TMI Blog2022 (11) TMI 1017X X X X Extracts X X X X X X X X Extracts X X X X ..... d [ 2022 (1) TMI 1275 - ITAT BANGALORE] - Accordingly, this issue remitted to the file of AO/TPO for re-examine if the credit period is more than 90 days adjustment towards interest receivable to be made. Issue is accordingly remitted to AO/TPO. Disallowing the expenditure on ESOP u/s 37 - Expenditure incurred is not notional expense - HELD THAT:- Similar issue came for consideration before this Tribunal in the case of Novo Nordisk Inia Pvt. Ltd [ 2013 (11) TMI 218 - ITAT BANGALORE] expenditure in question is wholly and exclusively for the purpose of the business of the assessee and the fact that the parent company is also benefited by reason of a motivated work force would be no ground to deny the claim of the assessee for deduction, which otherwise satisfies all the conditions referred to in section 37(1) of the Act. The decision of the Hon ble Supreme Court in the case of Sassoon J. David Co. (P) Ltd. [ 1979 (5) TMI 3 - SUPREME COURT] and Mysore Kirloskar Ltd. [ 1986 (9) TMI 62 - KARNATAKA HIGH COURT] clearly support the plea of the assessee in this regard. Thus the expenditure in question was wholly and exclusively for the purpose of the business of the assessee and had to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant data for the concerned financial year could be deduced from the corresponding financials. 1.6 The Learned AO/learned TPO/Hon ble DRP erred in rejecting companies having employee cost filter less than 25% of total sales. 1.7 The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% of the total sales, leading to a narrower set of comparable companies. 1.8. The learned AO/ learned TPO/ Hon'ble DRP erred in considering bad and doubtful debts as non-operating in nature. 1.9. The learned AO/ learned TPO/ Hon'ble DRP erred in collating the information that are not publicly available using powers under section 133(6) of the Act. 1.10. The learned AO/ learned TPO/ Hon'ble DRP erred in law and facts in the methodology applied for computing Related Party Transactions ( RPT ) filter. 1.11. The learned AO/ learned TPO/ Hon'ble DRP have erred in not al lowing appropriate adjustments towards working capital differential existing between the Appellant vis-a-vis independent comparable companies. 1.12. The learned AO/ learned TPO/ Hon'ble DRP have erred in not allowing appropriate adjustment towards the risk difference between the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking capital adjustment and hence no separate adjustment is required. 1.21 The learned AO/learned TPO/Hon ble DRP erred in computing interest on the outstanding balance from the AE by evaluating on invoice by invoice basis even though the weighted average period period of receivables of the Appellant is only 24 days, which is less than 30 days as accepted by the Ld. TPO. 1.22 The learned AO/ learned TPO/ Hon'ble DRP erred in imputing interest on the outstanding receivables from AEs ignoring the fact that the Appellant followed the same policy of not charging any interest on trade receivables from both AEs as well as Non-AEs. 1.23. Without prejudice, the learned AO/ learned TPO/ Hon'ble DRP erred in computing notional interest by considering entire year after providing 30 days grace period rather than limiting it to the delay beyond the average credit cycle of the comparable companies selected by the TPO while proposing the TP adjustment. Further without prejudice, the learned TPO has committed arithmetical mistakes in computation of interest. 1.24. Without prejudice, the Honorable DRP has erroneously directed the learned TPO to adopt State Bank of India ( SBI ) short term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng reliance on the case laws decided in different context and not applicable to the facts of the Appellant. 2.8. The Honorable DRP has erred in law and on facts by stating that the ESOP is uncertain by not appreciating the fact that the ESOP expenses are actual expenses claimed by the Appellant, based on actual invoices issued and actual payments made. Non-Applicability of section 195 of the Act 2.9. The learned AO has erred in law and on facts by disregarding that the ESOP expense is liable to TDS under section 192 of the Act as perquisite in the hands of the employees and appropriate taxes are deducted and remitted by the Appellant, which is evidenced by sample Form 16 copies. 2.10. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act shall be applicable on the remittance of reimbursement towards ESOP without taking cognizance of the fact that there was no income element arising to the recipient of such remittances. 2.11. The learned AO has erred in law and on facts by stating that the provisions of section 195 of the Act has not been complied with and consequently reimbursement towards ESOP shall suffer disallowance under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty proceedings under section 271(1)(c) of the Act. 4.2 The learned AO has erred in law and on facts in levying interest under section 234B and section 234C of the Act. 2. Ground Nos.1.1 to 1.13 are general in nature, which do not require any adjudication. Ground No.1.14 is as follows:- Software Development Segment ( SWD ) 1.14.The learned AO/ learned TPO/ Hon'ble DRP have gros sly erred in not rejecting the following companies: Inteq Software Private Limited; Larsen Toubro Infotech Limited; Nihilent Limited; Persistent Systems Limited; Infobeans Technologies Limited; Aspire Systems (India) Private Limited; Infosys Limited Thirdware Solution Limited; and Cybage Software Private Limited. 