Income Tax Appellate Tribunal - Bangalore
Tektronix India Private Limited, ... vs Assistant Commissioner Of Income Tax, ... on 8 May, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No. 759/Bang/2022
Assessment Year : 2018-19
M/s. Tektronix India
Pvt. Ltd.,
Salarpuria Permia The Assistant
Survey No. 16, Commissioner of
Sarjapur Outer Ring Income Tax,
Road, Circle - 7(1)(1),
Kadubeesanahalli, Vs. Bangalore.
Bangalore - 560 103.
PAN: AAACT7289F
APPELLANT RESPONDENT
Shri Sharath Rao, CA &
Assessee by :
Smt. Vaidehi Govindarajan, CA
Shri Sunil Kumar Singh,
Revenue by :
CIT-2 (DR)
Date of Hearing : 06-03-2023
Date of Pronouncement : 08-05-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal is filed by the assessee against the final assessment order dated 28.07.2022 passed by Ld.ACIT, Circle - 7(1)(1), Bangalore u/s. 143(3) r.w.s. 144C(13) and section 144B of the IT Act for A.Y. 2018-19 on following grounds of appeal:
"1. The AO/DRP/TPO have erred in law and on facts in making transfer pricing adjustment of Rs. 8,52,25,669/- to the return of income filed by the Appellant and in holding Page 2 of 28 IT(TP)A No. 759/Bang/2022 that the international Transaction of provision of Software Development Segment and Trading Segment was not at Arm's Length and further erred in law and on facts in imputing interest on delayed receivables from its Associated Enterprises.
2. The AO/DRP/TPO have erred in rejecting the TP study of the Appellant and conducting fresh search process with additional and/or modified filters for selecting the companies comparable to the Appellant.
3. The AO/DRP/TPO have erred in rejecting companies if the data pertaining to FY 2017-18 are unavailable in the public databases.
4. The AO/DRP/TPO have erred in law in rejecting certain comparable companies merely on the ground that the financial year ending of the Appellant and the comparable company are different.
5. The AO/DRP/TPO have erred in law in rejecting the application of upper turnover filter without appreciating the fact that the lower turnover filter of Rs. 1 Crore have been applied on the comparable companies.
6. The AO/DRP/TPO have erred in law in applying the export earning filter with a threshold limit of 75% in selecting the comparable companies.
7. The AO/DRP/TPO have erred in law in rejecting comparable companies having losses in two (2) out of three (3) years by erroneously application of persistent loss filter.
8. The AO/DRP/TPO have erred in law in computation of Related Party Transaction (RPT) Filter by taking only the (RPT income)/(Total income) or (RPT Expenditure)/(Total Expenditure) instead of taking the over value of RPT transaction (RPT Income + RPT Expenditure)/Sales.
9. The AO/DRP/TPO have erred in law and on facts in considering the following companies in the Software development Segment (SWD) as comparable to the Appellant without appreciating that the said companies are not comparable to the Appellant due to multiple reasons including functionality, product sales, presence of brand and Intangibles led revenue, lack of segmental data, Page 3 of 28 IT(TP)A No. 759/Bang/2022 inadequate financial information, extraordinary evens, engaged in R&D etc 9.1. Exilant Technologies Private Limited 9.2. Tech Mahindra Limited 9.3. L&T Infotech Limited 9.4. Great Software Laboratory Pvt Ltd 9.5. Elveego Circuits Pvt Ltd 9.6. Black Pepper Technologies Private Limited 9.7. Mindtree Limted 9.8. Aptus software Labs Pvt Ltd 9.9. Acewin Agriteck Ltd 9.10.Persistent Systems Ltd 9.11.Wipro Ltd 9.12.Tata Elxsi Ltd 9.13.Infobeans Technologies Ltd 9.14.Nihilent Ltd 9.15.Three sixty Logica Testing Services Pvt Ltd 9.16.Infosys Ltd 9.17.Cybage Software Pvt. Ltd.
