TMI Blog2022 (10) TMI 1153X X X X Extracts X X X X X X X X Extracts X X X X ..... ate to remit this issue to the file of AO to consider it afresh to see whether all the filters applied by the TPO is satisfied. Accordingly, this ground is remitted back to the file of AO for fresh consideration. Accordingly, all three comparables are remitted to AO for fresh consideration on similar lines. Turnover filter to be applied between Rs.1 crore to Rs.200 crores and if the comparable from the software development segment exceeds Rs.200 crores, the same to be excluded from the list of comparables. Companies functinally dissimilar with that of assessee need to be deselected . TP adjustment determined by AO in respect of interest on outstanding receivables - Tribunal consistently taking a view that if the credit period granted to the AE is more than 90 days that should be a TP adjustment towards notional interest @ LIBOR+2% - we remit this issue to the file of AO/TPO to pass order in conformity with the above direction of Tribunal as in the case of Swiss Re Global Business Solutions India Pvt. Ltd. Cited [ 2022 (1) TMI 1275 - ITAT BANGALORE] by allying LIBOR+2% in this case also. - IT(TP)A No.261/Bang/2021 - - - Dated:- 3-10-2022 - SHRI N.V. VASUDEVAN, VI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by rejecting certain comparable companies selected by the Appellant in the comparability analysis. namely. Sagar4oft (India) Ltd. Akshay Software Technologies Ltd and Sasken Communication Technologies Ltd. despite these companies being functionally similar to the Appellant. 10. While giving effect to the Hon'ble DRP directions, the Ld. AO/Ld. TPO erred in law and facts by not accepting Rishabh Software Private Ltd as comparable company. 11. The Hon'ble DRP/Ld. AO/Ld. TPO erred in law and facts by accepting companies namely Persistent Systems Ltd. Aspire Systems (India) Pvt, Ltd. Infosys Ltd. Larsen Toubro lnfotech Ltd. Thirdware Solutions Ltd, Nihilent Ltd, Inteq Software Pvt. Ltd. Infobeans Technologies Ltd and Cybage Software Pvt Ltd from the Ld. TP0's search as being comparable to the Appellant despite being functionally dissimilar to the Appellant. 12. The Hon'ble DRP/Ld. AO/Ld. TPO erred in law and facts by accepting R S Software (India) Ltd as a comparable which was rejected by the Appellant during the course of assessment proceedings as being functionally dissimilar to the Appellant. 13. The Hon'ble DRP/Ld. AO erred in considering outstand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above appeal pertains to the Transfer pricing adjustment ( TP adjustment ) made by the Transfer Pricing Officer ( the TPO for short) towards the international transaction of provision of Software Development ( SWD for short) services to the Assessee s Associated Enterprises ( AE for short), and TP adjustment made with respect to interest on outstanding trade receivables aggregating to Rs. 5,94,16,549/- which was subsequently enhanced to Rs. 6,10,92,371/- on giving effect to the directions of the Dispute Resolution Panel ( the DRP for short). BRIEF FACTS: 3. The assessee is a wholly owned subsidiary of NTT Data FA Insurance Systems Pte. Ltd. The assessee is engaged in the business of providing software development services to its parent company. During the previous year relevant to the assessment year 2016-17, one of the international transactions that took place between the assessee and its AE was the provision of SWD services by the assessee at a price of Rs. 25,52,91,602/- in respect of which the TPO determined a TP adjustment of Rs. 5,89,33,636/-. Additionally, the TPO determined a TP adjustment in respect of interest on delayed receivables of Rs. 4,82,913/-. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up (OP/OC) 3.90% Comparison of the TP studies done by the assessee and TPO: Assessee TPO Methodology adopted Primarily CUP Supplementary method TNMM TNMM Profit Level Indicator (PLI) OP/TC (TNMM) OP/OC Database used PROWESS CAPITALINEPLUS (TNMM) PROWESS Ace TP Comparables selected 7 (TNMM) 14 Period for which data used FYs 2013-14 to 201516 (TNMM) FYs 2013-14 to 201516 Filters applied by Assessee in its TP study under TNMM: Step Description 1. Companies having sales income less than 1 crore rejected 2. Companies with service income more than or equal to 75% of the total income selected 3. Companies with ratio of research and development expenses to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sl. No. Name of the company Weighted average (in %) 1. Akshay Software Technologies Ltd. 1.08 2. Sagarsoft (India) Ltd. 1.47 3. Sasken Communication Technologies Ltd. 6.89 4. CG-Vak Software Exports Ltd. 12.16 5. E-zest Solutions Ltd. 13.79 6. Cigniti Technologies Ltd. 19.44 7. R S Software India Ltd. 21.16 35th Percentile 6.89 Median 12.16 65th Percentile 13.79 3.7 Out of the 7 comparables selected by the assessee, the TPO accepted the 3 highlighted above, viz. CG-Vak Software Exports Ltd., E-zest Solutions Ltd. and R S Software India Ltd. and rejected the other 4. Filters applied by the TPO: Step ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Aspire Systems (India) Pvt. Ltd. 39.28 14. Cybage Software Pvt. Ltd. 66.45 35th Percentile 20.87 Median 27.28 65th Percentile 32.42 Computation of arm s length price by the TPO and the adjustment made: Taxpayers operating revenue 26,18,78,852 Taxpayer operating cost 25,20,52,552 Taxpayers operating profit 98,26,300 Taxpayers PLI 3.90% 35th Percentile Margin of comparables set 20.87 Adjustment required (if PLI 35th Percentile) Yes Median margin of comparable set 27.28 Arm s length price 3,08,12,488 Price received 26,18,78,852 Shortfall being adjustment u/s. 92CA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound No.6 of the assessee is reproduced below:- 6. Without prejudice to the above grounds, the Hon ble DRP/Ld. AO/Ld. TPO erred in rejecting the segmental profitability analysis computed by the Appellant while computing the arm's length price of Appellant's provision of software development services transactions using Transactional Net Margin Method (TNMM'). 