2.1 Out of above comparables, the assessee seeks exclusion of 3 comparables namely (1) Larsen Toubro Infotech Limited (2) Persistent Systems Ltd. (3) Infosys Limited. Larsen Toubro Infotech Limited:- 4. The Ld. A.R. submitted that there is no information in AR as to any IPR developed or licensed or owned by this company. The amalgamation has not impacted in increasing the profitability. Selling and marketing by this company constitutes only 0.24% of total expenses. In this regard, Ld. A.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o basis. The nature of activity performed by this company is given at page 62 of the annual report, as follows:- We offer an extensive ranee of IT services to our clients in diverse industries such as banking and financial services, insurance, energy and process, consumer packaged goods, retail and pharmaceuticals, media and entertainment, hi-tech and consumer electronics and automotive and aerospace. Our range of services includes application development, maintenance and outsourcing, enterprise solutions, infrastructure management services, testing, digital solutions and platform-based solutions The nature of activities and the nature of its revenue, is also discussed at page-68 of the annual report as under: We generate revenue from our continuing operations through time-and-materials contracts and fixed-price contracts by providing IT services and solutions to our clients in our industrials and services clusters 4.1 In view of the above information, Ld. D.R. submitted that it is very clear that this company is engaged in software development services only and hence functionally comparable. The plea that it has diversified activities has no basis, as could be seen from the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence this company has to be excluded. 4.4 Having examined the pleas, Ld. DRP noted that the details of intangible assets are given at page 96 of the annual report. As per that information, the company has reported intangible assets worth Rs.741.07 million as at 31-3-2016, which comprises computer software of value Rs.553.51 million and intangible assets under development of Rs.187.56 million. There is no information as to any intellectual property rights developed or license owned by the company. The computer software referred to were normal software used by any software company and hence it cannot be construed as a unique or non-routine asset. The reference to intangibles under development also indicates that as at the end of the year, it does not possess its own intellectual property rights; and does not have any revenue stream on account of IPR. Thus, Ld. DRP did not find any material difference as to the intangibles owned by the assessee company and the comparable company. The assessee also failed to demonstrate as to any material effect on the profits of the enterprise. In view of the above discussion, Ld. DRP did not find any merit in these pleas and are accordingly rejected. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. DRP noted that the expenses on this count is only 0.24% of the total expense and which is not at all significant to affect the profitability of the comparable. Accordingly, this plea is rejected by Ld. DRP. 4.8 Further, Ld. DR stated that it is seen that this company was upheld to be functionally comparable to a software service provider company, by the ITAT Bangalore in the case of M/s. Advice America Software Development Centre Private Limited (in ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 201344). The ITAT Bangalore in the case of Oracle Solution Services v DCIT, (IT (TP) A No.880/Bang/2013 held that turnover is not a relevant criteria and rejected the contention of the assessee to exclude the comparable L T Infotech on the ground of high turnover. 5. We have heard the rival submissions and perused the materials available on record. This comparable has been considered as not comparable in the case of EIT Services India Pvt. Ltd. in IT(TP)A No.210/Bang/2021 dated 22.8.2022 wherein it was held as under:- 3.5 We have heard the rival submissions and perused the materials available on record. As rightly pointed out by the Ld. A.R. in the assessment year 2015-16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid on sales 111.79 Traveling and conveyance 19.27 Total related party transactions (A) 3,891.93 Total Sales (B) 12,424.98 RPT % of Sales (A/B) 31.32% From the above computation, it is clear that the controlled transactions of Persistent constitutes 31.32% of sales . Based on the above, it can be seen that Persistent fails the `RPT to sales ratio' filter applied by the learned TPO and should therefore not be considered as a comparable. 34. This argument has been addressed by the DRP in its order as follows:- 4.4.9We note that the approach of the TPO in treatment of related party transaction into two sets, are for revenue transactions and other for expense transaction islogical and correct. We also note that the RPT filter was adopted by the TPO was with the above conditions and has adopted consistently. Hence, we do not find any infirmity the approach. Hence, we reject the assessee's plea. We hold that onsite expenses do not adversely affect comparability and hence, such plea is rejected. 