TMI Blog2020 (4) TMI 883X X X X Extracts X X X X X X X X Extracts X X X X ..... om this company under section 133 (6) to understand the reasoning behind the fall in revenue. In the event, diminishing revenue indicates the level of risk undertaken by this company which cannot be compared with absolutely no risk company like assessee, the same should be excluded. Aspire Systems (India) Pvt.Ltd. - Authorities below has not verified the statistics advanced by Ld.AR in respect of the percentage of related party sales this company had, it would be just and proper to direct Ld.AO/TPO to examine submissions advanced in this regard. We also direct that if RPT is found to be more than 15% of the total revenues, then this comparable should be excluded from the finalist. Accordingly we set aside this comparable back to Ld.AO/TPO Infobeans Technologies Ltd. - As the annual report of this company categorises the diversify services provided by this company under software development segment. We also note that this company is basically into application development for web and mobile and provides customised services to its offshore clients comprising. Entire revenue received by this comparable ease under one single segment of sale of software. This company also owns soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s excluded from final list. Platinum Advertising Pvt. Ltd. - As authorities below has summarily included this comparable without analysing the functional profile assets owned and risks assumed by this comparable having any similarity with assessee before us. We accordingly direct Ld.AO to carry out FAR analysis having regard to the annual report available on public domain. In the event further information is required Ld.AO/TPO shall call for it under section 133 (6) of the act. Needless to say that proper opportunity of being heard shall be granted to assessee as per law.Accordingly this comparable is set aside to Ld.AO/TPO for verification afresh. Priya International Ltd (Seg) - As both sides submitted that DRP in its order has some really rejected the comparables without considering the submissions advanced by assessee. Thus we set aside this issue back to Ld.AO/TPO for reconsideration of Priya International Ltd (Seg.) Adjustment of notional interest on outstanding receivables - HELD THAT:- This Bench referred to decision of Instrumentation Corpn. Ltd. [ 2016 (7) TMI 760 - ITAT KOLKATA] held that outstanding sum of invoices is akin to loan advanced by assessee to fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut demonstrating as to why it was necessary and expedient to do so. 3. The Income Tax Authorities have erred in not appreciating that, the addition made to the income returned is bad in law as the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X. 4. The Income tax authorities have erred in passing the Order without demonstrating that the Assessee had any motive of tax evasion. Ground relating to computation of ALP for the software development segment 5. The Income Tax Authorities have erred in: a. Relying on information collected u/s 133(6) of the Act without providing the Assessee the complete information or providing an opportunity to cross examine the companies concerned or their authorized representative in case of following companies; i. Nihilent Technogies Limited ii. Infobeans Technologies Limited iii. Cybage Software Private Limited b. Adopting a flawed process in issuing notices u/s133(6) and relying upon the replies thereto to compute the ALP; c. Not detailing the process as to how and to which companies the notices had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se risks and therefore have to be credited with a risk premium on this account; and o. Not granting adjustment for working capital differential while computing the ALP. Ground relating to computation of ALP for the sales and marketing segment 6. The learned DRP has erred in confirming the action of the TPO in: a. Rejecting the transfer pricing analysis undertaken by the Assessee on unjustifiable grounds; b. Conducting a fresh transfer pricing analysis despite absence of any defects in the transfer pricing analysis submitted by the Assessee; c. Adopting inappropriate filterss like 25% RPT filter, one sided turnover filter, etc in the process of selecting comparables; d. Rejecting Priya International Limited as a comparable as selected by the Appellant in the TP study on unjustifiable grounds; e. Adopting companies as comparables even though they are not comparable in respect of functions performed, risks assumed, assets utilized, size, turnover, RPT filter, despite having unusual business circumstances or high margins, etc.; i) Ugam Solutions Pvt.Ltd ii. Axience Consulting Private Limited iii. Platinum Advertising Private Limited f. Inappropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the first