Income Tax Appellate Tribunal - Bangalore
Arm Embedded Technologies Pvt Ltd , ... vs Deputy Commissioner Of Income Tax ... on 8 June, 2023
IT(TP)A No.899/Bang/2022
M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
"A'' BENCH: BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SHRI GEORGE GEORGE K., JUDICIAL MEMBER
IT(TP)A No.899/Bang/2022
Assessment Year: 2018-19
M/s. Arm Embedded
Technologies Pvt. Ltd.
Bagmane World Technology
Centre, SEZ, Citrine Block Deputy Commissioner
5th Floor, Marathahalli Outer of Income-tax
Vs.
Ring Road, Doddanekkundi Circle-1(1)(1)
Village, Mahadevpura Bangalore
Bangalore 560 048
PAN NO : AAECA1582E
APPELLANT RESPONDENT
Appellant by : Smt. Tanmayee Rajkumar, A.R.
Respondent by : Shri D.K. Mishra, D.R.
Date of Hearing : 07.06.2023
Date of Pronouncement : 08.06.2023
ORDER
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order of Deputy Commissioner of Income-tax Circle-1(1)(1), Bangalore passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act,1961 ['the Act' for short] for the assessment year 2018-19 dated 28.7.2022.
2. The issue that arises for consideration in the above appeal pertains to the Transfer Pricing ('TP' for short) adjustment of Rs.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 2 of 36 40,65,217/- made by the Transfer Pricing Officer ('the TPO') towards the international transactions of marketing and sales support services ('MSS') provided by the Assessee to its Associated Enterprises ('AEs'), and an adjustment of Rs. 5,62,08,198/- being notional interest imputed in respect of delayed receivables, the aggregate of which is Rs. 6,02,73,415/-.
3. BRIEF FACTS:
(i) The Assessee is a subsidiary of Arm Limited, UK. The Assessee is engaged in providing contract software development services ('SWD services') and MSS to its AEs.
(ii) During the previous year relevant to the assessment year 2018-19, the relevant international transactions that took place between the Assessee and its AE was the provision of SWD services by the Assessee at a price of Rs. 4,36,29,32,202/- and provision of MSS at a price of Rs. 4,35,41,366/-. The Assessee was compensated on a cost-plus basis, and in the TP study maintained by the Assessee, the Assessee concluded the international transactions as being at arm's length.
(iii) On a reference being made by the Assessing Officer, the TPO passed an order dated 29.07.2021 determining a TP adjustment of Rs. 30,48,82,625/- in respect of the SWD services segment, adjustment of Rs. 47,39,738/- in respect of the MSS segment and an adjustment of Rs. 2,84,48,899/- being notional interest in respect of the delayed receivables.
(iv) Initially, a draft assessment order dated 30.09.2021 came to be passed by the Assessing Officer, in which the aforesaid TP adjustments were incorporated. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 14.06.2022 IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 3 of 36 disposed of the objections by granting partial relief to the Assessee.
Pursuant to the directions of the DRP, the TPO passed an order giving effect to the same dated 21.07.2022, whereunder the TP adjustment for SWD services was NIL and the TP adjustment for MSS segment was reduced to Rs. 40,65,217. The TP adjustment on account of interest on outstanding receivables stood enhanced to Rs. 5,62,08,198/-
(v) In line with the directions issued by the DRP, the Assessing Officer passed the impugned final assessment order dated 28.07.2022, in which the aggregate TP adjustment was reworked to Rs. 6,02,73,415/-.
(vi) Aggrieved by the final assessment order to the extent questioned herein, the Assessee has preferred the above appeal to this Hon'ble Tribunal.
I. SUBMISSIONS ON TRANSFER PRICING ADJUSTMENT:
DETAILS OF THE ASSESSEE'S INTERNATIONAL
TRANSACTIONS
Particulars Amount in Rs. Outcome of the TP
Order
Receipts from Rs. 4,36,29,32,202/- Adjustment of Rs.
provision of contract 30,48,82,625/-
SWD services subsequently
reworked to NIL on
giving effect to the
DRP directions.
Receipts from Rs. 4,35,41,366/- Adjustment of Rs.
provision of contract 47,39,738
MSS subsequently
reworked to Rs.
40,65,217/- on giving
effect to the DRP
directions.
IT(TP)A No.899/Bang/2022
M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 4 of 36 Receipts from Rs. 7,31,660/- Accepted to be at arm's provision of resource length augmentation services Reimbursement of Rs. 25,20,921/- Accepted to be at arm's travel and length communication expenses Reimbursement of Rs. 1,70,37,521/- Accepted to be at arm's expenses received - length Resource augmentation services Reimbursement of Rs. 26,09,289/- Accepted to be at arm's expenses received - length others I. MARKETING AND SALES SUPPORT SERVICES A. ANALYSIS OF THE TP STUDY OF THE ASSESSEE AND THE TPO:
A.1. Net mark-up on cost earned by the Assessee as computed by the TPO:
Operating Income Rs. 4,37,04,549/-
Operating Cost Rs. 4,03,90,434/-
Operating Profit (Op. Income - Op. Rs. 33,14,115/-
Cost)
Operating/Net mark-up (OP/TC) 8.21%
A.2. Comparison of the TP studies done by the Assessee and TPO:
Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator OP/TC OP/OC (PLI) Database used CAPITALINE PLUS PROWESS Comparables selected 8 13 Period for which data FYs 2015-16 to 2017- FYs 2015-16 to 2017-18 used 18 IT(TP)A No.899/Bang/2022
M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 5 of 36 A.3. Filters applied by Assessee in its TP study:
Step Description
1. Companies for which relevant financial data was available for FY 2016-17 and 2017-18 - selected.
2. Companies having positive sale in the current financial year, i.e. FY 2018-19 or the year immediately preceding the current year, i.e. FY 2017-18 - selected.
3. Companies which are independent, non-governmental, non-co- operatives - selected.
4. Companies having sales of less than INR 1 crore - rejected.
5. Companies with average positive net worth in the current financial year or the year immediately preceding the current year- selected.
6. Companies primarily involved in service activity - selected.
7. Companies clearing quantitative and qualitative criteria -
selected.