35.Further, the assessee had also raised plea with regard to onsite revenue filter by pointing out that onsite revenue is substantial and therefore this company should not be regarded as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument again ignores the fact that the approach of the TPO has been to highlight the fact that there can be no functional comparability, if the assets employed and risks assumed are taken into consideration. It is in that context the TPO has referred to the margins. 67. The companies who generate more than 75% of the export revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. The ld. Counsel pointed out that though this decision was rendered with reference to AY 2011-12, the same reasoning would apply to AY 2015-16 also and in this regard, he drew our attention to page 696 of assessee s PB, which gives the details of the revenue generated by this company without any segmental break-up. Our attention was also drawn to page 682 of PB which shows that there is substantial onsite revenue activity as well as cost incurred on onsite software development. We notice from page 676 of assessee s PB that this company as part of its operating profit in Schedule-O of profit loss account contains expenditure for cost of bought out items for resale and this is a significant part of the operating expenditure. When we see the revenue in Schedule M of the profit loss account, there is no break-up of the revenue with regard to software services and software product. In our opinion, this distinction is enough to exclude this company from the list of comparable companies as held by the Hon ble Delhi ITAT in the case of Saxo India Pvt. Ltd. (supra) which decision was also confirmed by the Hon ble Delhi High Court (C) INFOSYS LTD . 39.The next company which the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility, Big Data analytics. Ld.AR thus submitted that this company is functionally not at all similar with a captive service provider like assessee that this providing Ltd services to its associated enterprises. 14.3.1.0n the contrary Ld. CIT DR, referring observations of DRP in para 3.6.1 submitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133 (6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to learnt AO/TPO for verification. 14.3.2. We have perused submissions advanced by both sides in light of records placed before us. It is observed that 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 software licenses. 14.3.3. In our considered opinion this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT, Pune, in the case of Entercoms Solutions (P.) Ltd. v. Asstt. CIT [2022] 134 taxmann.com 59 (Pune - Trib.). Accordingly, we direct the AO/TPO to exclude this company as comparable from the list of comparables. 3.7 In view of above order of the Tribunal, we take a consistent view and we direct the AO/TPO to exclude L T Infotech Ltd. from the list of comparables. 5.1 In view of the above order, we exclude this company from the list of comparables. Persistent Systems Ltd. 6. Ld. A.R. submitted that this company s core activity is rendering services to develop software products. The income from software license of assessee s company constitutes only 0.51% and R D constitutes only 0.43% of operating revenue. Value of Intangible assets constitutes only 1.02% of operating revenue. It passes RPT filter. Assessee company s selling and marketing expenses constituted only 0.11% of total revenue. In this regard, Ld. A.R. relied on the following decisions of the coordinate benches of ITAT Bangalore Hyderabad as mentioned below:- 1) M/s. Advice America Software Development Centre Private Limited ITA (TP) No. 2531/Bang/2017 dated 23.05.2018 relating to A.Y. 2013-14 2) Mercedes Benz in IT(TP)A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses Reselling activity 38,18,400 GEMS Licenses Reselling activity 22,50,000 ODBC Test Heirness Reselling activity 22,83,225 Others Licensing activity -80,84,107 Grand Total 23,88,01,634 Total # #7.22 Crores 7.1 Ld. DR submitted that from the information in the above table it could be seen that only an amount of Rs.7.22 crore represent income on account of internally developed activity which constitute 0.51% of operating revenue, and all others licence revenue was from distribution or reselling activity. Besides, the company has also categorically clarified in its reply u/s 133(6) that it is predominantly engaged in software product development services only. The relevant extract of the reply is as under: - Persistent System Limited is predominantly engaged in the business of providing outsourced software product development services to customers across the globe from following industry verticals: Infrastructure and systems, Telecom and Wireless, Life science and Healthcare and Financial services. The company reports segment information based on the above industry verticals. The nature of services provided under each of these segments differs only in terms of the industry and spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was stated in the notes to the consolidated results that the increase of intangible block of assets during the year (2012-13), of Rs.262.84 million, was mainly on account of acquisition of various IPs during the year