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TMI Blog2025 (4) TMI 979X X X X Extracts X X X X X X X X Extracts X X X X ..... verdue receivables to the Appellant's total income. 1.2 The Ld. AO/TPO erred in not considering the decisions of the Hon'ble Income Tax Appellate Tribunal ('ITAT') passed in favour of the Assessee for prior years (AY 2017-18 and AY 2018-19) for similar issues under consideration. 1.3 The Ld. AO/TPO erred in not providing the Assessee a copy of the 'Giving Effect Order' passed by the Ld. TPO, thereby causing grave injustice to the Assessee by not providing any opportunity to verify the application of the directions of the Hon'ble DRP by the Ld. AO/TPO in the Final Assessment Order. Further the same renders the entire Assessment proceedings to be void, bad in law and the adjustment made thereto is liable to be quashed. 1.4 Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. AO /TPO has erred in not passing the final assessment order dated 30 July 2024 as per the directions of the Hon'ble DRP Panel as prescribed in section 144C (10) and 144C (13), thereby rendering the assessment order being null & void and liable to be quashed. Ground No. 2: Transfer Pricing Provision of Software Development Services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in the circumstances of the case and in law, the Ld. AO/Ld. TPO erred in making an adjustment of INR 2,13,79,401 and the Hon'ble DRP further erred in confirming the actions of the Ld. AO/TPO, whereby treating outstanding receivables from inter-company transaction of recovery of expenses as an international transaction and - Re-characterizing the same as loan granted by the Appellant to the Associated Enterprise ('AE'); - Arbitrarily imputing an interest based on LIBOR plus 400 basis points, without any basis 3.2 Erred in imputing interest on outstanding receivables separately than the underlying international transactions. 3.3 Erred in failing to appreciate that Appellant is a debt free company and thereby erroneously alleging that interest bearing funds were used to pass on the benefit in the form of extended credit period to AE. 3.4 The Ld. AO/Ld. TPO failed to appreciate that the Appellant has net payable position and therefore the question of charging interest does not arise. Further, the learned AO/TPO failed to recognize that no interest was charged by the AE to the Appellant on such payables. 3.5 Erred by not following any of the methods prescribed ..... 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Transactional Net Margin Method 5 Availing of project and installation services 37,917,115 Transactional Net Margin Method 6 Rendering of sales and marketing service 402,207,281 Transactional Net Margin Method 7 Purchase of assets 2,962,521 Transactional Net Margin Method 8 Purchase of software license (Firewall, NetApp etc.) 67,456,046 Comparable Uncontrolled Price Method 9 Purchase of software license (Software VMWARE) 1,709,635 Other Method 10 Allocation of Microsoft Azure License Cost 20,144,898 Transactional Net Margin Method 11 Recovery of Expenses 454,032,201 Comparable Uncontrolled Price Method 12 Reimbursement of expense paid 129,897,046 Transactional Net Margin Method 13 Reimbursement of expenses paid 14,838,543 Comparable Uncontrolled Price Method 14 Amount collected on behalfofAE 6,325,000 Other Method 15 Closing outstanding receivable 915,545,480 Other Method 16 Closing outstanding payables 2,283,881,902 Other Method 2.3. The Ld.TPO noted that, the assessee used transactional net margin method (hereinafter referred to as TNMM) with the profit level indicator (hereinafter referred to as PLI) as operating profit to opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.77 % 12. Comviva Technologies Ltd. 23.34 % 13. Virinchi Ltd 24.40 % 14. X S Cad India Pvt. Ltd. 24.92 % 15. Nihilent Ltd. 25.31 % 16. C G VA K Software and Exports Ltd. 29.08 % 17. Moonfrog Labs Pvt. Ltd. 44.34% 18. Cybage Software Pvt. Ltd. 46.66 % 35th Percentile 18.51 65th Percentile 23.34 Median 20.89 Assessee's ALP 18.16 The Ld.TPO thus proposed in an adjustment of Rs. 4,14,65,376/- being the shortfall. 2.5. The Ld.AO further noted that, the assessee had outstanding receivables from its AE's for which no interest was charged. The Ld.TPO thus computed notional interest by adopting LIBOR rate 400 basis point and proposed adjustment at Rs.21,379,401/ -. 2.6. The Ld.TPO thus without adjustments we handsomely assessee: Sr. No. Nature of Transaction Adjustment (Rs.) 1 Adjustment on account Provision of software development services and purchase of software licenses 4,14,65,376/- 2 Adjustment on account of interest on outstanding receivable 2,13,79,401/- Total 6,28,44,777/- 3. On receipt of the transfer pricing order order, the Ld.AO passed the draft assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le for understanding the requirement of software. Based on the agreement with customers, Varian AEs provide software support services. ii. Accordingly, Varian AEs instruct Varian India to develop or test the software accordance w the instruction and specification. iii. Further Varian AEs are also responsible for review of software developed by Varian India and ensure that the software received from Varian India are free of error(s) and confirms to the required designs and specifications on a test basis. iv. Varian AEs being the contracting entity and front ending entity is responsible for raising the invoices and collecting the payments from the customer. v. General administrative and management functions like finance, accounting and legal are performed by Varian AEs to carry out their business operations on a day to day basis. E. Assets Owned - Tangible and Intangible 27.7 Varian India possesses all necessary assets to for its businesses. Please refer paragraph 7.21 to 7.24 for assets owned by Varian India. 