Income Tax Appellate Tribunal - Hyderabad
Epam Systems India Private Limited ... vs Assistant Commissioner Of Income Tax, ... on 20 November, 2018
N THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No.2122/Hyd/2017
Assessment Year: 2013-14
M/s. EPAM Systems Vs. ACIT,
India Pvt Ltd., Circle-17(1),
Hyderabad. Hyderabad.
PAN: AAACW 2012 R
(Appellant) (Respondent)
Assessee by: Aliasger Rampurwala
Revenue by: Smt. Alka R. Jain, DR
Date of hearing: 05.09.2018
Date of pronouncement: 20.11.2018
ORDER
PER Smt. P. Madhavi Devi, J.M.:
This is assessee's appeal against the final assessment order passed by the Assessing Officer u/s 143(3) r.w.s 92CA(3) and 144C(13) of the Income Tax Act, 1961 (the Act) dated 30.10.2017.
2. The assessee has raised the following revised grounds of appeal.
Grounds of appeal:
"1. On the f acts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel ('DRP') erred in upholding the action of the Ld. Assessing Off icer CAO') / Ld. Transf er Pricing Off icer CTPO') in determining a mark -up of 24.73% (af ter working capital adjustment) f or provision of sof tware development and consultancy services to its Associated Enterprise CAE'), thereby making an adjustment of 2 Rs. 7,51,51,293 to the total income of the Appellant u/s 92CA of the Income-tax Act, 1961.
2. While doing so, the Ld. DRP /Ld. TPO /Ld. AO erred in:
2.1 rejecting the transf er pricing study which was maintained in good f aith and with due diligence;
2.2 rejecting the search process f ollowed by the Appellant and carrying out f resh comparability analysis for determining the ALP;
2.3 rejecting use of multiple year data;
2.4 using the data available at the time of assessment proceedings instead of that available as on the date of preparing the TP documentation;
2·5 rejecting, modif ying and applying certain f ilters while undertaking the comparability analysis;
2.6 including f ollowing companies in the comparability analysis which are diff erent f rom the Appellant in terms of the f unctions perf ormed, asset used and risks assumed;
a . RS Software (India) Ltd.
b. Mindtree Ltd.
c. Kals Information Systems Ltd.
d. CG-Vak Software & Exports Ltd.
e. Persistent Systems Ltd f. Infobeans Technologies Ltd.
g. L&T Infotech Ltd. (Seg) 2·7 not including f ollowing companies similar to the Appellant in terms of the f unctions perf ormed, asset used and risks assumed;
a. Akshay Sof tware Technologies Limited b. Cigniti Technologies Limited 2.8 considering 'provision f or doubtf ul debts' and 'provision no longer required written back' as non -operating items and 'other income' j 'miscellaneous income' as an operating item f or the computation of margins of the Appellant as well as the comparable companies; and 2.9 not granting risk adjustment.
3. On the f acts and in the circumstances of the case and in law, the Hon'ble DRP erred in upholding the action of the Ld. AO TPO in making an adjustment of Rs.16,01,847 to the total income of the Appellant in respect of notional interest on delay in collection of dues f rom the AE.
4. While doing so, the Ld. DRP /Ld. TPO /Ld. AO erred in:
4.1 considering overdue receivables f rom the AEs as a separate international transaction under the provisions of S. 9 2B of the Act;3
4.2 not considering that the working capital adjustment takes into account the impact of outstanding receivables on the prof itability.
5. Without prejudice to Ground 3 & 4, the Hon'ble DRP / Ld. AO TPO erred in ignoring that, if at all transf er pricing adjustment has to be sustained with respect to notional interest on overdue receivables, it has to be made at a UBOR rate and not at short term f ixed deposits as determined by the Ld. AO / TPO.
6. Without prejudice to Ground 3, 4 & 5 the Ld. AO /TPO erred in giving eff ect to the directions of the DRP as regards the computation of the adjustment made on account of overdue receivables.
7. On the f acts and in circumstances of the case and in law, the Ld. AO erred in levying interest u/s. 234B, 234 C and 234D of the Act.
The grounds mentioned herein are without prejudice to one another."
3. In addition the above, the assessee has filed an application for admission of the following additional ground of appeal stating that during the Transfer Pricing proceedings, the Transfer Pricing Office (TPO) has applied Related Party Transaction (RTP) filter of more than 25% and the assessee is now seeking the application of RPT filter @ 15% instead of 25% .
