ARISTOCRAT TECHNOLOGIES INDIA PRIVATE LIMITED,NOIDA vs. DCIT, CIRCLE-5(1)(1), NOIDA

With respect to the ground of appeal

In respect of ground no. 10 of appeal relating to computation of alleged interest on outstanding receivables. The ld. Counsel submits that the TPO has erred in computing interest on outstanding receivables on each invoice ignoring the fact that there were instances where the payments was received much prior to the credit period allowed by the TPO itself. The assessee had provided detailed working, however, the TPO ignored the working and computed the notional interest on outstanding receivables. Without prejudice to the primary argument, the ld. Counsel submits that outstanding receivables cannot be characterized as loan and advances to AE’s. Even, if an adjustment is warranted and notional interest is to be imputed on a LIBOR base rate then an appropriate markup should be arrived at through proper bench marking analyses. The ld. Counsel further pointed that the weighted average credit period of the assessee is 27 days, whereas, the TPO has considered average period of 30 days. The industry norm is 45 to 60 days.

Per contra, Shri S.K. Jhadav representing the department vehemently defending the assessment order and directions of the DRP submitted that the TPO has excluded R Systems and Infomile Technology Ltd. from the list of comparable companies as they are functionally different. He placed reliance on findings of the TPO and the DRP for not including said companies in the list of comparables. In so far as exclusion of Nihilent Ltd., Sagarsoft (India) Ltd. and Cybage Software P. Ltd., (AY 2020-21) the ld. DR placed reliance on the decision of TPO and the directions of the DRP to retain these companies in the list of comparables.

We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee in appeal has raised as many as 13 grounds. The ground no. 1 to 3 of appeal are general, hence require no separate adjudication.

In ground no. 4 of appeal, the assessee has assailed exclusion of Cybage Software P. Ltd., Nihilent Ltd., and Sagarsoft (India) Ltd. from the list of comparable companies. The TPO has included the said companies on the premise that the companies are functionally similar to the assessee. Our findings on exclusion of said companies is as under:- Cybage Software P. Ltd:- The assessee is an engaged in providing Software Development Services and Global Information Technology Services to its AE’s. The assessee is a captive service provider. Whereas, Cybage Software P. Ltd. is a product company unlike the assessee i.e. engaged only in development and testing module of certain software and its AE’s only. The company Cybage has developed a sophisticated data-science drawn platform ExcelShare. It is further contended that no segmental data is available with regard to revenue from product and services. A perusal of financial statements of Cybage Software P. Ltd. for the period ending 31.03.2020 at pages 321 to 337 of the paper book shows that the said company has declared income from Software Services with segmental bifurcation of Export Turnover and Domestic Turnover. But there is no segmental data of income from Services and Products. Since, no segmental data of Revenue is available Cybage (AY 2020-21) cannot be treated as comparable. Hence, the TPO/AO is directed to exclude said company for the list of comparables. Sagarsoft (India) Ltd:- The TPO included said company in the list of comparables for the reason that since the company is also engaged in software services it is comparable. Whereas, according to the assessee the said company is not comparables as the company is engaged in creation of complete software and delivering created products to end customers. Further no segmental information regarding products and services is available in public domain. The assessee further pointed that overseas travelling expenses are as high as 21.16%, whereas the assessee, has travelling expenditure of 1.23% of the total turnover. Referring to the traveling expenses, the argument of ld. Counsel is that Sagarsoft (India) Ltd. is engaged in on-site services, which is not in the case of the assessee. A perusal of Financial Statements of Sagarsoft (India) Ltd. for the Financial Year ending on 31.03.2020 at pages 303 to 315 shows that the company is only engaged in software development and consultancy activities, hence, no segmental reporting by the assessee. As per the Financials there is no product development by the company. From perusal 24th Annual Report relating to Financial Year 2019-20 of the company, it is not emanating that there is any product development or closing stock of any product. Hence, the contention of the assessee that the company is engaged in product development is unsustainable, hence, rejected. The assessee has further pointed that overseas travel expenditure of Sagarsoft (India) Ltd. is as high as 21.16% of the total expenditure. To contend that the said company is providing on-site services, apart from the inference drawn from the travel expenditure there is no other document to show that the said company is (AY 2020-21) providing on-site services. In light of above findings, we are not in agreement with the assessee that Sagarsoft (India) Ltd. is is not a good comparable. Nihilent Ltd:- The TPO has included the company in the list of comparables as the said company is stated to be engaged in providing software and other services and functionally similar to that of the assessee. The assessee is seeking exclusion of Nihilent Ltd. as it is engaged in diversified activities including Software Services, Business Consultancy and Performance Management and Providing IT related services. It is further argued that segmental information with regard to the revenue from various activities is not available. It is further contended that during the period relevant to assessment year under appeal, the company has acquired business of Hypercollective Creative Technologies P. Ltd. an advertising agency which shows that the company has expanded its operations beyond software services. The assessee has placed on record the financials of Nihilent Ltd. at pages 28 to 248 of the paper book. A perusal of the financial statements reveals that the company is engaged in providing consultancy and IT Solutions. The assessee is also engaged in providing product engineering, DevOps and Scaled Agile Framework TM besides conventional IT programs. However, no segmental information is available with respect to diversified services offered by the said company. Further, there is an extra ordinary event of acquisition of business by the said company during the FY 2019-20. Therefore, in our considered view the said company is not an idle comparable to be selected in the final list of comparables. Therefore, TPO/AO is directed to exclude the company from the list of comparables. Thus, in light of above findings, ground no. 4 of appeal is partly allowed.

