TaxTMI 
TaxTMI 
2026 (6) TMI 354
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....d. TPO")/ Hon'ble Dispute Resolution Panel ('Hon'ble DRP') grossly erred in - General 1 - 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 7,14,74,670 to the international transactions. Grounds 2 to Ground 8 - Adjustment of INR 7,14,74,670 pertains to international transaction of provision of software development services Ground 2 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) Export services income filter c) Employee cost filter d) Functionality Filter e) Service Income Filter f) One Sided Turnover filter g) Persistent Loss filter, and h) Related party transaction filter Ground 3 against selection o....
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.... of the case. b) Not appreciating that the receivables are consequential/closely linked to the principal transaction of provision of services and hence have been aggregated for determination of ALP under TNMM c). Not appreciating the fact that the working capital adjustments undertaken take into account the impact of outstanding receivables of the controlled transactions vis-à-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-characterizing 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. f) No interest burden on the Assessee, being a debt free company g) All service-related costs are embedded in the remuneration received from the AEs. h) No custom to charge interest in the industry of the Assessee. Without prejudice to the above i) Considering SBI short-term deposit rates for imputing notion....
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....der, the assessee filed objections before the Learned Dispute Resolution Panel ("Ld. DRP"). The Ld. DRP issued directions under section 144C(5) of the Act on 22.05.2024 and thereafter the Ld. TPO passed order giving effect to the directions of the Ld. DRP on 12.06.2024. After passing of the order by the Ld. TPO giving effect to the directions of the Ld. DRP, the Ld. AO passed final assessment order under section 143(3) r.w.s. 144C(13) and 144B of the Act on 14.06.2024 making adjustment of Rs. 7,14,74,670/- on account of SDS and Rs. 26,99,532/- on account of interest on trade receivables, thereby assessing the total income of the assessee at Rs. 45, 13,73,632/ -. 5. Aggrieved by the final assessment order of the Ld. AO, the assessee is in appeal before this Tribunal. At the outset, the Learned Authorized Representative ("Ld. AR") submitted that the assessee is not pressing Ground Nos.1, 5, 7, 8, 10, 11 and 12 raised in the appeal. With regard to Ground No.2, the Ld. AR submitted that the assessee is pressing only the issue relating to adoption of different financial year filter by the Ld. TPO with regard to exclusion of R Systems International Limited from the list of comparables....
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....before us. At the outset, since the assessee has not pressed Ground Nos. 1, 5, 7, 8, 10, 11 and 12, the same are dismissed as not pressed. 9. As far as the argument of the Ld. DR that the working mechanism provided under Rule 10CA neutralizes the impact of selection of high turnover comparables is concerned, we are unable to accept the same. Rule 10CA merely provides a mechanism for determination of Arm's Length Price based upon arithmetic computation and percentile range of profit margins. The said Rule cannot be interpreted to mean that functional dissimilarities or impact arising on account of exceptionally high turnover companies automatically stands neutralized merely because the comparables fall within the prescribed percentile range. Therefore, in our considered opinion, the contention of the Revenue on this issue is devoid of merit. 10. As regards exclusion of Nihilent Technologies Limited, Tata Elxsi Limited, Infosys Limited and Wipro Limited, we have gone through the relevant portion of the order of this Tribunal in assessee's own case in IT(TP)A No.73/Hyd/2022 for Assessment Year 2017-18 dated 16.07.2025, which is to the following effect: Tata Elxs....
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....cost plus mark-up basis in respect of one vertical of software development i.e., gaming solutions, whereas, the Persistent Systems Limited is engaged in providing IP and product business and also development of software products 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 Asse....
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....is. Further, the Ld. AR has pointed out that, there is no difference in functionality of the assessee and the comparables between the A.Y. 2015-16 and the assessment year under consideration i.e. 2017-18. The Ld. DR has also not brought on record any material 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. Wipro Limited : 15. As far as exclusion of Wipro is concerned, we have gone through the specific pages of the annual report of Wipro as referred to by the Ld. AR. On perusal of the same, we find consider....