Additional Ground of appeal: -
"8. On the f acts and in the circumstances of the case and in law, the Hon'ble Dispute Resolution Panel (DRP) erred in upholding the action of the Ld. A.O. / TPO in not excluding companies which had related party transactions exceeding the tolerance limit of 15% during the year under consideration ."
4. It is further submitted that on this issue the facts are already recorded and the TPO has applied the RTP filter of more than 25% and therefore, this ground may be admitted and adjudicated. Observing that the facts are already on record on this issue and the dispute is only with regard to the rate of RTP 4 filter to be adopted, we deem it fit and proper to admit the ground and adjudicate as unde r:-
5. At the outset, Learned Counsel for the Assessee submitted that the assessee does not wish to press the Groun ds No.2.2 to 2.5 and 2.7 to 2.9, 4.1, 5 and Ground no.6. These grounds are accordingly rejected as not pressed. Grounds No.1 and 2.1 are general in nature and need no adjudication.
6. As regards Ground No.2.6, the Learned Counsel for the Assessee submitted that though the assessee has raised the ground against the comparability of 7 companies to the assessee-company, the assessee is seeking exclusion of only 4 companies viz., (i) CG-Vak Software & Exports Ltd (ii) Persistent Systems Ltd (iii) Infobeans Technologies Ltd and (iv) L & T Infotech Ltd (Seg.). The other comparables which are not challenged at this level are (i) RS Software (India) Ltd (ii) Mindtree Ltd and (iii) Kals Information Systems Ltd. Therefore, we are not adjudicating the comparability of these companies to the assessee for the relevant assessment year 2013 -14. As regards the comparability of the four companies , which is under challenge, the brief facts are as under:
7. The assessee-company, engaged in the business of providing software development and consulting services to its AE and also in rendering application development, maintenance, quality assurance and strategic guidance to its customers , the assessee entered into an international transact ion with its AE (during the relevant financial year) for providing software development and consulting services worth Rs. 77,73,23,706/ -. Assessee filed its return of income for the relevant assessment 5 year on 29.11.2013 declaring total income of Rs. 9,89 ,88,650/- under the normal provisions and the book profit of Rs. 9,64,26,781/- u/s 115JB of the Act. Since the assessee has entered into an international transaction, the determination of the ALP of the said international transaction was referred to the TPO u/s 92CA(3) of the Act. During the TP proceedings, the TPO observed that along with the international transaction , the assessee had also receivables of Rs. 29,88,38,386/ - which was not reported by the assessee in Form 3CEB or in its TP document, though it was an international transaction.
8. The TPO observed that the assessee has conducted TP study and adopted TNMM as the most appropriate method and as against the assessee's margin of 13.93%, the assessee has arrived at the average margin of the comparables at 14.08% and therefore reported its transactions at ALP. The TPO, however, was not satisfied with the assessee's TP study and therefore, rejected the same and conducted independent analysis of the companies adopted by the assessee and has arrived at the final list of 9 comparable companies, whose average margin was 19.96%. Thereafter, after giving working capital adjustment of 0.28%, the TPO arrived at the ALP of 19.68% and proposed the adjustment accordingly. In accordance with the said proposal, the A.O. passed a draft assessment order against which the assessee raised its objections before the DRP. The DRP, however, confirmed the draft assessment order and in accordance therewith, the final assessment order has been passed, against which the assessee is in appeal before us.
9. As far as the additional ground is concerned, the Learned Counsel for the Assessee has drawn our attention to page 6 of 6 the TPO's order wherein the TPO has enumerated the filters adopted by the assessee and as to whether such filters are appropriate or otherwise. At item 8 of the table on page 6 of his order, the TPO has accepted that the compan ies having related party transactions of less than 25% of sales is an appropriate filter. However, while searching for comparables, he has not applied this filter. Therefore, we deem it fit and proper to direct the TPO to consider the said filter while examining the comparability of the comparables challenged by the assessee before us.