A.4. Comparables selected by Assessee and the range of weighted average of OP/TC of comparable companies:
Sl. No. Name of the company Average OP/TC
(in %)
1. MCI Management (India) Pvt. Ltd. 0.41
2. Netlink Solutions (India) Ltd. (Info Media) 2.26
3. Kestone Integrated Marketing Services Pvt. 4.86
Ltd. (Marketing and Sale Services)
4. Deepali Designs & Exhibits Pvt Ltd. 7.32
5. Cheers Interactive India Pvt. Ltd. 7.96
6. Fusion Events Ltd. 8.90
7. Competent Automobiles Co. Ltd. 11.71
8. UBM India Pvt. Ltd. (Exhibitions, 17.28
Conferences and Marketing)
Count 8
35th Percentile 4.86
Median 7.64
65th Percentile 8.90
NOTE: The TPO rejected all 8 comparables selected by the Assessee.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 6 of 36 A.5. Filters applied by the TPO:
Step Description
1. Companies having different financial year ending (i.e. not March 31,2018) or data of the company which does not fall within 12- month period i.e. 01-04-2017 to 31-03-2018-rejected
2. Companies whose income was less than Rs. 1Crore - excluded
3. Companies whose MSS service income is less than 75% of its total operating revenues - excluded
4. Companies who have more than 25% related party transactions -
excluded
5. Companies who have export service income less than 75% of the sales - excluded
6. Companies with employee cost less than 25% of turnover -
excluded A.6. Comparables selected by TPO and the mean of weighted average of PLIs of the companies:
Sl. Name of the Company OP/OC OP/O OP/O
Average
No 16 C 17 C 18
OP/OC
.
1. Goldmine Advertising -4.57 5.01 5.47 1.68
Ltd.
2. Scarecrow 4.71 12.10 21.20 10.80
Communications Ltd.
3. Ugam Solutions Pvt. 26.74 6.50 6.99 15.59
Ltd.
4. Confluence Integrated 9.89 28.84 -34.54 16.66
Services Pvt. Ltd.
5. Axience Consulting Pvt. 17.99 10.41 25.90 18.21
Ltd.
6. Dun & Bradstreet 18.14 20.25 21.08 19.42
Information Services
India Pvt. Ltd.
7. Pressman Advertising 20.73 21.38 13.42 19.94
Ltd
8. Focus Suites Solutions 26.88 25.27 21.33 25.77
& Services Ltd.
9. Egon Zehnder 26.10 38.65 30.50 27.74
International Pvt. Ltd.
10. Lintas India Pvt. Ltd. 27.15 29.89 30.53 28.56
11. Adfactors P R Pvt. Ltd. 38.33 28.77 30.29 33.29
IT(TP)A No.899/Bang/2022
M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 7 of 36
12. Majestic Research 56.25 45.95 35.88 51.73 Services & Solutions Ltd.
13. Cheil India Pvt. Ltd. 74.38 64.45 66.17 69.58 35th Percentile 18.21 Median 19.94 65th Percentile 27.74 A.7. Computation of arm's length price by the TPO and the adjustment made:
Taxpayers operating revenue Rs. 4,37,04,549/- Taxpayer operating cost Rs. 4,03,90,434/-
Taxpayers operating profit Rs. 33,14,115/-
Taxpayers PLI 8.21% 35th Percentile Margin of comparable set 17.11% Adjustment required (if PLI<35th Percentile) Yes Median margin of comparable set Rs. 19.94/- Arm's length price Rs. 4,84,44,287/- Price received 4,37,04,549/- Shortfall being adjustment u/s. 92CA 47,39,738/- 3.1 DIRECTIONS ISSUED BY THE DRP:
Briefly, the directions issued by the DRP are as follows:
(i) The DRP accepted the Assessee's contention that Focus Suites Solutions & Services Ltd., Egon Zehnder International Pvt. Ltd. and Adfactors P R Pvt. Ltd. are to be excluded.
(ii) The DRP upheld the TPOs inclusion of Axience Consulting Pvt. Ltd. as a comparable.
(iii)The DRP directed verification and adoption of correct figures as per annual report of Scarecrow Communications Ltd., Ugam Solutions Pvt. Ltd., Confluence Integrated Services Pvt. Ltd, Dun & Bradstreet Information Services India Pvt. Ltd., Pressman Advertising Ltd., Lintas India Pvt. Ltd., Majestic IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 8 of 36 Research Services & Solutions Ltd. and Cheil India Pvt. Ltd., and accordingly compute PLI margin.
(iv) All other submissions of the Assessee came to be rejected.
3.2 List of comparables post the DRP's Directions:
On giving effect to the above directions issued by the DRP, the final list of comparables is as follows:
Weighted Sl. Average Name of the Company No. Margins% (Unadjusted)
1. Goldmine Advertising Ltd. 1.68
2. Confluence Integrated Services Pvt. Ltd. 3.17
3. Scarecrow Communications Ltd. 10.8
4. Ugam Solutions Pvt. Ltd. 15.59
5. Axience Consulting Pvt. Ltd. 17.11 Dun & Bradstreet Information Services 19.42
6. India Pvt. Ltd.
7. Pressman Advertising Ltd. 19.94
8. Lintas India Pvt. Ltd. 27.25 Majestic Research Services & Solutions 50.54
9. Ltd.
10. Cheil India Pvt. Ltd. 69.58 35th Percentile 15.59 Median 18.27 65th Percentile 19.94 3.3 TPO's order giving effect to DRP directions and the Final Assessment Order The TPO passed an order giving effect to DRP's directions in terms of which, the TP adjustment of MSS stood recomputed at Rs.
40,65,217/- and consequently, the Assessing Officer incorporated the said adjustment in the final assessment order.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 9 of 36 3.4 Against this order, the assessee is in appeal before us with the following grounds of appeal.
4. Ground Nos.1 to 2 of the assessee's appeal are reproduced as under:
1. On the facts and in the circumstances of the case and in law, the order of the Assessment Unit, Income Tax Department, National e-Assessment Centre, Delhi (AO') dated 28 July 2022, passed u/s 143(3) r. w. s. 144C(13) r. w. s. 144B of the Income-
tax Act, 1961 (the Act'), pursuant to the directions of the learned Dispute Resolution Panel (Panel), to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case, and is liable to be quashed.
2. On the facts and in the circumstances of the case and in law, the learned AO / TPO erred in making a transfer pricing (TP) adjustment of INR 4,065,217 to the Appellant's marketing support services ('MSS') segment and INR 56,208,198 towards interest on delayed receivables.
