Income Tax Appellate Tribunal - Bangalore
M/S Kbace Technologies Prvate Limited , ... vs The Deputy Commissioner Of Income Tax ... on 29 January, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT
AND SHRI A.K.GARODIA, ACCOUNTANT MEMBER
ITA No.3189/Bang/2018
Assessment Year : 2014-15
KBACE Technologies Pvt. Ltd., Vs. The Deputy Commissioner
6th Floor, New No.1655, of Income Tax,
Menon Eternity Building, Circle 4(1)(1),
St. Mary's Road, Alwarpet, Bangalore.
Chennai - 600 018.
PAN: AACCK 3468K
APPELLANT RESPONDENT
Appellant by : Shri Nageshwar Rao, Advocate
Respondent by : Shri Pradeep Kumar, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 13.01.2020
Date of Pronouncement : 29.01.2020
ORDER
Per N.V. Vasudevan, Vice President This is an appeal by the assessee against the final order dated 28.9.2018 passed by the DCIT, Circle 4(1)(2), Bangalore u/s. 143(3) r.w.s 144C of the Income-tax Act, 1961 [the Act].
2. The first issue that arises for consideration in this appeal is in respect of correctness of determination of arm's length price (ALP) in respect of an international transaction of rendering software development services by the assessee to its Associated Enterprises (AE). It is not in ITA No.3189/Bang/2018 Page 2 of 12 dispute that the transaction of rendering of software development services by the assessee to its AE is an international transaction and that the ALP of the same has to be determined as per the provisions of section 92 of the Act. It is also not in dispute that Transaction Net Margin Method (TNMM) is the most appropriate method for determination of ALP and the Profit Level Indicator (PLI chosen for the purpose of comparison of the assessee's profit margin with the comparable companies is OP/OC.
3. The TPO did not accept the comparables chosen by the assessee in its TP study and the TPO on his own chose 8 comparables and the arithmetic mean of profit margin of those companies was as follows:-
Amounts in Rs. Lakh S OP/OC NAME OF TAX PAYER OR/SALES OC OP (in % NO 1 Infosys Ltd. 46,91,700 32,77,700 11,84,200 36.13% 2 Larsen & Toubro Infotech Ltd. 4,54,360 3,64,619 89,741 24.61% 3 Mindtree Ltd. 2,99,010 2,48,290 5,072 20.43% 4 Persistent Systems Ltd. 1,18,412 87.649 3,07,625 35.10% 5 R S Software (India) Ltd. 35,188 28,321 6,867 24.25% 6 Cigniti Technologies Ltd. 5,563 4,359 1,204 27.62% 7 S Q S India B F S I Ltd. 20,061 16,394 3,667 22.37% 8 Thirdware Solution Ltd. 19,883 13,742 6,140 44.68% Average 29.40%
4. The assessee was aggrieved by the inclusion of certain comparables in the final list of comparable companies chosen by the TPO. The assessee was also aggrieved by the action of the TPO in not accepting some other comparable companies chosen by the assessee in its TP analysis. The TPO ultimately determined the ALP of the international transactions and addition to be made to the total income as follows:-
ITA No.3189/Bang/2018 Page 3 of 12SWD Arm's Length Mean Margin on cost 29.40 % Operating Cost 162140385 Price Received 187853506 Arm's Length Price(ALP)@ 129.40% of Operating Cost) 209809658 Variation in price 21956152 3% of price received 5635605 Shortfall being adjustment 21956152 "The above shortfall of Rs.2,19,56,152/- is treated as transfer pricing adjustment u/s. 92CA in respect of software development segment of the taxpayer's international transactions."
5. The AO incorporated the additions suggested by the TPO in his draft order of assessment against which the assessee filed objections before the DRP, but without much success. Hence the assessee has filed the present appeal against the final order of assessment.
6. We have heard the final submissions. Though there were many grounds of appeal raised by assessee in the grounds of appeal filed by the assessee, at the time of hearing the ld. counsel for the assessee pressed for adjudication of only exclusion of 5 comparable companies chosen by the TPO and has prayed for inclusion of 3 companies. The 5 comparables sought to be excluded by the assessee in this appeal are; (1) Infosys Ltd., (2) L&T Infotech Ltd., (3) Mindtree Ltd., (4) Persistent Systems Ltd. and (5) Thirdware Solutions Ltd. The assessee seeks inclusion of 3 companies viz., Sagarsoft India Ltd., Evoke Technologies P. Ltd. & Maverick Systems Ltd.
7. As far as inclusion of 5 companies listed above which are part of the final comparable companies chosen by the TPO are concerned, we find that the turnover of these companies is 10 times greater than the turnover ITA No.3189/Bang/2018 Page 4 of 12 of the assessee which is only a sum of Rs.18,79,48,280. The turnover of Infosys Ltd. is Rs.44,431 crores, that of L&T Infotech Ltd. is Rs.4,644 crores, Mindtree Ltd. 3032 crores, Persistent Systems Ltd. 1084 crores & Thirdware Solutions Ltd. 207 crores. It has been held by the Hon'ble Karnataka High Court in the case of Acusys Software (I) P. Ltd. v. ITO in ITA No.223/2017, judgment dated 14.8.2018 that if the turnover of the comparable company is less or more than 10 times the turnover of assessee, then it cannot be considered as a comparable company. In the light of the aforesaid decision of the Hon'ble High Court, we are of the view that the aforesaid 5 companies should be excluded from the list of comparable companies. We hold and direct accordingly.
8. As far as inclusion of 3 companies which was argued before us by the ld. counsel for the assessee, the first company which the assessee seeks for inclusion is Sagarsoft (I) Ltd. This company was rejected by the TPO by applying the RPT filter which was not accepted by the DRP. The DRP directed the TPO to consider the comparability of this company afresh. The TPO while giving effect to the order of DRP, chose to reject this company as a comparable by pointing out that this company fails the persistent loss filter. It was the submission of the ld. counsel for the assessee that that in the light of decision of ITAT Pune Bench in the case of Yezaki (I) Pvt. Ltd., ITA No.621/PUN/2014 AY 2009-10, order dated 11.17.2019, the persistent loss filter can be applied only if there is a loss in 3 successive assessment years and that if there is a profit in any one of the 3 past financial years, then that company cannot be excluded on the basis of persistent loss making filter. It was submitted that all other filters have been accepted by the TPO in the order giving effect and therefore this company deserves to be included as a comparable company.
9. We have given a careful consideration to the submissions of the ld. counsel for the assessee and are of the view that if in any of the three ITA No.3189/Bang/2018 Page 5 of 12 previous financial years, if Sagarsoft (I) Ltd. has made a profit, then it shall not be excluded by applying the persistent loss filter. The TPO/AO will verify this aspect and consider inclusion of this company in the final comparables in accordance with law, after due opportunity to the assessee.
10. The next company which the assessee seeks inclusion is Evoke Technologies Ltd. It is the plea of assessee that the TPO and the DRP included this company on the ground that this company fails the export revenue filter i.e., export turnover is less than 75% of the turnover of company. The ld. counsel for the assessee pointed out to page 2421 of the assessee's PB which contains the annual report of this company for FY 2014-15 in which there is a reference to the revenue of this company for the year 2014-15 to be Rs.55,60,87,264 and the export turnover, out of this to be RS.55,44,99,764. Attention was also drawn to pages 2397 and 2395 to show that the export income as per financial statement was 79.60%. In the light of the above statements, we are of the view that it would be just and appropriate to remand the issue for fresh consideration by the AO/TPO in accordance with law, after due opportunity to the assessee.
11. The next company which the assessee seeks inclusion in the list of comparable companies is Maverick Systems Ltd. On this comparable chosen by the assessee in its TP study, the TPO has not discussed the reasons for excluding it from the list of comparable companies. In its objections before the DRP, it was contended by the assessee that the software testing services is a wing of software development services and is functionally similar. The entire revenue is from export of software development and this company satisfies all these filters. The DRP, however, observed that from the annual report this company had incurred substantial expenses to the tune of 6% of the turnover towards R&D and that there was a threshold limit of 3% of revenue towards R&D expenses to consider a company as a software development services company. Since ITA No.3189/Bang/2018 Page 6 of 12 the R&D filter of 3% of revenue was not satisfied, this company deserved to be excluded. The ld. counsel for the assessee submitted before us that this was never a filter applied by the TPO in his TP analysis. Apart from the above submissions, it was also submitted that incurring of R&D expenses excluding capital expenditure was only Rs.95.25 lakhs and that constituted 1.12% of turnover. We are of the view that this aspect also needs to be looked into afresh by the TPO/AO and accordingly we set aside the order of the DRP on this issue and remand the question of comparability of this company to the TPO/AO for fresh consideration in accordance with the law, after due opportunity to the assessee.
