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TMI Blog2020 (6) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transactions' of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ('TPO')/ Dispute Resolution Panel ('DRP'). 1.2. That the DRP/TPO erred on facts and in law in considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the appellant: (i) lnfobeans Technologies Limited (ii) Larsen & Toubro Infotech Limited (iii) Mindtree Limited (segmental) (iv) Thirdware Solution Limited (v) Tala Elxsi Ltd. (segmental) (vi) Cybercom Datmatics Information Solutions Ltd. (vii) lnteq Software Private Limited 1.3. Without prejudice, that the TPO erred on facts in considering incorrect operating profit margin of following companies: (i) Tala Elxsi Limited (ii) Larsen & Tourbo Infotech Ltd. ] 1.4. That the DRP! TPO erred on facts und in law in not allowing appropriate risk adjustment to establish comparability ell account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent software development service provider. 1.5. Tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 1104/Del/2015 and 1115/Del/2017. 2.7. That the DRP/ TPO erred on facts and in law in adding an adhoc mark-up of 400 points on the Libor rate of interest, arbitrarily on account of credit rating risk, security risk, transaction cost etc. 2.8. That the RP/ TPO erred on facts and in law in not appreciating that the in terms of Master Circular No.14/2014-15, Reserve Bank or India allows a period of 12 months to all companies for receiving repatriation of export sales proceeds, and therefore, interest if any, ought to be imputed on the period of delay beyond 12 months." 3. The first issue raised in the present appeal is against the addition of Rs. 9.24 crores (approx.) in relation to international transaction of provision of software development services rendered by the assessee to its Associated Enterprises (in short "AE"). 4. Briefly in the facts of the case the assessee has furnished its return of income declaring total income of Rs. 41.05 crores (approx.). The assessee was wholly owned subsidiary of Global Logic Inc. and is engaged in the provision of software development services to Global Logic group and unrelated customers. The company operates through export oriented un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 25,73,69,131/- was proposed by the TPO. 6. Second adjustment which was made in the hands of the assessee was on account of delay in receipt of payment from the AE. The TPO was of the view that where payment on account of sales to AE was realized, after significant time period, which was beyond the period specified in the Agreement then this was an international transaction, which had to be benchmarked in the hands of the assessee. The TPO relied on Explanation (1)(c) to section 92B, which was inserted by Finance Act, 2012, w.e.f. 01.04.2002 and also section 92S(v) and Rule 10B(2)(c), the TPO observed that the Transfer Pricing Regulations were to be applied keeping in mind the overall scheme of the assessee's business arrangement. The TPO held it to be international transaction within meaning of section 92B(1) of the Act and proposed an upward adjustment of Rs. 6,01,18,689/- on account of outstanding receivables. 7. The Assessing Officer issued draft assessment order against which the assessee filed objection before the DRP which in turn passed order dated 02.08.2019. The DRP directed that since the extraordinary expenditure incurred by the assessee on ESOP, was chargeabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within 35th Percentile and 65th Percentile of mean margins of the comparables. He further pointed out that the third concern Cybercom Datamatics Information Solutions Ltd. was functionally not comparable as it was engaged in the business of development, testing, implementation and other application; though the TPO observed that it had considered the segmental detail, but the Pune Bench of Tribunal in PubMatic India (P.) Ltd. vs ACIT (ITA No.655/Pun/2017) Assessment Year 2012-13 vide order dated 09.03.2018 had excluded the said concern on account of financial dissimilarity with the concern engaged in providing software development services. He thus submitted that the margins of the said concern also should be excluded from the final set of comparables. 