4.1 These grounds are general in nature, which do not require any adjudication.
5. Ground Nos.3 to 3.5 of the assessee's appeal are reproduced as under:
3. That on the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the MSS segment, the learned Panel / AO / TPO erred in:
3.1 Rejecting the TP documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence, on the grounds that the Assessee did not apply appropriate filters and accordingly contended that the data used in computation of arm's length price (ALP') is not reliable or correct.
3.2. Rejecting the comparability analysis carried out by the Appellant in the TP documentation and in conducting a fresh comparability analysis for the MSS segment based on the application of modified filters in determining the ALP.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 10 of 36 3.3. Using data, which was not contemporaneous, and which was not available in the public domain at the time of preparing the TP documentation.
3.4. Conducting a fresh comparability analysis by disregarding certain filters applied by the Appellant in the TP documentation as below:
a) Rejection of companies having research & development (R&D') expenses greater than 3% o sales
b) Rejection of companies with net fixed assets to sales greater than 200%.
3.5. Applying / modifying the following filters while undertaking comparability analysis:
a) Rejection of companies with the different financial year ending
b) Rejection of companies having export revenue less than 75% of the total revenue
c) Rejection of companies having employee cost less than 25% of the total revenue 5.1 These grounds are not pressed and accordingly dismissed as not pressed.
6. Ground No.3.6 of the assessee's appeal is reproduced as under:
"3.6. Including the following companies even though they fail the test of comparability:
a) Scarecrow Communications Ltd.
b) Axience Consulting Pvt. Ltd.
c) Dun & Bradstreet Information Services India Pvt. Ltd.
d) Pressman Advertising Ltd.
e) Lintas India Pvt. Ltd
f) Majestic Research Services & Solutions Ltd.
g) Cheil India Pvt Ltd.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 11 of 36 6.1 At the time of hearing, assessee has pressed only following 7 comparables:
(A) Scarecrow Communications Ltd. ('Scarecrow'):
Functionally dissimilar:
6.2 The ld. A.R. submitted that the company has operated without having a single employee during the financial year 2017-18. It has incurred no employee expenses and the annual report states that the company had no employees during the year. The company essentially acts as an intermediary by purchasing the services from external agencies and reselling them in contrast to the Assessee which is a MSS provider. This is evident from the presence of expenses such as professional charges, service charges, etc., which suggest that Scarecrow depends on external agencies that provides advertisement, marketing support.
6.2.1 Further, in terms of the annual report, the company has various revenue streams such as retainership fees, shoot/production fees and service receipts & other fees. No segmental information is available as regards these diverse activities and therefore, the company cannot be considered as comparable to the Assessee.
6.2.2 The ld. A.R. submitted that this company was directed to be excluded by the DRP in the assessee's own case for the assessment years 2013-14 and 2014-15 on the ground that it is not functionally comparable to the assessee. The relevant extracts of the DRP's directions are reproduced on page 256-257 of the appeal set.
6.2.3 Further, the ld. A.R. submitted that this company was directed to be excluded from the final list of comparables in the IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 12 of 36 Assessee's own case by this Hon'ble Tribunal for the assessment year 2016-17 vide its order dated 30.08.2022 in IT (TP) A No. 235/Bang/2021 and thus, this company ought to be excluded from the final list of comparables.
6.2.4 Without prejudice, the Assessee sought the re-computation of margin of Scarecrow Communications Ltd. The ld. A.R. submitted that the correct weighted average margin of this Company is 9.26% as against 10.80%, as computed by the TPO.
6.3. The ld. D.R. relied on the orders of lower authorities.
7. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in assessee's own case for the assessment year 2016-17. The Tribunal vide order dated 30.8.2022 in IT(TP)A No.235/Bang/2021 held as under:
"29. Scarecrow Communications Ltd.
It is submitted that this company has operated without having a single employee during the financial year 2015-16. The company acts as an intermediary in providing its services which is contrary to the activity undertaken by the assessee as a marketing support service provider. The company having operated without a single employee shows that the company is not rendering any services on its own and is therefore not comparable to the assessee.
Further the revenue earned is in respect of different types of services which are not comparable to the assessee. Further, there are no segmental details available as regards the services. It is submitted that this company was directed to be excluded by the DRP in the assessee's own case for the assessment years 2013-14 and 2014-15 on the ground that it is not functionally comparable to the assessee. The relevant extracts of the DRP's directions are produced on page 188 of the appeal set.
We have perused the submissions of both sides in light of records placed before us. This comparable has been excluded by the revenue itself in the preceding assessment years for being functionally different.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 13 of 36 We therefore direct exclusion of this company from the final list."
7.1 In the present case also it has been excluded by ld. DRP in the assessment years 2013-14 & 2014-15 on the same analogy following the assessee's own case cited (supra). We direct the AO/TPO to exclude this Scarecrow Communications Ltd. from the list of comparables to determine the ALP of international transactions.
(B) Axience Consulting Pvt. Ltd.:
Functionally dissimilar
8. The ld. A.R. submitted that the Company is engaged in providing consultancy and advisory services in the field of Finance, Market Research and Business Administration which are different from the services provided by the Assessee under the MSS segment. Further, it is evident from the Company's website that it is engaged in financial analytics and research, business intelligence, business and market research and strategic human capital services. Thus, the services provided by the company are more in the nature of knowledge process outsourcing services ('KPO'), which as per Rule 10TA of the Income Tax Rules, 1962 includes human resources services, engineering and design services, business analytics and market research, etc. which are not similar to the MSS provided by the Assessee.
8.1 In this regard, the ld. A.R. placed reliance on the order dated 30.03.2023 passed by this Hon'ble Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022 for assessment year 2018-19 and in the case of Lloyds Offshore Global Services (P.) Ltd. v. DCIT (reported in (2023) 146 taxmann.com 226 (Bangalore-Trib.), wherein in the case of a similarly placed assessee IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 14 of 36 for the assessment year 2015-16 and 2016-17, this company came to be excluded. In view of this, this Company ought to be excluded as it is functionally not comparable to the Assessee. 8.2. The ld. D.R. relied on the orders of lower authorities.
9. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Tivo Tech Pvt. Ltd. in IT(TP)A No.862/Bang/2022 for the assessment year 2018-19 vide order dated 30.3.2022, wherein held as under:
"9(i) Axience Consulting Pvt. Ltd.
