Income Tax Appellate Tribunal - Bangalore
M/S. Radisys India Limited (Formerly ... vs Deputy Commissioner Of Income Tax, ... on 19 July, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH : BANGALORE
BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No. 739/Bang/2022
Assessment Year : 2018-19
M/s. Radisys India Ltd.
(formerly known as Radisys
India Pvt. Ltd.),
The Deputy
6th Floor, Electra Wing B,
Commissioner of
Exora Business Park,
Income Tax,
Sarjapur, Vs.
Circle - 3(1)(1),
Marathahalli,
Bengaluru.
Outer Ring Road,
Bengaluru - 560 103.
PAN: AACCC3169M
APPELLANT RESPONDENT
Assessee by : Shri Mahaveer C Jain, CA
Revenue by : Ms. Neera Malhotra, CIT-DR
Date of Hearing : 05-06-2023
Date of Pronouncement : 19-07-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal arises out of order dated 28.07.2022 passed by the Assessment Unit for A.Y. 2018-19 on the following revised grounds of appeal:
Page 2 IT(TP)A No. 739/Bang/2022 Page 3 IT(TP)A No. 739/Bang/2022 Page 4 IT(TP)A No. 739/Bang/2022 Page 5 IT(TP)A No. 739/Bang/2022 Page 6 IT(TP)A No. 739/Bang/2022 Page 7 IT(TP)A No. 739/Bang/2022 Brief facts of the case are as under:
2. Assessee is wholly owned subsidiary of Radisys India LLC and is engaged in providing software development and marketing support services to its ultimate holding company, Radisys Corporation, USA.
2.1 For the year under consideration, assessee filed its return of income on 30.11.2018 declaring total income of Rs.29,93,53,150/-. The return was selected for scrutiny and statutory notice u/s. 143(2) along with questionnaire u/s. 142(1) was issued. The Ld.AO noted that assessee had international transactions with its associated enterprises and therefore a reference was made u/s. 92CA for determining the arms length price of such international transactions. 2.2 On receipt of the reference u/s. 92CA, the Ld.TPO called for the economic details in form 3CEB. It was noted that following were the international transactions undertaken by assessee during the relevant year under consideration.
International Transactions Nature of Transaction Amount (In INR) Income from software 1,761,227,281 development services Income from marketing 40,640,450 support services Reimbursement of 3,014,652 expenses Withholding from employees and payment 6,167,096 on their behalf for purchase of stocks under ESPP Scheme Page 8 IT(TP)A No. 739/Bang/2022 2.3 The Ld.TPO noted that assessee computed its margin at 14.91% by using TNMM as the most appropriate method and NCP as the PLI for SWD as well as MSS segment. It was noted that assessee selected set of 17 comparables with margin ranging between 0.99% to 8.42% under SWD segment and set of 8 comparables under MSS segment with margin ranging between 2.26% and 7.55% as under:
SWD SL. Weighted Name of the Company No Average 1 Kals Information Systems Ltd -8.56% 2 Rheal Software Pvt Ltd -7.11% 3 Toxsl Technologies Pvt Ltd -0.85% 4 Inteq Software India Pvt Ltd 0.98% 5 Batchmaster Software Pvt Ltd 1.27% DCIS DOT COM Solutions 6 1.86% India Pvt Ltd 7 Evoke Technologies Pvt Ltd 3.48% Isummation Technologies Pvt 8 2.43% Ltd 9 Maveric Systems Ltd 6.52% 10 Ksolves India Ltd 6.42% 11 Harbinger Systems Pvt Ltd 8.26% Orangescape Technologies 12 9.74% Ltd Data Collection Infotech 13 8.46% (India) Pvt Ltd 14 Infomile Technologies Ltd 9.69% C G-V A K Software & 15 13.77% Exports Ltd 16 E-Zest Solutions Ltd 15.60% 17 Mindtree Ltd. 15.46% Page 9 IT(TP)A No. 739/Bang/2022 MSS segment Weighted Sl.No. Name of the Company Average (%) Confluence Integrated 1 -6.02% Services Private Limited Cyber Media Research & 2 -1.01% Services Ltd.