6.1 The Ld. A.R. submitted that the TPO has erred in computing the profitability of the assessee at entity level and arriving at a mark-up of 3.90% as against the profitability computed by the assessee at 10.17% in its TP Study by bifurcating its revenues and expenses into related party and non-related party segments. In this regard, he submitted that the segmentation has been done on logical allocation keys and this segmentation of the assessee has been accepted by the Tribunal in assessee s own case for AY 2004-05 and 2005-06. The facts and circumstances as well as the nature of the transactions for this assessment year has remained similar to that of AY 2004-05 and 200506. Thus, he submitted that the TPO ought to have accepted the segment level PLI as computed by the assessee as against the entity level PLI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P of the assessee should he determined only on the international transactions and not on the entire transactions at entity level. We also find from various decisions that the four comparables selected by the TPO out of 9 have been rejected for various reasons like high turnover, functionally different, abnormal profits etc. Taking the totality of the facts and circumstances, we are of the view that this matter has to go back to the TPO for denovo adjudication in view of the fact that no proper opportunity was given by the TPO. Therefore, we direct the TPO to complete the denovo assessments keeping in view the decisions of the Jurisdictional High court and various other Tribunals in rejecting various comparables selected by the TPO after providing adequate opportunity of being heard to the assessee. 8.1 In view of above order of the Tribunal, we decide the issue in favour of the assessee and direct the AO/TPO to consider the segmental profitability analysis computed by assessee with regard to software development services transactions using TNMM method. Ordered accordingly. 9. Ground Nos.7,8 10 are not pressed. Hence, dismissed as not pressed. 10. Ground No.9 in the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables have high turnover i.e. more than Rs.200 crores. a) Infosys Ltd. b) L T Infotech Ltd. 24.83 c) Persistent Systems Ltd. d) Asper System India Pvt. Ltd. e) Thirdware Solutions Ltd. f) Cybage Pvt Ltd. g) Nihilent Technologies Ltd. 14. We have heard the rival submissions and perused the materials available on record. This Tribunal consistently holding that the turnover filter to be applied between Rs.1 crore to Rs.200 crores and if the comparable from the software development segment exceeds Rs.200 crores, the same to be excluded from the list of comparables. Accordingly, we direct the AO/TPO to consider the segmental financials of the above company and if it is more than Rs.200 crores, those companies to be excluded in view of the order of the Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore Trib), wherein held as under:- 17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. La, (supra) was as to whether comparable can be rejected on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofitability increased by 147%. Also, the company s margin fluctuates widely (34.98%- FY 2015-16, 20.78%- FY 2014-15, 41.95%-FY 201314) which demonstrates that there exists some factor having an impact on the margin, and therefore the company cannot be selected as a comparable. 16.5 The website of the company shows that the company is engaged in diverse dissimilar services, and therefore it ought to be excluded. Ld. A.R. made detailed submissions are made at pages 163-168 of the paperbook. He placed reliance on the decision of this Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Tribunal in IT(TP)A No. 235/Bang/2021]), the decision of this Tribunal in the case of SanDisk India Device Design Centre Pvt. Ltd. v. JCIT (order dated 30.06.2022 passed in IT(TP)A No. 288/Bang/2021) and the decision of the Tribunal at Hyderabad in ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227 228/Hyd/2021 at para 7] where, in the case of a similarly placed assessee, the Tribunal directed the exclusion of Infobeans from the list of comparables for assessment year 2016-17 on the ground that it is not functionally comparable and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and, hence, functionally comparable to assessee company. 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribunal in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: 21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below: 18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the margin of the company for the financial year 2013-14, the TPO did not give effect to the same. Wide fluctuation in the margin: 19.3 Ld. A.R. further submitted that the company s margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company s margin stood at 47.21%, for the FY 2014-15 32.14% and for the FY 2015-16 7.56%. He stated that the detailed submissions are available at pages 158-162 of the paperbook and he placed reliance on the decision of this Hon ble Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Tribunal in IT(TP)A No. 235/Bang/2021]), the decision of the Delhi Bench of the Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17. In view of the above, he submitted that Inteq Software Pvt. Ltd. ought to be excluded from the final list of comparables. 20. The Ld. D.R. submitted that as per information in the Director's report of the company, the company's principal activity is software development services (NIC code 620), which is 100% of its total turnover. The independent Audit rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparables. 22. Ground No.12 in the appeal of the assessee is reproduced below:- 12. The Hon'ble DRP/Ld. AO/Ld. TPO erred in law and facts by accepting R S Software (India) Ltd as a comparable which was rejected by the Appellant during the course of assessment proceedings as being functionally dissimilar to the Appellant. 