TMI Blog2019 (6) TMI 1567X X X X Extracts X X X X X X X X Extracts X X X X ..... O to exclude E-Infochips Ltd. from the list of comparables. Wipro Technologies Limited (Wipro) has generated its entire revenue pursuant to the master service agreement having its huge scale of operation as compared to taxpayer and the fact that the taxpayer is a routine captive service provider, the ld. CIT (A) has rightly excluded. E Zest solutions Ltd. exclude the same on the ground that it is providing high end technical services and as such, is a KPO and not a software development company. C G VAK Software Exports Ltd. ( CG VAK ) - TPO as well as the DRP were erred in excluding CG VAK Software and Exports Ltd. from the list of final set of comparables even though there is no adverse remark about functional similarity between two companies, hence we direct the TPO to include CG-VAK Software and Exports Ltd. in the final set of comparables for determination of arithmetic mean margin to benchmark international transactions with its AE. R Systems International Ltd.- TPO has accepted this company as comparable in earlier AY 2010-11 and later AY 201213. Therefore, we are of the considered view that when functions carried out by this company are similar to the function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed out of order of the TPO/AO u/s 143(3) r.w.s 144C(1) of the Act ,dated 11/02/2015. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this consolidated order. 2. The assessee, in its memorandum of appeal has taken following grounds of appeal. Adjustment I Addition to Total Income INR 3,64,56,910/- 1. on the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (AO) erred in proposing and the Hon'ble Dispute Resolution Panel ('DRP') further erred in confirming the proposed addition to the Appellant's total income of INR 3,64,56,910/- based oil provisions of Chapter X of the Income-tax Act, ('the Act'). Requisite Conditions under Section 92C(3) - Not Satisfied 2. On facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned AO and learned TPO in not stating any reasons to show that either of the conditions mentioned in clauses (a) to (d) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO of rejecting one of the Appellant's comparable viz. Varna Industries Limited on the grounds that the company is engaged in providing Engineering Services however erroneously erred in accepting E-Infochips Limited providing hitech engineering services, which clearly brings out the inconsistency in the approach adopted by the learned TPO as well as the Hon'ble DRP. In view of the above, the Appellant prays that the aforesaid inconsistency in the approach of the learned TPO as well as the Hon'ble DRP lacks consistency and contains inherent contradictions being against the established principles of benchmarking exercise and is liable to be rejected/appropriately corrected. Incorrect application of an arbitrary filter to select functionally different companies 7. On the facts and in the circumstances of the case and in law, the Hon'ble DRP further erred in arbitrarily applying a filter of software development services more than 50 per cent to select two companies viz. e-lnfochips Limited and Wipro Technologies Limited to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts and in circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in making an adjustment of INR 8,74,585 by using the LIBOR plus 2% for the purpose of benchmarking the notional interest cost to the Appellant by erroneously ignoring the fact that the Appellant is a zero debt company and it does not have any borrowings / loans from external sources, therefore no actual interest cost borne by the Appellant, thereby disregarding the factual explanations submitted by the Appellant during the course of assessment proceedings. In view of the above, the Appellant prays that the addition of notional interest on account of the delay in receipts from the AEs made by the learned AO, learned TI'0 and confirmed by the Hon'ble DRP is erroneous, unwarranted and should be deleted. Initiation of Penalty Proceedings under section 271(1)(c) of the Act 13. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the learned AO be directed to drop the penalty proceedings initiated und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviding similar software services as derived from the Prowess and Capitaline database. The assessee has selected 14 comparables with average margin of 13.35% and then compared to the margin earned by the assessee of 14.89% and stated that international transaction with its AE is at ALP. The details of comparables with margin selected by the assessee are as under:- Sr. No. Company Name NCP 2011(%) 1 Akshay Software Technologies Ltd. 0.69 2 CG-Vak Software Exports Ltd. 5.44 3 Evoke Technologies Pvt. Ltd. 8.11 4 Goldstone Technologies Ltd. 5.92 5 Helios Matheson Information Technology Ltd. 15.16 6 LGS Global Ltd. 13.57 7 Mindtree Ltd. 8.86 8 Persistent systems Ltd. 25.88 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Acropetal technologies Ltd. 36.69 TPO 9 L T Infotech Ltd. 18.00 TPO 10 Powersoft