10. The AO/DRP/TPO have erred in law and on facts in not including the following companies in the final list of comparable in the Software development Segment (SWD) merely for reasons including non-availability of the company in TPO search matrix and erroneous application filter such as different financial year ending, persistent loss of 2 out of 3 years, export revenue, negative net worth etc. 10.1. Evoke Technologies Private Limited 10.2. EC Info systems India Private Limited 10.3. Orion India Systems India Private Limited 10.4. R Systems International Limited 10.5. Rheal Software Private Limited 10.6. Sasken Technologies Ltd - Seg 10.7. Sure IT Solutions India Private Limted 10.8. Athena Global Technolgies Limited 10.9. E-Zest Solutions Limited 10.10. Kals Information Systems Limited 10.11. Ace Software Exports Limited 10.12. Batchmaster Softwarre Private Limited 10.13. IECS Consultancy Ltd 10.14. Indianic Infotech Limited 10.15. Minvesta Infotech Limited 10.16. Synfosys Business Solutions Limited
11. The AO/DRP/TPO have erred in law and on facts in considering the following companies as comparable to the Appellant in the Trading Segment without appreciating that the said companies are not Page 4 of 28 IT(TP)A No. 759/Bang/2022 comparable to the Appellant due to multiple reasons including functionality, lack of segmental data, inadequate financial information etc 11.1. RMD Mediaids Ltd 11.2. Biolitec India Pvt Ltd
12. The AO/DRP/TPO have erred in law and on facts in not including the following companies in the final list of comparable companies in the Trading Segment which are also in the business of trading in medical devices similar to the Appellant 12.1. Hicks Thermometers (India) Limited 12.2. ADS Diagnostics Limited 12.3. Cardiomed India Limited 12.4. Aishwarya Technologies and Telecom Limited 12.5. Kusam Electrical Industries Limited 12.6. Mohan Exim India Limited 12.7. Biomex Instruments Private Limited
13. The AO/DRP/TPO have erred in computing the transfer pricing adjustment for trading segment of the Assessee by adopting incorrect methodology of computing adjustment. The TPO has erred in ignoring the rectification order dated 02 December 2021 passed by himself wherein the TPO had rectified and recomputed the transfer pricing adjustment for trading segment.
14. The AO/DRP/TPO have erred in not restricting the transfer pricing adjustment to the value of international Transaction with Associated Enterprise alone and have erroneously extended the application of the arm's length margin to the uncontrolled independent third-
party transactions. The AO/DRP/TPO have failed to appreciate that the value of international transaction (purchase of traded goods) is only 35.22% of the total cost in the trading segment and hence the transfer pricing adjustment ought to be limited to that extent.
15. The AO/DRP/TPO have erred in considering the provision for bad and doubtful debts as non-operating in nature while computing the operating profit margins of the comparable companies.
16. The AO/DRP/TPO have erred in committing arithmetic errors while computing the margins of the certain comparable companies.
Page 5 of 28IT(TP)A No. 759/Bang/2022
17. The AO/DRP/TPO have erred in not granting working capital adjustment while computing the arm's length price / net margin of the comparable companies.
18. The AO/DRP/TPO have erred in not granting risk adjustment to the Appellant.
19. The AO/DRP/TPO have erred in law and on facts in re-characterising the delayed outstanding receivable as unsecured loan within the purview of international transaction and thereby imputing tax on notional income.
20. The AO/DRP/TPO have erred in law and on facts in imputing interest on outstanding receivables from the Associated Enterprises without appreciating the fact that the Appellant has followed the same policy of non-charging of interest on trade receivables from both AEs and non- AEs.
21. Without prejudice to the above grounds, the AO/DRP/TPO have erred in law and on facts in not computing the notional interest payable by the Appellant on the outstanding payables to its AEs and netting-off of such payables and receivables.
22. Without prejudice to the above grounds, the AO/DRP/TPO have erred in law and on facts in restricting the credit period to thirty (30) days for the purpose of computing the interest on trade receivables.
23. Without prejudice to the above grounds, the AO/DRP/TPO have erred in law and on facts in erroneously applying State Bank of India (SBI) short term deposit as against the London Inter-Bank Offered Rate (LIBOR).
24. The AO has erred in short granting of credit of tax deducted at source. Further, the AO has erred in not granting credit of INR 50,56,162 reflecting in PAN AABCT1733D of the entity merged with the Company.
25. The AO has erred in law and on facts in erroneously computing interest under section 234C of the Act on 'assessed income' instead of 'returned income'.
The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further Page 6 of 28 IT(TP)A No. 759/Bang/2022 documents, facts and evidence before or at the time of hearing of this appeal.
For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided."
2. Brief facts of the case are as under:
2.1 Assessee is engaged in the business of software development service ("SWD"). The assessee has entered into master service agreement with its holding company and other group companies to provide services at an agreed mark-up on costs incurred in accordance with the contractual terms. Further, the assessee also carries on the business of trading / marketing of test and measurements equipment and related maintenance services. The Assessee filed its return of income for the AY 2018-19 on 30.11.2018 declaring a total income of Rs. 21,27,94,790/-. The case was selected for scrutiny under CASS and a notice u/s 143(2) & 142(1) was issued and served on the assessee. 2.2 The assessee for the year under consideration, had entered into international transaction for software development segment and trading segment with its associated enterprises. The Ld.AO noted that assessee had international transactions with the associated enterprises and accordingly a reference was made u/s. 92CA of the act to the Ld.TPO to determine the margin of such international transactions. The Ld.AO noted that assessee had earned a margin of 14.50% in the SWD segment and 5.58% in the trading segment. Following are the details of the international transactions entered into by the assessee.