Paradigmplus Marketing 3 2.73% Communications Pvt Ltd 4 Channelplay Ltd 3.75% Retail Scan Mgmt.
5 5.31% Services Pvt Ltd Scarecrow 6 8.84% Communications Mudra Online 7 12.47% Technologies Pvt Ltd Rediffusion-Dentsu, 8 14.38% Young & Rubicam Pvt Ltd 2.4 The Ld.TPO noted that assessee thus treated its two segments to be at arms length as its margin was higher than the range of comparables for SWD and MSS segment. 2.5.1 Dissatisfied with the comparables selected by assessee, the Ld.TPO selected a set of following 20 comparables under SWD segment with a median of 23.60%.
Page 10 IT(TP)A No. 739/Bang/2022 Page 11 IT(TP)A No. 739/Bang/2022 2.5.2 A set of following 13 comparables under MSS segment with a median of 19.94%.
Page 12 IT(TP)A No. 739/Bang/2022 Page 13 IT(TP)A No. 739/Bang/2022 The Ld.TPO thus proposed an adjustment under the two segments being the shortfall as under:
S.No. Particulars Proposed adjustment
1. SWD Rs. 13,44,71,593/-
2. MSS Rs. 18,07,628/-
2.6 The Ld.TPO further noted that the assessee had certain delayed receivables. He thus computed notional interest on such delayed receivables calculating the interest by using the following formula.
INTEREST = A* WAIR * Days/36500;
(A=Amount, WAIR = Weighted Average Interest Rate, Days = No. of days delayed) The Ld.TPO thus proposed an adjustment in respect of interest on delayed receivables at Rs.1,68,92,473/-. 2.7 Working capital adjustment was denied in the hands of the assessee by the Ld.TPO.
3. On receipt of the DRP directions, the Ld.AO passed the draft assessment order on 28.09.2021 by making an addition in the hands of assessee being the proposed adjustment u/s. 92CA at Rs.15,31,71,694/-.
3.1 On receipt of the draft assessment order, the assessee preferred objections before the DRP. The DRP while considering Page 14 IT(TP)A No. 739/Bang/2022 inclusion / exclusion of the comparables under the SWD and MSS segments, gave certain relief to the assessee by excluding one comparable and including six comparables under the SWD segment as proposed by the assessee and under MSS segment agreed for exclusion of three comparables. 3.2 On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition in the hands of the assessee at Rs.8,92,80,599/-.
Aggrieved by the final assessment order passed by the Ld.AO, assessee is in appeal before this Tribunal. The issue alleged by the assessee in Ground nos. 5-7 is regarding inclusion / exclusion of comparables. Before we undertake the comparability analysis, it is sinequa non to understand the FAR of assessee under SWD segment. Page 15 IT(TP)A No. 739/Bang/2022 Page 16 IT(TP)A No. 739/Bang/2022 Page 17 IT(TP)A No. 739/Bang/2022 Page 18 IT(TP)A No. 739/Bang/2022 Page 19 IT(TP)A No. 739/Bang/2022 Page 20 IT(TP)A No. 739/Bang/2022 Page 21 IT(TP)A No. 739/Bang/2022
4. The Ld.AR at the outset has submitted a letter dated 02.06.2023 stating that following issues are not pressed being
a) Ground no. 5
(ii) Data Collection Infotech (India) Pvt. Ltd.
b) Ground nos. 8, 14 and 17.