Global Solutions Ltd. 19.91 Assessee 11 R S Software (India) Ltd. 16.2 Assessee 12 Sasken Communication Technologies Ltd. 29.36 Assessee 13. Tata Elsxi (seg) 11.4 Assessee 14 Zylog Systems Ltd. 28.74 TPO 15 Wipro tech Ltd. 54.42 TPO 16 Sankhya infotech 26.2 TPO 17. Infosys Ltd. 43.53 TPO 18 E Zest solutions Ltd. 34.83 TPO Mean 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28.74 DRP 16 Sankhya infotech 54.42 DRP 17. Infosys Ltd. 26.20 DRP 18 E Zest solutions Ltd. 34.83 DRP Mean 23.07 DRP 7. The AO has passed final assessment order u/s 143(3) r.w.s. 144C(1) of the Act, dated 30/12/2015 and made TP adjustment as suggested by the DRP-3, Mumbai, at ₹ 3,55,82,325/-. The AO has also made adjustment towards interest on sundry debtors as suggested by the TPO at ₹ 8,74,585/-. 8. Aggrieved by the order of DRP-3, Mumbai, the assessee as well as the Revenue are in appeal before us. 9. The assessee has taken various grounds in its memorandum of appeal challenging TP adjustment suggested by the DRP on various grounds including cherry picking of comparable companies, incorrect selection of comparable companies, incorrect rejections of comparable companies selected by the assessee in TP report, inconsistency in approach while s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 62.60%, the same cannot be considered s comparable to the assessee. In this regard, he relied upon the decision of ITAT Delhi, in the case of Cadence Design Systems (I)(P.) Ltd. (2018) 93 taxmann.com 227(Del. Trib.). The assessee has also relied upon the following judgments: i. Alcatel Lucent India Pvt. Ltd. [2016] 74 taxmann.com 105 (Del. Trib.) ii. Adobe Systems India Pvt. Ltd. [2018] 96 taxmann.com 15 (Del. Trib.) iii. Radknee (India) P. Ltd. (2019] 102 taxmann.com 08 (Pune Trib.) iv. Ness Technologies India P. Ltd. [2016] 76 taxmann.com 209 (Mum. Trib.) v. Zynga Game Natework India P. Ltd. [2017] 85 taxmann.com 11 (Bang. Trib.) 11. The Ld. DR, on the other hand, strongly supported the order of the Ld. DRP and submitted that the Ld. DRP has brought out clear facts to the effect that Einfochips Ltd. is functionally comparables to the assessee and also the company satisfies filter of receipt of similar nature of more than 50%. In so far as, other arguments of the assessee with regard to extraordinary events, the DRP has negated all argument of the assessee in the light of decision of Bangalore ITAT, in the case of Genisys Information Systems India Pvt. Ltd. vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions of Provision of software development services. The relevant findings of the Tribunal are as under:- 31. Assessee resisted the inclusion of this company in the list of comparables mainly contending that the company's revenue from software development services is less than 75% of its operating revenue and also that it is engaged into diversified activities as could be seen from the annual report of this company. Earning of super normal profits was also contended before the ld. TPO. However, ld. TPO observed that the assessee is also engaged in Semantics, under two heads of income i.e. income from software development and income from IT services which put together amounts to 86% of the total income, as such the assessee cannot insist on considering the income only from software development. He further observed that the other activities are of very small volume and integrally connected with the function of providing software services. 32. Ld. DRP observed that the revenue from software services of this company is as high as 85% of total receipts and there was no earning from sale of software products. Only a small component of earning is from hardware. Following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity. 37. In Ness technologies (India) (P.) Ltd. case (supra) this aspect was argued before the Mumbai Tribunal. Having considered the rival contentions in the light of the annual report of this company and also the decision of a coordinate bench of Delhi Tribunal in the case of Saxo India (P.) Ltd. (supra), it was held that this company is not a good comparable and deserves to be excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintenance and technology infrastructure support services. There is no segmental data available in so far as revenue from each segment. It derives more than 64% revenue from software development and related services. The Ld. AR further submitted that it has abnormal high margin owing to huge brand value of its different economic scales. Wipro brand is amongst the top five Greenpeace International Ranking Guide which is one of the top position among Indian IT Brands. As per the annual report, the value of the brand as on 31St March 2011 is 839 million. Therefore, this company cannot be compared with assessee which is mainly providing software development services to its AE. 15. The Ld. DR, on the other hand, submitted that the Ld. DRP has brought out clear facts to the effect that although this company is into diversified activities, but its source of revenue is from software development and related service which passes filter adopted