MAVENIR SYSTEMS PRIVATE LIMITED,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1), BANGALORE

ORDER

PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 29.04.2022 passed by the Ld.DCIT, Circle 4(1)(1), Bangalore for A.Y. 2017-18. The Ld.AR has relied on the specific grounds of appeal filed before this Tribunal which are as under:

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2. Companies whose income was less than Rs. 1 Crore – rejected.

3. Companies whose SWD service income is less than 75% of its total operating revenues – rejected.

4. Companies who have more than 25% related party transactions of the sales – rejected.

5. Companies who have export service income less than 75% of the sales – rejected.

6. Companies with employee cost less than 25% of turnover – rejected.

2.5 Comparables selected by TPO weighted Sl. Name of the Company average No. (in %) 1. Rheal Software Pvt. Ltd. -1.85 Kals Information Systems Ltd. 3.62 2. 3. Infomile Technologies Ltd. 10.43 Harbinger Systems Pvt. Ltd. 14.1 4. 5. CG-VAK Software & Exports Ltd. 15.09 Larsen & Toubro Infotech Ltd. 21.14 6. 7. Great Software Laboratory Pvt. Ltd. 21.24 Mindtree Ltd. 24.17 8.

Page 6 of 32 IT(TP)A No. 453/Bang/2022 R Systems International Ltd. 24.40 9.

10. Persistent Systems Ltd. 26.17 Tata Elxsi Ltd. 26.19 11.

12. Infobeans Technologies Ltd. 26.44 Aptus Software Labs Pvt. Ltd. 26.46 13.

14. Nihilent Ltd. 29.82 OFS Technologies Ltd. 29.93 15.

16. Cygnet Infotech Pvt. Ltd. 30.19 Infosys Ltd. 39.50 17. Threesixty Logica Testing Services Pvt. 41.94 18. Ltd. Cybage Software Pvt. Ltd. 57.82 19.

Page 7 of 32 IT(TP)A No. 453/Bang/2022 the DRP directions, the Ld.AO following were the comparables that remained.

Sl. Name of the Company No.

1. Kals Information Systems Ltd.

2. Rheal Software Pvt. Ltd.

4. Sagarsoft India Pvt. Ltd.

20. Threesixty Logica Testing Services Pvt. Ltd.

Page 8 of 32 IT(TP)A No. 453/Bang/2022 Infosys Ltd., Cybage Software Pvt. Ltd., and Consilient Technologies Pvt. Ltd. ought to be excluded on account of the companies being functionally dissimilar to the assessee. (Ground No. 1.5) b. That Sasken Communication Technologies Ltd., Maveric Systems Ltd. and Evoke Technologies Pvt. Ltd. ought to be included in the final list of comparables as the companies are functionally comparable to the assessee. (Ground No. 1.6) c. The TPO erred in computing the margins of certain comparable companies. (Ground No. 1.7) d. That the lower authorities erred in computing an adjustment towards notional interest on outstanding receivables (Ground No. 2) 2.10 Before we undertake the comparability analysis it is sine qua non to understand the FAR of the assessee for the year under consideration, which is as under:

Page 9 of 32 IT(TP)A No. 453/Bang/2022 Page 10 of 32 IT(TP)A No. 453/Bang/2022 Page 11 of 32 IT(TP)A No. 453/Bang/2022 Page 12 of 32 IT(TP)A No. 453/Bang/2022 Page 13 of 32 IT(TP)A No. 453/Bang/2022 Page 14 of 32 IT(TP)A No. 453/Bang/2022 2.11 Based on the above, we shall carry out the comparability in respect of the comparables sought for inclusion / exclusion by the assessee.

