TMI Blog2020 (1) TMI 1433X X X X Extracts X X X X X X X X Extracts X X X X ..... h that of assessee need to be deselected from final list. Persistent Systems and Solutions Ltd company earned income from sale of software services and products and no segmental details are available in respect of the same. It is also observed that income generated under both these segments cumulatively amounts to tune of ₹ 6.67 crores and in schedule 11, entire revenue has been shown under one segment. It is also observed that this company is rendering software development services and licensing, and earns royalty of software products. Therefore in our considered opinion, in the absence of segmental details we cannot appreciate the view taken by authorities below. Sasken Communications Technologies Ltd - We are unable to appreciate arguments advanced by Ld.AR regarding segmental details not available. Further it is observed that Ld.TPO considered the consolidated figure appearing in profit and loss account, instead of considering segmental profits from software services of this company. We therefore set aside this comparable to Ld.AO/TPO to verify relevant observations recorded herein above and to recompute margins of this comparable. LGS global Ltd FCS software s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nally selected. If that information is insufficient, it is beyond the power of Assessee to produce correct information about comparable companies. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defense to say that Assessee has not furnished required details to deny any adjustment on account of working capital/risk differences. Ld.AO/TPO shall then compute risk as adjustment in accordance with law. International transaction or not - loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period - HELD THAT:- As decided in INSTRUMENTARIUM CORPORATION LIMITED,[ 2016 (7) TMI 760 - ITAT KOLKATA] Outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B - In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. Alternatively, it has been argued that working capital adjustment subsume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... captive software development service provider. In facts of present case, assessee is doing part of software development cycle under the guidance of its AE s and therefore has been categorised as a captive software development service provider catering to needs of the group. Assessee in TP study held to be comprise of Software Engineers, who develop project based on inputs received from AE. Engineers employed by assessee designs functional specifications for the project identification of interfaces components coding and bug fixing. Ultimate approval and owner of project developed is the AE. In our view, by involving itself in process of Software development for AE, assessee cannot be held to be fulfledged Software Development Company. One has to look into transaction in regards to services rendered and FAR, which catagorises it to be a captive service provider, working on business model of cost plus margin. We have perused view of co-ordinate bench of this Tribunal in case of Mercedes-Benz research and development India private limited [ 2018 (2) TMI 1975 - ITAT BANGALORE] in respect of Accropatel Technologies Ltd and L T Infotech Ltd. It is observed that these comparables we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d DRP erred in upholding the rejection by the learned Transfer Pricing Officer ( the learned TPO ) of the analysis undertaken by the Appellant in its Transfer Pricing ( TP ) documentation, and thereby erred in not appreciating that the Appellant had prepared the TP documentation with bona fide and in good faith. 3. The learned AO and the learned DRP erred in law and on facts in disregarding application of multiple year / prior year data as used by the Appellant in the TP documentation and holding that only current year (i.e. financial year 2010- 11 relevant to assessment year 2011-12) data for comparable companies should be used. 4. The learned AO and the learned DRP erred on facts and in law in upholding the acts of the learned TPO: (a) in conducting a fresh benchmarking analysis using non-contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis based on his own conjectures and assumptions. (b) in rejecting the comparability analysis of the Appellant in the TP documentation and in submissions provided during the assessment proceedings, and confirming the comparability analysis as adopted by the learned TPO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the learned AO erred in charging interest under section 234C of the Act. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal. ITA (TP) A No. 505/B/2016 (revenue s appeal) 1. On the issue of excess claim u/s 10A and 10AA, whether the DRP was right in relying on the decision of the Hon ble High Court of Karnataka in the case of Tata Elxsi Others v. CIT (349 ITR 98) and in allowing the claim in favour of the assessee and against the Revenue. The decision is not accepted in principle but due to low tax effect, further appeal is suggested. 2. On the issue of disallowance of software expenses whether the DRP was right in relying upon the decision of the Hon ble ITAT in assessee s own case for A.Y. 2008-09 and in allowing the appeal. AO has not accepted the decision. 3. Whether ld.DRP has erred in granting 1% risk adjustment arbitrarily without appreciating the facts of the case and its comparables. 