by the TPO while selecting the comparables. The Ld. DR further submitted that the Ld. DRP has negated all arguments made by the assessee in light of brand value and high margins to come to the conclusion that scale of operations and brand value do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provide to its AE and held the Wipro Technology Ltd. cannot be compared for benchmarking the ALP of international transactions. The relevant findings of the Tribunal are as under:- 7. The ld. DR challenged the inclusion of Wipro by ld. CIT (A) on the ground that abnormally high margin and assuming entrepreneurial risk and marketing risk cannot be a ground to exclude any comparable and in such circumstances, only captive subsidiaries can be used as comparables which is not possible and relied upon findings returned by TPO. 38. However, on the other hand, ld. AR for the taxpayer supported the order passed by the ld. CIT (A) on the ground that the Wipro is functionally not comparable being into technology infrastructure; support products; and software related support services activities; that Wipro has generated entire revenue pursuant to the master service agreement between Wipro and Citi Group services; that Wipro has huge scale of operation and without prejudice, correct margin at 52.09% instead of 54.42% be taken; and relied upon Agilis Information Technologies (P.) Ltd. v. ITO [2017] 88 taxmann.com 6 (Delhi - Trib.). 39. Co-ordinate Bench of the Tribunal in case cited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd, he relied upon number of judicial precedence including the decision of ITAT, Delhi in the case of Clear 2 Pay India Pvt. Ltd. vs ITO (2018) 95 taxmann.com 284 (Del. Trib.). 19. The Ld. DR, on the other hand, strongly supported the order of the Ld. DRP and submitted that the TPO as well as DRP has brought out clear facts to the effect that this is a best comparable for the purpose of determination of Arm s Length Price of international transaction of the assessee with its AE by negating the arguments of the assessee that super normal profit companies cannot be considered for benchmarking of international transaction unless it is demonstrated that some exceptional circumstances during the year let to super normal rate of profits. 20. We have heard both parties, perused the material available on record and gone through orders of the authorities below. The main contention of the assessee is that this company is functionally not comparable as it is engaged in Software product development services including product design and development, product feature enhancement, product platform migration, software product testing, maintenance and support and license management etc. This c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi Bench in the case of Clear 2 Pay India Pvt. Ltd. vs ITO (supra), we direct the AO/TPO to exclude E-Zest Solutions Ltd. from the list of final set of comparables. (iv) C G VAK Software Exports Ltd. ( CG VAK ) 22. The assessee has included C G VAK Software Exports Ltd. in the final set of comparables on the ground that the software services segment is comparable to the functions carried out by the assessee. The assessee further stated that as per financial of this company, 90% revenue is generated from software services and 10% from BPO. The TPO excluded CG WAK Software and Exports Ltd. on the ground that it is into both IT and ITeS services with IT forming a major part. The TPO further observed that it is persistent loss making company. The DRP excluded this company on the ground that although it is has profit but such profit has been arrived at after including FOREX gain as operating revenue. But if FOREX gain is excluded from operating income, then it will be under loss, hence, this company cannot be considered as comparable to the assessee. 23. The Ld. AR for the assessee submitted that the company has three business segments namely software services, BPO se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is into profit if FOREX foreign exchange gain is considered as part of operational revenue, but such FOREX gain or loss cannot be considered as part of operating revenue to determine the operating margins. We find that the issue of foreign exchange gain is whether part of operating revenue has been considered by the Hon ble Delhi High Court in the case of Pr. CIT vs B.C. Management Services Pvt. Ltd. (2018) 403 ITR 45 (Del.). and by following its earlier order in the case of Pr. CIT vs Cashedge India Pvt. Ltd. in ITA NO.279 of 2016 held that as far as the question of foreign exchange fluctuation element is concerned, the records clearly indicate that the safe Harbour rules came into force later, whereas the facts of the case pertains to AY 2010-11 as a consequence, the impugned order of the Tribunal cannot be interfere with, where the Tribunal held that FOREX gain is part of operating revenue for the purpose of determination operating margin. In this case, there is no doubt with regard to the fact that if FOREX gain is included as part of operating revenue, then this company is not a persistent loss