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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K. & SHRI LAXMI PRASAD SAHU
Per Laxmi Prasad Sahu, Accountant Member :
This appeal filed by the assessee is against the order of National e-Assessment Center (NFAC) DIN No.
IT(TP)A No.721/Bang/2022 Page 2 of 18 ITBA/AST/S/143(3)/2021-22/1033149506(1) dated 08/06/2022 with the following grounds of appeal:- “That on the facts and circumstances of the case and in law, the AO has erred in assessing total income of the Appellant at INR 36,60.34,273 as against the returned income of INR 28,98,03,750 in pursuance to the directions issued by the Dispute Resolution Panel ("DRP").
2. That on the facts and circumstances of the case and in law, the assessment order passed by the AO is bad in law as the mandatory conditions to invoke the jurisdiction under section 92CA of the Act did not exist, or having not been complied with and consequently the assessment order of the AO is bad in law for want of requisite jurisdiction. Transfer pricing adjustment relating to Information Technology Enabled Services:
3. That on the facts and circumstances of the case and in law, the AO / DRP / Transfer Pricing Officer ('TPO') have erred in making a transfer pricing adjustment of INR 7,58,31,575, in respect of information technology enabled services ("ITeS"), alleging that the services were not rendered at arms length in terms of the provisions of sections 92C(1) and 92C(2) of the Act, read with Rule 10 of the Income-tax Rules, 1962 ("the Rules").
4. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily rejecting the transfer pricing study of the Appellant and used arbitrary filters for benchmarking the international transaction pertaining to ITeS. 4.1 That on facts and circumstances of the case and in law, the AO/DRP/TPC have erred in applying the turnover filter by selecting the lower limit of turnover of Rs. 1 crore and not restricting the upper limit of turnover at Rs. 200 crores.
5. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily selecting comparable companies based on incorrect appreciation of functional, asset and risk profile, and arbitrary filters. 5.1 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily selecting companies namely. Tech Mahindra Business Services Limited, lnfosys BPM Limited, SPI Technologies India Pvt. Ltd. and Eclerx Services Limited, based on incorrect appreciation of functional, asset and risk profile, arbitrary filters and without appreciating that the said companies have significantly high turnover in comparison to the Appellant i.e. the said companies fail 5.2 That on the facts and circumstances of the case and in law, the AO / TPO have erred in arbitrarily dropping the comparable company namely.
IT(TP)A No.721/Bang/2022 Page 3 of 18 E-Zest Solutions Ltd., from the final comparable set, without giving any cogent reasons and without appreciating that the same was proposed by the TPO himself in the show-cause notice and was duly accepted by the Appellant. The DRP, further, erred in upholding such an action of the lower authorities. 5.3 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily rejecting R Systems International Ltd (seg) basis different financial year ending than the Appellant. 5,4 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in rejecting the comparable companies namely, AlIsec Technologies Ltd, Jindal Intellicom Ltd. And Cosmic Global Ltd., by erroneously and arbitrarily applying filter of export service income less than 75% of the sales. 5.5 That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in rejecting the comparable companies namely, Sundaram Business Services Ltd., Hartron Communications Ltd., and ACE Software Exports Ltd. by erroneously and arbitrarily applying the filter of persistent loss-making companies.
6. That on the facts and circumstances of the case and in law, the AO / TPO have erred in not granting economic / risk adjustments and working capital adjustment. Transfer pricing adjustment relating to notional interest on trade receivables: 7. That on the facts and circumstances of the case and in law. the AO / DRP / TPO have erred in making notional adjustment of INR 1,23,961 alleging that the outstanding trade receivable is a separate international transaction within the meaning of section 92B of the Act and failing to appreciate the fact that it is a routine business transaction and not per se a loan transaction.
8. That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in charging notional interest on outstanding balance of debtors without appreciating that there was no delay in receipt of any of the invoices raised during the impugned financial year.
9. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not appreciating that Appellant is a debt free company and therefore no transfer pricing adjustment on account of notional interest is warranted since a debt free company is neither paying any interest nor receiving any interest.
10. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not appreciating that once working capital adjustment is granted no separate adjustment on account of outstanding receivable is maintainable.
IT(TP)A No.721/Bang/2022 Page 4 of 18
11. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not appreciating that international transaction of ITeS and outstanding receivable being inter-connected and intertwined should be benchmarked on an aggregate basis. 11.1. That on the facts and circumstances of the case and in law, the A0 / DRP / TPO further erred in not appreciating that if the two functions are segregated and benchmarked, then the same would result in over taxation and is contrary to the provisions of the Act.
12. Notwithstanding and without prejudice, that on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in arbitrarily adopting SBI short term deposit interest rate for imputing interest, which is arbitrary and unreasonable. 13 That on the facts and circumstances of the case and in law, the education cess ("EC") and secondary and higher education cess ("SHEC") on Income Tax is an allowable expenditure for computing total income as per the provisions of the Income-tax Act, 1961, 14 That on the facts and circumstances of the case and in law, the A0 has erred in computing interest under section 234B and 2340 of the Act. 15 That on the facts and circumstances of the case and in law, the AO/DRP has erred in initiating penalty proceedings under section 271(1)(c) of the act mechanically and without recording any adequate satisfaction for such initiation Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal.”
The assessee filed return of income on 28/11/2016 declaring return of income at Rs.28,98,03,750/-. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee submitted details were and from the details, it was observed that the assessee had undertaken international transactions with its AE’s, therefore the reference was made to the TPO for computation of arms length price u/s 92CA of the Act with regard to international transactions after
IT(TP)A No.721/Bang/2022 Page 5 of 18 taking approval from the competent authority. The assessee company is involved in provision of IT enable services. It has grown into a leading medical transcription service organization and serves a large array of satisfied customers, hospitals and physician groups, located primarily throughout the United States. The company has operations in 5 cities in India from offices which are registered with the STPI. The financial results worked out by the TPO as under:-
The documents maintained under 92D of the Act was called for and it was noted that the assessee has applied TNMM method as most appropriate method for calculation of operating profit to operating cost . Further the TPO noted that as per provision of sec. 92C(3)(c) r.w.s 92CA of the Act, in the opinion of the TPO the information or data used in computation of arms length price was IT(TP)A No.721/Bang/2022 Page 6 of 18 not reliable or correct therefore, the TPO proceeded to determine the arms length price in relation to the international transactions in accordance with sec.92C(1) and (2) of the Act and rejected the Transfer Pricing study report filed by the assessee. The following filters were applied by the TPO after fresh search. 1) Use of current year data were available 2) Companies having different financial year end [i.e not March 31st 2016] or data of the company which does not fall within 12 months period it means 01/04/2015 to 31/03/2016 were rejected. 3) Companies whose income was less than 1 crore were excluded. 4) Companies whose IT enable services income is less than 75% of its total operating revenue were excluded 5) Companies who have more than 25% related party transactions were excluded 6) Companies who have export service income less than 75% of the sales were excluded 7) Companies with employee cost less than 25% of the turnover were excluded.
