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TMI Blog2023 (4) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(2) was duly served on the assessee. The case was referred to the TPO for determination of ALP of the international transactions the assessee is having with its AE. The TPO made the following TP adjustments :- (i) Software development services - Rs.41,20,89,204 (ii) BPO Services (ITeS Services) - Rs.22,42,68,187 (iii) Interest on delayed receivables - Rs.53,92,838 3. Aggrieved, the assessee raised its objections before the DRP pursuant to which, the TP adjustments were modified as under:- (i) Software development services - Rs.33,47,10,065 (ii) BPO Services (ITeS Services) - Rs. 13,83,31,654 (iii) Interest on delayed receivables - Rs.53,92,838 4. Aggrieved the assessee is in appeal before the Tribunal raising the grounds with respect to the following issues:- I. Ground No.1 & 2 - general. II. Ground No.3 - Comparability analysis and determination of ALP. III. Ground No.4 - TP adjustment with regard to software development segment (SWD). IV. Ground No.5 - TP Adjustment with ITeS segment. V. Ground No.6 - Not providing working capital adjustment and risk adjustment. VI. Ground No.7 - Notional interest on outstanding receivables. SWD Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gies P. Ltd. 59.44 22 Ginni Systems Ltd. 66.51 35th Percentile 16.46% Median 24.00% 65th Percentile 36.30% 8. Accordingly, the TPO computed the TP adjustment as below:- Appellant's PLI (OP / OC) 14.89% 35th Percentile 16.46% Adjustment required Yes Median Margin of comparable set (`M') 24.00% Operating Cost of the Appellant Rs. 452,50,95,852/- Arm's Length Price - (1 + M) * Operating Cost Rs.561,11,18,856/- Price Received , Rs. 519,90,29,652/- Shortfall being adjustment u/s. 92CA Rs. 41,20,89,204/- 9. On further objections by the assessee, the DRP upheld most of the comparables chosen by the TPO and directed the exclusion of two companies i.e., Quickseal Technologies Ltd. and E-Infochips P. Ltd. as being functionally dissimilar to the assessee. The DRP further issued directions to the TPO to re-compute the margins of certain comparables as requested by the assessee. As a result of DRP directions, the TP adjustment was recomputed at Rs.33,47,10,065. Aggrieved, the assessee is in appeal before the Tribunal. 10. Ground No.4 reads as under:- "Ground No. 4: Comparability analysis - SWD segment 4.1. The Ld. AO/Ld. TPO erred in including the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions such as digital strategy advisory, global infrastructure services, application services, product engineering, analytical services, research & development, hardware & software design, etc. which is clear from the extract of annual report as given in page 787 of PB Vol. III. It is also noticed that the company has spent INR 3041 million during FY 2017-18 on R&D activities. It is also noticed that the DRP in assessee's own case for AY 2017-18 (PAGE 983 of caselaw compilation) has excluded Wipro on the ground that the FAR of the company is distinct and different from that of the assessee company. The FAR analysis in the light of the DRP's decision to exclude Wipro in assessee's own case has not been considered by the TPO and therefore we remit the issue back to the TPO for fresh consideration with a direction to keep in mind the directions issued by the DRP in assessee's own case for AY 2017-18. Needless to say that the assessee may be given a reasonable opportunity of being heard. Infosys Ltd ("Infosys") 16. The assessee submitted before the TPO that the company is functionally dissimilar having diversified business operations with no segmental data. The assessee also submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and different from that of the assessee company. The FAR analysis in the light of the DRP's decision to exclude Infosys in assessee's own case has not been considered by the TPO and the contention of the assessee that there is no segmental information available inspite of the diversified operations needs to be examined factually. Therefore we remit the issue back to the TPO for fresh consideration with a direction to keep in mind the directions issued by the DRP in assessee's own case for AY 2017-18. Needless to say that the assessee may be given a reasonable opportunity of being heard. Tally Solutions P. Ltd ("Tally") 21. The assessee submitted that the company is engaged in business of software products and software subscription and earns revenue from the said operations. The assessee therefore submitted that the company would fail the service income less than 75% filter applied by the TPO. The assessee also submitted that Tally is engaged in R&D activities and has inhouse R&D centre. The TPO did not accept the submission of the assessee and held that Tally is providing software support services and the effect of other contentions are very miniscule not having impact on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s/ high level technical designs which provides a roadmap for the development. * Development/ Coding Wipro India undertakes the preparation of detailed design based on the core architecture and then undertakes the coding function with respect to the software modules to be developed. These services only act as a support function to the overall software development activity being performed by the AEs. * Project management The project team of Wipro India works in close co-ordination with the project team of the AEs. This is to ensure that the software is available for use as per the prescribed delivery schedules. However a major part of project management is handled by the AEs. Wipro India on the other hand is responsible for the day to day project management of the software development process. * Testing Wipro India undertakes testing procedures with respect to the software codes written by it. Further, the AEs provide Wipro India with guidelines on the quality control procedures to be adopted for the IT services undertaken by Wipro India. After testing the modules and software which underwent maintenance and repairs, AEs validates the performance of the software. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India AEs Market Risk: Market risk arises for a business due to increased competition and relative pricing pressures, change in demand patterns and needs of customers, inability to develop / penetrate in a market, etc. For the RPT under review, Wipro India is a captive service provider and is assured of a specified return on its costs. Wipro India is unaffected by the market conditions except to the extent that the service requests from related parties will decline. Hence Wipro India bears indirect market risk AEs are responsible for marketing, negotiating and entering into contracts with their customers. Consequently, the entire market risk rests with AEs. Service Liability Risk: Risks associated with service failures including non-performance to generally accepted or regulatory standards or error in provision of services. For the RPT under consideration, Wipro India is a captive unit engaged in providing services only to AEs in accordance with their instructions and specifications. It earns a fixed mark up on the costs incurred by it. In case the services provided by Wipro India do not meet the requisite standards, the same may require re-work; however, since Wipro In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses from strategic partnerships with the developer community to co-create applications, products for businesses, creating a platform that can process vast amounts of diverse data from various sources and analyse the data of businesses. (Page 64 of the annual report for FY 2017-18) Sale of products Revenue front sale of software is recognised when all the significant risks and rewards of ownership of the goods have been passed to the buyer, usually on delivery of the goods. Under standard terms and conditions of sale, the Company transfers title and risk of loss to the buyer at the time product is delivered to the customer and revenue is recognised accordingly. The Company collects sales tax and value added taxes (VAT) on behalf of the government and, therefore. these are not economic benefits flowing to the Company and hence, they are excluded from revenue Excise duty deducted from revenue (gross) is the amount that is included in the revenue (gross) and not the entire amount of liability arising( during the year. Sale of services Revenue from rendering of software subscription service is recognised as soon as it is made available to customers. Under standard trims and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been included as a comparable for ITeS segment also by the TPO and the DRP has upheld the inclusion on the ground that there should not be any distinction between KPO and BPO services. The ld. AR therefore submitted that it is clear from the findings of the DRP that the company is into ITeS services and therefore cannot be a comparable for software development segment. The ld. AR also drew our attention to page 13 of the DRP order where the DRP has extracted the same findings while confirming the inclusion of the company in the ITeS segment in page 19 of the same order. 30. On perusal of the DRP's order, we notice that the findings given while confirming the inclusion in the Software development segment is same as what is given in ITeS segment. From this, it is clear that the DRP itself has treated that the company is into ITeS services. On perusal of records it is noticed that the company is into KPO services as per the corporate information given in the Annual Reports (page 764 of paper book Vol III) Therefore, there is merit in the contention of the ld. AR that this company cannot be used as a comparable for software development segment. Accordingly, we direct that the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the considered view that the issue should go back to the AO/TPO for a fresh examination of facts. The AO/TPO is directed to verify the nature of activity of the company and the availability of segmental details and decide the inclusion in accordance with law. Consilient Technologies P. Ltd. 35. The assessee submitted that this company is functionally dissimilar as it is a provider of licensable software products. The TPO rejected the submissions of the assessee and included Consilient as a comparable. The DRP upheld the order of the TPO on the ground that the company is involved in software publishing, consultancy, supply and documentation of ready-made non-customised software. Hence it is a software service provider and it is thus functionally comparable to the assessee. However, the DRP directed the TPO to verify the company's margin and recompute it. 36. The ld. AR reiterated the submissions made before the lower authorities. We heard both the parties. We notice from the submissions made by the assessee before the DR (page 758 to 760 of paper book Vol III) that the company is an embedded solutions provider of video, voice and fax technologies and also offers a range of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the arm's length even as per the TPO's order. We also notice that the TPO in spite of the fact that the assessee's margin is within the range, has proceeded to make a TP adjustment which, in our view, is not warranted. We therefore direct the TPO to consider the submissions made by the assessee in the rectification petition dated 22.8.2022 and pass the order accordingly. 41. Ground Nos. 5.2 & 5.3 are with regard to other contentions relating to TP adjustment in ITeS segment and have become academic in the light of the above directions and therefore no separate adjudication is warranted. Working capital and Risk adjustment - Ground 6 (6.1 & 6.2) 42. Ground No.6.1 is regarding working capital adjustment reads as follows:- "6.1 The Ld. AO/Ld. TPO erred both in law and facts in not providing working capital adjustment for determining the arm's length price while relying on the judicial precedents based on a fact pattern which is not applicable to the Appellant. The Ld. Panel erred in upholding the same." 43. The TPO did not give working capital adjustment for the reason that the assessee has demonstrated that there is a difference in the level of working capital employed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly show that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. The tribunal referred to Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annexure to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. The Tribunal referred to Paragraphs 13 to 16 of the aforesaid OECD guidelines, wherein the need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The tribunal observed that the guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. The Tribunal further observed that 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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the weighted average collection period of the Appellant is 39 days in respect of invoices raised during the assessment year was within the credit period agreed as per the inter-company agreement between the Appellant and its Associated Enterprises." 49. The TPO considered the interest on receivable as a separate international transaction and accordingly calculated the notional interest by applying 6 months LIBOR + 400 basis points and arrived at a notional interest of Rs.53,92,838 which is upheld by the DRP. 50. Before us, the ld. AR submitted that the company is having a master service agreement as per the terms of which there is a credit period of 45 days. The ld. AR also submitted that the average receivable period of the assessee is 39 days and therefore the notional interest levy is not warranted. The ld AR further submitted that the TPO had not considered any credit period while computing the interest. The ld. AR relied on the decision of the coordinate bench in the case of Tio-Tech Pvt. Ltd. v. DCIT, IT(TP)A 237/Bang/2021 dated 12.10.2022 wherein it was held that - 26. We have considered the rival submissions and perused the material on record. We have heard the riva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 international transaction and the transfer pricing adjustment is war ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ospective 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. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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" 27. In view of the above discussion and considering the decision of the of the coordinate bench of the Tribunal and the judgment of the Hon'ble High Court of Karnataka in the case of AMD (India) Pvt. Ltd. (supra), we hold that the treatment of intere ..... X X X X Extracts X X X X X X X X Extracts X X X X
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