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...., 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. 11. On perusal of the above, we found that this Tribunal has excluded Nihilent Technologies Limited, Tata Elxsi Limited, Infosys Limited and Wipro Limited from the final set of comparables in assessee's own case. The Revenue has not disputed the contention of the assessee that the agreement entered into by the assessee with its AEs and the business model of the assessee during the year under consideration remain identical to Assessment Year 2017-18. Further, the Ld. DR has also not brought on record any material to demonstrate any change in functionality of these comparables vis-à-vis the assessee durin....
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....s and fall within the umbrella IT services, as per NASSCOM. As per the annual report information for the year ended 31.03.2020, the main object of the Assessee company is to carry on the business of designing software development, software maintenance and support services the areas of computer networks, computer software and hardware, data communication equipment, electronic equipment, radio and wireless communication product and equipment wireless telecommunication equipment of every description. Thus, the activities of L&T are functionally comparable to the Assessee company, as evident from the nature of services rendered by it. Therefore, the plea that this company performs different functions has no basis. The nature of activity performed by this company is given at page 83 of the annual report, as under: "Larsen & Toubro infotech Limited ('Company') together with its subsidiaries shall mean Larsen and Toubro infotech Limited ("Group'). The Group offers extensive range of IT services like application development, maintenance and outsourcing, enterprise solutions, infrastructure management services, testing, digital solutions, and platform-based solutions to....
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....lgamation has not impacted in increasing the profitability of the transferee company. Besides, it is also seen that the company has not reported amalgamation as a significant factor affecting its revenue growth or profitability. In view of these, we reject the plea that this company has to be excluded on account of amalgamation. 2.5.6.6 The Assessee has also argued that this company derives a significant amount of revenue from its onsite activities as well as incurring onsite branch office expenses. Although the Assessee has argued for the exclusion of the company also on this ground but, has not given any reasons or justification as to how this affect comparability. 2.5.6.7 At the outset, we note that in many cases, the expenditure incurred in foreign currency has been assumed to represent onsite expenses which are totally incorrect. All expenses incurred in foreign currency cannot be assumed to relate to expenditure incurred for onsite activity. There will be many situations, that for the offshore activity, the enterprise may have to incur expenses in foreign currency, such as towards commission payment, consultancy payment, travel expenses etc., Therefore, the ....
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....R&D and hence not to be taken as comparable. However, perusal of the information in the annual report shows that there is an expenditure of Rs. 302 million as against total revenue of Rs. 69, 064 million which comes to 0.43% of total revenue. This percentage of expenditure is below the threshold limit of 3% adopted in case of R&D expenditure. There is no indication in the annual report to show that the R&D had resulted in any distinct product development giving rise to source of separate revenue stream. The information on technology absorption on which the Assessee has relied on states that R&D activities are integrated with software development process with objective of ensuring efficiency and quality. Therefore, they are to be taken as routine activities in enhancing the quality of delivery of services. In view of the above these pleas are rejected. 2.5.6.10 The plea of the turnover range will not affect the comparability as discussed in paras 2.4.3.1 & 2.4.12.1 to 2.4.12.12 above. 2.5.6.11 In view of the above, we uphold the selection of this comparable." 20. At the threshold, we may herein observe that LTI is engaged in diversified activities, wherein....
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....been considered as a comparable for benchmarking the transactions of software development segment in the case before them for the reason that it was functionally dissimilar, and also that no segmental information etc. of its software development segment was available. We find that the ITAT, Bangalore in the case of AMD India Private Limited vs. ACIT, IT(TP)A. No. 775/Bang/2022, while disposing of the case of the assessee before them for AY 2018-19, had held that the aforementioned company could not be selected for benchmarking the transactions in the software development segment for the reason that the same was functionally dissimilar and was involved in diversified activities. For the sake of clarity, the observations of the Tribunal wherein it had held that the LTI could not be selected as a comparable for benchmarking the transactions of software development services are culled out as under: "15. The Id. AR submitted that this company is functionally different as it is engaged in diversified business activities like infrastructure management services, digital consultation, data and analytics and is not a pure software development company. The services are provided under....
