TaxTMI 
TaxTMI 
2025 (6) TMI 1531
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....with the provisions of Act read with the Income Tax Rules, 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. ....
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.... not covered in the definition of international transaction as defined u/s 92B of the Act in the facts and circumstances of the case. b) Not appreciating the facts and circumstances surrounding the receivables and re-characterising the outstanding receivables as unsecured loans advanced to AEs. c) Not appreciating the fact that under TNMM, the impact of outstanding receivables on the working capital adjustments 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 a....
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....itional ground are legal in nature for which relevant facts are stated to be emanating from the existing records. 5. The brief facts of the case are that the assessee is a company Software Development and Business support Services, filed its return of income for A.Y. 2014-15 on 30.11.2014 declaring total income of Rs.6,68,89,860/-. In view of the international transactions involved during the year under consideration, for determination of Arm's Length Price ("ALP"), the case was referred to Learned Transfer Pricing Officer ("Ld. TPO"). The 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 ....
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.... "3. The assessee has declared international transaction in 3CEB report / TP document for the year under consideration as under:- Name of AE Nature of transaction Amount (Rs.) Wave Crest Group Ltd. Provision of Software development and support services 20,19,96,429 Wave Crest Holding Ltd. Provision of Software development and support services 12,73,47,844 Total 32,93,44,273 8.3 We have also gone through the profile of M/s. Wave Crest Payment Technology Pvt. Ltd, which has been captured at para No.2 of the order of this Tribunal in the 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 a....
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.... May, 2020, in the case of M/s Global Logic India Ltd. vs. DCIT in ITA No. 4740/Del/2018 and submitted that the Tribunal has rejected this company as comparable to a Software Development Company on the ground of functional dis similarity. He has also relied upon the decision of Hyderabad Benches of the Tribunal dated 6.8.2019 in the case of M/s Infor (India) P. Ltd. vs. DCIT in ITA Nos. 161 & 2307/Hyd/2018. 8.2 On the other hand, learned DR has submitted that as per annual report of this company, it provides Software Development Services and the activity under this segment is functionally comparable to the assessee and 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....
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....tric vehicle, designed the control hardware for India's Mars orbiter Mission, worked with GVK to design the experiential services for various consumer touch points at Mumbai International Airport's new integrated terminal-2. The relevant part of the Annual Report has been reproduced by the learned TPO in his order. From the various achievements of the company mentioned in the Annual Report, we are of the opinion that the company has earned revenue from designing using softwares rather 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 won the 59th Filmfare 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 servic....
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....ls on record. On a perusal of the documents placed in the paper book it appears that this company is engaged in various activities including development of niche product and development services. Thus, the company is functionally different from the assessee. Considering the aforesaid aspect, the Co- ordinate Bench in case of Telcordia Technologies India (P.) Ltd. (supra), which is for the very same assessment year, has excluded this company as a ITA No. 1689/HYD/2019 and S.A.No.98/Hyd/2020, A.Y.2015-16 M/s Infor (India) Private Limited, Hyderabad comparable. Similar view has also been expressed in the other decisions cited by the learned Authorized Representative. Thus, keeping in view the decisions of the Tribunal referred to above, we hold 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 d....
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....y and therefore, in terms of clause (i) of Rule 10B (3) if none of these differences is likely to materially affect the profit arising from such transaction in open market such uncontrolled transactions shall be considered as comparable to an international transaction. He has relied upon the direction of the DRP. 10. We have considered the rival submission as well as relevant material on record. The DRP has accepted this fact that this company is generating Revenue from sale of product though the same is not considered as in significant in comparison to the Revenue from Software Development Services. Further the objection of the assessee regarding the R&D activities and I.P./Intangibles were rejected by DRP for want of any supporting material. At the outset we note that the 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....