It is submitted that Axience is engaged in providing consultancy and advisory services in the field of Finance, Market Research and Business Administration which are different from the services provided by the assessee under the MSS segment. Further, from the Company's website, it is clear that it is engaged in financial analytics and research, business intelligence, business and market research and strategic human capital services, which services are more in the nature of knowledge process outsourcing services ('KPO') rather than marketing services.
Reliance in this regard is placed on the decision of coordinat bench of this Tribunal in the case of Lloyds Offshore Global Services (P.) Ltd. v. DCIT reported in (2023) 146 taxmann.com 226, wherein on functional dissimilarly for the assessment year 201516 and 2016- 17, this company came to be excluded.
The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
We note that the background of the company as described in the annual report at page 4548 of paper book under note 26 reveals that this company is in the business of providing consultancy and advisory services in the field of finance, market research and business administration to corporate and non-corporates. Further the revenue from operations have been segmented under one heading at page 4540 without giving any segmental details. The only bifurcation of revenue in schedule 20 at page 4546 gives is service charges (local) and service charge (export). From the above it is clear that all the revenue earned by this company from consultancy and advisory charges in the field of market research, business administration and finance are clubbed together. The assessee IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 15 of 36 before us is only providing marketing services to its AEs in respect of the presales activities as per the functions reproduced hereinabove which has not been disputed by the Ld.TPO as observed from para 10 of the 92CA order. The DRP included this comparable by observing that assessee also undertakes similar services in advertising, marketing, consulting in creating awareness of the product and therefore is functionally similar with the company. This observation of the DRP is contrary to the functions described at page 761 of the paper book carried out by assessee under the marketing support service segment. We therefore hold this comparable to be not functionally similar with that of assessee. Accordingly, this comparable is directed to be excluded from the final list."
9.1 In view of the above order of the Tribunal, since the facts and circumstances of the case are similar, we direct the AO/TPO to exclude this Axience Consulting Pvt Ltd. from the list of comparables.
(C) Dun & Bradstreet Information Services India Pvt. Ltd.:
Functionally dissimilar
10. The ld. A.R. submitted that Dun & Bradstreet is engaged in providing service such as Business Information Report, Credibility & Business Insight solutions, Supply Management Solutions, etc. These suites of services are in the nature of credit risk solutions and trading exchange solutions, which are not comparable activities undertake by MSS providers such as the Assessee. Further, the Company is not a pure service provider as it also offers technology products, unlike the Assessee. It is also submitted that the Company earns revenue from subscription or retainership arrangements as well as royalty income which is in contrast to the Assessee's business model under MSS segment. It is submitted that no segmental details are available as regards to various suites of services provided by the Company.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 16 of 36 10.1 Reliance in this regard is placed by the ld. A.R. on the Order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022, wherein in the case of a similarly placed assessee for the assessment year 2018-19, this company came to be excluded.
10.2 The ld. D.R. relied on the orders of the lower authorities.
11. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Tivo Tech Pvt. Ltd. cited (supra) wherein the Tribunal held as under:
"9(ii) It is submitted that Dun & Bradstreet is engaged in providing services in the nature of credit reporting, risk management, learning and economic insights, etc. The company provides credit risk and financial analysis data insights for businesses, which are different from that of the functions performed by the Assessee in its MSS segment. Further, the company is also not a pure service provider as it also offers technology products. It has earned revenue from sale of products during FY 2017-18 and as per the revenue recognition policy, the company earns revenue from subscription or retainership arrangements as well as royalty income which is not comparable to the services rendered by the Assessee. It is submitted that no segmental details are available as regards the varied services provided by the Company. It is evident from the Company's website that the company is engaged in providing varied products/ services such as Business Information Report, Credibility & Business Insights Solutions, Supply Management Solutions, etc. These suites of services are in the nature of credit risk solutions and trading exchange solutions, which are not comparable to the activities undertaken by a routine MSS provider. Therefore, the company ought to be excluded from the final list of comparables.
The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
We note that as per the annual report placed at page 4556, the description of the project or services provided by this company is mentioned to be credit reporting services. At page 4662, we note that this company is engaged primarily in the business of providing IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 17 of 36 risk management and sales and marketing solutions. The background of the company also describes to be providing learning and economic insight services. The company offers a wide suite of information solutions and its services are used extensively by banks, financial institutions, multi nationals, corporate entities, public sector undertaking, exporters and importers. It also describes itself to be in the field of market analysis, locate prospects and incurs revenue from new and existing customers. The sales and marketing solutions offered by this company also include sale of data and related services. In our considered opinion, these functions cannot be compared with the limited services rendered by assessee to its AEs.
We accordingly direct this comparable to be excluded."
11.1 In view of the above order of the Tribunal on the basis of functionality, we direct the AO/TPO to exclude this company M/s. Dun & Bradstreet Information Services India Pvt. Ltd. from the list of comparables.
(D) Pressman Advertising Ltd.:
Functionally dissimilar:
12. The ld. A.R. submitted that the Company is engaged in providing advertising services and are into selling space for advertising in print media and on a perusal of the Company's annual report it is evident that revenue earned during the relevant AY 2018- 19 is solely from advertising services, which cannot be considered as comparable to the Assessee.
12.1 Reliance in this regard is placed by the ld. A.R. on the Order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022, wherein in the case of a similarly placed assessee for the assessment year 2018-19, this company came to be excluded. Further, reliance in this regard is placed on the decision of this Tribunal in case of Radisys India Ltd. v. DCIT, (2022) 145 taxmann.com 294 (Bang-Tri) for the AY 2017- IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 18 of 36 18 where in the case of an assessee engaged in providing similar service as the Assessee, this Tribunal directed exclusion of this company from the final list of comparables. The ld. A.R. submitted that since, the profile for the relevant AY 2018-19 is same, the company ought to be excluded from the final list of comparables.
12.2 The ld. D.R. relied on the order of the lower authorities.
13. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Tivo Tech Pvt. Ltd. cited (supra) wherein the Tribunal held as under:
"9(iii) It is submitted that the primary business activity of Pressman is providing advertising services, selling of space for advertisement in print media. It has earned revenue solely from advertising services (such as corporate advertising, brand advertising, financial advertising, social advertising, government advertising, media buying). This being the case, the company cannot be comparable to marketing support functions provided by the Assessee.