making company. Further, various Courts and the Tribunals has consistently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company is a captive service provider and is comparable to the assessee which is also captive service provider. Further, the TPO has accepted this company as comparable in earlier AY 2010-11 and later AY 201213. Therefore, we are of the considered view that when functions carried out by this company are similar to the functions carried out by the assessee and also the TPO accepted this company in earlier years and subsequent years, there is no reason for the TPO to exclude this company for the year under consideration without their being any change in facts and circumstances. The DRP after considering relevant facts has rightly directed the TPO to include R Systems International Ltd. in the final set of comparables for determination of Arm s Length Price of international transactions with AE. Hence, we are inclined to uphold the findings of Ld. DRP and dismissed the appeal filed by the Revenue. 28. The assessee has raised various grounds taking inclusion and exclusion of same more comparables and given three more options. At the time of hearing, the Ld. AR for the assessee submitted that if E-Infochips Ltd., Wipro Technologies Limited, E-Zest Solutions Ltd. are excluded and CG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in LIBOR rate. The issue regarding quantum of spread over LIBOR is to be decided on the basis of peculiar facts of each case after evaluating terms of the loans i.e. period of loans, quantum of loans and creditworthiness of the borrower and the nature of collateral. The delay in realisation of debtors from the AE is akin to a transaction of advancing of a interest free loan to the AE, hence, the principle of benchmarking applicable and accordingly by taking note of the period of delay in realisation of sundry debtors wherein between 30 days to 183 days as per the data furnished in the order of the TPO, the AO was right in considering reasonable period of 60 days but while applying the SBI PLR, the AO has ignored the fact that when loan is advanced to AE in foreign currency an appropriate rate for benchmarking interest is LIBOR plus reasonable mark up for risk factors. Therefore, after considering relevant facts, direct the AO/TPO to re-compute transfer pricing adjustment by considering the Arm s Length rate of interest at LIBOR plus mark-up of 2%. The relevant findings of the DRP are as under:- 7.2 We have considered the TPO's order and the submissions of the assessee. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the discussion above, we hold that the transfer pricing adjustment made by the TPO by way of computing interest income with regard to the delayed recovery of sundry debtors from the AEs is in accordance with the transfer pricing provisions of the I.T.Act and is in order. 7.7 However, we do not agree with the benchmarking carried out by the TPO with regard to this international transaction by considering the PLR of SBI along with a mark up of 3% as the Arm's Length Price, it has been held in various decisions of the Hon'ble Tribunals and the Hon'ble Delhi High Court (in the case of M/s. Cotton Natural (India) Pvt. Ltd.) that benchmarking of international transactions of interest on loans advanced in foreign currency to AEs shall be made on LIBOR plus basis. The issue regarding the quantum of spread over the LIBOR rate is to be decided on the basis of peculiar facts of each case after evaluating the terms of the loan i.e. period of loan, quantum of loan, creditworthiness of the borrower and the nature of collateral (secured/unsecured loans). 7.8 The delay in realisation of debtors from the AE is akin to a transaction of advancing of a interest free loan to the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the findings of the TPO in benchmarking interest receivables on sundry debtors for delay in remittance from the AE, but while adopting rate of interest erred in considering LIBOR plus 2% as against SBIPLR + 3% considered by the TPO without assigning any reason as to why LIBOR rate is applicable for benchmarking interest receivables from sundry debtors. 33. We have heard both parties, perused the material available on record and gone through the orders of authorities below. There is no dispute with regard to the fact that the assessee has not charged any interest receivables from both AE as well as non-AE for delay in receipt of sale proceeds. Further, there is complete uniformity in not charging interest from both AE and non-AE for delay in export proceeds. In absence of any findings as to the fact that the assessee has allowed undue benefit to the AE by extending credit period for realisation of sundry debtors and such extension of credit period benefits the AE, no adjustment could be made under the TP provisions of the Act to benchmark interest receivables on hypothetical or notional basis because late realisation of export receivable /sundry debtors cannot be considered as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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