4. Whether Hon ble DRP erred in fact in rejecting the company as a comparable on the grounds that it is functionally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143 (1) of the Act, and was selected for scrutiny. Consequentially, notices under section 143 (2), 142 (1) along with questionnaire was issued to assessee. In response to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details as called for. 2.1. From details filed by assessee, Ld.AO observed that assessee has entered into international transaction with its associated enterprise that exceeds ₹ 15 crores. Accordingly, case was referred to transfer pricing officer to determine arm s length price under section 92CA of the Act. Upon receipt of reference, Ld.TPO called for economic details in respect of international transaction entered into by assessee. Ld.TPO observed that assessee had following international transactions with its associated enterprises: Particulars Amount in Rs. Provision of services, SWD 3,86,63,46,033/- Provision of services, ITES 1,17,69,82,795/- Management fees paid 19,44,47,584/- Reimbursement of expenses paid 2,59,69,337/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Dealt are Services (I) Pvt.Ltd 3.84% 5. Informed Technologies India Ltd 2 2.44% 6. Infosys BPO Ltd 27.74% 7. Jindal Intellicom Pvt.Ltd. 9.22% 8. Professional Management Consultants Pvt.Ltd. 3.22% 9. Spanish BPO Services Ltd 3.34% 10. In House Productions Ltd- Healthcare division 11.84% 11. Microland Ltd-IT Enabled Services -9.82% 12. Techprocess Solutions Ltd- Processing services 33.50% Average Margin 13% As assessee s margin was more than the average margin of comparables selected under respective segments, the transaction with AE was treated to be at arms length. 2.2. Ld.TPO upon analysing comparables selected by assessee under both seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Jindal Intellicom 11.13% 9. Mindtree Ltd (SEG) 10.76% 10. IGate Global Solutions Ltd 25.07% Average Margin 24.77% Ld.TPO thus proposed shortfall as adjustment under both segments as under: S.No Particulars Proposed adjustment 1. Provision of SWD services ₹ 48,03,26,838/- 2. Provision of ITES services ₹ 14,23,71,346/- 2.3. Ld.TPO restricted working capital adjustment to 1.63%. He also denied any risk adjustment for the reason that assessee failed to establish the difference in risk level of the tested party and uncontrolled comparables and that no reasonably accurate adjustments could be made for want of a scientific method for computing the quantum of risk adjustment. The Ld.TPO did not consider certain expenses as operating in nature while computing the margins of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eject comparables. 2.6.1. Ld.CIT DR submitted that the issue arises from the records and there is no need to consider any fresh evidences for adjudicating the additional ground raised. Ld.CIT DR submitted that DRP erred in directing exclusion of companies whose turnover is more than 200 crores in respect of segments under consideration. She submitted that turnover cannot be the only criteria for exclusion. She submitted that t was an inadvertent omission for raising grounds in respect of the same. 2.6.2. On the contrary, Ld.AR submitted that assessee strongly objects for Additional ground to be admitted as, by way of additional ground revenue is seeking to challenge what is already settled by various decisions of this Tribunal. However Ld.AR also submitted that assessee has filed cross objection against the additional ground raised by revenue in support of all those comparables excluded by DRP by applying turnover filter. Ld.AR submitted that even apart from not satisfying the turnover filter, these comparables so excluded by DRP are functionally also not similar captive service provider like assessee. 2.6.3. We have perused submissions advanced by both sides in light o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment for the group companies on several financial software products and is compensated on a cost plus markup basis. The group company has the required infrastructure with skilled resources in all areas of project management and development, resources with specialised skills to meet the project needs are recruited locally by assessee on a case to case basis. It has been submitted in the TP study that assessee follows a structured set of guidelines and procedures developed by the group companies which is the management of outsourced project or product development. FAR analysis of SWD segment: 3.1.1 Functions performed: Assessee provides post sales services of maintenance support to third-party customers of group companies within India which includes provision of new releases of software modules, resolution of reported problems and provision of helpdesk services. For this purpose assessee imports basic software from its group company in UK. Customisation is carried out through a third-party contract service provider. Assessee come with staff provided by the UK group companies undertakes software implementation. Assessee also provides post warranty maintenance servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent (SWD) Comparable sought for exclusion: Persistent Systems and Solutions Ltd This comparable has been included by Ld.TPO though it has been objected by assessee on functional dissimilarities. It has been submitted that segmental information is in respect of this company is