3. Ground no. 1.5 raised by the assessee seeking the following comparables to be excluded. a) Larsen & Toubro Infotech Ltd., b) Great Software Laboratory Pvt. Ltd., c) Mindtree Ltd., d) R Systems International Ltd., e) Persistent Systems Ltd., f) Tata Elxsi Ltd., g) Infobeans Technologies Ltd., h) Aptus Software Labs Pvt. Ltd., i) Nihilent Ltd., j) OFS Technologies Ltd., k) Cygnet Infotech Pvt. Ltd., l) Infosys Ltd., Cybage Software Pvt. Ltd., and m) Consilient Technologies Pvt. Ltd. 3.1 The Ld.AR submitted that from the above list, if following six comparables are considered for exclusion, the assessee would be within the acceptable margin. She however prayed that the remaining comparables may be left open with the liberty to argue in an appropriate circumstances. The six comparables that has been argued by the assessee are i) Larsen & Toubro Infotech Ltd. ii) R Systems International Ltd. iii) Persistent Systems Ltd. iv) Infobeans Technologies Ltd. v) Infosys Ltd. vi) Tata Elxsi Ltd. Page 15 of 32 IT(TP)A No. 453/Bang/2022 I. Larsen & Toubro Infotech Ltd.:- (a) The Ld.AR submitted that this company is engaged in functionally diversified activities including analytics, automation, blockchain, IoT, infrastructure management services, etc. which are not comparable to the services rendered by the assessee. It is also submitted that L&T is engaged in sale of products and licenses and segmental details as regards the same are not available. (b) The Ld.AR referring to page nos. 820, 833, 940 and 941 submitted that during the year under consideration, L&T has acquired AugmentIQ, and GDA Technologies Ltd. amalgamated with the company. It is submitted that the company has grown inorganically, and the inorganic growth is bound to have an impact on the margin of the company. (c) It was further submitted that this company has significant onsite activity and has also carried out substantial research and development activity during the year on latest technologies, the expenditure in respect of which amounts to Rs. 270 million. (d) The Ld.AR submitted that this company is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. The company also owns proprietary software products which are developed in-house. Further, she submitted that L&T enjoys significant brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market resulting in extraordinary profits. It was also submitted that this company incurs significant ‘consultancy charges’.

Page 16 of 32 IT(TP)A No. 453/Bang/2022 (e) Reliance was placed on the following decisions of Coordinate Bench of this Tribunal to submit that this company has been consistently excluded for the above reasons.

Page 21 of 32 IT(TP)A No. 453/Bang/2022 (f) This Tribunal in the above referred decision has restored R Systems International Ltd. with the direction to verify if the said company has prepared the financials for financial year ending on March 31 or if it could be reasonably extrapolated. We accordingly remand this comparable to the Ld.AO/TPO for reverification based on similar direction. IV. Persistent Systems Ltd. (a) It is submitted that Persistent is functionally dissimilar to the Appellant and hence cannot be considered as a comparable. The company is engaged in licensing and sale of products, technology innovation and also earns royalty income. However, segmental details as regards its diverse services are unavailable. Considering the same, it can be observed that Persistent is engaged in software product development unlike the Appellant which is a low-risk captive SWD service provider. Even going by the company’s reply to the TPO’s notice under Section 133(6) of the Act, the company is predominantly engaged in the business of providing outsourced product development services, which are vastly different from the services rendered by the Appellant. (b) The company undertakes significant R&D activities to develop technologies and intellectual property to differentiate themselves form the industry and has established ‘Persistent Labs’ to focus on R&D activities. (c) Moreover, the company has also incurred significant expenses in foreign currency, demonstrating that it renders significant onsite services, which business model is different from that of the Appellant’s.

