TMI Blog2021 (10) TMI 1351X X X X Extracts X X X X X X X X Extracts X X X X ..... en raised by the Assessee for the first time before the Tribunal. The Revenue authorities did not have any occasion to examine this issue and therefore we deem it fit and proper to remand this issue to the AO/TPO for consideration afresh and in the light of the relevant applicable statutory provisions. Determination of ALP by construing the delayed realization of receivable by the Assessee from its AE as a separate international transaction and determining ALP of such delayed receivables - HELD THAT:- Non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec. 92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the Assessee, the first dispute is with regard to determination of Arms' Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 3. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison of the Assessee's profit margin with that of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24.14% 20.87% 5. Larsen Toubro Infotech Ltd. 26.29% 24.22% 23.54% 24.83% 6. Nihilent Ltd. 15.94% 29.19% 35.72% 26.36% 7. Inteq Software Pvt. Ltd. 7.53% 32.14% 45.00% - 28.20% 8. Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 9. Infobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 10. Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 11. Infosys Ltd. 38.22% 41.30% 36.28% 38.61% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transactions. Thus a sum of ₹ 2,78,16,697/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE. 6. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment consequent to determination of ALP was added to the total income of the Assessee by the AO. The DRP gave certain directions. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal before the Tribunal. 7. The main grievance of the Assessee projected in the grounds of appeal filed before the Tribunal which was argued before us was (i) choice of comparable companies by the TPO in disregard of the Assessee's claim that the companies chosen had high turnover and hence should not be considered as comparable with the Assessee. The stand of the TPO was affirmed by the DRP against which the Assessee is in appeal (Ground No. 8.7) The said ground reads thus: 8.7 Without prejudice, the Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f)...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down expli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 11. As far as comparability of companies listed as (a) to (g) in Grd. No. 8.7 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than ₹ 200 Crores and the Assessee's turnover is only ₹ 24,71,71,242/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than ₹ 1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet Bradstreet and NASSCOM have g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of R.S. Software (India) Ltd., is concerned, the turnover of this company in the current year is less than ₹ 200 Crores but in the earlier two years its turnover was more than ₹ 200 crores and was liable to be excluded in those earlier two years. The question raised in the aforesaid grounds is as to: whether this company should also be excluded on the application of turnover filter by reason of its turnover in the earlier two years being more than ₹ 200 crores in the light of Rule 10CA of the rules which were applicable from AY 2014-15 onwards or whether in computing the weighted average profit margin of this company, the earlier two years profit margins have to be ignored because they fail the test of comparability in those two earlier years by reason of the application of the ₹ 200 Crore turnover filter. 16. To answer the above question, we need to look at the amendment to the rules that allow for introduction of a range concept for determination of ALP and use of multiple year data for undertaking comparability analysis in transfer pricing cases. The provisions of the Income-tax Act were amended through the Finance (No. 2) Act, 2014 to fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng order and the arm's length price shall be determined on the basis of the dataset so constructed: Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,- (i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of sales which has been considered for arriving at the respective prices; (ii) where the prices have been determined using the method referred to in clause (c) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs which has been considered for arriving at the respective prices; (iii) where the prices have been determined using the method referred to in clause (e) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices ........... 17. Let us apply the above rules to the comparable company R.S. Software (India) Ltd. As per Rule 10CA(2), the dataset of comparable companies chosen has to be arranged in ascending order. As per the 1st proviso to Rule 10CA(2), R.S. Software (India) Ltd., was chosen as a comparable company based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this argument because the 1st and 2nd proviso to Rule 10CA(2) of the Rules refers to only R.S. Software (India) Ltd., (i.e., where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction ) undertaking uncontrolled transaction during the relevant previous year and if this condition is satisfied then the profit margin of R.S. Software for the 2 financial years immediately prior to the current financial year has to be taken. A plain reading of the 1st proviso would show that the question of comparability is not to be seen while applying the 1st and 2nd proviso to Rule 10CA(2) of the Rules. The provisions of Rule 10CA(2) have to be read harmoniously with the other provisions of Rule 10B. Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction [or the specified domestic transaction] has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be 25% of the total transaction. The Hon'ble Karnataka High Court in its Judgment 28-06-2018 in I.T.A. No. 684/2017 I.T.A.. No. 685/2017 Pr. Commissioner of Income Tax-7 Anr. Vs. M/s. Yodlee Infotech Pvt. Ltd., had to consider among other questions of law the following questions of law with regard to application of RPT filter, viz., Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified by not acknowledging its own orders where the Tribunal has held in stretching RPT% from 15-20% in case of Katera Software India Pvt. Ltd. and Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that RPT filters should be 15% and not 25%, taken by the TPO?. The Hon'ble Court held as follows: 3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to 'Transfer Pricing' and 'Transfer Pricing Adjustments' made by the concerned authorities below. We consider it appropriate to quote from the order of Tribunal rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper in the case of the assessee. By applying this filter of 15% RPT, we modify the impugned order of the CIT (Appeals) and therefore only one company namely Four Soft Limited will be excluded from the said comparable having more than 15% RPT. Accordingly, we direct the A.O./TPO to exclude the Four Soft Ltd. having 19.89% of RPT. ........ 4. This Court in ITA No. 536/2015 C/w ITA No. 537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable. ..................... 5. The relevant portion of the said judgment is quoted below for ready reference: Conclusion: 55. A substantial quantum of internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the facts of the Assessee's case is similar to the case decided by the Hon'ble High Court and in the light of the aforesaid decision of the Tribunal which has been upheld by the Hon'ble Karnataka High Court, the RPT filter has to be applied adopting the threshold limit of 15%. We hold and direct accordingly. 