Page 22 IT(TP)A No. 739/Bang/2022 For the sake of convenience, the said letter is scanned and reproduced as under:
It is submitted that Ground no. 1 is general in nature and therefore do not require any adjudication. 4.1 Ground no. 2 is not pressed. 4.2 Ground no. 3 is raised by assessee as the Ld.TPO rejected certain companies by applying persistent loss filter, even though the comparables satisfy the said filter. The Ld.AR submitted that under SWD segment, KALS Information Systems Ltd. and Rheal Software Pvt. Ltd. were rejected by the Ld.TPO by applying this Page 23 IT(TP)A No. 739/Bang/2022 filter. He submitted that from the annual reports of these comparables there is positive turnover under SWD segment. The Ld.AR filed the following details in respect of the same.
Company FY 2015-16 FY 2016-17 FY 2017-18 Kals Information Systems 3.67% 27.46% -0.11% Ltd (Pg 192 of PB 1) Rheal Software Pvt Ltd 3.20% -12.16% -13.69% (Pg 194 of PB 1) 4.2.1 He also placed reliance on the decision of Coordinate Bench of this Tribunal in case of KBACE Technologies (P.) Ltd. vs. DCIT in ITA No. 3189/Bang/2018. He also submitted that the two comparables are engaged in rendering software development service and therefore satisfies all the relevant filters that was applied by the Ld.TPO.
4.2.2 The Ld.DR on the contrary submitted that the above details requires verification.
4.2.3 We have perused the submissions advanced by both sides in the light of records placed before us. In the interest of justice, considering the submissions from both the Ld.AR as well as Ld.DR, we remand these two comparables to the Ld.AO/TPO to verify the details filed by assessee and to consider its inclusion in accordance with law. Accordingly, ground no. 3 raised by assessee stands allowed for statistical purposes.
5. Ground no. 4 is raised by assessee as the Ld.TPO rejected the following 3 comparables under SWD segment by applying negative networth filter.
1) Toxsl Technologies Pvt. Ltd.
2) Isummation Technologies Pvt. Ltd.
Page 24 IT(TP)A No. 739/Bang/2022
3) Ksolves India Pvt. Ltd.
5.1 It is the submission of the Ld.AR that the authorities have incorrectly computed the networth and that these comparables have positive networth as per the details in the annual reports.
5.2 The Ld.DR on the contrary submitted that the above details requires verification.
5.3 We have perused the submissions advanced by both sides in the light of records placed before us.
In the interest of justice, considering the submissions from both the Ld.AR as well as Ld.DR, we remand these three comparables to the Ld.AO/TPO to verify the details filed by assessee and to consider its inclusion in accordance with law. Accordingly, ground no. 4 raised by assessee stands allowed for statistical purposes.
6. Ground no. 5 is in respect of rejecting 3 comparables in the software development segment by holding that sufficient data was not available and that they were not functionally comparable with assessee. The Ld.AR however submitted that amongst the comparables the assessee do not wish to press Data Collection Infotech (India) Pvt. Ltd. as per the letter dated 18.05.2023. He thus submitted that Evoke Technologies Pvt. Ltd. and E-Zest Solutions Ltd. may only be considered based on the arguments advanced for inclusion.
Page 25 IT(TP)A No. 739/Bang/2022 6.1 The Ld.AR submitted that the two comparables satisfies all the relevant filters applied by the Ld.TPO and that all details necessary for verifying are available. The Ld.AR prayed for remanding the two comparables to the Ld.AO for consideration. 6.2 The Ld.DR on the contrary submitted that the above details requires verification.
6.3 We have perused the submissions advanced by both sides in the light of records placed before us.
In the interest of justice, considering the submissions from both the Ld.AR as well as Ld.DR, we remand these two comparables to the Ld.AO/TPO to verify the details filed by assessee and to consider its inclusion in accordance with law. Accordingly, ground no. 5 raised by assessee stands allowed for statistical purposes.
7. Ground no. 6 is in respect of exclusion of comparables under SWD and MSS segment sought by assessee by applying 1 to 200 crores turnover filter. The Ld.AR filed the following details in respect of the comparables for which the upper turnover filter has not been applied. He also placed reliance on the decision of Coordinate Bench of this Tribunal in case of MWYN Tech Pvt. Ltd. vs. ITO in IT(TP)A No. 753/Bang/2022 by order dated 31.10.2022 for A.Y. 2018-19 and M/s. Motorola Mobility India Pvt. Ltd. vs. DCIT in IT(TP)A No. 879/Bang/2022 by order dated 17.11.2022 for A.Y. 2018-19.