Reliance in this regard is placed on the decisions of coordinate bench of this Tribunal in case of Radisys India Ltd. v. DCIT reported in (2022) 145 taxmann.com 294 for the AY 2017-18. The assessee therein was engaged in providing similar service as the assessee before us. This Tribunal directed exclusion of this company from the final list of comparables. It is submitted that since the profile for the assessment year 2018-19 is same, the company ought to be excluded from the final list of comparables. The Ld.DR relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in light of records placed before us.
At page 4818 of the annual report placed in the paper book, we note that this company is providing services in the field of advertising, PR and allied services. Further in the notes to the financial statements at page 4843, this company is said to be engaged in selling of space for advertisement in print media and public relations business. At page 4844, income from services has been said to be recognised from advertising, public relations and allied services however in the profit and loss account at page 4840, the entire income has been categorised to be under revenue from IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 19 of 36 operations with the segmental details available as advertising services and other operating income under schedule 18. In note 28 at page 4855, it has been stated that the company's business activity falls within a single business segment i.e. advertising, selling of space for advertisement in print media and public relations and hence no additional disclosure other than those made in the financial statements are required under indas 108 "operating segments". Thus it is clear that under the advertising services, this company also earns revenue from selling of space for advertisement in print media and public relations for which no bifurcation has been provided. In any event, advertisement services provided by this company also cannot be compared to the services rendered by assessee to its AE under the marketing support services which is limited to presale support activities.
Accordingly, we direct this comparable to be excluded from the final list."
13.1 In view of the above order of the Tribunal on the basis of functionality, we direct the AO/TPO to exclude this company M/s. Pressman Advertising Ltd. from the list of comparables.
(E) Lintas India Pvt. Ltd.:
Functionally dissimilar
14. The ld. A.R. submitted that Lintas is engaged in providing advertising services and as per its revenue recognition policy, the company earns revenue from advertisement published or displayed or aired, retainer fees, client agency commission, etc. which is different from that of the Assessee. It also provides an insight into the various revenue streams of the Company and earns revenues from media and provision of non-media services as well as retainer fees and client agency commission, which is functionally not similar to the Assessee's MSS. Therefore, this company ought to be excluded from the final list of the comparables.
Reliance in this regard is placed by the ld. A.R. on the Order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 20 of 36 Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022, wherein in the case of a similarly placed assessee for the assessment year 2018-19, this company came to be excluded.
14.1 The ld. D.R. relied on the orders of the lower authorities.
15. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Tivo Tech Pvt. Ltd. cited (supra) wherein the Tribunal held as under:
"9(iv) It is submitted that Lintas is engaged in providing advertising services and as per its revenue recognition policy, the company earns revenue from advertisement published or displayed or aired, retainer fees, client agency commission, etc. which are different from the services rendered by the Assessee. Therefore, this company ought to be excluded from the final list of the comparables. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
We note that this company is providing advertising services and the principle business activity has been described at page 4868 of the paper book in the annual report to be advertising and marketing communications. The revenue recognition by this company has been mentioned to be an advertising agency catering services to much number of clientele. We therefore do not find this comparable to be functionally similar with that of assessee who is a captive service provider.
Accordingly, this comparable is directed to be excluded from the final list."
15.1 In view of the above order of the Tribunal on the basis of functionality and dissimilarity, we direct the AO/TPO to exclude this company M/s. Lintas India Pvt. Ltd. from the list of comparables.
(F) Majestic Research Service & Solutions Ltd. ('Majestic'):
Functionally dissimilar:
16. The ld. A.R. submitted that the company is engaged in market research services. It offers customer service evaluation, mobile IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 21 of 36 analytics, eye tracking, data analytics etc. It offers a suite of customized solutions that cater to business at various stages of product development or launch across the product life cycle. It offers a wide range of qualitative and quantitative research services. It is involved in high-end services like research services, data analytics, product development and testing. market scoping etc. 16.1 The ld. A.R. further submitted that the Company focuses on market research, advertising research, and brand research and to deliver powerful insights into the effectiveness of branding, advertising and consumer choices relies on high level technologies such as eye tracking, mobile analytics, video analysis, facial recognition, digital tracking, online communities, neuroscience, emotional analysis, automated audience measurement, sensory sciences, etc., which is functionally different as compared to the Assessee.
16.1.1 The ld. A.R. placed reliance in this regard on the Order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022, wherein in the case of a similarly placed assessee for the assessment year 2018-19, this company came to be excluded.
16.1.2 Further, the ld. A.R. placed reliance in this regard on the decision of this Tribunal in the case of Epson India Pvt. Ltd. v. DCIT, Bangalore in IT (TP) A No. 821/Bang/2022 for the AY 2017- 18 where in the case of an assessee engaged in providing similar services as the Assessee, this Tribunal, following its Order dated 14.07.2022 passed in Epson India Pvt. Ltd. v. DCIT, Bangalore, [2022] 144 taxmann.com 63 (Bangalore-Trib.) for the AY 2016- 17, passed an order 22.12.2022 directing exclusion of this company from the final list of comparables. The ld. A.R. submitted that since, IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 22 of 36 the profile for the relevant AY 2018-19 is same, this company ought to be excluded in the final list of comparables. Furthermore, reliance in this regard is placed on the decisions of Lloyds Offshore (supra), wherein for the assessment year 2016-17, this company was excluded and Radisys India Ltd. (supra), wherein for the assessment year 2017-18, this company was excluded in the final list of comparables.
16.2 The ld. D.R. relied on the orders of the lower authorities.
17. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in the case of Tivo Tech Pvt. Ltd. cited (supra) wherein the Tribunal held as under:
"9(v) It is submitted that Majestic is engaged in market research services. It offers customer service evaluation, mobile analytics, eye tracking, agricultural research etc. It offers a suite of customized solutions that cater to business at various stages of product development or launch across the product life cycle. It offers a wide range of qualitative and quantitative research services. It is involved in high-end services like research services, data analytics, product development and testing, etc. market scoping etc. It also focuses on market research, advertising research, and brand research and to deliver powerful insights into the effectiveness of branding, advertising and consumer choices relies on high level technologies such as eye tracking, mobile analytics, video analysis, facial recognition, digital tracking, online communities, neuroscience, emotional analysis, automated audience measurement, sensory sciences, etc., which is functionally different as compared to the Assessee.
