Income Tax Appellate Tribunal - Bangalore
Nts Technology Services Private ... vs The Deputy Commissioner Of Income Tax, ... on 27 March, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No. 940/Bang/2022
Assessment Year : 2018-19
M/s. NTS Technology
Services Pvt. Ltd.,
The Deputy
2nd Floor, Salarpuria
Commissioner of
symphony,
Income Tax,
Basapura,
Circle - 3 (1)(1),
Hosur Main Road,
Vs. Bangalore.
Bangalore.
PAN: AAGCG4073J
APPELLANT RESPONDENT
Smt. Tanmayee Rajkumar,
Assessee by :
Advocate
Shri Sunil Kumar Singh,
Revenue by :
CIT-2 (DR)
Date of Hearing : 07-03-2023
Date of Pronouncement : 27-03-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal is filed by assessee against the final assessment order dated 29.07.2022 passed by the Ld.DCIT, Circle - 3(1)(1), Bangalore for A.Y. 2018-19 on following grounds of appeal:
"Based on the facts and circumstances of the case and in law, NTS Technology Services Private Limited (hereinafter referred to as -NTS" or the "Company" or the "Appellant"), respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income Tax, Circle 3(1)(1). Bengaluru dated 29 July 2022 (received by the Appellant on 3 August 2022), under section 143(3) Page 2 IT(TP)A No. 940/Bang/2022 read with section 144C(13) read with section 144B of the Income Tax Act, 1961 ("the Act") in pursuance of the directions issued by Dispute Resolution Panel ("DRP"), Bangalore dated 16 June 2022 under section 144C(5) of the Act ("impugned order"). inter-alia on the following grounds. which are without prejudice to each other:
GENERAL GROUNDS:
That on the facts and circumstances of the case and in law:
1. Impugned order of Ld. AO/ Transfer Pricing Officer ("TPO") and directions of Ld. DRP are based on incorrect appreciation of facts and incorrect interpretation of law and therefore, are bad in law.
2. The Ld. AO/ DRP erred in assessing total income of the Appellant at Rs. 13.11,54.630/- under the normal provision of the Act as against the returned income of Rs. 9,06,17,060/-.
3. The Ld. AO/ DRP erred in determining a sum of Rs.
1,49,35,996/- as balance tax payable by the Appellant. GROUNDS ON NATURAL JUSTICE:
4. The lower authorities have erred in passing the order based on conjecture and surmises. without considering all the submissions and / or without appreciating properly the facts and circumstances of the case and the law applicable.
5. The learned AO has erred in making a reference for the determination of the arms-length price of the international transactions to the learned TPO without demonstrating as to why it was necessary and expedient to do so.
6. The Ld AO has erred in referring the case to the Ld TPO without obtaining prior approval from the Principal Commissioner or Commissioner of Income-tax as mandated by the provisions of section 92CA of the Act.
7. The Ld DRP has erred in holding that the approval letter from the Principal Commissioner or Commissioner of Income-tax need not be given to the Appellant.
8. The lower authorities erred in making transfer pricing adjustment without sharing the search process with the Appellant.
GROUNDS ON TAX EVASION AND CHARGE OF INCOME TAX:
9. The lower authorities have erred in making adjustment under section 92CA without demonstrating that the Appellant had any motive of tax evasion.
10. The lower authorities have erred in not appreciating that, the addition made to the income returned is bad in law as the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X. Page 3 IT(TP)A No. 940/Bang/2022 GROUNDS RELATING TO TRANSFER PRICING ADJUSTMENT RELATING TO SOFTWARE DEVELOPMENT SEGMENT (SWD) TO THE EXTENT OF RS.3,92,67,473:
11. The Lower Authorities have erred in law and on facts in making an adjustment of Rs 3,92,67,473 to the ALP of the international transactions of the Appellant with its Associated Enterprises in the SWD segment.
12. The Lower Authorities erred in
(a) Rejecting the Transfer Pricing study of the Appellant on unjustifiable grounds:
(b) Re-computing the profit level indicator (PLI) for SWD segment by treating the following operating incomes as non-operating income
(i) provision written back and
(ii) other income
(c) Conducting fresh search process and arriving at the fresh set of comparables despite absence of any defects in the transfer pricing analysis submitted by the Assessee;
(d) Adopting inappropriate filters like current year data, persistent loss making, different financial year etc in the process of selecting comparables;
(e) Not appreciating that the TPO is not empowered to exclude companies on the ground of current year data not being available, as in such circumstances the data of the preceding year could be adopted;
(f) Not appreciating that a comparable cannot be rejected because it is incurring losses if it is otherwise functionally comparable and not considering the various judicial precedents on this matter including the jurisdictional tribunal decision:
(g) Concluding that the methodology adopted by the Appellant in applying the Related Party Transaction filter is skewed;
(h) Adopting the RPT filter at 25% instead of 15% on operating sales.
13. The Ld DRP erred in upholding the action of the Ld TPO in finalizing the TP order with the following companies as comparable to the Appellant even though they are not comparable in respect of one or more of functions performed, risks assumed, assets utilized, size, turnover, related party filter non-availability of segmental information etc:
i. Exilant Technologies Pvt. Ltd.
ii. Tech Mahindra Ltd iii. Great Software Laboratory Pvt. Ltd. iv. Elveego Circuits Pvt. Ltd.
v. Black Pepper Technologies Pvt. Ltd.
vi. Acewin AgriteckLtd.
vii. Mindtree Ltd.
Page 4 IT(TP)A No. 940/Bang/2022 viii. Aptus Software Labs Pvt. Ltd.
ix. Persistent Systems Ltd x. Wipro Ltd xi. Tata Elxsi Ltd xii. lnfobeans Technologies Ltd xiii. Nihilent Ltd xiv. Threesixty Logica Testing services Pvt. Ltd. xv. Cybage Software Pvt. Ltd.
xvi. Infosys Ltd.
14. The Lower Authorities erred in not appreciating the specific objections with regard to the issues such as functionality, diversified activity, presence of intangibles etc in respect of each of the above comparables and rejecting the objections with general unsubstantiated remarks.
15. The lower authorities erred in considering/ retaining the following companies in the final list of comparables without appreciating the fact that the turnover of these companies should also be a criteria in selection of comparables. thereby not following jurisdictional judicial precedents laid down by the Honourable Income-tax Appellate Tribunal:
i. Tech Mahindra Ltd ii. Mindtree Ltd iii. Persistent Systems Ltd iv. Wipro Ltd v. Tata Elxsi Ltd vi. Cybage Software Pvt. Ltd.
vii. Infosys Ltd.
16. The LD DRP erred in rejecting the following companies as comparables without providing any cogent reasons:
i. SOS India BFSI Limited (Consolidated) ii. Sagarsoft (India) Limited iii. Virinchi Limited (Segmental) iv. Sasken Technologies Limited (Segmental) v. CG-VAK Software & Exports Limited vi. Sankhya lnfotech Limited (Segmental) vii. Kcube Consultancy Services Private Limited viii. Evoke Technologies Private Limited ix. Jindal Intellicom Limited (Segmental) x. Maveric Systems Limited xi. Isummation Technologies Private Limited Without prejudice to the above grounds
17. The Lower Authorities have erred in
(a) not allowing adjustments relating to working capital, risks, R&D adjustment: and
(b) in not restricting the TP adjustment, if any, to AE transactions only.
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IT(TP)A No. 940/Bang/2022
GROUNDS RELATING TO TRANSFER PRICING
ADJUSTMENT RELATING TO INTEREST ON NOTIONAL RECEIVABLES:
18. The Ld AO/ TPO/ Honourable Dispute Resolution Panel ("DRP') have erred in law and on facts:
(i) In making an addition of INR 12,70,088/- to the total income of the Appellant on account of notional interest imputed on outstanding receivables from Associated Enterprises ("AEs").
(ii) In considering the outstanding dues from AE to be in the nature of loan and not considering the business/commercial expediency of the arrangement
(iii) In treating the outstanding dues from AE as a separate international transaction and not considering the same to be closely linked with the primary international transaction of provision of software services to AEs.
(iv) In not appreciating that when the primary international transaction of provision of software services to AEs has already been held to be at arm's length. there is no need to propose a separate addition on account of notional interest imputed on outstanding dues from AEs since the transaction is closely linked with the primary international transaction.
(v) By not appreciating the facts that Appellant does not have a policy of charging interest from other unrelated parties in similar transactions nor has it paid any interest on its outstanding trade payable at year end to unrelated vendors.
19. Without prejudice to above ground, the Ld. AO/ TPO/ DRP has erred, in law and on facts by adopting the SBI short term deposit interest rate to compute the notional interest on outstanding receivable as on 31 March 2018 instead of LIBOR rate.
OTHER GROUNDS
20. The Appellant craves for consequential relief of interest under section 234B & 234C under the Act.
The Appellant submits that each of above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law."
2. Brief facts of the case are as under:
2.1 The assessee is a wholly owned subsidiary of News Singapore. The assessee is engaged in the business of IT support Page 6 IT(TP)A No. 940/Bang/2022 services and IT infrastructure support services exclusively to News UK and its subsidiaries.
2.2 During the year under consideration, assessee filed its return of income on 30.11.2018 declaring total income of Rs.9,06,17,064/-. The case was selected for scrutiny and notice u/s. 142(1) was issued to assessee. The Ld.AO noted that assessee had international transactions exceeding Rs. 15 crores with its associated enterprises and therefore a reference was made to the transfer pricing officer to compute the arms length price of the transaction.
2.3 On receipt of the reference, the Ld.TPO called for economic details of the international transaction in form 3CEB. The Ld.TPO noted that assessee had following international transactions.
Particulars Amount
Provision of IT support
Rs. 58,80,32,678/-
services
Issue of equity shares at
Rs. 27,23,74,143/-
premium
Cost allocation from AEs Rs. 82,30,726/-
2.4 The Ld.TPO noted that assessee had computed its margins at 15.02% by taking OP/TC as the PLI.
2.5 It used TNMM as the most appropriate method and 15 comparables were selected with the median of 6.10%.
Thereby the assessee held its transaction to be at arms length.
Comparables selected by assessee
Weighted average
Sl. No. Name of the company
(in %)
1. Isummation Technologies Pvt. Ltd. 2.25
2. Maveric Systems Ltd. 3.03
3. Jindal Intellicom Limited (Segmental) 3.47
4. Evoke Technologies Private Limited 3.66
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IT(TP)A No. 940/Bang/2022
Kcube Consultancy Services Private
5. 3.69
Limited
6. Sankhya Infotech Limited (Segmental) 3.69
7. Harbinger Systems Private Limited 5.39
8. CG-VAK Software & Exports Ltd. 6.10
9. Sasken Communication Technologies Ltd. 8.52
10. Infomile Technologies Limited (Segmental) 10.17
11. Virinchi Limited (Segmental) 10.86
12. Sagarsoft (India) Ltd. 16.04
13. SQS India BFSI Limited 18.72
14. R Systems International Limited 18.89
15. Larsen & Toubro Infotech Limited 20.04
35 Percentile
th 3.69
Median 6.10
65th Percentile 10.17
2.6 Dissatisfied with the comparables so selected, the Ld.TPO applied following filters.
Step Description Companies having different financial year ending (i.e. not March
1. 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 for which data is available for FY 2017-18- selected.
3. Companies whose income was less than Rs. 1 Crore - rejected.
Companies whose SWD service income is less than 75% of its
4. total operating revenues - rejected.
Companies who have more than 25% related party transactions
5. of the sales - rejected.
Companies who have export service income less than 75% of the
6. sales - rejected.
Companies with employee cost less than 25% of turnover -
7. rejected.
8. Companies reporting persistent losses - excluded.
9. Companies having positive net worth - accepted
10. Companies with similar FAR - accepted 2.7 On the application of the above filters, the Ld.TPO shortlisted a set of 20 comparables with a median of 23.6%.
Sl. weighted average
Name of the Company
No. (in %)
1. Infomile Technologies Ltd. 9.69
2. Harbinger Systems Pvt. Ltd. 11.65
3. Exilant Technologies Pvt. Ltd. 17.17
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IT(TP)A No. 940/Bang/2022
4. Tech Mahindra Ltd. 18.57
5. Larsen & Toubro Infotech Ltd. 18.94
6. Great Software Laboratory Pvt. Ltd. 19.73
7. Elveego Circuits Pvt. Ltd. 20.19
8. Black Pepper Technologies Pvt. Ltd. 20.62
9. Mindtree Ltd. 21.21
10. Aptus Software Labs Pvt. Ltd. 22.70
11. Acewin Agriteck Ltd. 24.51
12. Persistent Systems Ltd. 24.98
13. Wipro Ltd. 26.83
14. Tata Elxsi Ltd. 28.24
15. Infobeans Technologies Ltd. 28.52
16. Nihilent Ltd. 30.17
17. Thirdware Solution Ltd. 30.94
Threesixty Logica Testing Services Pvt.
18. 36.58 Ltd.
19. Infosys Ltd. 37.38
20. Cybage Software Pvt. Ltd. 56.81 35th Percentile 20.19 Median 23.60 65th Percentile 26.83 2.8 The Ld.TPO thus proposed the shortfall being Rs.4,38,68,697/-. The Ld.TPO also proposed adjustment in respect of interest on receivables outstanding amounting to Rs.12,70,088/-. The Ld.AO passed the draft assessment order by incorporating the proposed transfer pricing adjustment on 16.06.2022. On receipt of the draft assessment order, the assessee filed objections before the DRP. The DRP accepted the contentions of the assessee regarding exclusion of Thirdware Solutions Ltd. and remanded comparable TechMahindra Ltd. to the file of the TPO to examine if it satisfies the RPT filter. On the other issues alleged by assessee, the DRP upheld the TPO order. 2.9 Post the DRP directions, following were the comparables that were retained by the Ld.AO after passing the final assessment order.
Page 9 IT(TP)A No. 940/Bang/2022 Sl. No. Name of the Company
1. Infomile Technologies Ltd.
2. Harbinger Systems Pvt. Ltd.
3. Exilant Technologies Pvt. Ltd.
4. Tech Mahindra Ltd.
5. Larsen & Toubro Infotech Ltd.
6. Great Software Laboratory Pvt. Ltd.
7. Elveego Circuits Pvt. Ltd.
8. Black Pepper Technologies Pvt. Ltd.
9. Mindtree Ltd.
10. Aptus Software Labs Pvt. Ltd.
11. Acewin Agriteck Ltd.
12. Persistent Systems Ltd.
13. Wipro Ltd.
14. Tata Elxsi Ltd.
15. Infobeans Technologies Ltd.
16. Nihilent Ltd.
Threesixty Logica Testing Services Pvt.
17. Ltd.
18. Infosys Ltd.
19. Cybage Software Pvt. Ltd.
2.10 The Ld.AO thus passed the final assessment order in which the transfer pricing adjustment was reworked to Rs.4,05,37,561/-.
3. At the outset, the assessee has filed an application seeking admission of additional ground that reads as under:
"For the reasons stated in the accompanying affidavit, it is most humbly prayed that this Hon'ble Tribunal be pleased to permit the Appellant to raise the following additional ground in continuation of the existing grounds of appeal and be read as Ground Nos. 15(a) in the interests of justice and equity:
Ground No.15(a): That in the facts and circumstances of the case, the lower authorities erred in not excluding Larsen & Toubro Infotech Ltd. from the final list of comparables although the said company failed the turnover filter and is otherwise not functionally comparable to the Appellant."
3.1 The Ld.AR submitted that this comparable was not included in the grounds of appeal filed by the assessee due to oversight. It is submitted that this comparable is sought for exclusion by Page 10 IT(TP)A No. 940/Bang/2022 applying the turnover filter which has been alleged by assessee in ground no. 15.
3.2 It has been submitted that no new facts needs to be considered in order to dispose of the additional grounds raised by the assessee. It is submitted that the additional grounds is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee.
3.3 On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which would challenge such a right available to assessee under the Act. We have perused the submissions advanced by both sides in light of records placed before us.
3.4 The Ld.DR did not object for the additional grounds being admitted.
3.5 We note that the additional ground is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts.
3.6 Considering the submissions and respectfully following the decisions of Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly, ground no. 15a raised by assessee stands admitted.
Page 11 IT(TP)A No. 940/Bang/2022
4. The Ld.AR submitted that ground nos. 1 to 5 are general in nature and therefore do not require adjudication.
5. Ground nos. 6 to 7 - The Ld.AR submitted that this issue is against the assessee as in the present, there is no need to give the copy of reference to the assessee. Accordingly, we dismiss these grounds raised by assessee.
6. Ground nos. 8 to 12 are again submitted to be general in nature and therefore do not require adjudication.
7. In Ground nos. 13-14, assessee is seeking exclusion of 10 comparables by applying turnover filter. She submitted that this ground may be read with additional ground no. 15a.
8. It is submitted that the TPO erred in not applying a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the assessee. In this regard, it is submitted that application of turnover filter is a relevant criterion in choosing comparable companies. It is submitted that the difference in the scale of operations has a direct impact on the profitability. The concept of economies of scale wherein, an increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered. Therefore, the per unit fixed cost of a small- scale company would be much higher than that of a medium/large size organisation. Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the turnover of the assessee from rendering SWD services is Rs. 58,86,93,724/-. This being so, the TPO ought to have applied the upper turnover filter while Page 12 IT(TP)A No. 940/Bang/2022 selecting companies comparable to the assessee. In this regard, the assessee places reliance on the decision of this Hon'ble Tribunal in Autodesk India (P) Ltd. V. DCIT reported in (2018) 96 taxmann.com 263. On application of the turnover filter of 1-200 crores,
9. Assessee thus submitted that following comparables deserves to be excluded for having high turnover as against assessee. Further reliance is placed on the decision of this Hon'ble Tribunal in MWYN Tech Private Ltd. by order dated 31.10.2022 passed in IT(TP)A No. 753/Bang/2022.
Turnover
S.No. Name of the comparables
(in crores)
Exilant Technologies Pvt.
1. 332.51
Ltd.
2. Tech Mahindra Ltd. 23,661
3. Larsen & Toubro Infotech Ltd. 6906.40
4. Mindtree Ltd. 5325
5. Nihilent Ltd. 280
6. Persistent Systems Ltd. 1733
7. Wipro Ltd. 44710
8. Tata Elxsi Ltd. 1386
9. Infosys Ltd. 60,941
10. Cybage Software Pvt. Ltd. 737
10. Assessee seeks exclusion of above 10 comparables. 10.1 The assessee seeks exclusion of the above 10 comparable companies on failing the turnover filter. It is submitted that the Ld.TPO in selecting comparables applied filter of companies with turnover of more that one Crore however failed to apply the upper turnover limit. This Tribunal has been consistently applying the turnover filter for the purpose of choosing comparable companies.
10.2 On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of Page 13 IT(TP)A No. 940/Bang/2022 coordinate benche of this Tribunal . The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT reported in (2018) 89 Taxmann.com 44, took note of the decision of the another decision of coordinate bench of this Tribunal in the case of Sysarris Software Pvt.Ltd. Vs. DCIT reported in (2016) 67 Taxmann.com 243, wherein this Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015, wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. Following were the conclusions of the Tribunal in the case of Dell International (supra):
"41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:-
"9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these Page 14 IT(TP)A No. 940/Bang/2022 benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study."
42. The Assessee's turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non- jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 10.3 The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT reported in (2018) 96 Taxmann.com 263, took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:
17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the Page 15 IT(TP)A No. 940/Bang/2022 ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.
17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed.
Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co- ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Page 16 IT(TP)A No. 940/Bang/2022 Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 10.4 In view of the above, the aforesaid 10 companies are directed to be excluded for failing turnover filter.
11. Assessee is seeking exclusion of following 7 comparables on functional dissimilarities.
11.1 Great software Laboratory Pvt. Ltd. 11.1.1 The Ld.AR submitted that this company is engaged in the business of design and development services of software applications including customisation and packaged software. She further submitted that the primary service of the Company are cloud products and operations management, IDM and connected experience practice, big data analytics and support services. The Company has also earned revenue from sale of products. The company is engaged in diverse activities for which no segmental details is available. It is further submitted that the company owns significant intangibles and that this company earned significant onsite revenue which demonstrates that it operates on a different model and therefore functionally not comparable with the assessee.
Page 17 IT(TP)A No. 940/Bang/2022 11.1.2 The Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. in IT(TP)A No. 713/Bang/2022 by order dated 11.01.2023. The Ld.DR on the contrary, relied on the observations of the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
11.1.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was remanded for want of complete annual reports. However in the present case, the Ld.AR has filed the necessary details and complete annual report to verify the arguments advanced. On perusal of the detailed submissions, filed by the assessee at pages 141-145 of the appeal set as well as 820-822 of the paper book, we note that admittedly the TPO accepts that this comparable provides various services using the same platform of SWD. It is also an admitted fact that this company works in a different horizontal and this company has been retained by the Ld.TPO only because it renders services under the category SWD. It is also noted by the Ld.TPO that the operations of this comparable is from SWD segment without there being any segmental details, which according to the Ld.TPO is irrelevant. In our considered opinion, this Tribunal has been consistently rejecting the comparables whether there are no segmental information available in order to compare "an apple with an apple". Therefore the services rendered by the assessee under a contract with its AE cannot be compared with a company that renders various services under SWD segment. We do not find any reason to include this comparable in the final list.
Page 18 IT(TP)A No. 940/Bang/2022 Accordingly we direct the Ld.AO/TPO to exclude Great software Laboratory Pvt. Ltd.
11.2 Elveego Circuits Pvt. Ltd.
11.2.1 The Ld.AR submitted that this company is engaged in the business of electronics and semiconductor design services which is no way comparable to the captive software development activities as provided by the assessee. It is submitted that the company specialises in the design of Analog, Mixed-Signal and RF Integrated Circuits, and that no segmental details are available. 11.2.2 It is also submitted that, this company invested significantly in intangible assets, during the financial years 2016- 16, 2016-17 and 2017-18. She thus submitted that this comparable is functionally not similar with that of the assessee. Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. (supra). The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
11.2.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was excluded by observing as under:
"C.3. We note that this company is in the business of Chip and semiconductor design services where as the assessee before us is into basic SWD services of coding an documentation, Testing and quality assurance, software patches and maintenance. There is no similarity between the functions performed by the assessee vis-à-vis that of this company. We therefore at the threshold reject this company being functionally not similar with that of the assessee.
Accordingly, the Ld.TPO is directed to exclude this company from the final list of comparables."
Respectfully following the same, we direct the Ld.AO/TPO to exclude this company from the final list.
Page 19 IT(TP)A No. 940/Bang/2022 11.3 Blackpepper Technologies Pvt. Ltd. 11.3.1 The Ld.AR submitted that this company is engaged in the business of software development and consultancy services. Further, the company has incurred significant R&D expenses towards development of a new product design. The company has significant intangibles of about 96% of the total assets and also has high inventory risk.
11.3.2 Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. (supra). The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
11.3.3 We note that this comparable was remanded in case of Sprinklr India Pvt. Ltd. (supra) by this Tribunal for want of complete annual report. However in the present case, the Ld.AR has filed complete details in the paper book.
11.3.4 On perusal of the DRP direction, we note the following observation by them:
"Having considered the submissions, on perusal of Note 18 forming part of financial statement of the annual report, the company is engaged in providing Information Technology, Software Development and Consultancy Services. As per the Note 2.13 of Note 18 forming part of financial statement of the annual report, the company has only one business segment. The revenue breakup given Note 12 forming part of financial statement of the annual report, the revenue is completely derived from sale of services and there is no income from sale of products. Therefore, it is very clear that the company is into Software Development Services and hence, no diversified business activities reported as alleged by the assessee. Further, as the whole income is derived from sale of software development services there is no need of reporting segmental information as per AS17."
Page 20 IT(TP)A No. 940/Bang/2022 11.3.5 On perusal of the P&L account of the company, we notice that for the year ended 31.3.2007, the company has generated revenue only from sale of services and no revenue is generated from sale of products. We therefore tend to agree with the above findings of the DRP and accordingly we see no reason to interfere with the decision of the DRP.
Accordingly, we uphold the inclusion of this company. 11.4 Aptus Software Labs Pvt. Ltd.
11.4.1 The Ld.AR submitted that, the nature of business of this company is not available in the public domain. It is submitted that from the annual report of the company, the NIC code of the product/ service is mentioned to be 6201 which includes computer programming, consultancy and related activities. 11.4.2 Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. (supra). The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
11.4.3 We note that in case of Sprinklr India Pvt. Ltd. (supra), this comparable was remanded for want of sufficient information in annual reports filed by the assessee therein before this Tribunal. However, in the present case, the Ld.AR has filed complete annual report.
11.4.4 We notice that this company is deriving revenue from both domestic as well as foreign company. The notes to the account being note 24 reveals the revenue is recognised by this comparable from service transactions. The NIC code being 6201 as appearing at page 3383 of paper book reveals the description Page 21 IT(TP)A No. 940/Bang/2022 to be information technology services as against computer programming, consultancy and related activities as submitted by the assessee in the synopsis. We therefore do not find any reason to exclude this company from the final list. We direct the Ld.AO/TPO to retain this company in the list. 11.5 Acewin Agritech Ltd.
11.5.1 The Ld.AR submitted that this company is engaged in software development and information technology outsourcing company, wherein the core business of this company is Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development and DevOps Implementation. In addition, she submitted that this company is developing on the leading Blockchain platforms and widening its service offerings and domains more specifically in Healthcare, Media, and Financial Services. The Ld.AR also submitted that in terms of product offerings, the company enhanced the Food processing ERP product with predictive analytics. No segmental details are available. 11.5.2 She further submitted that, in the software services outsourcing business, this company does designing, building, testing and maintaining commercial products and digital solutions. Further, she submitted that, this company has significant R&D expenses.
11.5.3 She thus prayed for exclusion of this comparable as it is into varied activities for which there is no segmental details. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
Page 22 IT(TP)A No. 940/Bang/2022 11.5.4 In the annual report of this comparable at page 2854 of the paper book, we note that the NIC code is 8920 at the description of the project / services is software development. At page 2879, the business overview of the company has been described to be as under:
"OFS Technologies is a leading software development and information technology outsourcing company. In the last financial year, we intensified our technology expertise with latest technologies in our core business - Enterprise Application Development, Mobile Applications Development, Cloud Enablement, UI Development and DevOps Implementation. In addition, we are technically developing on the leading Blockchain platforms, widening our service offerings and domains more specifically in Healthcare, Media, and Financial Services. In terms of product offerings, we enhanced the Food processing ERP product with predictive analytics."
11.5.5 It is also revealed at page 2881 that this company has invested in enlarging its business development team and also has the product development vertical the income recognition is only from the sale of services being export and therefore this company does not have a segmental details of the variety of services rendered by it. Moreover, the company is a leading software development and information technology outsourcing company and therefore as the entire revenue is categorised under one single segment, it is not comparable with the captive service provider like that of assessee before us that renders its services on a cost plus model with its AE. We accordingly reject this comparable and direct the Ld.AO/TPO to exclude from the final list.
11.6 Infobeans Technologies Ltd.
11.6.1 The Ld.AR submitted that this company is engaged in providing software engineering services primarily in product engineering, digital transformation, automation and devOps. Though the annual report of the company mentions that the company is Page 23 IT(TP)A No. 940/Bang/2022 earning 100% revenues from sale of software services, such services are in the nature of CAD,CMS etc., which are in the nature of KPO services. The above services rendered by the company are vastly different from the SWD services rendered by the assessee, and therefore the company ought to be excluded as being functionally different. Further, the segmental details for these diverse services are not available and therefore the company cannot be selected as a comparable.
11.6.2 She submitted that the company has huge inventory and allied inventory risk whereas the assessee is a mere captive service provider who is engaged routine software development services. Further, it is submitted that Infobeans has employed significant intangibles during the financial years 2016-17 and 2017-18. 11.6.3 Reliance was placed on the decision of Coordinate Bench of this Tribunal in case of NTT data FA Insurance Systems (India) Pvt. Ltd. in IT(TP)A No. 261/Bang/2021 for the AY 2016-17 by order dated 03.10.2022.
11.6.4 She placed reliance on the decision of this Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Tribunal in IT(TP)A No. 235/Bang/2021]), the decision of this Tribunal in the case of SanDisk India Device Design Centre Pvt. Ltd. v. JCIT (order dated 30.06.2022 passed in IT(TP)A No. 288/Bang/2021) and the decision of the Tribunal at Hyderabad in ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 at para 7] where, in the case of a similarly placed assessee, the Tribunal directed the exclusion of Infobeans from the list of comparables for assessment year 2016-17 on the ground that it is not functionally comparable and no segmental details were Page 24 IT(TP)A No. 940/Bang/2022 available for the said year and the decision of the Delhi Bench of the Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17. He also placed reliance on the decision of this Tribunal in para-11 in the case of Airlinq Technology Pvt. Ltd. In IT(TP)A No.231/Bang/2021 dated 28.7.2022. The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
11.6.5 In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:-
7. "Infobeans Technologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons:
1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics,
2. No change in the business as compared to last year
3. Leading provider of consulting technology & next generation service.
4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore.
5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce
6. No segmental details are available.
7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable.
7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company.
7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribunal in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for dete rmining ALP by observing as under:
21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below:
Page 25 IT(TP)A No. 940/Bang/2022 "18. We have heard the r ival contentions and perused the record. T he f irst aspect is the f unctional co mp arabil ity of concern wh ich has been f inally selected to be co mparable. In respect of Inf obeans Syste ms Pvt. Ltd., the f in ancials of said concern clearly ref lect that in addition to prov iding sof tware develop men t services to its associated enterprises, it had also earned f oreign exchange f rom export of goods on FOB basis. T he event of export of goods was also men tioned in notes and also in the Prof it and L oss Account, wh ere revenue f rom sale of sof tware was declared. T he segmental de tails of two ac tivities carried on by the said concern were not available and in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises.
Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee ".
22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also.
7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee's own case for AYs 2014 -15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables."
11.6.6 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgment, we are inclined to direct the AO/TPO to exclude this company from the list of comparables. Respectfully following the above view, we direct the Ld.AO/TPO to exclude this company from the final list. 11.7 Threesixty Logica Testing Services Pvt. Ltd. 11.7.1 The Ld.AR submitted that this company derives revenue primarily from software testing, quality assurance and related services. Further, the company also earns revenue from sale of third Page 26 IT(TP)A No. 940/Bang/2022 party software products and hardware. No segmental details are not available.
11.7.2 She submitted that this company has invested significantly in intangible assets during the financial years 2015-16, 2016-17 and 2017-18.
11.7.3 It is submitted that this company has incurred significant marketing expenditure and this company has significant RPT transactions during the year. It was thus submitted that the comparable may be excluded.
11.7.4 The Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in case of Altair Engineering India Pvt. Ltd. vs. ACIT in IT(TP)A No. 1025/Bang/2022 by order dated 09.01.2023.
The Ld.DR on the contrary relied on the orders passed by the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
11.7.5 From the annual reports filed by the Ld.AR in the paper book, we note that this company derives 100% income from writing, modifying, testing of computer program to meet the needs of a particular client excluding webgage and designing. In the annual report, the revenue recognition by this company is stated to be primarily from software testing, QA and related services which is also supported from the notes to account being note 1 wherein the company overview also states that it is primarily engaged in providing information technology services being software testing and QA services and it also stated in the segmental report and operating segmental details that there are no other reportable segments. We Page 27 IT(TP)A No. 940/Bang/2022 therefore see merit in the arguments of the Ld.AR that this company is not comparable functionally since the assessee is a contract service provider rendering limited services to its AE alone. Accordingly, this comparable is directed to be excluded.
12. Ground no. 16 is raised by assessee seeking inclusion of following comparables.
a) Kcube Consultancy Services Pvt. Ltd.
b) Jindal Intellicom Ltd.
c) Isummation Technologies Pvt. Ltd.
d) Evoke Technologies Pvt. Ltd.
e) Virinchi Ltd.
f) CG-Vak Software & Exports Ltd.
g) Sagarsoft Ltd.
h) Maveric Systems Ltd.
12.1 Kcube Consultancy Services Private Limited and Jindal Intellicom Limited 12.1.1 The above companies came to be rejected by the TPO for the reason that they did not feature in the search matrix of the TPO.
12.1.2 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 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 this Hon'ble Tribunal in the case of Prism Networks Private Limited [(2022) 141 taxmann.com 163 (Bangalore-Tri)].
Page 28 IT(TP)A No. 940/Bang/2022 In view of the above, we remand this comparable to the Ld.TPO to consider it based on FAR analysis in accordance with law. 12.2 Isummation Technologies Private Limited 12.2.1 It is submitted that the said company came to be rejected by the TPO for the reason that it fails the net worth filter applied by the TPO.
12.2.2 In this regard, it is submitted that the company has a positive net worth of Rs. 47,49,635/- as on 31st March 2018. Further, it is submitted that the company passes all the filters applied by the TPO.
12.2.3 Reliance is placed on the decision of this Hon'ble Tribunal in MWYN Tech Private Ltd. (order dated 31.10.2022 passed in IT(TP)A No. 753/Bang/2022). Further, it is submitted that in case of a similar assessee, the DRP had directed inclusion of the said company for the year under consideration. 12.2.4 In view of the above, it is submitted that Isummation ought to be included in the final list of comparables. 12.3 Virinchi Limited 12.3.1 It is submitted that the company came to be rejected by the TPO for the reason that the same fails the export income filter.
12.3.2 In this regard, it is submitted that the company has an export income of Rs. 137,28,26,154/- which constitutes 79.8% of the total revenue (Rs. 172,00,51,553/-) of the company. In view of the above, it is submitted that the company ought to be included in the final list of comparables. 12.4 Evoke Technologies Private Limited Page 29 IT(TP)A No. 940/Bang/2022 12.4.1 It is submitted that the company came to be rejected by the TPO for the reason that the same fails the export income filter.
12.4.2 In this regard, it is submitted that the company has an export income of Rs. 87,58,58,153/- which constitutes 99% of the total revenue (Rs. 88,20,51,191 of the company. In view of the above, it is submitted that the company ought to be included in the final list of comparables 12.5 CG-Vak Software & Exports Ltd.
12.5.1 It is submitted that the company is functionally comparable to the assessee. It is submitted that 96% of the revenue is from software services. Further, it is submitted that the company passes all the filters applied by the TPO. Therefore, in view of the above, it is submitted that CG-Vak Software & Exports Ltd. ought to be included in the final list of comparables. It is submitted that in case of a similar assessee, the DRP had directed inclusion of the said company for the year under consideration.
12.6 Sagarsoft Limited 12.6.1 It is submitted that the company is engaged in the business of software services. As the company is engaged only in the business of software development, business segment reporting is not applicable.
12.6.2 Further, it is submitted that the company passes all the filters applied the TPO and therefore, ought to be considered as a comparable in the final list of comparables. 12.7 Maveric Systems Limited Page 30 IT(TP)A No. 940/Bang/2022 12.7.1 It is submitted that the said company came to be excluded by the TPO for the reason that the same fails export income filter. In this regard, it is submitted that the company passes the export revenue filter. The details of the same are set out below:
Particulars Amount
Foreign earnings 154,94,00,000
Total turnover 173,24,00,000
Total foreign earning 89.43%
12.7.2 Further, it is submitted that the company passes all the filters applied by the TPO.
The Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
12.8 She submitted that the remaining comparables may be left open to be argued in an appropriate circumstances. 12.9 We note that all the above comparables requires to be considered afresh by the Ld.AO/TPO in the light of the respective annual reports. Needless to say that the FAR analysis has to be verified with that of the assessee in order to come to a conclusion of the same being functionally similar with that of assessee. Accordingly we remand the above comparables sought for inclusion by the assessee to the Ld.AO/TPO to carry out necessary verification.
Accordingly, this ground raised by assessee stands partly allowed.
12.10 The Ld.AR submitted that the remaining comparables may be left open to be argued in an appropriate circumstances. We accordingly grant liberty to assessee to contest the comparables that has not been argued herein to be raised in an appropriate situation.
Page 31 IT(TP)A No. 940/Bang/2022 Accordingly, ground no. 16 raised by assessee stands partly allowed.
13. Ground no. 17 is not pressed by assessee. Accordingly, the same is not adjudicated.
14. Ground nos. 18-19 are raised by assessee for computing interest on outstanding receivables.
14.1 The Ld.AR submitted that the Ld.TPO proposed transfer pricing adjustment in respect of outstanding receivables in respect of trade creditors being the AEs by using SBI rate and CUP as the most appropriate method.
14.2 The Assessee wishes to submit that the delayed/ outstanding receivables should not be considered as a separate international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of inter- company transactions of provision of services has been already determined and no separate adjustment is necessary in this regard.
14.3 The Ld.AR placed reliance on decision of Hon'ble Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. reported in (2017) 398 ITR 66, held that, no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Hon'ble Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order dated 21/07/16 in Page 32 IT(TP)A No. 940/Bang/2022 ITA No. 379/2016, also upheld by Hon'ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 14.4 It was submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables as assessee adopted TNMM as the MAM for computing its margin, and therefore no separate adjustment is required to be made.
14.5 On the contrary, Ld.CIT.DR submitted that, interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of her contentions, she placed reliance on decision of Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT (2015- TII-347-ITAT-DEL-TP) wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that:
(i) the expression "international transaction" shall include--
...... (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;....' . 14.6 Ld.CIT DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international Page 33 IT(TP)A No. 940/Bang/2022 transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case referred to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 108, which dealt with 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 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' 3.5.6. She submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-
charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined.
Page 34 IT(TP)A No. 940/Bang/2022 He thus submitted that the Interest on outstanding receivables have been rightly constituted as independent international transaction 14.7 We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15/07/2016, 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. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones 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 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 Page 35 IT(TP)A No. 940/Bang/2022 whether the said transactions can be characterized as international transactions."
14.8 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. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR + 300 basis points which is in accordance with the principles laid down by Hon'ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly, this ground raised by assessee stands partly allowed for statistical purposes.
15. Ground no. 20 is consequential in nature and therefore do not require any adjudication In the result, the appeal filed by the assessee stands partly allowed.
Order pronounced in the open court on 27th March, 2023.
Sd/- Sd/-
(CHANDRA POOJARI) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 27th March, 2023.
/MS /
Page 36
IT(TP)A No. 940/Bang/2022
Copy to:
1. Appellant 2. Respondent
3. CIT 4. DR, ITAT, Bangalore
5. Guard file
By order
Assistant Registrar,
ITAT, Bangalore