TaxTMI 
TaxTMI 
2025 (11) TMI 1250
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee on 31st of March 2021 declaring total income of Rs. 9,970,661,310 is assessed at Rs. 11,716,843,086. 02. The assessee is aggrieved with the same and is in appeal before us. The assessee is not pressing, ground No. [1] which is general, by ground No. [2] is contesting that the final assessment order passed is barred by limitation, general ground on transfer pricing adjustment of distribution segment as per ground No. 3 and other grounds on the transfer pricing adjustment related to the filters. The ground No. 5 is against the initiation of penalty proceedings which is premature. Accordingly, all these grounds are dismissed. 03. This leaves with the only two issues involved in this appeal (1) with respect to the adjustment made on the distribution segment, (2) the transfer pricing adjustment on interest on overdue outstanding receivable of Rs. 4,11,95,410/-. 04. Brief facts of the case shows that that the assessee company was incorporated on 14 March 1996 engaged in the distribution of software products of its associated enterprises. Assessee company is engaged in the business to sell, license, install and provide maintenance, consultancy, hosted cloud, and training ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ated to be at arm's-length. 05. The learned Transfer Pricing Officer (TPO) computed the Profit Level Indicator (PLI) of the assessee and determined it to be 6.18% for the distribution activity and 83.88% for the consultancy activity. Upon examining the software and services distribution segment, the TPO rejected the assessee's transfer pricing study report on the grounds that the Transfer Pricing Study Report (TPSR) failed to meet the filters adopted by the assessee and relied on data available only as of 1 April 2020. Consequently, the TPO conducted a fresh search and initially examined eight comparable companies, which were subsequently rejected for not meeting the metrics applied by the TPO Using revised filters, the TPO conducted a search on the Prowess database on 29 May 2023 and identified 12 comparable companies. The margins of these companies ranged from the 35th percentile at 8.37% to the 65th percentile at 16.09%, with a median margin of 10.13%. After inviting objections from the assessee, the TPO finalized a set of 11 comparable companies, with the 35th percentile margin at 9.02%, the 65th percentile margin at 16.09%, and the median margin at 11.08%. Based on this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ick Heal technologies Ltd and Tally solutions private limited and some other comparable from the comparability analysis. He submits that unjustifiable the working capital adjustments is denied to the assessee. With respect to the claim of the interest on outstanding receivables, the learned authorised representative has stated that receivables should be net of against the payables from its associated enterprises and the net amount should be subjected to the determination of ALP. It was stated that this proposition has been accepted in assessee's own case in ITA No. 874 and 875/Bangalore/2022 for assessment year 2017 - 18 and 2018 - 19. Therefore, it is submitted that that interest on outstanding receivables should be adjusted 1st against the outstanding payable and then only the working of overdue receivable should be made. 12. The learned CIT DR vehemently supported the orders of the learned lower authorities and submitted that the exclusion of Designtech systems private limited, Quick heal technologies Ltd and Tally solutions private limited has been dealt with by the learned TPO as well as the learned DRP. Further if the margins taken by the learned TPO of Compucom softwa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of 11.08% and computed the adjustment of Rs. 1,813,813,200/-. 16. The functions performed by the SAP India Ltd in the distribution segment is that in terms of its software distribution agreement entered into with SAP SE, assessee markets a range of SAP products and provides support services to independent customers in India. The support services provided on SAP products include maintenance services for the products licensed, which includes information on updates, 24- hour online customer support services. Assessee obtained a nonexclusive license to use, market and sublicense the software products in India. It also pays royalty to the parent for these sublicensing of software and maintenance services provided to the end-user, to compensate it for the right to sublicense and use of the intellectual property in the software developed by parent. Assessee has been granted permission by the Secretariat for Industrial Assistance, government of India, permitting payment of royalty for software licensing and maintenance revenue to AE. Assessee performs the sales activity of customer lead identification and developing probable client contact for sale of products in India. It enters into ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by developing training module specific to domain and business areas and conducts training on products to both the working professionals and graduating college students. The training programs are conducted with an objective of creating resources to cater to industry requirement of the product. The training is imparted by experienced practising SAP consultants with Fortune and SIP certified instructors, having in-depth knowledge, project implementation experience and a proficient teaching skill. Assessee also partners with various educational