Transaction Particulars Method amount Purchase of traded goods 188742021 TNMM and spares Commission Income 140250878 TNMM Page 7 of 28 IT(TP)A No. 759/Bang/2022 Maintenance and support 13393345 TNMM services Provision of SWD 919086899 TNMM Purchase of fixed assets 810035 TNMM Purchase of laptops and 14440141 TNMM accessories Reimbursement of 7741279 TNMM expenses Other Recovery of expenses 5058185 Method Other Sale of fixed assets 2110592 Method 2.3 And the margin computed by the assessee under the segments by using TNMM is as under:
Software Particulars Distribution Unallocated Total Development Income Revenue from operation 594466445 919086990 1513553435 Operating revenue 594466445 919086990 1513553435 Expense 0 Purchase of traded 181490953 181490953 goods (Increase)/decrease in inventories of traded 6055499 6055499 goods Consumption of stores 71479661 71479661 and spares Total 259026113 259026113 Gross Profit 335440332 919086990 1254527322 Employee benefit 146855789 594099797 2585387 743540973 expense Other expense 138594935 157892281 502021 296989237 Depreciation 15530880 33809011 127522 49212369 Finance cost 0 0 0 Operating cost 560007717 785801089 3214930 1349023736 Operating profit 34458728 133285901 -3214930 164529699 OP/OC 6.15% 16.96% OP/OR 5.80% 14.50% Page 8 of 28 IT(TP)A No. 759/Bang/2022 2.4 The Ld.TPO noted that assessee used OP/OC as the PLI for the SWD segment and OP/OR as PLI for trading segment.
The Ld.TPO also noted that assessee used 13 comparables with an average margin of 9.54% for SWD segment and thus held the transaction to be at arms length.
2.5 In respect of trading segment, the Ld.TPO observed that assessee had used a set of 4 comparables with mean of 2.97% and thus held the transaction to be at arms length. Dissatisfied with the transfer pricing study, the Ld.TPO shortlisted a set of 26 comparables under software development segment with a median of 22.27%. The details of which are as under:
F.Year wise OP/OC (%) Wt.
Sl.No. Company Name
Average
2015-16 2016-17 2017-18
1 Infomile Technologies Ltd. 9.91 11.12 8.64 9.89
Harbinger Systems Pvt.
2 12.69 12.8 9.46 11.65
Ltd.
Exilant Technologies Pvt.
3 25.9 17.19 8.5 17.17
Ltd.
4 Tech Mahindra Ltd. 17.08 16.51 20.03 19.43
Backoffice I T Services
5 26.74 19.49 14.13 19.44
India Pvt. Ltd.
Larsen & Toubro Infotech
6 19.21 20.78 18.36 19.59
Ltd.
Great Software Laboratory
7 17.88 23.87 17.31 19.73
Pvt. Ltd.
8 X S Cad India Pvt. Ltd. 27.57 18.93 15.96 20.40
9 Temenos India Pvt. Ltd. 18.47 20.37 20.6 20.60
Black Pepper Technologies
10 9.63 13.84 24.83 20.61
Pvt. Ltd.
11 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 21.19
12 Mindtree Ltd. 26.11 20.12 18.00 21.41
13 Nihilent Ltd. 24.46 30.8 27.83 22.10
Page 9 of 28
IT(TP)A No. 759/Bang/2022
Aptus Software Labs Pvt.
14 27.68 24.84 14.42 22.44
Ltd.
Smartstream Technologies
15 22.99 22.89 23.04 23.04
India Pvt. Ltd.
16 AcewinAgriteck Ltd. 26.54 23.23 22.72 24.51
Anjana Software Solutions
17 102.68 76.58 24.84 24.84
Pvt. Ltd.
18 Persistent Systems Ltd. 23.95 25.05 26.94 25.94
19 Infobeans Technologies 41.21 23.34 27.55 26.82
Ltd.
20 Wipro Ltd. 27.27 28.28 27.78 27.78
21 Tata Elxsi Ltd. 29.13 24.9 33.11 28.65
22 Thirdware Solution Ltd. 30.18 33.36 29.27 29.27
ThreesixtyLogica Testing
23 48.46 36.64 26.67 36.75
Services Pvt. Ltd.
24 Infosys Ltd. 38.51 39.24 37.07 37.79
25 Cybage Software Pvt. Ltd. 61.97 63.3 48.03 53.93
Consilient Technologies
26 71.83 54.85 41.06 55.68
Pvt. Ltd.
