Income Tax Appellate Tribunal - Delhi
Global Logic India Limited, Delhi vs Dcit Tpo-2(1)(1), Delhi on 23 November, 2022
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I": NEW DELHI
BEFORE
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
AND
MS. ASTHA CHANDRA, JUDICIAL MEMBER
ITA No. 370/Del/2022
Assessment Year: 2017-18
Global Logic India Limited, Vs. DCIT, TPO-2(1)(1)
207, Gupta Archade LSC Delhi.
Plot No. 05, Mayur Vihar,
Phase-1 Extension,
Delhi 110 001
PAN AABCI2526F
(Appellant) (Respondent)
Assessee by: Shri Neeraj Jain, Advocate
Mr. Abhishek Aggarwal, CA,
Ms. Shubhangi Jain, CA
Department by: Shri Mahesh Shah, CIT(DR)
Date of Hearing: 16.06.2022
Date of 23.11.2022
pronouncement
ORDER
PER ASTHA CHANDRA, JM:
The appeal of the assessee arises out of the order dated 30.12.2021 of the Ld. Addl./Joint/Dy./ACIT/ITO, National Faceless Assessment Centre, Delhi ("AO") under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (the "Act") pertaining to the assessment year ("AY") 2017-18.
2. The issue raised in the assessee's appeal is against the addition of Rs. 7,44,36,493/- on account of transfer pricing adjustment with respect to international transaction of provision of software development services and addition of Rs. 7,12,59,891/- with respect to interest on delay in receipt of receivables from Associated Enterprises ("AEs").
ITA No. 370/Del/223. The assessee is a wholly owned subsidiary of Global Logic Inc. and is engaged in the provision of software development services to its customers including Global Logic Group entities. Additionally, the assessee also provides IT enables Services ("ITeS") to certain third party entities. For the services rendered to its AEs, it is remunerated on a cost plus mark-up basis.
4. During AY 2017-18, the assessee entered into the following international transactions with its AEs:-
A. International Transactions Associated Nature of transaction Total value of Enterprise transaction (in Rs.) Global Logic Provision of software 3,38,12,46,071 Inc. development services Global Logic Provision of software 24,36,671 Israel Ltd. development services Global Logic Reimbursement of expenses 7,57,357 Inc. paid to AE Global Logic Reimbursement of expenses 11,99,27,155 Inc. received from AE B. Deemed International Transactions Associated Deemed International Transfer Price Enterprise Transaction (in Rs.) Oracle India Provision of software 17,12,280 Pvt. Ltd. development services
5. In its transfer pricing report for the financial year ended 31.03.2017, the assessee has reported that in respect of international transactions pertaining to provision of software development services to its AEs, the assessee has determined the Transactional Net Margin Method ("TNMM") as the most appropriate method under section 92C of the Income Tax Act, 1961 ("Act"). The assessee is operating margin for the financial year ended 2 ITA No. 370/Del/22 March 31, 2017 was compared with margins of comparable companies and accordingly, the amount receivable as computed by the assessee having regard to the ALP is the amount receivable as per his books of account. Further international transactions pertaining to provision of software development services (deemed international transaction), reimbursement of expenses to AE and accounts receivable/accounts payable/advances from all AEs has been closely linked to the main international transaction pertaining to 'provision of software development services'. It is also reported that the assessee has incurred certain expenses on behalf of its AE and the same has been cross charged by the assessee on cost to cost basis. Accordingly, the subject transaction pertaining to reimbursement of expenses from the AE has been benchmarked using "other method" as prescribed under Rule 10AB of the Income Tax Rules, 1962 ("IT Rules").
6. As can be seen from the table in para 4 above, the assesee has reported the international transactions of provision of software development services to its AEs totalling to Rs. 3,38,36,82,742 (Rs. 3,38,12,46,071 + Rs. 24,36,671) and deemed international transaction of provisions of software services to Oracle India Pvt. Ltd. amounting to Rs. 17,12,280/-. The assessee applied the TNMM as the most appropriate method to demonstrate that the international transaction of providing software development services was at ALP. As reported in the transfer pricing study the assessee used the Profit Level Indicator ("PLI") of Operating Profit to Operating Cost ("OP/OC").
6.1 The assessee, in its transfer pricing document, computed its segmental OP/OC margin earned from services rendered to the associated enterprises at 14.72%. For application of TNMM, the assessee considered the following 13 comparable companies in its transfer pricing document with their median operating profit margin at 13.43% [page 108 of the Paper Book (Merits)], as computed below:
3 ITA No. 370/Del/22S. No. Name of the company OP/OC % (Weighted average working capital adjusted margin) 1- Sagar Soft India Limited 8.91%
2. Sankhya Infotech Ltd. 9.40%
3. Maveric Systems Ltd. 10.09%
4. Evoke Technologies Pvt. Ltd. 10.48%
5. Sasken Communication Technologies Ltd. 11.66%
6. RS Software Ltd. 12.75%
7. Cg-Vak Software and Exports Ltd. 13.43%
8. Harbinger Systems Pvt Ltd. 13.90%
9. Jindal Intellicom Private Ltd. 16.54%
10. Infomile Technologies Ltd. 17.58%
11. SQS India BFSI Ltd. (consol) 23.77%
12. Puresoftware Pvt Ltd. 24.43%
13. R Systems International Ltd. 27.57% th 35 Percentile 11.66% Median 13.43% th 65 Percentile 16.54% 6.2 This is how the assessee demonstrated that since, assessee's operating profit margin of 14.72% on operating cost is within the range of the margins of the comparable companies of 11.66% to 16.54%, the said international transaction of provision of software development services is at ALP as required under the transfer pricing regulations.
7. The assessee's case was referred by the Ld. Assessing Officer ("AO") to the Ld. Transfer Pricing Officer ("TPO") for the determination of the ALP.
7.1 During the transfer pricing proceedings, the Ld. TPO accepted TNMM as the most appropriate method for benchmarking of international transaction of provision of software services. He proceeded to analyse the filters used by the assessee for selection of comparables; applied certain additional filters and after conducting a fresh search of comparable companies arrived at the final set of 15 comparable companies with their respective average profit margins as under:
4 ITA No. 370/Del/22 S. No. Name of company Introduced by OP/OC(%)
1. Maveric Systems Ltd. Assessee 3.44%
2. Evoke Technologies Pvt. Ltd. Assessee 4.93%-
3. Sagarsoft India Ltd. Assessee 6.65%
4. Sankhva Infotech Ltd Assessee 7.58%
5. C G-V A K Software & Exports Ltd. Assessee 14.18%
6. Mindtree Ltd. TPO 15.84%
7. Xavient Software Solutions (India) Pvt.Ltd. TPO 16.29%]
8. Great Software Laboratory Pvt. Ltd. TPO 17.24%
9. Larsen & Toubro Infotech Ltd. TPO 19.32%
10. Puresoftware Pvt. Ltd. Assessee 21.02%
11. Nihilent Ltd. TPO 22.03%
12. Tata Elxsi Ltd. TPO 23.66%
13. Infobeans Technologies Ltd. TPO 24.74%
14. Cybage Software Pvt. Ltd. TPO 67.91%
15. Cybercom Datamatics Information Solutions Ltd. TPO 73.08%
th
35 Percentile 15.84%
th
65 Percentile 21.02%
Median 17.24%
7.1.1 In this way the Ld. TPO worked out median operating profit margin of the above 15 comparable companies at 17.24%. The Ld. TPO in his order under section 92CA(3) of the Act, observed that since margin of the assessee is not in range therefore median of the comparable is proposed as arms length margin. He proceeded to exclude certain items of income which were non operating in nature from operating revenues and certain items of expenses which were non operating from operating expenses and concluded that the ALP of the transaction related to rendering of software development services is proposed to be recast based on the above arms length mean margin. Accordingly, he computed the ALP of the international transaction related to software development services as below:
Particulars Amount Operating Cost 3,37,46,17,168 Arm's length margin (%] 17.24% Arm's length margin [Rs.] ^ 58,17,84,000 Arm's length Price 3,95,64,01,168 Price charged by the assessee 3,87,12,43,299 5 ITA No. 370/Del/22 Difference between ALP and Price charged by assessee 8,51,57,869 Total Transaction with AE related to software service 3,38,36,82,742 % of Transaction 87.41% Proportionate Adjustment 7,44,36,493
7.1.2 This resulted into the transfer pricing adjustment of Rs. 7,44,36,493/- on international transaction of provision of software development services for which equal amount of addition was made by the Ld. AO in his final order.
8. The assessee raised objections before the Hon'ble Dispute Resolution Panel ("DRP") against inclusion of 9 comparables, namely i) Mindtree ii) Xavient Software Solutions (India) Pvt. Ltd. iii) Great software Laboratory Pvt. Ltd iv) Larsen & Tourbro Infotech Ltd. v) Nihilent Ltd. vi) Tata Elxsi Ltd. vii) Infobeans Technologies Ltd. viii) Cybage Software Pvt. Ltd. ix) Cybercom Datamatics Information Solution Ltd. by the Ld. TPO alleging that these comparable companies are functionally dissimilar/lack segmental data/owns significant tangibles..
8.1 The Hon'ble DRP vide its order dated 18.11.2021 under section 144C of the Act, after considering the submissions of the assessee, directed the Ld. TPO/AO to retain all the aforesaid 9 comparable companies holding them to be functionally similar to that of the assessee.
9. Aggrieved, the assessee is before us challenging the inclusion of the aforesaid 9 comparable companies by the Ld. TPO/AO/Hon'ble DRP out of the total 15 comparable companies which were considered as final set of comparable companies for benchmarking the transaction of provision of software development services on the ground that these companies are not passing the test of comparability provided under Rule 10B(2) of the I.T. Rules.
10. At the very outset, the Ld. AR submitted that if the 4 comparables, namely i) Larsen & Tourbro Infotech Ltd. ii) Tata Elxsi Ltd. iii) Infobeans Technologies Ltd. & iv) Cybercom Datamatics Information Solution Ltd. are 6 ITA No. 370/Del/22 excluded from the list of comparable companies considered by the Ld. TPO/DRP, the assessee's margin would fall within the arm's length range and therefore transfer pricing adjustment will not survive. Ld. AR further submitted that these 4 companies were excluded by the Hon'ble Tribunal in preceding years in assessee's own case if these 4 companies are excluded from the list of comparable companies the resultant final set of comparable companies would be as below which would lead to the assessee's margin falling within the ALP range.
S. Comparable companies selected by TPO OP/OC (%) No.
1. Maveric Systems Ltd. 3.44%
2. Evoke Technologies Pvt. Ltd. 4.93%
3. Sagarsoft India Ltd. 6.65%
4. Sankhya Infotech Ltd 7.58%
5. C G-V A K Software & Exports Ltd. 14.18%
6. Mindtree Ltd. 15.84%
7. Xavient Software Solutions (India) Pvt. Ltd. 16.29%
8. Great Software Laboratory Pvt. Ltd. 17.24%
9. Puresoftware Pvt. Ltd. 21.02%
10. Nihilent Ltd. 22.03%
11. Cybage Software Pvt. Ltd. 67.91% th 35 Percentile 7.58%' ,h 65 Percentile 17.24%-
Appellant's Margin 14.72% 10.1 The Ld. CIT-DR on the other hand argued that the aforesaid 4 comparables are not covered by the decision of the Hon'ble Tribunal in assessee's own case in the earlier years. He strongly relied on the orders of the Ld. TPO/Hon'ble DRP and filed a detailed written submission dated 14.06.2022 in support of his arguments.
11. We have heard the rival submissions of the parties and perused the material available in the records. The assessee has prayed for the exclusion of the aforesaid 4 companies, namely i) Larsen & Tourbro Infotech Ltd. ii) Tata Elxsi Ltd. iii) Infobeans Technologies Ltd. & iv) Cybercom Datamatics Information Solution Ltd. which has strongly been opposed by the Ld. CIT-
7 ITA No. 370/Del/22DR. We will now proceed to examine each of these 4 comparable companies in light of the submissions of the Ld. CIT-DR and the rejoinder to the submissions of the Ld. CIT- DR dated 15.06.2022 filed by the assessee.
Larsen & Tourbro Infotech Ltd.
11.1 The Ld. AR submitted that this company is functionally dissimilar; lacks segmental data and is leveraging on the brand of "Larsen & Tourbro" or "L&T" which is a globally reputed brand having presence since 1938 and owns significant intangible in the form of software and intangible assets under development, which is evident from the annual report of the company which is placed on record in Paper Book-Annual Reports of Comparables. The Ld. AR relied on plethora of judicial pronouncement in support of its contention wherein this company has been directed to be excluded from the list of comparable companies. The Ld. AR further submitted that the Hon'ble Tribunal in assessee's own case for the AY 2014-15 in ITA No. 4740/Del/2018, AY 2015-16 in ITA No. 8726/Del/2019 and in AY 2016-17 in ITA No. 868/Del/2021 has directed this company to be excluded from the final set of comparable companies and that the department has not filed appeal against the decisions of the Hon'ble Tribunal (supra).
11.2 The Ld. CIT-DR in his written submission dated 14.06.2022 filed before us has objected to the exclusion of this company as a comparable and submitted that this comparable is not covered by the decision of the Hon'ble Tribunal in the earlier years (supra). The relevant extract of the written submission of the Ld. CIT-DR in respect of this comparable is reproduced below:
"4.1 This comparable was decided by the Hon'ble ITAT in A.Y 2014-15 against the Revenue. The arguments of the assessee before the Hon'ble Bench are being reproduced as under: -
"6. This company was selected by the assessee as comparable in its transfer pricing study, however before the Ld. TPO, the assessee sought to exclude it from set of the comparables on the ground of functional dissimilarity being engaged in diversified operations. The learned TPO referred to the Annual Report of the company and held 8 ITA No. 370/Del/22 that the company is not engaged in sale/license of software products or any other diversified activities, and thus it is a valid comparable.
6.1 Before the Learned DRP, the assessee sought exclusion of the company on the ground of extraordinary event, significant intangibles and sofWare packages purchased for resale (sale of product). The learned DRP held that company's revenue was not impacted by the intangibles held by the company as most of the intangibles were software. The Ld DRP also held that there is no revenue from the sale of the products.
6.2 Before us, the learned Counsel has sought to exclude the company on the ground of significant intangibles, expenses on cost of the bought-out items for resale, multiple segments and extraordinary event. "
4.2 Hon'ble ITAT decided this issue against the revenue by holding as under: -
"6.4 We have heard rival submission of the parties on the issue in dispute. The learned Counsel of the assessee submitted that the company owns significant intangibles (Rs. 75,04,78,329/-) in the form of the software and intangible assets under development. On perusal of fixed assets schedule, available on page S-1245 of the Annual Report (page 116 of PB-2), we find that at the beginning of the year the assessee owned intangible assets of Rs.153,42,45,196/- which included software of Rs.143,61,95.196 ( 93 %>), thus the intangible other then the software are insignificant. During the year, the company has sold/transferred the software and claimed depreciation, which resulted in net block of software at the end of the year to Rs.33,22,11,879/-. The assessee has also shown intangible assets under development of Rs. 41,82,66,450/-, which makes the net intangibles owned by the company to Rs. 75,04,78,329/- at the end of the year. But no depreciation has been claimed on the under developed intangibles, therefore there is no effect on the profitability of the company on account of the underdeveloped intangibles. Thus, the objection of the assessee of non- comparability of the assets is rejected.