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....arables by the TPO for benchmarking the transactions of providing software development services by the assessee company to its AE. Before proceeding further, we deem it apposite to cull out the observations of the DRP, which had upheld the inclusion of Tata Elxsi Ltd. in the final list of comparables by the TPO, as under: "2.5.10.1 Having considered the submissions, on perusal of the annual report of this company, the operations of the company are into Design and Development of Computer Hardware and Software as its principal business activity. On further perusal of the Annual report (page no. 79) of the company, the Panel has noticed that the company provides product design and engineering services to the consumer electronics, communications & transportation industries and systems integration and support services for enterprise customers. The software development of the company provides design and engineering services to the consumer electronics, communications and transportation industries. The principal business activity of the company as per the Form MGT-9 (page 40 of the annual report) is design and development of computer hardware and software which contributes 97.08%....
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....above, the company is involved in diversified activities is not acceptable. 2.5.10.3 The plea of the turnover range will not affect the comparability as discussed in paras 2.4.3.1 & 2.4.12.1 to 2.4.12.12 above. 2.5.10.4 With regard to the plea that the company has significant intangibles, we note that the value of intangibles assets shown in the balance sheet (Note 3. (ii) -Page 74) represent the computer software. The value of intangible assets as on 31-3-2020 was only Rs. 3462.77/- lakhs (page no 90 of AR) as against total revenue of Rs. 1,60,986.04 lakhs constituting 2.15% of total revenue. There is no reference to any IPR or patent owned or developed by the company, in the stand-alone qual report. There is also no acquisition of IPR during the year. The Assessee se did not point to any information in the annual report to indicate that the intangibles have materially affected the profitability of the company as required in clause (i) of sub-rule (3) of Rule 108. Taking into account all these aspects, we do not find any material difference so as to affect comparability. Hence, these pleas of the Assessee for exclusion of the company are hereby rejected. ....
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....ccordance with the taxpayer's accounting practices but also enhances the reliability of the Transfer Pricing analysis by promoting a more robust and relevant set of comparables for determining the arm's length price of international transactions entered into by the Assessee. Thus, the Panel finds no infirmity with TPO's findings and accordingly the objection raised by the Assessee are hereby rejected. 2.5.10.8 In view of the above, we uphold the selection of this comparable." 26. Having given thoughtful consideration, we concur with the Ld. AR that, as the aforementioned company, viz., Tata Elxsi Ltd., is engaged in diversified activities, viz., provision of high-end services like embedded product design and engineering services to its consumers in electronics, communications & transport industries and systems integration and support services for enterprise customers, and works with leading OEM's and suppliers in the automotive and transportation industries for R&D design and product engineering services from architecture to launch and beyond, and further works with leading car manufacturers and suppliers, in developing electronics and software for....
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....imilar. For the sake of clarity, we deem it apposite to cull out the observations of the Tribunal, as under: "28. In the case of Tata Elxsi, the assessee has taken the following objections: (a) It is not functionally comparable to the assessee. In the financial statemen of the company, the nature of business carried out by Tata Elxsi is given below: (1) Corporate Information "Tata Elxsi Ltd was incorporated in 1989. The Company provides product design and engineering services to the consumer electronics, communications and transportation industries and systems integration and support services for enterprise customers. It also provides digital content creation for media and entertainment industry 29. We find that in the case of Infor (India) (P) Lad. v. ACIT in ITA No. 2307/Hyd/2018, the Co-ordinate Bench of the Tribunal has considered similar objections of the assessee therein and has held that these two companies along with Thirdware Solutions Ltd is not comparable to the software development company like the assessee before us. The relevant portions has been reproduced by us in the above paras. Respectfully following the same, these two compani....
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....report of the company, we note that this company provides business IT services (comprising software application development, integration, maintenance, validation, enterprise system implementation, product engineering, infrastructure management and business process management); consulting and systems integration services (comprising consulting, enterprise solutions, systems Integration and advanced technologies); products, business platforms and solutions to accelerate intellectual property-led innovation. All these activities fall within the gamut of 'software services. The mere reason that these services are rendered in regard to different industries such Financial, Manufacturing, Life Science, Energy, Retall does not make it functionally dissimilar. As per information in the stand-alone P&L account of this company (available at page 172 of the annual report), it has reported revenue from 'software services' of Rs. 78,809 crores and from 'software products of Rs. 238 crores, and thus it could be seen that the product revenue constitute meagre 0.30% of total operating revenue. Therefore, the contention of the Assessee that it is involved in licensing of Software pro....