quarter of FY 2014- 15 as Appellant's services are not liable for output tax; iii. Without appreciating the fact that, out of total service tax input written off of ₹ 61,37,356/- debited to the profit loss account during the year, the Assessee received refund of ₹ 50,68,250/- on 10-Nov-17 and the same is offered to tax in the return of income for AY 2018-19 and refund of ₹ 716,171/- on 22-Oct-18 and same is offered to tax in AY 2019-20. iv. Without prejudice, the AU to be directed to exclude Service tax refund offered to tax in AY 2018-19 and AY 2019-20 from the total income of the respective years. GROUND RELATING TO INTEREST U/S 234A and 234B 9. The learned DRP and AO have erred in levying a sum of ₹ 75,28,600/- under section 234A and ₹ 6,00,80,838/- under section 234B respectively. In the facts and in the circumstances of the case, interest under section 234A and 234B is not leviable. The Assessee denies its liability to pay any further interest. Even otherwise, the interest calculated is excessive and incorrect. The Appellant submits that each of the above grounds/ sub-grounds are independent and without prejudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and marketing segment. Following are the comparables selected by assessee in the TP study under both these segment: Software Development Service segment: S.No. Name of the Company Weighted Average of adjusted margins (OP/OC) 1 Sagar Soft India Limited -0.90% 2 TVS Infotech Limited 2.96% 3 Kals Information Systems Ltd 3.38% 4 Caliber Point Business Solutions Limited (Segmental) 3.65% 5 Akshay Software Technologies Limited 5.37% 6 Sasken Communication Technologies Limited (Segmental) 7.23% 7 Cigniti Technologies Ltd. 8.20% 8 CG-VAK Software a Exports Ltd 11.54% 9 Helios a Matheson Information Technology Limited 15.68% 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der both segments are as under: Software Development Segment: Sl.No. Name of the Company Weighted Average Opearating Margin Cost 1 Kals Information Systems Ltd 11.88% 2 E-Zest Solutions Ltd 14.05% 3 CG-V AK Software Exports Ltd. 18.50% 4 Tata Elxsi Ltd. (Seg) 19.34% 5 Rheal Software Pvt. Ltd 19.88% 6 Mindtree Ltd. 20.55% 7 Larsen Toubro Infotech Ltd. 24.21% 8 R S Software (India) Ltd. 24.82% 9 Infobeans Technologies Ltd. 29.91% 10 Persistent Systems Ltd 31.69% 11 Nihilent Technologies Ltd. 32.21% 12 Aspire Systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Services 2,26,02,390 3 Interest on delayed receivables 24,18,490 Total adjustment u/s 92CA 27,73,44,760 Ld.TPO did not grant working capital adjustment in the hands of assessee. Aggrieved by proposed adjustment, assessee raised objections before DRP. 7. DRP while giving directions to Ld.AO excluded hardware solutions Ltd, Intech software as it fails RPT filter for FY 2012-13 and FI 13-14. DRP accepted Cigniti and Sasken Communications as comparables under software development segment. 7.1. Regarding sales and support service segment, DRP excluded Irclass Systems and Solutions Pvt.Ltd, India Tourism Development Corporation Ltd and Killick Agencies and Marketing Ltd as comparable. 7.2. As regarding working capital adjustment DRP upheld the order of Ld.TPO even though this Tribunal in assessee s own case for assessment year 2013-14 directed Ld.AO to provide working capital adjustment. 8. On receipt of the directions by DRP, Ld.AO passed final assessment order by making addition in respect of transapprising adjustment amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emunerated on cost plus basis for the above services. Metric Stream Inc. ( Metric Stream ) provides Enterprise-wide GRC and Quality solutions for global corporations. Metric Stream enterprise solutions are used in diverse industries such as pharmaceutical, medical device, high tech manufacturing, energy financial services, healthcare, manufacturing, food and beverages, and automotive to manage quality processes, corporate policies manage regulatory and industry-mandated compliance and corporate governance initiatives. Metric Stream India is a part of Metric Stream Inc. Its 99.65 percent of equity share capital is held by Metric Stream Inc. Accordingly, Metric Stream India shall constitute Metric Stream Inc.'s AEs by virtue of common control and capital. 12.1.1. From TP study at page 257 it is observed that assessee entered into an agreement with its associated enterprise in U.S. according to which assessee is to provide service in relation to information technology strategy, software development, testing, infrastructure management and technical support at cost plus basis. 