TMI Blog2022 (6) TMI 1357X X X X Extracts X X X X X X X X Extracts X X X X ..... issue.we see no reason to interfere with the decision of the lower authorities and hence these grounds of the assessee are dismissed. Comparability analysis adopted by TPO for determination of ALP - HELD THAT:- We direct the AO/TPO to apply 15% RPT filter in respect of all the comparables. Interest on the average outstanding trade receivables - TPO Rejected the contentions of the Assessee and computed the TP adjustment on the basis of average receivables and considered the interest rate at LIBOR+400 basis points - HELD THAT:- As relying on judgment of AMD (India) Pvt. Ltd [ 2018 (8) TMI 2094 - KARNATAKA HIGH COURT ] we hold that the treatment of interest on deferred receivables is rightly considered as an independent international transaction and benchmarked separately by the revenue authorities. Calculation of interest - Considering the fact that the average receivable days is 83 and that the TPO in assessment year 2018-19 has allowed 90 days credit for the assessee, we are of the view that it is reasonable to allow 90 days credit for the purpose of calculating interest on receivables. We are also of the opinion that the interest rate to be adopted is LIBOR rate + ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber This appeal is against the final order of the Income Tax Officer Ward 1 (1) (1) Bengaluru (the AO) dated 30/10/2018 passed under section 143(3) r.w.s. 144(13) of Income-tax Act, 1961 [the Act] for the assessment year 2014-15. 2. The Assessee is a wholly owned subsidiary of Applied Materials Inc., USA, which is a supplier of products and services to the global semiconductor industry. The Assessee was incorporated on 11.07.2003 under the provisions of the Companies Act, 1956, and is engaged in the provision of SWD services and engineering services to Applied Inc., its AE, as a captive service provider. In terms of the provisions of Sec.92A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ( AEs ). 3. In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services is international transaction i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justments and Ground No. 9 and 10 are relating to Corporate Tax issues. The assessee also raised an additional ground with regard to disallowance of education cess. However during the course of hearing the ld AR submitted that this ground is not pressed and hence dismissed. 9. We will first consider the issues pertaining to TP adjustments. As far as the provision of SWD services are concerned, the Assessee filed a Transfer Pricing [TP] Study to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method [TNMM] as the Most Appropriate Method [MAM] of determining ALP. The Assessee selected Operating Profit/Operating Cost [OP/OC] as the Profit Level Indicator [PLI] for the purpose of comparison. The PLI of the comparables is arrived at by considering the weighted average margin of the 3 years data. The OP/OC of the Assessee was arrived at by the Assessee in its TP study as below:- Operating Income Rs.373,60,37,837 /- Operating Cost Rs.329,76,52,420 /- Operating Profit (Op. Income Op. Cost) Rs. 43,83,85,417/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO that in order to ensure timely delivery of software development services to its AE, it utilized the services of certain third-party sub-contractors who performed a part of the services in the relevant previous year. It was further submitted that the said sub-contracting charges formed a part of its total cost base on which the cost plus mark-up of 13.37% was applied only because the revenue recognition policy followed by the Assessee and the service agreement entered into by it with its AE, both required that the mark-up be charged on the entire costs incurred by it for provision of the services. It was thus submitted that since the sub-contracting charges were paid to third-party service providers under uncontrolled circumstances, the same ought to be considered as being at arm s length. Moreover, the third-party service providers, being Tier I and Tier II companies in India, were marking-up their costs by a significant margin and it was thus submitted that the aforesaid sub-contracting charges included the profit element which was earned by such thirdparty service providers. Consequently, it was urged that applying a further mark-up on such already marked-up charges would l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or costs while determining the arm s length price of the services provided by it to its AE. 17. The assessee has raised the following grounds with regard to determination of Net Cost Margin of the assessee excluding the subcontract charged:- 4.1 The ld. AO/TPO had erred on facts and in law in not acknowledging that the sub-contracting charges incurred by the Assessee represents arm s length consideration and was thereby required to be considered as pass-through costs and that the same thus ought to be excluded from the Assessee s operating costs and income while computing the arm s length price. The ld. Panel erred in confirming the same. 4.2 Without prejudice to the above, the ld. AO/TPO erred in not making a reasonably accurate adjustment to the Assessee s NCP margin so as to eliminate the material effects of the differences between the Assessee and the comparable companies in this regard. 