Income Tax Appellate Tribunal - Bangalore
Unilog Content Solutions Private ... vs Assistant Commissioner Of Income Tax, ... on 13 March, 2023
IT(TP)A No.852/Bang/2022
M/s. Unilog Content Solutions Private Limited, Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
"C'' BENCH: BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT
AND
SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
IT(TP)A No.852/Bang/2022
Assessment Year: 2018-19
Unilog Content Solutions
Private Limited
11, 15th Cross, 20th Main
Outer Ring Road ACIT
Vs.
JP Nagar 5th Phase Circle-7(1)(1)
Bangalore 560 078. Bangalore
PAN NO : AADCS3121N
APPELLANT RESPONDENT
Appellant by : Shri Nageshwar Rao, A.R.
Respondent by : Ms. Neera Malhotra, D.R.
Date of Hearing : 13.03.2023
Date of Pronouncement : 13.03.2023
ORDER
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against final assessment order passed by ACIT Circle-7(1)(1) Bangalore dated 19.7.2022 for the assessment year 2018-19.
2. Ground Nos.1 & 2 are general, which do not require any adjudication.
3. Ground Nos.3 to 3.3 of the appeal, which reads as under:
IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 2 of 24 "3. That the ld. AO/TPO/ DRP erred in not accepting that the overseas Associated Enterprise ("AE") as the tested party, being the least complex of the transacting entities and further erred in categorizing the Appellant as the tested party without appreciating the functional profile and the complexity of operations of the Appellant who is a full risk bearing entrepreneur.
3.1 That the Id. AO/TPO/DRP erred in not appreciating the business operations of the Appellant and its AEs, and disregarding the allocation of functions, risks and assets as adopted by the Appellant and the AE.
32 That the Id. AO/TPO/DRP erred in disregarding the approach adopted by the Appellant in the TP Report and further erred in rejecting the search carried out by the Appellant in selecting foreign comparable companies while benchmarking the overseas AE as the tested party 3 3. That the Id. AO/TPO/DRP erred in not appreciating that TP adjustment cannot exceed the total profit made by the Appellant Group from the international transactions entered into."
4. The ld. A.R. for the assessee submitted that the details of functions performed and risks assumed by each of the entity are detailed as follows:-
4.2 Entity Characterisation: The ld. A.R. submitted that with respect to the data content services of Unilog, Unilog India may be characterized as an Entrepreneur bearing normal market risk, Unilog LLC and Unilog IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 3 of 24 Australia could be characterized as limited risk support service provider in relation to marketing, sales and front end liaising to Unilog India.
4.3 Accordingly, Unilog India, the Indian entity performs significant functions and assumes key risks. It not only is engaged in Information technology enabled Services, but also unlike captive service providers, is involved in conceptualisation and designs, marketing and business development and is involved in end-to-end delivery, execution and implementation of the engagement / project.
4.4 Further, the ld. A.R. submitted that the founding members and key managerial personnel related to content service segment located in India performs the key functions and take strategic decisions for the Group. Hence, Unilog India is entitled to Entrepreneurial returns - while Unilog India would be entitled to high profits earned by the Group, it would also be entitled to the losses earned by the Group. The margins earned by Unilog India is attributable to market forces, having regard to the marketing and business development strategy of the Group, the pricing of the solutions, the competition in the market and the expenses incurred by the Group {which are third-party expenses).
4.5 This is evidenced through the list of employees in Unilog India and Unilog LLC. While Unilog India has a full team comprising of CEO, Vice President- Content, Domain Expert etc., Unilog LLC primarily consists of Sales, Marketing and Business Development personnel at various roles. While Unilog India has 594 employees in Content division. Unilog LLC has only 16 employees.
4.6 Separately, from an Organisation Structure, following are the key points:
Mr. Achutha Bachalli (or Mr. B K Achutha) is the founder, shareholder and CEO of the Group. He is based in India and IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 4 of 24 is responsible for the entire operations of Unilog Group, including Content Segment.
Mr. Ramachandra Raje Urs is the VP-Content Service Division, based in India, who is responsible for conceptualisation, design and operations of Content division. He reports to the CEO.
The team in India consist of General Manager, Sr. Project Managers, Managers who leads the team in India.