28.1 This section provides a discussion of the risks that Varian India and Varian AEs assume through their business operations for the international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and technologies. Hence, in that case, business units may face loss of potential revenues due to inefficiencies arising from obsolete infrastructure and tools as well as obsolescence of manufacturing processes. Varian India does not face technology risk as it performs services outsourced to them by Varian It is Varian AEs responsibility to ensure use of upgraded versions and processes and therefore any risk arising out of obsolescence of technology is borne by Varian AEs. Hence, Varian AEs were the technology risk. 6. Foreign Exchange Risk This risk relates to the potential impact on profits that rates. may arise because of changes in foreign exchange Varian India is compensated on a cost plus basis and its costs include losses on foreign exchange fluctuation, hence it assumes no foreign exchange risk. As Varian AEs compensate Varian India on co plus basis, hence they undertake the entire foreign exchange risk. 7. Manpower Risk This risk relates to scarcity of skilled professionals and high labour turnover in the industry that affects the fortunes and operations of any company Varian India undertakes manpower risk as it assumes the responsibility of recruiting, training an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ysis of the companies sought for inclusion/exclusion by the assessee. A. Cybage Software Pvt.Ltd The Ld.AR submitted that this comparable is not functionally similar with that of assessee as it is providing IT consulting and related support services. It is also submitted that this comparable undertakes R&D activities involving developing new technologies under the software segment. A.1 Referring to the annual report the Ld.AR submitted that, this company has R& D activities which are incorporated with software development process with the object of devising efficient method of product development. It is submitted by the Ld.AR that this comparable owns huge intangibles due to the R&D activities undertaken by it. It is also submitted that this comparable has a huge turnover of 7,000 crores and therefore is an entrepreneur by itself which cannot be compared with the limited risk service provider like assessee. A.2 Nihilent Ltd. The Ld.AR submitted that this comparable is not functionally similar with that of assessee as it is engaged in providing advanced analytics, artificial intelligence, block chain, business intelligence, data signs, cloud services etc. It is also submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this company is more into business process outsourcing support services, management services etc, which are not akin to software development and related services provided by the assessee. We therefore direct exclusion of this comparable with that of assessee. D. Mavric Systems Ltd. The Ld.AR submitted that this company is functionally similar to the assessee. However the Ld.TPO rejected it by observing that this company does not pass through the turnover filter range of 1/10times to 10 times. D.1 The Ld.AR submitted that this company has a turnover of Rs. 159.49 crores. And the turnover of the assessee is 1,79,68,19,482/- he submitted that, 10 times range of assessee turnover is Rs. 17.96 crores to 1796.82 crores. He thus submitted that this company satisfies the turnover filter and thus sought for its inclusion. D.2 On the contrary, the Ld.DR placed reliance on the orders passed by the authorities below. We have perused the submission advanced by both sides in light of records placed before us. D.3 Based on the submissions advanced by both sides, we direct this comparable to be remanded to the Ld.AO/TPO to verify the above and to include this company in the final list ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be TP adjustment on this count after making proper TP study by the Ld.TPO by considering the period of credit enjoyed by the comparables and also applicable LIBOR rate in the place of AE's, for benchmarking the rate of interest to arrive at the ALP. As per the RBI Master Circular no. 8/2010-11 dated 1-7-2010, for average maturity period upto 3 years, the maximum cost ceiling is LIBOR plus 200 basis points. The relevant extract of RBI Master Circular is as under :- Average maturity period of the loan on invocation All-in-cost ceilings over 6 month LIBOR Up to 3 years 200 basis points 3 years and up to 5 years 300 basis points More than five years 500 sis points 8.1 The Ld.AR submitted that the assessee has not undertaken any working capital adjustment. In this context, we also refer to the decision of Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT reported in (2018) 91 taxmann.com 286, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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