Reliance is placed on following decisions of coordinate bench of this Tribunal:
- Lloyds (supra), wherein for the assessment year 2016-17, this company was excluded;
- Epson India Pvt. Ltd. v. DCIT reported in (2022) 144 taxmann.com 63, wherein for the assessment year 2016-17, this company was excluded; and
- Radisys India Ltd. (supra), wherein for the assessment year 2017- 18, this company was excluded.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 23 of 36 Therefore, it is submitted that the company ought to be excluded from the final list of comparables.
The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in light of records placed before us.
The annual report of the company placed at page 5353 reveals this company is engaged in digital marketing research. At page 5391 in the company overview, we note that this company deliver critical media and marketing information, analytics. Further, it is noted that this company is also doing significant investments in resource and associates all over India supported by strength of Majestic MRSS. In the notes forming part to financial statements at page 5401, under the head corporate information, this company is said to be first Indian market research company to be listed on BSE on SME platform and is engaged in providing market research services offering a wide range of qualitative and quantitative research services. The only segment under which the revenue is revealed is under sale of services in note 17 at page 5409 of the paper book. In our view this company cannot be held to be functionally similar with that of assessee.
Accordingly, we direct this comparable to be excluded from the final list."
17.1 In view of the above order of the Tribunal on the basis of functionality and dissimilarity, we direct the AO/TPO to exclude this company M/s. Majestic Research Service & Solutions Ltd. from the list of comparables.
(G) Cheil India Pvt. Ltd.:
Functionally dissimilar
18. The ld. A.R. submitted that the Company is primarily engaged in advertising, communication, publicity and merchandising including undertaking market research, planning and providing consultancy service and training in the same field. In order to undertake the said activities, the Company undertakes functions such as attracting clients who are advertisers by developing advertising strategies by a workforce which majorly constitutes of IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 24 of 36 creative writers and designers etc. The Company also undertake research activities to understand a client's market situation, competition and customers in the process of planning an advertisement campaign etc. Given the above, the ld. A.R. submitted that the activities undertaken by the Company are not akin to the services rendered by the Assessee.
18.1 The ld. A.R. further submitted that the company enters into an agreement with its customers under which it procures advertising services on behalf of the customers and bills the customers on cost- to-cost basis without charging any mark-up. The company earns revenue from commission income, fee from production job, transaction processing job, etc. which is in contrast to the Assessee's business model under MSS segment. Therefore, the Company operates under a different business model and provides services which are not comparable to the MSS provided by the Assessee. Given the same, the Company ought to be excluded from the final list of the comparables.
18.1.1 The ld. A.R. placed reliance in this regard on the Order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022, wherein in the case of a similarly placed assessee for the assessment year 2018-19, this company came to be excluded. In view of the above, the ld. A.R. submitted that the companies ought to be excluded from the final list of comparables.
18.2 The ld. D.R. relied on the orders of the lower authorities.
19. We have heard the rival submissions and perused the materials available on record. This issue came for consideration IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 25 of 36 before this Tribunal in the case of Tivo Tech Pvt. Ltd. cited (supra) wherein the Tribunal held as under:
"9(vi) It is submitted that Cheil is engaged in providing digital solutions, analytical solutions (data analytics) which are not akin to the services rendered by the Assessee. It derives its income primarily from advertising, communication, publicity and merchandising and undertakes consultancy services and training. It is submitted that an advertising agency undertakes functions such as attracting clients who are advertisers, developing an advertising strategy, creation of advertisements by a creative team consisting of writers, designers and copy writers. They also undertake research activities to understand a client's market situation, competition, customers in the process of planning an advertisement campaign etc. Therefore, the aforementioned activities are not similar to the functions performed by the Assessee in the nature of product marketing, targeted campaign creation and management, public relations, customer and associate lead generation and distribution, etc. Further, it also uses a separate charging mechanism for services rendered by it to its customers, and revenue is recognised based on such charging mechanism (outsourcing in nature). The company has also entered into an agreement with its customers under which it procures advertising services on behalf of the customers and bills the customers on cost-to-cost basis without charging any mark-up. The company earns revenue from commission income, fee from production job, transaction processing job, etc. which is different from the services rendered by the assessee.
The Ld.DR relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in light of records placed before us.
From the annual report placed at page 5447 of the paper book, this company is described to be a full-fledged advertising service company. It is only the entire revenue earned by this company is from advertising services as observed at page 5485. The general information provided at page 5582 of the paper book reveals that this company is engaged in the business of advertising, communication, publicity and merchandising including undertaking market research, planning and providing consultancy services and training in the same field. There is no segmental details available and the entire revenue is disclosed as revenue from sale of services. In light of the above, we do not find this company to be functionally IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 26 of 36 similar with that of assessee. Accordingly, we direct this comparable to be excluded.
Accordingly Ground no.6.3 raised by the assessee stands allowed."
19.1 In view of the above order of the Tribunal on the basis of functionality and dissimilarity, we direct the AO/TPO to exclude this company M/s. Cheil India Pvt. Ltd. from the list of comparables.
20. Ground No.3.7 of the assessee's appeal is reproduced as under:
"3.7. Excluding the following companies forming part of the TP documentation. even though they are functionally comparable to the Appellant and pass all the filters applied by the learned TPO.
a) MCI management India Pvt. Ltd
b) Kestone Integrated Marketing Services Pvt Ltd -- Marketing and sales services segment
c) Fusion Events Ltd.
d) Cheers Interactive India Pvt. Ltd.
e) Deepali Designs & Exhibits Pvt. Ltd.
f) Netlink Solutions (India) Ltd. -- Info Media segment"
20.1 In this ground, assessee pressed only two comparables which are as follows:
a) MCI Management India Pvt. Ltd.
b) Kestone Integrated Marketing Services Ltd. - Marketing and sales services segment.
(A) MCI Management India Pvt. Ltd.
20.1.1 The ld. A.R. submitted that the TPO rejected the above comparable on the ground that it did not form part of the search matrix (page 392). The DRP upheld the rejection of the comparables on the ground that the Company is a globally renowned event management company which is engaged in providing AMC, PCO, PIP, Meeting and Event services. It is submitted that the companies rendering comparable IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 27 of 36 services cannot be rejected only on the ground that they are large event management companies, which is purely ad hoc and arbitrary. She submitted that this Company and the Assessee are engaged in providing similar services such as targeted campaign creation and management etc. Further, the company passes all the filters applied by the TPO.