6.5 Further, the learned Counsel submitted that operating expenses amounting to Rs. 34,91, 74,116/-and Rs. 54,82,74,109/- on cost of the software packages for own use and cost of the bought-out items for resale during the year under consideration. Thus, according to the learned Counsel, the company was engaged in sale of the product and accordingly not comparable. On perusal of the profit and loss account of the company on page S-1237 of the Annual Report (Page 108 of PB-2), we find that company has shown two revenue streams. First, as revenue from the operations of Rs.46,439,403,178/-from overseas and second as other income (loss of Rs. 81,09,17,799/-). No revenue from sale of product has been shoM'n. As regard to the objection of cost of software packages for own use under operating expenses, is concerned in our opinion, for a company engaged in software development, incurring expenses on purchase of the software for own use cannot term the assessee as engaged in sale of the product. Regarding the cost of the items for resale is concerned, the cost of purchase of inventory for resale will not impact on the profit and loss account because when goods are not sold, then it will appear in closing stock and resultant effect on profit and loss account is nil.
6.6 The next objection of the assessee is regarding multiple segments. From segment reporting on page S-1258 of the Annual Report (page 129 of PB-2), we find 9 ITA No. 370/Del/22 that the assessee has reported three business segments. The first segment is service cluster which includes banking, financial services, insurance, media and entertainment, travel and logistics and healthcare. The second segment industry cluster which includes Hi Tech and consumer electronics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under: "TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs.489.53 crs based on fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year. "
6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- (page 129 of PB-2), which has not been allocated into three segments, and thus the segmental results are distorted.
6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No. 1897/Del./2004), which has been approved the Hon'ble High Court in ITA No. 813/2015, the company is held to be not valid comparable on account of extraordinary events. Thus, In view of the extraordinary event in the year under consideration also, this company is liable to be excluded from the set of the comparable.
6.9 Accordingly, in view of the functional dissimilarity at entity level and extraordinary event during the year, this company is directed to be excluded from the final set of the comparables. "
4.3 In the later years i.e., A.Y 2015-16 and A.Y 2016-17, the Hon'ble ITAT has followed its judgment for A.Y 2014-15 to exclude this company as a comparable.10 ITA No. 370/Del/22
4.4 A perusal of the above order clearly demonstrates that the Hon'ble ITAT has held that the assessee was engaged in providing engineering services which is distinct from the services of software development. There was also an extraordinary event in that year. However, the engineering services division had been hived off in the year 2014-15 by the assessee company which is quite evident from the note being reproduced by the Hon'ble ITAT in the above referred order. In the current year, the assessee company has only 2 divisions which are known as Services cluster and. Industrial cluster. Both these clusters are engaged in software development services only.
4.5 The segmental results of these 2 clusters are also given on page no - 48 of PaperBook 'Annual Reports of Comparables' wherein the segmental results have clearly been shown by the assessee company. It is also evident from the above page that the segmental results of these 2 segments have been computed by the assessee company clearly showing the profits earned from these segments. Therefore, there are no unallocable expenses in this year at all. In any case, since the assessee company is engaged in only 2 segments, both of which are in software development services, this issue will not have any impact in this year.
4.6 It is also seen from a perusal of the T'PSR filed by the assessee in Paper Book on merits, the assessee has given the details of assets employed by the assessee company on page no - 95 of this Paper Book. The total tangible assets used by the assessee company was Rs. 14,82,54,028/- which consists of computer and networking equipment of Rs. 10,37,69,470/-. The assessee has also used intangible assets to the tune of Rs. 2,43,97,704/-.Therefore, the assessee company has also used tangible as well as intangible assets in its business. Hence, the comparable company having tangible and intangible assets will not make a difference in the comparability.
4.7 In view of the above, it is a good comparable and the coordinate Bench judgement in the earlier years will not have any impact in the current year."
11.3 The assessee in its rejoinder dated 15.06.2022 has rebutted the objections of the Ld. CIT-DR as under:
"1. It is submitted that in the order passed by the Hon'ble ITAT for AY 2014-15, the company was excluded, inter alia, for the reason of extra-ordinary events:
6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014 which has also impacted the profits of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited ITA No. 1897/Del/2004), which has been approved the Hon'ble High Court in ITA No. 813/2015, the company is held to be not valid comparable on account of extraordinary events. Thus, in view of the extraordinary event in the year under 11 ITA No. 370/Del/22 consideration also, this company is liable to be excluded from the set of the comparable companies 6.9 Accordingly, in view of the functional dissimilarity at entity level and extraordinary event during the year, this company is directed to be excluded from the final set of the comparables The Id. DR, it would be appreciated, in Para 4.4 and 4.5 above has made submission in relation to segment accounts reported by the company in the AY 2014-15 vis-a-vis the year under consideration, however, has not disputed the exclusion of company on account of extra-ordinary event.
It is submitted that for the year under consideration too, the company has reported following two extra-ordinary events resulting in functional dissimilarity:
(i) The company had acquired GDA Tech Inc., USA in 2007 which was engaged in provision of electronic design services. After acquisition of GDA, provision of such services were carried on by L & T. In FY 17, GDA Tech Inc. was amalgamated with L&T Infotcch. [Page 34-PB-AR] Update on Amalgamation of GDA Technologies Limited ('GDA ') with the Company:
Pursuant to the Scheme of Amalgamation sanctioned by the Hon 'ble High Court of Bombay vide its order dated April I, 2016 and by the Hon'ble High Court of Madras vide its order dated August 3, 2016, GDA was amalgamated with the Company with effect from September 2, 2016, with the appointed date being April 1, 2016. Consequently, the entire business, assets, liabilities, duties and obligations of GDA have been transferred to and vested in the Company with effect from April I, 2016.
(ii) The company had acquired AugmentlQ Data Science P. Ltd. engaged in providing IP based big data and analytics solution.
[Page 34/38-PB-AR| Amalgamation of AugmentlQ Data Sciences Private Limited ('AugmentlQ*) with the Company: The Board of your Company and AugmentlQ in their meetings held on May 4, 2017 and May 3, 2017 respectively, approved the Scheme of Amalgamation ('Schemed) of AugmentlQ with the Company under section 230-232 of the Companies Act, 2013. The appointed date for the proposed Scheme is April 1,2017.
LTI acquired AugmentlQ Data Sciences Private Limited ('AugmentlQ), an innovative startup offering IP-based Big Data Analytics Solution that helps enterprises derive business benefits from Big Data in FY17, In addition to acquisitions, the Company is also investing in partnering with startups to help enhance its digital offerings and in turn, give startups a platform and opportunity to scale-up. The Company is actively partnering with academic institutions such as Massachusetts Institute of Technology (MIT), Indian Institute of Management Ahrnedahad (LIMA), Veermala Jijabai Technological Institute (V./T1) in order to provide though (-leadership to its clients for future digital solutions.
12 ITA No. 370/Del/222. The Id. DR at Para 4.3 of his synopsis has concluded that "In the later ears i.e., A. Y 2015-16 and A. Y 2016-17, the Hon'ble HAT has followed - judgment for A. Y 2014-15 to exclude this company as a comparable. ".
However, in the order passed for AY 2015-16bearing ITA No. S"26/Del/2019, the company was excluded by the Hon'ble ITAT on account of extra ordinary event occurring during to acquisition of 'Information Systems Resource Centre Private limited ("ISRC")' and not demerger of Product Engineering Services segment, reproduced from the order as under:
"20. The Tribunal in assessee's own case in ITA No.4740/Del/2018 relating to Assessment Year 2014-15 vide order dated 01.05.2020 has directed the exclusion of the said concern from the final list of comparables while benchmarking the ALP of the international transaction by the assessee with its AE. Before parting, we may also refer to an extraordinary event under which Larsen & Toubro Infotech Ltd. initiated and completed transfer of its Product Engineering Services Business (PES) Unit to L&T Technology Services Ltd. w.e.f. January 1, 2014 as part of the business restructuring undertaken within the Larsen & Toubro group. Though the initiation started from 01.01.2014 but the whole effect of the transaction was during the year under consideration. Further, Larsen & Toubro Infotech Ltd. during the year under consideration acquired Information Systems Resource Centre Private limited ("ISRC") thereby making it wholly owned subsidiary and because of such extraordinary event of acquisition, the said concern cannot be held to be a valid comparable and thus has to be excluded from the final set of comparable. Accordingly, we hold so. "
As submitted above, in the year under consideration, the company has reported two extra-ordinary events resulting in functional dissimilarity (i) merger of GDA Tech Inc., USA and (ii) acquisition of AugmentlQ Data Science P. Ltd. Accordingly, the decision of Hon'ble ITAT rendered in appellant's case for AY 2015-16 is squarely applicable for the year under consideration. Further in the order passed for AY 2016-17 bearing ITA No. 868/Del/2021, the company was excluded by the Hon'ble ITAT on account of following additional reasons:
20. In view of the facts inter alia that L&T is into various segments having no segmental financials, having huge brand value and intangibles is not a suitable comparable vis-a-vis taxpayer which was working as a captive entity and that contention raised by the Id. DR that under TNMM minor dissimilarities do not affect the overall comparability is not sustainable because though it is a taxpayer's own comparable but there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture cpia profit earned by the company front provisions of SDS. L&T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the 13 ITA No. 370/Del/22 higher profitability. So, we are of the considered view that L&T is not a suitable comparable vis-d-vis the taxpayer, hence ordered to be excluded.
The decision of Hon'ble ITAT rendered in appellant's case for AY 2016- 17 is squarely applicable for the year under consideration, in as much as:
As per the annual report of the company, in addition to provision of application development and maintenance services ('ADM') which constitutes 39.2% of total revenue for the year under consideration, the company also provides infrastructure solutions, enterprise solutions, platform and digital solutions such as big data analytics, artificial intelligence and cognitive, Mobility, Intelligent automation, Cloud and Infrastructure services ('CIS'), Digital integration etc. |Page 27-PB-AR] The digital business and in house product development- Mosaic are further described in the annual report of the company [Page 40-PB-AR] Further, the company is also involved in sale of software products. The development and sale of various products are provided at Page 27, 65- 66 and 81 of the PB-AR.
It is submitted that the Hon'ble Delhi Bench of Tribunal in the case of Sapient Corporation P. Ltd. vs. CIT [1TA No. 5263/Del/2010] has directed to exclude Zenith Infotech, a software product company as comparable to a captive software development service provider. The revenue did not challenged the decision of ITAT filed appeal before the High Court.
It is submitted that the company is leveraging on the brand of "Larsen &Toubro" or "L&T", which is a globally reputed brand having presence since 1938. It shall be noted that the brand has not just provided the company, access to new markets and secures credibility among new customers, it has also resulted in availing the company significant competitive advantage in the form of premium pricing and/or higher volume of business leading to higher profitability. [Page 38/30/73-PB- 3-AR- Part 1] In view of the aforesaid cumulative reasons, following the Hon'ble ITAT in appellant's own case for the assessment year 2014-15 in ITA No. 4740 Del/2018, assessment year 2015-16 in ITA No. 8726/Del/2019 and in assessment year 2016-17 in ITA No 868/Del/2021, the company ought to be excluded from the final set of comparable companies."
We have carefully considered the contentions of the Revenue as well as the assessee and perused the orders of the Hon'ble Tribunal for preceding AYs (supra) as well as various judicial precedents cited by the assessee wherein this company has been excluded as a good comparable by the judicial authorities. The Ld. CIT-DR has sought to distinguish the facts of 14 ITA No. 370/Del/22 the earlier years viz a viz the relevant year under consideration, however perusal of the orders of the Hon'ble Tribunal in preceding AYs shows that the Hon'ble Tribunal has passed a well reasoned order directing exclusion of this company as a comparable company. Based on the submission of the Ld. CIT- DR, rejoinder of the assessee and the orders of the Hon'ble Tribunal for preceding years (supra), we are of the considered view that this company is not functionally comparable to that of the assessee as there has been an extraordinary event that has occurred even during the relevant AY in the form of amalgamation of GDA Technologies Ltd. and AugmentIQ with the assessee company L&T Infotech. Further, we tend to agree with the submission of the assessee that this company owns significant intangibles and no segmental data is available in respect of the revenue generated from provision of software development services. Perusal of the orders of the Hon'ble ITAT for the preceding years (supra) shows that all these aspects have been duly considered by the Hon'ble Bench in arriving at the conclusion for exclusion of this company from the final list of comparable companies. The Department has not challenged the finding of the Hon'ble Tribunal in any of the earlier years. In view of this, the objections raised by the Ld. CIT(DR) in our opinion are not sustainable. We, therefore, hold that this company is not a good comparable and accordingly direct the Ld. AO/TPO to exclude this company from the final set of comparable companies.
Tata Elxsi Ltd.
12. In respect of this comparable the main contention of the assessee is that this company is functionally not comparable to that of the assessee company as it provides product design and engineering services to the consumer electronics, communication and transportation industries and systems integration and support services for enterprise customers. It also provide digital content creation for media and entertain industry. The website of this company also shows that it is also providing solutions and services for technologies such IOT, bigdata analytics, cloud, mobility, virtual reality and artificial intelligence. The company has also generated intangible 15 ITA No. 370/Del/22 in the form of technical know-how for rendering services to its customers and offers integrated hardware and package to software solutions as apparent from the annual report of this company. Various judicial precedents for exclusion of this company have been relied upon by the Ld. AR as also the decision of the Hon'ble ITAT in assessee's own case for AY 2007-08 in ITA No. 5809/Del/2011, AY 2008-09 in ITA No. 122/Del/2013, AY 2014-15 in ITA No. 4740/Del/2018 and AY 2015-16 in ITA No. 8726/Del/2019 ad AY 2016-17 in ITA No. 868/Del/2021 against which the department is not in appeal before the Tribunal.
