TMI Blog2023 (4) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... Comparable selection - Functionally dissimilar companies cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE. Interest on receivables - We note that in assessee s own case TPO has considered a credit period of 90 days. Accordingly, we direct the Ld.AO/TPO to compute the notional interest if any that falls out of this credit period for the year under consideration by considering LIBOR + 300 basis points. Disallowance u/s. 40(a)(i) towards the salary cost reimbursed by assessee to AE on cost to cost basis - HELD THAT:- We remand this issue to the Ld.AO to consider the claim in accordance with the decision of Hon ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. [ 2022 (6) TMI 1251 - KARNATAKA HIGH COURT ] and M/s. Toyota Boshoku Automotive India Pvt. Ltd. [ 2022 (4) TMI 1443 - ITAT BANGALORE ], Goldman Sachs Services Pvt. Ltd. [ 2022 (4) TMI 1444 - ITAT BANGALORE ] having regard to the evidences filed by the assessee. We also direct that in the event, TDS has been deducted u/s. 192 of the Act, no disallowance can be made u/s. 40(a)(i). Section 40(a)(i) can be invoked only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M as most appropriate method for benchmarking the transaction. In the TP study, assessee had used 7 comparables with an average margin of 10.91% and thus held its transaction to be at arms length. Sl.No. Name of the Company Weighted Average (%) 1. Lycos Internet Ltd. (Formerly known as ybrant Digital Ltd.) 3.49 2. Sasken Communication Technologies Ltd. 8.50 3. Evoke Technologies Pvt.Ltd. 5.25 4. E-Zest Technologies Ltd. 11.02 5. Akshay Software Technologies Ltd. 2.11 6. R Systems International Ltd. 23.51 7. OFS Technologies Ltd. 26.74 2.5 Dissatisfied with the companies selected by assessee, the Ld.TPO finalised following comparables after giving an opportunity to the assessee under the SWD segment. 2.6 These comparables had an average margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Communications India Pvt. Ltd. reported in (2011) 11 taxmann.com 205. 4.2 However, the Ld.AR fairly admitted that this issue has been considered against assessee in assessee s own case for A.Y. 2014- 15 reported in (2022) 141 taxmann.com 421. We refer to the relevant observation which is reproduced as under: 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 of the order). The relevant observations of the Tribunal are as follows:- 7. We have considered the rival submissions as well as the relevant material on record. Undisputedly, the assessee is charging a mark up on the software development services provided to the AE being captive service provider. Therefore the assessee is not acting as an agent or distributor of the AE but is a provider of services of its own. It is not the case of rendering services of an agent without any value addition but the assessee is providing software development services to the AE and charging margin on the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that in Ground no. 5.12, assessee seeks exclusion of 10 comparables being a) RS Software b) L T Infotech Ltd. c) Nihilient Technologies Ltd. d) Intex Software Pvt. Ltd. e) Persistent Systems Ltd. f) Infobeans Technologies Ltd. g) Thirdware Solutions Ltd. h) Infosys Ltd. i) Aspire Systems India Pvt. Ltd. j) Cybage Software Pvt. Ltd. 5.2 He submitted that the two comparables raised by assessee in 5.12.1 and 5.12.2 are not pressed and accordingly they are not adjudicated herein. 6. Before we undertake the comparability analysis, it is sinequa non to understand the FAR analysis of assessee under the SWD segment. FAR Characterisation Based on the FAR analysis it may be concluded that Applied India is an IT service provider who is insulated from a majority of the business risks and is engaged in rendering services as per the requirements of, and specifications provided by AEs. Based on such a FAR profile, it may be appropriate to characterize Applied India as a limited risk captive service provider. 7. Based on the above facts, as presented in the FAR analysis, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on pages 943, 946, 920, 1011 of the annual report paper book in support. Referring to page 1023, 1015 the Ld.AR submitted that this company has significant onsite activities. Further, he submitted that during the year under consideration, this company has extraordinary event, whereby Information Systems Resources Centre Private Limited amalgamated with the Company. He thus prayed for exclusion of this company from the final list. 14. Infobeans Technologies Ltd.: It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is specialised in business applications development for web and mobile. This company provides software engineering services primarily in Custom Application Development, Content Management Systems, Enterprise Mobility, Big Data Analytics. He placed reliance on page 1668 of annual report paper book. The services rendered by this company are different from the routine low end software development services rendered by the assessee as a captive service provider to its AE. The Ld.AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions qua SDS on the grounds inter alia that it is functionally dissimilar; that its segmental data is not available; that L T is a huge brand with ownership of intangibles and on account of extra ordinary event; and on the ground that this company was rejected in taxpayer's own case in Global Logic India Ltd. v. Dy. CIT [2020] 117 taxmann.com 39 (Delhi - Trib.). 