and the same is shown in the intangible Asset Schedule of the consolidated financial statement at page 115 as under: - 7.6 Ld. D.R stated that all these clearly show that the IP related and product revenue pertain to other group entities and does not pertain to M/s Persistent Systems Ltd, which is being compared. It is also relevant to note that this company has clarified in its reply given u/s 133(6), that M/s Persistent Systems Ltd is predominantly engaged in the business of rendering software development services; the revenue reported is primarily on account of rendering of software development services only. The relevant extract is as under In respect of the information you have requested under 3(a) and 3(c) in respect of software products and innovations, overseas subsidiary companies of Persistent Group have acquired certain Intellectual Property (IP) products and generating some revenue from licencing and support of these products. in case of PSL India, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter adopted by the TPO. We noted that the assessee has computed by aggregating the transactions, on the revenue and expense side, without taking corresponding parity in the denominator. Such a computation is totally skewed. Thus, we do not find merit in the plea raised and accordingly rejected. 7.9 It was argued by the assessee before Ld. DRP that this company has incurred significant expenses towards cost of technical professionals, and hence cannot be taken as comparable. Ld. DRP failed to understand the plea as to how it affects comparability. He noted that these are routine operating expenses incurred by the company for its operational activities, and does not affect comparability as such. Besides under the TNMM, the net profit margins are compared and there is no requirement to make item to item comparison of expenses of the enterprises. Thus, Ld. DRP did not find merit. in the plea and accordingly rejected. 7.10 It was also pleaded that the company had incurred advertisement and sponsorship expenses to the tune of Rs.16.01 million, which constituted meagre 0.11% of total revenue and thus it is insignificant to materially affect comparability or profitability. Besides, under T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise customers. It also provides digital content creation for media and entertainment industry 29. We find that in the case of Infor (India) (P.) Ltd. v. ACIT in ITA No. 2307/Hyd/2018, the Co-ordinate Bench of the Tribunal has considered similar objections of the assessee therein and has held that these two companies along with Thirdware Solutions Ltd is not comparable to the software development company like the assessee before us. The relevant portions has been reproduced by us in the above paras. Respectfully following the same, these two companies are also directed to be excluded from the final list of ITA No 2233 of 2018 ADP Private Ltd Hyderabad comparables. Thus, assessee's ground of appeal No. 2 is partly allowed. 6.3 In the said decision, it has been held that the company is functionally different and engaged in diversified activities and since the revenue could not controvert the said decision nor brought any contrary decision, following the same, we direct the AO/TPO to exclude this company from the final list of comparables. 8.1 In view of the above decision of the Tribunal, we are inclined to hold that Persistent Systems Ltd. cannot be considered as a comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating revenue. Taking into consideration, various information available in the annual report and the fact that the company is predominantly having revenue from software services, (ie. nearly 99% of its operating revenue) Ld. DRP was of the considered view that this company can be considered as functionally comparable to the assessee. The pleas that it has diversified activities, rendering services to various industries, and hence it is functionally dissimilar are rejected by Ld. DRP. 10.1 It was pleaded before Ld. DRP by the assessee that this company has a huge brand which has contributed to its growth in revenue and hence not comparable. A perusal of the annual report by the Ld. DRP shown that the growth in revenue was on account of various business initiatives taken to accelerate growth such as - internal re-organization, implementing cost effectiveness through reducing cost of operation, improving utilization percentage of employee, restricting the organization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, reducing attrition rate, increasing the offshore mix, improving delivery expertise etc., As per information in page 20 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is much less: than the generally acceptable tolerable limit of 3% of the total revenue. It is also noted that out of this, only Rs.31 crore was capital in nature and the remaining Rs.384 crore represented revenue expenditure, which go to show that the R D initiative are substantially routine for immediate business purposes for developing expertise and improved process execution. It was also pleaded that by the assessee before Ld. DRP that the company has significant intangibles. However, on perusal of the information at page 109 of the annual report, Ld. DRP noted that the value of intangible assets as on 31.03.2016. was Rs 30 crore and as on 31.0.2015 was. Rs.42 crore, which is