12. The Second issue which requires consideration by the Tribunal in this appeal is the question with regard to determination of ALP in respect of an international transaction whereby interest income was attributed by the TPO/AO on the delayed recovery of trade receivables. The TPO rejected the plea of assessee that any delay or extended period of credit allowed on trade receivables cannot be an international transaction and therefore there cannot be any benchmarking of the said transaction. It was also plea of the assessee that when TNMM is adopted as the most appropriate method, the effect of the extending the credit period for trade receivables will get subsumed in working capital adjustment and no separate addition on account of interest income should be made. The above contention was rejected by the TPO and determined the ALP observing as follows:-
"18. Computation of interest on delayed receivables As discussed in the preceding paragraphs, interest on the delayed trade receivables is computed under the weighted average method, using LIBOR- 6 months + 300/400 basis points applicable for the FY 2013-14, which works out to 4.3836%. The quantum of adjustment works out to Rs.8,08,957/- as under:ITA No.3189/Bang/2018 Page 7 of 12
39.62838271 Delay in recover(days) Total invoice amount for the period 1699,73,415 Rate of interests per annum 4.3836% Interest calculated 8,08,957
13. On appeal by the assessee, the DRP confirmed the order of TPO by observing as follows:-
"Panel: All the above grounds relate to the same issue and hence considered together. it was noted by the TPO that substantial amounts were pending as receivables beyond the allowable credit period and TPO charged arm's length interest on the same @ 6 months LIBOR plus 400 basis points (4.3836%). Before DRP assessee contended that the outstanding receivable cannot be considered as international transaction.
Having considered the submissions. we find that in view of the amendment inserted by way of Explanation to sec.92B with retrospective effect from 1-4-2002; international transaction"
would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business" and hence non-charging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. This view finds support in the latest decision of the Honourable ITAT Delhi in the case of Bechtel India Pvt Ltd (in ITA No.6530/De1/2016 dated 16 May 2017). It is important to note that the Hon'ble Bench while arriving at the said conclusion distinguished its earlier order in Bechtel case. and also rejected the contention that interest gets subsumed in the working capital adjustment. The relevant discussion holding 'deferred receivables' would constitute international transaction is as under:
"14...... ...In the case of Techbooks India International Pvt. Ltd vs. DCIT (supra), taking note of the &planation inserted by the Finance Act, 2012 to Section 92B, it was observed that there remained no doubt that apart from ITA No.3189/Bang/2018 Page 8 of 12 any short-term or long-term borrowing, etc.. or even advance payments or deferred payments. 'any other debt arising during the course of business' had also been expressly recognized as an international transaction. In the said decision, the decision of the Horrible Bombay High Court in the case of CIT vs. Patni Computer Systems was also considered, wherein Hon'ble Bombay High Court set aside the view taken by the Tribunal in view of amendment to section 92B. The decision in the case of KUSUM Healthcare Pvt. Ltd. was duly considered in the case of ,4meriprise India Pvt. Ltd and it was observed from para 20 to 23 as under:
The ld AR supported the impugned order by relying on a Tribunal order dated 31.3.2015 passed in Kusum Healthcare Pvt. Ltd. vs. ACTT (ITA No.6814/Del/2014) in which it has been held that no additional imputation of interest on the outstanding receivables is warranted if the pricing/profitability is more than the working capital adjusted margin of the comparables. In the opposition, the ld. DR relied on a later order dated 6.7.2015 passed by the Tribunal in the case of Techbooks International Pvt. Ltd. (supra), in which the transfer pricing adjustment on account of the delayed realization of invoices from .4Es has been upheld. The ld. DR contended that the order in the case of Kusum Healthcare Pvt. Ltd. (supra), Tins been passed without considering the amendment to section 92B carried out by the Finance Act, 2017 with retrospective effect from 1.4.2002, which has been duly taken into account by the Tribunal in its later-order in Techbooks International Pvt. Ltd. (supra).