18. The ld. AR submitted that the determination of net cost margin excluding the sub-contract charges is decided against the assessee by the Tribunal in assessee s own case for the AY 2011-12 in IT(TP)A No.17/Bang/2016 dated 21.09.2016 (page 2265 to 2269 of PB, para 4 to 8 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully following the above decision of the coordinate bench of the Tribunal, we see no reason to interfere with the decision of the lower authorities and hence these grounds of the assessee are dismissed. 20. Vide ground No.5, the assessee raised the following grounds relating to the comparability analysis adopted by TPO for determination of ALP:- 5.1 The Ld. AO/ Ld. TPO grossly erred on facts and the Ld. Panel erred in confirming the benchmarking of transactions of software development services of the Assessee with companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the Assessee vis- -vis the companies selected as being comparable. 5.2 The Ld. AO/ Ld. TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Assessee, without establishing functional and the Ld. Panel also erred in confirming the same. 5.3 The Ld. AO/ Ld. TPO erred on facts in arbitrarily accepting companies without considering the turnover and size of the Assessee and comparables. The Ld. Panel also erred in confirming the same. 5.3.1 The Ld. AO /Ld. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o that of the Assessee. The Ld. Panel erred in confirming the same. 5.10 The Ld. AO/ Ld. TPO erred in arbitrarily rejecting certain companies from the Ld. TPO's own search matrix, despite the fact that they are functionally comparable and pass all the filters applied by the Ld. TPO, viz. Maveric Systems Limited and InfoMile Technologies Limited. 5.11 The Ld. AO/ Ld. TPO erred in not considering the Assessee's submission that Infosys Limited, Larsen Toubro Infotech Limited and Persistent Systems Limited were held as functionally not comparable by the Hon'ble Bangalore Tribunal in the Assessee's own cases of AY 2010-11 and AY 2011-12. 5.12 The Ld. AO/Ld. TPO erred in considering Provision for Doubtful Debts as non-operating while computing the margins of the comparable companies. The Ld. Panel erred in upholding the actions of the Ld. TPO. 5.13 The Ld. AO/Ld. TPO erred in considering data obtained u/s 133(6). The Ld. Panel erred in upholding the actions of the TPO. 21. Out of the above grounds, ground no. 5.1 to 5.6 are general in nature. 22. The ld. AR submitted that issue of erroneous consideration of margins of certain companies contended in gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Also, the company has significant intangibles as a part of its fixed assets in the nature of intellectual property. It company owns seven Edge products/platforms and six other product based solutions. It leverages on its premium banking solution Finnacle , owns significant brand value and focuses immensely on brand building. For this purpose it incurs significant brand building expenses, which goes to help the company have a premium pricing for its services. IT derives more than 51% of its revenue from onsite activities and places high reliance on the onsite activities as they generate higher revenue when compared to services performed at their own facilities. Since the company adopts a business model different from that of the Assessee who renders services offshore, the company ought to be excluded. The company also heavily focuses on research and development activity and incurs significant expenditure for this account. For the concerned financial year the company has incurred research and development expenses of Rs.873 crores. The company for the relevant financial year has earned abnormally high profit with margin of 36.13%, which makes it incomparable to the Assessee. The co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Persistent Systems Ltd. : It is submitted that this company ought to be excluded from the final list of comparables inter alia for the reasons that it is functionally not comparable to the Assessee and as there exists peculiar economic circumstances for which no appropriate adjustment can be made to its mark-up to eliminate the material effects thereof. It is functionally dissimilar as it is engaged in rendering IT services and in the development of software products without there being separate segmental information disclosed in its Annual Report for such activities. The company focuses mainly on product development and during the year under consideration launched a new product brand Accelerite . Further, it made significant investments towards research and development activities in the relevant previous year. The company has incurred significant expenses in foreign currency amounting to 13.14% of its total revenue which suggests that is engaged in provision of onsite services. The company also made significant investment in intellectual property led solutions and also had a dedicated team for research and IP developments. It also owns several IP solutions, and during the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT ([2020] 117 taxmann.com 439 (Bangalore - Trib.), wherein in the cases of similarly placed assessees, for the assessment year 2014-15, the company came to be excluded. In view of the above, it is submitted that this company ought to be excluded from the final list of comparables. 