35th Percentile 20.61
Median 22.27
65th Percentile 36.75
2.6 In respect of trading segment, the Ld.TPO shortlisted a set of 4 comparables with an average margin of 9.85%, the details of which are as under:
Wt.PLI Sl.No. Company Name OP/OR (%)
1. Kox Med & Lab Pvt. Ltd. 5.31 Hospimax Healthcare Pvt.
2. 7.32 Ltd.
3. RMD Mediaids Ltd. 9.53
4. Biolitec India Pvt. Ltd. 17.23 Average 9.85% 2.7 The Ld.TPO has thus proposed an adjustment under the software development segment as well as the trading segment being the shortfall which is as under:Page 10 of 28
IT(TP)A No. 759/Bang/2022 Adjustment u/s Sl.No. Description 92CA (In Rs.)
1. SWD Segment 5,45,76,108
2. Trading segment 5,52,85,136 The Ld.TPO also did not grant working capital adjustment to the assessee in respect of both the segments. 2.8 The Ld.TPO also considered the trading segment at entity level without restricting its adjustments / analysis only in respect of the international transaction of assessee. The Ld.TPO also computed the notional interest of outstanding receivables by considering SBI short term deposit rate applicable for F.Y. 2017- 18 which was computed by using following formula.
INTEREST = A*WAIR*Days/36500;
(A=Amount, WAIR=Weighted Average Interest Rate, Days=No. of days delayed) 2.9 The Ld.TPO only provided 30 days credit period to assessee beyond which all the outstanding receivables were considered for computing notional interest. He thus proposed an adjustment in respect of interest on trade receivables at Rs.4,93,755/-. 2.10 On receipt of the transfer pricing order u/s. 92CA, the Ld.AO passed the draft assessment order by proposing an addition in the hands of the assessee at Rs.10,98,61,244/-. 2.11 Against the draft assessment order passed on 27.09.2021, the assessee filed objections before the DRP. The DRP confirmed the transfer pricing adjustment proposed in respect of SWD segment. In respect of trading segment, the DRP did not accept the inclusion of two comparables sought by the assessee and also did not accept the exclusion of two comparables which were trading in medical and surgical equipments.
2.12 On receipt of the DRP directions, the Ld.AO passed the final assessment order making addition at Rs.8,52,25,669/- in respect Page 11 of 28 IT(TP)A No. 759/Bang/2022 of the transfer pricing order passed by the authorities. An order u/s. 154 was passed wherein certain corrections were made by the Ld.TPO under the trading segment and thus the adjustment was made at Rs.2,53,58,920/-.
2.13 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal.
3. At the outset, the Ld.AR submitted that Ground nos. 1-4 and 6-8 are not pressed by the assessee.
Accordingly these grounds are dismissed as not pressed.
4. Ground no. 5 is raised by assessee seeking exclusion of following comparables on not fulfilment of turnover filter.
Turnover
S.No. Name of the comparables
(in crores)
1. Exilant Technologies Pvt. Ltd. 332.51
2. Tech Mahindra Ltd. 23,661
3. L&T Infotech Ltd. 6,906.40
4. Mindtree Ltd. 5,325
5. Persistent Systems Ltd. 1,733
6. Wipro Ltd. 44,710
7. Tata Elxsi Ltd. 1,386
8. Nihilent Ltd. 280
9. Infosys Ltd. 60,941
10. Cybage Software Pvt. Ltd. 737
4.1 The Ld.AR relied on the following decisions in support of his contention.
1) Decision of Coordinate Bench of this Tribunal in case of Autodesk India (P) Ltd. reported in (2018) 96 taxmann.com 263 Page 12 of 28 IT(TP)A No. 759/Bang/2022
2) Decision of Coordinate Bench of this Tribunal in case of Arista Networks India (P.) Ltd. reported in (2021) 133 taxmann.com 204
3) Decision of Coordinate Bench of this Tribunal in case of Sprinklr India Pvt. Ltd. in IT(TP)A No. 250/Bang/2022 4.2 The Ld.AR submitted that as per the Dun & Bradstreet classification of software industry, the companies could be classified under three (3) major heads depending on the turnover of the company viz., a. Less than Rs 200 crores categorized as small size companies;
b. Rs 200 crores to Rs 2000 crores categorized as medium size companies;
c. More than Rs 2,000 crores categorized as large size companies.
4.3 The turnover of the assessee for the relevant assessment year in the SWD segment is Rs 91.90 Crores and therefore would fall under the category of small size company having turnover in the range of Rs 1 crore to Rs 200 crores. Therefore, the companies not falling within the range ie, companies having turnover less than Rs 1 crore or turnover more than Rs 200 crores deserves to be excluded.