not available in the annual report. Ld. CIT DR placed reliance upon orders of authorities below. We have perused submissions advanced by both sides in light of the records placed before us. Annual report of this company is placed at page 1011 to 1022 of paper book Index to Annual Reports Volume 1. We find that this company earned income from sale of software services and products and no segmental details are available in respect of the same. It is also observed that income generated under both these segments cumulatively amounts to tune of ₹ 6.67 crores and in schedule 11, entire revenue has been shown under one segment. It is also observed that this company is rendering software development services and licensing, and earns royalty of software products. Therefore in our considered opinion, in the absence of segmental details we cannot appreciate the view taken by authorities be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee is seeking inclusion of these comparable. It has been submitted that LGS Global Ltd., was submitted as an addition to original list of comparables during TP assessment. Ld.AR submitted that Ld.TPO rejected this company on the ground that annual report did not give breakup of employee cost. As regards FCS Software Solutions Ltd, Ld.AR submitted that this comparable was initially proposed by Ld.TPO in the show cause notice but subsequently not included on the sole ground that impact of its working capital on profit was more than 4%, despite the fact that Ld.TPO categorically held it is functionally similar to assessee. Ld.CIT DR placed reliance upon decision of coordinate bench of this Tribunal, wherein this comparable is held to be not a good comparable in case of ACIT vs AT T Global Business Services India (P) Ltd reported in (2019) 101 Taxmann.com 10. However in all fairness she submitted that in case of Finestra software solutions (India) Pvt Ltd vs ACIT reported in (2018) 93 Taxmann.com 460 wherein these comparables have been set aside. She therefore submitted that these comparables may be set aside to Ld.AO/TPO for due verification. We have perused su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICRA Online Ltd Assessee objected for inclusion of this comparable. Ld.AR submitted that this company is functionally not comparable under this segment as it is providing high-end KPO services, whereas assessee is carrying out back office services. He also submitted that this company fails RPT filter applied by Ld.TPO. On the contrary Ld. CIT DR placed reliance on view taken by this Tribunal in case of Swiss Re Shared services (India) Pvt.Ltd vs ACIT (supra). We have perused submissions advanced by both sides in light of records placed before us. The annual report of this company is placed at page 1738-1760 of Index to Annual Reports Paper Book Volume 2. It is observed that this company has 3 reportable segments being information services, outsourced services, software services. Further it is observed that, this Tribunal in case of Swiss Re Shared services (India) Pvt.Ltd vs ACIT (supra) and M/s Zyme Solutions Pvt.Ltd vs ACIT in ITA (TP) A No. 85/B/2016 for assessment year 2011-12 remanded this company for fresh consideration to Ld. AO/TPO. Following the same, we also direct this company to be setaside to Ld.AO/TPO for fresh consideration of comparability the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds to comparables finally selected. She placed reliance upon VM global Technology Services (India) Pvt.Ltd vs ACIT reported in (2018) 91 taxman.com 403 in support of her contention. We have perused submissions advanced by both sides in light of records placed before us. 3.4.2.We have perused orders passed by authorities below on the basis of records placed before us. It is noted that working capital adjustment has been restricted by Ld.TPO and upheld by DRP at 1.63% which is contrary to provisions of transfer pricing rules. As held by various decisions of coordinate benches of this Tribunal, we direct Ld.TPO to recompute working capital adjustment in actual, and to consider the same for purposes of computing arm s length margin as per the view expressed by this Tribunal in case of Huawei Technologies India Pvt. Ltd vs JCIT reported in (2019) 101 taxman.com 313. 3.4.3 As regards the risk adjustment on ad hoc basis at 1%, it is observed that there is no scientific manner which has been applied by DRP. Assessee is a low risk bearing company for ITES segment and bears certain amount of entrepreneurial risk under SWD segment. Therefore while computing risk adjustment risks assu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 66 (Del), held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon able Delhi High Court vide order dated 21/07/16 in ITA No. 379/2016, also upheld by Hon ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 3.5.3. 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. 3.5.4. 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 her contentions, she placed reliance on decision of Delhi Tribunal order in Ameriprise In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing above question, Hon ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon ble Bombay High Court restored the issue to file 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. In so far as charging of rate of interest is concerned, he relied on decision of the Hon ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) 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. 