TMI Blog2022 (7) TMI 1512X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of computer radiated designing and development of commercial vehicle systems. The company is developing specific software for associated enterprises. It is also subsidiary of the ultimate holding company. The software development is used enhanced integrating the same with the main produce. Finally, what is being marketed is a final product by the ultimate holding company. The role of company has been that it is a contract software development support services provider. Being so, it cannot be considered as functionally comparable to assessee. Accordingly, on the basis of functionality, we direct the AO/TPO to exclude this company from the list of comparables. Infobeans Technologies Ltd is providing wide range of services 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. Thus we direct the AO/TPO to exclude this company from the list of comparables. Thirdware Solutions - As decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Also following the earlier decision in Kusum Healthcare [ 2017 (4) TMI 1254 - DELHI HIGH COURT] it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision (supra), the Hon ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions - thus we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment - ground raised by assessee stands allowed for statistical purposes. - Shri Chandra Poojari, Accountant Member And Smt. Beena Pillai, Judicial Member For the Appellant : Shri C. Ramesh, A.R. For the Respondent : Shri Praveen Karanth, D.R. ORDER PER C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant company is only a captive service provider, providing services only to its AE. v) not appreciating the fact that, the DRP has ignored the position of law laid down by the Hon ble Tribunal in the case of the appellant for the A.Ys.2011- 12 2012-13 in its orders in ITA Nos.IT(TP)A No.314/Bang/2016 IT(TP)A No.1842/Bang/2016 that, the volume of turnover has to be a criteria in selecting comparables and for the said years has deleted companies of extra ordinarily high turnover from the list of comparables. vi) not appreciating the fact that, the DRP has not considered the objection that, out of the sixteen comparable selected by the TPO in his order u/s. 92CA(3) of the act, furnished details collected u/s. 133(6) of the act, only in respect of the following comparable and hence, the other comparable could not have been a part of the final list of comparable, since there is no opportunity of hearing and hence selecting such comparable would be against the principals of natural justice. (1) Tata Elxsi Ltd (2) Persistant Systems Ltd (3) Infobeans Technologies Ltd (4) Thirdware Solution Ltd (5) Cybage Software Ltd vii) not appreciating the fact that, the DRP has ignored the ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delay in recovery of receivables ignoring the fact that, there was no such delay in recovery. xiv) making an adjustment to the extent of Rs. 14,79,713/- towards interest receivable on alleged delay in recovery of receivables ignoring the fact that, the DRP specifically directed that, the details of realization with reference to each of the invoices were to be produced before the Assessing Officer/Transfer Pricing Officer who were directed to compute interest for the period of delay and in the absence of any such opportunity provided to produce the details as directed no adjustment could have been made and hence the adjustments are against a directions of the DRP. xv) making an adjustment to the extent of Rs. 14,79,713/- towards interest receivable on average of net receivables at an arbitrary interest rate of 5.39% with an alleged period of delay of 335 days ignoring the fact that, the receivables as on the last day of the accounting year were bills of the last of the months and hence there was no delay in recovery and therefore no interest could have been charged. 2. GROUNDS RELATING TO NATURAL JUSTICE i) The learned TPO and also the DRP erred in passing an order without consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/- (iii) M/s. Meritor Heavy Vehicle Braking Systems (UK) Ltd (Export of Software) 64,24,600/- (iv) M/s. Meritor Heavy Vehicle Systems (Export of Software) 22,77,609/- (v) M/s. Meritor HVS India Ltd (Computer aided designing Development Services) 3,89,09,897/- (vi) M/s. Meritor Inc (Management Consultancy Charges) 1,41,71,646/- (vii) M/s. Meritor Holdings (Barbados) Ltd (Interest on borrowings) 28,711/- ( ) M/s. Meritor Inc (Reimbursement of expenses paid) 1,28,80,083/- 1.4 The assessee adopted TNMM method to justify that the transactions are at Arm s Length. 1.5 The case was referred to TPO for determining the adjustments towards arm s length price. The TPO did not disturb the method adopted. The TPO rejected some of the comparables of the assessee and selected certain other comparables on his own and determined the following adjustments under the provisions of section 92CA(3) of the Act vide order dated 30 10.2019. i) Revenue from software services 5,48,12,375/- ii) Interest on alleged delay in recovery on receivables 15.67,527/- 5,63,79,902/- 2. At the time of hearing, the assessee has not pressed ground Nos.1(i), 1(ii), 1(iv) 1(v). Accordingly, these grounds are dismissed as no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing 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 find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment 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 non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons 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 companies listed in Sl.No.(a) to (g) of Grd.No.4 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. 3.4 In view of the above order of the Tribunal, we direct the AO to exclude those high turnover companies from the list of comparables. 