On the contrary, the Ld.DR supported the orders of the authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
4.4 We note that similar comparables have been excluded in the case of M/s. Sprinklr India Pvt. Ltd. vs. DCIT in IT(TP)A No. Page 13 of 28 IT(TP)A No. 759/Bang/2022 250/Bang/2022 by order dated 15.07.2022 by observing as under:
"11. We have heard rival submissions and perused the material on record. At the outset, we notice that the TPO/DRP have erred in not applying the upper turnover filter to reject high turnover companies, while on the other hand, he has rejected companies with lower turnover of less than one (1) Crore. As per the Dun & Bradstreet classification of software industry, the companies could be classified under three major heads depending on the turnover of the company viz., a. Less than Rs 200 crores categorized as small size companies;
b. Rs 200 crores to Rs 2000 crores categorized as medium size companies;
c. More than Rs 2,000 crores categorized as large size companies.
12. The turnover of the assessee for the relevant assessment year is Rs 134 crores and therefore would fall under the category of small size company having turnover in the range of Rs 1 crore to Rs 200 crores. Therefore, the companies not falling within th e range, i.e, companies having turnover less than Rs.1 crore or turnover more than Rs 200 crores deserves to be excluded. The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. v. ITO (supra) has considered various judicial pronouncements on this issue including that of the Hon'ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that application of turnover filter is justified on the basis of clas sification of companies as per the report of Dun and Bradstreet.
As regards the specific plea of the learned DR that if turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company, we find this plea was rejected by the Bangalore Bench of the Tribunal in the case of Northern Operating Services Pvt Ltd. (supra). The relevant submission of the parties and the finding of the Tribunal in case of Northern Operating Services Pvt. Ltd. (supra) read as follows:-
"15. The ld. DR submitted that the Hon'ble High Court of Karnataka in the case of M/s. Acusis Software (I) P. Ltd. V. ITO in ITA No.223/2017, judgment dated 14.08.2018, Page 14 of 28 IT(TP)A No. 759/Bang/2022 has taken the view that if the turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company. The ld. DR drew our attention to the turnover of 10 comparable companies which is as follows:-
Sl, No. Name of the case Operating Income Operating cost OP./OC 1 Accentia Technologies Ltd. 1,069,026,524 82,93,91,898 28.89% 2 Acropetal Technologies 494,399,332 389706574 26.86% 3 Cosmic Global Ltd. 62,496,615 5,69,15,360 9.81% 4 e4e Healthcare (capitaline) 613,160,587 54,56,25,872 12.38% 5 ICRA Online Ltd. (seg.) 156,691,000 11,67,49,267 34.21% Jeevan scientific 6 1,721,400,000 1,00,86,52,592 70.66% Technology Ltd.
7 Infosys B PO Ltd. 11,291,147,909 9,57,73,24,546 17.89% Jindal Intellicom 8 390,358,799 35,12,69,641 11.13% (capitaline) 9 Mindtree Ltd. (seg.) 5,653,000,000 5,10,39,05,999 10.76% 10 iGate Global Solutions Ltd. 11,845,540,000 9,47,11,65,000 25.07% He submitted that if such criterion is applied, then that would be the proper basis for excluding companies for the purpose of comparability based on turnover.
16. The ld. Counsel for the assessee, on the other hand, submitted that the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) merely dismissed the appeal of assessee on the ground that no substantial question of law arises for consideration. In particular, he drew our attention to the following paragraphs of the judgment of Hon'ble High Court:-
"14. The findings of the learned Tribunal as regards the comparable namely, Mercury Outsourcing Management Ltd., which too have been excluded by the Tribunal are quoted below for ready reference:- "(ii) Mercury Outsourcing Management Ltd.
13.1 The learned Authorised Representative has submitted that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost. 13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than Rs.1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO.
13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is only Rs.45.33 lakhs which is any case does not satisfy any Page 15 of 28 IT(TP)A No. 759/Bang/2022 filter of turnover in comparison to the assessee's turnover more than Rs.27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee's turnover then the company which is having less than Rs. 2.7 Crores of turnover will be outside the said range of 10 times. Accordingly, we are of the view that this company which is having only Rs. 45.33 lakhs turnover cannot be considered as a good comparable to the assessee".
15. From the aforesaid findings of the learned Tribunal, we are satisfied that the reasons assigned by the learned Tribunal in excluding the aforesaid company as comparable is also reasonable and the same deserves to be accepted by us. It is analysed by the learned Tribunal in extenso which arrived at a decision that the company which is having only Rs.45.33 lakhs turnover cannot be considered as comparable to the Assessee-company whose turnover is more than Rs.27 Crores.