In Unilog LLC, Mr. Suchit Bacchali heads the operations, who primarily looks at sales, marketing, business development in the US region, However, he also reports to the CEO in India. All the team members in US, report to Mr. Sucit Bacchali, who are primarily engaged in sales and marketing activities.
The consolidated profits of Unilog Group is lower than the adjustment proposed 4.7 The ld. A.R. further submitted that since Unilog India is the ultimate holding company of the Group, as per the Indian Accounting Standards, Unilog India is required to prepare and maintain consolidated financial statements of the Group, including all its subsidiaries i.e., Unilog LLC and Unilog Australia.
4.8 The Consolidated Financial Statements of Unilog Group are provided below:
IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 5 of 24 4.9 Basis the same, the ld. A.R. stated that the consolidated operating margins of the Group for FY 2017-18, for both the segments and for all the entities (including Unilog LLC and Unilog Australia), put together is as under:
4.10 In this regard, the total profits earned by the Group as a whole, from its external customers and incurring third party expenses is only 4.53% {on the operating cost). There is no element of intercompany / related party IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 6 of 24 transaction in arriving at the aforesaid margin, and hence, the aforesaid results are not tainted. The aforesaid margins purely reflect the results of a third-party independent business operating in the market.
4.11 Hence, in a situation while determining the margins to be earned by Unilog India as 26.84%, the same would be significantly higher than the overall margins and revenues earned by the Group. Under the current facts and circumstances of the overall revenue earned by the Group, Unilog India under no stretch of imagination would have earned a margin of 26.84%. The same is explained as under:
4.12 The ld. A.R. submitted that hypothetically, without prejudice to assessee's contentions provided in the submission, where the AO upheld the arm's length margin of 26.84% for Unilog India, following would be the impact of the adjustment performed:
4.13 In order to meet the arm's length condition as proposed by the AO, Unilog India alone ought to have earned INR 14,05,68,589/-. However, since the entire group has only earned a profit of INR 4,69,74,5047-, it would not be feasible for Unilog India to earn the requisite profits and there would be a shortfall of INR 9,35,94,085 /- within the Group.
4.14 In the event of Secondary adjustments triggering. The ld A.R. submitted that Unilog Group would not be able to bring-in additional INR 9.35 Crores. since such sum is not available within IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 7 of 24 the Group. The transfer pricing provisions only provide for adjustment for profits earned between related parties, and would not include profits that should have earned from third-parties.
4.15 In this regard, the ld. A.R. submitted that the aforesaid adjustment proposed by the TPO would amount to imposing an impossible burden on the assessee which cannot be the intendment of the statute. The Assessee cannot be mandated to earn more than what it has actually earned from independent third parties.
4.16 Hence, the ld. A.R. submitted that, in no stretch of imagination could Unjloq India alone earn a margin of 26.84% as a whole, when the overall consolidated margin of the Group is only 4.53%.
4.17 Further, the ld. A.R. submitted that, where the TPO restricts the quantum of adjustment to the amount of profits earned by the Group, i.e., INR 4,69,74,504/-, this would mean that Unilog LLC and Unilog Australia would be left with no profits and would be performing functions at no remuneration. This would be against the transfer pricing principles and absurd proposition, since as per the TP principles, every entity needs to be remunerated to the value contribution having regard to the functions performed, risks assumed and assets employed by it.
Hence, Unilog LLC and Unilog Australia is also ought to be appropriately remunerated for its operations and therefore, the profits earned by Unilog India is appropriate.
Acceptance of Unilog LLC and Unilog Australia as Tested Parties 4.18. Basis the functional profile captured in the TP study report, the ld. A.R. submitted that Unilog India is the entrepreneurial entity and Unilog US and Unilog Australia are characterised as limited risk support IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 8 of 24 service providers in relation to the marketing, sales and front-end liaising services provided.
