnataka sanctioned the scheme of amalgamation of Infosys Consulting India Limited (ICIL) with Infosys Limited with an effective date of August 23, 2013 and an appointed date of January 12, 2012 ICIL was a wholly- owned subsidiary of Infosys Limited and was engaged in software-related consultancy services. The merger of ICIL into Infosys Limited has been accounted for under po....
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....hrough the establishment of Client Innovation Centres, publishing focused technology points of view, implementing proofs of concepts driven by our focus on client value, and conducting client workshops. Additionally, we have set up innovation centres with a number of our clients, university partners, and industry research consortia to drive co-creation. Infosys Labs focuses on developing significant new intellectual property to enhance the productivity and quality of our services while enabling differentiation in client offerings. During fiscal year 2014, Inlosys Labs filed 79 unique patent applications in the United States Patent and Trademark Office (USPTO), the Indian Patent Office and other jurisdictions. On a standalone basis, our research and development expenses for fiscal years 2014, 2013 and 2012 were Rs. 873 crore Rs. 907 crore and Rs. 655 crore, respectively." Extraction from Page 311 of PB-II "Research and development expenditure The R&D centers of the Company (Finacle and Infosys Labs) located at Bangalore, Bhubaneswar, Chandigarh, Chennai, Pune, Hyderabad, Mysore and Thiruvananthapuram have been accorded approval for weighted deduction by the Department of Sc....
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.... segmental information in the annual report of the company, it is into Telecom and Wireless. Life science and Healthcare and infrastructure and Systems. Further, it is engaged in rendering "software product development" services to its customers as against the contract software development services provided by the Assessee. No segmental information is available for this company. It has diversified operations, which inter alia includes Intellectual Property ('IP') led business. This company is focusing on product development activities and product vertical contribute significant amount of revenue. 19. On the other hand, the Ld. DR has submitted that as per the annual report of this company, it is specializing in software product services and technology. Though there is revenue from sale of software services however, predominately this company earns revenue from foreign currency from sale of software and there is no reference to sale of products. Thus, this company is mainly engaged in providing software services. The R&D expenditure is very meagre of 0.33% of the operating revenue. Similarly, intangible asset is only 1.36% of the operating revenue therefore, these are not having a....
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....olidated EBIDTA increased by 28.4% and the net profit after tax went up by 32.9% during the same period." (b) It is also evident from page no.701 of PB-II that the company is also engaged in R & D Activities and has incurred Revenue and Capital expenditure towards the same for Rs. 3.96 Crs. Extraction from Page 701 of PB-II "35. Research and development expenditure. The particulars of expenditure incurred on in-house research and development centre approved by the Department of Scientific and Industrial Research (DSIR) are as follows: For the year ended March 31, 2014 March 31, 2013 Capital 2.43 - For the year ended March 31, 2014 March 31, 2013 Capital 2.43 1 Revenue 37.18 27.87 39.61 27.87 (c) Though the company's revenue flows from the three streams viz., products (IP Business), platforms (Solutions Integration) and services (Product Engineering), the main segments disclosed in the Annual Report are Telecom & Wireless, Life- sciences & Health care, and Infrastructure & systems. Thus, the segmental details in the annual report is absent. Extraction from Page 675 of PB-II "(m) Segment reporting (i) Identification of....
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.... calculated on F.O.B. basis. Further, the company also has MODVAT and sales tax deposits. Infobeans in engaged in Custom Application Development (CAD), content Management Systems (CMS), Enterprises Mobility (EM) and Big Data Analytics (BDA) which is high end service and distinct from routine software development services. These services also fall within the definition of knowledge process outsourcing (KPO) services as published in the Safe Harbour by CBDT. He has relied upon the decisions as under: (i) M/s Kony IT Services Private Limited. (ii) M/s. Alcatel Lucent India Ltd. 22.1 On the other hand, the learned DR has submitted that as per the annual report of this company, the entire Revenue drived by this company is from Software Services. 23. We considered the rival submissions as well as the relevant material on record. The co-ordinate Bench of this Tribunal in the case of M/s Kony IT Services Private Limited (supra) has considered the functional comparability of this company at page 15 and 16 as under: " (iii) M/s. Infobeans Technologies Limited: - (a) From the Annual Report Page No.276 of the PB-II it is apparent that the assessee has also been engaged in sale of goods....