21. After considering the rival submissions and perusing the relevant material on record, it is noticed as highlighted above, that the assessee argued before the TPO that interest on receivables is not an international transaction. At this stage, it would he apposite to note that the Finance Act, 2012 has inserted Explanation to section 9211 with retrospective effect from 1.4.2002. Clause (i) of this Explanation. which is otherwise also far removal of doubts, gives meaning to the expression 'international transaction' in an inclusive manner. Sub-clause (c) of clause (0 of this Explanation. which is relevant for our purpose, provides as under:-ITA No.3189/Bang/2018 Page 9 of 12
"Explanation- For the removed of doubts, it is hereby clarified then-(i) the expression "international transaction" shall include--
(a) .............
(b) ..............
(c) capital financing, including any type of long-term or short-term borrowing. lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business: ............"
22. On going through the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP. The expression 'debt arising during the course of business' in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with, the TP adjustment on account of interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the TPO that it is not an international transaction, turns out to be bereft of any force.
ITA No.3189/Bang/2018 Page 10 of 1223. The Hon`ble Bombay High court in the case of CIT vs. Patni Computer Systems Ltd, (2013) 215 Taxman 108 (Bom) dealt, inter alia, with the following question of law:-
"(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 9213(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?"
24. While answering the above question, the Hon'ble High Court noticed that an amendment to section 9213 has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this ITA No.6530/De1/2016 issue to the file of the Tribunal for fresh decision in the light of the legislative amendment.
25. The foregoing discussion discloses that non-charging or under- charging of interest on the excess period of credit allowed to the AF, for the realization of invoices amounts to an international transaction arid the ALP of such an international transaction is required to be determined."
18. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted."
Similarly, in the case of BT e Serv (TS-849-ITAT-2017(DEL)-TP) the Hon'ble ITAT Delhi held that undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently. overdue outstanding is an "international transaction". The natural corollary would be of imputing interest on such "capital financing" if same is not charged at arm's length. The 17`AT concluded that if outstanding receivables are within the terms of agreement then it may be argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement ITA No.3189/Bang/2018 Page 11 of 12 does not specify the term of the payment even then assessee must be given benefit of credit period which is accepted business practice in the trade. The ITAT confirmed 30 days as the normal credit period adopted by the TPO.
Considering the above discussion, it is held that deferred trade receivable constitutes international transaction and the TPO has correctly made adjustment to the differed trade receivables. Grounds rejected."
14. Aggrieved by the order of DRP, the assessee is in appeal before the Tribunal. The ld. counsel for the assessee submitted that the transaction of giving extended credit period cannot be regarded as international transaction and in this regard relied on the decision of ITAT Delhi Bench in the case of Bectel India P. Ltd. v. DCIT, ITA 1478/Del/2015, AY 2010-11, order dated 21.12.2015.
15. The ld. DR, on the other hand, relied on the order of DRP wherein the DRP has placed reliance on the decision of the same Delhi Bench of ITAT in the case of Bectel India P. Ltd., ITA 6530/Del/2016, order dated 16.5.2017, wherein the earlier decision of the ITAT was distinguished and it was held that the mere fat that working capital adjustment is done while determining the ALP in respect of enhanced credit period will not subsume the determination of ALP in respect of enhanced credit period given for trade receivables. He also brought to our notice retrospective amendment to section 92B of the Act w.e.f. 1.4.2002 whereby deferred payment on receivables or any other debt arising during the course of business was also included as an international transaction. In view of the aforesaid decision cited by the ld. DR, we are of the view that the order of DRP has to be upheld. Accordingly, we uphold the order of DRP and find no merit in the grievances projected by the assessee. No other arguments were advanced on this issue except the contention that the extended credit ITA No.3189/Bang/2018 Page 12 of 12 period allowed to AE on account of trade receivables will not constitute an international transaction attracting the provisions of Sec.92 of the Act.
16. In the result, the appeal is partly allowed for statistical purposes.
Pronounced in the open court on this 29th day of January, 2020.
Sd/- Sd/-
( A.K.GARODIA ) ( N V VASUDEVAN )
ACCOUNTANT MEMBER VICE PRESIDENT
Bangalore,
Dated, the 29th January, 2020.
/Desai S Murthy /
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Assistant Registrar
ITAT, Bangalore.