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....nsformation. Apart from that, Infosys Limited is also engaged in the development of software products. Also, no segment-wise breakup regarding software development services of the aforementioned company can be gathered from its annual report. We are of the considered view that, in the backdrop of the diversified business transactions of Infosys Limited, it could not have been picked up as a comparable for benchmarking the software development segment of the assessee company, i.e., a low-risk captive software development service provider to its AE. Apart from that, we find that Infosys Limited has a huge brand value and continues to own and create significant intangible assets. Further, we find that the scale of operation of Infosys Limited is significantly higher than that of the assessee company before us. On a perusal of the annual report of the Infosys Limited, we find that it had during the subject year i. e., Financial Year 2019-20 revenue generation of Rs. 79,047 crores primarily from the IT services comprising of software application development, integration, maintenance, validation, consulting and technology implementation and from licensing of the software products ( refer....
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.... that this it has a turnover of Rs. 53,983 crores whereas assessee's turnover is Rs. 437 company cannot be compared as the different in its size and scale of operations have a direct impact on their profitability. He relied on various decisions of ITAT including the decision in ADP (P) Ltd. (supra) wherein this company is excluded as comparable. 9.2 On the other hand, Id. DR submitted that under TNMM comparable transactions needs to be broadly similar with this company and significant product diversity and some functional diversity between the controlled and uncontrolled parties are acceptable. 9.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The co-ordinate bench in assessee's own case in ADP (P) Ltd. (supra), directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: 25. Having regard to the rival contentions and the material on record, we find that in a number of decisions including the assessee's own case, Infosys Lid has been held to be not comparable with any other software development company....
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....issimilar and into diversified activities, owns intangibles etc. Also, we find that the ITAT, Bangalore in the case of AMD India Pvt Ltd vs. ACIT, IT(TP)A No. 775/Bang/2022, while disposing of the appeal of the assessee company for the AY 2018-19, had held that the aforementioned company could not be considered as a comparable for benchmarking the software development segment for the reason that it was functionally dissimilar and into diversified activities. Also, we find that the ITAT, Hyderabad in the case of SSNC Fin Tech Services India Private Limited vs. DCIT, ITA No. 916/Hyd/2024, dated 03/07/2025, had directed the exclusion of Infosys Limited as a comparable for benchmarking the software development services provided by the assessee company before them, by observing as under: "7. We have heard both the parties, perused the material on record and the orders of the authorities below. The appellant-company is a captive service provider to it's AEs on cost plus basis as per the agreement entered into by it with it's AEs. The appellant-company provides software development services to it's AEs on cost plus basis, whereas, Infosys Limited being a giant softwar....
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....relevant AY is also 2014-15, the facts and circumstances under which those companies have been held to be not comparable to M/s. Kony India Private Limited are also the same, the said decision is also applicable to the case before us. 6.1. In view of the same, respectfully following the decision of Coordinate Bench of this Tribunal to which one of us (i.e. J.M. ) is a signatory, we direct the exclusion of above mentioned companies from the final list of comparables. For the sake of ready reference, the relevant paragraphs from the order of this Tribunal are reproduced hereunder: - "9. We have heard the rival submissions and carefully perused the materials on record. From the paper book furnished by the assessee as well as the arguments advanced by the Ld.AR, we find merit in his contention because of the following reasons : - (i) E-Infochips Limited: - (a) As per the annual report of M/s. E-Infochips Limited for the period 1/4/2013 to 31/3/2014 (Page No.98 of the paper book-Volume-II) it is evident that the company is primarily engaged in software development, IT Enables Services and product-based company. Further, no segmental details are availa....