10. The first company which is challenged by the assessee is Persistent Systems Ltd. The assessee has challenged this company on the ground that this company specializes in software products, services and technolo gy innovation and also offers complete life-cycle services and that the company has also revenue from products as well as services, but, there is no segmental data available. It was also submitted that the company's business is divided into three lines vi z., (i) product engineering services (ii) platforms & solutions and (iii) IP and related business which are not comparable to the functions and business lines of a captive service provider. It was also brought to the notice of the TPO that this company is engaged in Outsourced Product Development (OPD) which is different from software development services and it has been recognised and awarded as a leading global OPD vendor. The fact that the company has huge intangible assets and various contractual rights worth 240.48 millions and thus cannot be compared to the captive service provider who does not have any intangible assets was also not considered by the TPO. It was submitted that during the year, the RPT of this company was at 19.47% to 7 total sales. In favour of the above argument that this company is not a comparable to the assessee -company, the Learned Counsel for the Assessee placed reliance on the following decisions:
(i) Saxo India (P) Ltd vs. ACIT - ITA No. 6148/Del/2015
(ii) PCIT vs. Cashedge India P. Ltd - ITA No.279/2016 (Delhi HC)
(iii) Conexant Systems (P) Ltd vs. DCIT (ITA No.264/Hyd/2015
(iv) Electronic Arts Games India (P) Ltd vs. ACIT - ITA No.444/Hyd/2017
(v) ITO vs. Intoto Software (India) (P.) Ltd - ITA No. 1921/Hyd/2014
(vi) Agilis Information Technologies International (P) Ltd vs. ITO - ITA No.1063/Del/2016
(vii) Alcatel-Lucent India Ltd vs. DCIT - ITA No.6856/Del/2015
11. Learned Departmental Representative, on the other hand, supported the orders of the authorities below and placed reliance upon the decision of the TPO at para 6.7 of his order in particular.
12. Having regard to the rival contentions and the material on record, we find that the assessee is into software development services, whereas Persistent Systems Limited is into both the software products, services and technology innovation ; and the segmental details are not available. This is evident from the financials of Persistent Systems Limited and the report of the Director at page 918 of the paper book. At page 1039, it has been clearly mentioned that the Persistent Systems Limited is a global company specializing in software products, services and technology innovation. From the list of intangible assets at page 1051 of the paper book, we find that the assessee has been 8 claiming depreciation both on tangible and intangible assets for the periods ending 31.03.2012 and 31.03.2013. From page 1059 of the paper book, we find that the final segmental results of each segment is not available and therefore, we are of the opinion that the TPO ought to have excluded this company from the final list of comparables. We find that in the case of PCIT vs. Cashedge India P Ltd (supra), the Hon'ble Delhi High Court vide its order dated 04/05/2016, has considered the TP study in the case of Cashedge India P Ltd for the A.Y. 2010-11 and the comparables therein and at para 6 of its order the Hon'ble High Court has discussed the financial results of Persistent Systems Ltd and held as under:
"6. As f ar as the f irst company, i.e., Persistent Systems Ltd., is concerned, the material on record - as found by the ITAT - shows that this company was involved in sof tware development, sof tware products and marketing. Furthermore and perhaps more importantly published segmental data was not available. In these circumstances, having regard to the specif icity of the Transfer Pricing Rules under Rule 10(b) to 10(e) of the Income Tax Rules, the data of the said f irm, i.e., Persistent Systems Ltd., could not hav e been included. Likewise, as f ar as the Wipro Technology Services goes, it was part of the Citi Group and was during the f inancial year in question acquired on 21.01.2009 by the Wipro Ltd as a subsidiary. As a part of the arrangement, the existing contracts pertaining to the work of the Citi Group continued to be with the newly created entity, i.e., Wipro Technology Services. Equally importantly, is that there was no published segmented data as f ar as sof tware development or its finances were concerned with respect to Wipro Technology Services. In these circumstances, the f indings of the ITAT are purely f actual and cannot be gone into as no substantial question of law arises for consideration."
13. In the case of Pr. CIT vs. Saxo India (P.) Lt d for the A.Y. 2011-12 the Coordinate Bench of the Tribunal at Delhi has considered the very same facts to hold that it is not a comparable company as segmental information is not available with regard to the products and services. Learned Departmental 9 Representative has not been able to bring out any dissimilarity of facts between the A.Ys 2010-11 & 2011-12 and the assessment year before us. Therefore, respectfully following the decision of the Coordinate Bench of the Tribunal and also the decision of the Hon'ble Delhi High Court in the case of PCIT vs. Cashedge India P Ltd (supra), we hold that this company is not a comparable to the assessee -company and has to be excluded from the final list of comparables. A.O is directed accordingly.