12.1.2. It is observed that U.S. associated enterprise play significant role in determining bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that authorities below applied lower limit of turnover filter of ₹ 1 crore and ignored applying an upper turnover filter. It was submitted that, consistently revenue always took stand that turnover is not a relevant filter in software industry. It has been contended by revenue that in software industry size has no influence on the margins earned by a comparable company. What matters is a human capital. It was under these circumstances that Ld.TPO applied only lower limit of turnover filter for excluding companies having turnover less than ₹ 1 crore. 13.3. Ld.CIT.DR submitted that when companies functionally similar to assessee, and is potentially comparable, the same cannot be excluded merely because of high or low turnover. Ld.CIT.DR placed reliance upon decision of Hon ble Delhi High Court in case of Chriscapital Investment Advisers (India) Pvt. Ltd vs DCIT reported in [2015] 56 taxmann.com 417. We have perused submissions advanced by both sides in light of records placed before us. 13.4. We note that Ld.AO/TPO has applied filter of more than ₹ 1 crore, but did not put an upper limit to the filter. This Tribunal in case of Genesis Integrating Syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of software development. He submitted that this company was selected by learnt TPO on the ground that it is only earning income from export of software development services. Referring to the annual reports placed at page 930-937 of paper book volume 2, Ld.AR submitted that this company earns income only from export of software development services. It has been submitted that this comparable has fluctuating margins of net profit over a period of 5 years. Referring to page 710 of paper book volume to Ld.AR submitted that figures referred in the table reproduced herein below, shows drastic fluctuation, which do not indicate profit and loss resulting from operations of this company. Particulars FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY 14-15 Operating Revenue 10,25,11,776 9,33,74,775 8,05,96,844 8,80,89,662 6,48,67,848 Operating Profit 3,93,45,616 3,90,57,071 31,60,967 2,34,38,726 16,70,562 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the statistics of related party transaction in the annual report at page 1087-1094 of paper book volume 2. Ld. A.R. has filed summary of related party transactions in immediately to preceding assessment years which has been reproduced as under: Revenue Operation Nature of transaction 1,56,52,92,158 1,79,11,27,395 Name of the Party Nature of Transaction 2012-13 2013-14 2014-15 Aspire Systems Inc., USA Rendering of Services NA 19,35,53,666 23,62,84,09 1 Aspire Systems Inc., USA Purchase of Service 16,91,3 1,960 18,39,98,056 Aspire Systems Inc., USA Expenses Reimbursed 96,35,388 2,58,04,908 Aspire Systems FZE, UAE Rendering of Services 89,54,074 1,09,74,404 Aspire Systems FZE, UAE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en following RPT filter of more than 15% and has excluded comparable which do not satisfy the filter. 14.2.2. On the contrary, Ld.CIT.DR submitted that Ld.AR does not dispute functional similarity of this company with assessee. Ld.CIT.DR submitted that this comparable may be set aside to Ld.AO/TPO for verification of submissions advanced by Ld.AR. 14.2.3. We have perused submissions advanced by both sides in light of records placed before us. It is noted that DRP also has not verified this aspect though the objection was raised. In fact DRP notes that this company fulfils RPT filter adopted by Ld.TPO. DRP went on different footing which was not raised by assessee as an objection. The details necessary for computing RPT of this comparable in the preceding 2 financial years were available before authorities below however the same has been ignored. This Tribunal in case of Robert Bosch Engineering and Business Solutions Ltd vs DCIT reported in (2018) 99 taxman.com 359, held that RPT filter can be in the range of 25% to 15% of total receipts from software development services depending on availability of comparable companies. As there are comparables under this segment, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for web and mobile and provides customised services to its offshore clients comprising. Entire revenue received by this comparable ease under one single segment of sale of software. This company also owns software licenses. 14.3.3. In our considered opinion this comparable cannot be considered to be functioning in 100% risk mitigated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee. Accordingly we direct this comparable to be excluded from finalist 14.4. Inteq Software Pvt. Ltd. Ld.AR submitted that this comparable was wrongly included by Ld.TPO on the ground that it passes all filters. He submitted that this comparable is also having related party transaction which is more than 25% in the preceding 2 assessment years. Referring to page 783 Ld.AR submitted that this comparable has RPT of 81.86% and 79.74% for financial years 2012-13 and 2013-14 respectively. For the sake of convenience the said table is reproduced herein below: Description FY 2012 -13 FY 2013 -14 Sale of Software Development and service Charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Pvt.Ltd. for functional dissimilarities. 