4.19 As per Para 3.18 of the OECD TP Guidelines provides that "The tested party is usually the participant in a transaction for which profitability can be ascertained most reliably and for which reliable data on comparables can be found. The tested party will also typically be the party with the least intangibles,"
4.20 For the class of international transactions under consideration, the AEs i.e., Unilog LLC and Unilog Australia have been chosen as the tested party due to the fact that the AEs do not own any significant intangibles, they are the least complex entities and the profitability of the AEs with respect to these services can also be reliably ascertained. Unilog LLC and Unilog Australia perform limited functions and assume limited risks. These entitles are merely sales and marketing arm, providing sales and marketing functions to Unilog India. Hence, the ld. A.R. submitted that these entities are least complex entities and hence, is chosen as tested party.
4.21 The concept of selection of foreign entities as tested party to the transaction has been upheld by various Courts and Tribunals. Following are the judicial precedents in wherein the same has been upheld -
TNT India Pvt Ltd [TS-920-ITAT-2016(Bang)-TP] General Motors India Pvt. Ltd. [TS-215-lTAT-2013(Ahd)-TP] Royal Canin India Private Limited [TS-294-ITAT-2016(MUM)-TP] Majesco Software and Solutions ITA NO.7070/MUM/2019 Ranbaxy Laboratories Ltd v [TS-173-ITAT-2016(DEL)-TP] Landis Gyr Limited [TS-518-ITAT-2016(Kol)-TP] IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 9 of 24 4.22 Selection of foreign AE as tested party to the transaction undertaken by Unilog India with its AEs under Content Services segment is valid and in lines with the provisions of the Act. Details w.r.t to Uniloq US and Unilog Australia:
4.23 The search parameters, keywords used, search matrix, parameters are provided vide submission dated 12 July 2021.
The signed financial statement of Unilog LLC for FY 2017-18 has been submitted on 19 July 2021 before TPO. The PLI computation has been captured in Annexure 5 to the TP report submitted on 12 July 2021 before TPO.
The signed financial statement of Unilog Australia for FY 2017-18 has been submitted to TPO on 19 July 2021. The PLI computation has been captured in Annexure 9 to the TP report submitted on 12 July 2021 before TPO.
The annual reports in relation to the comparable companies chosen by the Assessee are available on the respective company websites. The Assessee submitted the annual reports of the comparable companies considered by the Assessee in a CD was submitted to TPO on 19 July 2021.
Given the above, the ld. A.R. submitted that the benchmarking analysis has been performed in lines with the transfer pricing principles laid down, all data and information relevant to such analysis has been maintained by the Assessee and brought to record before TPO, hence, the methodology drawn by the Assessee in justifying the arm's length nature of its international transactions under the Content Services segment is justified and needs to be accepted.
5. The TPO on examination of the TP document noticed following defects:-
IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 10 of 24 "5.2 From the examination of the TP document, the following defects have been found in the TP analysis carried on by the tax payer.
i) The Unilog India's transactions being under review, in the absence of details of AEs, it becomes imperative to apply TNMM method over India entity rather than separately applying on US and Australian entities.
The tested party should be less complex and financials and other factors like analysis of economic situation should be considered while choosing the tested party. In backdrop of this Indian entity is more suitable as tested party than the foreign AEs.
ii) With regard to taxpayers' methodology to benchmark transactions with Unilog LLC USA, there is no information provided about the search parameters, keywords used, search matrix, parameters on which other comparables are rejected, neither the financials of the US entity are shared with the computation of the PLI margin. In backdrop of this , it cannot be assured that comparison is at par and appropriate non-operating items are excluded from financials of the taxpayer and comparables to make it fair. The financials of the comparables alongwith the margin computation are not brought on record.
iii) The taxpayer has not applied appropriate filters ,as considered by TPO, to lake a fair and accurate search. Moreover annual reports and other financial details of le comparables are not available in public domain and neither provided by the taxpayer, absence of the details, search matrix of the taxpayer stands unreliable.
5.3 Therefore, in view of section 92C(3)(c), it is relevant to hold that the data used in computation of the arm's length price is not reliable or correct. Based on the above grounds, the TP documents is proposed to be rejected and the TPO proceeds to determine arm's length price by conducting an independent search for comparables considering the functions of the tax payer, the assets employed and the risks taken."