26. The ld. DR supported the orders of the lower authorities. 27. We find that in the assessee s own case for AY 2011-12, the coordinate Bench of this Tribunal vide order dated 21.9.2016 (supra) has dealt with this issue and held as under:- 9.2.4 We have considered the rival submissions as well as the relevant material on record. At the outset we note that the functional comparability of these two companies have examine by the co-ordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in para 60 and 61 paras 24 to 26 as under: 60. **** 61. **** (4) Persistent Systems Ltd. 24. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 times higher than the assessee. Following the decision of this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any reason to interefere with the directions of the DRP on this issue. (iv) L T Infotech Ltd. 19. ***** We further find that the comparability of this company has been considered by the co-ordinate bench of the this Tribunal in the case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in paras 62 to 65 as under: 62. The assessee has raised objection against this company on the basis of high turnover in comparison to the assessee. It was also contended that related party transaction (RPT) of this company is 18.66%. The DRP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services provided by this company. Thus the DRP held that software development segment is comparable to the assessee and therefore this company has to be retained as comparable. 63. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion model which the company has adopted. The above comparable was excluded in assessee's own case on functional dissimilarity in the Assessment Years 2005-06 and 2007-08 and learned Authorised Representative also relied on Lime Labs (India) (P.) Ltd. v. ITO [2019] 101 taxmann.com 201 (Delhi Trib.). We found the co-ordinate Bench of the Tribunal in the case of LG Software India (P.) (supra) for the Assessment Year 2014-15 has excluded the comparable as observed at paras 8 8.1 at page 4 as under : 8. We also notice that in A.Y 2008-09, the coordinate bench has excluded M/s. Thirdware Solutions Ltd also by following the decision rendered in the case of 3DPLM Software Solutions Ltd. (supra), where in it was held that M/s. Thirdware Solutions Ltd. is engaged in product development and earns revenue from sale of licenses and subscription. Further, the segmental details were not available. 8.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in A.Y 2008-09, we direct exclusion of M/s. Thirdware Solutions Ltd. The comparable Thirdware Solutions Ltd. has to be excluded as it is predominant in activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Systems Ltd. observed as under:- Maveric Systems Limited : This comparable was rejected by the TPO and it was sought for inclusion by the assessee and whereas TPO has rejected without any basis and was excluded on the ground that the company was engaged in R D activity and expenditure is 6% of total turnover. Similarly, the DRP has upheld the exclusion of the company. The learned Authorised 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. 35. Respectfully following the above order of the Tribunal, we restore this issue to the TPO with similar directions. 36. Ground No.7 is regarding interest of Rs.4,49,06,596 on the average outstanding trade receivables. Before the TPO the assessee submitted that the amounts outstanding have been settled by the AE on an on-going basis in the normal course of business havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to be set aside. Reliance in this regard is placed on CIT v. Merck (reported in (2016) 73 taxmann.com 23 (Bombay) and Verifone India Technology Pvt. Ltd. V. ACIT (Order dated 25.04.2022 passed in IT(TP)A No. 290/Bang/2021). e. The Assessee has substantial own funds and has not incurred any additional cost on account of the delayed receivables, warranting a TP Adjustment. Also, the average delay was only of 83 days and since the same is marginal, no TP adjustment on that count is required to be made. Reliance in this regard is placed on OSI Systems Pvt. Ltd. v. DCIT (Order dated 18.11.2020 passed in ITA No. 2228/Hyd/2017, at paras 6.6 and 6.7). f. Without prejudice, an appropriate study ought to be made, taking into account the credit period extended by the comparables, and the delay, if any, ought to be computed accordingly. Reliance in this regard is placed on the decision of this Hon ble Tribunal in the case of ISG Novasoft Technologies Ltd. V. DCIT (Order dated 18.03.2021 passed in IT(TP)A No. 3284/Bang/2018). g. Interest, if any, ought to be adopted at LIBOR+2% as held in Swiss Re Global Solutions India Pvt. Ltd. (Order dated 21.01.2022 passed in IT(TP)A No. 397/Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances. 