TMI Blog2020 (10) TMI 1346X X X X Extracts X X X X X X X X Extracts X X X X ..... operating income and taken into consideration while computing the operating profit of the assessee. Following the aforesaid decision, we direct the computation of PLI by treating the gains arising from fluctuation of foreign exchange having nexus with international transaction as part of operating income. TP adjustment in respect of delayed receivables on a notional manner - whether delayed realization of trade receivables from the AE constitutes an international transaction or not? - HELD THAT:- Non-charging or undercharging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. Thus it is held that deferred trade receivable constitutes international transaction. Having concluded that deferred trade receivables constitute international transaction, we now proceed to deal with the argument of the Assessee that the credit period allowed to the AE is not unreasonable so as to warrant an inference of any benefit to the AE and consequent determination of ALP of such delayed receivables. From the annual report of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f appeal raised by the assessee reads as follows:- The grounds stated hereunder are independent of, and without prejudice to one another. The Appellant submits as under: 1. Order/ Directions bad in law and on facts a) The order issued by the Deputy Commissioner of Income Tax, Circle 4(1)(1), Bangalore [(`Assessing Officer') or ('AO')], under section 143(3) read with section 144C (1 ), pursuant to the directions issued by the Hon'ble Dispute Resolution Panel ['DRP' / Panel ], is bad in law and on facts and is in violation of the principles of natural justice. b) The AO has erred in law in making a reference to the learned Assistant Commissioner of Income Tax [Transfer Pricing (2)(1)(1)] ['TPO']. The Ld. Panel erred in upholding the actions of the Ld. AO/ TPO. c) The directions issued by the Ld. Panel did not take cognizance of the objections raised by the Appellant in relation to the transfer pricing matters while issuing the directions under Section 144C(5). d) The directions issued by the Ld. Panel and the order passed by the Ld. AO is without jurisdiction, inter alia, in so far as it purports to give effect to an invalid order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g (i.e. other than 31 March 2014) (vii) companies with persistent losses. e) The Ld. AO / TPO erred in law in applying an arbitrary filter to reject companies having related party transactions greater than 25% of sales. Further, the Ld. Panel also erred in upholding the related party transaction filter of 25%, disregarding the Appellant's ground for application of the related party transaction filter at a threshold of 10% or 15% of sales. f) The Ld. AO/ TPO erred in including Infosys Limited, Larsen Toubro Infotech Limited, Mindtree Limited, Persistent Systems Ltd, R S Software (India) Limited, Cigniti Technologies Ltd and Thirdware Solutions Ltd as comparable, despite these companies being functionally dissimilar to the Appellant. The Ld. Panel also erred in confirming the same. g) The Ld. AO/ TPO erred in rejecting following companies from its own search which are otherwise functionally comparable and pass all the filters applied in the transfer pricing order: Infomile Technologies Limited; Sagarsoft India Limited; and Maveric Systems Ltd. The Ld. Panel failed to adjudicate the aforesaid contentions of the Appellant. h) The Ld. AO/TPO erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s erred in confirming the disallowance of the principal payment towards financial lease of Rs. 67,328,039 and capitalized the same as leasehold improvements after allowing the depreciation ic4 10% thereby leading to the net disallowance of Rs. 60,595,235. b) On facts and circumstances of the case, though the Appellant has erroneously conceded and misconceived the issue as covered matter, wherein it in fact meant to submit that the same issue in pending before Hon'ble 1TAT for earlier years, the DRP has erred in dismissing the same and not adjudicating on merit basis. c) Without prejudice to the above, the Ld. AO and the Hon'ble DRP has failed to take cognizance of the fact that the assets taken on lease do not include only leasehold improvements but also include furniture and office equipments which are depreciable at 10% and 15% respectively. However, the Ld. AO has erred in providing depreciation at the rate of 10% only considering that all the assets taken on lease are lease hold improvements. 8. Non grant of TDS Credit The learned DCIT erred in granting TDS credit of Rs. 2,160,691 as against Rs. 2,162,489 as claimed in the return of income, resulting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is contrary to Assessee s own stand in the TP study. We are also of the view that in the case of companies providing software development services such as the assessee, inclusion of the aforesaid company as a comparable has always been an issue. In these circumstances, we admit the additional ground for adjudication. 6. Ground Nos.1 to 5 raised by the assessee in the grounds of appeal are with regard to determination of Arm s Length Price (ALP) in respect of an international transaction of rendering software development [SWD] services by the assessee to LSI Corporation, USA which is an Associate Enterprise [AE]. On the issue of determination of ALP, the Assessee mainly reiterated its stand as put forth before the revenue authorities and the learned DR relied on the order of the AO/TPO and the DRP. 7. The assessee rendered SWD services to its AE for which assessee received a sum of Rs.624,64,83,200. It is not in dispute that the transaction of rendering SWD services to its AE was an international transaction and the arm s length price [ALP] in respect of such transaction has to be determined having regard to the arm s length test as laid down in section 92 of the Act. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ark-up (OP/TC) 15.56% As already stated in computing the margin, the TPO excluded the foreign exchange gains only from the operating revenue, not treating it as a operating income and also did not reduce the said sum from the operating cost as expense and this was one of the reason for the difference in the PLI as computed by the Assessee and as computed by the TPO. 10. The assessee chose 6 comparable companies and the average arithmetic mean profit margin of those 6 companies were 13.32%. Since the profit margin of the comparable companies was less than the profit margin earned by the assessee from the international transaction, the assessee claimed that the price receive in the international transaction was at arm s length. The TPO accepted 2 out of 6 comparable companies chosen by the assessee, viz., Mindtree Ltd. and R S Software India Ltd. 11. The TPO on his own chose 6 other comparables and computed the ALP of the international transaction and the consequent addition to be made to total income as follows:- Comparables selected by TPO and their arithmetic mean Sl.No. Name of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its AE, the profit margin of the Assessee was on cost and foreign exchange gain would go to reduce the cost of the Assessee for the purpose of computing Assessee s profit margin. The DRP however did not agree with the contention of the Assessee and concurred with the view of TPO in this regard. The relevant observations of the DRP were as follows:- 10. Ground of objection: The Ld. TPO erred in computing the margin earned by the Assessee as 15.56% instead of 16.10%. The Ld. AO erred in upholding the. actions of the TPO. Panel: The assessee has made the following arguments in respect of its contention that the TPO has not computed the margins correctly. The Assessee submits that LSI India is compensated on a cost plus markup of 1S% for rendering of IT services to its AEs. The Assessee has submitted the margin computation with the IA. TPO vide its submission filed on 9 Oct 2017. The same is reproduced below: Particulars Amount in Rupees (as per TP Study) Revenue from Operations Other income Less: Interest Income Less: Foreign Exchange Gain 6,241,140,050 167,456,407 21,832,154 140,281,103 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 2,1832,154/- is not reduced from the operating income. However, with reference to the claim of the assessee that Forex gain should be reduced from the operating cost, the Panel is not inclined to accept the same as it is not part of the expenditure of the assessee as seen from the financials. The Audited financial results have to be taken and necessary adjustments are to be made as per law. It is contended that the AE compensates the assessee for forex loss or gain so that the assessee remains neutral to forex risk. However, it is not clear that the AE adjustments affect the financials of the current year. Hence such argument cannot be accepted. With reference to provision for doubtful advances and advances written off, the Panel conforms the view taken by the TPO. Accordingly, the computation of the profit margin is reworked as under: Particulars Amount in Rupees (as per TP Study) Revenue from Operations Other income Less: Interest Income Less: Foreign Exchange Gain 6,241,140,050 167,456,407 21,832,154 140,281,103 Total Income (A) 6,246,483,200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lutions Ltd (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd (ITA No.1054/Bang/2011) was followed and it was held that M/s Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break-up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee s own case in AY 2008-09, we direct exclusion of M/s Infosys Ltd. 7. In AY 2008-09, the co-ordinate bench has excluded M/s Persistent Systems Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd (supra), where in it was held that M/s Persistent Systems Ltd is engaged in product development and product design services while the assessee is a software development service provider. Further, the segmental details were not available. 7.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee s own case in AY 2008-09, we direct ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plea for inclusion of certain comparable companies. The assessee is seeking inclusion of Akshay Software Technologies Ltd., Infomile Technologies Ltd., Sagarsoft India Ltd., Maverick Systems Ltd., I2T2 India Ltd. Evoke Technologies Ltd. The grievance in this regard is projected in grounds 2(b), 2(g) 2(k) of grounds of appeal. 20. As far as inclusion of Akshay Software Technologies Ltd. is concerned, it was selected by the assessee as a comparable company in its TP study, but was rejected by the TPO for the reason that this company was engaged in providing professional services, procurement, installation, implementation, support maintenance of ERP products and services and incurrent significant foreign branch expenses indicating a different operating model from that of assessee. 