3.5.7. 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 Inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly these ground raised by assessee stands allowed for statistical purposes. 3.6.Ground No. 12 is against non-granting of TDS credit claimed by assessee while filing its return of income. Ld.TPO/AO is directed to verify the same and granted accordance with law. Assessee is directed to furnish requisite information/details in support of its claim. Needless to say that proper opportunity in accordance with law shall be granted to assessee. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 3.7. Ground No. 13-14 raised by assessee are consequential in nature and therefore do not require adjudication. Accordingly appeal filed by assessee stands allowed as indicated hereinabove. Revenue s appeal 4. Ground no 1 (Revenue appeal) This ground is in respect of excluding expenses incurred in foreign currency from export turnover while computing deduction under section 10A/AA of the Act. 4.1. Ld.AR submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct Ld.AO to grant deduction claimed by assessee under section 37 of the Act. Accordingly, this ground raised by revenue stands dismissed. 6. Ground No. 4-5 (revenue appeal), additional ground raised by revenue and CO filed by assessee. Revenue by way of additional ground challenges exclusion of comparables merely on turnover filter without analysing the functions of comparables with that of assessee. Assessee by way of cross objection is in support of exclusion of these comparables on non-satisfaction of turnover filter on the ground that it is a settled principle to exclude the comparables which are with high turnover and cannot be compared with a captive service provider like assessee 6.1. In Revised Additional Ground, revenue is challenging exclusion of following comparables on turnover filter by DRP. SWD Segment Acropetal Technologies Ltd, eZest Solutions Ltd., E-Infochips Ltd, Evoke Tech Pvt.Ltd, ICRA Techno Analytics Ltd, Larsen and Toubro Infotech Ltd, Persistent Systems and Solutions Ltd., RS Software (India) Ltd. ITES Segment Infosys BPO Ltd., Mindtree Ltd, iGate Global Soutions Ltd 6.2. Ld.CIT DR at the outset submitted that DRP re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various verticals of software. Ld.TPO as well as assessee searched for comparables, which are engaged in software development services, but has not consider verticals/functional or service lines, in which the company is engaged. Thus it is observed that comparables selected are into different verticals and functional lines, though assessee is catering to software development and maintenance needs of the group and has been characterized as captive software development service provider. In Genesis Integrating Systems India (P) Ltd vs DCIT (supra), this Tribunal observed as under: 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith that of assessee and also because they have a high turnover. It is submitted that subsequently this Tribunal in case of Yodlee Infotech Pvt. Ltd vs ITO in IT(TP)A no. 108/Bang/2014 For assessment year 2009-10, vide order dated 12/12/14, excluded these companies following Genesis Integrating systems Indi Pvt.Ltd vs.DCIT(supra). Hon ble Delhi High Court in case of Chriscapital (supra), Hon ble Court was of the opinion that assessee could not challenge functional differences before the court for first time and that assessee had included one of the companies in its earlier year. In the present case facts are not similar to that of Chriscapital (supra). 6.8. Reliance is placed on decision of this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT reported in (2018) 96 Taxmann.com 263, where this Tribunal followed similar view to exclude identical comparables by applying turnover filter, wherein all decisions relied upon by Ld. CIT DR has been considered and dealt with. 6.9. However, we have also analysed functional similarities/dissimilarities of these comparables with assessee having regard to annual reports placed in Index to Annual report paper book Volume I II. Comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee before TPO/DRP that in order to maintain the brand image of Infosys BPQ Ltd. in the market, the company incurs substantial selling and marketing expenditure whereas the assessee being a contract service provider does not incur such expenses to maintain its brand has not been controverted by them. Further, Infosys BPO Ltd. being a subsidiary of Infosys has an element of brand value associated with it. This can be further confirmed by the presence of brand related expenses incurred by Infosys BPO Ltd. Further, Infosys BPO Ltd. has acquired Australian based company M/s Portland Group Pty Ltd. during financial year 2011-12. They provide sourcing and category management services in Sydney, Australia. Therefore, this company also failed the TPO's own filter of rejecting companies with peculiar circumstances. In view of the above i.e. functionally not comparable, presence of brand and extraordinary event that has taken place during the year on account of acquisition of Australian based company, we are of the considered opinion that Infosys BPO Ltd. should not be included in the list of comparables. We accordingly direct the Assessing Officer/TPO to exclude Infosys BPO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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