16.1. Ugam Solutions Pvt.Ltd., Ld.AR submitted that complete set of annual report of this comparable is not available in public domain. He submitted that relevant extract of database available from website are placed at page 1421-1423 of paper book is volume 3 from which at page 1423 this company has been stated to be operating in one primary segment being managed analytics. He submitted that this company even otherwise going by the website information is functionally not similar with that of assessee as the clientele of this company services and provides solutions to global market research firms which include research operations, technology infrastructure transition, data warehousing aggregation and visualisation, sample management optimisation, global program management, custom panel solution, reporting solution and mobile solutions etc. He thus submitted that this comparable is functionally not similar with assessee who is a captive service provided and provides Ltd functions as required by the associated enterprise. 16.1.1. Ld.CIT DR relied upon authorities below. 16.1.2. We have perused submissions advanced by both sides o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R on the contrary submitted that this company is and assessee before us provides advertising services to its associated enterprises. He thus submitted that functionally this comparable is similar with that of assessee. 16.3.2. We have perused submissions advanced by both sides in light of records placed before us. We note that authorities below has summarily included this comparable without analysing the functional profile assets owned and risks assumed by this comparable having any similarity with assessee before us. We accordingly direct Ld.AO to carry out FAR analysis having regard to the annual report available on public domain. In the event further information is required Ld.AO/TPO shall call for it under section 133 (6) of the act. Needless to say that proper opportunity of being heard shall be granted to assessee as per law. Accordingly this comparable is set aside to Ld.AO/TPO for verification afresh. 16.4. For Inclusion: Ld.AR submitted that assessee seeks inclusion of Priya International Ltd (Seg). At the outset both sides submitted that DRP in its order has some really rejected the comparables without considering the submissions advanced by assessee. It ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 17.4. 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 Pvt. Ltd. vs. ACIT (2015- TII-347-ITAT-DEL-TP) 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 clause (i) of this Explanation provides that: (i) the expression international transaction shall include- (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; . . 17.5. Ld.CIT DR submitted that expression debt arising during the course of business refers to trading debt arising from sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 17.7. 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 in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15-7-2016, held that 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 of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 17.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to associated enterprise would amount to double taxation. Hon ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting it as a part of respective aspect expense account. He submitted that the service tax input couldn t be utilised in the 1st quarter, as there was no output tax on marketing support services provided by assessee. Further he submitted that due to certain amendments in the indirect tax loss, assessee was liable to pay service tax on the marketing support services only from October 2014 and in order to pay such output tax, assessee utilized input tax credit that was brought forward as balance. Under such circumstances Ld.AR submitted that the input tax credit amounting to ₹ 61,37,356/- has been written off in the books of account and claimed as refund in the service tax return. Ld.AR submitted that assessee has received a refund of the said amount which was offered to tax in the relevant year however assessing officer denied that the refund was due to assessee. 18.1. Ld.AR at the outset submitted that the same may be verified by Ld. AO before considering the claim. 18.2. Ld.CIT DR did not object for due verification of above details submitted by Ld.AR. 18.3. We have perused submissions advanced by both sides in light of records placed before us. We note that e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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