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....e when the services are rendered and related cost is incurred which shows that there is no reference for any product sale or inventory in the financial statements. He has relied upon the directions of DRP. 13. We have considered the rival submissions and as well as relevant material on record. At the outset, we note that the Delhi Benches of the Tribunal in the case of M/s Global Logic India Ltd. vs. DCIT (supra) has considered the functional comparability of this company in para 6.4 to 6.7 as under: "6.4 We have heard rival submission of the parties on the issue in dispute. The learned Counsel of the assessee submitted that the company owns significant intangibles (Rs.75,04,78,329/-) in the ITA No.4740/Del./2018 form of the software and intangible assets under development. On 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 than the software are insignificant. During the year, the company has sold/transferred the software and claimed ....
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....ant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under: "TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business 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 la....
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....was transferred to its subsidiary and has incurred expenses in foreign currency being 57.13% of its total expenditure. The company was excluded as comparable in the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 6(ii) at page 592 & 593 of Paper Book as under:" 6 (ii) L & T Infotech Limited : The company has a margin of 24.61% and has high brand value and is a market leader, high presence and the intangible income in proprietary products. Significant expenditure in foreign currency to the extent of 57.13%. During the year the product engineering business service of the company was transferred to its subsidiary. The company segments are divided into service cluster, industrial cluster and telecom business. As per the Annual Report of the company, the company has a significant capital work-in-progress and the 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....
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....unal on the functional comparability of this Company, we direct the TPO to exclude this company from the set of comparables while computing arm's length price. 15. Infosys Ltd. The learned AR of the assessee has submitted that as per the financials of this company, it provides solutions that span the entire software life cycle encompassing consulting, design, development, re-engineering, maintenance systems integration, package evaluation and implementation. In addition, the company develops/owns proprietary products like Finacle, Infosys m-Connect. It has also earned revenue by sale of its products. This company derives substantial portion of its revenue from proprietary products (including its flagship banking product suite Finacle). In the segmental P&L has a segment of software services & products. However, the allocation of income for software services & product is not provided. He has further submitted 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. Hy....
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....Lodestone Holding AG CHF 20 million 136 Infosys Public Services, Inc USD 12.5 million 75 Edgeverve Systems Limited 1 Lodestone Holding AG CHF 20 million 136 Infosys Public Services, Inc USD 12.5 million 75 Edgeverve Systems Limited 1 (1) On April 15, 2014, the Board of Directors of Infosys authorized the Company to execute a Business Transfer Agreement and related documents with Edgeverve (Refer to Note 2.10.2 of the standalone financials). Refer to statement pursuant to Section 212 of the Companies Act,1956 for the summary financial performance of our subsidiaries. The audited financial statements and related information of subsidiaries will be available on our website,www.infosys.com. Extraction from page 349 of PB-II 2.10.1 Investment in Lodestone Holding AG On October 22, 2012, Infosys acquired 100% of the outstanding share capital of Lodestone Holding AG, a global management consultancy firm headquartered in Zurich, Switzerland. The acquisition was executed through a share purchase agreement for an upfront cash consideration of Rs. 1, 87 crore and a def....
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....forts focus on the twin goals of improving productivity and quality of our services, alongside working towards technology driven innovation and differentiation that will deliver greater value to our clients. At Infosys Labs, Service innovation is being achieved through enhanced automation, optimization, prevention and effective collaboration among described teams. Infosys Labs has established a set of service innovation groups focused on enhancing quality and productivity of six dominant Infosys services-Business Process Outsourcing; Infrastructure Management Services; Independent Validation Services; Application Development and Maintenance including Large Deals; Consulting and Systems Integration; and Modernization. These groups work on service platforms with a focus on automation, optimization, consolidation, and on enhancing the effectiveness of contextual collaboration for distributed teams. Under its Client Innovation umbrella, Infosys Labs has established six Centres of Excellence (CoE), namely Modernization, Advanced Analytics, Security and Dependability, Advanced Mobility, Experience, and Innovation Co-Creation. The CoEs work towards establishing technolog....
