TMI Blog2023 (3) TMI 1218X X X X Extracts X X X X X X X X Extracts X X X X ..... development. It is the submission of the ld AR that the L T is engaged in trading of goods and there is no segmental break-up for such services/ products. We also notice that the company has made several acquisitions during the year under consideration. There is no change to facts for the year under consideration also, we respectfully follow the decision of the co-ordinate bench and direct the AO/TPO to exclude L T Infotech Limited from the list of comparables. Interest on receivables - independent international transaction - TPO after allowing a credit period of 30 days computed the interest for 335 days to arrive at an adjustment - DRP directed the TPO to apply SBI short term rate and recompute the amount of adjustment - whether Outstanding receivables cannot be treated as a separate international transaction? - HELD THAT:- Issues of whether the interest on receivable is a separate international transaction and the rate of interest to be considered has been considered in the decision of the coordinate Bench of the Tribunal in the case of Swiss Re Global Solutions India Pvt. Ltd. [ 2020 (5) TMI 512 - ITAT BANGALORE] as held deferred receivables would constitute an independ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the international transaction the assessee had with its AE. The TPO ignored the segmental financials of the assessee and considered the entire operations as SWD services. Accordingly, the AO arrived at TP adjustment of Rs.82,58,40,327 in the SWD services segment. The TPO further calculated the notional interest on delayed receivables at LIBOR + 450 basis points to arrive at an adjustment of Rs.6,89,46,372. The AO passed the draft assessment based on the order passed by the TPO. Aggrieved the assessee filed its objections before the DRP. 3. The DRP gave partial relief to the assessee whereby the TP adjustment in SWD segment was reduced to Rs.55,69,83,890. With respect to interest on receivables, the DRP directed the TPO to use the short term deposit rate of SBI to recomputed the adjustment, according to which the interest was reworked at Rs.6,49,06,385. The assessee is in appeal before the Tribunal against the final assessment order passed by the AO. 4. It is not in dispute between the assessee and the TPO that the Transaction Net Margin Method is the most appropriate method for determination of ALP and the Profit Level Indicator (PLI) to be adopted for comparison of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited (segmental) 24.17% 13 Sasken Technologies Limited (segmental) 6.52% 35th Percentile 5.89% Median 8.19% 65th Percentile 21.18% 6. The TPO however considered the Operating Revenue and the Operating Cost at entity level and took the margin of the assessee at 13.13% (refer Total column in the above table). The TPO conducted a fresh search for comparables and the final set of comparables as arrived at by the TPO is as given below:- Sl. No. Name of comparable company Weighted average unadjusted margin (OP/OC)(%) 1 Infomile Technologies Ltd 9.89% 2 Harbinger Systems Private Limited 11.65% 3 Exilant Technologies Private Limited 17.17% 4 Tech Mahindra Limited 18.57% 5 Larsen Toubro Infotech L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Rs.55,69,83,890. 9. The assessee raised 7 grounds and several sub-grounds contending the TP adjustment. Ground nos. 1 to 3 are general and Ground no.6 7 are consequential. These grounds therefore do not warrant separate adjudication. Ground no.4 is with regard to the TP adjustment in SWD segment. Ground 5 pertains to levy of interest on delayed receivables. 10. During the course of hearing, the ld. AR submitted that of the various sub grounds of ground 4 if the exclusion of 2 of the comparables viz., Infosys Ltd. (Ground No.4.6(xv) and L T Infotech Ltd (Ground No.4.6(iii). are adjudicated in favour of the assessee, then the rest of the grounds will not be pressed with regard to TP adjustment in the SWD segment. So we will adjudicate first the exclusion of Infosys ltd and L T Infotech Ltd. Infosys Ltd. - (Ground No.4.6(xv) 11. The ld. AR submitted that this company is to be excluded from the list of comparables on the following grounds:- 1. Functionally different The company provides business consulting, technology, outsourcing, next generation services and software. The company also provides products business platforms and solutions to accelerate in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nual report - Part 1) 7. Full-fledged risk bearing entity Infosys is a full-fledged risk bearing entity and cannot be considered as comparable for the Appellant, who is a captive service provider. (Page 1939 of Paperbook II - Annual report - Part 1) 8. Huge selling and marketing expenditure Infosys has made significant expenditure in relation to sales and marketing. However, the Appellant is a captive service provider who does not undertake any selling and marketing expenses. (Page 1933 of Paperbook II - Annual report - Part 1) 9. Significant foreign expenditure It has incurred significant foreign expenditure which works out to 68.09%, 49.06%, and 49.51% of total expenditure incurred for FY 2017- 18, FY 2016-17 and FY 2015-16 respectively. (Page 1920 of Paperbook II - Annual report - Part 1) 10. Mergers and acquisitions Board of Directors have approved to acquire WongDoody Holding Company Inc, a US based creative and consumer insights agency. (Page 1879 of Paperbook II - Annual report - Part 1) 12. The ld AR also submitted that the coordinate bench in assessee s own case has been consistently holding Infosys Ltd., should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablish that differences, if any, on account of R D, brand and intangibles have material effect on the margin of the said company. Further the assessee itself considered such companies as comparable which had R D expenditure to sales ratio less than 3%. The reason given by assessee to apply such a filter was to select companies which do not own intangibles and are pure service providers. Thus this company cannot be rejected as a comparable because of R D or intangibles.. 