TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1994
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....ossly erred in - 1. General Ground for TP adjustments By not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ('Rules') and modifying / undertaking fresh analysis while determining the arm's length price and in doing so making an adjustment of INR 6,86,82,703 to the international transactions. Grounds 2 to Ground 7 - Adjustment of INR 6,07,17,520 pertains to international transaction of provision of software development services 2. Ground against use of additional/modified filters Inter-alia use of the following additional/ modified filters in undertaking the comparative analysis and rejecting comparable companies: a) Different financial year end filter; b) Related party transaction filter; c) Export services income filter; and d) Employee cost filter. 3. Ground against selection of uncomparable companies Not undertaking an objective comparative analysis and inter- alia selecting the following companies as comparable which are functionally not comparable to the Appellant: ....
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....into account the impact of outstanding receivables of the controlled transactions vis-a-vis the uncontrolled transactions in determining the arm's length margin and no separate benchmarking is required; d) Not appreciating the facts and circumstances surrounding the receivables and re-characterising the outstanding receivables as unsecured loans advanced to AEs; e) Not following any statutorily prescribed method and without doing any comparability benchmarking as prescribed under Chapter X of the Act. Without prejudice to the above f) Considering SBI short-term deposit rates for imputing notional interest instead of LIBOR; and g) Considering ad-hoc credit period of 30 days instead of the industry average credit period 9. Ground on erroneous initiation of penalty under section 271BA and 271AA of the Act Ld. AO was not justified and rather grossly erred in law and in facts by initiating penalty proceedings under section 271BA and 271AA of the Act by falsely stating that the Assessee has not reported transaction of receivables in TP report and Form 3CEB. 3. The facts of the case are that, the assessee is a company e....
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....n of Infosys, Persistent and Tata Elxsi are concerned, the Ld. AR submitted that, these comparables have already been excluded by this Tribunal in assessee's own case for A.Y. 2015-16 in ITA no.1801/Hyd/2019 dated 06.03.2025 based on detailed functional analysis. It was further submitted that, the functional profile of the assessee as well as profiles of Infosys, Persistent and Tata Elxsi have remain unchanged in A.Y. 2017-18. Accordingly, the Ld. AR prayed before the bench to exclude these 3 comparables form the set of comparables. 6.2 Per contra, the Ld. DR submitted that, the principle of res judicata is not applicable to the income tax proceedings, and therefore, the findings of earlier year cannot automatically binding on the revenue authorities for subsequent year. It was further submitted that, each assessment year is independent and exclusion of comparables must be examined afresh in each year based on prevailing facts. Accordingly, the Ld. DR supported the action of Ld. AO/TPO in retaining these 3 comparables. 6.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through the order of....
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....cts services and technology innovation. Further there is no segmental details in financials and annual report to compare this software development services segment to the appellant-company. Further the company has spent significant amount towards R and D and also acquired significant rights in the nature of intangible assets. From the details submitted by the assessee-company, we find that Persistent Systems Limited is engaged in diversified activities, whereas, the assessee company engaged in providing software development services to it's AE on cost plus mark-up basis as a captive service provider and, therefore, in our considered view, Persistent Systems Limited cannot be compared with the appellant company. At this stage we take support from the decision of ITAT Hyderabad Bench in assessee's own case for the assessment year 2010-2011 in ITA. No. 222/Hyd/2015 and ITA.No.334/Hyd/2015 order dated 29.11.2018 wherein the Tribunal has directed the Assessing Officer/TPO to exclude Persistent Systems Limited from the list of comparables on functional dissimilarities. Therefore, we direct the learned Assessing Officer/TPO to exclude Persistent Systems Limited from the list of comparable....
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....rial to demonstrate any change in facts or law. Therefore, we are inclined to follow the decision of this Tribunal following the consistency and judicial discipline. Further, as far as the submission of Ld. DR with regard to non-applicability of res judicata in income tax proceedings is concerned, in the absence of any change in facts or law, a consistent view should be taken on the same issue in subsequent year. Our view has been endorsed by the Hon'ble Supreme Court in the case of Radhasoami Satsang Vs. CIT (1992) 193 ITR 321 (SC). In view of the above discussion, we accept the contention of the Ld. AR and direct the Ld. AO/TPO to exclude Infosys, Persistent and Tata Elxsi from the final set of comparables. 7. With regard to exclusion of E-Infochips, Wipro, Nihilent and Infobeans, the Ld. AR vehemently objected to the inclusion of the same as comparables by Ld. AO / TPO. It was submitted that the assessee is a captive service provider engaged in low-end SDS such as coding and testing, strictly in accordance with the specifications and control of its AEs. The assessee assumes limited risks, has no intangible assets, does not develop software products or undertake independen....
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....k, the Ld. AR demonstrated that the company has incurred payments to subcontractors for technical assistance. At page no. 1711 of the paper book, he submitted that the company has earned revenue from technical know-how, and at page no.1710 of the paper book, he pointed to inventory of finished goods like printed circuit boards, all of which indicate product-based operations. 8.6 Finally, the Ld. AR highlighted the absence of segmental data in the segment report at page no.1688 of the paper book, and argued that in the absence of segmental bifurcation between embedded R&D, technical knowhow, and product sales, e-infochips cannot be reliably used as a comparable. Accordingly, it was prayed that the said company be excluded. 9. The Ld. AR sought exclusion of Wipro Limited, submitting that the said company is a full-fledged risk-bearing entity, engaged in diversified operations well beyond the scope of the assessee's functions. To substantiate his argument, the Ld. AR brought to our attention to page no.1873, under the Business Overview section of Wipro's annual report, where the company has disclosed that it's IT services business provides: "A range of IT and IT-enabled....
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....es." At page no.2620 of the paper book, under "Background", it is mentioned that the company is engaged in "Rendering software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services." At page no.2644 of the paper book, the financials show that the entire revenue is from information technology consultancy, thus affirming that consultancy and business advisory services form the core of its operations. 10.1 Finally, the Ld. AR argued that these services involve a higher level of expertise, market-facing roles, strategic advisory functions, and business model transformation, which are not comparable to the back-end software development work done by the assessee. It was emphasized that a functional mismatch exists and hence Nihilent should be excluded. 11. Seeking exclusion of Infobeans, the Ld. AR pointed out that the said company is functionally different and operates in diversified domains involving high-end software engineering and data analytics services. In support of this contention, the Ld. AR invited our attention to page no. 1165 of the paper book, where under the heading "Business Perfo....
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....we have gone through the page nos. 41 of the order of Ld. TPO, 67 of the order of Ld. DRP, 1499, 1510, 1522, 1688, 1706 to 1711 of the paper book. On perusal of same, we found that, e-infochips is engaged in embedded system development, technical consultancy, and product engineering for specialized industries, including aerospace, defence, and healthcare. The company has earned revenue from sale of products, incurred cost of materials, carried inventories, paid subcontractors, and derived income from technical know-how. These findings in our view, are inconsistent with a low-risk SDS provider. Moreover, as pointed out by the Ld. AR, the segmental reporting does not provide a clean demarcation of revenue and costs from embedded systems, product sales, or technical services. In absence of reliable segment data, we are unable to accept e-infochips as a suitable comparable. Accordingly, we find merit in the contention of the Ld. AR and hold that e-infochips is functionally dissimilar and unsuitable as a comparable for benchmarking the international transaction. 15. As far as exclusion of Wipro is concerned, we have gone through the specific pages of the annual report of Wipro as ref....
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....ry-driven, and functionally distinct. On perusal of these disclosures, we are of the considered opinion that Nihilent is functionally not comparable to the assessee. The company is engaged in IT and business consulting services, which require strategic and domain-level expertise and command higher margins, unlike the routine back- end software development and coding services provided by the assessee to its AE. Accordingly, we are satisfied that Nihilent is functionally not comparable with the assessee and direct the Ld. AO / TPO to exclude Nihilent from the list of comparables. 17. As far as exclusion of Infobeans is concerned, we have examined the nature of operations of Infobeans based on the documents referred by the Ld. AR i.e. at page no.1165 of the paper book, the company states that it specialises in enterprise software development across platforms, technology and devices, at page no. 1191 of the paper book, the company discloses that it provides custom-developed software, including content management systems, enterprise mobility, and big data analytics. Further, the company's business model involves end-to-end solution architecture, client-specific innovation, and delive....
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....ision of Ld.AO/TPO. 18.4 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. As far as issue with regard to application of the appropriate interest rate on trade receivables from foreign AEs is concerned, we find that an identical issue has been dealt 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....
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....Court in the case of CIT vs. Cotton Naturals (I) Private Ltd, reported in 276 CTR 445 (Del.) and the Hon'ble Delhi High Court has held in para 35 to 40 as under: "35. The LIBOR rate plus markup or the interest rate prevailing in the United States at that time, i.e. 2003 have not been examined and are not the basis on which the TPO made 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 compara....
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.... for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined 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....
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...., there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed 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 appl....
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....reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). 8. In view of the above we see no reason to entertain the present appeal 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 ....
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....49/374 ITR 516 has held that the ALP in case of loan advanced to AEs should be determined on the basis of rate of interest charged in the country where loan is received. The Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 has also held that the currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. rate of interest. The Hon'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 assess....
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....this issue, we would like to clarify that the ld. CIT(A) has considered 4.42% as EURIBOR applicable for the assessment year under consideration by relying on an order of the Tribunal, in which the average LIBOR was considered at this level. Equality of LIBOR and EURIBOR could not be substantiated from any material on record. In the given circumstances, we set aside the impugned order and remit the matter to the file of the AO for considering EURIBOR +2% as arm'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 com....