Applying certain filters as noted above only 2 companies were accepted out of 13 comparables selected by the assessee. The TPO made fresh search using Prowess Database & extracted 2215 companies and selected 10 companies and calculated
IT(TP)A No.721/Bang/2022 Page 7 of 18 median @ 23.92% . The assessee was issued show cause notice. The assessee filed detailed objections before the TPO and finally the TPO selected 6 companies as comparables and calculated median @ 23.44% as under:-
The TPO calculated arms length price for adjustment towards international transactions as under:-
IT(TP)A No.721/Bang/2022 Page 8 of 18
The TPO further observed that the assessee has receivable on which no interest has been charged for delay realisatios. The TPO after discussing the issue details in his order, upheld that the interest on outstanding on receivables is an international transactions within the meaning of sec.92B(1). The details were asked from the assessee invoice wise details of all the trade receivables from AEs. The details were asked in the particular format: amount raised in invoice, date of invoice , date of receipt & delay in No. of days. The assessee submitted details as on 21/02/2019. Accordingly, the interest was calculated after applying the average weighted six months Libor + 450 basis points @ 4.985% and there was interest on rceivables calculated at Rs.1,12,354/-. Accordingly the TPO proposed for adjustment towards international transactions with its AE as under:- ITeS segment - Rs.12,57,81,941/- Interest on delayed receivable - Rs.1,12,354/-
Accordingly, total adjustment u/s 92CA was proposed for Rs.12,58,94,295/- and TPO passed order on 30/10/2019. After receipt of TPO order, the AO made further disallowance u/s 40a(ia) of Rs.3,98,949/- and incorporating the adjustments suggested by the TPO, passed order on 24/12/2019 DIN No. ITBA/AST/F/144C/2019-20/1023046996(1). . The assessee filed objections before the DRP. The assessee challenges the following comparables selected by the TPO:-
IT(TP)A No.721/Bang/2022 Page 9 of 18
1. Tech Mahindra Business Services Ltd.
2. Infosys BPM Ltd. 3. SPI Technologies India Pvt. Ltd. 4. Eclerx Services Ltd.
7.1 The ld. DRP has upheld for inclusion b AO of above four companies in para No. 5.1 to 5.1.4.3 of order. The assessee also requested for inclusion of Supravin Technologies Ltd which were accepted by the TPO but in final set of comparables it was excluded, the ld. DR accepted the plea of the assessee. The E-Zest Solutions Ltd were also contested but the ld. DRP did not accept, the interest on outstanding receivables was also challenged but it was not accepted and passed the order on 25/03/2021after giving partial relief. Accordingly, the adjustment towards international transactions with its AEs was restricted to Rs.7,58,31,575/- and interest on receivable was calculated at Rs.1,23,961/- and AO completed final assessment order and assessed total income at Rs. 36,60,34,274/-.
Aggrieved from the above order, the assessee filed appeal before the Income Tax Appellate Tribunal.
The ld.AR reiterated submissions made before the lower authorities and he has filed a chart which is placed on record. Before us, the assessee contested the following companies for IT(TP)A No.721/Bang/2022 Page 10 of 18 exclusion from comparable companies on the basis of high turnover as under:- Name of the Companies Turnover(Rs. in (Cr.) 1. Tech Mahindra Business Services Ltd. 722.70 2. Infosys BPM Ltd. 2849.00 3. SPI Technologies India Pvt. Ltd., 336.00 4. Eclerx Service Ltd., 1105.70 9.1. The ld. AR of the assessee further submitted that the assessee’s turnover is Rs. 171.38 Crores which is less than the Rs. 200.00 crores. Once the lower turnover filter is applied then there should be upper turnover limit. The above four companies can not be considered as a comparables because of having high turnover,therefore, this companies should be excluded as per the various decisions of coordinate benches of the Tribunal to which the ld.AR relied. He further submitted that in assessee’s own case for the three assessment year i.e 2008-09, 2012-13 & 2014-15 in IT(TP)A No. 1609/Bang/2012, 173/Bang/2017 & 3230/Bang/2018 respectively the Hon’ble Tribunal has excluded on the basis of high turnover, therefore the same ratio should be applied for the impugned assessment year. In support of his argument he also relied on many judgment which are as under:- 1. Mindteck India Ltd. vs. DCIT (IT(TP)A No.252/Bang/2021 2. TE Connectivity Services India Ltd vs.The ITO IT(TP)A No. 300/Bang/2021
IT(TP)A No.721/Bang/2022 Page 11 of 18 3.Fulcrum Fund Services (India) Pvt. Ltd. vs ITO IT(TP)A No. 2521/Bang/ 2017. 4. Misys Software Solutions (India) (P) Ltd. vs ITO, ITA NO. 1650/Bang/2016. 5. Swiss Re Global Business Solutions India Private Limited vs DCIT , ITA No. 2315/Bang/2016.