5.1 Against this assessee sought direction from the DRP. The ld. DRP observed that the TPO finds the Unilog India's transaction, it is imperative to apply TNMM over India entity rather than separately applying on US and Australian entities. The TPO also finds that with regard to taxpayers 'methodology to benchmark transaction with Unilog LLC USA, assessee has not provided sufficient information about the search parameters, keywords used, search matrix, parameters on which other comparables are rejected, neither the financials of the US entity are shared with the computation of the PLI IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 11 of 24 margin. In backdrop of this, it cannot be assured that comparison is at par and appropriate non-operating items are excluded from the financials of the taxpayer and comparables to make it fair. The financials of the comparables along with the margin computation are not brought on record. The AO found that the assessee has not applied appropriate filter as considered by TPO to make a fair and accurate search. Moreover, annual reports and other financial details of the comparables are not available in public domain and neither provided by the taxpayer. In absence of the details, search matrix of the taxpayer stands unreliable. Having considered the above submissions, the ld. DRP was of the considered view that the TPO has rightly dealt the issue and there is no interfere in the action of the AO/TPO. Accordingly, the ld. DRP rejected this ground of appeal of the assessee in its directions. Consequently, AO passed final assessment order. Against this, the assessee is in appeal before us.
6. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in the case of M/s. Atmecs Technologies Pvt. Ltd. in IT(TP)A No.187/Bang/2021 for the assessment year 2016-17 vide Tribunal order dated 20.12.2021 wherein observed as follows:-
28. The next issue that requires consideration is the plea of the assessee that selecting foreign AE as a tested party was an appropriate method of determining ALP and the Revenue authorities were not justified in rejecting the plea of the assessee. On this issue, the contention of the learned Counsel for the assessee was that as per Section 92C(1) of the Act, the ALP of an international transaction is required to be determined using any of the prescribed methods, being the most appropriate method, having regard to the nature of transaction or class of transaction.
However, in order to determine the most appropriate method for determining the arm's length price, it is first necessary to select the 'tested party'. Although the Indian regulations do not lay down any specific procedure or guidelines for the choice of the tested party; however, the OECD Transfer Pricing Guidelines 2017, UN Practical Manual on Transfer Pricing for developing countries 2013 ("UN TP Manual") and the US regulations have provided some guidance for selecting the tested IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 12 of 24 party. He drew our attention to the relevant extracts of OECD Guidelines, have been provided below for your Honour's reference and UN TP Manual:
(i) Para 3.18 of the OECD Guidelines, which states the following:
3.18 When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis.
Further, the OECD Guidelines indicate that, the tested party ought to be the enterprise that offers a higher degree of comparability, with uncontrolled companies. Consequently, the enterprise that requires the least amount of adjustments as compared to potentially comparable companies should be the tested party. Accordingly, the tested party should be the participant in a transaction which would have higher degree of comparability or would require lesser adjustment. Thus, for the purpose of undertaking a rational transfer pricing comparability analysis, tested party has to be the enterprise which would be the least complex and assumes lesser risk amongst the transacting parties.
(ii) separate 'India' section of the UN TP Manual which states as under:
"...10.3.1.3. The regulation prescribes mandatory annual filing requirements as well as maintenance of contemporaneous documentation by the taxpayer in case international transactions between associated enterprises cross a threshold and contains stringent penalty implications in case of noncompliance. The primary onus of proving arm's length price of the transaction lies with the taxpayer. Indian transfer pricing administration prefer Indian comparables in most of the cases and also accept foreign comparables in cases where foreign associated enterprises is less or least complex entity and requisite information are available about tested party and comparables."
Based on the above, he submitted that even the Indian Government's stated / declared position on the issue is that the foreign AE can be considered as the tested party when the foreign AE is the less / least complex entity and requisite informati:-available about the tested party and the comparable. He submitted that based on the above, the following four conditions that need to be evaluated while concluding upon a party as 'tested party':
IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 13 of 24 The party that is the least complex in terms of functions performed, assets employed and risks undertaken should be selected as the 'tested party' i.e., the party to the international transaction whose functions are simpler to evaluate, which does not own valuable non routine intangible assets and does not undertake substantial business risks.
• Reliable information about the 'tested party' must be easily and readily available and should be capable of being verified independently. • Reliable information about the 'comparable companies' must be easily and readily available and should be capable of being verified independently.
• The available information on 'tested party' and 'comparable companies' shall be sufficient to carry out reliable adjustments for material differences, if any.