Page 26 IT(TP)A No. 739/Bang/2022 7.1 On the contrary, the Ld.DR placed reliance on orders passed by authorities below.
7.2 We have perused the submissions advanced by both sides in the light of records placed before us.
7.2.1 We note that the Ld.TPO erred in not applying a cap on upper limit on the turnover while selecting the companies comparable. In this regard, it is submitted that application of turnover filter is relevant criterion in choosing comparable companies. The difference in the scale of operations has a direct impact on the profitability. The concept of economies of scale wherein, an increase in the size and scale of the operations leads Page 27 IT(TP)A No. 739/Bang/2022 to a decrease in the long run average cost of each unit or each service project delivered. Therefore, the per unit fixed cost of a small-scale company would be much higher than that of a medium/large size organisation.
7.2.2 Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the turnover of the assessee under SWD services is Rs. 48.48 crores. This being so, the Ld.TPO ought to have applied upper turnover filter while selecting comparable in the present case. 7.2.3 We draw support from the decision of this Tribunal in case of Autodesk India (P) Ltd. V. DCIT [Reported in (2018) 96 taxmann.com 263 (Bang Trib)]. On application of the turnover filter on 1-200 crores, the above 11 companies are to be excluded. Further reliance is placed on the decision of this Hon'ble Tribunal in ACI Worldwide Solutions Pvt. Ltd. v. ACIT (order dated 13.05.2022 passed in IT(TP)A No. 106/Bang/2022). 7.2.4 Considering the facts and respectfully following the decision of the Coordinate Bench of the Tribunal in the case of Autodesk India Pvt Ltd., (supra), we hold that the above listed companies whose turnover in the current year is more than Rs.200 crores should be excluded from the list of comparable companies under SWD and MSS segment.
Accordingly, ground no. 6 raised by assessee stands allowed.
8. Ground no. 7 is raised by assessee seeking exclusion of following comparables under SWD segment
a) Exilant Technologies Pvt. Ltd.
b) Persistent Systems Ltd.
Page 28 IT(TP)A No. 739/Bang/2022
c) Tech Mahindra Ltd.
8.1 The Ld.AR submitted that Exilant Technologies Pvt. Ltd. deserves to be excluded as it does not fulfill the financial year filter. He submitted that this comparable have prepared the financial year ending 14.02.2018 whereas the assessee has financial year ending on 31.03.2018. He thus prayed for exclusion of this comparable.
8.2 On the contrary, the Ld.DR submitted that this Tribunal has been taking a view that in the event, financials would be extrapolated in a case where there is a different financial year ending, such comparables cannot be excluded. 8.3 We have perused the submissions advanced by both sides in the light of records placed before us.
8.3.1 We note that the argument advanced by the Ld.DR has merit and deserves to be accepted. We remand this comparable to the Ld.AO/TPO to consider it in the event financials could be extrapolated as on 31.03.2018.
Accordingly this comparable is remanded to the Ld.AO for necessary verification and inclusion. 8.3.2 In respect of Persistent Systems Ltd. and Tech Mahindra Ltd., the Ld.AR submitted that these comparables exceed the RPT filter of 25% applied by the Ld.TPO. 8.3.2.1 He submitted that for Persistent Systems Ltd., the RPT % is 27.19%. He referred to pages 1488-1499 of paper book Vol 3 in support of this submission.
8.3.3 In regards to Tech Mahindra Ltd., the Ld.AR submitted that the RPT % is 36.14% referring to page 1704 of paper book vol 3 Page 29 IT(TP)A No. 739/Bang/2022 in support of this contention. He thus prayed for these comparables to be excluded for failing the RPT filter. 8.3.4 On the contrary, the Ld.DR placed reliance on orders passed by authorities below.
8.3.5 We have perused the submissions advanced by both sides in the light of records placed before us. In respect of Persistent Systems Ltd, apart from the arguments raised regarding RPT filter we note that this comparable is also not functionally similar with that of assessee as it is engaged in cloud computing, analytics, collaboration and mobility. On perusal of the annual report placed at pages 1456, 1457, 1460, 1468, 1471 of paper book vol 3, we note that this company has also established an IP led business by acquiring end of life and non-strategic products.
8.3.5.1 Further we note that this company has classified its business into 3 segments being
a) Financial services
b) Healthcare and life sciences and
c) Industrial 8.3.5.2 It is also offering complete product life cycle service and works on all aspects of product development. For the above reason, we do not find this comparable to be functionally similar with that of assessee.
We therefore direct exclusion of this comparable for functional dissimilarities.
8.3.5.3 In respect of Tech Mahindra Ltd., we note that though the RPT is more than 25%, it is functionally not similar with that of assessee as it is a multinational company and has a huge brand Page 30 IT(TP)A No. 739/Bang/2022 value in the industry. The turnover of this comparable is also huge and is engaged in providing technical services in the areas of mobility, network, cloud security etc. The annual report of this comparable is placed at pages 1675 & 1676. At page 1689, we note that this company is engaged in a varied line of business such as telecom services, BPO services, consultancy services, infrastructure outsourcing, information technology including ITeS. Under such circumstances, we do not find this comparable to be comparable with that of a captive service provider like assessee.
Accordingly this comparable is directed to be excluded form the final list.
9. Ground no. 7(c) raised by assessee is not pressed as most of the comparables have been considered in Ground nos. 6 & 7(a), 7(b) hereinabove.
10. Ground no. 8 is not pressed by assessee as per letter dated 02.06.2023.
11. Ground no. 9 is in respect of inclusion of comparables sought by assessee under marketing support service segment. The Ld.AR submitted that liberty may be granted to assessee to raise these comparables in an appropriate circumstances. Accordingly this ground is not adjudicated and assessee is granted liberty to raise these comparables in an appropriate circumstances.
12. Ground no. 10 raised by assessee is seeking exclusion of 7 comparables for being functionally not similar with that of assessee.
i) Ugam Solutions Pvt. Ltd.
Page 31 IT(TP)A No. 739/Bang/2022
ii) Axience Consulting Pvt. Ltd.
iii) Dun & Bradstreet Information Services India Pvt. Ltd.
iv) Pressman Advertising Ltd.
v) Lintas India Pvt. Ltd.
vi) Cheil Pvt. Ltd.
vii) Majestic research solutions and services Ltd. 12.1 The Ld.AR submitted that Lintas India Pvt. Ltd. and Cheil Pvt. Ltd. has been sought for exclusion ground no. 6 on turnover filter. We note that these two comparables have already been excluded by applying the turnover filter in the said ground no. 6. 12.2 Ugam Solutions Ltd.
The Ld.AR submitted that this comparable is not functionally similar with that of assessee. However, the Ld.DR contradicted by saying that this comparable was never challenged by assessee before the DRP.
12.3 In respect of Pressman Advertising Ltd. and Majestic research solutions and services Ltd., the Ld.AR submitted that these comparables were excluded by Coordinate Bench of this Tribunal in assessee's own case for A.Y. 2017-18 in ITA No. 190/Bang/2022 vide order dated 18.11.2022. Accordingly these comparables are directed to be rejected for the year under consideration also.
12.4 In respect of Axience Consulting Pvt. Ltd., the Ld.AR submitted that it is engaged in data research, public opinion pooling, consultancy and advisory services. He also submitted that it is engaged in securitization structure financial services and human capital.