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....Development and implementation. Though in the profit and loss account, the company has mentioned the Revenue from sale of products however in the foot note, it is clearly mentioned that the Revenue was on account of export of software services. The Revenue from sale of license is very meagre of 0.03% of total operating Revenue. He has relied upon the directions of the DRP. 25. We have considered the rival submissions as well as relevant material on record. The DRP has not disputed the fact that this company is generating Revenue from various activities which includes export of software services being sale of software and separately on account of software services sales subscription and training. This company has also shown Revenue from sale of licenses. The Bangalore Benches of the Tribunal in the case of M/s ARM Embedded Technologies Private Ltd. vs. Income Tax Officer, Bangalore (supra) has considered the functional comparability of this company at 15 & 16 as under:- "iv) Third ware Solutions Ltd. - The company is not functionally comparable as it has different diversified activities, and derives income from software development, income from subscription contract and from sal....
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....the case of M/s Kony I.T. Services Private Ltd., vs. DCIT, Hyderabad (supra) has also considered the functional comparability of this company at page 13 to 15 as under: "(ii) Thirdware Solutions Limited: (a) As argued by the Ld. AR it is evident from the Annual Report (page No.235 of PB- II) that the company has derived revenue from sale of products amounting to Rs. 206.75 Crs. Further, there is no revenue from sale of services during the previous year. The assessee has also purchased stock amounting to Rs. 40.21 Crs. While as the assessee company is not engaged into any activity of producing physical goods. Page No.235 of PB-II (b) It is also apparent that the company is receiving revenue from various streams and none of them were pertaining to software development services. As apparent from page 237 of PB-II, the company has received Revenue from training and subscription amounting to Rs. 59.32 lakhs and sale of licenses Rs. 7.98 lakhs. The assessee company is only engaged in ITES. Extraction from page no.237 of PB-II: (c) It is also apparent from page no. 217 of PB-II that the company has not disclosed segmental details between software development services and produ....
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....he product and is amortized on the straight-line method over its estimated useful life of three years, as perceived by the management." 10.1. In the case of the assessee company neither such expenses are incurred, or any intangibles are acquired during the relevant period. 11. Since the assessee company is primarily engaged in custom-built mobile applications and software support and maintenance related services to M/s. Kony Group of Companies, we are of the considered view that M/s. Third-ware Solutions Limited cannot be considered as a comparable company because of the reasons stated hereinabove." Following the earlier orders of this Tribunal, we direct the TPO to exclude this company from the set of comparables." 8.5 On perusal of the above, we found that, this Tribunal has very elaborately dealt with the issue and not find Tata Elexis Limited (Seg), E-Infochips Ltd, Larsen and Tourbo Infotech Limited, Infosys Ltd, Persistent Systems Limited, Infobeans Technologies Limited and Thirdware Solutions Limited as good comparables and directed the Ld. AO / TPO to exclude the same from the final set of comparables. Respectfully, following the decision of this Tribunal in the case o....
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....ique intangibles that materially affect the profitability of R S Software. He further submitted that under Rule 10B(3)(i), even the likelihood of such IPR influencing profits is sufficient ground for exclusion. It was contended that the Ld. TPO erred in requiring a quantified impact in the financials, as proprietary tools and solutions developed internally are often not recorded unless acquired or valued for a particular purpose. The Ld. AR also highlighted that R S Software business model involves full-cycle services and domain specialization, which is not comparable to the low-risk, captive service model of the assessee. Accordingly, the Ld. AR strongly pleaded for exclusion of R S Software from the final set of comparables. 9.3 Per contra, the Ld. DR objected to the submissions of Ld. AR regarding exclusion of R S Software from the final set of comparables. The Ld. DR submitted that R S Software is engaged in SDS and therefore, functionally similar to the assessee. In support of their submissions, Ld. DR invited our attention to para No.21 related to Revenue from Operations of the financial statement of R S Software placed at Page No.4257 of the Paper Book and submitted that th....
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....assessee to show that such industry focus has resulted in materially different functions, assets, or risks that would warrant exclusion. 9.5 As rightly pointed out by the Ld. DR, the absence of segmental financials, combined with the fact that 100% revenue is from SDS, leads to a reasonable conclusion that R S Software is functionally comparable with the assessee. The Tribunal in multiple decisions has held that unless it is shown that the alleged functional difference translates into differential margins or risk profiles demonstrable through segmental results, mere reference to technical capabilities or internal intangibles cannot be the basis for exclusion. 9.6 In view of the above discussion and considering that the assessee has failed to establish any decisive functional difference backed by financial evidence, we are of the considered view that R S Software is functionally comparable to the assessee and deserves to be retained in the final list of comparables. Accordingly, the assessee's plea for exclusion of R S Software from the list of comparables is rejected. 10. With respect to exclusion of Mindtree Limited ("Mindtr....
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....uch as analytics, information management, and business technology consulting. It also underscore Mindtree's multi-segment specialization and operations in high-end segments beyond routine SDS. Further, the Profit & Loss Account placed at page no. 4044, quantitative details at page nos. 4062 and segmental details at page no. 4063 of the paper book do not provide clear revenue bifurcation for isolating a functionally comparable SDS segment. The absence of reliable segmental data, despite disclosures about multiple verticals, renders the functional comparability assessment speculative. Therefore, we are inclined to accept the argument of the Ld. AR. Accordingly, we hold that Mindtree is engaged in diverse and high-end service offerings. The fact that multiple verticals are disclosed, without a clear demarcation of revenues attributable to each segment, indicates that the company's functional profile is not limited to SDS. Moreover, the lack of reliable and segment-specific financial data makes it unfeasible to reasonably benchmark Mindtree with the assessee's captive SDS operations. Accordingly, in view of the functional dissimilarity and absence of reliable segmental data, Mindtree L....
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....ence in the business model adopted by the company and the assessee. The company was included as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT 115 taxmann.com 293 (Bang - Tribunal) at para 7(i) page 595 of Paper Book as under : " 7 (i) Akshay Software Ltd. which has a margin of 8.13%. The income from commission on sale of software license constitute meager 0.5% of total revenue and TPO has not applied transfer development filter. The said company was rejected by the TPO for the reason that the company is engaged in providing provisional services, procurement installation, and employment support of ERP products. The DRP has rejected the comparable without applying the filter and there is no difference in the business model adopted by the company and the assessee. We on perusal of the Annual Report at Page 1373 of Paper Book, found IT(TP)A No.3374/Bang/2018 that major revenues are from operations as per Note 19 being income from software services and commission received on sale of software licenses. The earnings as per Note 28 as per the financial statements, the company has earning from export of software and in the F.Y.....
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....e Development and Testing Services. The other two companies namely Signity Technologies Limited and R.S. Software (India) Ltd., were included by the TPO in the final list of comparable but the DRP has rejected those two companies. In support of his contention he has relied upon the decision of the Tribunal dated 24.11.2020 in case of M/s ARM Embedded Technologies Pvt. Ltd., vs. Income Tax Officer (supra). 27. On the other hand, learned DR has submitted that it is evident from the annual report of this company that it has incurred substantial expenses to the tune of Rs. 6% of the turnover towards R&D which is beyond the generally acceptable tolerance limit of 3% of the Revenue. The DRP has noted that the assessee has not controverted this finding of TPO. He has relied upon the orders of the authorities below. 28. We have considered the rival submissions as well as relevant material on record. The TPO and DRP has excluded this company from the set of comparables by applying a filter of R&D expenditure of more than 3%. The assessee has contended that as per the annual report, no R&D expenditure incurred by this company. The learned AR has also relied upon the decisions of Bangalor....
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....uted that the TPO excluded this company due to R&D filter breached by this company. Therefore, the decision relied upon by the learned AR would not help the case of the assessee. We further note that the coordinate Bench of this Tribunal in the case of M/s. Infor (India) P Ltd. Vs. DCIT in ITA Nos. 161 & 2307/Hyd/2018 dated 06.08.2019, which has been relied upon by the learned AR while supporting the other comparbales has considered the functional comparability of this company in para 71 and 72 as under:- "71. The learned DR, on the other hand, relied on the orders of the authorities below as well as the annual Report of Maveric Systems Ltd., wherein it is reported that 6% of the turnover has been spent towards R&D. 72. Having regard to the rival contentions and the material on record, we are satisfied that though this company is functionally similar, it fails the R&D filter of less than three percent of the turnover and hence cannot be taken as a comparable to the assessee." Accordingly, in view of the fact that this company is having R&D Expenditure equivalent to 6% of the turnover cannot be taken as comparable." 12.1 On perusal of the above, we found that this Tribunal ha....
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.... para nos. 8 & 9 of the decision of co-ordinate Bench of the Tribunal in the case of KABACE Technologies Pvt. Ltd Vs. DCIT in ITA No.3189/Bang/2018 dated 29.01.2020, wherein the Tribunal has held that, if there is profit in any one of the three financial years considered for analysis, then, that company cannot be excluded on the basis of persistent loss making filter. Accordingly, the Ld. AR prayed before the Bench to include Sagar Soft in list of set of comparables. 14.1 Per contra, the Ld. DR relied on the order of Ld. AO / TPO 14.2 We have heard the rival contentions and also gone through the record in light of submissions made by either side. We have gone through page no.5224 of the paper book, which is to the following effect: Sagarsoft PBT working Financial Year 2011-12 2012-13 2013-14 Operating Revenue 9.68,35,727 10,28,10,064 11,28,66.549 Operating Cost 8.99,92.694 10,77,20,489 11,59.69.701 Operating Profit 68.43.033 49.10.425 -31.03.152 OPIOC 7.60% -4.56% -2.68% Add : Non operating income Total income 9.99.32,197 10.72,13,264 12.56.45.632 Add : Non operating expenses Total expenses 9.02.95,747 ....
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....-12 which is within the bracket of three years, therefore, respectfully following the decision of co-ordinate Bench of the Tribunal in the case of KABACE Technologies Pvt. Ltd Vs. DCIT (supra), we hold that Sagar Soft cannot be excluded from the set of comparables on the basis of persistent loss making filter. Accordingly, we direct the Ld. AO /TPO to include Sagar Soft in the set of comparable. 15. Ground no.8 of the assessee is related to the denial of working capital adjustment ("WCA") by the Ld. TPO while determining the ALP. The Ld. AR submitted that the Ld. TPO denied WCA on the ground that only year-end figures were available and the assessee failed to furnish detailed working capital cycle data during the year. The Ld. AR further submitted that the assessee is not in a position to obtain granular or daily/monthly working capital data of the uncontrolled comparable companies, as such data is not available in the public domain, and the assessee has no access or right to call for such internal details from third-party comparables. The Ld. AR also submitted that WCA is a legitimate adjustment intended to neutralize the impact of difference levels of working capital between the....
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.... our considered view, unjustified, particularly when such data is admittedly not available in the public domain. The assessee cannot be expected to obtain information which is beyond its reach. Therefore, we are of the considered opinion that, WCA cannot be denied merely due to the absence of detailed working capital cycle data and the adjustment should be granted based on average of opening and closing balances. Hence, we direct the Ld. TPO to grant appropriate WCA to the assessee while determining the ALP, by adopting the average of opening and closing working capital balances of comparables, as available from their annual reports. Accordingly, the ground No. 8 of the assessee is allowed for statistical purpose. 16. Ground No.10 of the assessee are related to the benchmarking of interest on outstanding trade receivables. The Ld. AR contended that no separate benchmarking is required in respect of interest on trade receivables, as the same forms part of the working capital and is subsumed within the overall pricing of the international transaction. 16.1 Per contra, the Ld. DR opposed this contention and submitted that interest on trade receivables constitutes an independent inte....
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....lt by this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT in ITA No. 1041/Hyd/2024 dated 06/03/2025, wherein at para no. 6 to 10 of the order this Tribunal has held as under : "6. It is pertinent to note that, not following the decisions of the Tribunal in assessee's own case amounts to judicial indiscipline on the part of the DRP. However, since the issue has now come up before the Tribunal, therefore, we will discuss the merits of this issue. The basic question before us is, whether for benchmarking the outstanding receivables from AEs, the comparable interest rate should be PLR rate/SBI short term rate or LIBOR rate/LIBOR+ mark up. This issue was considered by the Chennai Special Bench of this Tribunal in case of Shiva Industries & Holdings Ltd. v. Assistant Commissioner of Income-tax reported in 46 SOT 112/11 Taxmann.com 404 (SB) and held in para 11 as under: "11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares. Thus, it is noticed that the funds raised by the assessee company for giving the loan to India Tele....
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....the adjustment and compute the interest rate for the transaction under consideration. It claimed that the LIBOR rates in the year 2002 varied between 1.447 % to 3.006 % and in the year 2003 between 1.201% to 1.487%. Rates in the year 2004 were again marginal, with the highest at 3.100% and the lowest at 1.340%. The LIBOR rate of 5.224% quoted in the TPO's order, it is pointed out, was the rate received on the investment made during the assessment year in question by the assessed. Thus, it was argued that the present case is of a long-term loan granted to the AE and the rate of interest charged was much higher than the then prevailing LIBOR interest rate. There is no finding of the TPO, the DRP or the Assessing Officer questioning the long-term transaction as such. 36. Under sub-rule (4) to Rule 10B, the data used for comparability of the uncontrolled transaction should be the data relating to the financial year in which the international transaction has been entered into. The proviso permits consideration of data, not more than two years prior to the financial year, if such data reveals facts which would have influenced determination of transfer price in relation to the trans....
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....rmined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in th....
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.... the money." 40. The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply." 8. The Hon'ble High Court has answered the question whether the interest rate prevailing in India should be applied for the lender who is an Indian Company/Assessee or the lending rate p....
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....as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order. Accordingly, we see no reason to entertain the proposed questions of law." 9. We further note that, the Pune Benche of the Tribunal in the case of DCIT vs. iGATE Global Solutions Ltd reported in (2019) 109 Taxmann.com 48 (Pune) has again discussed this issue elaborately in Para 4 to 10 as under: "4. We have heard both the sides and gone through the relevant material on record. It is observed from the order passed by the TPO that the assessee advanced loans to its two AEs, one in the USA and the other in Germany. Insofar as loan to Symphoni Interactive LLC, an Associated Enterprise in the USA is concerned, the assessee charged interest @ 6%. The ld. CIT(A) has recorded that the assessee also paid interest to another AE in the USA, namely, iGATE Corporation, USA at 5.9% on its External Commercial Borrowings (ECB). He further recorded in para 57 of the impugned order that the TPO accepted this transaction and made no transfer pricing adjustment on this score, thereby, he also impliedly accepting this transaction at ALP. The viewpoint of the ld. CIT(A) on this p....
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....on'ble Bombay High Court in CIT v. The Great Eastern Shipping Co. Ltd. [2018] 301 CTR 642 has reiterated that the arm's length rate of interest is to be considered with reference to the country in which the loan is received and not from where it is paid. In view of these precedents, it is palpable that the viewpoint of the AO in considering the rate of interest prevalent in India, being, the lender country, as determinative of the ALP of rate of interest charged by the assessee, is not correct. To this extent, we uphold, in principle, the view canvassed by the ld. CIT(A) that the rate of interest prevalent in Germany, being, the country in which the loan was consumed, is determinative of the arm's length rate of interest charged by the assessee-lender. 7. Now we espouse the second facet of the dispute relating to the determination of the arm's length rate of interest. It is seen that the ld. CIT(A) has held that average EURIBOR for the A.Y. 2007-08 should be considered as a benchmark. In determining the average EURIBOR at 4.42%, he relied on an order passed by the Tribunal in which the average LIBOR was considered at 4.42%. In other words, the ld. CIT(A) considere....
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....#39;s length rate of interest to be applied on loan advanced by the assessee to Mascot Systems GmbH, Germany. In case EURIBOR +2% turns out to be lower than 4.42% as directed to be applied by the ld. CIT(A) on the understanding of the same being EURIBOR simplicitor, then the addition should be restricted with reference to 4.42% rate of interest, as the assessee is not in appeal on this issue. In the otherwise scenario, the relief allowed by the ld. CIT(A) will be restricted pro tanto." 10. Therefore, we find force in the assessee's case to adopt LIBOR rate for benchmarking the transactions of outstanding receivables from the AEs. Accordingly, the Assessing Officer/TPO is directed to adopt the LIBOR + 200 basis as comparable rate for benchmarking the transaction of outstanding receivables from AEs after allowing a credit period of 60 days as a normal credit period without any interest." 17.4 On perusal of above, we found that this Tribunal has adopted LIBOR rate for benchmarking the transactions of outstanding receivables from the AEs. Therefore, respectfully following the decision of this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT (supra), we hold that, the justi....