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.... 100.0 Software development expenses 26,738 60.3 21,662 58.9 17,603 39.7 41.1 Gross profit 15,103 Selling and marketing expenses 2,390 5.4 1,870 5.1 General and administration expenses 2,686 6.0 2,218 6.0 5,076 11.4 4,088 11.1 Operating profit before depreciation 12,527 28.3 11,015 30.0 While as in the case of the assessee company no such expenses have been incurred as it is catering only to its parent company. 12. Considering the above-mentioned factors, we are of the considered view that M/s. Infosys Limited is not a comparable company with respect to the assessee company for TP Adjustments. "We further note that the size of the company as well as having brand value and leader in the market has been considered by the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies Pvt. Ltd reported in 36 taxmann.com 289 and held that Infosys Ltd., is not comparable having its giant size and brand value. Accordingly, following the decision of the co-ordinate Bench as well as the decision of Hon....
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....Private Limited vs. DCIT (supra) has considered the functional comparability of the assessee at page 22 to 24 as under: "(v) M/s Persistent Systems Ltd:- (a) It is evident from Page No. 533 of PB-II that the company is mainly engaged in three areas such as products (IP Business), platforms (Solutions Integration) and services (Product Engineering) and is also selling its branded products. Extraction from Page 533 of PB-II "Business overview Your company specializes in building computer software products. Your company's business is organized with a focus on the following three areas: Products (IP Business), Platforms (Solutions Integration) AND Services (Product Engineering). Your company has decided to brand the product business separately from the Persistent brand and has named it 'Accelerite' (www.accelerite.com). Accelerite will be headquartered in the Silicon Vally and will help your Company provide clarity - the Persistent brand is for product development and the Accelerite brand is for products. Your company has organized the development and engineering teams around three strategies. Account-Led, Platform-Led and Produc....
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....ts have not been presented except for trade receivables as these items are used interchangeably between segments and the company is of the view that it is not practical to reasonable allocate these items to individual segments and an adhoc allocation will not be meaningful." 13. From the above, it is evident that M/s. Persistent Systems Ltd is functionally dissimilar to the assessee company, it also has intangibles unlike the assessee company and further segmental data are not available. Hence, M/s. Persistent Systems Ltd cannot be treated as a comparable company with the assessee company for the purpose of TP adjustments." 21. 30 ITA No. 233/H/2018 A.Y. 2014-15 Similarly, in the case of Infor (India) P. Ltd. vs. DCIT (supra), the Tribunal has excluded this company from the comparables of Software Development Service Provider in Para 7.7 as under: "7.7. 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 assessee's own case for the A.Y 2007-08 and it is submitted that there is no change of activities of either the assessee or the compar....
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....red 9,400 9,400 Good Telephone Deposit 9,153 3,500 Other Deposit 10,000 10,000 Custom Deposit 140,850 73,150 Deposit with MPPKVVCL 10,000 Sales Tax Deposit (Kotak FDR) 25,000 25,000 Deposit (M-VAT) 10,121,460 M.P.S.E.D.C. Ltd Total 10,325,863 121,050 The Tribunal has noted the fact that this company has MODEVAT and Sales Tax deposits. Therefore, this company is engaged in the sale of goods alongwith rendering of services. Accordingly, following the earlier order of this Tribunal, we direct the TPO to exclude this company from the set of comparables while computing the arm's length price. 24. Thirdware Solution Limited The Ld. AR has submitted that the company earns revenue from development and sale of software products. Further it is also involved in earning revenue from subscription contracts and sale of user licenses for software applications. From the annual report of the company in notes to accounts it can be seen that 100% revenue is derived from sale of products and revenue from sale of service is nil. The company has reported "purchases of stoc....