16. The decision of the learned Tribunal in the other cases referred to by the learned counsel for the Appellant- Assessee would not render the findings of the learned Tribunal in the present case nugatory or perverse for the reason that analyzing of the comparables may be in a different context and the same need not be blindly or generally adopted in all cases, irrespective of the context or the circumstances calling upon for the inclusion/exclusion of the comparables which absolutely is a decision to be taken by the learned Tribunal as last fact finding authority. This view is supported by our judgment dated 25.08.2018 on Softbrands case (supra), which we find it appropriate to quote hereunder to its relevant extent:-"
17. He submitted that the question of law which the assessee sought to raise before the Hon'ble High Court was justification for excluding Mercury Outsourcing Management Ltd. as a comparable company. It is in that context that the aforesaid decision was rendered by the Hon'ble High Court. He pointed out that the Tribunal in excluding Mercury Outsourcing Management Ltd., had taken a view that its turnover was small compared to the assessee's turnover and therefore not comparable, even if the tolerance range of turnover of 10 times on both the sides of assessee's turnover is applied. There is no positive finding by the Tribunal that the company can be excluded for the purpose of comparability on the basis of turnover, only if the turnover is 10 times on both the sides of assessee's turnover. On the conclusions of the Tribunal, the Hon'ble High Court only held Page 16 of 28 IT(TP)A No. 759/Bang/2022 that it is reasonable and deserves to be accepted. In para 16, the Hon'ble High Court has clearly observed that the decisions rendered in other cases referred to by the ld. Counsel for the assessee would not render the findings of the Tribunal in the case before the High Court as negatory or perverse for the reason that analysing of the comparables may be in a different context. The same need not be blindly or generally adopted in all the cases, irrespective of the context or circumstances calling for exclusion/inclusion of the comparables. The finding in each case is therefore a finding of fact. He pointed out that the Tribunal in the case of Autodesk (I) P. Ltd. v. DCIT [2018] 96 taxmann.com 263 [Bang. Trib.] after analysing the entire cases on the point, came to the conclusion that the decision rendered by the Tribunal in the case of Genesis Integrated Systems (I) P. Ltd. [2012] 53 SOT 159 lays down the correct law on the application of turnover filter and that decision has to be followed. He pointed out that the DRP in the present case has followed the ruling in the case of Genesis Integrated Systems (I) P. Ltd. (supra) and therefore the order of DRP has to be upheld.
18. We have given a careful consideration to the rival submissions and are of the view that as rightly submitted by the ld. Counsel for the assessee, the decision rendered by the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) does not positively say that for a company to be excluded on the basis of high turnover, the tolerance range of turnover of 10 times on both the sides of assessee's turnover has to be seen. Even the Tribunal in the order against which the appeal was filed, did not proceed on application of turnover filter with any such condition. Therefore, it is not correct to say that for application of turnover filter, tolerance range of turnover of 10 times on both the sides of assessee's turnover has been laid down by the Hon'ble High Court. The Hon'ble High Court held that the order of Tribunal is correct and calls for no interference and further held that no question of law arose for consideration. The decision rendered in the case of Autodesk (I) P. Ltd. (supra) of the Tribunal after analysing every conflicting views has ultimately concluded that the law laid down in the case of Genesis Integrated Systems (I) P. Ltd. (supra) has to be followed. The following were the relevant observations of the Tribunal:-
"17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be Page 17 of 28 IT(TP)A No. 759/Bang/2022 followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-
ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)."
19. In the given facts and circumstances of the case, we find no grounds to interfere with the order of DRP on this issue. Consequently, ground Nos.4 & 5 raised by the revenue are dismissed as without any merit.
20. In the result, the appeal by the revenue is dismissed."
Page 18 of 28IT(TP)A No. 759/Bang/2022
13. Accordingly, by following the above orders of the Tribunal, we direct the AO / TPO to apply appropriate upper turnover filter and exclude above mentioned seven companies from the list of comparables. It is ordered accordingly."
4.5 Respectfully following the above view, we direct the Ld.AO/TPO to apply upper turnover filter and exclude all the above comparables mentioned hereinabove from the final list. Accordingly, ground no. 5 raised by assessee stands allowed.
5. Ground nos. 9-10 becomes academic at this juncture and therefore assessee did not wish to press these grounds.
6. Ground nos. 11-12 are in respect of the comparables sought for exclusion / inclusion under the trading segment. 6.1 It is submitted that there are various comparables which are not functionally similar with the trading activity carried on by the assessee. It is submitted that there are comparables that have been included by the Ld.TPO that trade in medical equipments and rejected the comparables sought for inclusion by the assessee which are also in trading medical equipments. The Ld.AR submitted that there is no parity in the comparables selected by the Ld.TPO under the trading segment. The Ld.AR thus requested for the trading segment to be remanded to the Ld.TPO / TPO for denovo consideration. The Ld.DR did not object for the request adhered by the Ld.AR. Considering the submissions by the Ld.AR, we remand the entire trading segment to the Ld.AO/TPO to carry out denovo search with the direction to include comparables having parity with the trading activities carried on by the assessee. Needless to say that the FAR analysis must be given primary importance for selecting the comparables.