Page 32 IT(TP)A No. 739/Bang/2022 12.5 The Ld.AR submitted that for all these services there are no segmental data available and that assessee is purely rendering marketing and research services which is akin to the highly skilled services rendered by this company. Referring to page 1857 of paper book vol 4, the Ld.AR submitted that this company is providing consultancy and advisory services in the field of finance and marketing research and business administration be corporate and non-corporates.
He thus prayed for exclusion of this comparable. 12.6 In respect of Dun & Bradstreet Information Services India Pvt. Ltd., the Ld.AR submitted that this comparable primarily renders in providing risk management and sales and marketing solutions. Referring to pages 1865, 1866 and 1870 of paper book vol 4, the Ld.AR submitted that this company offers a wide suite of information solutions and its services are used extensively by banks, financial institutions, multinationals and corporate entities, public sector undertaking and exporters and importers. He submitted that this comparable is thus functionally not similar with that of assessee.
12.7 On the contrary, the Ld.DR relied on the observations of the DRP in respect of the above two comparables. 12.8 We have perused the submissions advanced by both sides in the light of records placed before us.
12.8.1 We note that these comparables are largely engaged in providing financial services to banking sector and risk management in respect of sales and marketing sector whereas the services rendered by assessee is purely marketing services with minimum risk associated with it.
Page 33 IT(TP)A No. 739/Bang/2022 We therefore direct the Ld.AO/TPO to exclude these comparables from the final list.
Accordingly, ground no. 10 raised by assessee stands allowed.
13. Ground no. 11 raised by assessee is in respect of the correcting the arithmetic errors while computing the margins of the comparable companies. It is submitted that the DRP had directed the Ld.AO/TPO to compute the margins in accordance with the annual reports. However the DRP direction has not been followed while passing the final assessment order. 13.1 We accordingly direct the Ld.AO/TPO to follow the DRP directions in para 9.1 and to compute the correct margins of the remaining comparables herewith.
Accordingly this ground raised by assessee stands allowed for statistical purposes.
14. Ground nos. 12 to 16 raised by assessee for considering bad debts, commission and other expenses and foreign exchange gain or loss as non-operating in nature.
With regard to the provision for doubtful debts, commission, foreign exchange gain or loss (as the case may be), other expenses, recoverability of some receivables may be doubtful although not definitely irrecoverable. Such provisions are only estimation and are created by a business organization on a conservative basis. Further the assessee has provided the extract of Rule 10TA as follows:
"(j) Operating expenses means the cost incurred in the previous year by the assessee in relation to the international transactions during the course of its normal operations including depreciation and amortization, but not including the following, namely:
Page 34 IT(TP)A No. 739/Bang/2022 ♦ Interest expenses ♦ Provision for unascertained liabilities ♦ Pre-operating expenses ♦ Extraordinary expenses ♦ Loss on transfer of assets ♦ Expense on account of income tax & ♦ Other expenses not relating to normal operations of the assessee."
14.1. Hence, the assessee has considered the same as non- operating in nature and has been excluded for the purpose of margin computation.
14.2. The Ld.TPO considered the arguments of the assessee, and observed that the "Provision for doubtful debts,commission, foreign exchange gain or loss (as the case may be), other expenses, as the name suggests, is made for the debts deemed to be unrecoverable by the company with respect to the sales made by the company. It is an integral part of the normal operations of any company. Further, the assessee has been into business for 6 years. It should, by this time be able to judge the credibility of its customers & be able to provide for non-recovery. Just because the appropriation is done, the assessee cannot claim the same to be non-operative. The very basis of any business lies on recognition of its customers & their credibility. Hence, making provision for non-recoverability of debts from customers is part & parcel of normal operations of the company & the same should be considered while calculating its PLI. Hence, the Ld.TPO rejected the contention of the assessee and the DRP has upheld the decision of the TOP by rejecting the objections of the assessee.