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.... products and earns revenue from sale of user licenses and purchase stock in trade during the year and has intangibles. Further the margins of the company fluctuate year on year basis due to different revenue recognition model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also relied on Lime Labs (India) Pvt. Ltd. Vs. ITO 101 Taxman.com 201 (Delhi Trib.). We found the co-ordinate Bench of the Tribunal in the case of LG Software India Pvt. Ltd. Vs. DCIT in IT(TP)A No.3122/Bang/2018 dt.28.05.2019 for the Assessment Year 2014-15 has excluded the comparable as observed at paras 8 & 8.1 at page 4 as under : "8. We also notice that in A.Y 2008-09, the co-ordinate bench has excluded M/s. Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s. Thirdware Solutions Ltd. is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 It was stat....
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....ar geographical segment, are reported. Fixed Assets, Current Assets, Loans and Advances, Current Liabilities and provisions are classified based on specific geographical segment's business. The company maintains separate books of account for the reported segments. Wherever the costs are directly identifiable with the reported segment, it has been booked to that segment. Wherever common expenses are incurred, those expenses have already been considered for allocation and relevant entries in the books of account have been passed. Hence there are no un-allocable expenses. Further, cash, investment (net of provision) and bank balances are reported at the enterprise level. Current assets and current liabilities relating to the specific business segments are identified and reported. Those, which are not identifiable, are reported as common assets / liabilities." (d) As disclosed in the annual account it is also apparent that the company has acquired intangibles during the year. Relevant portion of page 210 of PB-II is extracted hereinbelow for reference:- "d) Intangible Assets and Amortization Acquired intangible assets relating to software purchas....
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..../TPO to exclude Tata Elexis Limited (Seg), E-Infochips Ltd, Larsen and Tourbo Infotech Limited, Infosys Ltd, Persistent Systems Limited, Infobeans Technologies Limited and Thirdware Solutions Limited from the set of comparables. 9. As far as, the exclusion of R S Software (India) Limited ("R S Software") from the set of comparables is concerned, the Ld. AR contended that R S Software is functionally dissimilar and should be excluded from the set of comparables. The Ld. AR further submitted that R S Software is engaged in activities other than SDS. In support of their submission, the Ld. AR invited our attention to para No.11 of page No.4253 of the Paper Book related to intangible assets forming part of financial statements of R S Software and submitted that, R S Software hold intangibles and is involved in Research and Development, thereby not functionally comparable with a routine SDS Provider like assessee. 9.1 Ld. AR further invited our attention to Annual Statement wherein the company has mentioned line of business in which the company is engaged and submitted that R S Software is engaged in activities vastly different from that of the assessee. It was also submitted that....
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....nnual report cannot be the conclusive evidence of actual functional dissimilarity. It was emphasized that unless it is demonstrated that the company has undertaken such diversified activity during the relevant financial year and unless revenue has been generated from such non SDS activity, the company cannot be said to be functionally different. The Ld. DR further submitted that the entire revenue during the relevant financial year has been derived by R S Software from SDS got fortified from the fact that no such segmental information is available in their financial statements. Accordingly, the Ld. DR reiterated that R S Software is engaged in SDS only and functionally similar to the assessee. Further, as regards the possession of intangibles, the Ld. DR submitted that the intangibles are held by R S Software for internal use and for regular business functions. Further, R S Software has not earned any revenue which is attributed to licensing or commercial exploitation of such intangibles. The Ld. DR also submitted that the assessee has not demonstrated how the existence of these intangibles will affect the profit margin of R S Software in a manner that would render it not comparabl....