15 . However, on the other hand, ld. DR for the Revenue opposed the contentions raised by the taxpayer to exclude L T as a comparable on the grounds inter alia that this comparable was chosen by the taxpayer itself and in case of TNMM applied for benchmarking the international transactions minor dissimilarities are not to be taken into account; that the taxpayer cannot be taken as a captive entity as its spectrum is much more and it is also a global brand having presence in many countries and relied upon the order passed by the ld. TPO/ld. DRP. 16 . When we examine profile of L T from its financials, available at pages 6, 7 11 of the paper book, it is into providing application development and maintenance services providing digital solutions such as big data analytics, enterprise computing, cogn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to consolidate the engineering services business under a separate subsidiary of L T, L T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs. 489.53 crs based on ITA No. 4740/Del./2018 fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year. 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ials, having huge brand value and intangibles is not a suitable comparable vis- -vis taxpayer which was working as a captive entity and that contention raised by the ld. DR that under TNMM minor dissimilarities do not affect the overall comparability is not sustainable because though it is a taxpayer's own comparable but there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture qua profit earned by the company from provisions of SDS. L T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the higher profitability. So, we are of the considered view that L T is not a suitable comparable vis - vis the taxpayer, hence ordered to be excluded. THIRDWARE SOLUTION LTD. (THIRDWARE) 40 . The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis- -vis the taxpayer. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices under four verticals i.e. services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis- -vis the taxpayer which is a routine software development services provider. Infobeans has been excluded as a comparable on account of functional dissimilarity vis- -vis routine software development service provider by the coordinate Bench of the Tribunal in case of Pub Matic India (P.) Ltd. (supra). So, in view of the matter, we order to exclude Infobeans from the final set of comparables. INTEQ SOFTWARE LTD. (INTEQ) 46 . The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct the effects of their products on human skin). He placed reliance on page 1421 of the annual report paper book. Persistent has established persistent labs which focuses on latest technologies viz., gesture computing, machine learning etc. Using the innovations of Persistent labs. The Ld.AR further submitted that this company partnered with IBM and have added an engineering team that is building products and tools for continuous lifecycle management and for digital transformation and has partnerships with various leading platform providers in Analytics, Big Data, Cloud, Mobile, Machine Learning, and IoT. He placed reliance on page 1420, 1421, 1422, 1391 of the annual report paper book. The Ld.AR submitted that as a part of Aepona acquisition, this company acquired development centers in Belfast, UK and in Colombo, Sri Lanka during the year under consideration. He placed reliance on page 1420, 1421 of the annual report paper book. He thus prayed for exclusion of this company from the final list. The Ld.AR submitted thus submitted that Persistant Systems Ltd, is not functionally similar with that of assessee who is a captive service provider to its AE. 20. Infosys Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve service provider to its AE. It is also submitted that these comparables are not functionally similar with that of the assessee as has been observed by Coordinate Bench of this Tribunal in following cases: 1. Decision of Hon ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. vs. Addl. CIT reported in (2022) 136 taxmann.com 52. 2. Decision of coordinate bench of this Tribunal in case of OLF India Software Pvt.Ltd. vs. ACIT in IT(TP)A No.182/2021 by order dated 28/09/2022 for A.Y. 2016- 17. 3. Decision of Hon ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. vs. DCIT in ITA-TP.No. 198/Hyd/2021 by order dated 06.10.2021 for A.Y. 2016-17. On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 21. Before us, the Ld.DR has not been able to place anything on record contrary to the above submissions by the Ld.AR. We of the view that with such varied functions, these companies cannot be compared with assessee before us, which is a captive service provider. We accordingly direct the Ld.AO/TPO to exclude Persis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany are wide in range and diversified. The Ld.AR submitted that, the company is engaged in diversified activities. It is submitted that, it renders services in the nature of consulting, software development and product development, provision of business consulting in the area of the enterprise transformation, change and performance management, digital transformation, business intelligence and data science services and also providing related IT services. The Ld.AR submitted that, software-consulting services include end-to-end solutions, onsite management and IT functions, and planning system designing, which are in no way comparable to the captive software development activities as provided by the assessee. The Ld.AR further submitted that, this company has incurred significant expenses in foreign currency of 37.68%, 33.27% and 37.47% of its total expenditure during the FYs 2015-16, 2014-15 and 2013-14, respectively, which suggests that is engaged in provision of onsite services. And that, during the FY relevant to assessment year under consideration, this company acquired GNet Group LLC, a business intelligence and analytical company, and Intellect Bizware Services Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis- vis assessee which is a routine software development service provider working on cost + markup model, hence ordered to be excluded. We note that the assessee in Red Hat India Pvt. Ltd. v. ACIT (supra) was a captive service provider to its AE for assessment year 2016-17. Nothing has been placed by the Revenue to deviate from the above view taken by the coordinate bench of this Tribunal in Red Hat India Pvt. Ltd. v. ACIT (supra). We are of the view that, based on the functions performed by this company as submitted by the Ld.AR and the observations of Hon ble Mumbai Tribunal, this comparable deserves to be excluded from the final list. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Nihilent Technologies Ltd from the final list. 24. Cybage Software Pvt.Ltd. It is submitted that this company is engaged in the provision of diversified servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the services rendered by the assessee. It is submitted that this company conducts research and development work in the areas of real time analytics, MDM, proximity, payments, digital commerce, mobile payments, testing, automation, personalised loyalty in payments and merchant management in payments laboratory. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE. We therefore direct the Ld.AO/TPO to exclude R.S Software (I) Pvt.Ltd, from the final list. Accordingly this ground raised by the assessee stands allowed. Before us, the Ld.DR has not brought out any distinguishing factor in order to take a different view. Respectfully following the above view, we direct the Ld.AO/TPO to exclude a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or receivable or any other debt arising during the course of business;....' . 9.6 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 transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Kol.) of 2009, dated 15- 7-2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 9.10 Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loan and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of M/s. Faurecia Automotive Holding vs. DCIT (IT) in ITA No. 784/PUN/2015 by order dated 08.07.2019 Coordinate Bench of this Tribunal in case of M/s. Toyota Boshoku Automotive India Pvt. Ltd. vs. DCIT in IT(TP)A No. 1646/Bang/2017 by order dated 13.04.2022 and Coordinate Bench of this Tribunal in the case of Goldman Sachs Services Pvt. Ltd. vs. DCIT in IT(IT)A Nos. 362 to 369 338 to 345/Bang/2020 by order dated 29.04.2022. 11.2 It is submitted that identical issue has been considered at length and in detail in the above decisions. The Ld.AR referred to the recent decision of Hon ble Karnataka High Court in case of M/s. Flipkart Internet Pvt. Ltd. vs. DCIT (IT) (supra) wherein Hon ble Court observed as under: (viii) The Revenue has relied upon the judgment of the Apex Court in C.C., C.E. S.T.-Bangalore (Adjudication) etc. v. M/s.Northern Operating Systems Pvt. Ltd.12 where the Apex Court has interpreted the concept of a secondment agreement taking note of the contemporary business practice and has indicated that the traditional control test to indicate who the employer is may not be the sole test to be applied. The Apex Court while construing a contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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