TMI Blog2023 (4) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... nsummation Technologies Ltd - Tribunal has allowed the inclusion of the company in the AY 2016-17 based on the fact that the DRP in AY 2017-18 has accepted the inclusion of the company. Accordingly, respectfully following the decision of the coordinate Bench, we hold that the company be included for AY 2017-18 in assessee s case. Working capital adjustment - As relying on case of Huawei Technologies India Pvt. Ltd [ 2018 (10) TMI 1796 - ITAT BANGALORE] we direct the AO/TPO to allow working capital adjustment claimed by the assessee. Adjustment made Towards notional interest on loans advanced to AE - TPO treated the loan as a separate international transaction by stating that the assessee has provided benefit to its AE by way of advancement of interest free loan and accordingly proposed a TP adjustment by computing a notional interest of Rs.7,31,76,246 at the rate of 6 months LIBOR + 400 basis points - HELD THAT:- There cannot be an adjustment towards interest on loan when the loan amount itself is NIL during the year under consideration. Accordingly we hold that the notional interest charged on the loan given by the assessee to its AE which is written off and reflected a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e erred in law and facts by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Incometax Rules, 1962 ( Rules ) and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and holding that the Appellant's international transaction is not at arm's length. 5. The learned DRP/AOTTPO erred by applying the following quantitative and qualitative filters: a) The learned DRP/AO/TPO have erred, in law and in facts, by rejecting certain comparable companies having different accounting year/ financial year (i.e., companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) b) The learned DRP/AO/TPO have erred, in law and in facts, by not applying an upper turnover filter and accordingly accepting companies which are much larger in size and operations as compared to the Appellant c) The learned DRP/AO/TPO erred in law and in facts by providing employee cost greater than 25% of turnover as a comparability criterion d) The learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii. R Systems International Limited ix. Infobeans Technologies Limited x. Infosys Limited xi. Cybage Software Private Limited xii. Nihilent Limited xiii. OFS Technologies Limited xiv. Consilient Technologies Private Limited 8. The learned DRP/AO/TPO erred, in law and on facts, in recomputing the operating margin of the Appellant by considering certain operating items (e.g. Provisions and liabilities written back, etc.) as non-operating in nature and viceversa. 9. The learned AO/ TPO/ DRP have erred, in law and in facts, by not making suitable adjustment to account for differences in working capital position of the Appellant vis-a-vis the comparables. 10. The learned DRP/AO/TPO erred, in law and in facts, by not making suitable adjustments on account of differences in the risk profile of the Appellant vis-a-vis the comparables, while conducting comparability analysis. 11. The learned DRP/TPO/ AO have erred in not restricting the transfer pricing adjustment only to the value of the-international transactions under consideration (i.e. revenue earned from provision of software development services to AEs outside India) and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee applied TNM method as the most appropriate method for computing the ALP. Operating Profit/Operating Cost is considered as Profit Level Indicator. The margins computed as per the TP study of the assessee is given below:- Particulars Software Development Services (IN INR) Income: Revenue from operations 343,529,933 Provision for doubtful advances no longer required written back 4,155,821 Miscellaneous income 1,062,406 Total operating income 348,748,160 Expenses: Direct cost 191,309,625 Other indirect expenses 96,968,126 Foreign Exchange loss 13,015,509 Depreciation 8,153,007 Total operating expenses 309,446,268 Operating profit 39,301,892 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.05 26.44 24.40 13 Persistent Systems Ltd. 25.05 23.95 30.4 26.17 14 Tata Elxsi Ltd. 24.9 29.13 24.45 26.19 15 Aptus Software Labs Pvt. Ltd. 24.84 27.68 26.73 26.32 16 Cygnet Infotech Pvt. Ltd. 25.48 27.76 32.41 28.55 17 Infobeans Technologies Ltd. 23.34 41.21 22.21 28.92 18 Nihilent Ltd. 30.8 24.46 34.26 29.84 19 Cadsys (India) Ltd. 18.59 31.58 45.7 30.22 20 OFS Technologies Ltd. 19.95 28.64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm's Length Price ALP=(1+M)*OC 390,459,301 Price Received OR 343,529,933 Shortfall being adjustment ALP-OR 4,69,29,368 9. The DRP after considering the objections of the assessee gave partial relief whereby the TP adjustment was reduced to Rs.11,45,97,470. 10. During the course of hearing the ld. AR submitted that Larsen Toubro Infotech Limited., Persistent Systems Limited., Tata Elxsi Limited., Infosys Limited., Cybage Software Private Ltd., Nihilent Technologies Ltd., Mindtree Limited., R system International Limited., should be excluded based on upper turnover filter of Rs.200 crores. The ld. AR submitted that the turnover of the assessee is Rs.34.35 crores. The TPO while applying the turnover filter failed to apply the upper turnover filter of Rs.200 crores and above. Accordingly, the above 8 comparables whose turnover is more than 200 crores should be excluded. In this regard, the ld. AR relied on the decision of the coordinate Bench in the case of Radisys India Ltd. v.DCIT, IT(TP)A No.190/Bang/2022. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high 7.4. It is also an admitted position that coordinate bench of this Tribunal in assessee s own case in IT(TP)A No.2482/Bang/2019 dated 22.2.2022 excluded comparables with high turnover and have been consistently following the turnover range of Rs.1 to 200 Crores and Rs.200 to Rs.2000 crores, so on and so forth. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-Trib) wherein the Tribunal after noticing the decision of the Hon ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt. Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): 41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 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.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a nonjurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that 7 companies listed in Sl.No.1,2,4,6,7, 10 and 11 of Grd.No.1 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. 7.5. In view of the above decision in assessee s own case as well as the consistent approach followed by this Tribunal, we d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able on record. Infobeans Techonologies Ltd. was considered as comparable in the case of ADP Pvt. Ltd. by the coordinate bench of Hyderabad cited (supra) wherein it was held as under:- 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 co-ordinate bench of this Tribunal 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: 21. Having regard to the rival contentions and the material on record, we find that the Co-ordinate 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 serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 700 employees and high customer focus has enabled it to grow a blue-chip client base with over 90% repeat business. 8.4. Further, at page 2320 of the paper book, this company is said to be providing computer programming, consultancy and related activities as per NIC code. A combined reading of this makes it clear that this company is engaged in not only SWD service but other allied services to various industrial segments. Whereas on perusal of financial statement at page 12367 of the paper book and Note 20 at page 2378 of the paper book, we note the revenue recognition is only under one head being Expert amounting to Rs.66,12,31,773/-. We also notice that at page 2408, in Related Party Transaction details this company has earned revenue of Rs.8,00,53,350/- from it s AE. From this it is clear that this company is rendering services to non-AE customers also, whereas the assessee before us is a captive service provider only catering to the requirements of its AE. Under such circumstances we do not deem it fit to be considered in the final set of comparables. Accordingly, this comparable is directed to be excluded. 16. In assessee s case, the year under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provider. 9.5.7 The rationale for this filter is that companies that are engaged in providing similar services will require a minimum level of expenditure as personnel expense. Employees cost constitutes the major component of cost in any service sector. Very low employee cost, viz., less than 25% of total cost, indicates that company is either engaged in some other business or it has outsourced the service functions to a third party, i.e., it is not rendering services on its own. Such companies cannot be treated as functionally comparable to the assessee. Hence, we do not find any infirmity in application of above filter. The objection is accordingly rejected. In view of the above discussion, the selection of this company is upheld. 18. The ld. AR therefore submitted that the DRP has accepted the contentions of the assessee, however, has erroneously concluded that the objections are rejected. 19. After hearing both the parties, we notice that the DRP has agreed with the various contentions of the assessee which is supported by the relevant extract given above. We notice that the DRP while concluding has stated that the objection of the assessee with regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionally comparable to the assessee (page 4793 of PB). It is also submitted that it passes all filters applied by the TPO and accordingly needs to be included. The ld. AR relied on the decision of Radisys India Ltd (supra) in this regard. 23. We have heard the rival submissions and perused the material on record. We notice that the above two comparables are considered in the decision of the coordinate Bench in the case of Radisys India Ltd. (supra) where it is held that 6. Ground No.6 is raised by assessee seeking inclusion of following comparables under SWD segment: (i) Akshay Software Technologies Ltd (ii) Batchmaster Software Private Ltd (iii) DCIS DOT COM Solutions India Pvt Ltd (iv) Evoke Technologies Private Ltd (v) Sagarsoft (India) td (vi) Sasken Technologies Limited (vii) E-Zest Solutions Limited 6.1 *** It is submitted that the remaining 5 comparables sought for inclusion, were not considered by the Ld.TPO/AO. We therefore deem it appropriate to remit them to the Ld. AO/TPO. The Ld. AO/TPO shall look into the functional profile of these comparables and verify the same with that of the assessee. If they are fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he annual report especially the segmental reporting the business activity of the company falls within the single primary business segment viz. Software development. As it is functionally similar and satisfies the export turnover filter, the TPO is directed to consider the company as comparable for the determination of ALP in the software development services. 7.7 In view of the above, we do not find any reason to exclude this company viz. Isummation Technologies Ltd. from the list of comparables in the assessment year 2016-17. Directed accordingly. 27. We notice that in the above decision, the Tribunal has allowed the inclusion of the company in the AY 2016-17 based on the fact that the DRP in AY 2017-18 has accepted the inclusion of the company. Accordingly, respectfully following the decision of the coordinate Bench, we hold that the company be included for AY 2017-18 in assessee s case. Working capital adjustment 28. The TPO did not give working capital adjustment to the assessee. The DRP while upholding the decision of TPO, held that it was not demonstrated with any data or information there exists a difference in price because of the working capital adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: (3) An uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment. Aggrieved the assessee is in appeal before us. 34. The ld AR submitted separate arguments with regard to loan inherited as a result of merger and with regard to the loan given by the assessee to its AE directly. 