14. The next company, which is sought to be excluded by the assessee is CGVAK Software & Exports Ltd. According to the assessee, this company is engaged in OPD which is different from software development services and the company earns revenue from software services, software products as well as BPO services and that though the breakup of revenue between the software services and BPO are available, the break up of Operating Cost (OC) and the net profitability between them are not available. In support of the contention that the said company should be excluded in such circumstances, Learned Counsel for the Assessee relied upon the following decisions:
(i) Agilis Information Technologies Intl. P. Ltd vs. ITO - ITA No. 1063/Del/2016
(ii) PCIT vs. Saxo India (P) Ltd - ITA No.682/2016 -
Delhi High Court
(iii) PCIT vs. Cashedge India P. Ltd vs. ITA 279/2016 (Delhi High Court)
15. Learned Departmental Representative, however, supported the orders of the authorities below.
16. Having regard to the rival contentions and the material on record, we find that the assessee has raised its objections before 10 the TPO but he held that it is functionally similar. We have gone through the annual reports of CGVAK Software & Exports Ltd and find that the said company is having revenue from both software services and BPO services but there is no segmental data with regard to each of these transactions. Therefore, as held by the Coordinate Bench of the Tribunal in a number of cases (cited supra), we hold that this company cannot be taken as a comparable to the assessee-company. Accordingly, we direct the TPO to exclude this company from the final list of comparables.
17. As far as the L & T Infotech is concerned, the assessee's objections are that the it is a giant company with a turnover of Rs. 3613 Crs and has a significant brand value and in RPT schedule there is revenue from sale of services as well as products. Further, under operating expenses there are costs of bought-out items for resale of products and therefore, in the absence of segmental details, it cannot be considered as a comparable. In support of this contention, Learned Counsel for the Assessee placed reliance upon the following decisions:-
(i) Saxo India (P) Ltd vs. ACIT - ITA No. 6148/Del/2015
(ii) Electronic Arts Games India (P) Ltd vs ACIT - ITA No.444/Hyd/2017
(iii) Agilis Information Technologies Intl. P. Ltd vs. ITO -ITA No. 1063/Del/2016
(iv) Alcatel-Lucent India Ltd vs. DCIT - ITA No.6856/De/2015
18. We have gone through the financial results of this company which are placed at 1116 of the paper book and find that the revenue from IT services of this company for the relevant assessment years is Rs. 3613 Crs and that it has huge 11 intangibles. This company has been considered by the coordinate Bench of the Tribunal at Delhi and also the Hon'ble High Court in various decisions and in the case of PCIT vs. Saxo India (P) Ltd (supra), the Hon'ble High Court has held that this company cannot be compared to the assessee therein, particularly when its segmental data was not available. The relevant para of Delhi High Court judgment is reproduced here under for ready reference:
"10. On a comparison with the data available and made available, undoubtedly, the object of the statute is to "pull in transactions which otherwise escaped the radar of tax assessment under one head or the other. The transfer pricing methodology - shorn of its details is an attempt by each nation to locate the incidents of income which would be subjected to levy within its jurisdiction where international transactions are involved. This exercise does not compare with other income assessments where the methodology adopted in their domestic jurisdiction will differ".
The TNMM method depends on accurate data with respect to all the three elements - wherever they apply. In the Comparable Uncontrolled Price (CUP) method - which is premised upon the elements in Rule 1 OB(l )(a), the methodology adopted is the price charged or paid for property transfer or services provided in the Comparable Uncontrolled transaction. Therefore, the nature of the transaction and the appropriate filter determines the elements that are to be considered in TNMM. Therefore, the costs, sales and assets employed wherever relevant are to be applied. From this perspective, the revenue's contention that segmental data was available, cannot be accepted. The mere availability of proportion of the turnover allocable for software product sales per se cannot lead to an assumption that segmental data for relevant facts was available to determine the profitability of the concerned comparable."
19. Respectfully following the same, we direct the TPO / A.O. to exclude L & T Infotech from the final list of comparables.
20. The last company, which is sought to be excluded by the assessee is Infobeans Technologies Ltd on the ground that in addition to software development services, it has also earned foreign exchange from export of goods on FOB basis and that as per Note 17, the company clearly mentions that it has generated revenue from sale of software and therefore, functionally this company is not comparable. In support of 12 this contention, Learned Counsel for the Assessee placed reliance upon the following decisions:
(i) PubMatic India Pvt Ltd vs. ACIT - ITA No.655/Pun/2017
(ii) PCIT vs. Saxo India (P) Ltd - ITA No.682/2016 - Delhi High Court.