29. He submitted that the assessee in the present case satisfies all the parameters and was right in law to have chosen foreign AE ATMECS US as a tested party in its Transfer Pricing Analysis.
• ATMECS US is engaged in provision of software development support and other services. The operations of ATMECS US are divided into two segments i.e., onsite and offshore. While onsite services are being handled by ATMECS US, ATMECS India is responsible for the management of the off-shore projects relating to software development services undertaken by it.
• With regard to the offshore segment of ATMECS US, the role of ATMECS US is limited to acting as a distributor of the services of ATMECS India in the US region. ATMECS US undertakes lead generation of services to be distributed and once agreed, it contracts with the third-party customers. There ends the role of ATMECS US in the supply chain of services. Hence, with respect to the offshore services, ATMECS India undertakes the end-to-end delivery of the project to the customers as primary instructions are received from customers.
• In relation to the services sub-contracted/ distributed by ATMECS US, the clients provide their functional requirement and specifications. ATMECS India is involved in understanding the clients' requirements. The engineers supporting and providing the services in ATMECS India interact directly with the third-party customers, understand the requirements, modifications, alterations or any additional features required IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 14 of 24 in the services delivered. Thus, ATMECS India is primarily responsible for the assessment of client requirements.
• ATMECS India is responsible for the management of the off- shore projects undertaken by it. ATMECS India's software development team undertakes software coding according to the functional specifications and requirement analysis agreed with the client. Further, ATMECS India is responsible for the quality of the services rendered by it. ATMECS India undertakes the initial testing during the development process, and also on completion of the development, to ensure that the service meets the specification/ requirements of the project as agreed with the client.
• ATMECS India recruits, trains and retains skilled technical professionals and is responsible for reviewing and approving the overall plan/ strategy of resource allocation/ utilization. Retaining the talent and resources is a significant driver to maintain the quality of delivery.
• Further, the Intellectual Property Rights ('IPR') developed is generally owned by the client. ATMECS India perform functions as per requirements of clients, using its IPR.
• ATMECS US involvement in the performance and execution of the service and delivery is very negligible. It acts as a client facing entity for contracting purposes and helps ATMECS India establish its business in the US region. It merely acts as a distributor/ marketer for the offshore services delivered and does not have any valuable, unique contribution in relation to the transaction.
• As evident from the functional profile, most of the functions in the entire supply chain of the services are rendered by ATMECS India with respect to the offshore business. Accordingly, ATMECS India also bears majority of the risks associated with the business such as market risk, underutilization of resource risk, rework risk, service liability risk, etc. • The contracts entered by ATMECS US with the third-party customers also provide that ATMECS India will perform all tasks and duties assigned by the Customer Stakeholder and shall be managed by the "Contractor Manager -- Project Management" on a day-to-day basis. Hence, once a contract is signed, ATMECS US shall have no further role to play in delivery of the project.
IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 15 of 24
30. The learned counsel for the Assessee submitted that the term 'Enterprise' and 'associated enter prise' under TNMM and all other methods, in absence of any specific legal provision, restrictive interpretation of the term 'Enterprise' and 'associated enterprise' is uncalled for. The Indian TP regulation postulate/envisage construing both Indian Assessee as well as overseas AE as a tested party as may be suitable in fact and circumstances of the case. Sub rules (2) and (3) of Rule 10B of the Rules do not restrict taking an overseas entity/AE of an enterprise as the tested party. The two sub rules provide the yardsticks for comparability of an international transaction with an uncontrolled transaction. As per Rule 10B(2), the factors prescribed for inclusion or exclusion of comparables to determine the ALP are based on the comparison of the Assessee with the chosen entities. It was submitted that the operative word used in the said rule is respective parties to transaction rather than Assessee. A construction, which interprets respective parties to transaction to mean "Assessee", is prima-facie inappropriate, and it would be rationale to consider that legislation by design, by using an open-ended phrase (i.e respective parties to the transactions), has kept the possibilities of considering both parties to transactions as tested parties alive. It was submitted that the Indian TP legislation has been consistent in using such open ended or generic phrase (i.e enterprise, respective parties to the transactions), across the relevant rules and provisions, basis which considering only party (i.e Assessee) as the relevant party would tantamount to reading something which is neither written nor intended by the legislation. The Indian TP regulation could be constructively construed to allow considering both Indian Assessee as well as overseas AE in the periphery of tested party. Even if Indian TP regulations were silent on this issue, it would be in line with common judicial position that international guidelines (such as OECD & UN TP Guidelines) could be restored to for interpreting local regulation unless they are expressly repugnant to each other. Thus, the term 'Enterprise' under TNMM and all other methods could include both the Assessee as well the AE being the other related party to the international transaction.