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....es beyond mere captive software development. Specific reference was made to the 4th bullet point on page no. 4028 of the paper book forming part of Annual Report of Mindtree, which highlights the company's multi-segment specialization. Further, the para no. 1 of the Notes to Accounts placed at page no. 4046 of the paper book reveal that Mindtree operates in divergent high-end segments such as analytics and information management, business technology consulting etc. It was also submitted that the Profit & Loss account placed at page no. 4044 of the paper book and the segmental information placed at page nos. 4062 and 4063 of the paper book do not provide sufficient clarity to isolate a segment comparable to the assessee. In view of these material functional differences and lack of reliable segmental data, Ld. AR urged for exclusion of Mindtree from the final list of comparable companies. 10.1 Per contra, the Ld. DR objected to the submissions of the Ld. AR regarding exclusion of Mindtree from the set of comparables. The Ld. DR submitted that Mindtree Limited is primarily engaged in SDS, and therefore functionally comparable to the assessee. In support of this submission....
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....n of Akshya Software Technologies Limited ("Akshya Software") is concerned the Ld. AR invited our attention to para No.7 of the decision of this Tribunal in the case of M/s. Wave Crest Payment Technology Pvt. Ltd. Vs. DCIT (supra) and submitted that this Tribunal has considered Akshya Software as a good comparable. Accordingly, the Ld. AR prayed before the Bench to include Akshya Software in the set of comparables in the case of the assessee also. 11.1 Per contra, the Ld. DR relied on the order of Ld. AO / TPO. 11.2 We have heard the rival contentions and also gone through the record in light of submissions made by either side. We have gone through para No.7 of M/s. Wave Crest Payment Technology Pvt. Ltd. Vs. DCIT (supra) which is to the following effect : "7. We have considered the rival submissions as well as the relevant material on record. So far as the functional comparability of Akshay Software Technologies Limited is concerned, we note that company is engaged in providing Software Development Services and the nature of Services provided by this company is not disputed either by the TPO or by the DRP. However, the TPO and DRP have rejected this comp....
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.... include the comparable in the final list for determination of ALP. The Tribunal has noted the fact that there is no difference in the business model adopted by this company that of assessee merely because certain expenditure were incurred in respect of foreign branch which are not categorized onsite Development of Software. Further, when the TPO did not apply onsite filter while selecting the comparable then applying the said filter for this company is not justified. Accordingly following the decision of the Bangalore Benches of the Tribunal in the case of M/s ARM Embedded Technologies Pvt. Ltd., vs. Income Tax Officer (supra) we direct the TPO to include this company in the set of comaprables for determination of ALP." 11.3 On perusal of the above, we found that this Tribunal has held that Akshya Software is a good comparable to M/s. Wave Crest Payment Technology Pvt. Ltd. We have already held that M/s. Wave Crest Payment Technology Pvt. Ltd. is comparable to the assessee. Accordingly, the decision of this Tribunal in the case of M/s. Wave Crest Payment Technology Pvt. Ltd. Vs. DCIT (supra) is applicable to the case of the assessee. Therefore, respectfully fo....
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....ble as it has engaged in software testing and integral part of software development. The DRP erred in upholding the exclusion of the company on the ground that it incurred R&D exp of 6% of turnover, when no filter was applied by the TPO to exclude companies incurring R&D expenses. The company was included as comparable in IT(TP)A No.3374/Bang/2018 the decision of co-ordinate Bench in the case of EMC Software and Services Pvt. Ltd. Vs. JCIT (supra) at para 7(iii) page 595 of Paper Book as under : "7 (iii) Maveric Systems Limited : This comparable was rejected by the TPO and it was sought for inclusion by the assessee and whereas TPO has rejected without any basis and was excluded on the ground that the company was engaged in R & D activity and expenditure is 6% of total turnover. Similarly, the DRP has upheld the exclusion of the company. The learned Authorised Representative submitted that company's functional profile is comparable and applied the TPO filters. Whereas the DRP has observed that the company has 37 ITA No. 233/H/2018 A.Y. 2014-15 incurred substantial expenses to the tune of 6% of turnover towards R & D and the tolerable limit is 3%. We found the observati....
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....see . Accordingly, the findings of this Tribunal in the case of M/s. Wave Crest Payment Technology Pvt. Ltd. Vs. DCIT (supra) can be squarely applied to the assessee. Therefore, respectfully, following the decision of this Tribunal in the case of M/s. Wave Crest Payment Technology Pvt. Ltd. Vs. DCIT (supra), we hold that Maveric Systems is not comparable to the assessee. Accordingly, we reject the request of the assessee for inclusion of Maveric Sytems in the set of comparables. 13. As far as the request of the assessee for inclusion of Sankhya Infotech Limited ("Sankhya Infotech") is concerned, we found that Sankhya Infotech has R&D expenditure of 5.9% of the turnover. We have already held that due to R&D expenditure of 6% of turnover, Maveric Systems is not comparable to the assessee. On the basis of our discussion and reasoning given for the rejection of Maveric Systems, we hold that Sankhya Infotech is not comparable to the assessee due to it's R&D expenditure of 5.9 % of turnover. Accordingly, the request of the assessee for inclusion of Sankya Infotech in the list of comparable is rejected. 14. As far as inclusion of Sagar Soft India Limited ("Sagar Soft") as ....
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....above, we found that, Sagar Soft has operating profit of Rs.68,43,033/- in F.Y. 2011-12 which is falling within the bracket of three years which has been considered for analysis. We have also gone through para nos. 8 & 9 of the decision of the coordinate bench of Tribunal in the case of KABACE Technologies Pvt. Ltd Vs. DCIT (supra), which is to the following effect : "8. As far as inclusion of 3 companies which was argued before us by the ld. counsel for the assessee, the first company which the assessee seeks for inclusion is Sagarsoft (I) Ltd. This company was rejected by the TPO by applying the RPT filter which was not accepted by the DRP. The DRP directed the TPO to consider the comparability of this company afresh. The TPO while giving effect to the order of DRP, chose to reject this company as a comparable by pointing out that this company fails the persistent loss filter. It was the submission of the ld. counsel for the assessee that that in the light of decision of ITAT Pune Bench in the case of Yezaki (I) Pvt. Ltd., ITA No.621/PUN/2014 AY 2009-10, order dated 11.17.2019, the persistent loss filter can be applied only if there is a loss in 3 successive assessment y....
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....e computed on the basis of average of opening and closing balances as available from the annual reports of comparables, which is consistent with settled principles laid down in multiple judicial precedents. Finally, the Ld. AR prayed before the Bench that, in order to bring parity in comparison, a working capital adjustment should be granted. 15.1 Per contra, the Ld. DR submitted that the assessee has not furnished the necessary data or workings in support of its claim for working capital adjustment. Specifically, the assessee has not demonstrated whether the comparable companies have met their working capital requirements through borrowed funds or internal sources. The assessee has also failed to establish whether the comparable companies have incurred any actual cost on working capital deployment or the impact of such financing on their profit margins. Therefore, in the absence of any such supporting material, the assessee's request for working capital adjustment is required to be rejected. 15.2 We have considered the rival contentions and perused the material available on record in view of the submissions made by either side. The Ld. AR has submitted that the Ld. TPO denie....
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....serted to Section 92B of the Act by the Finance Act, 2012, with retrospective effect from 01.04.2002. The said Explanation clarifies that international transactions shall include capital financing, including receivables, loans, and any other debt arising during the course of business. 16.2 We have considered the rival contentions and perused the material available on record in view of the submissions made by either side. In light of the settled legal position, including the statutory amendment to Section 92B of the Act, we are unable to accept the contention of the Ld. AR that no separate benchmarking is required for outstanding receivables. Accordingly, we hold that the interest on trade receivables constitutes a separate international transaction requiring independent benchmarking, and thus, the assessee's ground on this issue is liable to be rejected. 17. Ground no.11 of the assessee is related to allowability of credit period and applicability of rate of interest for the purpose of benchmarking of interest on trade receivables. 17.1 As far as the applicability of rate of interest for benchmarking of trade receivable is concerned, the Ld. AR submitted that, the Ld. TPO ....
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....diary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assesse has charged interest at 6 per cent which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumsta....
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.... in the year 2002-03 when the loans were granted to the AE. This was the financial year of the international transaction. Payment of interest is also an international transaction but would have reference to the year in which the loan was granted in case of a long term loan. However, in such situations, question may arise whether the case would fall under the second exception mentioned in the case of E.K.L. Appliances (supra), when an AE has the right to recall and ask for repayment of loan. These aspects have not been considered and applied by the TPO, DRP and the Assessing Officer. Neither has this ground been argued before us on behalf the Revenue. We, therefore, would not proceed to examine the said aspect and leave the question open. Similarly, we have not expressed any opinion on the issue or question of "thin capitalization" which does not arise for consideration in the present case. 37. We observe that whatever the Revenue argues and submits in the case of outbound loans or for that matter what we have observed would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs. The parameters cannot be different for outbound and inbound loans. ....
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....rower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by ....
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....place of the AE should be applied. The Hon'ble High Court has held that the interest rate should be the market determined rate applied to the currency concerned in which the loan has to be repaid. The interest rate should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of resident of either party. Once the loan or credit is given in foreign currency and also to be repaid in same currency, the interest applicable to loan granted and to be returned in Indian rupee would not be the relevant comparable. The Hon'ble High Court has held that the PLR rate would not be applicable and should not be applied for determining the interest rate in such cases where loan to be repaid in foreign currency. This issue was again considered by the Hon'ble Bombay High Court in the case of CIT vs. Tata Autocomp Systems Ltd reported in (2015) 56 Taxmann.com 206 (Bom.) and the Hon'ble Bombay High Court has upheld the decision of the Tribunal directing the Assessing Officer to benchmark the interest at the prevailing EURIBOR rate instead of rupee loan rate to be computed at Arms' Length on the loan advanced to the AE. The relevant ....
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....s point is not fully correct. We have noted above that the TPO worked out the transfer pricing adjustment by considering the loans advanced by the assessee to both of its AEs, including Symphoni Interactive LLC, USA. Be that as it may, it is seen that the ld. CIT(A) also impliedly accepted the interest earned by the assessee from Symphoni Interactive LLC, USA, at 6% as at ALP, against which the Department has no grudge as the assail is only to the application of EURIBOR of 4.42%, which relates to the loan advanced by the assessee to Mascot GmbH, Germany. As such, we are confining ourselves only to international transaction of receipt of interest from Mascot GmbH, Germany. As against the assessee charging interest at the rate of 1.50% from Mascot GmbH, Germany, the TPO determined the arm's length rate of interest at 14%, which the ld. CIT(A) reduced to 4.42% by treating it as the average EURIBOR rate for the year under consideration. 5. There are two facets of the dispute raised by the Revenue on this issue. The first is that the rate of interest should be considered with reference to the prime lending rate prevalent in India and the second is that the reduction in rate....
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....the ld. CIT(A) considered EURIBOR as a comparable uncontrolled transaction for the purpose of benchmarking the rate of interest charged by the assessee. 8. At this juncture, we consider it expedient to clarify that EURIBOR (Euro Inter-bank Offered Rate) is not a rate of interest, in itself, at which loans are advanced by banks in Euros to borrowers. EURIBOR is a reference rate which is calculated from the average interest rate at which Euro Zone Banks offer lending on inter-bank market. While calculating EURIBOR, 15% of the lowest and 15% of the highest interest rates collected by a panel of European banks are eliminated and the remaining 70% form the basis for its calculation. In such circumstances, EURIBOR, being, not an average rate at which the loans are advanced by European banks to borrowers, cannot per se be characterized as a comparable uncontrolled rate of interest at which loans are advanced in Germany. 9. On lines of EURIBOR, there is LIBOR (London Inter-bank Offered Rate), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international ....