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....intangible assets, therefore, it could not have been picked up as a comparable for benchmarking the software development segment of the assessee company before us. 37. Accordingly, in terms of our aforesaid observations, we are of a firm conviction that the aforementioned company, i.e., Infosys Limited, for the reasons stated hereinabove, could not have been picked up as a comparable for benchmarking the international transactions of the assessee company, thus, direct the A0/TPO to exclude the same from the final list of comparables. Wipro Limited: (D). Wipro Ltd. 38. We shall now deal with the Ld. AR's contention that the TPO/DRP had erred in including Wipro Limited as a comparable for benchmarking the software development services rendered by the assessee company to its AE. Before proceeding further, we deem it apposite to cull out the observations of the DRP, which had upheld the inclusion of Wipro Ltd. in the final list of comparables by the TPO, as under: "2.5.4.1 Having considered the submissions, we ascertained that the TPO has considered the IT services segment on standalone basis. The segment of 'Global IT services and p....
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....dent which has been laid down in earlier or subsequent year. A comparable is a comparable on facts and not because a precedent makes it so. Neither can the tax payer insist that a comparable be included nor can it be insisted that it be excluded only on the ground of it having been included or excluded in some other a previous assessment year. 2.5.4.4 In case of Agnity India Technologies Pvt. Ltd vs Assessee, Hon'ble ITAT, New Delhi in I.T.A.No.6485/Del/2012 for assessment year 2008-09 observed that precedents cannot be blindly followed. The relevant observations made are extracted as under: - "Para 7.33. Having heard the rival submissions and perused the material available on record we find that in the peculiar facts and circumstances of the case where the Hon'ble High Court has not approved of the approach of the ITAT in relying upon the precedent available in assessee's see's own case for the immediately preceding assessment year which precedent stood approved by the Hon'ble High Court itself, we find that the prayer of the Ld. DR that decision be made first on facts on record and thereafter precedence be considered is not only a settled leg....
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....company during the previous year under a contract with a group company. Therefore, this intangible does not pertain to year under consideration and there is no indication of any revenue generated on account of customer relationship. Other intangible assets like technical know-how and trade-marks are very meagre compare to the turnover of the company so as to affect the profitability significantly. We also note the Assessee has failed to establish that such differences, if any, on account of intangibles have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B. Taking into account all these aspects, we do not find any material difference so as to affect comparability. Hence, these pleas are rejected. 2.5.4.7 The perusal of the details in the annual report shows that the company has incurred R & D expenditure to the tune of Rs. 4619 millions, which constitute meagre 0.91% of its total operating revenue, and which is much less than the generally acceptable tolerable limit of 3% of the total revenue. It is also noted that the R&D initiatives are substantially routine for immediate business purposes for developing expertise and ....
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.... 41. We find that the ITAT, Bangalore in the case of AMD India Pvt Ltd vs. ACIT, IT(TP)A No. 775/Bang/2022 for AY 2018-19, had observed that the aforementioned company, viz., Wipro Limited cannot be considered as a comparable for benchmarking the software development segment of the assessee company before them, inter alia, for the reason that it was functionally dissimilar and was into diversified activities, i.e., engaged in global information technology, consulting and business process solutions, etc. For the sake of clarity, the observations of the Tribunal are culled out as under : "27. The Id. AR referred to the following written submissions for exclusion of this company which is as under: - Reasons for rejection Reference & case laws Substantial related party transactions 1. The Company has substantial RPT for FY2017-18 (15.97%) and thus fails RPT filter of 15%. 1. Submission at Pg 1422- 1423 of PB I& Relevant extracts of AR at Pg 1935, PB 1942-1949 of II(Computation of RPT is given at Pg 30 of the Note). Functionally Different 2. The Company is functionally different as it is not engaged in rendering of pure software development services. ....
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.... software development services to its AE, the subject comparable i.e., Wipro Limited (supra) which is engaged in diversified business of global information technology, consulting and business process solutions, is functionally dissimilar with no separate segment - wise breakup available. Also, the said company owns intangible assets and undertakes R&D activities and has significantly higher scale of operations as in comparison to the assessee company before us. Accordingly, in the backdrop of our aforesaid observations and the view taken by the coordinate benches of the Tribunal as referred by us herein above, we direct the TPO/AO to exclude the said company, viz. Wipro Limited from the final list of comparables. Nihilent Technologies Limited: (E). Nihilent Ltd. 44. We shall now deal with the Ld. AR's contention that the TPO/DRP had erred in including Nihilent Limited as a comparable for benchmarking the software development services rendered by the assessee company to its AE. Before proceeding further, we deem it apposite to cull out the observations of the DRP, which had upheld the inclusion of Nihilent Ltd. in the final list of comparables by the T....