31. In support of his contention as above, the learned counsel for the Assessee, relied on the decision of ITAT, Bangalore in the case of IMS Health Analytics Services Pvt. Ltd. v. DCIT [2021] 124 taxmann.com 251 (Bangalore - Trib.) where it was held that where the functions and risks of the assessee are more complex in nature and numerous adjustments would have to be made, the foreign AEs should be considered as tested party as has been considered by the assessee in the TP study. Reference was made to the decision of the Hon'ble Madras High Court in the case of Virtusa Consulting Services (P.) Ltd. v. DCIT [2021] 124 taxmann.com 309 (Madras) where it was held that where assessee considered its AEs to be tested party to determine ALP of its international transactions and also submitted relevant evidences and IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 16 of 24 documents to establish functional profile and risks assumed by its AEs and the TPO rejected same and undertook a fresh search for external comparables, the TPO himself had not attached any sanctity to TP documentation as submitted by assessee, he could not foreclose assessee from canvassing issue that subsidiaries were least complex entities which should be taken note of and matter was remanded back to TPO.
32. The learned DR while relying on the decision of the Hon'ble Pune Tribunal in the case of Eaton Industrial Systems Pvt. Ltd., Vs. DCIT (2020) 113 taxmann.com 267 (Pune Tribunal) submitted that the ratio laid down in the aforesaid decision that foreign AE cannot be chosen as a tested party and the profit earned by the foreign parties cannot be compared with the price charged by the the Assessee and ALP determined by the Indian tax authorities. He placed reliance on the orders of the lower authorities.
33. We have carefully considered the rival contentions. We find that the Hon'ble Madras High Court in the case of Virtusa Consulting Services Pvt. Ltd., (supra) considered the issue whether foreign AE can be considered as a tested party and has held as follows:
"24. Before doing so, we may point out the following. The assessee in ground Nos.6 to 8 before the Tribunal had contested the issue relating to consideration of the foreign AE as tested party. The assessee has submitted evidences and documents relating to the assessee's transfer pricing documentation, global transfer pricing reports of the foreign AE at United Kingdom, Australia and German; extracts of inter-company service agreement, reconciliation of operating credits earned by the overseas subsidiaries. etc. So far as the risks assumed by the assessee, the same has been elaborately brought out in the TP documentation as could be seen from paragraph 4.03.3 under the sub heading Risks Assumed and paragraph 4.06 under the sub heading Associates Employed. This vital material has not been considered by the TPO but the assessee has been precluded from canvassing the said issue on the ground that the stand taken during the course of TP proceedings was not what was the subject matter of the TP documentation/TP study of the assessee. The question would be whether this could be the reason for rejecting the assessee's plea. This issue has been considered by the Tribunal in several decisions.
25. In Yamaha Motor (P.) Ltd., the question arose as to whether the word 'Associated Enterprise' can be given a restrictive meaning to mean the other party to whom the assesee has sold or purchased goods. It was held that under the Act and the Rules, the words 'Enterprise' and 'Associated Enterprise' have been used interchangeably and the arguments that the Enterprise will mean the assessee and the Associated Enterprise will mean the other party to whom the assessee has sold or purchased goods is incorrect. As could be seen from the definition of Enterprise given in section 92F(iii) and Associated Enterprise as defined in section 92A of the Act, it is IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 17 of 24 evidently clear that the statute does not indicate that 'Enterprise' shall mean the assessee and the 'Associated Enterprise' will mean the other party. As pointed out earlier, the words 'Enterprise' and 'Associated Enterprise' have been used interchangeably. Therefore, the conclusion of the Tribunal in this regard is not sustainable.