35. With respect to the loan amount of INR 74,21,40,000 resulting out of merger scheme, the ld AR submits that this asset is appearing in the books of the company because of adoption of pooling of interest method to give effect to the amalgamation. The assessee had not paid any consideration to acquire this asset as the same was not expected to be realised even by the erstwhile company. Accordingly, it was accounted in the books at the time of acquisition as asset brought in and the entire amount is provided for. It is further submitted that the loan issued by erstwhile Company not forming part of consideration paid on account of merger and is adjusted from the general reserve and hence the consideration paid was only for the net amount. The ld AR submitted that the loan should not be treated as an asset in the books of the assessee as there is not it is probable that future economic benefits associated with the item that will flow in future. Thus, the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holly owned subsidiary is a strategic investment for increasing business, sales and profit, and therefore the assessee, has a deep interest in the operations of its subsidiaries. Any support to them is therefore in the business interest of the assessee and it was obligatory on part of the assessee, being the parent company and the company desirous of expanding its business in US Market, to provide the funds required for the expansion. Thus, it is argued that any support granted to its subsidiary is in the business interest of the assessee and represents a shareholder activity. In addition to the above, the ld AR submitted that the assessee has similar amount outstanding for the previous years as well in relation to which the TPO has consistently accepted the position of the assessee and has not imposed any transfer pricing adjustment, i.e., has not imputed any notional interest in respect of such irrecoverable loan amount. 37. Without prejudice to the above contentions, the ld AR would submit that even if the TPO imputes notional interest income on the aforementioned irrecoverable debt, it also requires corresponding deduction u/s 36(1)(vii) as the loan stands irrecoverable. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this context it is placed that the decision of the Hon ble SC was rendered in the context of a banking company that too in the context of a domestic transaction which doesn t involve either related party transaction nor international transaction and where there is no scope for profit shifting. Whereas the transaction of appellant in question involves international transaction and related party transaction with scope for profit shifting and the adjustment was made by the TPO with respect to interest under Chapter X which contains special provisions relating to Avoidance of tax through international transactions with Associated Enterprises. The Special bench decision in the case of Instrumentarium Corporation Ltd.v.Assistant Director of Income-tax, International Taxation-I, Kolkata reported in [2016] 71 taxmann.com 193 (Kolkata - Trib.) (SB) made it clear that the principle of commercial expediency which is applicable in the case of domestic transaction as approved in the case of SA Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 is not applicable to international transactions. Applying the same ratio, the decision of Hon ble SC rendered in the context of unrelated party d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Technologies Ltd. v. Assistant Commissioner of Income-tax, Circle- 8(2), Mumbai d. [2015] 55 taxmann.com 523 (Delhi) Commissioner of Income-tax -I v. Cotton Naturals (I) (P.) Ltd The request of the assessee to write off the interest determined at ALP u/s 36(1)(vii) is without any basis and is against the intention of the Chapter X of the IT Act 1961. 39. We heard the rival submissions and perused the material on record. The loan amount on which the notional interest is imputed consists of two parts. Rs.74.21 crores inherited from a SSI Ltd as part of merger and an amount of Rs.98.61 crores which the assessee has lent to its AE. As per the financial statements of the assessee a provision is created and adjusted against these loans and the net amount is shown as NIL. The common submission of the ld AR with regard to the amount recoverable being shown as NIL in the books of accounts is that there is no future economic benefit is expected from these loans. 40. With regard to the amount inherited as part of merger, the contention of the TPO was that though the assessee has not given the loan, the assessee is compensated for adjusted during the acquisition process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er activity are not tenable. 42. Now, whether an ALP adjustment is warranted with regard to the loan given by the assessee to its AE is the next issue to be considered here. From the perusal of the records, it is clear that the assessee has created a provision of against the loan on the basis that there is no economic benefit to be derived and there is no possibility of recovery in future. The provision thus created is adjusted against the loan amount and the net figure of NIL is shown in financial statements of the assessee. It should be mentioned here that the provision is created and adjusted against the loan for the year ended 31.03.2011 and the status remains the same till the financial year of the year consideration. The contention of the ld DR is that there is no actual write off since it is only a provision that is created in this case and therefore the interest adjustment towards loan receivable is justified. With regard to the question of whether the provision adjusted against the loan whether amounts to actual write off is settled by the Hon ble Supreme Court in the case of Vijaya Bank v. CIT, [2010[ 323 ITR 166 (SC) where in it was held that the provision for doubtfu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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