12.1 The Ld. CIT-DR objected to the exclusion of this company on the ground that the facts of the earlier years are not applicable in the current year and filed the written submission which is reproduced below:
"5.1 The judgment of the Hon'ble Tribunal for A.Y 2014-15 is being reproduced as under: -
"8. Before the learned TPO, the assessee claimed this company as functionally dissimilar. The learned TPO, however, referred to page 35 of the Annual Report containing details of the activities under segment of software development and service and system integration and support and concluded that the company is functionally similar to the assessee. Before the learned DRP, the assessee again submitted that the company provides technology consulting, new product design development and testing services. The company also provide solutions and services for technologies such as Internet of things (IOT), big data analytics, cloud mobility, virtual reality and artificial intelligence. All these functions being different, from the assessee, the company should be excluded. The learned DRP, however held that under TNMM, the broad functional similarity is to be seen and thus upheld the action of the learned TPO. Before us the Learned Counsel of the assessee repeated the submissions made before the learned DRP and submitted that revenue from the operations include revenue from product design, graphics animation and gaming and system integration and support. According to him all these activities are functionally different from that of the assessee. He also submitted that the in Assessee's own case for assessment year 2007-08 and 2008-09, the Coordinate bench of the Tribunal in ITA No. 5809/Del/2011 and 122/De/2013 has directed to exclude the company from the set of the comparables.
8.2 We have heard the rival submission of the parties on the issue in dispute and perused the relevant material including annual report of the company. The details of revenue from operations available on page 51 of the Annual Report (page 394 of PB-
2), reproduced as under: 18. Revenue from Operations Year ended 31 March, 2014 Sale of traded goods [Refer None(i) below] 4,700.51 Rendering on services [Refer 16 ITA No. 370/Del/22 None(ii) below] 72,509.25 Total 77.209.76 (i) Sale of traded goods include sales of computers, networking and storage systems, (ii) Rendering of services comprises:
(a)Product Design 66,427.07 (b) Graphics Animation and Gaming 1,843.15 (c) System Integration and Support 4,239.03 72,509.25 8.3 Out of the above revenue streams, we find that major revenue has been earned from rendering of product design services. Under Product design, the assessee has carried major project of design and developing of a complete electronic control unit (ECU) including hardware and software for hybrid electric vehicle, designed the control hardware for India's Mars arbiter Mission, worked with GVK to design the experiential services for various consumer touch points at Mumbai International Airport's new integrated terminal-2. The relevant part of the Annual Report has been reproduced by the learned TPO in his order. From the various achievements of the company mentioned in the Annual Report, we are of the opinion that the company has earned revenue from designing using softwares rather than software development services and software maintenance services. The other services of graphic animation and gaming includes major project for animation and visual effects for two feature films, which won the 59th Filmfare award and the star Guild Award 2014 for Best visual effects for it works in film " Dhoom 3 ". The company also carried out visual effects for the film "Bhag Milka Bhag". The services under the revenue from graphics animation and gaming are also different from services of software development.
8.4 In view of the activity from which revenue has been earned by the company, the company is functionally different from the assessee at entity level, thus, we direct the Learned AO/TP O to exclude the company from the set of the comparables." 5.2 A perusal of page no- 143 of the paper book "Annual Reports of Comparables" shows the P&L account of the company. The revenues from operations are given in 'Note 16' which is available on page no - 156. The same is being reproduced as under: -
NOTE '16' TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2017 (in lakhs) PARTICULARS YEAR ENDED 31 YEAR ENDED 31 MARCH, 2017 MARCH, 2016 Revenue from operations Rendering of services 120,100.98 104,146.28 Sale of traded goods 3,202.99 3,374.33 Total 123,303.97 107,520.61
(i) Sale of traded goods include sales of computers, networking and storage systems.
(ii) Rendering of services comprises:
(a) Product design 114,413.53 99,734.06
(b) Graphics animation and gaming 2,231.60 1,083.02
(c) System integration and support 3,455.85 3,329.20
Total 120,100.98 104,146.28
17
ITA No. 370/Del/22
5.3 The TPO has applied a filter that a comparable company must have income from
rendering of services at least of 75% of the total revenues. Therefore, a comparable company can have 25% income from products, still, it would be a good comparable in view of the filter applied by the TPO.
The assessee has not disputed the filter being applied by the TPO and there is no specific ground challenging the filters being applied by the TPO.
5.4 It is a fact that the assessee has earned income from sale of traded goods, graphics animation and gaming as well as system integration and support. However, the same is very minuscule to the extent of Rs 5687.45 which is 4.73 % of the total revenues which falling in the filter applied by the TPO. This company has also clearly mentioned that product design is in fact rendering of services and the same has been covered under the head 'rendering of services', therefore, the same is nothing but software development services. In view of the above, the facts of the earlier years are not applicable in the current year."
In rebuttal to the Ld. CIT(DR)'s written submission, the assesee has filed the following rejoinder:
"1. The Id. DR at Para 5.3 of his order has contended that "The TPO has applied a filter that a comparable company must have income from rendering of services at least of 75% of the total revenues. Therefore, a comparable company can have 25% income from products, still, it would be a good comparable in view of the filter applied by the TPO. The assessee has not disputed the filter being applied by the TPO and there is no specific ground challenging the filters being applied by the TPO. "
In this regard, it is submitted that comparability is the cardinal principle under the Transfer Pricing regulations. Rule 10B(2) read with Rule 10B(3) of the Income-tax Rules, 1962 ("the Rules"), provides the test of comparability for the purpose of selection / rejection of comparables, as under:
"10B.Determination of arm's length price under section 92C.
(1) ........................................................ (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:-- development and level of competition and whether the markets are wholesale or retail.
(3) An uncontrolled transaction shall be comparable to an international transaction if-
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. "18 ITA No. 370/Del/22
In terms of clause (a) of sub-rule (2) of Rule 10B of the Income-tax Rules ("the Rules"), for determining the arm's length price of an international transaction, establishing comparability of an international transaction with an uncontrolled transaction, inter alia, requires that the specific characteristics of the property transferred or services provided in the two transactions (controlled and uncontrolled) is to be taken into consideration.
Also, analysis of functions performed, assets utilized and risks assumed by the transacting parties (alternatively termed as FAR analysis or functional analysis in the Transfer Pricing parlance) is another test of comparability, provided in clause (b) of rule 10B(2) of the Rules. Functional analysis, in fact, is the key for analyzing the nature of international transactions and to establish comparability of an uncontrolled and controlled transaction.
The Hon'ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. vs. CIT 377 ITR 533, made a clear distinction between a BPO and KPO service provider and upheld them to be functionally dissimilar to each other, holding as under:
"34. We have reservations as to the Tribunal's aforesaid view in Maersk Global Centers (India) Pvt. Ltd. (supra). As indicated above, the expression 'BPO' and 'KPO ' are, plainly, understood in the sense that whereas, BPO does not necessarily involve advanced skills and knowledge; KPO, on the other hand, would involve employment of advanced skills and knowledge for providing services. Thus, the expression 'KPO' in common parlance is used to indicate an ITeS provider providing a completely different nature of service than any other BPO service provider. A KPO service provider would also be functionally different from other BPO service providers, inasmuch as the responsibilities undertaken, the activities performed, the quality of resources employed would be materially different. In the circumstances, we are unable to agree that broadly ITeS sector can be used for selecting comparables without making a conscious selection as to the quality and nature of the content of services. Rule I OB (2) (a) of the Income Tax Rules, 1962 mandates that the comparability of controlled and uncontrolled transactions be judged with reference to service/product characteristics. This factor cannot be undermined by using a broad classification of ITeS which takes within its fold various types of services with completely different content and value. Thus, where the tested party is not a KPO service provider, an entity rendering KPO services cannot be considered as a comparable for the purposes of Transfer Pricing analysis. The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services cannot be a ground for assessing the transactions relating to services rendered by the BPO service provider by benchmarking it with the transactions of KPO services providers. The object is to ascertain the ALP of the service rendered and not of a service (higher in value chain) that may possibly be rendered subsequently.
35. As pointed out by the Special Bench of the Tribunal in Maersk Global Centers (India) Pvt. Ltd. (supra), there may be cases where an entity may be rendering a mix of services some of which may be functionally comparable to a KPO while other services may not. In such cases a classification of BPO and KPO may not be feasible. Clearly, no straitjacket formula can be applied.19 ITA No. 370/Del/22
In cases where the categorization of services rendered cannot be defined with certainty, it would be apposite to employ the broad functionality test and then exclude uncontrolled entities, which are found to be materially dissimilar in aspects and features that have a bearing on the profitability of those entities. However, where the controlled transactions are clearly in the nature of lower-end ITeS such as Call Centers etc. for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold."
Relying on the above decision in the case of Rampgreen, the co-ordinate bench of Delhi High Court in the case of Avaya India Pvt. Ltd. V. ACIT, (2019) 416 ITR 638 upheld exclusion of companies on account of difference in scale of operation and ownership of brand value.
In a more recent decision dated 18.05.2020, the Hon'ble High Court in the case of Pr. CIT vs. Open Solutions Software Services Pvt. Ltd. [ITA 201/2018], further clarified that even if a comparable passes the quantitative filters, it can be rejected as comparable on the basis of qualitative analysis:
34. In view of the above, it emerges that none of the comparables have been excluded on the ground of high turnover alone. The test functional similarity applied by the Tribunal is in consonance with the legal position discussed hereinabove. Therefore, we do not find merit in the contentions urged by the Revenue on this ground. Equally meritless is the contention of the Revenue regarding the bar to challenge the comparables after the acceptance of the filters. The filters are applied to narrow down the search to find the comparables that are closest to the assessee. The use of filters has to be necessarily validated from the annual reports. Since the TPO would have to do this exercise on the basis of the actual data in the report of the comparables, he would surely have the freedom to adopt or reject the comparables. We cannot hold that merely because a comparable clears the filters, its inclusion in the list of comparables is immune to challenge by the assessee.
In view of the aforesaid, the contention of the Id. DR that since the comparable passes the filter of service income more than 75%, it cannot be challenged on account of functional dissimilarity is far stretched and erroneous. It is submitted that even if the income earned from provision of service by the company is more than 75% of its total revenue, in terms of Rule 10B(2) and the decision cited above, the nature of service provided by the entity and functions performed in rendering such services, ought to have similarity with services rendered by the appellant, in order to satisfy the comparability test.
2. In Para 5.4 of the synopsis, the Id. DR has further submitted that "This company has also clearly mentioned that product design is in fact rendering of services and the same has been covered under the head rendering of services, therefore, the same is nothing but software development services. In view of the above, the facts of the earlier years are not applicable in the current year. "
20 ITA No. 370/Del/22It is submitted that the conclusion drawn by the Id. DR that since product design services are covered under the head rendering of services and therefore, is in the software development services, does not corroborate from the facts mentioned in the annual report of the company.
From perusal of Page 81 of the Annual Report of the company [Page 163 of Paper book - Annual Report], the income earned from rending product design services amounting is shown under the segment head "Software Development & Services", meaning thereby, that the segment includes software development services as well as other services.
Even if product design services are considered as software development services, as concluded by the Id. DR, such software development services comprises of the following services [Refer Page 13 of the Annual Report (Page 128 of Paper Book)]:
Embedded Product Design The Embedded Product Design (EPD) division provides technology consulting, new product design, development, and testing services for the broadcast, consumer electronics, healthcare, telecom and transportation industries. Transportation We offer electronics, software development and system design services for the automotive, rail and aerospace industry. We leverage our cross-technology expertise in multimedia, imaging, connectivity technologies and well- established processes for automotive software development, to support both car manufacturers and system suppliers in product development and engineering.
Broadcast and Communications We address the complete product development lifecycle from R&D, new product development and testing to maintenance engineering for Broadcast, Consumer Electronics and Communications.
Industrial Design and Visualization Tata Elxsi helps customers develop endearing brands and products by using design and technology as a strategic tool for business success. It has supported the launch of multiple brands and products across the world, winning various international awards for design and innovation. It is for these reasons that the Hon'ble IT AT in order passed for AY 2014-15 bearing ITA No. 4740/Del/2018 has excluded the company, holding that:
8.3 Out of the above revenue streams we find that major revenue has been earned from rendering of product design services. Under Product design, the assessee has carried major project of design and developing of a complete electronic control unit (ECU) including hardware and software for hybrid electric vehicle, designed the control hardware for India's Mars orbiter Mission, worked with GVK to design the experiential services for various consumer touch points at Mumbai International Airport's new integrated terminal-2. The relevant part of the Annual Report has been reproduced by the learned TPO in his order. From the various achievements of the 21 ITA No. 370/Del/22 company mentioned in the Annual Report, we are of the opinion that the company has earned revenue from designing using softwares rather than software development services and software maintenance services. The other services of graphic animation and gaming includes major project for animation and visual effects for two feature films, which won the 59th Filmfare award and the star Guild Award 2014 for Best visual effects for it works in film Dhoom 3 The company also carried out visual effects for the film "Bhag Milka Bhag". The services under the revenue from graphics animation and gaming are also different from services of software development services Accordingly, the decision of the Hon'ble ITAT rendered for the AY 2014-15 in the appellant's own case squarely applies to the facts for the year under consideration and therefore, the company ought to be excluded from the final set of comparable companies.
3. It is submitted that in the order passed for AY 2016-17 bearing ITA No. 868/Del/2021, the Hon'ble ITAT has directed the exclusion of the company on account of following additional reasons:
22. We have perused the financials of Tata Elxsi, available at pages 596 & 597 highlighting its profile and page 643-highlighting its ownership of intangibles.
Business analysis highlighted in the financials of Tata Elexi goes to prove that Tata Elexi is into system integration & support and software development services. Software development services segment further constitutes three major sub- segments viz. embedded product design, industrial design and visual computing labs whereas taxpayer is a routine software development services provider working on cost plus mark-up model.
23. Furthermore, when we examine Note 9 Fixed Assets forming part of the financial statement, available at page 643 of the annual reports paper book, it shows that Tata Elexi is having intangibles in the form of internally generated technical know-how and acquired intangibles computer software which certainly gives edge to Tata Elexi over other players operating in software development services provisions.
24. Moreover, when undisputedly taxpayer has not undergone any change in its business model vis-a-vis AYS, 2007-08, 2014-15 & 2015-16 in ITA Nos.5809/Del/2011, 4740/Del/2018 & 8726/Del/2019 respectively, Tata Elexi was held to be non comparable by the Tribunal.
25. In view of the matter, we are of the considered view that on account of functional dissimilarity and having ownership of internally generated intangibles in the form of technical know-how for rendering services to its customers make Tata Elexi not a suitable comparable vis-a-vis the taxpayer who is a routine software development service provider working on cost plus mark-up model having no intangibles of its own, hence we direct to exclude Tata Elxsi from the final set of comparables.
It is submitted that the above finding of the Hon'ble ITAT rendered in the order passed for AY 2016-17, has not been controverted by the Id. DR in his synopsis. Further, the finding rendered by the Hon'ble ITAT equally applies to the facts for the year under consideration, in as much as:
22 ITA No. 370/Del/22 As per the annual report of the company, the company provides product design and engineering services to the consumer electronics, communications & transportation industries and systems integration and support services for enterprise customers. It also provides digital content creation for media and entertainment industry. [Page I22/128-PB-AR].