insignificant considering its turnover of Rs.53,983 crore and net Asset portfolio of Rs.8248 crore. Ld. DRP also noted that, the assessee has failed to establish that such differences, if any, on account of R D, brand and intangibles have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B. Besides, he also noted that the assessee leverages on the intangibles owned by the AEs without factoring the corresponding cost in its analysis. Further, as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therein. First proviso to Section 92C(2) clearly provides that when more than one price are determined by the most appropriate method; then the Arm's Length Price shall be taken to be Arithmetic Mean of such prices. It does not talk of excluding companies with high or low turnover or high or low profit rate. Further, the Delhi Tribunal in Nokia India Pvt Ltd (ITA No.242/0/2010) has held that a potentially comparable company cannot be excluded for the reason of high or low turnover or high or low profit margin. In reaching this conclusion, the Delhi bench also considered a special bench order passed in the case of Maersk Global Centre India Pvt Ltd. Vs ACIT (2014) 147 1TD 83 (BOM)(SB)'. Similarly, the Mumbai Tribunal in Capgemini, took note of the ITAT, Bangalore decision in Genisys (supra), and other Tribunal decisions to conclude (in Para 5.3.5 5.3.6) that there was no such correlation of profit margins with the turnover of the IT companies, which is primarily based on skilled manpower and related costs, and that the classification based on turnover made in Dun and Bradstreet study was not based on profit margins and hence not relevant. The ITAT, Bangalore, in a recent dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the above, Ld. DRP upheld this company as comparable to the assessee. 11. We have heard the rival submissions and perused the materials available on record. This comparable has been considered as not comparable in the case of ADP Pvt. Ltd. by the coordinate bench of Hyderabad cited (supra), wherein held as under:- 9.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The co-ordinate bench in assessee's own case in ADP (P.) Ltd. (supra), directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: '25. Having regard to the rival contentions and the material on record, we find that in a number of decisions including the assessee's own case, Infosys Ltd has been held to be not comparable with any other software development company such as the assessee due to its huge turnover and high profit margin and also as it is into software products and owns intangible intellectual property rights. In the case of Agnity India Technologies Ltd, 36 Taxmann.com 289 (Del), the Hon'ble Delhi High Court has held that Infosys Ltd is not comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logies Private Limited; vii. Eluminous Technologies Private Limited; viii. Sagarsoft (India) Limited; ix. Ace Software Exports Limited; x. Synfosys Business Solutions Limited; xi. Isummation Technologies Private Limited; xii. InfoMile Technologies Limited; and xiii. Mudunuru Limited. 13.1 However, the assessee pressed for inclusion of following comparables only:- i. Sasken Communication Technologies Limited; ii. Evoke Technologies Private Limited; iii. Sagarsoft (India) Limited; iv. Ace Software Exports Limited v. Isummation Technologies Private Limited; i. Sasken Communication Technologies Ltd.:- 14. The Ld. A.R. submitted that this is functionally different and he drew our attention to the order of the TPO wherein the TPO gave his remarks that this company is into Embedded design and programming. Sasken is engaged with several of the top 10 vendors in the semiconductor industry providing a range of IC Design and Software Services for their flagship development, integration and testing services. TPO stated that he has identified key sectors that offer growth opportunities for the assessee in ER D services and have sharpened their focus on them. Overall, TPO believed that assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee s ground Nos.4(i) and 4(iv) are accepted therefore. 16.1 In view of the above order of the coordinate bench of Hyderabad Tribunal, we direct the AO/TPO to include this company in the list of comparables. ii. Evoke Technologies:- 17. The Ld. A.R. submitted that the final sales are unreliable as the figures from branch office outside India was included. From Note 2.29 on page 29 of the annual report of the company, it was noticed by the TPO that the standalone financials reported for the year 2015-16 include revenue and net-profit figures of one branch outside India also. The relevant portion of annual report is reproduced as below:- Note 2.29 the Balance sheet and Profit and Loss account include the unaudited financial statement of a Branch situated outside India, whose financial statements reflect liability of Rs.4,75,78,953/- as at 31st March, 2016, revenue of Rs.13,00,22,161 for the year ended as on dated 31st March 2016 and branch net loss of Rs.27,33,756/- for the year ended 31st March, 2016. 17.1 Ld. TPO stated in his report that since the financials include figures from an outside branch, which are unaudited and hence not reliable. Hence, the company is not accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was rejected by the TPO. In this regard, Ld. A.R. relied on the following decisions of the coordinate bench of ITAT Bangalore as mentioned below:- 1) EIT Services India Pvt. Ltd., AY 2016-17, Bangalore ITAT IT(TP)A No.210/Bang/2021 2) Mindteck India Limited, AY 2016-17, IT(TP)A No 252/Bang/2021 21. The Ld. D.R. relied on the order of lower authorities. 22. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of EIT Services India Pvt. Ltd. cited (supra) where in it was held as under:_ 9.7 Ld. A.R. submitted that the learned TPO in in the TPO order (Page 49) has erroneously rejected Sagarsoft by stating that it fails service revenue filter. To this the Ld. A.R. stated that Sagarsoft has an IT service income to sales percentage of 100% and hence passes the aforesaid filter and must be accepted as a comparable company. 9.8 The Ld. A.R. further submitted that Sagarsoft is engaged in software development services. The relevant extract from the annual report is provided at page 2017 of the paper book which makes it evident that the company is engaged in rendering software services. The Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. (He referred Page 66 of the Case Law Compilation) 10.2 In view of the above-mentioned reasons, Ld. A.R. requested to direct the TPO to include this comparable to the final list of SWD/IT Segment. 10.3 Ld. D.R. relied on the order of Ld. DRP. 10.4 We have heard the rival submissions and perused the materials available on record. In this case, it was excluded by Ld. DRP in assessment year 2017-18. We do not find any reason to exclude in the assessment year 2016-17. Being so, we direct the AO/TPO to include this company in the list of comparables. 25.1 In view of this, we direct the AO/TPO to include this company in the list of comparables. Isummation Technologies Pvt. Ltd. 26. The Ld. A.R. submitted that the AO has not commented on this comparable and he submitted that this company has been included in the case of EIT Services India Pvt. Ltd. cited (supra) in the A.Y. 2016-17 and the same may be followed. 27. The Ld. D.R. relied on the order of the Ld. DRP. 28. We have heard the rival submissions and perused the materials available on record. This issue was considered by this Tribunal in the case of EIT Services India Pvt. Ltd. cited (supra), wherein it was held as under: 7.6 It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receivables on account of excess credit period. They further erred in not considering the fact that the outstanding amount from the money advanced by the assessee would get adjusted in the working capital adjustment and hence no separate adjustment is required. They further erred in computing interest on the outstanding balance from the AE by evaluating on invoice by invoice basis even though the weighted average period period of receivables of the Appellant is only 24 days, which is less than 30 days as accepted by the Ld. TPO. They also erred in imputing interest on the outstanding receivables from AEs ignoring the fact that the Appellant followed the same policy of not charging any interest on trade receivables from both AEs as well as Non-AEs. Without prejudice, the learned AO/ learned TPO/ Ld. DRP erred in computing notional interest by considering entire year after providing 30 days grace period rather than limiting it to the delay beyond the average credit cycle of the comparable companies selected by the TPO while proposing the TP adjustment. Further without prejudice, the learned TPO has committed arithmetical mistakes in computation of interest. Without prejudice, the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for. 23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, 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 (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: (c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? 23.6. Ld.CIT.DR submitted that, while answering 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 decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions. 23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/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 accordance with law. 36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esponse to the above the Company had furnished its response vide submission dated 06 December 2019, explaining the reasons why Tax Deduction at Source ( TDS ) provisions are not applicable on the subject cross-charges, which are on cost-to-cost basis. 34.3 However, in the DAO the learned AO proceeded to make adjustments under section 37 of the Income-tax Act, 1961 ( the Act ) (without providing the Company any opportunity to explain allowability of expenditure), while the AO also noted his observation on non-deduction of TDS under Section 195 of Act, in the DAO. 34.4 Ld. A.R. highlighted that the questions sought by the learned AO in the notice were pertaining to applicability of TDS provisions, but the AO proceeded to make adjustment under section 37 of the Act in the DAO. In view of the above, we have in the paragraphs below provided our detailed submission explaining the reasons for which the addition proposed by the learned AO needs to be dropped Background 34.5 Ld. A.R. submitted that the employees of the Company are eligible to participate in Share based compensation schemes of the Ultimate Holding Company, wherein the shares of Ultimate Holding Company are granted to employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme 34.9 ESIP schemes provides