Page 19 of 28IT(TP)A No. 759/Bang/2022 Assessee must be granted proper opportunity of being heard for considering this issue.
Accordingly, ground nos. 11-12 raised by assessee stands allowed for statistical purposes.
7. Ground no. 14 is in respect of the grievance of the assessee for considering the trading segment at entity level. 7.1 It is submitted that the value of the international transaction of the assessee with respect to traded goods was only 32.22% of the total cost in the trading segment. The Ld.AR submitted that any adjustment beyond the value of international transaction is outside the scope of the transfer pricing principles. He placed reliance on following decisions of Hon'ble High Courts as well as Coordinate Bench of this Tribunal.
1) Decision of Hon'ble Delhi High Court in case of Keihin Panalfa Ltd. reported in 381 ITR 407
2) Decision of Hon'ble Bombay High Court in case of Alstom Projects India Ltd. reported in 2016 (12) TMI 1408
3) Decision of Hon'ble Bombay High Court in case of Hindustan Unilever Ltd. reported in (2016) 72 taxmann.com 325
4) Special Leave Petition filed has been dismissed in (2018) 99 taxmann.com 135 (SC).
7.2 The above principle has also been upheld by this jurisdictional Bangalore Tribunal in the following cases. Continental Automotive Components India Pvt. Ltd. in IT(TP)A No. 713/Bang/2017 Tokai Rika Minda India Pvt. Ltd. in IT(TP)A No. 2327/Bang/2016 The Ld.DR relied on the orders passed by authorities below.
Page 20 of 28IT(TP)A No. 759/Bang/2022 We have perused the submissions advanced by both sides in the light of records placed before us.
7.3 We direct the Ld.AO/TPO to restrict the adjustment if any only in respect of the value of international transaction between assessee and AE. Respectfully following the ratios laid down in plethora of decisions hereinabove, we remand this issue back to the Ld.AO/TPO to consider the claim in accordance with law. Accordingly this ground raised by assessee stands allowed.
8. Ground no. 17 is in respect of non-granting of working capital adjustment.
8.1. It has been submitted by Ld.AR that working capital was been denied to the assessee on the ground that assessee failed to demonstrate such differences could have any impact on assessee's profit. It has been submitted by Ld.AR that the submissions advanced by assessee demonstrating computational impact has not been considered by the Ld.AO/TPO. 8.2. Before us, Ld.AR submitted that it is an accepted principle upheld in various decisions of this Tribunal that working capital adjustment should be allowed on actual. It has been submitted that all relevant details for computation of working capital was provided to the Ld.AO/DRP which has been disregarded. He placed reliance upon the decision of coordinate bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt. CIT reported in (2019) 101 taxmann.com 313, wherein it has been held that the working capital has to be granted in actual. 8.3. On the contrary, Ld.CIT DR placed reliance upon orders passed by authorities below.
Page 21 of 28IT(TP)A No. 759/Bang/2022 We have perused submissions advanced by both sides in light of records placed before us including the decision relied upon by 8.4. Ld.AR in case of Huawei Technologies India Pvt. Ltd. (supra). A reading of Rule 10B(l)(e)(iii) of the Rules read with sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market.
8.5. Chapters I and III of OECD Transfer Pricing Guidelines contain guidelines on comparability analyses for transfer pricing purposes. Guidlines on adjustments to be provided is found in paragraphs 3.47-3.54 and in the Annex to Chapter III. The guidelines must be followed for computing arm's length principle, and for comparing comparable uncontrolled transactions. Reasonably accurate adjustments should be made to eliminate effect of any such differences.
8.6. Paragraphs 13 to 16 of OECD guidelines, emphasizes need for working capital adjustment in terms of receivables and payables as under:
"13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element Page 22 of 28 IT(TP)A No. 759/Bang/2022 to reflect these payment terms and compensate for the timing effect.
14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect.
15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory)
16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that:
A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts in suppliers"
8.7. The reverse applies to huge accounts payable. By having high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Making a working capital Page 23 of 28 IT(TP)A No. 759/Bang/2022 adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. Methodology to compute working capital adjustment is given in Paragraphs 13 to 16 of the aforesaid OECD Guidelines (supra). These guideline also indicate factors that needs to considered like;
8.8. The point in time at which the Receivables, Inventory and Payables should be compared between tested party and comparables, and whether it should be the figures of receivables, inventory payable at the yearend or beginning of the year or average of these figures that should be considered;, 8.9. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the assessee or the Department to show what is the Arm's Length Price. The data available with the assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as the assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alleged by DRP/TPO in case of certain comparables, Hon'ble Delhi Bench in case of ITO v. E Value Servc.com reported in (2016) 75 taxmann.com 195 held that, insisting on daily balances of working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed.