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....hange, and performance management and related IT services by using proprietary frameworks and methodologies. Also, the said company earns revenue mainly from online consulting assignments. Further, we may herein observe that no separate data of providing segment-wise breakup and revenue generation by the aforesaid comparable from its software development services is available. 46. We, thus, find substance in the Ld. AR's claim that, as the aforementioned company, being into diversified activities, is not only functionally dissimilar vis-à-vis the assessee company before us, but also as no segmental information for its software development services is available in the public domain, therefore, it could not have been selected as a comparable for benchmarking the software development segment of the assessee company before us. 47. We find that the issue regarding the inclusion of Nihilent Ltd (supra) as a comparable company in the case of software development segment, had come up before the ITAT, Bangalore in the case of AMD India Pvt Ltd vs. ACIT, IT(TP)A No. 775/Bang/2022 for AY 2018-19, wherein it was held that as the said company was functionally dissim....
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.... Consulting: Nihilent partners with businesses in transforming their organizations with solutions using a holistic design-thinking led approach to problem solving. Our suite of consulting-led offerings an include customer driven digital transformation, industry transformation and organizational change management services We have deep expertise and several person-years or experience in strategy alignment and execution, organizational design and process restricting, balanced scorecards, customer loyalty evaluation among others. Analytics: We help enterprises answer complex business questions of the day by getting them to make sense of all the data they have. Our leading-edge analytics solutions include predictive analytics techniques like fraud analytics, churn analytics, market basket analysis among others, data visualization and dashboards, and data enrichment and insight offerings. including sentiment analysis, data abstraction, deep learning & artificial intelligence. Technology: Our technology-driven service offerings help business achieve greater agility in the digital era and enable systems to be future- ready, using a holistic design-thinking approach. So....
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....y had entire earnings from software development services. Under operating segments in the annual report, it is mentioned that the company operates in a single business segment namely software development services and no other reportable segments mentioned. The independent Audit Report specifies that the company is engaged in software services and does not hold any inventory. In view of the categorical information in the annual report that the company is engaged in software development services, we hold that this company is software service provider and functionally comparable to the assessee. 2.5.12.2 It was contended that the company is engaged in functionally dissimilar activities and involved in providing plethora services with reference to certain information said to be available in the company's website. We note that the information put in website cannot be given much credence, as they are mere forward- looking statements with the motive of advertisement and other promotion. Besides, such information pertains to the activities of the entire group. Further, the information in website is dynamic and cannot be related to a particular period. There is no way to verify....
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....ally dissimilar, wherein it had undertaken R&D activities involving developing new technologies under the software segment. Referring to its annual report, it was observed that the said company had R&D activities which were incorporated with the software development process with the object of devising an efficient method of product development. Further, it was observed that the said company owned huge intangibles due to the R&D activities undertaken by it. Further, the Tribunal by drawing support from the order of the ITAT, Hyderabad in the case of Infor (India) Pvt. Ltd., IT(TP)A No. 198/Hyd/2021, dated 06.10.2021, had observed that as the aforementioned comparable was functionally different than a routine software development service provider and had abnormally high average margins, therefore, the same was to be excluded from the final list of comparables for benchmarking the international transactions of the software development segment of the assessee company before them. For the sake of clarity, the observations of the Tribunal are culled out as under: "(C) Cybage Software Pvt. Ltd. The Ld. AR submitted that this comparable is not functionally similar with th....
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....e 1796 of the Annual Report this company is doing other computer related activities but nowhere software services are mentioned. On the other hand, the assessee is offsite provider and thus functionally different. We direct the A.0/T.P.0 to exclude this company from the list of comparables. 14.11 Similarly, the Hyderabad Tribunal in the case of Infor (India) Pvt Ltd 0(0000 198/Hyd/2021 dt. 06.10.2021 has directed exclusion of Cybage Software. Relevant portion is extracted hereunder. "4.3. Next come M/s. Thirdware Solution Limited and M/s. Cybage Software Private Limited which have already have been ordered to be excluded by the tribunal after holding the same to be functionally different than software development services and having abnormally average high margin; respectively. " 14.12 The Tribunal in assessee's own case for AY 2016-17 in ITA 285/Bang/2021 dated 03.02.2023 considering the above decisions in Optiva and Infor has rejected Cybage Software Pvt Ltd as comparable. The Tribunal in for AY 2017-18 in ITA assessee's own case 291/Bang/2022 dated 15.03.2023 has rejected this company as comparable. In consideration of the above, we direct the ....