20.1.2 Further, she submitted that this Tribunal in the Assessee's own case for the assessment year 2016-17 vie its order 30.08.2022 in Appeal no. IT (TP)A No. 235/Bang/2021 (para 31) remitted this Company to the AO/TPO for fresh consideration and for consideration of the information available in the public domain. She submitted that since, the profile for the relevant AY 2018-19 is same, this Company ought to be included in the final list of comparables.
20.2 The ld. DR. relied on the order of lower authorities.
21. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that similar issue came for consideration in assessee's own case in AY 2016-17 in IT(TP)A No.235/Bang/2021. The Tribunal vide order dated 30.8.2022 remitted the issue to the file of AO/TPO by observing as under:
"31. Ground No. 2.13 is in respect of following comparables that the assessee is seeking to include under the MSS segment:
• Cheers Interactive India Pvt.Ltd.,
• MCI Management India Pvt.Ltd. and
• Showhouse Event Management India Pvt. Ltd.,
It is submitted that these companies are engaged in providing MSS services. It is submitted that these comparables were not considered by the Ld.TPO, as they did not appear in the search matrix carried out by him, which has been upheld by the DRP.
The both sides relied on the submission made in respect of comparables sought for inclusion under SWD segment.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 28 of 36 On similar situation, we have remanded the comparable to the Ld.AO/TPO for fresh consideration herein above following the decision of coordinate bench of this Hon'ble Tribunal in the case of Prism Networks Pvt. Ltd. reported in (2022) 141 taxmann.com
163. Respectfully following the above view mutatis mutandis, we remit the comparables back o the Ld.AO/TPO for fresh consideration in the light of information available in public domain.
Accordingly this ground stands allowed for statistical purposes."
21.1 In view of the above order of the Tribunal, we inclined to remit this comparable MCI Management India Pvt. Ltd. to the file of AO/TPO in similar lines.
(B) Kestone Integrated Marketing Services Pvt. Ltd ("Kestone")
22. The ld. A.R. submitted that the TPO rejected the above comparable on the ground that it did not form part of the search matrix (page 392). The DRP, inspite of noting that the Company is predominately providing integrated business marketing and sale services, upheld the rejection of the comparables on the ground that the above functions of the Company is not similar to the Appellant. She submitted that this ground for rejection of the Company is ad hoc and arbitrary. Further, she submitted that the company passes all the filters applied by the TPO.
22.1 The ld. A.R. further submitted that the DRP's action of upholding the company's exclusion solely on the ground that the company did not feature in the TPO's search matrix is erroneous. Reliance in this regard is placed on the order dated 30.03.2023 passed by this Tribunal in the case of TiVo Tech Pvt. Ltd. v. ACIT in IT(TP)A No. 862/Bang/2022 for assessment year 2018-19 and Prism Networks Private Limited v. ACIT, Order dated 11.02.2022 passed by this Tribunal in IT(TP)A No. 349/Bang/2021]. In view of IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 29 of 36 the above, she submitted that the companies ought to be included in the final list of comparables.
22.2 The ld. D.R. relied on the order of lower authorities.
23. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal for the assessment year 2018-19 in the case of Tivo Tech Pvt.Ltd. cited (supra), wherein held as under:
8. "Ground no.6.2: The assessee is seeking inclusion of only two comparables being Honeycomb Relationship Management Services Pvt. Ltd. and Kestone Integrated Marketing Services Pvt.
Ltd.
8.1. She submitted that these comparables were rejected as they did not fall under the search matrix by the Ld.TPO.
In this regard, it is submitted that the companies cannot be rejected solely on the ground that the same were not featuring in the search matrix of the Ld.TPO. It is submitted that above companies are functionally comparable to the assessee and passes all filter applied by the assessee. Reliance in this regard is placed on the decision of Coordinate Bench of this Tribunal in case of Prism Networks Private Limited reported in (2022) 141 taxmann.com 163.
8.2. We thus remand the comparables to the Ld.TPO to consider it based on FAR analysis in accordance with law.
The Ld.AR is directed to file the annual reports of the above comparables to the Ld.AO/TPO to assessee in considering them as per the directions hereinabove.
Accordingly Ground no.6.2 raised by the assessee stands allowed for statistical purposes."
23.1 In view of this order of the Tribunal, we remit this comparable Kestone Integrated Marketing Services Pvt. Ltd. to the file of AO/TPO for fresh consideration on similar lines.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 30 of 36 23.2 Other comparables in ground No.3.7 in sl.nos. (c) Fusion Events Ltd. (d) Cheers Interactive India Pvt. Ltd. (e) Deepali Designs & Exhibits Pvt. Ltd. & (f) Netlink Solutions (India) Ltd. - Info Media Segment, are dismissed as not pressed.
24. Ground No.3.8 of the assessee's appeal is reproduced as under:
"3.8. Excluding the following companies even though they are functionally comparable to the Appellant and pass all the filters applied by the learned TPO:
a) DNA Entertainment Network Pvt. Ltd."
24.1 At the time of hearing, the ld. A.R. submitted that if ground No.3.6 is decided in favour of the assessee, she is not interested in pressing ground No.3.6. As we have decided ground No.3.6 in favour of the assessee, this ground has become infructuous and dismissed accordingly.
25. Ground No.3.9 of the assessee's appeal is reproduced as under:
"3.9. Computing the mark-up on operating cost of certain comparable companies by not considering expenses such as provision for doubtful debts, provision for warranties, miscellaneous expenditure etc.. as operating in nature on the premise that they are not routine operating costs."
25.1 We direct the AO/TPO to compute the correct operating margin as per the direction of the ld. DRP.
26. Ground Nos.4 & 5 of the assessee's appeal are reproduced as under:
"Working capital adjustment
4. On the facts and in the circumstances of the case and in law. the learned Panel / AO / TPO erred in not providing working capital IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 31 of 36 adjustment for determining the ALP by relying on the judicial precedents based on a fact pattern, which is not applicable to the Appellant.
Risk adjustment
5. On the facts and in the circumstances of the case and in law, the learned Panel I AO / TPO erred in ignoring the limited risk nature of the services provided by the Appellant and thereafter selecting high profit-making entrepreneurial companies as comparable. While doing so. the learned Panel / AO / TPO has erred in not providing an appropriate adjustment towards the risk differential, even when full-fledged entrepreneurial companies have been selected as comparable."