21. Learned Departmental Representative, however, supported the orders of the authorities below.
22. Having regard to the rival contentions and the material on record and also after going through the financials of this company, we find that under Note 24 of the International Statement, it was clearly mentioned that export of goods and services was calculated under FOB basis. However, except for this reporting, there is no material whatsoever placed before us to demonstrate that this company is carrying on such business and that it is functionally different from the assessee- company. Therefore, we deem it fit and proper to remand the comparability of this company to the file of the A.O. / TPO for reconsideration in accordance with law. Accordingly, Ground No.2.6 is partly allowed.
23. As regards Grounds No.3 and 4 are concerned, we find that the TPO has considered the "interest on receivables" also as an international transaction and has benchmarked and proposed the adjustment. The DRP confirmed the draft assessment order and against the final assessment order, the assessee is in appeal before us. Learned Counsel for the Assessee submitted that this issue is covered in favour of the assessee in the assessee's own case for the A.Y. 2012-13 wherein this Tribunal has held that "no adjustment of interest on receivables" is required as it has already been considered while computing the working 13 capital adjustment. Having gone through the said decision, we find that vide para 9 of its order, the Tribunal has held as under:
"During the TP proceedings u/s 92CA of the Act, the TPO considered the above TP documentation and accepted that after allowing working capital adjustment (WCA in short), the price received by the assessee within + /- 5% of the average margin of the comparables and therefore, no adjustment was proposed. Thereafter, he proceeded to consider the receivables at the end of the year and noticing that a sum of Rs. 21,96,43,078/- has been received after a considerable delay, proposed to charge interest thereon. He accordingly charged interest @ 14.75% p.a on the outstanding receivables. This, in the opinion of the Counsel for the assessee, is not warranted as this already got factored in the working capital adjustment allowed by the TPO. We have gone through the TP study of the assessee and also the TP order of the TPO. Though the A.O. has stated that the working capital adjustment is allowed, the working of such adjustment is not available on record and it is not evident that the margins of the assessee and the comparables are arrived at after such adjustment. The decisions relied upon by the Ld Counsel for the assessee support this contention. Though, we agree with the assessee's contention that no separate addition of interest on receivables is required after allowing working capital adjustment in the absence of material on record, we are unable to give any relief to the assessee on this ground. Therefore, we deem it fit and proper to direct the A.O. to examine if the final margins of the comparables and the assessee have been arrived at after WC adjustment to hold the international transactions of the assessee to be at "ALP" and if it is found to be so, then we direct that no further addition on account of interest on receivables shall be made. However, in the event, it is found that WCA has not been made to the final margins which are compared to the margin of the assessee, then the A.O. shall allow the reasonable period of credit ie., three months from the date of notice and on the outstanding balance exceeding such period, the interest at LIBOR rate may be applied for making the adjustment. A.O. is directed accordingly."
24. Further, we find that this view of the Hon'ble Delhi High Court in the case of PCIT vs. Kusum Health Care Pvt Ltd (ITA No.765/2016, dated 25.04.2017), has been followed by the Tribunal in the assessee's own case for the A.Y. 2012-13 (supra). Respectfully following the same, we hold that no separate adjustment of the interest on receivables is required as already it has been considered while computing the working capital adjustment. Thus, Grounds No.3 and 4 are allowed.
1425. Ground No.7 is consequential in nature and therefore the A.O. is directed to give consequential relief to the assessee, if any.
26. In the result, assessee's appeal is partly allowed.
Pronounced in the open Court on 20 th November, 2018.
Sd/- Sd/-
(S. RIFAUR RAHMAN) (P. MADHAVI DEVI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 20 th November, 2018
OKK
Copy to:-
1) EPAM Systems India Private Limited (Previously known
as M/s. Alliance Global Services IT India private Limited, Plot No.5, North Wing, 3 rd and 4th Floor, Software Units Layout, Madhapur, Hyderabad -500
081.
2) ACIT, Circle-17(1), Signaturee Towers, Hyderabad.
3) The DRP-1, Bangalore
4) DCIT/TPO-1, 5 th Floor, Aayakar Bhavan, Basheerbagh,
Hyderabad-004.
5) The DR, ITAT, Hyderabad
6) Guard File