Page 22 of 32 IT(TP)A No. 453/Bang/2022 (d) Reliance was placed by Ld.AR on following decisions in support of the above submissions. the decision of Hon’ble Delhi Court in the case of PCIT v. Cashedge i) India Pvt. Ltd. (Order dated 04.05.2016 passed in the decision of this Hon’ble Tribunal in Arm Embedded Technologies ii) Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021). the decision of the Hyderabad Bench of the Hon’ble Tribunal in Infor iii) (India) Pvt. Ltd. v. ACIT (order dated 25.08.2022 passed in ITA-TP No. 228/Hyd/2022) for the assessment year 2017-18. (e) We note that this company is mostly into product development and owns huge intellectual properties. It is also noted that there is no segmental details available in respect of the various systems of revenue earned by this company. Under such circumstances, we do not find it appropriate to be included in the final list. Accordingly we direct the Ld.AO/TPO to exclude this company. V. Tata Elxsi Ltd. (a) It is submitted that Tata Elxsi is functionally dissimilar to the Appellant and cannot be accepted as a comparable. The company is engaged in providing high end services in the nature of technology consulting, product design, development and testing services, design and technology services for consumer goods sector, high-end content development and 3D animation services for media and entertainment industry. It is submitted that the services rendered in the SWD segment are in the nature of embedded product design, industrial design and visual computing labs, which are not comparable to the services rendered by the Appellant. Further, it is Page 23 of 32 IT(TP)A No. 453/Bang/2022 submitted that the company renders services in niche areas as opposed to routine SWD services rendered by the Appellant. (b) Further, it is submitted that Tata Elxsi is focused on research and development activities and incurs expenses for developing new functionalities and patenting innovative technologies. (c) Detailed submissions are placed at pages 188-190 of the appeal set and 260-261 of the paperbook. (d) Reliance was placed on the decision of the Hon’ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. v. ACIT by order dated 25.08.2022 passed in ITA-TP No. 228/Hyd/2022 for the assessment year 2017-18. We have perused the submissions advanced by both sides in the light of records placed before us. Admittedly this company is into research and development activities and has developed various product design, industrial design etc. It is also noted that though this company is into software development services, in the process has developed various products that has been sold and revenue has been generated from sale of products. The segmental details in respect of software services rendered and product sale is not available in the financials of this company. It is noted that Hon’ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. vs. ACIT (supra) for similar reason has excluded this company from the final list. We therefore direct this comparable to be excluded from the final list as it is not comparable with a captive service provider like that of assessee.

Page 24 of 32 IT(TP)A No. 453/Bang/2022 VI Infobeans Technologies Ltd. (a) It is submitted that Infobeans is functionally dissimilar to the Appellant. The company is engaged in providing software engineering services primarily in Custom application development (“CAD”), Content Management Systems (“CMS”), Enterprise Mobility, big data analytics. Though the annual report of the company mentions that the company is earning 100% revenues from sale of software services, such services are in the nature of CAD,CMS etc., which are not pure software development. It is submitted that the software services provided by Infobeans are in the nature of KPO services and not pure software development services as defined in the safe harbour rules. Further, it is submitted that Infobeans has not provided any segmental information bifurcating revenue generated from SWD services and that of KPO services. (b) Further, the company owns significant intangible assets. Further, the revenue increased from Rs. 35 crore (FY 2014-15) to Rs. 62 crore (FY 2015-16) in a period of 1 year (76%). This demonstrates that the company does not reflect the market standard, and therefore, the company ought to be excluded from the final list of comparables. (c) Detailed submissions are made at pages 173 of the appeal set and 242-243 of the paperbook. (d) The Ld.AR placed reliance on the following decisions. i) this Hon’ble Tribunal in the case of NTT Data FA Insurance Systems (India) Pvt. Ltd. (order dated 03.10.2022 passed in IT(TP)A No. 261/Bang/2021) ii) this Hon’ble Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021); Page 25 of 32 IT(TP)A No. 453/Bang/2022 iii) this Hon’ble Tribunal in Airlinq (Order dated 28.07.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 231/Bang/2021); iv) Hyderabad Bench of the Hon’ble in ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in at para 7]; v) of the Delhi Bench of the Hon’ble Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17, and vi) the decision of the Mumbai Bench of this Hon’ble Tribunal in Red Hat India Pvt. Ltd.g v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021). (e) We note that for the above submitted objections by the Ld.AR, this company has been excluded by Coordinate Bench of this Tribunal in case of Airlinq (supra) by observing as under: Accordingly, we direct the Ld.AO/TPO to exclude this company from the final list. In respect of the remaining comparables, we grant liberty to the assessee to argue in an appropriate circumstances as submitted by the Ld.AR. Accordingly, ground no. 1.5 raised by the assessee stands partly allowed.

Page 26 of 32 IT(TP)A No. 453/Bang/2022 4.2 The Ld.TPO rejected the above companies for the reason that they are functionally not similar though they are alleged to have been rendering SWD services. The Ld.AR submitted that in following decisions of Coordinate Bench of this Tribunal, above comparables have been directed to be included. 4.3 We therefore remand Maveric Systems Ltd. and Evoke Technologies Pvt. Ltd. to be readjudicated by the Ld.TPO based on the annual reports of these companies. The Ld.TPO is directed to verify the FAR analysis of these companies and to consider the claim of assessee in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 4.4 Sasken Communication Technologies Ltd. 4.4.1 It is submitted that this comparable has been excluded by the Ld.TPO as it is involved in R&D activities and owns huge patents. We have hereinabove excluded Infosys Ltd., L&T Infotech Ltd. for the reason that they are into research and development activities and owns huge intangibles which is not akin to a captive service provider. Applying the same principle, we do not find any infirmity in exclusion of Sasken Communication Technologies Ltd. by the Ld.TPO. Accordingly, we reject this comparable sought for exclusion by assessee. Accordingly ground no. 1.6 raised by assessee stands partly allowed.

5. Ground no. 1.7 has been raised by assessee seeking the correction in the margins of the comparable companies. It is submitted that assessee has filed all the relevant details in Page 27 of 32 IT(TP)A No. 453/Bang/2022 respect of the comparables that needs to be verified by the Ld.TPO/AO. We thus direct the Ld.AO/TPO to recompute the margins in accordance with law. Accordingly this ground stands allowed for statistical purposes.

6. Ground no. 2 is related to the transfer pricing adjustment with respect to outstanding receivables. Primarily the Ld.AR has objected by submitting that no interest is attributable as the same was not charged by the AEs on any delayed payment by the assessee. However, assessee submitted that only two invoices payment were delayed to be paid by the AE with respect to 15 days and one day. In any event, if at all any interest is to be computed, LIBOR rate is to be applied as submitted by the Ld.AR. The Ld.DR relied on the order passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. Admittedly attributing interest to the delayed payment is an international transaction. 6.1 The Ld.AR submitted that the Ld.TPO proposed transfer pricing adjustment in respect of outstanding receivables in respect of trade creditors being the AEs by using 6 months LIBOR rate and CUP as the most appropriate method. The Ld.TPO thus proposed adjustment at 5.8749% amounting to Rs.3,37,183/-. 6.2 The Assessee wishes to submit that the delayed/ outstanding receivables should not be considered as a separate Page 28 of 32 IT(TP)A No. 453/Bang/2022 international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of inter- company transactions of provision of services has been already determined and no separate adjustment is necessary in this regard. 6.3 The Ld.AR placed reliance on decision of Hon’ble Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. reported in (2017) 398 ITR 66, held that, no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Hon’ble Delhi Tribunal in case of Bechtel India vs DCIT reported in (2016) 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order dated 21/07/16 in also upheld by Hon'ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 6.4 It was submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables as assessee adopted TNMM as the MAM for computing its margin, and therefore no separate adjustment is required to be made.

Page 29 of 32 IT(TP)A No. 453/Bang/2022 6.5 On the contrary, Ld.CIT.DR submitted that, interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of her contentions, she placed reliance on decision of Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT (2015- TII-347-ITAT-DEL-TP) wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include-- ...... (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....' . 6.6 Ld.CIT DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non- payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case referred to the Page 30 of 32 IT(TP)A No. 453/Bang/2022 decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 108, which dealt with question of law: (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?' 3.5.6. She submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under- charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. He thus submitted that the Interest on outstanding receivables have been rightly constituted as independent international transaction 6.7 We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. v. Asstt. DIT in 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 Page 31 of 32 IT(TP)A No. 453/Bang/2022 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 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." 6.8 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.

Page 32 of 32 IT(TP)A No. 453/Bang/2022 Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly this ground raised by the assessee stands allowed for statistical purposes.

7. Ground nos. 1 to 1.4 are general in nature and do not require adjudication. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 23rd March, 2023.