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....sion in the case of HighRadius Technologies Private Limited vs. DCIT (supra), we direct the Ld. AO/TPO to exclude Nihilent Technologies Limited, Tata Elxsi Limited, Cybage Software Private Limited, Infosys Limited, Larsen & Toubro Infotech Limited and Wipro Limited from the final set of comparables. 15. Under Ground No.4, the assessee is pressing only inclusion of R Systems International Limited into the final list of comparables. In this regard, the Ld. AR submitted that the issue is also covered by the order of this Tribunal in the case of HighRadius Technologies Private Limited vs. DCIT (supra) for the same Assessment Year and accordingly prayed before the Bench to include R Systems International Limited in the final set of comparables. 16. With regard to inclusion of R Systems International Limited, the Ld. DR relied upon the findings recorded by the Ld. AO/Ld. TPO and opposed inclusion of the said comparable. 17. We have considered the rival submissions and perused the material available on record including the case laws relied upon. We have gone through the para nos. 57 to 64 of the order of this Tribunal in the case of HighRadius Technologies Private Limited Vs. DCI....
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....e decision of the Hon'ble Delhi High Court in the case of CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd., in ITA No. 217/2024, decided on 27/03/2015, if the comparable is functionally same as that of tested party then same cannot be rejected merely on the ground that data for entire financial year is not available. If from the available data on record, the results fo financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings. Following this dictum respectfully, we direct the learned Assessing Officer to permit the assessee to extrapolate the results for the relevant financial year and consider the same as a good comparable." 62. We further find that the ITAT, Hyderabad in the case of Hyundai Motor India Engineering Private Limited vs. ITO (2017) 78 taxmann. com 22 (Hyderabad), had observed, that a company having a different financial year ending can be considered as a comparable in case its data available in the public domain can be extrapolated for the financial year ending of the assessee company. 63. We, thus, in terms of our aforesaid deliberations,....
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.... 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. In terms of Rule 10B(1)(e)(iii) of the Income- tax Rules, 1962, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and comparable uncontrolled transactions which could materially affect the amount of net profit margin. In our view, difference in levels of working capital between the tested party and the comparables have an affects on the margins and profitability. Therefore, the Ld. TPO's approach in insisting upon daily/monthly working capital cycle data of third-party comparables is, in 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 d....
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.... we find that the Tribunal directed the Ld. TPO to grant working capital adjustment to the assessee while determining the Arm's Length Price. Respectfully following the aforesaid decision of the Coordinate Bench, we direct the Ld.AO/TPO to grant working capital adjustment to the assessee while determining the ALP in accordance with law and in terms of the findings rendered by the Tribunal in the aforesaid decision. 25. Ground No.9 of the assessee relates to the adjustment made on account of interest on outstanding trade receivables. In this regard, the Ld. AR submitted that once working capital adjustment is granted while computing the profit margin of the assessee, no separate adjustment on account of interest on trade receivables is warranted, as the impact of delayed receivables already stands subsumed in the working capital adjustment. It was further submitted that if, after granting effective working capital adjustment, the profit margin of the assessee is found to be higher than the arm's length margin of the comparable companies, then no separate adjustment on account of interest on receivables survives. Accordingly, the Ld. AR prayed that a suitable direction may....
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....he differential impact of working capital of the assessee vis-a-vis its comparables had already been factored in the pricing/profitability" which was more than the working capital adjusted margin of the comparables and, therefore, "any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified". 9. Mr. Raghvendra Singh, learned counsel appearing for the Revenue sub mitted that the Income-tax Appellate Tribunal overlooked the fact that the expression "international transaction" as defined in Explanation (i)(c) to section 92B of the Act included "payments or deferred payment or receivable or any other debt arising during the course of business", and therefore, the outstanding receivables could by themselves constitute an international transaction. He further referred to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Paras 3.48 and 3.49 under Chapter III para A.6.1 of the said guidelines titled "Different types of comparability adjustments" spoke of the need to eliminate differences that may arise from different accounting practices between controlled and uncont....