Page 24 of 28IT(TP)A No. 759/Bang/2022 8.10. It must not be forgotten that transfer pricing analysis is estimation and not an exact science. One has to see that, reasonable adjustment must be made where ever it is needed, so as to bring both comparable and test party on same footing. In present facts of case, DRP may be correct in denying working adjustment due to unavailability required data, however there is no merit in observations of DRP/TPO as supported by Ld.CIR DR, in denying working capital adjustment due to absence of details for working out adjustments in comparable companies chosen. If we appreciate the argument advanced by Ld.CIT.DR, there would remain no comparables for the purpose of comparability analysis to determine ALP of an international transaction, and this would be fatal to entire exercise of transfer pricing analysis. 8.11. Regarding comparable companies, one has to fall back upon only on information available in public domain. If that information is insufficient, it is beyond the power of the assessee to produce correct information about comparable companies. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defense to say that Assessee has not furnished required details to deny any adjustment on account of working capital differences. Therefore this objection of DRP is not sustainable. Therefore in, endeavor should be made to bring in comparable companies for the purpose of broad comparison and working capital adjustment claimed by Assessee should be analysed, keeping in mind, OECD guidelines (supra).
Page 25 of 28IT(TP)A No. 759/Bang/2022 8.12. Based on the above discussions, and respectfully following decision of coordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Ltd. (supra), we direct working capital adjustment to be computed and to allow as per actual, after considering exclusion/inclusion of comparable companies in the final set of comparables as discussed hereinabove. Accordingly Ground no. 17 raised by assessee stands allowed. Accordingly we remand this issue to the Ld.AO/TPO to consider the claim in accordance with law.
Accordingly this ground raised by assessee stands allowed for statistical purposes.
9. Ground nos. 19-23 raised by assessee are in respect of notional interest computed on the outstanding receivables. 9.1 It is submitted that the amounts outstanding have been settled by the AE on an on-going basis in the normal course of business having regard to economic and commercial factors. Since the outstanding receivables related to the primary services rendered, the assessee submits that, the determination of ALP of the outstanding receivables is not warranted as the same is subsumed in the ALP of the principal transaction. The Assessee also contends the outstanding receivables could not be made subject matter of TP adjustment as the same is not covered under the provisions of Section 92B of the Act. Also, it is submitted that the Assessee is a debt free company and does not bear any working capital risk since it is fully funded by its AEs. The Assessee has not incurred any interest expenses for its working capital requirement. Hence, the Assessee does not have any interest cost in the funds blocked on deferred receivables Page 26 of 28 IT(TP)A No. 759/Bang/2022 from AEs as it is entirely funded by its AEs for its working capital requirements.
9.2 The Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.
9.3 This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15/07/2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 observed that:
"There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it Page 27 of 28 IT(TP)A No. 759/Bang/2022 requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions."
9.4 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR + 300 basis points which is in accordance with the principles laid down by Hon'ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days.
Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly, ground nos. 19-23 raised by assessee stands partly allowed for statistical purposes.
10. Ground nos. 24-25 is in respect of short grant of TDS and interest u/s. 234C.
10.1 It is submitted that the Ld.AO has erroneously short granted the credit of TDS. It is submitted that an amount of Rs.50,56,162/- reflecting in PAN AABCT1733D of the entity merged with the company has not granted to the assessee. Further, it is submitted that the Ld.AO has erroneously levied Page 28 of 28 IT(TP)A No. 759/Bang/2022 interest u/s. 234C of the act on the 'assessed income' instead of 'returned income' as required under the provision of the Act. 10.2 We direct the Ld.AO to grant credit of TDS in accordance with law after carrying out necessary verifications in respect of the interest u/s. 234C, it is directed that the levy of interest must be on the returned income as mandated u/s. 234C of the act. Accordingly the Ld.AO is directed to carry out necessary corrections in accordance with law.
Accordingly these grounds raised by assessee thus stands allowed for statistical purposes.
In the result, the appeal filed by assessee stands partly allowed.
Order pronounced in the open court on 08th May, 2023.
Sd/- Sd/-
(CHANDRA POOJARI) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 08th May, 2023.
/MS /
Copy to:
1. Appellant 2. Respondent
3. CIT 4. DR, ITAT, Bangalore
5. Guard file
By order
Assistant Registrar,
ITAT, Bangalore