26. The Tribunal was largely guided by the decision in Aurionpro Solutions Ltd.. The learned senior counsel for the assessee has referred to various decisions of the Tribunal which were rendered subsequently, more particularly, the decision of the Ahemdabad Tribunal in the case of General Motors India (P.) Ltd., which had taken note of the decision of the Mumbai Tribunal in Aurionpro Solutions'. Ltd. and noted the facts of the said case and held that the said decision cannot be applied as the main issue in Aurionpro Solutions Limited was the percentage of interest to be calculated on the loan advanced by the assessee to its AE. Thus, on facts the decision in Aurionpro Solutions Ltd. could not have been applied to the facts of the assessee's case before us. As already pointed out, it is not a case where there were no material produced by the assessee to establish the functional risk assumed by the foreign AEs. The material was available before the TPO but the TPO non-suited the assessee on the ground that such contention by referring to the foreign AEs as tested party was not part of TP documentation. This finding is incorrect. Interestingly in the case of in the case on hand the TPO rejected the data placed by the assessee in their TP documentation and undertook a fresh search for external comparables and arrived at a final list of 12 comparables. Therefore, when the TPO himself has not attached any sanctity to the TP documentation as submitted by the assessee, could not have foreclosed the assessee from canvassing the issue that the subsidiaries are least complex entities which should be taken note of.
27. The revenue seeks to pin the assessee based upon the auditor's certification as filed in Form 3CED. As could be seen from the statutory form, it pertains only to the transactional claims and has got nothing to do with a tested party. The revenue cannot compare the case of the assessee with that of the assessee who fails to claim in his return of income a deduction or a benefit which he would be otherwise entitled to. In fact the TPO was rightly aware of his role when he has made an observation in paragraph 17.2 of the order dated 29-1-2015, wherein he would state that his office is responsible to ensure sufficiency of information/data and accordingly cannot be precluded to conduct a fresh search. However, when such is the legal position, as rightly understood by the TPO, the assessee should not have been foreclosed. Therefore, we are of the clear view that the findings rendered by the TPO, DRP and the Tribunal foreclosing the assessee's claim to refer to the foreign AEs as tested party is legally not sustainable."
34. The facts of the Assessee's case is similar to the case decided by the Hon'ble Madras High Court in as much as the Assessee had in its Transfer Pricing Study chosen the foreign AE as a tested party and the TPO refused to examine the said IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 18 of 24 claim. The decision of the Hon'ble Madras High Court being the only decision available on the issue of a High Court, judicial discipline requires us to follow the same in preference to the decisions of Tribunal to the contrary. Following the aforesaid decision of the Hon'ble Madras High Court, we remand the issue with regard to foreign AE being chosen as a tested party to the TPO for fresh consideration. The relevant ground of appeal of the assessee in this regard is treated as allowed for statistical purposes."
6.1 In view of the above order of the Tribunal, also taking note of the Rule 10D(3) of the Income Tax Rules, 1963, we remit the issue to the file of TPO/AO on similar directions to consider the overseas AE as Tested party, which being the least complex of the transacting entities. These grounds of appeal are allowed for statistical purposes.
7. Next ground Nos.4 to 4.4 of the appeal, which reads as follows:
"4. That the Hon'ble DRP / Learned AO erred both on facts and in law by imputing a guarantee commission with respect to corporate guarantee provided by the Appellant to its AE, and in doing so the Hon'ble DRP / Learned AO has grossly erred in agreeing with the Learned TPO's action of:
4.1. Not appreciating the fact that the issuance of corporate guarantee is not an international transaction as per section 92B of the Act.
4.2. Not appreciating the fact that guarantee extended should be viewed as a shareholder's activity performed by the Appellant to implement the group strategic decision.
4.3. Not appreciating the fact that the guarantee fee charged by third-
party banks towards provision of guarantee is cross-charged and recovered by the Appellant from its AE.
4.4 Without prejudice to the above grounds, that the Hon'ble DRP and Learned AO / Learned TPO have imputed the Guarantee fee prescribed under Safe Harbour Rules of the Rules, failing to take cognizance of that Safe Harbour rules gets applicable only when the option is exercised by an eligible assessee for an eligible international transaction."