23.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 wherein it is held that, interest on receivables is an inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing-up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 benchmarked independently as held by the Hon ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018. 37. Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly 40. In view of the above discussion and considering the decision of the of the coordinate bench of the Tribunal (supra) and the judgment of the Hon ble High Court of Karnataka in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14-Feb-14 150,760,055 15-Mar-14 27-May-14 73 99,040,000 15-Mar-14 9-Jun-14 86 33,105,105 15-Mar-14 23-Jun-14 100 5. AMIND C74/FY 2013 19-Feb-14 11,266,914 20-Mar-14 29-Apr-14 40 6. AMIND 118/ FY 2014 14-Mar-14 240,027,931 12-Apr-14 23-Jun-14 72 65,205,000 12-Apr-14 14-Jul-14 93 75,344,908 12-Apr-14 31-Jul-14 110 Total 1,182,319,866 Average days 83 Forex Loss adjustment (22,024,749) Balance as on 31.03.2014 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessible through the computer system alone. The AO restricted the depreciation to 15% on the basis that the assets were not computer software eligible for depreciation at 60% and were instead electronic items. The DRP upheld the AO s order that the assets are not integral part of the computer and were eligible for depreciation at 15%. 45. The ld AR submitted that the peripheral devices are integral part of the computer system and cannot operate independently and therefore, the same are eligible for depreciation at the rate of 60% as it applicable to computers and computer software . The ld AR placed reliance in this regard is placed on the following decisions:- i. Expeditors International (India) (P.) Ltd. v. ACIT ([2008] 118 TTJ 652 (Delhi)); ii. ITO v. Samiran Majumdar ([2006] 98 ITD 119 (Kolkata)); iii. CIT v. BSES Yamuna Powers Ltd. [2013] 358 ITR 47 (Delhi); iv. DCIT v. Datacraft India Ltd. ([2010] 133 TTJ 377 (Mumbai) (SB)); v. DCIT v. UAE Exchange Financial Services Ltd. ([2016] 69 taxmann.com 84 (Bangalore - Trib.)); and vi. CIT v. Sony India (P.) Ltd. ([2012] 26 taxmann.com 237 (Delhi)). 46. The ld AR also submitted, without prejudice, that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... event it is ascertained able that these accessories and Xerox machines could not be independently used but could only be used on being attached to computer 60% depreciation should be allowed. Insofar as racks, batteries and stabilisers are concerned these do not fall within the category of computer peripherals and we uphold the depreciation being allowed only at 15%. Accordingly this ground raised by assessee stands partly allowed. 49. In the year under consideration, the assessee has produced the list of assets with the details of date of purchase. We notice that the AO while computing the disallowance had not taken into consideration the date of put to use of the asset. We also notice that in assessee s own case cited supra, the coordinate bench of the Tribunal has allowed the rate of depreciation based on the nature of assets. Given this, we remit the issue back to the AO to verify the nature of asset and allow depreciation considering the principle laid down by the coordinate bench of the Tribunal in assessee s own case (supra) and the date of asset being put to use. This ground is allowed in favour of the assessee for statistical purposes. 50. Ground No.10 reads as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was after the asset was completed and was ready to be put to use. The ld AR brought to our attention that the date of put to use have been certified by the tax auditor in the tax audit report. The ld AR alternatively submitted that, in the event of depreciation claim is disallowed, the disallowance need to be reworked considering the date in which the relevant new premises started to function as the date of assets being put to use. The ld AR also contended that the depreciation disallowance should be restricted to the additions made during the year under consideration and not on the opening written down value (WDV) on which depreciation is allowed in the earlier years. 56. We have heard the ld. DR and perused the material on record. The AO has denied the depreciation on leasehold improvement since, according to AO, the assessee had not furnished the invoices bills supporting the expenditure and that the assessee had not provided evidence for completion of the work. The break-up of disallowance of depreciation of Rs.25,31,31,220/- is as under which is worked out as per date put to use as certified in the tax audit report (page 1523 of paper book):- i. Depreciation of Rs.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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