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.... 12. Consequently, the court is unable to find any error in the impugned order of the Income-tax Appellate Tribunal giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed. 29. On perusal of above, we find that the Hon'ble High Court has held that where working capital adjustment takes into account the impact of receivables on profitability, a separate adjustment on account of interest on outstanding receivables may not be warranted. Respectfully following the ratio laid down by the Hon'ble Delhi High Court, we direct the learned AO/TPO to compare the profit margin of the assessee with the margins of the comparable companies after granting due working capital adjustment. If, after giving effect to the working capital adjustment, the profit margin of the assessee is found to be higher than the arm's length margin of the comparables, then no separate adjustment shall be made on account of interest on trade receivables. 30. The alternate submission of the assessee with regards to application of rate for working of interest on trade receivable is that, the assessee is seeking for LIBOR plus 200 basis points rate instead....
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.... and the assessee 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 circumstances, the addition as made by the Assessing Officer on this count is deleted." 7. Thus, a transaction of loan to the AEs in foreign currency is considered as international transaction between the assessee and its AEs, then the transaction would have to be looked upon by applying the commercial principles in regard to the international transactions. Therefore, the domestic prime lending rate or domestic deposit rate would have no applicability on international transaction, but the international rate being London Interbank Offered Rate (LIBOR) or similar rate i.e. Euro Interbank Offered Rate (EURIBOR) would govern the international transactions of lending by the assessee to the AEs. This issue also came up for consideration before the Hon'ble Delhi High 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 inte....
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....nd 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. A similar reasoning applies to both inbound and outbound loans. Revenue has erroneously argued that different parameters would apply for inbound and outbound loans, which is not acceptable. 38. The DRP referred to the PLR rates fixed in India. It is evident that the PLR rates were not the basis for fixing the arm's length price. Both TPO and the DRP have referred to the PLR rates only by way of analogy so as to state the prevailing interest rates in India, but while applying CUP method for comparability, they had applied LIBOR rates prevailing and had applied a mark-up of 700 points on account of low credit rating of the subsidiary AE and the cost of transaction. 39. The question whether the interest rate prevailing in India should be applied, 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, mus....
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....e 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 forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, 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 p....
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....n 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 findings of the Hon'ble High Court in para 7 & 8 are as under: "7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT [IT Appeal No. 673 (Mum.) of 2006] and Dy. CIT v. Tech Mahindra Ltd. [2011] 12 taxmann.com 132/46 SOT 141 (Mum.) (URO) to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/ consumed. Mr. Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No 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 havin....
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....f 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 to 4.42% by the ld. CIT(A) is not justified. 6. As against the TPO's point of view that since the assessee in India advanced loan to its AE in Germany, which if not given, would have fetched interest @14% in India, the ld. CIT(A) has held that interest rate prevalent in the country in which the loan is received, should be considered for determining the ALP of transaction of interest received. We find that there is almost judicial consensus ad idem at the higher appellate forums on the question of which country, that is the borrower or the lender, should be considered for determining the arm's length rate of interest on loans advanced to the AEs. The Hon'ble Bombay High Court in CIT v.Tata Autocomp Systems Ltd . [2015] 56 taxmann.com 206/230 Taxman 649/374 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 i....
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.... (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 inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered for determining LIBOR. Therefore, LIBOR, as such, can also not be construed as a comparable uncontrolled transaction. The Hon'ble Bombay High Court in CIT v. Aurionpro Solutions Ltd. [2017] 99 CCH 70 approved the action of the Tribunal in considering LIBOR +2% as the arm's length rate as against the TPO applying LIBOR plus 3%. Drawing an analogy from this position, we hold that EURIBOR+2% should be considered as arm's length rate of interest for determining the ALP of the international transaction of interest received by the assessee from Mascot Systems GmbH, Germany. 10. Before parting with 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 averag....