The ld. DR relied on the order of the lower authorities and he submitted that once the comparable companies passes all the filters applied by the TPO it should not be excluded only on the basis of turnover which is more than Rs. 200.00/- crores.
After hearing the rival contentions and persuing the entire materials on record and order of the authorities below we observed that the assessee company is engaged in ITes business and his turnover is less than Rs. 200.00/- crores , The turnover is Rs. 171.38/- crores. The AR of the assessee contested only four companies for exclusion as noted above these companies having turnover is more than Rs. 200.00/- crores. The co-ordinate bench of Tribunal has taken the view the high turnover companies having turnover is more than Rs. 200/- crores can not be considered as comparables even otherwise it is comparables. . The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. v. ITO in IT(TP)A No. 310/Bang/2021 order dated 25.10.2021 has considered a host of rulings on this issue
IT(TP)A No.721/Bang/2022 Page 12 of 18 including that of Hon’ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that the application of the turnover filter is justified on the basis of the classification of companies as per the report of Dun and Bradstreet. Since the assessee, in the present case, has disclosed an operating revenue of Rs. 171.38/- Crores, companies reporting turnover above a threshold are considered not comparable. We also noted that in assessee’s own case the co- ordinate bench of the Tribunal has also considered on this point regarding high turnover in the above noted appeal of the assessee. Accordingly, by following the orders of the Tribunal, we direct the AO / TPO to apply the appropriate upper turnover filter and exclude the above four companies as contested by the ld. AR noted supra inparagraph No.
9. Accordingly the grounds raised by the assessee on these issues are allowed.
Further the ld.AR wanted to include the following three companies:- 1. Sundram Business Services Ltd., 2. ACE Software Export Ltd. 3. Harton Communication Ltd.,
The assessee submitted that in respect of these above three comparable companies selected by the assessee, the TPO has excluded that only because these companies are fails persistent
IT(TP)A No.721/Bang/2022 Page 13 of 18 loss filter. The TPO was in wrong premises that the persistent loss company can not be considered as comparable if the company is continuously making loss for three years, however, the companies have earned profit in the financial year 2016 as well as in any one of the years which is evident from the companies financials statements. The break-up of the Trading Profit & Loss accounts have been given in the chart submitted by the AR. of the assessee. In support of his contention he relied on the following judgments.
NTT Data Information Process Services Pvt. Ltd., vs. DCIT reported in [2022]142 taxmann.com 452.
2. Swiss Re Global Business Solutions India (P) ltd. vs CIT NFAC reported in [2022] 137 taxmann.com 417 3. Sterling Commerce Solutions India Private Ltd. vs DCIT in IT(TP)A 1410/Bang/2015 4. DCIT vs. Quark Systems P. Ltd. [42 DTR414] 414, ITA No. 100/CHD/2009
On the other hand, the ld. DR relied on the order of the lower authorities and he further submitted that the three companies are persistent loss making company, therefore these companies do not pass the appropriate filter applied by the TPO. The case law relied by Entity data process services Pvt. Ltd.. The TPO had not considered on the point of persistent loss. It was considered only functionally comparables. Therefore he submitted that these three companies y should not be included.
IT(TP)A No.721/Bang/2022 Page 14 of 18
After hearing both the parties and perusing the entire records and having gone through the orders of lower authorizes, we note that these three companies were considered at the time of calculation of arms length price in his TP study by the assessee but the TPO did not accept, these are persistent loss making company. On going through the summary of revenue , expenses & profit demonstrated in the chart filed before us, the company wise details are as under:- 1. Sundaram Business Services Ltd. Financial Total Revenue Total Expenses Profit/Loss (Rs.) Year (Rs.) (Rs.) 31.03.2014 213619332 243155652 -29536320 31.03.2015 24035800 254432000 -14074000 31.03.2016 244116000 243554000 69000 2. ACE Software Exports Ltd. 31.03.2014 55325532 49232355 6093177 31.03.2015 66254075 62389254 3864821 31.03.2016 87619659 75945864 11673795 3. Harton Communication Ltd. 31.03.2014 220974587 171787190 49187397 31.03.2015 352341551 329362733 22978818 31.03.2016 301490347 238750480 62739867
Since in this case the TPO has not accepted these companies only on the basis of persistent loss company, the assessee has provided functional results for 3 companies i.e 31/03/2014, 2015
IT(TP)A No.721/Bang/2022 Page 15 of 18 & 2016 as above and in which we observe that in case of Sundram Business Service Ltd. , the assessee has shown profit of Rs.69,000/-. Further in case ACE Software Ltd., the assessee has shown profit continuously. In case of Hurton Communication Ltd., the assessee has calculated profit for three consequent financial years but while the filter applied, the TPO has observed it as persistent loss company. However, form the order of the TPO/DRP, we did not find any where that the assessee raised any specific objection . Since the assessee raised this issue before us, and these were included as comparables by the assessee and filed financial statements also, therefore, considering the totality of facts, the issue is remitted back to the AO/TPO/DRP for a fresh consideration. The assessee is given liberty to file necessary documents for substantiating its case. The AO/TPO/DRP is directed to decide the issue as per law.
Regarding transfer pricing adjustment relating to notional interest on outstanding trade receivables. This ground has been raised by the assessee in ground No.7 to 12. In this ground the assessee has raised that the interest on receivable should not be made adjustment because the TPO himself allowed 90 days credit period and all the receivables were received within the period of 90 days then why the TPO has made adjustment under this head and he also submitted that this company is a debt free company, therefore, the adjustment should not be made. He further
IT(TP)A No.721/Bang/2022 Page 16 of 18 submitted that the AO/TPO/DRP have erred in computation of interest using SBI short term interest rate. The TPO is not justified in applying interest rate of 4.985% by using libor rate of six months + 450 basis points, whereas RBI circular sated that it is for external commercial borrowing rate which is a excessive and un reasonable. He further submitted that in case of assessee’s own case for the assessment year 2011-12, 2012-13& 2014-15 the LIBOR rate has been accepted by the Tribunal. We noted from the documents of the assessee that the TPO has allowed 90 days period in all the invoices are received within the 90 days of the period no adjustment can be made but the TPO has applied 6 months LIBOR + 450 basis points as per many decision of the Tribunal with the interest on receivable beyond he credit period is an international transaction and it is termed as capital financing to its AEs. Considering the totality of the facts we remand this issue to the file of TPO/AO for the recalculation of the notional interest receivables if the TPO found that the invoices raised by the assessee is not received within the credit period of 90 days. The interest may be charged LIBOR rate of 6 months + 350 points, the assessee directed to provide necessary details for earlier disposal of the case, therefore this issue is allowed for statistical purposes.
Ground No.13 has not argued by the assessee, hence it is dismissed as not pressed. The ground No. 1 is general in nature , Ground No. 02 was not pressed, Ground No. 06 is academic in IT(TP)A No.721/Bang/2022 Page 17 of 18 nature, Ground No.14 and 15 is consequential in nature & other grounds decided in above terms in the case of ITeS segment.
The Registry has pointed out that there is delay of 149 days in filing appeal. The Hon’ble Supreme Court has decided in M.A No.21 of 2002 vide order dated 10.01.2022 held that the period from 15.03.2020 to 28.02.2022 shall be excluded for limitation period. Therefore, in essence there is no delay in filing this appeal.
In the result, appeal of the assessee is partly allowed. Order pronounced in court on 16th day of February, 2023 Sd/- Sd/- (George George K) (LAXMI PRASAD SAHU) Judicial Member Accountant Member Bangalore, Dated, 16th February, 2023 / vms / Copy to:
1. 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore.