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Income Tax Appellate Tribunal, ‘J‘ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the Assessee, Varian Medical Systems International (India) Private Limited, against final assessment order passed by the Learned Deputy Commissioner of Income Tax Circle 3(3)(1), Mumbai („Ld. AO‟) under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 („the Act‟) for Assessment Years 2017-18; pursuant to the directions issued by Dispute Resolution Panel, Mumbai („DRP‟).
M/s. Varian Medical Systems International (India) Pvt.Ltd.
The assessee company was incorporated in the year 2009. It is engaged in marketing, installation and providing related servicing of medical & radio therapy equipments in India. Further during the year „Varian Medical Systems India Software Private Limited‟ has been amalgamated into the assessee. The assessee is also engaged in providing software development & related support services to its Associated Enterprises („AEs‟).
The return of income of the assessee was filed on 30/11/2017 declaring a total income of INR 26,63,11,380/-. The assessment was concluded at an income of INR 49,28,65,260/- after making adjustment as below:
Name of the Nature of adjustment Amount entity Varian Medical Adjustment on account of 13,99,71,558 System provision of warranty International services (India) Pvt. Adjustment on account of 1,47,66,112 Limited interest on outstanding receivables Varian Medical Adjustment on account of 6,61,49,166 System India software development and Software Pvt. related support services
M/s. Varian Medical Systems International (India) Pvt.Ltd.
Limited Adjustment on account of 56,67,048 interest on outstanding receivables Total 22,65,53,884
The assessee has raised following grounds in the present appeal before us:
1. On the facts and in the circumstances of the case and in law, the final assessment order passed by the Learned Assessing Officer ('Ld. AO') pursuant to directions of the Learned Dispute Resolution Paned ('Ld. Panel') under Section 143(3) read with Section 144C(13) of the Act, also read with the order passed by Learned Transfer Pricing Officer ('Ld. TPO') under Section 92CA(3) of the Act, is erroneous on facts and bad in law and is liable to be quashed.
2. On the facts and in the circumstances of the case and in law, the Ld. Panel erred in upholding the action of the Ld. AO / Ld. TPO in carrying transfer pricing adjustments to the below international transactions: a. Provision of warranty services - INR 13,99,71,558; b. Provision of software development services- lNR 6,61,49, 166; c. Notional interest towards outstanding receivables from AEs - INR 2,04,33, 160 3. On the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Ld. Panel erred in:
M/s. Varian Medical Systems International (India) Pvt.Ltd. a. rejecting the transfer pricing documentation which was maintained in good faith and with due diligence by the Appellant; and b. rejecting the search process followed by the Appellant and carrying out fresh comparability analysis for determining the arm's length price for the international transaction pertaining to provision of software development services. With respect to provision of warranty services 4. On the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO / Ld. Panel has erred in: a. rejecting the profit margin computation of warranty segment of the Appellant maintained in transfer pricing documentation; b. not appreciating the fact that the warranty income recognized in the profit and loss account from the 'Contract Deferred Revenue' on accrual basis pertains to the AY 2017-18; and c. computing the profit margin of warranty segment of the Appellant by excluding the warranty income of INR 18, 11,42,540. With respect to provision of software development services 5. On the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Ld. Panel erred in applying / modifying certain filters applied by the Appellant in its Transfer Pricing Study while undertaking fresh comparability analysis.
6. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in not following the principle of consistency by:
M/s. Varian Medical Systems International (India) Pvt.Ltd. a. accepting the 'e-lnfochips Ltd' as a comparable company, which was rejected by the Honorable Income Tax Tribunal ('Hon'ble ITAT') in the Appellant's own case in AY 2011-12; and b. rejecting the 'CG-VAK Software & Exports Limited' as a comparable company, which was accepted by the Hon'ble ITAT in the Appellant's own case in AY 2011-12.
7. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in excluding companies which are comparable to the Appellant's functions, asset base and risk profile.
8. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in including companies which are not comparable to the Appellant's functions, asset base and risk profile.
9. On the facts and in the circumstances of the case and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in including companies in the comparable set which have failed the quantitative filters applied by the Ld. TPO.
10. On the facts and circumstances of the case, and in law, Ld. AO/ Ld. TPO / Ld. Panel erred in not admitting the claim of the Appellant for granting the working capital adjustment while evaluating the arm's length price. With respect to notional interest on outstanding receivables 11. On the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO / Ld. Panel has erred in computing
M/s. Varian Medical Systems International (India) Pvt.Ltd. notional interest on outstanding receivables of the Appellant. While doing so, the Ld. AO/ Ld. TPO / Ld. Panel has erred in: a. considering deferred receivables as separate international transaction for arriving at an arm's length price; b. treating outstanding receivables from AEs as deferred when the realization of proceeds was done within 30 days; and c. not appreciating the fact that the working capital adjustment takes into account the impact of deferred receivables, if any, on the profitability of the international transaction pertaining to provision of software development service.
12. Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. AO/ Ld. TPO / Ld. Panel has erred in: a. levying interest by adopting LIBOR + 400 basis points which is arbitrary in nature; and b. computing the interest for the entire year instead for the period for which the debt was outstanding.
13. On the facts and circumstances of the case and in law, the Ld. AO/ Ld. Panel erred in not granting the deduction for health and education cess amounting to INR 26,84,419 paid by the Appellant, for which additional claim was made by the Appellant during the course of assessment proceedings.
14. On the facts and in the circumstances of the case and in law, the Ld. AO erred in levying interest under Section 2348 of the Act.
15. On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 270A of the Act.
M/s. Varian Medical Systems International (India) Pvt.Ltd.
During the course of hearing before us, the Ld. Counsel for the assessee, Shri Ajit Kumar Jain mentioned that the grounds number 1, 2 and 3 are general and do not require any adjudication. Further it was pointed out by the Ld. Counsel that, ground number 13 pertaining to deduction for health and education cess is not being pressed. Moreover, it was pointed out that ground number 14 pertaining to levying of interest u/s 234B and ground number 15 in respect of initiation of penalty proceedings u/s 270A are consequential. Therefore, we proceed to adjudicate on ground number 4 pertaining to provision of warranty services, ground number 5 to 10 pertaining to provision of software development services and ground number 11 and 12 pertaining to interest on outstanding receivables. TP Adjustment made towards Provision of Warranty support Services: 6. The facts in brief as submitted by the assessee mentions that it undertakes provision of after sales warranty services for the equipments sold by the AEs to the customers in India. As narrated in the transfer pricing study report on page number 168 of the paper book, the warranty services provided by Varian India are categorized as below: (a) One Year Warranty Services Medical equipments sold by Varian AEs warrant for one year free services. The services provided by the assessee under the one year of warranty services include replacing of spares, source wires, servicing of the equipments, etc.
M/s. Varian Medical Systems International (India) Pvt.Ltd.
These services rendered by the assessee are on behalf of AEs. (b) Extended warranty services In some instances, the warranty period of medical equipment sold by AEs is extended till four years. The assessee provides Annual Maintenance Contract (“AMC”) services wherein the assessee is responsible for providing labour services for the maintenance of medical equipment sold by AEs. Further, assessee is also responsible for providing Comprehensive Maintenance Contract (“CMC”) services which includes providing labour as well as replacement of spares, parts, etc. during the extended warranty period.
The assessee, in the transfer pricing report, selected TNMM as the most appropriate method to benchmark the international transaction. The assessee benchmarked the margin earned by it with the margins of the comparable companies selected based on a methodological and meticulous search strategy.
Before us the Ld. Counsel, Shri Ajit Kumar Jain, referring to page number 295 of the paper book, pointed out that the assessee has a policy of receiving warranty income of 5 years in advance. Further referring to page number 271 of the paper book he submitted that for AY 2017-18, the assessee had received warranty income of INR 1,04,81,976 from the AE. Further, referring to page number 273 of the paper book he mentioned that an advance of INR
M/s. Varian Medical Systems International (India) Pvt.Ltd.
19,02,06,055 was received from the AEs. The said advance was booked in the “Contract Deferred Revenue” account in the balance sheet, which is demonstrated at page number 76 of the paper book. Further elaborating the contract deferred revenue, Mr. Jain referred to page number 295 of the paper book which is as under:
With the help of above table, it was explained by Mr. Jain that the assessee accrued warranty income of INR 18,11,42,540 for the year under consideration in the profit and loss account and the same is transferred from advance account. Thus, the total revenue of INR 19,16,24,516 was recognized in the Profit and Loss Account at page number 94 of the paper book. This revenue of INR 19,16,24,516 recognized in the books of accounts was used for the purpose of computing the margins for the purpose of benchmarking for which Mr. Jain drew our attention to page number 178 of the paper book where the margins of the tested party has been computed at 35.71%.
After explaining the above factual position Mr. Jain submitted that during the transfer pricing assessment proceedings, the Ld. TPO recomputed the margin of the M/s. Varian Medical Systems International (India) Pvt.Ltd.
warranty segment considering only the warranty income as per Form 3CEB for the year under consideration amounting to INR 1,04,81,976. It was further submitted that the Ld. TPO did not consider the warranty income recognized in the P&L account of INR 18,11,42,540 while computing the margin of warranty segment. This led to an absurd position where the expenses of the entire segment have been considered for the purpose of the operating cost, however, major part of the revenue which was disclosed in the profit and loss account has been removed from the computation of operating revenue. This resulted into computing a negative margin for the segment at (-) 92.58%. The Ld. TPO did not disturb the comparables of the assessee and applied the median of 6.55% to compute the adjustment at INR 139,971,558 in relation with the aforesaid international transactions in the Transfer Pricing Order. The Ld. AO issued the draft assessment order following the order issued by the Ld. TPO.
Aggrieved by the Draft Assessment Order issued by the Ld. AO, assessee had filed objections before the DRP. The DRP has rejected the arguments and rebuttals put forth by the assessee and upheld the view of the Ld. AO / TPO.
Before us, Ld. Counsel of the assessee submitted that, Ld. TPO has erred in rejecting the accounting policy followed by the assessee and excluding the amount of accrued revenue from computation of margin. In support of the same, he pointed out that the assessee had accrued warranty income of INR 18,11,42,540 during the year and transferred the said
M/s. Varian Medical Systems International (India) Pvt.Ltd. amount from Contract Deferred Revenue account to P&L account. The above amount includes services for which advance was received in the earlier years as well as advances received during the year under consideration. This approach has been consistently followed by the assessee in the earlier years, has been accepted by the tax authorities and is also in line with the matching principle as per Generally Accepted Accounting Principles (GAAPs) and revenue recognition guidelines (Accounting Standard - 9).
Mr. Jain further argued that the assessee had offered total revenue of INR 19,16,24,516 to tax. The same was demonstrated before us through the relevant pages from the paper book, viz., statement of Profit and Loss Account at page number 69 of paper book, segmental profitability statements in the Financial Statements at page number 94 of paper book and the Income Tax Return copy at page number 9 of the paper book.
In response to the above arguments of the Ld. AR, the CIT DR submitted that the Ld. TPO has correctly determined the arm‟s length price of the international transaction of provision of warranty services. Ld. DR vehemently submitted that none of the documents demonstrates that the warranty receipts pertain to different financial years. Ld. AR submitted that the adjustment made by the TPO be confirmed.
In rebuttal, Ld. AR submitted that it receives warranty income in advance from the AE. A single invoice is raised by the assessee on its AE for warranty services for the life of the M/s. Varian Medical Systems International (India) Pvt.Ltd.
warranty. The said invoice mentions the start date and end date of the warranty period. It is not necessary that the start date and end date of the warranty period fall within the same financial year. It spans over the warranty period which is generally 3 to 5 years. However, for all these years, a single invoice will be raised when the assessee books advance warranty income in its books of accounts. He referred to the paperbook page number 301 to 328 to point out that while the invoices were raised in 2014 and 2015, the same invoice pertains to services to be provided for over a number of years including AY 2017-18. For e.g., at page no. 307 of the paper book Invoice No. 5480003368 dated 8 Dec 2014, the invoice is raised for warranty services to be provided from October 2015 to April 2017. Decision: 16. We have heard the rival submissions, perused the relevant finding in impugned order on the entire issue on adjustment made by the TPO on account of provision of warranty services. We have considered the transfer pricing study report, annual accounts of the assessee and documents submitted in the paper book. We have also considered the arguments of both the parties.
Warranty services, by the very nature, are provided for a period which may extend beyond a financial year. (For the sake of clarity and discussion the year in which warranty services are invoiced is called as Year-1. Subsequent years in which the services are provided are called Year-2, Year-3).
M/s. Varian Medical Systems International (India) Pvt.Ltd.
Once the tenure of warranty services extends beyond a financial year, the assessee cannot recognize the entire revenue in the Year- 1.
As per the accounting policies the revenue has to be recognized in Year-1, Year-2 and Year-3 depending upon the tenure of the warranty services. We take an example for the sake of clear understanding of the issue at hand. The assessee has entered into a service agreement with its AE on 1st July 2016 for a period of 3 years and the contract will end on 30th June 2019. Thus, the period of warranty services falls in different financial years as follows: FY 2016-17 (Year-1) 9 Months FY 2017-18 (Year-2) 12 Months FY 208-19 (Year-3) 12 Months FY 2019-20 (Year-4) 3 Months Since the services will be provided in Year-1, Year-2, Year-3 and Year-4, the expenses and revenue pertaining to this particular contract must be booked in each year. Since, provision of warranty services is an ongoing business, any particular financial year will be Year-1 for some contracts, while it could be Year-2/Year-3/Year-4 for various other contracts. Therefore, the revenue to be recognized in any particular financial year will be sum of; (a) the revenue received during that financial year and pertaining to the same financial year; and (b) the revenue received during earlier financial years but pertaining to this particular financial year.
18. We have examined the accounting policy of the assessee. The assessee has followed a scientific method to book the M/s. Varian Medical Systems International (India) Pvt.Ltd. revenue which is demonstrated at page number 295 of the paper book. The assessee is recognizing the revenue in two parts as under: (a) Warranty service income recognized in the profit and loss account out of the contract deferred revenue account amounting to INR 18,11,42,540. (b) Warranty service income invoice in FY 2016-17 and pertaining to FY 2016-17 amounting to INR 1,04,81,976. Thus, total revenue of INR 19,16,24,516 has been recognized in the profit and loss account. Further the expenditure pertaining to the warranty services rendered during this year have been booked in the profit and loss account, irrespective of the fact that the contract was entered in this financial year or earlier financial years.
The TPO has committed an error that while he has considered the cost of services provided during the financial year 2016-17, the TPO has not considered the revenue recognized during the year. This has resulted into a situation where the cost of services provided is considered but the revenue pertaining to these services have been ignored. Obviously, this will give absurd results. We, therefore, concur with the arguments advanced by the Ld. Counsel for the assessee and find no mistake in the accounting policy adopted by the assessee.
We have also considered the other arguments of the Ld. AR that the entire revenue recognized during the year amounting to INR 19,16,24,516 has been offered for taxation. Since we have accepted the accounting methodology adopted
M/s. Varian Medical Systems International (India) Pvt.Ltd. by the assessee, we do not wish to comment on this argument of Ld. AR.
In conclusion, we hold that the margin of the assessee under this segment should be computed by considering the entire revenue of INR 19,16,24,516. This computation is available at page number 3-4 of the order of the TPO and the margin works out to 35.71%. The median margin of the comparables which has been accepted by the TPO works out to 6.55% as available on page number 6 of the order of the TPO. Since the margin of the assessee is higher, the entire transfer pricing addition of INR 13,99,71,558 made by the TPO on account of provision of warranty services, is deleted. Provision of Software Development Services: 22. Now we turn to Ground numbers 5-10 pertaining to provision of software development services. The Appellant is engaged in providing software development & related support services to its AEs. The Functions performed by the assessee in relation with the aforesaid international transaction as per its TP study report is available at paper book page number 450 which is reproduced below:
M/s. Varian Medical Systems International (India) Pvt.Ltd.
The assessee has earned a margin of 15.51%. Detailed computation of the aforesaid profitability as provided at page number 430 of the paper book is reproduced below:
The assessee has selected 23 comparable companies for benchmarking the aforesaid international transaction in its T.P. Study Report. The list of companies as available at page number 461 of the paper book is as under:
M/s. Varian Medical Systems International (India) Pvt.Ltd.
The assessee submitted that from the above comparable list, the TPO has rejected following 15 companies on basis of Functional dissimilarity and Failure of turnover filter: Sr.No Name of Comparable Rejection . Reasons 1 Akshay Software Technologies Ltd Functionally dissimilar 2 Kireeti Soft Technologies Ltd Functionally dissimilar 3 Evoke Technologies Pvt Ltd Functionally dissimilar 4 Sagarsoft (India) Ltd. Functionally dissimilar 5 Sasken Technologies Ltd. (Seg) Functionally dissimilar 6 Harbinger Systems Pvt Ltd Functionally dissimilar 7 C G-V A K Software & Exports No Reasons Ltd. mentioned by the TPO 8 E-Zest Solutions Ltd Functionally dissimilar
M/s. Varian Medical Systems International (India) Pvt.Ltd.
9 Rheal Software Limited Fails Sales Filter 10 SmartCloudInfoservices Limited Fails Sales Filter 11 Maveric Systems Limited Functionally dissimilar 12 Data Collection Infotech (India) Functionally Private Limited dissimilar 13 Orange Scape Technologies Fails Sales Filter Limited 14 Astite Solutions Pvr. Limited Functionally dissimilar 15 Infomile Technologies Limited Fails Sales Filter
Further the TPO added following 14 comparable companies for determination of Arm‟s Length Price. Sr. Name of Comparable Rejection provided by the No. TPO for using these companies 1 Cygnet Infotech Pvt. Ltd. Functionally comparable 2 Cadsys (India) Ltd Functionally comparable 3 AcewinAgriteck Ltd Functionally comparable 4 Interglobe Technology Functionally comparable Quotient Pvt. Ltd. 5 Dun & Bradstreet Functionally comparable Technologies & Data Services Pvt. Ltd. 6 Cybage Software Pvt. Ltd. Functionally comparable 7 Nihilent Ltd Accepted by TPO in AY 2016-
M/s. Varian Medical Systems International (India) Pvt.Ltd.
17 8 Nihilent Analytics Ltd. Accepted by TPO in AY 2016- 17 9 InfoBeans Technologies Functionally comparable Limited (Formerly Known as InfoBeans Systems India Private Limited) 10 E-Infochips Ltd Functionally comparable 11 Saven technologies Accepted by TPO in AY 2016- 17 12 Dynamic Digital Accepted by TPO in AY 2016- Technology Pvt. Ltd. 17 13 Tavant Technologies Accepted by TPO in AY 2016- India Pvt. Ltd. 17 14 Sonata Software Accepted by TPO in AY 2016- 17
Based on the above, the TPO used 22 companies as comparables and determined the Arm‟s Length range of 19.53% to 30.22% with a median of 23.99%. Accordingly, the TPO made an adjustment of INR 6,61,49,166. The assessee approached the DRP which confirmed the adjustment proposed by the Ld. TPO.
Before us the assessee furnished a chart and sought exclusion of 14 companies and inclusion of 8 companies. The chart furnished by the assessee contains the arguments on the aforesaid inclusion and exclusion of comparable
M/s. Varian Medical Systems International (India) Pvt.Ltd. companies and also case laws relied upon for the same. The Ld. AR submitted that out of 14 companies, there are 4 companies which fails RPT filter of 25% and therefore the same should be excluded. The Ld. AR further submitted that the remaining 10 companies are functionally dissimilar and therefore fails the comparability test and ought to be excluded. The Ld. DR relied upon the order of the lower authorities in this regard. As far as the inclusion of 8 companies sought by the Ld. AR is concerned, he submitted that 7 companies out of 8 have been used by the TPO in either preceding year or subsequent year. Thus, it was submitted by the Ld. AR that unless the TPO/DRP points out any specific reason for the rejection, these 7 companies should be included in the comparable set.
We have given our thoughtful consideration to the charts furnished by the Ld. AR and the gist of annual reports of these companies whose exclusion or inclusion has been sought. Our comments on each of the companies are as follows: 29.1 E-Infochips Ltd: The assessee has argued that E- Infochips Limited is not functionally comparable company considering it is engaged in embedded research and development activity in niche areas across various sectors in addition to computer programming services, whereas the Assessee is engaged in development, coding and testing of software. It was submitted that as per Balance Sheet, E-Infochips Ltd. holds Inventory, reflecting additional activities to computer programming services.
M/s. Varian Medical Systems International (India) Pvt.Ltd.
Further the company has separate Revenue recognition policy for 'Sale of service as well as Sale of Product' and there are no separate segments available in the annual report. The Profit & Loss statement of the company involves sale of products and service. Considering the aforesaid submission, the assessee prays that E-Infochips Limited ought to be excluded in the final set of comparables for determination of the ALP.
29.2 Dun & Bradstreet Technologies & Data Services Pvt. Ltd.: The assessee has argued that this company is not functionally comparable considering it is engaged in rendering predictive analytics, software development and related technology services and solutions to its parent company as well as some other affiliates. Further as per the website of the company the company provides products and solutions in nature of credibility and business insights, risk management solutions, CFO Club, etc. Considering the aforesaid submission, the assessee prays that Dun & Bradstreet Technologies & Data Services Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP.
29.3 Interglobe Technology Quotient Pvt. Ltd.: The assessee has argued that company is not functionally comparable considering it is engaged in data processing export services travel technologies, and other support services. Further as per website, the company also has M/s. Varian Medical Systems International (India) Pvt.Ltd. its business unit „Interglobe Technology Quotient‟ which is an official distributor of Travelport in 6 different markets. Further the assessee submitted that the employee cost to total sales ratio of this company is less than 25% which shows that the business mode of this company is entirely different. Considering the aforesaid submission, the assessee prays that Interglobe Technology Quotient Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP.
29.4 Cybage Software Private Limited: The assessee has argued that this company is not functionally comparable considering it is a technology consulting organization specializing in outsourced product engineering services. More specifically the company performs data analytics, marketing and advertising activities, etc. Further as per the website, Cybage Software is engaged in providing architectural services, application product development, business intelligence services etc. Considering the aforesaid submission, the assessee prays that Cybage Software Private Limited ought to be excluded in the final set of comparables for determination of the ALP.
29.5 Sonata Software Limited: The appellant has argued that Sonata Software fails RPT Filter (i.e. RPT Sales to Total Sales amounts to 56.17%, 47.17%, 52.45% in FY 2016-17, FY 2015-16 and FY 2014-15 respectively).
M/s. Varian Medical Systems International (India) Pvt.Ltd.
Further the company is not functionally comparable as it is engaged in providing solutions such as Robotic Process Automatic, Artificial Intelligence, developing Platform, Machine learning, Digital Infrastructure services, Digital Cloud services, Testing Platform and solutions, etc. Considering the aforesaid submission, the Appellant prays that Sonata Software Limited ought to be excluded in the final set of comparables for determination of the ALP.
29.6 Acewin Agriteck Ltd.: The appellant has argued that this company is not functionally comparable as it is engaged in diversified services such as Product Strategy (ERP), Service Strategy (Outsourced Prod. Dev) Captive Development centres, Data Analytics, Testing, Mobile App development, Digitalization, etc. However, no segment financials are available. The company also undertakes R&D innovation activities. Considering the aforesaid submission, the Appellant prays that Acewin Agriteck Ltd ought to be excluded in the final set of comparables for determination of the ALP.
29.7 Tavant Technologies India Pvt. Ltd.: The appellant has stated that this company fails RPT Sales to total Sales filter 99.11%, 97.18% and 97.35% in FY 2016-17, FY 2015-16 and FY 2014-15 respectively. Further this Company is not functionally comparable as it is engaged in providing solution such as AI and M/s. Varian Medical Systems International (India) Pvt.Ltd.
Analytics, Digital Offerings, Quality Engineering, Salesforce etc. not comparable to Software Development Services. Considering the aforesaid submission, the assessee prays that Tavant Technologies India Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP.
29.8 Cadsys (India) Ltd.: The assessee has argued that the company is not functionally comparable as it is engaged in providing solutions for GIS & mapping services, Telecom & CATV services, Engineering and project management services and digital media & Project management services and balancing Cognitive strength of human mind and computing power of Machine to its clients. Further the company also has Significant Job work charges indicating outsourcing of work. Considering the aforesaid submission, the assessee prays that Cadsys India Ltd. ought to be excluded in the final set of comparables for determination of the ALP.
29.9 Cygnet Infotech Pvt. Ltd.: The assessee has submitted that this Company is not functionally comparable as it is engaged in the business of providing enterprise solutions, Application, Content Management services and IT enabled services. However no separate segmentare reported by the Company. The list of services provided by Cygnet pertains to blockchain, Artificial Intelligence, Robotic process Automation, Cloud, Internet
M/s. Varian Medical Systems International (India) Pvt.Ltd. of Things, Tax Technology, Augmented / Virtual Reality, Digital Transformation, Content Management, Microsoft, etc. Considering the aforesaid submission, the assessee prays that Cygnet Infotech Pvt. Ltd.ought to be excluded in the final set of comparables for determination of the ALP.
29.10 InfoBeans Technologies Limited (Formerly Known as InfoBeans Systems India Private Limited): The assessee has argued that the Company is not functionally comparable as it is engaged in the software engineering services primarily in Custom Application Development (CAD), Content Management Systems (CMS), Enterprise Mobility (EM), and Big Data Analytics (BDA) The company has during the year also launched new technology segments - Automation Engineering and Services. Further no segment details are available in the Annual Report. Considering the aforesaid submission, the Assessee prays that Infobeans Technologies Limited ought to be excluded in the final set of comparables for determination of the ALP.
29.11 Nihilent Analytics Ltd. (formerly known as ICRA Techno Analytics Limited): The assessee has argued that the company is not functionally similar to the Assessee on the grounds that basis the annual report of the Nihilent Analytics Ltd is engaged in software development and consultancy, engineering services, web
M/s. Varian Medical Systems International (India) Pvt.Ltd. development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing. The company is functionally dissimilar considering it is engaged in Business Intelligence and Analytics. Considering the aforesaid submission, the Assessee prays that Nihilent Analytics Ltd. ought to be excluded in the final set of comparables for determination of the ALP.
29.12 Nihilent Ltd.: The Assessee has argued that the company is not functionally similar to the Assessee on the grounds that basis the annual report of Nihilent Ltd., it is engaged in rendering diversified services including software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services. Further as per the website of the company the company is engaged in provides services such as business transformation services, digital transformation, brand and marketing transformation, platform and technology transformation, etc. Considering the aforesaid submission, the Assessee prays that Nihilent Ltd. ought to be excluded in the final set of comparables for determination of the ALP.
29.13 Dynamic Digital Technology Pvt. Ltd.: The assessee has argued that Dynamic Digital Technology Pvt. Ltd. fails RPT Filter (i.e. RPT Sales to Total Sales
M/s. Varian Medical Systems International (India) Pvt.Ltd. amounts to 98.54%, 88.16%, 100% for FY 2016-17, FY 2015-16 and FY 2014-15 respectively. Further the company is not functionally comparable as it is engaged in providing solutions such as web application development, telecom services, porting applications to its clients. Considering the aforesaid submission, the Assessee prays that Dynamic Digital Technology Pvt. Ltd. ought to be excluded in the final set of comparables for determination of the ALP.
29.14 Saven Technologies Ltd.: The assessee has argued that Saven Technologies Ltd fails RPT Filter (i.e. RPT Sales to Total Sales amounts to 99.66%, 100%, 100% for FY 2016-17, FY 2015-16 and FY 2014-15 respectively. Further the company is not functionally comparable as it is engaged in providing end to end services such as development of new software, web solutions, enterprise application services, re-engineering and enhancements, application integration and maintenance. The Assessee also submitted that Saven Technologies Ltd. Also holds significant Intangible Assets which is not similar to the software development services provided by the Assessee on Contract basis. Considering the aforesaid submission, the Assessee prays that Saven Technologies Limited ought to be excluded in the final set of comparables for determination of the ALP.
M/s. Varian Medical Systems International (India) Pvt.Ltd.
Further the Assessee sought inclusion of the following comparable companies rejected by the TPO in the transfer pricing order: 30.1 C G-V A K Software & Exports Ltd. The assessee submitted that C G-V A K Software & Exports Ltd. passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. The is engaged in providing Software Services (On shore and Offshore, Requirement analysis, designing, development, coding, layout main section, testing and bug fixing), which is functionally comparable with the development, coding and testing of software undertaken by the Assessee. Further, the comparable company is accepted by the TPO as a comparable company in AY 2016-17 and AY 2018-19 as a valid comparable company. For the current AY 2017-18, the Ld. TPO has not provided any comments on rejection of the comparable company. Considering the aforesaid submission, the Assessee prays that C G V A K Software & Exports Ltd. ought to be included in the final set of comparables for determination of the ALP.
30.2 Harbinger Systems Pvt Ltd.: The Assessee sought inclusion of Harbinger Systems Pvt Ltd. as a comparable company as it passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. Harbinger Systems Limited is engaged in Software development services as its principal business activity. Further the Company earns „Revenue from operation‟ from Sale of software services. As M/s. Varian Medical Systems International (India) Pvt.Ltd.
per the Annual Report, the nature of operation described by the company is „Harbinger is predominantly engaged in providing outsourced software development services‟. Further as per website, the company is providing software technology services for independent software vendors and enterprises. Hence, Harbinger Systems Pvt. Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. Further the aforesaid comparable company is accepted by the TPO as a comparable company in AY 2016-17 and AY 2018-19 as a valid comparable company. Considering the aforesaid submission, the Assessee prays that Harbinger Systems Pvt Ltd ought to be included in the final set of comparables for determination of the ALP.
30.3 Sasken Technologies Ltd.: The Assessee sought inclusion of Sasken Technologies Ltd. as the Company passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. Sasken Technologies Limited (Software Service Segment) is engaged in Software development services; The Revenue from operation has „Sale of software service‟ as major item. The Company has reported Segment reporting between 'Software service' and ' Software Product' and the relevant Segment 'Software Service' Selected by the Assessee. As per the website the company is engaged in software development for various industries including semiconductors, consumer electronics, Enterprise devices, satcom, telecom, etc.
M/s. Varian Medical Systems International (India) Pvt.Ltd.
Hence, Sasken Technologies Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. Considering the aforesaid submission, the Assessee prays that Sasken Technologies Ltd. ought to be included in the final set of comparables for determination of the ALP.
30.4 Sagarsoft (India) Ltd.: The Assessee sought inclusion of the company Sagarsoft (India) Ltd. as the Company passes all the quantitative filters adopted by the Assessee as well as the TPO. Further Sagarsoft (India) Ltd. is engaged in Software development services, as per the Company overview „Sagarsoft is engaged in business of providing IT services, consulting, technology and next generation services‟. Further as per the Segment reporting – company is engaged only in software development and consultancy. As per the website, the company is engaged in application development, application support and maintenance and monitoring services for global customers. Hence, Sagarsoft (India) Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. In addition to above, the aforesaid comparable company is accepted by the TPO as a valid comparable company in AY 2016-17 and AY 2018-19 as a valid comparable company. Considering the aforesaid submission, the Assessee prays that Sagarsoft (India) Ltd.ought to be included in the final set of comparables for determination of the ALP.
M/s. Varian Medical Systems International (India) Pvt.Ltd.
30.5 Evoke Technologies Pvt Ltd.: The Assessee sought inclusion of the company Evoke Technologies Pvt Ltd as the Company passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. Further Evoke Technologies Pvt. Ltd. As per the annual report, is engaged in Software development services and the Company earns Revenue from operation majorly from Software development charges. As per Segment reporting the company is engaged only in software development services. Further as per the website, the company is engaged in developing custom software for as per DEVOPs methodology and parallel testing activities. Hence, Evoke Technologies Limited is functionally comparable with the development, coding and testing of software undertaken by the Assessee. Further the aforesaid comparable company is accepted by the TPO as a comparable company in AY 2018-19 as a valid comparable company. Considering the aforesaid submission, the Assessee prays that Evoke Technologies Pvt Ltd ought to be included in the final set of comparables for determination of the ALP.
30.6 Kireeti Soft Technologies Ltd.: The Assessee sought inclusion of the company Kireeti Soft Technologies Ltd as the Company passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. As per the Annual Report, Kireeti soft Technologies Pvt. Ltd. is engaged in Software development services; The Description of service
M/s. Varian Medical Systems International (India) Pvt.Ltd. provided by the company is mentioned in the annual report as „Computer software and IT services‟. As per segmental reporting, it is mentioned that Co. operates in one segment i.e. Software and IT services. Further as per website, the company is engaged in providing customized software solutions and offshore software development activities. Hence, Kireeti Soft Technologies Ltd. is functionally comparable with the development, coding and testing of software undertaken by the Assessee. In addition to above, the aforesaid comparable company is accepted by the TPO as a comparable company in AY 2016-17 as a valid comparable company. Considering the aforesaid submission, the Assessee prays that Kireeti Soft Technologies Ltd ought to be included in the final set of comparables for determination of the ALP.
30.7 Maveric Systems Limited: The Assessee sought inclusion of the company Maveric Systems Limited as the Company passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. As per the Annual Report, Maveric Systems Ltd. is engaged in Software development services and earns Revenue from Sale of Services. The company is engaged in 'Computer programming activities and software testing activites'. As per the segmental analysis and nature of operations mentioned, the company is engaged in software testing activities. Hence, Maveric Systems Ltd. is functionally comparable with the development, coding and testing of software undertaken
M/s. Varian Medical Systems International (India) Pvt.Ltd. by the Assessee. In addition to above, the aforesaid comparable company is accepted by the TPO as a comparable company in AY 2018-19 adjacent year as a valid comparable company. Considering the aforesaid submission, the Assessee prays that Maveric Systems Limited ought to be included in the final set of comparables for determination of the ALP.
30.8 Akshay Software Technologies Limited: The Assessee sought inclusion of the company Akshay Software Technologies Limited as the Company passes all the quantitative filters adopted by the Assessee as well as the Ld. TPO. The company is accepted by the Ld. TPO as a comparable company in AY 2016-17 as a valid comparable company. Considering the aforesaid submission, the Assessee prays that Akshay Software Technologies Limited ought to be included in the final set of comparables for determination of the ALP. Decision: 31. We have considered the arguments of both the parties, the transfer pricing study report, the transfer pricing order and the charts furnished by the assessee. The assessee is developing the software and also responsible for identifying the bugs and conducting debugging in the software tools. The transfer pricing study shows that the software development and support services are being provided to Varian US and Varian Germany to the extent of INR 88,03,90,487 and INR 2,35,82,105 respectively. As per the transfer pricing study
M/s. Varian Medical Systems International (India) Pvt.Ltd. report Varian US is supplies informatics software for managing comprehensive cancer clinics, radiotherapy centers and medical oncology practices. Varian Germany also provides similar kind of services. The transfer pricing study report, thus, shows that the assessee is providing software development services including identifying the bugs and debugging the software while the AEs are responsible for all other functions. The TPO and the DRP have accepted this profile of the assessee and therefore the functional profile remains undisputed.
Ld. AR has argued that there are 4 companies viz. Sonata Software Limited, Tavant Technologies Limited, Dynamic Digital Technology Pvt. Ltd. and Saven Technologies which fails related party transactions (RPT) filter of more than 25%. The RPT numbers have been furnished by the assessee which shows that there are RPT of more than 25% in these companies. We have examined the transfer pricing study report at page number 486-488. The assessee while selecting the comparables had applied the RPT of more than 25% filter. The TPO at page number 14 of his order has also applied the filter of RPT more than 25%. Despite application of this filter, the TPO has selected the companies having RPT > 25% which is against the well settled position. We, therefore, hold that companies (1) Sonata Software Limited, (2) Tavant Technologies Limited, (3) Dynamic Digital Technology Pvt. Ltd. and (4) Saven Technologies be excluded from the comparables set. The TPO is however direct to verify the numbers of RPT submitted by the assessee and if the RPT is M/s. Varian Medical Systems International (India) Pvt.Ltd.
more than 25% to exclude these 4 companies. We hold accordingly. 33. Now we turn to the other 10 companies argued by the Ld. AR for exclusion. Each company is discussed herein below: 33.1 We noticed that E-Infochip Limited is not functionally comparable company since it is engaged in embedded research and development activity, it holds Inventory and there are no separate segments available in the annual report.
33.2 Dun & Bradstreet Technologies & Data Services Pvt. Ltd. is not functionally comparable since it is engaged in rendering predictive analytics, software development and related technology services and solutions. 33.3 Interglobe Technology Quotient Pvt. Ltd. is not functionally comparable since it is engaged in data processing export services travel technologies, and other support services. Further it is noted that the employee cost to total sales ratio of this company is less than 25% which shows that the business model of this company is different.
33.4 Cybage Software Private Limited is not functionally comparable since it is a technology consulting company specializing in outsourced product engineering services.
M/s. Varian Medical Systems International (India) Pvt.Ltd.
33.5 Acewin Agriteck Ltd. is not functionally comparable as it is engaged in services such as Product Strategy (ERP), Service Strategy (Outsourced Prod. Dev) Captive Development centres, Data Analytics, Testing, Mobile App development, Digitalization, etc.
33.6 Cadsys (India) Ltd. is not functionally comparable since it is engaged in providing solutions for GIS & mapping services, Telecom & CATV services, Engineering and project management services and digital media & Project management services and balancing Cognitive strength of human mind and computing power of Machine to its clients.
33.7 Cygnet Infotech Pvt. Ltd. is not functionally comparable as it is engaged in the business of providing enterprise solutions, Application, Content Management services and IT enabled services and no separate segment are reported by the Company. The list of services provided by Cygnet pertains to blockchain, Artificial Intelligence, Robotic process Automation, Cloud, Internet of Things, Tax Technology, Augmented / Virtual Reality, Digital Transformation, Content Management, Microsoft, etc. 33.8 InfoBeans Technologies Limited is not functionally comparable as it is engaged in the software engineering services primarily in Custom Application Development
M/s. Varian Medical Systems International (India) Pvt.Ltd.
(CAD), Content Management Systems (CMS), Enterprise Mobility (EM), and Big Data Analytics (BDA)
33.9 Nihilent Analytics Ltd. is not functionally comparable since it is engaged in software development and consultancy, engineering services, web development and hosting and subsequently diversified itself into the domain of business analytics and business process outsourcing.
33.10 Nihilent Ltd. is not functionally comparable since it is engaged in rendering diversified services including software services, business consulting in the area of enterprise transformation, change and performance management and providing related IT services.
We have considered the functional profile of the assessee and the functional profile of 10 companies as discussed above. We find that all these companies are not comparable to the assessee for the reasons recorded above. We direct the TPO to exclude all the 10 companies mentioned above. We hold accordingly.
Now we turn to the other arguments of the Ld. AR regarding the inclusion of 8 companies. We notice that the primary argument of the Ld. AR is that there are 7 companies which have been accepted as a good comparable by the TPO either in AY 2016-17 being the earlier assessment year or AY 2018-19 being the subsequent assessment year. Further, on page number 19-21 of his order, the TPO has given only a M/s. Varian Medical Systems International (India) Pvt.Ltd.
general comment against the name of each company “Based on the perusal of the business profile, the TPO is of the view that the company is functionally dissimilar. Hence rejected.” It has been argued before us that the TPO or DRP have not pointed out any specific reason for rejection of these 7 companies. Ld. AR has also submitted the orders of TPO as part of the paper book.
We are of the considered view that a company which is comparable in AY 2016-17 and/or AY 2018-19 cannot be rejected by the TPO just on the basis of a general and common comment. The TPO has not pointed out any specific reason for rejection of these companies while the same companies were good comparable either in the immediately preceding year or succeeding year. Thus, we direct the TPO to include the following companies in the comparable set: -
1. 1. C G-V A K Software & Exports Ltd. Accepted by the TPO as a comparable company in AY 2016-17 and AY 2018-19 as a valid comparable company.
2. Harbinger Systems Pvt Ltd. Accepted by the TPO as a comparable company in AY 2016-17 and AY 2018-19 as a valid comparable company.
3. Sagarsoft (India) Ltd. Accepted by the TPO as a valid comparable company in AY 2016-17 and AY 2018-19 as a good comparable company.
4. Evoke Technologies Pvt Ltd. Accepted by the TPO as a comparable company in AY 2018-19 as a valid comparable company.
M/s. Varian Medical Systems International (India) Pvt.Ltd.
5. Kireeti Soft Technologies Ltd. Accepted by the TPO as a comparable company in AY 2016-17 as a valid comparable company.
Maveric Systems Limited: Accepted by the TPO as a comparable company in AY 2018-19 as a valid comparable company. 7. Akshay Software Technologies Limited: Accepted by the TPO as a comparable company in AY 2016-17 as a valid comparable company. 37. Turning to the last companies viz. Sasken Technologies Ltd. which the Ld. AR has argued for inclusion on the ground that it passes all the quantitative filters adopted by the TPO. It has been submitted that Sasken Technologies Limited (Software Service Segment) is engaged in Software development services; The Company has reported Segment reporting between 'Software service' and ' Software Product' and the relevant Segment 'Software Service' Selected by the Assessee. Since the Ld. AR has argued that there are segmental results available, we direct the TPO to verify the same from the annual report and if segmental results are available use the segmental results for this company. We direct accordingly.
Notional interest on overdue receivables
The facts relating to this ground are that during the year, the assessee had accounts receivable balances from its AEs amounting to INR 55,58,90,618. The TPO considered
M/s. Varian Medical Systems International (India) Pvt.Ltd. amount of receivables from AE as indirect advance which benefitted the AE. The TPO in his order has observed that the Assessee has not submitted the required details in relation with the outstanding receivables. The TPO imputed interest on the entire outstanding receivables of INR 55,58,90,618 considering the interest rate of respective LIBOR rates plus 400 bps and proposed an adjustment of INR 2,04,33,160.
Before us Ld. AR invited our attention to paper book page no. 632 to 634, whereby details of the outstanding receivables from the AEs were submitted on sample basis; such as invoice details (date of invoice, due date for payment), details of payment received, actual credit period granted by the Assessee to the AE, etc. Ld. AR submitted that the TPO ignored the above submission and proceeded to compute the interest on outstanding receivables for the entire year.
Ld. AR pleaded before us that the interest if any, on outstanding balances should be computed considering actual outstanding days of the receivable balance.Further, the Assessee prays that interest if any, is only to be charged on period exceeding 90 days (i.e. as per the credit period followed by the Varian Group).Without prejudice, it was argued that LIBOR plus 200 bps to be considered for computing the adjustment on actual outstanding days for the receivable balances, as upheld in various judicial precedents. Reliance in this regard was placed on the following case laws; o Niko (Neco) Ltd. [2022] 141 taxmann.com 366
M/s. Varian Medical Systems International (India) Pvt.Ltd.
(Mumbai - Trib.) o Commvault Systems (India) (P.) Ltd. [2021] 126 taxmann.com 287 (Mumbai - Trib.) 41. Ld. CIT DR, on the other side, vehemently argued that the interest at the rate of Libor plus 400 bps has correctly been applied by the TPO and the same should be confirmed on the basis of computation made by the TPO.
We have considered the facts of the case and the arguments of both the sides. It is not the argument of the Ld. AR that there is no international transaction. Therefore, the short point to be decided here is (a) the amount and days on which the interest should be charged; (b) the grace period and (c) the rate of interest applicable.
As far as the amount and days on which the interest should be charged there is no doubt that the interest can be charged only on the actual amount outstanding for each and every invoice beyond the grace period. Charging of interest by the TPO on the closing balance without looking into delay of each and every invoice is incorrect. Therefore, we direct the TPO to compute the amount and number of days outstanding beyond the grace period for each and every invoice. The assessee shall provide complete information in this regard to the TPO.
Turning to the number of days of grace period, there is no thumb rule that grace period of 30 days, 60 days or 90 days should be allowed. It should be dependent upon (i) the M/s. Varian Medical Systems International (India) Pvt.Ltd.
terms and conditions of agreement with the AE and/or (ii) the terms and conditions of comparable business transactions with the Non-AEs. On being asked, the Ld. AR submitted that the assessee is a captive service provider and there are no comparable transactions with the Non-AEs. Thus, we are left with no choice but to remand this issue to the file of the TPO to examine if there are any agreements with the AE and what is the grace period in those agreements. If there are no agreements with the AEs, the TPO should consider the market practice in the relevant sector and then grant the grace period. We, however, clarify that in business world there is always a grace period and therefore non-granting of grace period is ignoring the business realities.
Coming to the last issue of rate of interest we have considered the arguments of both the sides. Following various judicial precedents, we hold that the rate of interest of Libor + 200 bps should be applied. We hold accordingly.
In the result, appeal of the assessee is partly allowed.
Order pronounced on 27th Dec, 2023.