17. We heard the rival submissions and perused the material on record. We notice that the issue of exclusion of Infosys Ltd. has been considered by the coordinate Bench in assessee s own case for the AY 2014-15 (ITA No.339/Bang/2019 dated 22.7.2021). We also notice that the assessee and the revenue had made similar submissions as above in AY 2014-15 also. The relevant extract of the decision of the Hon ble Tribunal is given below 25. We have heard both the parties and perused the material on record. The issue of comparability of Infosys Ltd. came up for consideration before the Tribunal in the case of Microsoft Research Lab India (P.) Ltd. v. Dy. CIT [IT (TP) Appeal No. 3131 (Bang.) of 2018, dated 5-2-2020 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts, functional profile and the decision of the co-ordinate Bench, direct the TPO to exclude the comparable from the final list of comparables for determination of ALP.' 26. Since the facts of the case are similar relating to SWD segment to the case of Microsoft Research Lab India (P.) Ltd. (supra), we direct exclusion of Infosys Ltd. from the comparables. 18. On perusal of the annual report of the Infosys ltd as on 31.03.2018, it is noticed that the revenue of the company from software development services is Rs.61,910 (page 1875 of paper book). Further that functional profile of the company as in the annual report (page 1993 of paper book II)) states that the company is rendering varied services under the umbrella of SWD services. It is also noticed that the company is having huge intangible assets being the brand value of the company. The assessee on the other hand is a captive service provider with no intangible asset as per the financials. Given the volume of revenue generated, different kinds of services within the SWD segment, brand value etc., of Infosys Ltd, it cannot be compared with a captive service provider like assessee. Therefore the grounds on which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with L T with effect from 01 April 2017 and entire assets were transferred with effect from 01 April 2017 (Pg 2981 of Paperbook II - Annual report - Part 3) 6. Investment in technology absorption and owns significant intangibles L T Infotech has made great investment in technology absorption. It operates Centers of Excellence in emerging technologies such as Big Data, Analytics, Internet of Things, Cloud, User Experience. (Pg 2991, 3000 of Paperbook II - Annual report - Part 3) Any analytics related activities have been classified under KPO services under the Indian safe harbor rules. Hence, it can be said that the company provides high-end services which are classified as KPO under rule 10TA of safe harbor rules and are not comparable to the routine SWD services segment of the Appellant. 7. Engaged in research and development activities Expenditure in R D will lead to increased productivity, modernization, operational synergies etc., which in turn has an impact on revenue/ for achieving cost efficient structure and on the profit margins. Accordingly, it is evident that the same cannot be comparable to Appellant which is a low risk service provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n equipment, electronic equipment, radio and wireless communication product and equipment and 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. The financial statements do not mention about any product sale or inventory. As there is no revenue stream on account of product sales, we do not find any merit in the argument that the company is engaged in product sales. 22. With regard to the plea of the assessee that L T brand value is contribute to the revenue of the company, it is submitted by the ld DR that there is no specific information in the financial statements to indicate that the brand has contributed to revenue growth of the company. On the other hand, the company has recognized client relationships and employee relationships as significant factor that has contributed to the revenue growth of the company. As to the significant factors contributing to the revenue growth, the annual report recognizes, Client relationships are at the core of our business. We have a history of high client retention and derive a significant proportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom this activity there is no need of providing segmental information as per AS 17 25. The next plea taken by the assessee is that L T Infotech has undertaken several acquisitions, the synergy from which will impact the profitability of the company. In this regard the ld DR submitted that on perusal of records it is noticed that the various amalgamation 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. 26. We have considered the rival submissions and perused the material on record. Exclusion of L T Infotech Ltd. is considered by the Tribunal in assessee s own case for AY 2014-15 (supra) wherein it is held that 34. We have considered the rival submissions. Similar issue was decided by the Tribunal in the case of Microsoft Research Lab India (P.) Ltd. (supra) wherein it was observed as follows: 'We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that Delhi ITAT in case of Aginity IndiaTechnologiesIndia private limited (supra) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed the TPO to apply SBI short term rate and recompute the amount of adjustment. Accordingly, the TPO recomputed the interest on delayed receivables at Rs.6,49,06,385. 30. The ld. AR submitted a detailed written submission in this regard which extracted below Outstanding receivables cannot be treated as a separate international transaction It was submitted that the assessee has provided SWD services and IT and technical support services to its AEs and amount outstanding as trade receivables merely represent the dues to be received by the Appellant against the services provided. As a business practice, the Appellant did not charge any interest on delayed realisation of invoice from AEs nor paid any interest on delayed payables. Early or late realization of service proceeds is incidental to the transaction of sale/ service, and not a separate transaction in itself. In other words, these represent the consequence of an international transaction and not an international transaction per-se. If the ALP in respect of an international transaction of service is determined, then there can be no question of treating non-receipt of interest in such transaction as sep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit to its AEs by blocking its interest-bearing funds by extending the credit period to AEs. The ld. AR submitted that outstanding/ delayed receivables from AEs cannot be treated as unsecured loans advanced to AEs and interest cannot be imputed on the same. TPO s jurisdiction to question the commercial wisdom of the Appellant Any prudent business entity will attempt to collect its outstanding receivables from their customers and charging of interest is not a routine case, as the same could result in loss of business from the customers in the future. The Appellant wishes to submit that not charging interest on overdue receivables is the commercial wisdom of the Appellant however, the learned TPO has proposed to impute interest on overdue receivables from AEs. (Page 668 of Paper Book I - Factual Document - Part 1) Working capital adjustment appropriately takes into account the delayed/ outstanding receivable; separate TP adjustment is unwarranted The Appellant requests that where working capital adjustment is granted, receivables amount gets adjusted in working capital adjustments and a separate addition is not required under the TP provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue from AE and the balance amount shall be considered for computing the interest. 31. The ld. AR relied on the following judicial Precedents:- 1. M/s. ON Semiconductor Technology India Private Limited IT(TP)A No.291/Bang/2021 AY 2016-17 - Para 24, Page no. 4284 - Paperbook III - Caselaw 2. M/s. Boston Scientific International BV India [2010] 40 SOT 11 (MUM.) (URO) - Para 32, Page no. 4295 - Paperbook III - Caselaw 3. M/s. Kusum Healthcare Pvt. Ltd. ITA No. 6814/Del/2014 AY 2010-11 - Para 14, Page no. 4308 - Paperbook III - Caselaw 4. M/s. Bechtel India Pvt Ltd CC No(s). 4956/2017 AY 2014-15 - Para 4, Page no. 4313 - Paperbook III Caselaw 5.M/s. Verifone India Technology Pvt. Ltd. IT(TP)A No.290/Bang/2021 AY 2016-17 - Para 4, Page no. 4316 - Paperbook III - Caselaw 32. We heard the rival submissions and perused the material on record. In our opinion, the impugned issues of whether the interest on receivable is a separate international transaction and the rate of interest to be considered has been considered in the decision of the coordinate Bench of the Tribunal in the case of Swiss Re Global Solutions India Pvt. Ltd. (Order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 23.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing-up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 23.7. We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib.), held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endent international transaction and the same is required to be benchmarked independently as held by the Hon ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018. 33. In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon'ble Delhi High Court in the case of Cotton Naturals (I) (P.) Ltd (supra) in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. 34. During the course of hearing the ld AR drew our attention to the the invoice-wise receivable collection of the assessee with with the average receivable days computed for the comparable companies proposed by the assessee where, it is observed that the weighted average number of days for which the invoices remained overdue during the year worked out to 43 days (Page 1096 and 1097 of Paper Book I - Factual Document - Part 2) and that of the comparable companies average came to 51 days. (Internal Page 387 of the DRP submission/ Page 664 of Paper B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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