26.1 These grounds are dismissed as not pressed.
27. Ground Nos.6 to12 of the assessee's appeal are reproduced as under:
"Interest on delayed receivables 6 On the facts and in the circumstances of the case and in law, the learned Panel / AO / TPO erred in making an adjustment of INR 56,208,198 towards interest on delayed receivables from associated enterprises ( AEs')
7. On the facts and in the circumstances of the case and in law, the learned Panel erred in upholding the adjustment towards interest on delayed receivables w. r. t. software development services segment, when the primary transaction of provision of such services has been accepted to be at arm's length by the learned Panel.
8. On the facts and in the circumstances of the case and in law, the learned Panel / AO / TPO erred in treating outstanding receivables from AEs as a separate international transaction as per the provisions of section 92B of the Act.
9. That without prejudice, the learned AO/Panel erred in ignoring that, if at all a TP adjustment has to be sustained with respect to the notional interest on delayed receivables, the interest IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 32 of 36 should be computed using LIBOR as against SBI short term deposit rate 10 On the facts and in the circumstances of the case and in law, the learned Panel erred in directing the TPO to use SBI short- term deposit rate for computing notional interest on delayed receivables without appreciating the fact that the Appellant's receivables are realised in USD and not in INR currency.
11 On the facts and in the circumstances of the case and in law, the learned AO / TPO erred in not considering the interest rates specifically provided in the directions issued by the learned Panel, while computing the interest on delayed receivables
12. The learned Panel erred in adopting an invoice wise approach for computing interest on delayed receivables, instead of considering the weighted average realization period. being 34 days in respect of the software development services segment and 85 days in respect of the MSS segment 27.1 The ld. A.R. submitted that the amounts outstanding have been settled by the AE on an on-going basis in the normal course of business having regard to economic and commercial factors. Since the outstanding receivables relates to the SWD and MSS rendered by the Assessee, the Assessee submits that the determination of ALP of the outstanding receivables is not warranted as the same is subsumed in the ALP of the principal transaction. The Assessee also submitted that the outstanding receivables cannot be made subject matter of a TP adjustment as the same is not covered under the provisions of Section 92B of the Act.
27.1.1 The ld. A.R. placed reliance in this regard on the following decisions:
(i) Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 (Bangalore-Trib)): The appeal against the above order came to be dismissed by the Hon'ble High Court of Karnataka IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 33 of 36 in PCIT and anr. V. Avnet India (P.) Ltd. (Order dated 01.08.2018 passed by the Hon'ble High Court of Karnataka in ITA No. 358/2016).
(ii) Goldstar Jewellery Ltd. v. JCIT (reported in [2015] 53 taxmann.com 353 (Mumbai-Trib)).
(iii) Kusum Healthcare Pvt. Ltd. v. ACIT ([2015] 62 taxmann.com 79 (Delhi - Trib.)). This decision came to be upheld by the Hon'ble Delhi Court in PCIT v. Kusum Healthcare Pvt. Ltd.
([2017] 398 ITR 66 (Delhi)).
27.1.2 In view of the above, she submitted that the delayed receivables cannot be treated as an independent international transaction.
27.1.3 In any event, the interest if at all, ought to be computed on an invoice wise basis, after granting a reasonable credit period of 90 days. She submitted that most of the invoices were received within a period of 90 days.
27.1.4 In any event, the weighted average realization period of receivables is 84 days in respect of the SWD services segment and 85 days in respect of the MSS segment. Therefore, she submitted that if the delay is computed invoice wise and a credit period of 90 days is granted, no adjustment is warranted and the entire adjustment would stand deleted. Reliance in this regard is placed by her on the decision of this Tribunal in the case of Applied Materials India Pvt. Ltd. v. DCIT (Order dated 30.11.2022 passed in IT(TP)A No. 209/Bang/2021).
27.1.5 Further, she submitted that since the Assessee's receivables are realised in USD and not in INR currency, the DRP erred in directing the AO/TPO to use SBI short term fixed deposit IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 34 of 36 interest rate for computing interest. Therefore, the applicable interest rate would if at all be LIBOR.
27.1.6 Reliance in this regard is placed on the decision in Applied Materials (supra) and the decision of this Hon'ble Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. v. The Addl./Jt./Dy./Asst.Commissioner of Income Tax/ITO, National Faceless Assessment Centre (Order dated 21.01.2022 passed in IT(TP)A No. 397/Bang/2021).
27.1.7 Wherefore, she prayed that this Tribunal be pleased to allow the appeal, in the interests of justice and equity.
27.2 The ld. D.R. relied on the orders of the lower authorities.
28. We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in the case of Applied Materials India Pvt. Ltd. in IT(TP)A No.209/Bang/2021. The Tribunal vide order dated 30.11.2023 held as under:
"9.8 Ld.TPO computed interest on outstanding receivables at the rate equal to 4.985% on the receivables that exceeded 6 months. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction.
9.9 This Bench referred to decision of Special Bench of Kolkotta Tribunal in case of in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (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.
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 35 of 36 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 time to discern a pattern which would indicate that vis- à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), 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 in Kusum Health Care (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."
9.11 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment."
28.1 In view of the above order of the Tribunal, we direct the AO/TPO to apply LIBOR rate for credits beyond 60 days only. These grounds are remanded to the file of AO/TPO for fresh consideration. Ordered accordingly.
29. Ground No.13 of the appeal is reproduced as under:
IT(TP)A No.899/Bang/2022 M/s. Arm Embedded Technologies Pvt. Ltd., Bangalore Page 36 of 36
13. "On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest u/s 234D of the Act."
29.1 After hearing both the parties, we are of the opinion that the interest u/s 234D is to be computed correctly in accordance with law.
30. Ground No.14 of the assessee's appeal is reproduced as under:
"14. On the facts and in the circumstances of the case and in law, the learned AO erred in serving notice u/s 274 r. w. s. 270A of the Act and initiating penalty proceedings."
30.1 After hearing both the parties, we are of the opinion that this ground is preposterous and dismissed accordingly.
31. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 8th June, 2023 Sd/- Sd/-
(George George K.) (Chandra Poojari)
Judicial Member Accountant Member
Bangalore,
Dated 8th June, 2023.
VG/SPS
Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The CIT(Judicial)
5. The DR, ITAT, Bangalore.
6. Guard file
By order
Asst. Registrar,
ITAT, Bangalore.