Page 35 IT(TP)A No. 739/Bang/2022 14.3. Before us, the Ld.AR submitted that the provision for doubtful debts, commission, foreign exchange gain or loss (as the case may be), other expenses is only an estimate and it is pre-recognition of future loss, . Prudence requires that a provision be created to recognize potential loss arising from the possibility of incurring bad debts, the same is considered as a debt while computing the net operating margins. It was further submission that the Safe Harbour Rules issued by the CBDT under section 92CB of the Act read with Rule 10TA(j) of the Rules states that any provision for uncertain liabilities should be excluded from the definition of operating expense. Thus, it was the submission that the assessee has considered the provision of doubtful debts as non-operating in nature and on parity basis provisions, if any, included in the financials of comparables companies has been excluded for the purpose of net margin computation. It was further submission that if the provision is included for computation of margin, it would amount to double adjustment. By relying on the order of the TPO in assessee's own case for the assessment year 2014-15, wherein, by considering the submissions of the assessee, the TPO has treated the provision for bad and doubtful debts as non operating in nature, the Ld.AR thus prayed that the provision for doubtful debts, commission, foreign exchange gain or loss (as the case may be), other expenses are to be treated as non-operating in nature that are peculiar to the assessee. 14.4. On the other hand, the Ld.DR submitted that each assessment year is separate and supported the TPO order for the assessment year under consideration.
Page 36 IT(TP)A No. 739/Bang/2022 We have perused the submission advanced by both sides in light of records placed before us.
14.5. A business organization regularly reviews its debtors at the end of every accounting period and makes a provision for doubtful debts, commission, foreign exchange gain or loss (as the case may be), other expenses considered not recoverable. Such Provisions are only estimation based and are created by a business organization on a conservative basis. In fact, even for computation of total income, the same has been excluded. Hence, if provision is included for computation of margin, it would amount to double adjustment. 14.6. In fact, even if it is a bad debt written off in the profit and loss account then also the same should not be considered for computing the operating margin under transfer pricing analysis because the same would be an extraordinary item and these bad debts relates to third party transaction and not related party transaction.
14.7. Also, as per the Safe Harbour Rules by the Central Board of Direct taxes under section 92CB of the Act read with Rule 10TA of the Rules, loss arising out of foreign exchange transactions should be considered as a non-operating expenditure. The relevant extract of the Rule has been reproduced herein above. We accordingly direct the Ld.AO/TPO to consider the provision for doubtful debts, commission, foreign exchange gain or loss (as the case may be), other expensesas non operating in nature.
14.8. We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable Page 37 IT(TP)A No. 739/Bang/2022 uncontrolled transactions should 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.
14.9. It is not the case of the revenue that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. For reasons given by Ld.TPO/DRP to deny the claim of the assessee is not acceptable, because, if working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:
"(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 to 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."
14.10. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison.
Page 38 IT(TP)A No. 739/Bang/2022 We therefore direct the Ld.AO/TPO to grant working capital adjustment as in accordance with law.
Accordingly these grounds raised by the assessee stands allowed.
15. Ground no. 17 is not pressed by assessee as per the letter dated 02.06.2023.
16. Ground no. 18 is against the computation of notional interest on the outstanding receivables. 16.1 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 from AEs as it is entirely funded by its AEs for its working capital requirements.
16.2 The Ld.DR relied on the orders passed by authorities below. 16.3 We have perused the submissions advanced by both sides in the light of records placed before us.
Page 39 IT(TP)A No. 739/Bang/2022 16.4 We 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.
16.5 Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 observed that:
"There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions."
Page 40 IT(TP)A No. 739/Bang/2022 16.6 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR + 300 basis points which is in accordance with the principles laid down by Hon'ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly, this ground raised by assessee stands partly allowed for statistical purposes.
Accordingly, this ground raised by assessee stands partly allowed.
In the result, the appeal filed by the assessee stands partly allowed.
Order pronounced in the open court on 19th July, 2023.
Sd/- Sd/-
(CHANDRA POOJARI) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 19th July, 2023.
/MS /
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IT(TP)A No. 739/Bang/2022
Copy to:
1. Appellant 4. DRP-2, Bangalore
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore