TMI Blog2019 (2) TMI 227X X X X Extracts X X X X X X X X Extracts X X X X ..... ment services by the assessee to its AE and has to be considered as part of the international transaction of Software Development Services. The decision of Mumbai Bench of Tribunal in the case of Goldstar Jewellery Ltd., Vs. JCIT [2015 (2) TMI 58 - ITAT MUMBAI]. URO supports the plea of the assessee. Following the aforesaid decision, we hold that there can be no separate determination of ALP of international transaction of realization of sale proceeds with extended credit period as it is only incidental to transaction of sale. The addition made by the TPO and confirmed by the DRP cannot be sustained and the same is directed to be deleted. Disallowance of depreciation on software expenses under section 40(a)(ia) read with section 194J - Held that:- As decided in M/S. WINTAC LIMITED VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE 12 (5) , BENGALURU [2017 (4) TMI 819 - ITAT BANGALORE] once the assessee has capitalized the payment in question though the assessee has not deducted the tax at source on such payment, Section 40(a)(i) cannot be invoked for disallowance of depreciation. Accordingly, we set aside the orders of the authorities below and the addition made by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime lending rate) without giving any cogent reason for adopting the same. 4. As already stated these grounds relate to determination of arms length price in respect of international transaction entered into by the assessee with Sunquest Information Systems Inc (Sunquest US). The assessee is a company engaged in the business of rendering Software Development Services. It is wholly owned subsidiary of Sunquest US. The assessee had entered into a master Software Development Agreement with Misys Physicians Systems L.L.C dated 25/5/2005 for rendering software development services. Subsequently another agreement was entered into with Misys Hospital Systems Inc. which was successor in interest of Misys Physicians Systems L.L.C. Misys Hospital Inc was renamed as Sunquest Information Systems Inc (Sunquest US). As per the agreement, the assessee develops, creates, tests and delivers programming materials within the domain of software development services. The assessee is compensated on a cost plus basis. 5. As per the provision of sec. 92 of the Income-tax Act, income arising out of international transaction has to be determined having regard to arms length price. It is not in dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,45,81,00,00,000 44.98% 3 Kals Information Systems Ltd.(seg) 2,16,92,935 1,61,39,288 34.41% 4 Larsen Toubro Infotech Ltd. 17,76,76,48,294 14,88,92,91,379 19.33% S Mindtree Ltd. (seg) 6,98,02,80,117 6,07,89,59,413 14.83% 6 Persistent Systems Solutions Ltd. 6,67,28,828 5,78,33,452 15.38% 7 Persistent Systems Ltd. 5,04,41,30,000 3,86,97,20,000 30.35% 8 R S Software (India) Ltd. 1,61,83,71,419 1,46,73,31,694 10.29% 9 Sasken Communication Technologies 4,01,50,89,000 3,42,12,53,000 17.36% 10 Tata Elxsi (seg) 3,36,94,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e companies got exclude namely ICRA Techno Analytics Ltd., Persistent Systems and Solutions Ltd., and Think Soft Global Services Ltd. 12. It can be mentioned here that in assessee s own case for asst. year 2005-06, Bangalore ITAT, in the decision reported in (2015) 61 taxman.com 81 (Bangalore Trib.), took the view that thresh hold limit of Related Party Transaction for exclusion as not comparable should be 15% of the turnover of the comparable companies. In other words if the comparable company chosen had transactions of 15% of more of its sales with related parties, then those companies were to be regarded as not comparable companies. In the present case, the 3 companies excluded had RPT transaction which were ICRA Techno Analytics Ltd., 14.95% of Sales Persistent Systems and Solution Ltd., 5.39% of sales and Think Soft Global Services Ltd. 11.01% of its sales. It is the plea of the assessee in ground No. 9 that the aforesaid 3 companies should be considered as comparable companies because the RPT transactions are below the threshold limit of 15% of sales. 13. The ld. DR on the other hand submitted that in some of the decisions rendered by the Bangalore Bench of ITAT thresho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof, the plea of the Assessee requires to be accepted. The TPO/AO are directed to adopt a threshold limit of 15% of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently, it is held that companies having RPT upto 15% of the total revenues can be included. 15. We have considered the rival submission and we are of the view that application of RPT filer at 15% of the sales would be appropriate in the given facts and circumstances of the case and as laid down in the case of Auto Desk India Pvt. Ltd., (Supra), we hold accordingly and direct to inclusion of 3 companies which were excluded by application of RPT Filter by the DRP. 16. The 2 companies out of the 11 companies chosen as final comparable companies by the TPO which remain after the order of the DRP were Kals Information Systems Ltd., and RS Software (India) Ltd. The assessee seeks to exclude Kals Information - Systems Ltd., from the list of comparable companies on the grounds that this company was not functionally comparable as it was engaged in developing software products and was not a pure software development services company. On comparability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparables. To support this contention, reliance was placed on various judicial pronouncements, including the decision of the Hon'ble ITAT, Bangalore in the case of Trilogy E Business Software India Pvt. Ltd Vs. DCIT (ITA NBo.1201/Bang/2010) which has been cited in the later judgments of the Bangalore ITAT in the case of Curam Software International Pvt. Ltd. Vs. ITO (ITA no.1280/Bang/2012) as well as in the appellant's own matter in ITA No.1538/Bang/2012. Additionally, the discussion around this company in the case of NettHawk Networks India Private Ltd. Vs. ITO (ITA no.7633/M/2012) was also cited. 9.3 The objections and arguments of the taxpayer have been considered and the order of the Hon'ble ITAT Bangalore in the case of M/s Trilogy E Business Software India Pvt. Ltd (supra) perused. At Para-46 of this order, the Hon'ble ITAT considered the decision in the case of Bindview India Private Limited and in Para-47 held as follows we have given a careful consideration to the submission made on behalf of the assessee, we find that the TPO has drawn conclusions on the basis of the information obtained by issue of notice u/s 133(6) of the Act. This i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that in the given facts and circumstances of the case, it is just an appropriate to set aside the matter to the TPO on the question regarding this company as comparable company and directing the TPO to exercise his power u/s 133(6) of the Act to find out whether this company is product company and also segmental margin, if it is a product company as well as software development services company. After affording opportunity of being herd to the assesee, the TPO will consider the comparability of this company with that of the assessee. 19. The next grievance of the assessee is reproduced in ground No.15. 20. As far as aforesaid grievance projected by the assessee is concerned, the TPO noticed that the assessee was allowing substantial credit period for payment to the AE. In these circumstances, the TPO made an addition of ₹ 52,73,0325/- treating the extended credit period given by the assessee to AE as international transaction. Following were relevant observations of the TPO in the order of assessment. Interest on Sundry debtors outstanding for more than 3 months : The taxpayer has shown receivables of ₹ 16,82 Crore from its AE. A notice was issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R] Debtors outstanding for more than 3 months 7,15,52.695 Debtors outstanding for less than 3 months 9,66,68,129 Total sundry debtors outstanding 16,82,20,823 7.2 It was submitted that the debtors outstanding with the AE were pure1y because of business and commercial expediency and there was no malafide intention to extend indirect credit period to the AE. The TPO, however, computed notional interest at the rate of 11.25% (being the SBI Prime Lending Rate) for the outstanding receivables from AE beyond 3 The taxpayer has grieved this treatment and cited the decision of the Hon'ble Mumbai ITAT in case of Evonik Degussa India P. Ltd.v/s Asstt. Commissioner of Income Tax-OSD Circle-3(1) (ITA No. 7653/Mum./2011) where it was held that the T.P. adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income, it was also pointed out by the taxpayer that the TPO had not given any basis for arriving at a threshold of three month for computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main transaction. The similar issue had come up for consideration before the Co-ordinate Bench of Mumbai in the case of Goldstar Jewellery Ltd. (supra), wherein it was observed as under; However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the arty depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sale to the AE. As per Rule 1 OA(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and clubbing of closely linked transaction are permitted under said rule. This concept of aggregation of the transaction which is closely liked is also su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from AE as well as non- AE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm's length in comparison to the average period of realization and multiplied by the outstanding from non-AEs then no adjustment can be made being the transaction is at arm's length. The third aspect of the issue is that the arm's length interest for making the adjustment. Both the TPO and the DRP has taken into consideration the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the AO/TPO to re-do the exercise of determination of the ALP in terms of above observation . Respectfully following the above decision, we hold that there can be no separate international transaction of 'interest' in the international transaction of sale. Ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re liable to tax deduction at source. 16.4 Without prejudice to the above, the learned AO has erred in holding that the Assessee has capitalized such expenditure and therefore depreciation claimed on the same to be disallowed. 27. The facts with regard to ground No.16 are that the assessee acquired computer software and licence and the total cost of such purchase was ₹ 10,39,0590/- were capitalized in the books of account under the head computer software . The assessee claimed the depreciation at 60% on computer software. The AO noticed that while making payment for the purchase of software and licence, the assessee did not deducted tax at source. According to the AO, assessee ought to have been deducted tax at source u/s 194J of the Act in respect of such purchases since the assessee has not deducted tax at source, the AO was view that provision of sec. 40a(ia) of the Act will be attracted. He was of the view that depreciation claimed on purchase of software and license by the assessee should be disallowed u/s 40a(ia) of the Act. The AO accordingly disallowed the depreciation to the extent of ₹ 1,039,590/- and the DRP confirmed the action of the AO. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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