for various incentives. In India, employees of HPISO are eligible to receive stock awards (in the form of Restricted Stock Units, hereinafter referred to as RSU ) and stock options. The rewards under the stock options and RSU, are explained in the paragraphs below - RSU represents Restricted Stock Unit. As per the scheme, upon completion of vesting period, the employees will be eligible to receive reward in the form of shares. HPE grants RSUs at no cost to the employees. The value of the RSU shall be the market price of stock multiplied by the number of shares, which the employee is eligible to receive. Stock options represents options, which provide employees the right to purchase Shares in future at a specified price (the grant price) set on the grant date. The mechanism and illustration similar to ESPP scheme shall apply under stock option plan. The interest of the employee (i.e., shares) in the RSUs/stock options shall vest according to the vesting schedule (say 1/3 each year over a period of three years). Illustration/Mechanism for RSU Particulars Refer Year 1 Year 2 Year 3 Market Price A 30 32 35 Exercise Price/Purchase price for the employee B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. ESOP Cross-charqes represents actual cost to HPISO 34.12 Ld. A.R. submitted that the ESOP cross-charges incurred by the Company represents the actual expenditure incurred by the Company. The remittance made towards such cross charges are in fact in the nature of incentives/compensation paid to the employees of HPISO, who form part of its business and are involved in carrying out dayto- day business operations/management. To substantiate the above, we have enclosed the following - Details of shares granted to employees in respect of which cost is recovered by Ultimate Holding Company from HPISO (enclosed as Annexure 6); Sample debit note/invoices in respect of which remittance is made towards ESOP charges during the year (enclosed as Annexure 7); Copy of the cost reimbursement agreement (enclosed as Annexure 2); Sample Form 16 evidencing that ESOP considered as taxable perquisite in the hands of the employees and included in their taxable salary and deduction of TDS on the taxable salary including the ESOP perquisite value as granted to the employees ESPP scheme document, ESIP scheme document and sample RSU agreement are enclosed as Annexure 1, Annexure 3 and Annexure 4A respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exure 8) has held that ESOP expenditure incurred is deductible under Section 37(1) of the Act. In the cited case, the Tribunal was dealing with the expenditure incurred on ESOP schemes (managed by the Holding Company) and expenditure was in respect of employees of Indian Company. The Tribunal held that the ESOP expenditure was wholly and exclusively for the purpose of the business of the Indian Company and had to be allowed as deduction as a revenue expenditure. Relevant extract of the decision is provided below - We fail to see any basis for the observation of the CIT(A) that the obligation to issue shares at a discounted price to the employees of the Assessee was that of the foreign parent company and not that of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a healthy work force. Business expediency required that the Assessee incur such costs. The parent company will be benefitted indirectly by such a motivated work force. This will be no ground to deny the deduction of a legitimate business expenditure to the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployee listing, actual remittances made by the Company and other documentary evidences; 34.21 In fact, the Company has deducted appropriate TDS under section 192 of the Act on the ESOPs granted to the employees (as evidenced by sample Form 16 enclosed). Therefore, the question of the said expenditure being notional in nature does not arise; 34.22 Additionally, in the decisions referred above, it has been clearly emphasized that ESOP cost represents actual expenditure and not notional in nature. Therefore, the expenditure is eligible for deduction under section 37 of the Act. 34.23 Given the expenditure incurred in the subject case is towards employees of the Company, the question of the same being in nature of 'personal' does not arise. Expenditure is not capital in nature 34.24 ESOP schemes designed are primarily to incentivize better performing employees and thereby earn more revenue by securing consistent and concentrated efforts of dedicated employees. The schemes designed are not with an intention to increase the capital needs of the Company. The shares granted to employees are the shares listed and traded in stock exchange at USA. 34.25 The compensation paid to the em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income, which is taxable in the hands of the Ultimate Holding Company as the same is cross-charged to HPISO on cost-to-cost basis. Provisions of section 195 of the Act inter a/ia provides for deduction of TDS only in respect of any sum of which is chargeable to tax under the Act. In the absence of any income element in the subject remittance, there is no sum chargeable to tax to Ultimate Holding Company and hence the provisions of Section 195 of the Act would not apply. The above principle has been upheld by various Courts including the Hon'ble Supreme Court in the case of GE India Technology Cen.