21. It is the plea of assessee that assessee s function is comparable with this company and that the TPO had chosen companies with significant foreign branch expenses as comparable companies. The ld. counsel for the assessee brought to our notice a decision of ITAT Bangalore in the case of EMC Software Services India P. Ltd. v. JCIT in IT(TP)A No.3375/Bang/2018, order dated 18.12.2019 for AY 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorised Representative submitted that company s functional profile is comparable and applied the TPO filters. Whereas the DRP has observed that the company has incurred substantial expenses to the tune of 6% of turnover towards R D and the tolerable limit is 3%. We found the observations of the DRP are without any basis. Accordingly we restore this issue to the file of TPO to give a logical conclusion and findings. 25. Following the aforesaid decision, we remand the issue of inclusion of this company i.e., Maveric Systems Ltd. to the TPO for fresh consideration on the lines directed in the order of the Tribunal referred to above. 26. As far as inclusion of Infomile Technologies Ltd. and Sagarsoft India Ltd. are concerned, it is seen that the DRP, despite objections by the assessee for inclusion of these two companies, did not adjudicate the same. Since some of the issue are being remanded to the TPO for fresh consideration. We deem it fit and proper to restore the question of inclusion of these two companies also to the TPO. 27. As far as inclusion of I2T2 India Ltd. is concerned, we find that in the case of LG Soft India Pvt. Ltd. (supra) this company was directed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as ground No.6 raised by the assessee is concerned, the facts are that the TPO, in the order passed under Section 92CA of the Act determined a TP adjustment of Rs. 7,08,83,288/- in respect of delayed receivables on a notional manner. The TPO has observed in this regard in his order that the Assessee did not furnish the trade receivable and details of realization and in the absence of such details, he has no other option but to determine the interest attributable to delayed realization of trade receivables by applying 6 months LIBOR plus 400 basis points with a mark-up of 100 basis points (which works out to 4.836%) on the average of opening and closing receivable. The DRP confirmed the action of the TPO. 33. Before the Tribunal the learned counsel for the Assessee submitted that it is a fully funded entity of the AE, and the amounts outstanding from the AE will be settled with the AE on an ongoing basis in the normal course of business, having regard to commercial and economic factors. The arm s length price determination for the said receivables is subsumed within the arm s length price determination of the principal transaction itself. The outstanding receivables are in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis- -vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction was amended by Finance Act, 2012, by way of insertion of an Explanation to sec.92B with retrospective effect from 1- 4-2002 and the same reads thus:- Explanation- For the removed of doubts, it is hereby clarified then- (i) the expression international transaction shall include- (a) . (b) .. (c) capital financing, including any type of long-term or shortterm borrowing. lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment of receivable or any other debt arising during the course of business: 38. The amendment is to the effect that international transaction would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business and hence non-charging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. It was so held by the ITAT Delhi Bench in the case of Bechtel India Pvt Ltd (in ITA No.6530/De1/2016 dated 16 May 2017). It is important to note that the Bench while arriving at the said conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. 41. Having concluded that deferred trade receivables constitute international transaction, we now proceed to deal with the argument of the Assessee that the credit period allowed to the AE is not unreasonable so as to warrant an inference of any benefit to the AE and consequent determination of ALP of such delayed receivables. From the details brought to our notice i.e., page 526 of PB Vol.II and page 18 of PB which is the annual report of the assessee, it is clear that the average credit period is about 66 days for realization of trade receivables from the AE. As to whether this period can be construed as reasonable or not has not been examined by the DRP despite submissions by the Assessee in this regard. If there has been no unreasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent ; (b) The arrangement is for a specified period only; (c) The rent is payable monthly; (d) The Appellant does not have any title to the assets; (e) There is no agreement/representation by the lessor which will entitle the Appellant to acquire the assets at any later date; (f) The lessor will have the authority to inspect the assets; (g) The assets will remain the property of the lessor and the Appellant has the right only to use the assets; (h) The Appellant is required to take insurance of the assets in the name of the lessor as owner and its own name as renter. The lessor shall be entitled to claim and receive all monies under the insurance policies; (i) If any asset is lost, stolen or damaged beyond economic repairs which is caused directly by the Appellant s negligence, the Appellant is bound to replace the asset with the asset if like nature, age and condition as approved by the lessor; (j) The leases are renewable only on mutually agreeable terms; and (k) At the end of the lease term, the Appellant will make the assets available for collection in good working order. It was submitted that the above clauses in the Agreement make it clear t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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