institutes who cater to the needs of industrial standards offers a varied level of courses. It has also different kind of module of training for the same. Thus, the functions performed by the assessee of distribution of SAP products in India is presale activity, marketing and advertisement, pricing, product customisation, replication of SAT software, quality control, sales and distribution, maintenance services, consultancy services and training services. This is extracted from paragraph No. 6.2.2 of the transfer pricing study report. This shows that the assessee is not a simple distributor but provides the host of activity which enables the sal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and hardware technology and to carry on business of consultancy and training in relation to software and hardware and the technology in respect thereof. Its income stream is revenue from sale of products and revenue from sale of services. The website extract is provided to show us that it is engaged in integrating augmented and mixed reality in their processes. We find that the functions performed by the assessee are more complex and therefore this company functionally it is comparable. Further the sale of products and sale of services are two segments of the assessee as it also provides to training similarly the comparable company has also sale of products and sale of services. The description of the business also shows it near to the distributor in relation to the software and hardware technology. Therefore, we do not find any infirmity in the order of the learned TPO or the learned dispute resolution panel in including the above company in the comparability analysis. Thus, this comparable is rightly included. 22. The second comparable that is requested for exclusion is daffodil software private limited. The claim of the learned authorised representative is that the above comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that because of the brand value or intangibles unless the impact the profit margin could not be the reason to exclude a comparable. 29. The learned dispute resolution panel also held that security software products sold are 99.64% of the total operating revenue and further the company is engaged in the business of providing security software products therefore it is functionally comparable to the assessee. 30. Before us, the assessee has stated that the company is engaged into providing diverse services apart from distribution of software products and is also engaged in carrying out software development, research and development and other software support activities. The assessee also stated that research and development expenditure made by the company were around 19% of the total revenue and that research and development team is also approximately of 340 people. It was further stated that this company is also engaged in providing training and running educational institutes. It was further stated that it owns a significant intellectual property right and therefore the same company cannot be held to be comparable. 31. We have considered the submission of the assessee and lo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arned TPO is directed to exclude the same. 35. Another company which is requested for exclusion is Tally solutions private limited wherein the assessee has challenged it to be functionally dissimilar, diversified business activity and in absence of segmental information availability this requires to be excluded. 36. The learned transfer pricing officer considered all these explanations and found that company is into packaged software which is for the purpose of trading thus this company is functionally like the assessee company. We find that Tally solutions private limited has its own product for sale and therefore it is not merely a distributor and therefore it is required to be excluded as a functionally dissimilar company. The learned TPO is directed to exclude the same. 37. The assessee has also requested for inclusion of Sonata information technology Ltd, Ducon Infra technologies Ltd, Apporva IT solution private limited, Redington India Ltd. The claim of the assessee is that these companies are functionally like the functions performed by the assessee and therefore they should be included. 38. We have carefully considered the rival contention we find that at paragr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nding receivable for determination of the arm's-length price independently. It is further stated that assessee is a debt free company during the year and does not pay any interest to the associated enterprises in relation to outstanding payable from its associated enterprises. Assessee also do not charge any interest from third-party customers on the overdue receivable. The assessee's only arguments are to consider the receivable after net of against the payable from its associated enterprises and only the net amount should be subject to determination of arm's-length price so far as the international transaction of overdue outstanding receivable is concerned. For this proposition, the assessee has relied upon the decision of the coordinate bench in assessee's own case for assessment year 2017 - 18 and 2018 - 19. Indeed, in assessee's own case for assessment year 2017 - 18 and 2018 - 19 identical issues arose as per ground No. 2 in ITA No. 875/Bengaluru/2022 for assessment year 2018 - 19. This ground has been dealt with at paragraph No. nine of the order of the coordinate bench at page No. 11. In paragraph No. 13 the coordinate bench has held that "however, in th....