(P.). Ltd vs CIT [2010] 327 ITR 456 (SC). Relevant extract of the Supreme Court decision is reproduced below - Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the expression sum chargeable under the provisions of the Act is used only in section 195. For example, section 194C casts an obligation to deduct TAS in respect of any sum paid to any resident . Similarly, sections 194EE and 194F inter alia pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to INR 18,18,00,000 by the Ultimate Holding Company to HPISO are actual expenses incurred and remitted by HPISO and not notional in nature. 34.37 The ESOP remittance does not contain any element of income, which is taxable in the hands of the Ultimate Holding Company as the same are cost-to-cost reimbursements. Accordingly, the provisions of Section 195 of the Act is not applicable in the subject case. 34.38 Given the above facts and the judicial precedents, the Company submitted that ESOP expense is a deductible expenditure under section 37 of the Act and provisions of section 195 of the Act is not applicable. 35. The Ld. D.R. relied on the order of lower authorities. 36. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in the case of Novo Nordisk Inia Pvt. Ltd. in ITA No.1275/Bang/2011 dated 30.9.2013, wherein it was held as under:- 18. We have considered the rival submissions. It is clear from the facts on record that there was an actual issue of shares of the parent company by the assessee to its employees. The difference, between the fair market value of the shares of the parent co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was met by the Assessee. This factual position is not disputed at any stage by the revenue. In such circumstances, we do not see any basis on which it could be said that the expenditure in question was a capital expenditure of the foreign parent company. As far as the assessee is concerned, the difference between the fair market value of the shares of the parent company and the price at which those shares were issued to its employees in India was paid to the employee and was an employee cost which is a revenue expenditure incurred for the purpose of the business of the company and had to be allowed as deduction. There is no reason why this expenditure should not be considered as expenditure wholly and exclusively incurred for the purpose of business of the assessee. 20. We fail to see any basis for the observation of the CIT(A) that the obligation to issue shares at a discounted price to the employees of the Assessee was that of the foreign parent company and not that of the Assessee. Admittedly, the shares were issued to employees of the Assessee and it is the Assessee who has to bear the difference in cost of the shares. The expenditure is necessary for the Assessee to retain a h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A). It can be seen from the decision in the case of Accenture (supra) that the shares of the foreign company were allotted and given to the employees of affiliate in India at the behest of the affiliate in India. The CIT(Appeals), however, presumed that the facts in the instant case of the assessee was that the shares were allotted to the employees of the affiliate in India at the behest of the foreign company. This is not the factual position in the assessee s case, as the assessee had on its own framed the NNIPL ESOP Scheme, 2005, to benefit its employees. NNAS may have a global policy of rewarding employees of affiliates with its shares being given at a discount and that policy might be the basis for the Assessee to frame ESOP. That by itself will not mean that the ESOP was at the behest of the parent company. In any event the immediate beneficiary is the Assessee though the parent company may also be indirect beneficiary of a motivated work force of a subsidiary. We are of the view that the factual basis on which the CIT(Appeals) distinguished the decision of the Mumbai Bench of ITAT in the case of Accenture (supra) is erroneous. 23.With regard to the observations of the CIT(Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is permissible as deduction, even though, the liability may have to be quantified and discharged at a future date. Section 2(15A) of the Companies Act, 1956, defines employees stock option to mean option given to whole time directors, officers or the employees of the company, which gives such directors, officers or employees, the benefit or right to purchase or subscribe at a future rate to securities offered by the company at a pre-determined price. In an employees stock option plan a company undertakes to issue shares to its employees at a future date at a price lower than the current market price. The employees are given stock options at a discount and the same amount of discount represents the difference between market price of shares at the time of grant of option and the offer price. In order to be eligible for acquiring shares under the scheme, the employees are under an obligation to render their services to the company during the vesting period as provided in the scheme. On completion of the vesting period in the service of the company, the option vests with the employees. The expression expenditure also includes a loss and therefore, issuance of shares at a discount whe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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