As per the segment reporting made in annual report of the company, the company has two main business segments, namely, (i) System integration & Support and (ii) software development services. [164-PB-AR]. Even if 'Software development and services' segment is considered, it would be noted that the segment constitutes income earned from product design services of Rs. 1,14,413.53 lakhs and Graphics Animation and Gaming of Rs. 2,231.60 lakhs [Page 156-PB-AR].
The company has also generated intangible in the form of technical know-how for rendering services to its customers, as apparent from its annual report [Page 153-PB-AR].
The company offers integrated hardware and packaged software solutions [Page 146-PB-AR].
In view of the aforesaid cumulative reasons, following the Hon'ble ITAT in appellant's own case for the preceding years, the company ought to be excluded from the final set of comparable companies."
We have carefully considered the contention of the Revenue as well as the assessee and perused the orders of the Hon'ble Tribunal for preceding AYs (supra) as well as various judicial precedents cited by the assessee wherein this company has been excluded as a good comparable by the judicial authorities. The Ld. CIT-DR has sought to distinguish the facts of the earlier AY 2014-15 and viz a viz the relevant year under consideration. However, perusal of the order of the Hon'ble Tribunal for AY 2014-15 shows that the Hon'ble Tribunal has passed a well reasoned order holding this company to be functionally dissimilar and having ownership of internally generated intangibles and therefore, not a suitable comparable to that of the assessee company. Further, the finding of the Hon'ble Tribunal in AY 2016-17 in favour of the assessee has not been controverted by the Ld. CIT-DR. Keeping in view the submission of the Ld. CIT-DR, rejoinder of the assessee and the order of the Hon'ble Tribunal for preceding years (supra), we are of the considered view that this company is not functionally comparable to that of the assessee and therefore we direct the Ld. AO/TPO to exclude this company from the final list of comparable companies.23 ITA No. 370/Del/22
Infobeans Technologies Ltd.
13. The Ld. AR submitted that this comparable is functionally dissimilar to that of the assessee in as much as per the annual report, this company along with provision of application development and maintenance services also provides services in the nature of Big Data Analytics Content Management System, Enterprise Mobility, Automation Engineering Services. This company is providing a wide range of services under 4 verticals i.e . Services, Automation, Enterprise and Industries. Under the Automation Services Verticals the company is providing advanced robotic process automation services. It was further submitted by the Ld AR that the Hon'ble Tribunal following the decision of the Tribunal in the case of PubMatic India (P.) Ltd. vs. ACIT ITA No. 655/Pun/2017 directed this company to be excluded from the final set of comparable companies in assessee's own case for AY 2016-17 in ITA No. 868/Del/2021.
13.1 The Ld. CIT-DR relying on the order of the Hon'ble Tribunal for AY 2014-15 wherein this comparable was held to be a good comparable made the following submission:
"6.1 The Hon'ble Tribunal has decided that this is a good comparable and therefore it was retained A.Y 2014-15. The judgment of the Hon'ble Tribunal is being reproduced as under: -
"10. Before the learned TPO, the assessee sought exclusion of the company on the ground of insufficient data/segmental information and functional dissimilarity. The learned TPO, however, referred to website and Annual Report of the company to highlight that the company is mainly engaged in providing software development services.
10.1 Before the Ld. DRP, the assessee submitted that company is providing wide- ranging services including automation engineering, Service Now, UX and UI and customize software services. Further it was submitted that company is doing business in three verticals i.e. Storage and visualization, publishing and SDO and e-commerce and no segmental bifurcations available in respect of the range of services. It w>as also submitted that this is exceptional year of operation in view of the increasing revenue of 52.0% and increase in profit before tax of 85.66%. The learned DRP however held that automation engineering is in context of providing automated testing services, which is part of software development services. Regarding exceptional year of operation, the learned DRP, held that the assessee has not 24 ITA No. 370/Del/22 demonstrated as to how high turnover/profit has affected the margins. Accordingly, the Ld. DRP, retained the company as comparable.
10.2 Before us, the learned Counsel repeated the submission which were made before the Learned DRP. Further, the Learned Counsel relied on the decision of the Pune bench of the Tribunal in the case of PubMatic India (p) ltd Vs ACIT (ITA No 655/Pun/2017), where the company has been excluded on account offunctional dissimilarity with the assessee engaged in provision of software development services. 10.4 We have heard rival submission and perused relevant material on record. We find that main objection of the assessee for including the company is range of the services undertaken by the company. The range of the services mentioned by the assessee are not available in the Annual Report for the year under consideration and same are available on the website of the company.
10.5 But in our opinion automation engineering, Service now, UX and UI and customize software services are all part of software development or software services. The Automation information technology is focused on service automation and quality assurance testing of automated process. Under the automation the goal is to eliminate defects, errors and problems with products Software Development and with business or customer service processes. Example of automation are automated 'chatbots ' to help solve customer issues or to direct customer to the right person. Automation is also used to streamline IT help desk ticketing, service management and to deliver quality products and software faster, with fewer defects. Thus, automation engineering is part of the process of the software development services. 10.6 Further, the term 'service now' has been described on the website of the company as under: "Service Now provides a framework that describes, organizes and automates the flow of work, and removes unnecessary emails and spreadsheets from the process to streamline the delivery of services. There is no denying the fact that Service Now has myriad benefits for an enterprise besides replacing manual transactions with consumerised and fast speed services ", 10.7 In view of the above description, the 'service now ' is a tool of automation process, which a software development service activity.
10.8 The term UX design refers to the term "user experience design ", while UI stands for "user interface design The user experience and user interface design are to be kept in mind while designing or developing the software, thus these range of services are part of software development services.
10.9 The three verticals in which company is doing business, is not making it functionally different. The prime function in all the three verticals remain the software development.
10.10 The assessee has placed reliance on the decision of the Tribunal in the case of Pubmatic Private Limited (supra), where the Tribunal has observed that company has shown foreign exchange from export of goods on FOB basis and thus in absence of segmental data, the company cannot be treated as comparable to a software development service company.25 ITA No. 370/Del/22
10.11 We find that the decision of the Tribunal is in relation to assessment year 2012-13, whereas the assessment year involved before us is 2014-15 and therefore result of that year being different, the decision relied upon by the assessee is distinguishable. We find that in the year under consideration in the Annexure to Auditors Report (page 76 of PB-2) in para 2 in respect of the inventory it is mentioned as under "2. The company is Service Company, Primarily engaged in Software Development. Accordingly, it does not hold any physical inventory. Thus, the provisions of clauses 4(ii)(a), 4(iii)(b) and 4(iii)(c), of order is not applicable. "
10.12 Thus, it is evident that in the year under consideration, the company is primarily in software development and there is no sale of the product. 10.13 Accordingly, we reject the contention of the assessee, and direct the Ld. AO/TPO to retain the company as valid comparable. " (emphasis supplied) 6.2 The Hon'ble ITAT in the year 2014-15 after giving detailed reasons has clearly held this company as a comparable as it is primarily engaged in software development services. The judgment is in favour of the Revenue.
6.3 However, in A.Y 2016-17, the Hon'ble ITAT relying on the judgment of PubMatic India (P) Ltd. vs. AC1T in ITA No.655/Pun/2017, decided this issue against the Revenue. The judgment of the Hon'ble ITAT is being reproduced as under: -
"44. The taxpayer sought exclusion of Infobeans as a comparable again on ground of functional dissimilarity, it also being into providing services viz. software engineering services primarily in Custom Application Development (CAD), Content Management Systems, Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book.
45. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e., services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis- a-vis the taxpayer which is a routine sofhvare development services provider. Infobeans has been excluded as a comparable on account of functional dissimilarity vis-a-vis routine software 24 ITA No.868/Del./2021 development service provider by the coordinate Bench of the Tribunal in case of PubMatic India (P) Ltd. vs. ACIT in ITA No.655/Pun/2017. So, in view of the matter, we order to exclude Infobeans from the final set of comparables. "
6.4 The order of Hon'ble ITAT in the Assessee's own case is in favour of the revenue in A.Y 2014-15 which have not been taken into account while passing the order by the coordinate bench in A.Y 2016-17 wherein the Assessee's appeal was allowed by relying on the case of PubMatic India (P) Ltd. vs. ACIT in ITA No.655/Pun/2017.
6.5 There is a judgment of Hon'ble coordinate bench in the Assessee's own case and admittedly there is no change in the FAR analysis of the assessee company, the judgment in the Assessee's own case would prevail. Therefore, the judgment of Hon'ble coordinate bench in A.Y 2016-17 would not be applicable. The P&L account of the assessee is placed at page no
- 197 of paper book "Annual Reports of Comparables, wherein the revenue from operations is 26 ITA No. 370/Del/22 given in 'Note 20'. The same is available at page no - 208 of the Paper Book. It is being reproduced as under: -
NOTE '20' TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED MARCH 31, 2017 PARTICULARS YEAR ENDED 31 MARCH, YEAR ENDED 31 MARCH, 2017 2016 Revenue from operations Income from Software Services Export 661,231,773 600,006,600 Domestic 13,367,057 15,545,046 Total 674,598,830 615,551,646 6.6 A perusal of the above clearly demonstrates that this company is engaged only in software services and therefore, is a good comparable."
13.2 The rejoinder of the assessee in respect of this comparable supporting its contention for exclusion of this comparable in the relevant AY 2017-18 is as under:
"1. It is submitted that in the order passed for the AY 2014-15, the Hon'ble Tribunal rejected the exclusion of company, proceeding on the basis that:
10.4 We have heard rival submission and perused relevant material on record. We find the main objection of the assessee for including the company is range of the services undertaken by the company. The range of the services mentioned by the assessee are not available in the Annual Report for the year under consideration and same are available on the website of the company.
However, in the order passed for the assessment year 2016-17, the Hon'ble Tribunal has rejected the company as comparable after duly referring to the annual report of the company and also recording the same in their order, as under:
44. The taxpayer sought exclusion of Infoheuns as a comparable again on ground of functional dissimilarity, it also being into providing services, viz, software engineering services primarily in Custom Application Development (CAD) Content Management Systems. Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book
45. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e., services automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified 27 ITA No. 370/Del/22 activities it cannot be a suitable comparable vis d- vis the taxpayer which is a routine software development services provider Infobeans has been excluded as a comparable on account of functional dissimilarity vis-a-vis routine software 24 ITA No.868/Del/2021 development service provider by the coordinate Bench of the Tribunal in case of PubMatic India (P) Ltd. vs. A CIT in ITA No. 655/Pun 2017. So, in view of the matter, we order to exclude Infobeans from the final set of comparables. For the year under consideration, the business description of the company is provided at Page 72 of the annual report [Page 199 of Paper book- Annual Reports], which states: I Info Beans Technologies Ltd (the "company''), operating at CMMI level 3, is a public limited company domiciled in India, and has also got listed on the National Stock Exchange -- SME Emerge Platform on 02nd May, 2017. The Company is specialized in software services. Our business is primarily engaged in providing custom developed services to offshore clients. InfoBeans provides software engineering services primarily in Custom Application Development (CAD), Content Management Systems (CMS), Enterprise Mobility (EM), and Big Data Analytics (EDA).
Accordingly, the later decision of Hon'ble ITAT rendered for the AY 2016-17 bearing ITA No. 868/Del/2021 is applicable to the case of the appellant and following the decision of Hon'ble ITAT, the company ought to be excluded from the final set of comparable companies.
2. It is submitted that along with the decision of Pune Bench of Tribunal in the case of PubMatic India (P.) Ltd. (supra) relied upon by the Hon'ble ITAT in appellant's case for AY 2016-17, in the following cases too, the company has been rejected as comparable to a captive software development services provider:
- Emerson Electric Company (India) Private Ltd. vs. ACIT (ITA NO.
6098/Mum/2018)
- Metric Stream Infotech (India) Pvt. Ltd. (ITA No.2347/Bang/2019)
- EIT Services India Pvt. Ltd. vs. ACIT (ITA No. 2498/Bang/2019)
- Zynga Games Network India P. Ltd. vs. DCIT (ITA No. 2573 / Bang / 2019) In view of the aforesaid, following the Hon'ble ITAT in appellant's own case for the AY 2016- 17, the company ought to be excluded from the final set of comparable companies."
13.3 We have carefully considered the submissions of the Ld. Representatives of the parties, perused the material on records. From the rejoinder of the Ld. AR we note that the Hon'ble Tribunal in AY 2014 rejected the exclusion of this company for the reason that the range of services undertaken by this company were not available in the annual report for that year. However, in subsequent AY 2016-17 the Hon'ble Tribunal has rejected this company as comparable after duly referring to the annual report of this company which indicates functional dissimilarity owing to provision of wide range of services by this company. The Tribunal in its order for AY 2016-17 28 ITA No. 370/Del/22 has considered the decision of the Pune Bench of Tribunal in the case of Pubmatic India (supra) and several other cases wherein this company has been rejected as a comparable to that of a captive software development services provider. In light of the above, respectfully following the decision of the Coordinate Bench for AY 2016-17 we direct the Ld. AO/TPO to exclude it from the final set of comparables.
Cybercom Datamatic Information Solutions Limited
14. The Ld. AR submitted that this comparable is functionally dissimilar as this company acts as consultants and advisors on information/internet system and surveyors, of information services. Further, it is engaged in the business of development, testing, implementation, migration of home grown and other applications, marketing and manufacturing of various information and technology products and services which is evident from the annual financial statement of this company available on records. Further, from the website of the company it can be noted that this company specialises in various fields such as digitalization, secure connectivity, internet things and cloud services. It follows a full life cycle approach which consists of various steps like advisory, innovation, creation, management, testing etc. Moreover, it has provided expertise and solutions against the challenge faced in the aforesaid mentioned fields. He placed reliance on the decisions the Hon'ble Tribunal in the case of PubMatic India (P.) Ltd.(supra) and Principal Global Services (P.) Ltd. vs. ACIT ITA No. 482/Pun/2017 for exclusion of this comparable. He further submitted that the Hon'ble Tribunal has directed this company to be excluded from the final set of comparable companies in assessee's own case for AY 2015-16 in ITA No. 8726/Del/2019 and in AY 2016-17 in ITA No. 868/Del/2021 against which the Department has not gone into appeal before the higher forum.
14.1 As against the above submission of the Ld.AR, the Ld. CIT-DR has submitted as under:
29 ITA No. 370/Del/22"7.1 The Hon'ble Tribunal held in A.Y 2015-16 that this is not a good comparable. The judgment of the Hon'ble Tribunal is being reproduced as under: -
"25- Before parting we may also consider the plea of the assessee for the exclusion of the concern Cybercom Datamatics Informaiton Solutions Ltd. The said concern was included in the final set of comparable and the margins were applied by the TPO rejecting the submissions of the assessee in this regard.
26- We find that the Pune Bench of the Tribunal in Pubmatic India Pvt. Ltd. Vs. ACIT in ITA No. 655/Pun/2017 vide order dated 09.03.2018 had directed the exclusion of the concern Cybercom Datamatics Information Solutions Ltd. on account of functional dissimilarity from the final list of comparables observing as under
15 "similarly, the concern Cybercom is also a product company and was providing software development to its associated enterprises and was also selling developed software products. Both the activities were clubbed under one software segment. As per the annual report of said company, it was engaged in providing consultancy and advisory services and was also carrying out the business of development, testing, marketing and manufacturing of information technology products and services. The annual report of the said concern placed at page 918 of PB declares the said facts and it is undisputed that the said concern is engaged in sale of software products. Following our reasoning in the paras herein above in respect of Cybermate, we hold that Cybercom is also to be excluded from final set of comparables. "
27- The assessee before us is solely engaged in the provision of software development concern hence, where the concern was also a product company, margin of the said concern cannot be included for benchmarking the ALP of the international transaction undertaken by the assessee. Accordingly, we direct its exclusion from the final set of comparables. "
7.2 The P&L account of the assessee company is given on page no - 226 of paper book "Annual Reports of Comparables". The sale of services has been shown at Rs. 7,78,76,993/-. The "Note 22" to the account on page no- 236 is regarding Segment information. The same is reproduced as under: -
"Note 22 segment information The principal business of the company is of providing technical and software services. All other activities of the company revolve around its main business. Hence no additional disclosure under accounting standard 17, "Segment Reporting" are required in these financial statements. "
7.3 In this note, it has clearly been provided that the principal business of the company is of providing of technical and software services. All other activities of the company revolve around its main business. Since the main business of the assessee company is providing software services as is clearly been written in the above note, it is a good comparable. These facts have not been considered by Hon'ble ITAT while passing the order for A.Y 2015-16 and therefore the same would not be applicable."
30 ITA No. 370/Del/2214.2 In its rejoinder to the arguments of the Ld. CIT-DR, the Ld. AR has submitted as under:
"1. It is submitted that in the order passed for the AY 2015-16, the Hon'ble Tribunal in appellant's own case has relied on the decision of Pune Bench of Tribunal in the case of Pubmatic India Pvt. Ltd. Vs. ACIT in ITA No. 655/Pun/2017, wherein, the Hon'ble Pune Bench of Tribunal has duly considered the annual report of the company and held:
15. "similarly, the concern Cybercom is also a product company and was providing software development to its associated enterprises and was also selling developed software products. Both the activities were clubbed under one software segment. As per the annual report of said company, it was engaged in providing consultancy and advisory services and was also carrying out the business of development, testing, marketing and manufacturing of information technology products and services. The annual report of the said concern placed at page 918 of PB declares the said facts and it is undisputed that the said concern is engaged in sale of software products. Following our reasoning in the paras herein above in respect of Cybermate, we hold that Cyber com is also to be excluded from final set of comparables.
The aforesaid reason on the basis of which the company was held to be incomparable to a captive software development service provider is also found in the annual report of the company for AY 2017-18:
• The company acts as consultants and advisors on information / internet system and surveyors, of information services. Further, it is engaged in the business of development, testing, implementation, migration of home grown and other applications, marketing and manufacturing of various information and technology products and services. The same may also be corroborated from the annual financial statement of the company. [Pg. 228 of PB-AR] • Further, from the website of the company it can be noted that the company specializes in various fields such as digitalization, secure connectivity, internet things and cloud services. It follows a full life cycle approach which consists of various steps like advisory, innovation, creation, management, testing, etc. Moreover, it has provided expertise and solutions against the challenges faced in the aforesaid mentioned fields. In view of the aforesaid, following the Hon'ble ITAT in appellant's own case for the AY 2015-16, the company ought to be excluded from the final set of comparable companies.
2. It is submitted that in the order passed for AY 2016-17 bearing ITA No. 868/Del/2021, the Hon'ble ITAT has directed the exclusion of the company on account of following additional reasons:31 ITA No. 370/Del/22
"27. We have perused the profile of Cyber com Datumatics in the Notes forming part of the financial statement for the year ending March 31, 2016 which shows that the company was originally incorporated as Innovative Internet Trading Private Limited on January 5, 2000 and thereafter pursuant to the joint venture agreement between Cybercom Group AB and Datamatics Global Services Ltd. w.e.f June 1, 2006, it started working as consultants and advisors on information/internet system and surveyors of information services and to carry on the business of development, testing, implementation, migration of home grown and other applications, marketing and manufacturing of information technology products and services, software and hardware systems to enterprise and embedded technologies in the telecom and other industries.
28. The taxpayer also traced from the website of Cybercom Datamatics that it specializes in various fields such as, digitalization, secure connectivity, internet of things and cloud services. It also follows a full life cycle approach which consists of various steps like advisory, innovation, creation, management, testing etc.
29. Moreover, suitability of Cybercom Datamatics has already been examined by the Tribunal in AY 2015-16 (supra) and since then its business model has not undergone any change vis-a-vis year under consideration.
30. Aforesaid profile of Cybercom Datamatics leads to the conclusion that it is into diversified services and is also a product company providing software development to its associated enterprises and also selling developed software product whereas the taxpayer is a routine software development services provider working on a cost plus mark-up model and as such its margin cannot be compared with Cybercom Datamatics, hence Cybercom Datamatics is ordered to be deleted as a comparable.
It is submitted that the above finding of the Hon'ble ITAT rendered in the order passed for AY 2016-17 has not been controverted by the Id. DR in his synopsis. Accordingly, in view of the consistency in facts, the company ought to be excluded following the order passed in the appellant's own case for the AY 2016-17.
3. It is submitted that along with the decision of Pune Bench of Tribunal in the case of PubMatic India (P.) Ltd. (supra) relied upon by the Hon'ble ITAT in appellant's case for AY 2015-16, the company has also been rejected as comparable to a captive software development services provider in the case of Principal Global Services (P.) Ltd vs. ACIT (ITA No. 482/Pun/2017).
In view of the aforesaid cumulative reasons, following the Hon'ble ITAT in appellant's own case for the preceding years, the company ought to be excluded from the final set of comparable companies."
14.3 We have perused the submissions of the Ld. AR as well as the Ld. CIT- DR and the material available on records. In our considered view this comparable is functionally dissimilar to that of the assessee and the Hon'ble 32 ITA No. 370/Del/22 Tribunal in its order for AY 2015-16 and AY 2016-17 held this comparable to be excluded owing to its functional dissimilarity with that of the assessee. The Ld. CIT-DR has not brought out any change in facts of the relevant assessment year under consideration viz. a viz AY 2015-16 and AY 2016-17. We, therefore, respectfully following the Hon'ble Tribunal's orders (supra) for preceding AY 2015-16 and 2016-17 hold this company not to be a good comparable and accordingly direct the Ld. AO/TPO to exclude this company from the final set of comparable companies.
15. Having held the above, after excluding the four comparable companies, namely i) Larsen & Tourbro Infotech Ltd. ii) Tata Elxsi Ltd. iii) Infobeans Technologies Ltd. and iv) Cybercom Datamatics Information Solutions Ltd. as per our direction, the assessee's margin in respect of international transaction of provision of software development services would fall within the arms length range and no transfer pricing adjustment would thus be required. We have therefore not examined and adjudicated upon the remaining comparables challenged by the assessee as the same has become academic in nature.
16. The second grievance of the assessee relates to transfer pricing addition of Rs. 7,12,59,891/- with respect to interest on delay in receipt of receivables from AEs. Brief facts on this issue are that from perusal of the invoice wise details of services rendered to the AE, it was noted that in certain cases, the remittance were received by the assessee after some time lag than the period agreed between the parties. Similar delay in receipt of receivables was also reported in transactions undertaken with unrelated third parties. Details of outstanding receivable for services rendered to AEs and unrelated third parties is enclosed at Page No. 225-232 of Paper book of merits (reply dated 04.01.2021) 16.1 The TPO in his order re-characterized the delay in receipt of receivables as unsecured loans advanced to the AE and imputed a notional interest at the rate of 4.485%, being Libor + 400 bps, on the period of delay 33 ITA No. 370/Del/22 exceeding 60 days. The TPO, accordingly, computed an interest of Rs. 7,12,59,891/- on account of delay in receipt of trade receivables from the AEs.
16.2 The Ld. AR submitted that this issue is covered in favour of the assessee by the Hon'ble Tribunal in assessee's own case for AY 2010-11 in ITA No. 1104/Del/2015 and AY 2012-13 in ITA No. 1115/Del/2017. The Hon'ble ITAT relying upon its decision for AY 2010-11 and 2012-13 decided this issue in favour of the assessee for subsequent AYs 2013-14 in ITA No. 7621/Del/2017, 2014-15 in ITA No. 4742/Del/2018, 2015-16 in ITA No. 8726/Del/2019 and 2016-17 in ITA No. 868/Del/2021. He further submitted that there is no change in the factual or legal position in the relevant AY under consideration viz. a viz AYs 2013-14 to 2016-17. For the year under consideration, the findings of the Hon'ble Tribunal in AY 2010-11 and 2012-13 are corroborated as under:
i) the operating margin earned by the assessee at 14.72% is within the arm's length range of 11.66% to 16.54%. The assessee has undertaken working capital adjustment of margins in the transfer pricing study.
ii) the assessee is not incurring any interest cost and has not availed any loan from AEs or unrelated third parties which is evident from the balance sheet and schedule on 'other long term liabilities forming part of financial statements' placed on page 18-19 of PB - merits (audited accounts).
iii) there is similar delay in receipt of receivables from others and the assessee is not charging interest on delay in receipt of receivable from services rendered to unrelated third parties.
(page 233-239 of PB - merits) 16.3 The Ld. CIT-DR controverted the above submissions of the assessee by filing the detailed written submissions dated 21.07.2022 which is reproduced below:
34 ITA No. 370/Del/22"3.4 The Hon'ble DRP on page no. 30 of the appeal set (internal page 9 of the DRP order) has summarized the facts of the case. The same is being reproduced as under:
1) "In its TP documentation, the assessee had stated that receivables and payables were settled by with the AEs on an ongoing basis in the normal course of business in an arm's length condition having regard to the economic and commercial factors. The TPO charged interest on inter-Company receivables overdue beyond the credit period of 60 days, by treating it as advance of unsecured loan to the AE and accordingly imputed a national interest of Rs. 7,12,59,8912/- thereon. The assessee has contended that it is debt free and thus, no interest or overdue receivables is warranted. He has also assailed the TPO's action of delinking the inter-company receivables arising from main international transactions and proceedings to bench mark the same as a separate transaction and applying 6 months IJBOR Plus 400 basis points and inputting 4.485% national interest. He has also contended that, the judgment passed by the Hon'ble IT AT in its own case in ITA No. 1104/D/2015 and 1115/D/2017 has not been followed by the TPO. "
2) "The Ld. AR of the assessee relied upon the orders of the Coordinate Bench of Delhi in the Assessee's on case in support of its contention. The findings of Hon'ble J.TAT Delhi in the case of assessee for the assessment year 2010-11 (ITA No.l 104/D/2015) and 2012-13 (ITA No. 1115/D/2017) are being reproduced as under: -
"14. Provisions contained under Explanation (i), (a) & (c) of section 92B have been analysed by Hon 'ble Delhi High Court in case cited as Pr. CIT-V vs. Kusum health Care Pvt. Ltd. In ITA No. 765/2016 order dated 25.04.2017, wherein it is held that the expression added in Explanation to section 92B does not mean that de hors the context, every item of receivables appearing in the accounts of an entity, which may have dealing with foreign AE, would automatically be characterized as an international transaction.
15. So in view of the law laid down by Hon 'ble High Court in Pr. CIT-V Vs. Kusum Health Care Pvt. Ltd. (supra), we are of the considered view that no adjustment can be made on account of notional interest on receivables by relying upon explanation(i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover, when the taxpayer is debt free company, there is no question of charging any interest or receivables. This issue has also been decided by Hon 'ble Delhi High Court in case of Pr. CIT-1 Vs. M/s Bechtel India Pvt. Ltd. in ITA. no. 379/2016 order dated 21.07.2016.
16. furthermore when we examine the entity level margin of the taxpayer vis-a-vis comparable companies, the taxpayer has earned higher margin i.e. taxpayer earned. 38.39%) OP/OC margin vis-a-vis margin of comparable companies at 11.43%. In such circumstances, no separate adjustment on account of interest can be made. Because the credit period extended to AE cannot be considered as a standalone transaction without considering the main transaction of the sale.
17. Furthermore when the taxpayer is undisputedly a debt free company, as it is not the case of the Ld. TPO that borrowed funds have been appropriated enabling the AE to made the delayed payment on receivables. So, when outstanding receivables is not a separate international transaction, the delay in realization of the sale proceed is incidental to the 35 ITA No. 370/Del/22 transaction of sale and as such no notional interest can be levied by treating the same as unsecured loan.
18. Furthermore, it is the case of the taxpayer that when the taxpayer is not charging interest from unrelated third party/non-AE, in case of such delay, no adjustment on interest in case of AE can be made and drew our attention towards the details f invoices raised qua unrelated parties available at page 183A of the paper book wherein delay in realization of the receivables is also up to 218 days for AY 2010-11 and up to 417 days qua AY 2012-13 as per detail of invoices raised on unrelated parties qua AY 2012-13, available at page 236 of the paper book. ""
3) The appellant has further argued that this decision was further relied by Hon'ble ITAT Delhi in Assessee's cases for A. Y. 2013-14 and 2015-16. "
4) The findings of the Hon'ble Tribunal for A.Y 2010-11 which have also been followed in A.Y 2013-14 & 2015-16 are summarized as under: -
(a) The working capital adjustment would subsume the adjustments to be made on account of overdue receivables in view of Hon'ble Delhi High Court judgements in the case of Kusum Health Care Ltd.
(b) Overdue outstanding receivable is not an international transaction.
(c) The assessee is a debt free company. (d) On examination of the entity level margin of the assessee company, it was found by Hon'ble
ITAT that the tax payer has earned margin of 38.39% OP/OC margin vis-a-vis margin of comparable companies at 11.43%.
(e) It has also been held by the Tribunal that when the tax payer is not charging interest from unrelated third party/non -AE, in case of such delay, no adjustment on interest in case of AE can be made."
A) The working capital adjustment would subsume the adjustments to be made on account of overdue receivables in view of Hon'ble Delhi High Court judgment in the case of Kusum Health Care Ltd.
(i) It was argued by the assessee that once the working capital adjustment has been made by the TPO/DRP, the adjustment on account of outstanding accounts receivable gets subsumed in the working capital adjustment and no separate adjustment is called for. For this proposition, the assessee relied on the judgement of Hon'ble Delhi court in the case of M/s Kusum Health-care Ltd. as well as the judgement of coordinate bench in the assessee own case for A.Y 2010-11, 2012-13, 2013-14, 2015-16 & 2016-17. For clarity's sake, the relevant para of Hon'ble Delhi High court is being reproduced as under: -
"9. Mr. Raghvendra Singh, learned counsel appearing for the Revenue submitted that the ITAT overlooked the fact, that the expression "international transaction" as defined in Explanation (i)(c) tp Section 92B of the Act included payments or deferred 36 ITA No. 370/Del/22 payment or receivable or any other debt arising during the course of business", and therefore, the outstanding receivables could by themselves constitute an international transaction. He further referred to the OCED Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Paras 3.48 & 3.49 under Chapter III A. 6.1 of the said Guidelines titled ''Different types of comparability adjustments" spoke of the need to eliminate differences that may arise from different accounting practices between controlled and uncontrolled transactions. In particular, it was noted under para 3.49 that "a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further investigation of the comparability characteristics of the potential comparable. " Mr. Singh submitted that the ITAT erred in disagreeing with the TPO, who had characterised the outstanding receivables as in international transactions by itself which required bench-marking.
10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression 'receivables' does not mean that the context every item of receivables ' appearing in the accounts of an entity, w>hich may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case-to-case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studies. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of lime to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.
11. The Court finds that the entire focus of the AO was just one A. Y. and the figure of receivables in relation to that A. Y. can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any re-characterised the transaction. This was clearly impermissible in law as explained by this Court in Commissioner of Income Tax v. EKL Ltd. (2012) 345 HR 241 (Delhi)."
ii) A perusal of the above order clearly demonstrates that in that case, as a factual exercise done by the Hon'ble Tribunal establishing that even after providing for working capital adjustment in the comparable companies, the assessee margin was far higher than the margin of the comparable companies. Therefore, the finding has been given by the Hon'ble High court based on the facts of that case. The same is clear from para no. 5 of the same order which is being produced as under for clarity's sake.
"5. As far as the assessee was concerned, it declared the following international transactions i.e. export of manufacture medicines and export of traded medicines.37 ITA No. 370/Del/22
Both the transactions were benchmarked applying TNMM. The profitability of the Assessee from its manufacturing and trading segments was benchmarked with the average operating profit margin earned by comparable companies performing similar manufacturing and trading functions. In both sets of transactions. the profit indicators (PLIs) showed that operating profit margin of the assessee to be higher than that of the comparable companies. Accordingly, the international transactions were projected by the assessee as having been undertaken at the arm's length price ('ALPj. " (Emphasis Supplied)
iii) A perusal of the summary of international transactions have been reproduced by the assessee on page no. 62 of the paper book in the TP Study Report. A perusal of the above table clearly demonstrates that the margin of the assessee company during the year was 14.72% for software development services whereas the margin of the comparable companies was in the range of 11.66%-16.54%. A perusal of the above clearly demonstrates that the margin of the assessee company is not much higherduring the year as has been claimed by the assessee. It may also be pointed out clearly that the TPO has determined the ALP of this transaction with median of 17.24% having a range of 15.84% being the 35th percentile- 21.02% being 65th percentile. The total adjustments made by the TPO on this account is 7.44 Crores which forms part of the appeal set of TPO order on page no 179-180 of the appeal set. This clearly demonstrates that the margin of the assessee at entity level is less than the comparable companies and not more as has been claimed. Based on this factual analysis, the order of the coordinate Bench of earlier years would not apply to the facts of this year.
iv) It may also be highlighted here that the working capital adjustment would not subsume the adjustments for outstanding receivables as in case of working capital adjustments, only the opening and closing balancing of the working capital are taken into account. The adjustments on account of addition and subtraction during the year from these balances do not form part of working capital adjustment and therefore would not be sufficient to subsume the adjustment. The reliance for this proposition is made on the judgment of Hon'ble Delhi tribunal in the case of Ameriprise India Pvt. Ltd ITA No 2010/Del/2014. The relevant portion of this judgement is being reproduced as under: -
"28. We do not approve the reasoning given by the DRP about the subsuming of such interest in the working capital adjustment. It is axiomatic that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for the credit period allowed a per the Agreement is factored in the price charged for the rendering of services. Au contraire, the non-realization of invoice value beyond the stipulated period is a separate international transaction, whose ALP is required to be determined. Granting of working capital adjustment is confined to the international transaction of rendering of services, whose ALP is separately determinable. On the ITA Nos.2010 & 25 75/Del/2014 other hand, the international transaction of interest receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction.38 ITA No. 370/Del/22
Allowing working capital adjustment in the international transaction of rendering services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per the Agreement. The amendment made by the Finance Act, 2012 in terms of insertion of Explanation to section 92B with retrospective effect from 1.4.2002 by considering any other debt arising during the course of business as a separate international transaction, impliedly disapproves the view canvassed by the DRP in obliterating the determination of the ALP of the separate international transaction of interest on allowing the working capital adjustment in the international transaction of rendering of services. In our considered opinion, both the transactions are separate and distinct from each other. Whereas the international transaction of rendering services contemplates comparison of the price charged for rendering services by impliedly including the interest for the period subject matter of the international transaction of rendering of services. There is one more f allacy in adjustment. Jt is simple that working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivables and payables. The TP adjustment on account of interest on delayed realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction-to-transaction basis. Months; and the invoice is actually realized on 31s' December. Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from Is' July to 3 Is' December), but the amount of invoice will not be receivable as at the end of the financial year on 31s1 March. As such, this receivable would not have an impact on the working IT A Nos. 2010 & 2575/Del/2014 capital adjustment in any manner, but would call for addition on account of the late the DRP in deleting the addition. However, in view of the fact that all the invoices were realized within the maximum period of 60 days allowed as per the Agreement, we hold that the charging of interest on receivables is not sustainable on the extant facts".
(v) The similar view has also been taken in the case of Mckinsey Knowledge Centre Pvt.
Ltd. by Hon'ble Delhi ITAT. The same is being reproduced as under for clarity's sake:
"63. The Delhi Bench in Ameriprise (supra) and Techbooks (supra) did not approve the reasoning about such interest subsuming in working capital adjustment. It found that the working capital adjustment is in respect of international transaction of rendering services to the AE. Interest for the credit period allowed as per the Agreement is factored in the price charged for the rendering of services. In the oppugnation, the non-realization of invoice value beyond the stipulated period, is a separate international transaction, whose ALP is required to be determined. Granting of working capital adjustment has been held to be IT A No. 154/Del/2016 confirmed to the international transaction of rendering of services, whose ALP is separately determinable. On the other hand, the international transaction receivable from its AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering services has been held to have no impact on the determination of ALP of the international transaction of interest on receivables from.39 ITA No. 370/Del/22
AEs beyond the stipulated period allowed as per the Agreement. In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/paid for such goods by impliedly including the interest for the period allowed for recdizcition of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable recovers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction ofpurchase/sale of goods. There is one more fallacy in the argument about the subsuming of interest income in the working capital adjustment. It is ITA No.l54/Del/2016 simple thcd working capital adjustment is ordinarily computed by considering the average of the opening and closing values of inventories, receivable and payables. A transfer pricing adjustment on account of interest on delayed, realization of invoice value has nothing to do with the closing or opening values. It depends on the period of realization on transaction-to-transaction basis. To put it differently, suppose on invoice is raised on 1st May'; period allowed for realization is two months; and the invoice is actually realized on 31st December, Notwithstanding the fact that interest on such late realization would become chargeable for a period of 6 months (from 1st July to 31st December), but the amount of invoice will not be receivable as at end of the financial year on 31st March. As such, this receivable would not have an impact on the working capital adjustment in any manner, but would call for addition on account of the late realization of invoice value for a period of six months. Following the orders in Ameriprise (supra) and Techbooks (supra), we uphold the view taken the TPO on the issue. Interest on late realization of invoices is directed to charge in line ITA No.l54/Del/2016 with the directions given in the above orders of the Delhi Bench on the tribunal".
(vi) A perusal of the above order, which have been passed by the coordinate Bench of the ITAT after the order of Hon'ble Delhi High Court in the case of M/s Kusum Health- Care ltd. which has duly been considered by the Hon'ble ITAT while passing these judgements. In view of the above it is humbly submitted that the working capital adjustment would not subsume the adjustments on account of outstanding receivables.
B) Overdue outstanding receivable is not an international transaction.
(i) The assessee argued before the TPO that interest on receivables is not an international transaction. In this connection, kind attention of the Hon'ble Bench is drawn to the explanation inserted by the Finance Act, 2012 to section 92B with retrospective effect from 01.04.2002. Clause (i) of this Explanation has been inserted with specific reference to "for removals of doubts, it is hereby clarified that". This amendment/explanation gives meaning to the expression 'international transaction' in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, which is relevant is being reproduced as under for clarity sake-
' Explanation-For the removed of doubts, it is hereby clarified that-
40 ITA No. 370/Del/22(i) The expression ''international transaction" shall include-
(a) ......................
(b) ......................
(c) Capital dinning, including any type of long-term or short-term borrowing,
lending or guarantee, purchase or sale of marketable securities or advance, payments or deferred payment or receivable or any other debt arising during the course of business... '.
(ii) A perusal of the relevant part of this Explanation which, although, has been inserted with retrospective effect from 01.04.2002, squarely applicable to the facts of this case as the assessment year involved in this case is A.Y 2017-18 which is much after the insertion of explanation by the Finance Act 2012. The above explanation leaves no doubt that apart from any long-term or short-term lending or borrowing etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly recognized as an international transaction, lhat being so, the payment/non- payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transaction, requiring the determination of their ALP. If the payment ot interest is excessive or there is no or low receipt of interest, then such interest expense/income needs to be brought to its ALP. The expression 'debt arising during the course of business' in common parlance encompasses, inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordinary by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on account of interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the lower Authorities that it is not an international transaction, turns out to be bereft of any force.
(iii) In this connection, reliance is also placed on the judgement of Hon'ble Bombay High Court in the case of CIT v. Patni Computer systems Ltd. (2013) 215 Taxmann. 108 (bom.), the relevant portion of the same is being reproduced as under:-
"The Hon'ble Bombay High Court in the case of CJT v. Patni Computer systems Ltd. (2013) 215 Taxmann. 108 (bom.) dealt, inter alia, with the following question of law:
-"(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B (1) of the Income lax Act 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? "
(iv) While answering the above question, the Hon'ble High Court notices that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 41 ITA No. 370/Del/22 01.04.2002. Setting restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment.
(v) The foregoing discussion discloses that non-charging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined."
C) The assessee is a debt free company (i) A perusal of the balance sheet of the assessee shows that the assessee has shown lease
equalization reserve under the head 'other long term liabilities' ofRs. 11070911/-as on 31.03.2017 (schedule '5' of balance sheet on page no. 18 of the paper book). In schedule '20' of the P&L account, the assessee has paid interest expense on Income Tax of Rs. 2829650/- (page no. 23 of the paper book).
(ii) In any case, the fact whether the assessee company is debt free company or not would have no implication as far as imputation of interest on overdue receivables is concerned. The money which otherwise would have been collected by the appellant has been left to be used by the AE's without any corresponding compensation. The assessee also runs the risk of foreign exchange as any appreciation in the currency rate would adversely affect its collection. Reliance is also placed on the judgement of Hon'ble ITAT in Bechtel India Pvt. Ltd. Vs. ACT [2017] 85 taxmann.121 (Delhi-Trib) for A.Y 2012-13. Thus, post-amendment, the findings recorded by the Tribunal in Bechtel India Pvt. Ltd. Vs. ACIT [2017] 85 taxmann.com 121 (Delhi-Trib) for A.Y 2012-13 may be summarized as follows:
(iii). Apart from any long-term or short-term lending or borrowing etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business' has also been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring the determination of their ALP.
(iv). The argument that just because the company was debt free fund company, no interest could be attributable on the late realization of receivables is not acceptable because interest on delayed realization of receivables is a separate international transaction and therefore, requires separate bench-marking. It has nothing to do with the operations of the assessee company being with the debt free funds only.
(v). Thus, the post-amendment, it is the subsequent decision of 11 AT (reported in Bechtel India Pvt. Ltd. Vs. ACIT [2017] 85 taxmann.com 121 (Delhi-Trib.) for A.Y 2012-13 hold the field and not the earlier decision of A.Y 2010-11.
(vi). The Assessee's reliance on the Delhi High Court's decision in PCIT Vs.Kusum Health Care Pvt.
Ltd. [2018] 99 taxmann.com 431 (Delhi) is quite misplaced as in that case, the assessee had already factored in the impact of receivables on its pricing/profitability by way ol undertaking working capital adjustment to comparable companies' profit margin and any further adjustment for outstanding receivables would have distorted the picture and re-
42 ITA No. 370/Del/22characterized the transaction. Further, the Assessee's pattern of sales realization in that case did not indicate any arrangement of parking receivables with the A.E. In the case at hand, no such analysis of pattern of receivables of different years have been given and under the circumstances the huge delay in receiving the receivables will partake the character of 'international transaction' for the purpose of transfer pricing bench-marking.
(vii). Further, in Kusum Health Care Pvt. Ltd. cited supra, an important aspect of the matter was not brought to the notice of their lordships that this new explanation to section 92B was specifically inserted to reiterate the fact that the items enumerated in the explanation will ipso-facto partake the character of an international transaction and will be subjected to transfer pricing provisions irrespective of whether they have any bearing on profit/loss of the relevant year or their impact on profit/loss account is determinable under normal computation procedures other than the transfer pricing regulations.
D) On examination of the entity level margin of the assessee company, it was found by Hon'ble ITAT that the tax payer has earned margin of 38.39% OP/OC margin vis-a-vis margin of comparable companies at 11.43%
(i) This is a factual finding given by the Hon'ble ITAT as per the facts of the case in the relevant assessment year. While applying this principle, the facts of the case and the margin of the assessee in each year is required to be compared. The decision would be based on the actual margins as per the facts of each assessment year and can't be applied across all assessments without verifying the facts. The facts in the present assessment year regarding the margin of the assessee have already been analysed in the earlier part of this submission. The same is being reproduced as under for clarity sake: -
"A perusal of the summary of international transactions have been reproduced by the assessee on page no. 62 of the paper book in the TP Study Report. A perusal of the above table clearly demonstrates that the margin of the assessee company during the year was 14.72% for software development services whereas the margin of the comparable companies was in the range of 11-66%o-16.54%o. A perusal of the above clearly demonstrates that the margin of the assessee company is not much higher during the year as has been claimed by the assessee. It may also be pointed out clearly that the TPO has determined the ALP of this transaction with median of 17.24% having a range of 15.84%) being the 35th percentile- 21.02% being 65th percentile. The total adjustments made by the TPO on this account is 7.44 crores which forms part of the appeal set of TPO order on page no 179-180 of the appeal set. This clearly demonstrates that the margin of the assessee at entity level is less than the comparable companies and not more as has been claimed. Based on this factual analysis, the order of the coordinate Bench of earlier years would not apply to the facts of this year. "
(v) In view of the above facts, it is humbly submitted that the findings of the coordinate Bench in the earlier years would not have application to this year in view of the low margin of the assessee company.
43 ITA No. 370/Del/22E) It has also been held by the Tribunal that when the tax payer is not charging interest from unrelated third party/non-AE, in case of such delay, no adjustment on interest in case of AE can be made.
(i) A perusal of schedule 12 of the balance sheet (page no. 22 of paper book) deals with trade receivables. Out of the total trade receivable of 100 crores, approx. 85 crores are due to the AEs. Therefore, 85% of the total outstanding is towards AEs. It is also seen on a perusal of page 62 of PB regarding international transaction that the assessee has also shown deemed international transaction as per section 92B(2) of the Act. The relevant note given by the assessee is reproduced as under: -
(ii) Deemed international transactions (u/s 92B of the Act) amounting to INR 1,712,280/- undertaken by GL India with third parties customers pursuant to the global logic contracts entered into by GL Inc. has been considered as closely linked to the main international transaction pertaining to 'provision of Software development services' while determining arm's length price of the said international transaction.
(ii) The above note clearly shows that the transactions which are being claimed by the assessee as entered into with third independent parties/non AEs may not be with the non AEs in view of the above note. This fact is also fortified with the business model of the assessee wherein the software development services are primarily being rendered to the AEs only. Therefore, the finding of the Hon'ble ITAT in the earlier years that since the assessee has not charged interest from non AEs may not be based on the facts of the case in this year. "
16.4 The assessee, in reply to the above submission of the Ld. CIT-DR filed its rejoinder on 23.07.2022 rebutting each argument taken by the Ld. CIT- DR. The relevant extract of the assessee's rejoinder is reproduced below:
"A) The working capital adjustment would subsume the adjustments to be made on account of overdue receivables in view of Hon'ble Delhi High Court judgment in the case of Kusum Health Care Ltd.
"1, It is submitted that in Point (i), (ii) and (iii) above, the Id. DR has sought to contend that in the case of Kusum Healthcare, decided by the Hon'ble High Court, the margin earned by the assessee was higher than the working capital adjusted margin of comparable companies, which is not in the case of the appellant. Therefore, the decision of High Court in case of Kusum Healthcare, relied upon by the Hon'ble ITAT in deciding the appeal of the appellant from preceding years, will not apply for the year under consideration.
Before submitting on the margin of the appellant vis-a-vis comparable companies, at the outset it is submitted that the Hon'ble High Court in the case of Kusum Healthcare (supra), after considering the amendment made in Explanation to Section 92B of the Act, held that not every item of receivables' appearing in the accounts of an entity, which may have 44 ITA No. 370/Del/22 dealings with foreign AES would automatically be characterised as an international transaction, as under:
10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92 B of the Act of the expression 'receivables' does not mean that the context every item of receivables' appearing in the accounts of an entity, which may have dealings with foreign AES would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case-to-case basis.........
Further, in the said decision, the Hon'ble High Court, in Para 10 or Para 11 of their decision has held that since the assessee have already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables is impermissible, as under:
10 ..................Importantly, the impact this would have on the working capital of the Assessee will have to be studies. In other words, 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 reflects an international transaction intended to benefit the AE in some way.
11. The Court finds that the entire focus of the AO was just one A. Y. and the figure of receivables in relation to that A. Y. can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in Commissioner of Income Tax v. EKL Ltd. (2012) 345 ITR 241 (Delhi)."
Accordingly, the conclusion drawn by the Id. DR that the margin of the appellant ought to be far higher than the working capital adjusted margin of comparable companies, in order to apply the ratio laid down by the Hon'ble High Court in the case of Kusum Healthcare, is farfetched and erroneous.
In the following case, the adjustment on account of receivables was deleted on the basis that the margin of the assessee company falls with the range of working capital adjusted margin of comparable companies, applying TNMM -
- ACIT vs. Gillette Diversified Pvt. Ltd. (ITA No. 5736/Del/2015) [Appellant's margin 5.63%; comparable margin 3.39%]
-EXL Service.com (India) vs DCIT (ITA No. 1708/Del/2016) [Appellant's margin 14.89%; comparable margin 14.29%] 45 ITA No. 370/Del/22 In the facts of the case, the appellant is providing software development services to its associated enterprise at a cost plus mark-up of 15%. The facts of the case has remained same in all the years in which the issue of receivable was decided by the Hon'ble ITAT and the margin of the appellant and comparable companies identified in the transfer pricing study is tabulated as under:
Appellant's Comparable margin
Assessment Comparabl e computed by TPO Remarks
Year margin margin (TPR)
(TPR)
Adjustment proposed
2010-11 15.68% 15.39% 25.96% in relation to SWD
segment was deleted
by DRP
2012-13 17.05% 14.25% - No adjustment by TPO
2013-14 28.22% 14.50% - in relation to SWD
segment
2014-15 13.17% 14.32% 22.60%
Adjustment proposed
2015-16 14.30% 4.83%- 19.36%-28.81 %
in relation to SWD
19.62% (Median 22.78%)
segment was deleted
2016-17 14.37% 13.76%- 21,25%-27.65% by ITAT
24.90% (Median 24.37%)
2017-18 14.72% 11.66%- 15.84%-21.02% Present appeal
16.54% (Median 17.42%)
From perusal of the above table, it would be noted that the margin of the appellant has remained the same for being charged on the basis of cost plus mark-up of 15% and has always been within the range of the working capital adjusted margin of comparable companies. Further, in the all the preceding years, the margin earned by the appellant was found to be at arm's length price.
Accordingly, the decision rendered by the Hon'ble ITAT in appellant's own case of the all the preceding years, i.e. AY 2010-11, 2012-13, 2013-14, 2014-15, 2015-16, 2016- 17, following the decision of Hon'ble High Court in the case of Kusum Healthcare, is applicable to the year under consideration as well and since the margin earned by the appellant falls within the range of working capital adjusted margin of comparable companies, no further adjustment on account of outstanding receivable ought to be made.
2. It is submitted that in Point (iv) and (v) above, the Id. DR has sought to submit that working 46 ITA No. 370/Del/22 capital adjustment would not subsume the adjustments for outstanding receivables as in case of working capital adjustments, only the opening and closing balancing of the working capital are taken into account. The Id. DR, in this regard, has referred to the decision of Delhi Tribunal in the case of Ameriprise India Pvt. Ltd ITA No 2010/Del/2014 and Mckinsey Knowledge Centre Pvt. Ltd.
The Id. DR further held that the above decision of the coordinate Bench of the ITAT (Ameriprise and McKinsey) was after the order of Hon'ble Delhi High Court in the case of M/s Kusum Healthcare Ltd., which has duly been considered by the Hon'ble ITAT while passing these judgements and therefore, the working capital adjustment would not subsume the adjustments on account of outstanding receivables.
It is respectfully submitted that the decision of Hon'ble ITAT relied on by the Id. DR (Ameriprise and McKinsey) are either passed before the decision of Hon'ble High Court in the case of Kusum Healthcare or was overturned by the Hon'ble High Court in their respective case. The sequence of events, in this regard, is as under:
The Hon'ble Delhi Tribunal in case of Kusum Healthcare Pvt. Ltd. vs. ACIT (ITA No. 6814/Del/2014) [order dated 31.03.2015] held that the working capital adjustment takes into account impact of outstanding receivables and no further adjustment required if the margin of the assessee is higher than working capital adjusted margin of comparable.
The Hon'ble Delhi Tribunal in case of Ameriprise India P. Ltd. vs. ACIT (ITA No. 2010/Del/2014) [order dated 14.08.2015] considered the decision of coordinate bench in the case of Kusum Healthcare and held that the allowing working capital adjustment in the international transaction of rendering services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs.
T he Hon ble Delhi I ribunal in the case of McKinsey Knowledge Centre Pvt. Ltd. vs. DCII [ I I A No. 154/Del/2016] (order dated 15.12.2016) followed their finding in the case of Ameriprise India (supra).
The Hon'ble Delhi High Court, vide order dated 25.04.2017 in the case of Kusum Healthcare, dismissed the appeal of the revenue against the decision of Hon'ble Tribunal and that (i) The inclusion in the Explanation to Section 92B of the Act of the expression "receivables" does 47 ITA No. 370/Del/22 not mean that de hors the context every item of "receivables" appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction and (ii) With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis- a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction.
In the appeal filed by the assessee in the case of Mckinsey Knowledge, the Hon'ble High Court vide order dated 07.02.2018, while admitting the appeal on the other issue, remitted the issue of interest charged on outstanding receivables to ITAT, following their decision in the case of Kusum Healthcare.
However, vide order dated 09.08.2018, the Hon'ble High Court in the case of Mckinsey Knowledge, while deciding the appeal of the assessee on other issue, also referred to the decision of the Hon'ble Delhi Tribunal in case of Ameriprise India P. Ltd. vs. ACIT (ITA No. 2010/Del/2014) on issue of interest charged on outstanding receivable and concluded that 'the assessee's contention that the ITAT erred in concluding that charging of interest on delayed receipt of receivables is a separate international transaction which requires to be benchmarked independently, is incorrect. "
Aggrieved, the taxpayer (Mckinsey Knowledge) filed Review Petition before the Hon'ble High Court against the order dated 09.08.2018 and the Hon'ble High Court, vide order dated 16.04.2019 in Review Pet. No. 360/2018, was pleased to recall/correct their order dated 09.08.2018, holding as under:
"9. As far as the first argument by the review petitioner, i.e., the answer to the question of bringing to tax the interest amounts goes, this Court is of the opinion that the fact that the order of 07.02.2018 referred to Kusum Health Care had expressly remitted the matter for consideration to the IT AT supports the assessee's submission. All that the court had stated on 07.02.2018 was that the matter required re-examination by the ITAT in the light of the Kusum Health Care (supra). For these reasons, the judgment to the extent it deals with adjustments made by the TPO, and regarding interest on delayed receipt of receivables, is a clear error. The court also furthermore notes the submissions made with respect to inapplicability to Explanation of Section 92B and its prospective operation. As the order of 07.02.2018 reserved by contentions, this Court does not propose to disturb the effect of that matter. The matter will be considered by the ITAT on its own merits.
In view of the aforesaid sequence of events, it would be noted that the decision of Hon'ble Delhi High Court in the case of Kusum Healthcare is still the binding precedent on the issue 48 ITA No. 370/Del/22 of interest on outstanding receivables. Needless to mention that the law laid down by the Hon'ble High Court in the case of Kusum Healthcare was followed by the Hon'ble ITAT in appellant's own case for the assessment year 2010- 11 (ITA No. 1104/Del/2015), 2012-13 (ITA No. 1115/Del/2017), 2013-14 [ITA No. 7621/Del/2017], 2015-16 [ITA No. 8726/Del/2019] and 2016-17 [ITA No. 868/Del/2021] and therefore, ought to be followed in the year under consideration too.^ B) Overdue outstanding receivable is not an international transaction.
"1 At the outset it is submitted that whether the outstanding receivables from the associated enterprise is an international transaction in terms of section 92B of the Act is not disputed by the appellant and therefore, the above submission of the Id. DR is academic in the present appeal.
2. liven otherwise, it is respectfully submitted that in the decision of Patni Computers, the Hon'ble Bombay High Court has merely set aside the matter to the file of ITAT to pass a fresh decision in light of the amendment made in Explanation to Section 92B, without dealing with the issue on merits. From perusal of the direction of the Hon'ble Court, it cannot, in any manner, be assumed that the Hon'ble Court has held that the alleged transaction of outstanding receivable is a separate international transaction in terms of section 92B of the Act.
In fact, the Hon'ble jurisdictional High Court in the case of Kusum Healthcare, after noting the amendment made in Explanation to section 92B of the Act has held -
10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression 'receivables' does not mean that the context every item of receivables' appearing in the accounts of an entity, which may have dealings with foreign AES would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case- to-case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studies. In other words, 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 reflects an international transaction intended to benefit the AE in some way.
It was held similarly by the Hon'ble Delhi High Court in the case of Avenue Asia Advisors Pvt.49 ITA No. 370/Del/22
Ltd. vs. DCIT reported at 398 ITR 120, wherein, the High Court too held that:
"On the question of notional interest, it was incorrect on the part of the Income- tax Appellate Tribunal to hold that the entire outstanding receivables constitute an international transaction. The reliance by the assessee on the decision of court dated April 25, 2017 in I. I.A. 765 of 2016 (Principle CIT vs. Kusum Healthcare Pvt. Ltd. reported in [2017] 398 ITR 66 (Delhi) (hereafter "Kusum Heath Care") is apt. There are several factors which need to be considered before holding that every receivable is an international transaction and it require an assessment on the working capital of the assessee. Applying the decision in Kusum Healthcare (supra), question (Hi) is answered in affirmative, i.e. in favour of the assessee and the Commissioner of Income-tax (Appeals) is directed to study the impact of the receivables appearing the books of accounts of the assessee; looking into various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions. "
Additionally, in the case of the appellant, the Hon'ble Tribunal in the preceding years has decided the issue in favour of appellant on the basis of following proposition-
1. The operating profit margin earned by the appellant is within the arm's length range of working capital adjusted margin of comparable companies and therefore, a separate benchmarking of receivables is unwarranted.
2. The appellant is a debt free company, i.e. it is not incurring any interest cost and has not availed any loan from AEs or unrelated third parties.
3. There is similar delay in receipt of receivables from unrelated third parties and the appellant is not charging interest on delay in receipt of receivable from services rendered to such parties.
Accordingly, the question whether alleged transaction of delay in receipt of outstanding receivables can be construed as a separate international transaction is academic and inconsequential in the present case as in the preceding years, the Hon'ble Tribunal has decided the issue on the facts of the case of appellant and applicable precedents."
C) The assessee is a debt free company 50 ITA No. 370/Del/22 "1. It is submitted that Lease equalization reserve is not an interest bearing debt availed by the appellant from any bank/ financial institution. The interest paid by the appellant is also interest paid to the Government for late deposit of advance tax/ withholding tax and is not interest paid on any loan/ debt. Other than the above two items, the Id. DR could not provide details of any expenses been incurred by the appellant in relation to any financial debt availed during the year. This proves beyond that the appellant is a debt free company and is undertaking its business activity on the revenue earned from provision of services to associated enterprise and third party customers.
2. It is further submitted that the appellant is a wholly owned subsidiary of Global Logic Inc. and all software development export services are rendered to the group entities. From perusal of the audited accounts of the appellant, it would be noted that the appellant is enjoying interest free reserves and surplus of Rs. 268,72,15,683 which otherwise is the income of the shareholder, i.e. associated enterprise. The aforesaid reserves and surplus of Rs. 268.72 crores is much higher than the outstanding receivables due to the associated enterprise, at any point of time in the year. It would be incorrect/ improper to suggest to utilize interest free funds of the associated enterprise in provision of services and on the other hand charge interest on the outstanding receivables due from them.
3. With regard to submission of the Id. DR in point (v) above, that in view of amendment in section 92B of the Act, the Hon'ble Tribunal in their subsequent decision of Bechtel India Pvt. Ltd. issued for AY 2012-13 has reversed their earlier decision issued for AY 2010-11, it is submitted that the Hon'ble Tribunal in their decision issued for AY 2010- 11 dated 21.12.2015 deleted the said adjustment on the basis of following observation which is a matter of fact in that case -
15.1. It is brought to our notice that the assessee is a debt free company. In such circumstances it is not justifiable to presume that, borrowed funds have been utilized to pass on the facility to its AE's. The revenue has also not brought on record that the assessee has been found paying interest to its creditors or suppliers on delayed payments.
4. Further, the above decision of the Hon'ble ITAT in Bechtel India for AY 2010-11 has reached finality as the SLP filed by the revenue against the decision of the Hon'ble High Court was dismissed by the Hon'ble Supreme Court.
5. It would also be noted that the subsequent decision of Hon'ble Tribunal rendered for AY 2012-13 in the 51 ITA No. 370/Del/22 case of Bechtel was decided without considering the its own decision of Hon'ble High Court and Supreme Court and therefore, is per incuriam.
6. In fact, in the appellant's own case, the Hon'ble Tribunal in their recent decision passed for the AY 2014- 15 dated 16.03.2022, has rightly followed their earlier decision for AY 2010-11 and 2012-13, wherein, the Hon'ble ITAT has relied on the decision of Bechtel (supra), as under:
3. The only issue contested during the hearing pertains to "adjustment of interest on receivables At the outset, it was brought to our notice that the issue of interest on receivables stands adjudicated by the orders of the Co-ordinate Bench of ITAT in assessee's own case in ITA No. 8726/Del/2019 for A. Y. 2015- 16 vide order dated 29.06.2020 and in ITA No. 868/Del/2021 for A. Y. 2016-17. For the sake of ready reference, the relevant part of the order is reproduced as under:ITA No. 8726/Del/2019 for A. Y. 2015-16
"32. Now coming to the next issue raised in the present appeal against the transfer pricing adjustment made on account of interest due on receivables outstanding. The said issue stands covered in favour of the assessee by the decision of the Tribunal in assessee's own case for Assessment Year 2010-11 in ITA No. 1104/Del/2015 and for Assessment Year 2012-13 in ITA No.l 115/Del/2017 vide order dated 12.12.2017. The Tribunal has relied on the decision of Hon 'ble Delhi High Court in Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. in ITA No.765/2016, judgment dated 25.04.2017 and held that no adjustment is to be made on account of notional interest on receivables by relying upon Explanation (i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company, there is no question of charging any interest on receivables. This issue has also been decided by Hon 'ble Delhi high Court in case of Pr.CIT-1 vs. M/s. Bechtel India Pvt. ltd. in ITA 379/2016 order dated 21.07.2016. The relevant findings of the order of the Tribunal in assessee's own case (supra) in paras 14 to 18 which are being reference but not being reproduced for the sake of brevity.
33. The assessee during the year under consideration had not avail any loan from AEs or unrelated third party and was not incurring any interest cost. Further, there was similar delay in receipt of receivables from others and the assessee was not charging any interest on delay in receipt of receivables against services rendered to unrelated third party.
34. In such facts and circumstances and following the ratio laid down by the Hon 'ble Delhi High Court in Kusum Healthcare Ltd. (supra) and also in line with the findings of the Tribunal in Assessment years 2010- 11 & 2012-13, we find no merit in making any adjustment on account of interest due on receivable from its AE. Ground of appeal Nos. 2 to 2.6 raised by the assessee are thus allowed. "ITA No. 868/Del/2021 for A.Y. 2016-17:
.......................................
52 ITA No. 370/Del/2215. So, in view of the law laid down by Lion 'ble High Court in Pr. CIT- V vs. Kusum Health Care Pvt. Ltd. (supra), we are of the considered view that no adjustment can be made on account of notional interest on receivables by relying upon Explanation
(i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debtfree company, there is no question of charging any interest or receivables. This issue has also been decided by Hon 'ble Delhi High Court in case of Pr. CIT-1 vs. M/s. Bechtel India Pvt. Ltd. in ITA 379/2016 order dated 21.07.2016.
.................................
53. Following the order passed by the coordinate Bench of the Tribunal in taxpayer's own case (supra), we are of the considered view that since the taxpayer has not incurred any interest cost nor has avai led of any loan from AE or unrelated third parties, as is evident from audited financials at pages 57 & 66 of the paper book, proposed adjustment on account of delay in receipt of receivables by the TPO/DRP is not sustainable, hence ordered to be deleted. Consequently, grounds no. 2 to 2.8 are determined in favour of the taxpayer. "
4. Decided cases must be put to rest, unless otherwise. In the absence of any material change in the factual matrix and the legal proposition, we direct that the addition made of "adjustment on interest due receivables" be deleted.
7. Regarding submission made by the Id. DR in point (vii) above, it is submitted that the Hon'ble High Court in the case of Kusum Healthcare, in Para 10 of their order, has duly noted the amendment made by insertion of Explanation to Section 92B and its import and held as under:
10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression 'receivables' does not mean that the context every item of receivables' appearing in the accounts of an entity, which may have dealings with foreign AES would automatically he characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case-to-case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studies. In other words, 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 reflects an international transaction intended to benefit. the AE in some way.
D) On examination of the entity level margin of the assessee company, it was found by Hon'ble ITAT that the tax payer has earned margin of 38.39% OP/OC margin vis- a-vis margin of comparable companies at 11.43%.
"1. The above contention of the Id. DR has already been dealt at Page 8 and 9 of this submission. It is reiterated that the in terms of the decision of Hon'ble Delhi High Court in the case of Kusum Healthcare (supra), no adjustment on account of delay in receipt of receivable ought to be made if the margin of the appellant is within the arm's length range of the working capital adjusted margin 53 ITA No. 370/Del/22 of comparable companies. Further, since the appellant is operating at cost plus margin of 15%, the margin of the appellant has remained same over the preceding years.
E) It has also been held by the Tribunal that when the tax payer is not charging interest from unrelated third party/non-AE, in case of such delay, no adjustment on interest in case of AE can be made.
"1. It is submitted that as per the Profit and Loss account prepared for the year under consideration, the total sales is reported at Rs. 387,12,43,299. Further, as per Note 24:
Related Party disclosure, the appellant, during the year under consideration has rendered software development services amounting to Rs. 338,36,82,742 to its associated enterprise. I he said amount of Rs. 338,36,82,742 is also reported in the transfer pricing document maintained by the appellant and audit report issued in prescribed Form 3CEB.
2. Further, even considering the deemed international transaction of Rs. 17,12,280, the total value of services rendered to the associated enterprise/ related parties works out to Rs.
338,53,95,022 (Rs. 338,36,82,742 + 17,12,280) which constitutes 87.45% of the total sales (Rs. 3385395022 / 3871243299). Accordingly, the balance of sales of services of Rs. 48,58,48,277 represents the sales made to unrelated third parties.
3. The Id. DR on the basis of one of the deemed international transaction of Rs. 17,12,280 undertaken by the appellant with one entity, namely, Oracle India P. Ltd. which is also duly reported as such in the certificate issued in Form 3CEB, is seeking to content that the entire sales of Rs. 48,58,48,277 made to unrelated third parties, may not be with third parties/ non- AEs.
4. It would be appreciated that the books of accounts of the appellant are prepared in accordance with the prescribed Accounting Standards and audited by independent firm of Chartered Accountants. Such Accounting Standard duly prescribe reporting of transactions undertaken by the appellant with related parties and the same is duly been provided in Note 24: Related Party disclosure of the audited accounts. Further, in terms of section 92E of the Act, the international transactions undertaken by the appellant is also audited by an independent firm of Chartered Accountants and report is issued in prescribed Form 3CEB. The said Form 3CEB issued and filed for the year under consideration too provides that the total sales made to the associated enterprise is Rs. 338,53,95,022.
54 ITA No. 370/Del/225. In view of the aforesaid, the contention of the Id. DR that the entire sales made by the appellant during the year under consideration could be made to associated enterprise/ related parties is baseless, without merit and erroneous.
6. Further, in response to the observation of the Id. DR that 85% of the total outstanding is towards the AEs, it is submitted that Rule 10B(l)(a) of the Rules, providing for application of CUP method itself provides that for applying CUP, the price charged in a comparable uncontrolled transaction, or a number of such transactions, is identified, as under:
Determination of arm's length price under section 92C.
10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction \or a specified domestic transaction\ shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :--
(a) comparable uncontrolled price method, by which,--
(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;
(ii)........
(iii).......
7. Accordingly, in the submission of the appellant, even a single transaction undertaken with unrelated third party is a sufficient comparable applying CUP method. In the present case, the appellant has undertaken transaction amounting to Rs. 48,58,48,277 with unrelated third parties, constituting 12.55% of the total sales and therefore, serve as valid comparable for application of CUP.
8. Reference in this regard is also placed on the decision of Delhi Bench of Tribunal in the case of Lummus Technology Heat Transfer BV vs. DCIT [ITA 6227/Del/2012], wherein, while dealing with applicability of internal TNMM, the Hon'ble I FAT held as under:
5 ............................................. We are also of the view that the size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions.
Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size 55 ITA No. 370/Del/22 of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee's transactions with non AEs, on the ground that the volume of business with non AEs was too small vis-a-vis business with AEs.
9. Similar view was taken by the Hon'ble Delhi Bench of Tribunal in the case of Interra Information Technologies (India) Pvt. Ltd. vs. DCIT, wherein, the Hon'ble Tribunal accepted 15% of total uncontrolled transaction as appropriate comparable for applying TNMM:
82 ..................The argument of the TPO for both the years is that the comparable is miniscule in nature and fails on the comparability of volumes or scale of operation.
This argument and finding of the TPO is factually incorrect for the A.Y. 2007-08. 15% of the total turnover, in our opinion is sufficient sample which can be used for the purpose of benchmarking, provided the transactions are functionally comparable. Even domestic uncontrolled transactions are about 10%. In case the transactions are functionally comparable these transactions can be used for benchmarking.
19. In view of the aforesaid, it would be appreciated that contention of the Id. DR in relation to rejection of comparison of delay in receipt of receivables from sales made to associated enterprise vis-a-vis unrelated third parties, applying CUP, is baseless, without merit and erroneous.
In view of the aforesaid cumulative reasons, the decision of Hon'ble ITAT in appellant's own case for the preceding years, i.e. for the assessment year 2010-11 (ITA No. 1104/Del/2015), 2012-13 (ITA No. 1115/Del/2017), 2013- 14 [ITA No. 762l/Del/2017], 2015-16 [ITA No. 8726/Del/2019] and 2016-17 [ITA No. 868/Del/2021] ought to be followed in the year under consideration too and the adjustment made by the Id. TPO ought to be directed to be deleted"
17. We have carefully perused the rival submissions of the Ld. Representatives of the parties and perused the material on record. In our considered view this issue came up for consideration before the Hon'ble 56 ITA No. 370/Del/22 Tribunal in preceding years as well and the Hon'ble Tribunal after considering the factual and the legal position passed its orders in favour of the assessee recording cogent reasons thereto. Although the Ld. CIT-DR has made an effort to establish that the decisions of the Hon'ble Tribunal in AY 2010-11, AY 2012-13, AY 2013-14, AY 2015-16 and AY 2016-17 are not applicable to the facts of the case in the relevant AY 2017-18 under consideration, in our opinion his arguments are not sustainable. Perusal of the order passed by Hon'ble Tribunal in AY 2010-11 and 2012-13 which was followed by the Hon'ble Tribunal in subsequent AY 2013-14, AY 2014-15 and 2016-17 indicates that the Hon'ble Tribunal has given its finding on this issue in the similar set of facts and on legal position. The finding of the Hon'ble Tribunal's order for AY 2010-11 and 2012-13 is reproduced below:
"14. Provisions contained under Explanation (i), (a) & (c) of section 92B have been analysed by Hon'ble Delhi High Court in case cited as Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. in ITA 765/2016 order dated 25.04.2017, wherein it is held that the expression added in Explanation to section 92B does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealing with foreign AE, would automatically be characterized as an international transaction and decided the issue in favour of the taxpayer by returning following findings:-
"10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression 'receivables ' does not mean that de hors the context every item of 'receivables ' appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, 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 API, the arrangement reflects an international transaction intended to benefit the AE in some way.
11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re- characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 245ITR 241 (Delhi).57 ITA No. 370/Del/22
12. Consequently, the Court is unable to find any error in the impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed. "
15. So, in view of the law laid down by Hon'ble High Court in Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. (supra), we are of the considered view that no adjustment can be made on account of notional interest on receivables by relying upon Explanation (i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company, there is no question of charging any interest or receivables. This issue has also been decided by Hon'ble Delhi High Court in case of Pr. CIT-1 vs. M/s. Bechtel India Pvt. Ltd. in ITA 379/2016 order dated 21.07.2016.
16. Furthermore when we examine the entity level margin of the taxpayer vis-a-vis comparable companies, the taxpayer has earned higher margin i.e. taxpayer earned 38.29% OP/OC margin vis-a-vis margin of comparable companies at 11.43%. In such circumstances, no separate adjustment on account of interest can be made. Because the credit period extended to AE cannot be considered as a standalone transaction without considering the main transaction of the sale.
17. Furthermore when the taxpayer is undisputedly a debt free company, as it is not the case of the Id. TPO that borrowed funds have been appropriated enabling the AE to make the delayed payment on receivables. So when outstanding receivables is not a separate international transaction, the delay in realization of the sale proceeds is incidental to the transaction of sale and as such no notional interest can be levied by treating the same as unsecured loan.
18. Furthermore it is the case of the taxpayer that when the taxpayer is not charging interest from unrelated third party / non-AE, in case of such delay, no adjustment on interest in case of AE can be made and drew our attention towards the details of invoices raised qua unrelated parties available at page 183 A of the paper book wherein delay in realization of the receivables is also up to 218 days for AY 2010-11 and up to 417 days qua AY 2012-13 as per detail of invoices raised on unrelated parties qua AY 2012-13, available at page 236 of the paper book."
In the absence of any change in the facts and the legal position, respectfully following the decisions of the coordinate bench of the Tribunal (supra) in the assessee's own case for the preceding year, we hold that the transfer pricing adjustment of Rs. 7,12,59,891/- with respect to interest on delay in receipt of receivables from AEs ought to be deleted. We order accordingly. In the result the appeal of the assessee is allowed.
Order pronounced in the open court on 23rd November, 2022.
sd/- sd/- (SHAMIM YAHYA) (ASTHA CHANDRA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 23 /11/2022 Veena 58 ITA No. 370/Del/22 Copy forwarded to - 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order 59