4. Ground No.1(vi) is reproduced below:- 1(vi) not appreciating the fact that, the DRP has not considered the objection that, out of the sixteen comparable selected by the TPO in his order u/s. 92CA(3) of the act, furnished details collected u/s. 133(6) of the act, only in respect of the following comparable and hence, the other comparable could not have been a part of the final list of comparable, since there is no opportunity of hearing and hence selecting such comparable would be against the principals of natural justice. (1) Tata Elxsi Ltd (2) Persistant Systems Ltd (3) Infobeans Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. Finally, what is being marketed is a final product by the ultimate holding company. The role of company has been that it is a contract software development support services provider. Being so, it cannot be considered as functionally comparable to assessee. Accordingly, on the basis of functionality, we direct the AO/TPO to exclude this company from the list of comparables. Infobeans Technologies Ltd.:- 4.10 The Ld. A.R. submitted that this company is functionally different from assessee company and the Tribunal Hyderabad bench has considered this comparable as not comparable in the case of ADP Private Ltd. In ITA Nos.227 228/Hyd/2021 vide order dated 3.2.2022. 4.11 On the other hand, Ld. D.R. relied on the order of Ld. DRP and submitted that the main revenue of M/s. Infobeans Technologies Ltd. was from provisions of software services and it satisfies all the filters adopted by TPO and it has to be considered as comparable. 4.12 We have heard the rival submissions and perused the materials available on record. We have carefully gone through the order cited by the Ld. A.R. in case of M/s. ADP Pvt. Ltd. cited (supra) wherein held as under:- 7. Infobeans Technologies Ltd.: The Id . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viding software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee . 22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee's own case for AYs 2014-15 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables. 4.13 Further, the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT 134 Taxmann.com 35 wherein held as under:- INFOBEANS TECHNOLOGIES LTD. (INFOBEANS) 44. The taxpayer sought exclusion of Infobeans as a comparable again on ground of functional dissimilarity, it also being into providing services viz. software engineering services primar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company is staled to be software development services and computer related activities. The Revenue Recognition Statement also discussed about the accounting principle adopted in recognizing revenue front software development services and not as to product sales. There is no discussion about ally other revenue stream in its annual and financial statements. Further, in the various notes of the annual report, it is mentioned that the company had entire earnings. from software development services. Under Segment Reporting, at p-I47 of the annual report, it is mentioned that 'the company operates in a single business segment namely software development services.' The independent Audit Report specifies that the company is engaged in software services and dues not hold any inventory. There is to reference in the annual report to indicate that this company is engaged in ITES services or any other activity. The assessor also could not point to any such information in the annual report. In view of the categorical information in the actual report that the company is engaged in software development services, hold that this company is software service provider and functionally c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. is not similar to the assessee and if the turnover was Rs. 722.25 crores in the assessment year under consideration, it has to be excluded on any one of the above reasons. The issue is remitted back to the file of AO/TPO for fresh consideration. 5. Ground No.1(vii) is reproduced as under:- 1(vii) not appreciating the fact that, the DRP has ignored the objection that the, TPO before passing the order u/s. 92CA(3) of the act, did not furnish the working of PLI in respect of M/s. Tata Elxsi Ltd and hence, there was no opportunity to rebut and under the circumstances, the said comparable could not have been a part of final comparables. 5.1 Ground No.1(vii) is infructuous in view of our finding in earlier grounds on these comparables. 6. Ground No.1(viii) is reproduced as under:- 1(viii) not appreciating the fact that, the DRP could not have rejected the comparable M/s. Sagar Soft India Ltd for the alleged reason that, there was persistent loss ignoring the fact that, for the F.Y. 2015-16 the said company had reported profits and hence, there is no issue of persistent loss. 6.1 In this ground assessee seeks exclusion of Sagar Soft India Ltd. According to the Ld. A.R., this company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the fact that, the DRP has not considered specific objections in regard to the issues such as functionality, diversified activity, presence of intangibles, peculiar economic circumstances etc., in respect of each of the comparables selected by the TPO including Integ Software Pvt Ltd and Infobeans Technologies Ltd and rejecting objections with general unsubstantiated remarks. Details of company wise objections included in the Annexure A. 9.1 The grievance of the Ld. A.R. is with regard to not considering submission of assessee by Ld. DRP with regard to these comparables though they are functionally different. This ground is general in nature which do not require any adjudication. 10. Ground Nos. 1(xii), (xiii), (xiv) (xv) are inter-related which are reproduced as under:- 1(xii) not appreciating the fact that, the DRP has issued directions that, no working capital adjustment be allowed and the justification for such directions are improper and not tenable under law. 1(xiii) making an adjustment to the extent of Rs. 14,79,713/- towards the arms length price on the basis of the order of the Transfer Pricing Officer u/s. 92CA(3) of the Act, in the order dated 24.03.2021 giving effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on decision of Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. (2017) 398 ITR 66 (Del), held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon ble Delhi High Court vide order dated 21/07/16 in ITA No. 379/2016, also upheld by Hon ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 17.3. 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 cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? 17.6. Ld.CIT DR submitted that, while answering above question, Hon ble Bombay High Court referred 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. In so far as charging of rate of interest is concerned, he relied on decision of the Hon ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) 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 corr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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