22.1 Assessee wants exclusion of R.S. Software Ltd. from the list of comparables. Ld. A.R. submitted that this company is engaged in diversified activities, which are not similar to the services rendered by the assessee. This company renders custom application development, quality assurance and testing, application maintenance and support, strategic consulting, in respect of which diverse services, segmental details are unavailable. 22.2 The company is engaged in development of platform services and is rendering data analytics services, which are different from the routine SWD services rendered by the assessee. The data analytics services rendered by the company will fall within the definition of KPO services, which are incomparable to the services rendered by the assessee. The company also owns stock in trade. Significant research an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. The company incurred expenses in respect of its foreign branch of 81.64% of operating cost during the FY 2013-14, 68.82% during the FY 2014-15 and 57.41% during the FY 2015-16, which demonstrates that the company operates in a different business model. He placed the detailed submissions in this regard at pages 79-84 of the paperbook. 22.8 Ld. A.R. placed reliance in this regard on the decision of this Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Tribunal in IT(TP)A No. 235/Bang/2021]). 22.9 Without prejudice, if the company were to be retained in the final list of comparables, the company s turnover for the financial years 201314 and 2014-15 is in excess of Rs. 200 crores, and therefore the margins for the said years ought to be excluded, and the margin of the company for FY 2015-16 alone ought to be considered. 23. Ld. D.R. submitted that the Ld. DRP after having considered the submissions, on perusal of the annual report, noted that this company is engaged in rendering services relating to maintenance and testing of computer software for the payment industry. As per information given at page 125 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. DRP. 23.3 Further, Ld. D.R. argued that the Ld. DRP noted in his order that R D activities are in the nature of routine activities to improve service delivery and there is no specific debit towards R D in the P L account. These indicate that the R D activities are towards routine business activity. The company does not own intangibles except for computer software licenses and ERP implementation. Therefore, Ld. DRP was of the view that this company is comparable to the assessee company. The assessee has failed to establish that such differences, if any, on account of R D/Intangibles, have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, these pleas are rejected by Ld. DRP. As the company is primarily engaged in software development services and earns the revenue from this activity, there is no need of providing segmental informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 (Bangalore - Trib.)) which was upheld by the Hon ble High Court of Karnataka in ITA No. 358/2016. 25.2 Further, Ld. A.R. submitted that the credit period agreed between the assessee and its AE was 90 days. However, the TPO has without any basis considered the credit period to be 30 days to impute notional interest. Detailed submissions in this regard are placed at pages 180-197 of the paperbook by the Ld. A.R. Without prejudice and in any event, the interest rate, if at all ought to be LIBOR plus, as computed by the TPO, as against SBI short term deposit interest rate which the Ld. DRP has erroneously applied. Reliance in this regard is placed by the Ld. A.R. on the decision of this Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. v. The Addl./Jt./Dy./Asst.Commissioner of Income Tax/ITO, National Faceless Assessment Centre (Order dated 21.01.2022 passed in IT(TP)A No. 397/Bang/2021). Without prejudice, Ld. A.R. submitted that TPO erred in making an addition of Rs. 16,75,822/- on account of interest on outstanding receivables as against Rs. 11,92,909/- while giving effect to the Ld. DRP s directions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -AEs also, it had not charged interest, and failed to demonstrate CUP with documentation evidence, accordingly, this plea was rejected by the Ld. DRP. 27. We have heard the rival submissions and perused the materials available on record. The Tribunal consistently taking a view that if the credit period granted to the AE is more than 90 days that should be a TP adjustment towards notional interest @ LIBOR+2%. Accordingly, same view was taken by the Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. in IT(TP)A No.397/Bang/2021 dated 21.1.2022 for the A.Y. 2016-17, wherein it was held as under:- 35. The only other issue that remains for adjudication is ground No.15 with regard to re-characterizing certain trade receivables as unsecured loans and computing notional interest on such trade receivables. The main contention of the ld. AR is that deferred receivables would not constitute a separate international transaction and need not be benchmarked while determining the ALP of the international transaction. In our opinion, this issue was considered by the Tribunal in assessee s own case for AY 2014-15 and in para 23 to 23.9 of the order dated 21.5.2020 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted 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 (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 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 longterm 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;. . . . ' 23.5. Ld.CIT.DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal transaction and its ALP has been correctly determined. 23.7. 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 (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib.), 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 92B 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. 23.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 has observed that: There may be a delay in collection of monies for supplies made, even beyo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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