9. The Ld.DR for the Revenue on the other hand strongly placed reliance on the directions of the DRP and fairly conceded that as far as exclusion of Larsen & Toubro Infotech Ltd. & Tata Elxsi Ltd. are concerned then the directions in Assessment year 2014-15 were to apply mutatis mutandi. Coming to the profile of the assessee in the TP study report at page 46 to 48, the Ld.DR for the Revenue pointed out that the assessee was engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (SEGMENTAL) 18.68% 5. Mindtree Ltd. (SEGMENTAL) 22.12% 6. Inteq Software Pvt.ltd. 23.44% 7. Larsen & Toubro Infotech ltd. 25.22% 8. Infobeans Technologies Ltd. 33.06% 9. Thirdware Solution Ltd. 37.31% 10. Cybercom Datamatics Information Solutions Ltd. 70.28% 35th Percentile 18.68% 65th Percentile 25.22% Assessee's margin 18.06% 13. The limited issue which has been raised by the assessee before us is in respect of inclusion of certain concerns as functionally comparable to the assessee. First such concern against which the assessee is in appeal before us is Larsen & Toubro Infotech Ltd. and case of the assessee is that the margins of the said concern cannot be included because of functional dissimilarity and distorted segmental account. The company is engaged in the business of software product, computer programming, consultancy and related services, which is functionally dissimilar to that of the assessee. Further, as per the annual report of the company, the company has three segments: Services, Industrials Cluster and Telecom segment which refers to Product Engineering Services (PES). 14. The segmental reporting of Larsen & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments which are also reported in the segmental reporting in the annual report of the said company, then such a concern cannot be selected as functionally similar to the concern providing only software development services. Coming to the segmental result, the company itself had reported unallocable expenses of Rs. 193.89 crores; then such segmental detail cannot be relied upon as the margins of the said concern cannot be finalized in the final analysis. 20. The Tribunal in assessee's own case in ITA No.4740/Del/2018 relating to Assessment Year 2014-15 vide order dated 01.05.2020 has directed the exclusion of the said concern from the final list of comparables while benchmarking the ALP of the international transaction by the assessee with its AE. Before parting, we may also refer to an extraordinary event under which Larsen & Toubro Infotech Ltd. initiated and completed transfer of its Product Engineering Services Business (PES) Unit to L&T Technology Services Ltd. w.e.f. January 1, 2014 as part of the business restructuring undertaken within the Larsen & Toubro group. Though the initiation started from 01.01.2014 but the whole effect of the transaction was during the year under co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the final set of comparable. The Ld.AR for the assessee had pointed out that in case the margins of the two concerns i.e. Larsen & Toubro Infotech Ltd. and Tata Elxsi Ltd. are excluded from the margins of the finally selected concerns, then the 35th Percentile and 65th Percentile of the comparable would be 12.48%-33.06% as against the margin of the assessee at 18.06%. Accordingly, no adjustment has to be made in the hands of the assessee on account of ALP of the international transaction undertaken by the assessee with its AE. We direct the Assessing Officer/TPO to delete the adjustment made in the hands of the assessee. 25. Before parting, we may also consider the plea of the assessee for the exclusion of the concern Cybercom Datamatics Information Solutions Ltd. The said concern was included in the final set of comparable and the margins were applied by the TPO rejecting the submissions of the assessee in this regard. 26. We find that the Pune Bench of the Tribunal in Pubmatic India (P.) Ltd. vs ACIT in ITA No.655/Pun/2017 vide order dated 09.03.2018 had directed the exclusion of the concern Cybercom Datamatics Information Solutions Ltd. on account of functional dissimilari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.12.2017. The Tribunal has relied on the decision of Hon'ble Delhi High Court in Pr. CIT-V vs Kusum Health Care Pvt.Ltd. in ITA No.765/2016, judgement dated 25.04.2017 and held that no adjustment is to be made on account of notional interest on receivables by relying upon Explanation (i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company, there is no question of charging any interest on receivables. This issue has also been decided by Hon'ble Delhi high Court in case of Pr.CIT-1 vs M/s. Bechtel India Pvt. ltd. in ITA 379/2016 order dated 21.07.2016. The relevant findings of the order of the Tribunal in assessee's own case (supra) in paras 14 to 18 which are being reference but not being reproduced for the sake of brevity. 33. The assessee during the year under consideration had not avail any loan from AEs or unrelated third party and was not incurring any interest cost. Further, there was similar delay in receipt of receivables from others and the assessee was not charging any interest on delay in receipt of receivables against services rendered to unrelated third party. 34. In such fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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