8. After hearing both the parties, we are of the opinion that the Tribunal has consistently holding that Corporate Guarantee is the international transaction and it should be benchmarked accordingly by placing reliance on the order of the Tribunal in Xchanging IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 19 of 24 Solutions Ltd. Vs. DCIT reported in (2017) 78 taxmann.com 54 (Bangalore-Trib), wherein held as under:
"16. We further note that the DRP for the Assessment Year 2011-12 vide its direction dt.3011.2015 as well as for the Assessment Year 2010-11 accepted the assessee's argument that an appropriate adjustment that the value of corporate guarantee received from its arm's length be granted. In para 2.9 of the said direction of DRP as under :
" 2.9 As far as the argument of corporate guarantee received by the taxpayer is concerned the same carries merit. In the interest of fairness, the TPO is directed to provide adjustment for the value of corporate guarantees received by the taxpayer form its AEs after verification of individual transactions."
Accordingly, we set aside this issue to the record of the A.O./TPO to recomputed the ALP by considering the arm's length guarantee fees at 0.5% and further by providing appropriate adjustment for corporate guarantee received by the assessee from its A.E.."
8.1 In view of this, we remit this issue to the file of TPO to pass order in conformity with the above order of the Tribunal cited (supra). This ground of appeal is partly allowed.
9. Next Ground Nos.5 to 5.4 of the appeal, which reads as follows:
"5 That the Hon'ble DRP erred both on facts and in law by imputing notional interest on the trade receivables and in doing so the Hon'ble DRP has grossly erred in agreeing with the Learned TPO's action of:
5.1 Not appreciating that the outstanding trade receivables from its AE's is resulting from the mam international transactions and is to be considered as closely linked to such transaction and should not be tested separately from arm's length perspective 5.2. Re-characterizing the outstanding receivables as on 31 March 2018 as a separate loan transaction.
5.3. Failing to appreciate that chapter x of the Act also follows concept of real income and notional adjustment without following evaluation process prescribed in Act and Rules is not permissible in law."
IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 20 of 24 5.4 Without prejudice to our grounds above, the Hon'ble DRP and the Learned AO /TPO have erred, in law and in facts, by adopting the SBI interest rate to compute the notional interest on outstanding receivable as on 31 March 2018 9.1 After hearing both the parties, we are of the opinion that similar issue came for consideration in the case of Swiss Re Global Business Solutions India Pvt. Ltd. in ITA Nos.IT(TP)A N.397/Bang/2021 dated 21.1.2022, wherein held as under:
"35. The only other issue that remains for adjudication is ground No.15 with regard to re-characterizing certain trade receivables as unsecured loans and computing notional interest on such trade receivables. The main contention of the ld. AR is that deferred receivables would not constitute a separate international transaction and need not be benchmarked while determining the ALP of the international transaction. In our opinion, this issue was considered by the Tribunal in assessee's own case for AY 2014-15 and in para 23 to 23.9 of the order dated 21.5.2020 this Tribunal held as under:-
"23. Ground No. 14-17 alleged by assessee against adjustment of notional interest on outstanding receivables.
From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for.
23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. 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.
23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[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 Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 21 of 24 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017.
23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances.
23.4. 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 the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 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 longterm 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;. . . . ' 23.5. 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 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 noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), 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 IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 22 of 24 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?"
23.6. Ld.CIT.DR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under- charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 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.
23.7. 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 of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib.), 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 92B 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.
23.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 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-a-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 v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 23 of 24 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 characterised as international transactions."
23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law."
36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon'ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018.
37. Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly
10. In view of the above, the issue is remitted on similar directions to TPO for fresh consideration. These grounds are partly allowed for statistical purposes.
11. No other grounds were argued before us. Accordingly, not considered and dismissed.
IT(TP)A No.852/Bang/2022 M/s. Unilog Content Solutions Private Limited, Bangalore Page 24 of 24
12. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 13th Mar, 2023.
Sd/- Sd/-
(N.V. Vasudevan) (Chandra Poojari)
Vice President Accountant Member
Bangalore,
Dated 13th Mar, 2023.
VG/SPS
Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR, ITAT, Bangalore.
6. Guard file
By order
Asst. Registrar, ITAT, Bangalore.