23. The next ground that requires adjudication is grounds with regard to exclusion from the list of comparable companies, (a) Inteq Software Private Limited and (b) Infobeans Technologies Ltd. 24. As far as exclusion of Inteq Software Private Limited is concerned, the first objection of the learned counsel for the Assessee was that this company is functionally not comparable because it is engaged in the business of computer programming, consultancy and related activities. The objections of the Assessee in this regard are based on contents in the website of this company. The DRP has dealt with this objection in paragraph 2.18.1 of its order, which reads thus: 2.20.1 Having considered the submissions, we note that as per information in the Director's report of the company, the company's principal activity is software development servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und of application of turnover filter for FY 2013-14 and 2014-15. Those reasons given will equally apply to this comparable company also and accordingly, we direct that the margins of this company for FY 2013-14 should not be taken for working out the average profit margins of this company which is to be included in the dataset. 27. As far as the plea of the Assessee for exclusion of Infobeans Software Ltd., is concerned, the first plea of the learned counsel for the Assessee is that this company is functionally dissimilar to a SWD service provider and in this regard reference has been made to certain decisions of Tribunal rendered for AY 2015-16. As far as AY 2016-17 is concerned, the DRP has observed that this company was in the business of rendering SWD services in para 2.16.3 to 2.16.7 of its order, which reads thus: 2.16.3. It was also pleaded that some of the software activities carried out by this company are not software services as defined in the safe harbor rules. In this regard, it is relevant to note that as per information submitted by this company in response to 133(6), this company is engaged in customized software development services and has not earned reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets. Therefore, such intangibles cannot be equated with the intangibles acquired created by the assessee to provide specific enduring benefit. Also, the assessee has failed to establish that such differences have material effect on the margin of the above company, in terms of clause (i) of sub-rule of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas are rejected. 2.16.7 It was contended that sufficient business information is not available in the public domain, and hence, it has to be excluded. We note that there is clear information in the annual report to show that this company is engaged in software development activity. Further. the information obtained u/s. 133(6) clarify that this company is engaged in software development activity. Hence, this plea is rejected. 28. The above conclusions of the DRP have not been countered by the Assessee and by merely relying on findings in earlier AY that this company wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es on a notional manner. The TPO has observed in this regard in his order that the Assessee was asked to furnish details of trade receivable and details of realization and in the absence of such details, he has no other option but to determine the interest attributable to delayed realization of trade receivables by applying 6 months LIBOR plus 400 basis points with a mark-up of 100 basis points (which works out to 4.485%) on the average of opening and closing receivable. The DRP confirmed the action of the TPO. The computation done by the TPO in this regard was as follows: 24. Computation of interest on delayed receivables 24.1 As discussed in the preceding paragraphs, interest on the delayed trade receivables is proposed to be computed on invoice basis. To calculate the delay, the Assessee (vide the show cause issued on 30.5.2019) was asked to furnish invoice wise details of all the trade receivables from AEs during the year. The following details were asked in a particular format: Amount raised in invoice, date of invoice, date of receipt, delay in no. of days. Interest is calculated, using LIBOR- 6 months + 400 basis points applicable for the FY 2015-16 and which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.2015 passed by the Delhi Bench of the Hon'ble Tribunal in ITA No. 6814/Del/2014) held that if the working capital investment of the assessee and the comparables rather are considered than looking at the receivable independently is not necessary as the working capital adjustment takes into account the impact of outstanding receivables on the profitability. It was pointed out that this decision came to be upheld by the Hon'ble Delhi Court in PCIT v. Kusum Healthcare Pvt. Ltd. (Order dated 25.04.2017 passed in ITA No. 765/2016) (refer paras 10 and 11):- 10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alization period of the trade receivables is 96 days. It was contended that since the period of credit is not unusually high, no addition is warranted. The ld. DR relied on the order of the DRP. 36. We have carefully considered the rival submissions. On the question whether delayed realization of trade receivables from the AE constitutes an international transaction or not, there are conflicting decisions of various benches of the Tribunal, which we shall point out. Sec. 92B of the Act defining what is an international transaction was amended by Finance Act, 2012, way of insertion of an Explanation to sec. 92B with retrospective effect from 1-4-2002 and the same reads thus:- Explanation- For the removed of doubts, it is hereby clarified then- (i) the expression international transaction shall include- (a) ............. (b) .............. (c) capital financing, including any type of long-term or short-term borrowing lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment of receivable or any other debt arising during the course of business: ............ 37. The amendment is to the effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s length. The ITAT concluded that if outstanding receivables are within the terms of agreement, then it may be argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement does not specify the term of the payment, even then assessee must be given benefit of credit period which is accepted business practice in the trade. The ITAT confirmed 30 days as the normal credit period adopted by the TPO. 39. The foregoing discussion discloses that non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. 40. Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the stipulated period. When the interest for realization of trade advances up to 150 days is part and parcel of the price charged from the AE, then the delay up to this extent cannot give rise to a separate international transaction of interest uncharged. Rather interest for the period in excess of normally realizable period in an uncontrolled situation upto 150 days needs to be considered in the determining the ALP of the international transaction of the 'Provision of IT Enabled data conversion services'. This can be done by increasing the revenue charged by the comparable companies with the amount of interest for the period between that allowed by them in realization of invoices and 150 days as allowed by the assessee, so as to bring such comparables at par with the assessee's international transaction of provision of the ITES. To illustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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