The ld. Counsel for the assessee made a statement at Bar, that he is not pressing ground no. 6 of appeal, hence, the same is dismissed as not pressed.

Ground no. 7 to 10 of appeals are taken up together as they broadly relate to same issue. The aforesaid grounds are in respect of outstanding receivables. The AO made adjustment qua outstanding receivables. TPO charged interest on delayed receivables beyond 30 days, by applying 6 months LIBOR plus 400 Basis point on invoice by invoice basis. It is argued that working capital adjustment subsumes the effect of credit period, hence, separate adjustment is not required. Reliance is placed on the decision rendered in the case of Kusum Healthcare Pvt. Ltd. v. ACIT, 62 taxmann.com 79 (Delhi-Trib.). The Coordinate Bench of the Tribunal while dealing this issue held as under:- “7. We have heard rival submissions and perused the material on record. An uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the functions it performs or products it provides. However, the amount of capital required to support these functions varies greatly, because the level of inventories, debtors and creditors varies. High levels of working capital create costs either in the form of incurred interest or in (AY 2020-21) the form of opportunity costs. Working capital yields a return resulting from a) higher sales price or b) lower cost of goods sold which would have a positive impact on the operational result. Higher sales prices acts as a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereby necessitating appropriate adjustment. The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon'ble Tribunals : • Mercer Consulting (India) (P.) Ltd. v. Dy. CIT [2014] 47 taxmann.com 84/150 ITD 1 (Delhi) • Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi) • E-Gain Communication (P) Ltd. v. ITO [2009] 118 ITD 243 (Pune) • Sony India (P.) Ltd. v. Addl. CIT [2012] 21 taxmann.com 224/51 SOT 96 (URO) (Delhi) • Capgemini India (P.) Ltd. v. Asstt. CIT [2013] 33 taxmann.com 5/[2014] 147 ITD 330 (Mum.) 8. In view of the above, a working Capital adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted.” [Emphasized by us] (AY 2020-21) The decision of Tribunal has been affirmed by the Hon’ble Delhi High Court in Pr. CIT v. Kusum Healthcare Pvt. Ltd. 173 taxamann.com 58 (Delhi) holding as under: 11. The court finds that the entire focus of the Assessing Officer was on just one assessment year and the figure of receivables in relation to that assessment year can hardly reflect a pattern that would justify a Transfer Pricing Officer concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction.This was clearly impermissible in law as explained by this court in CIT v. EKL Appliances Ltd 345 ITR 241(Delhi).” In light of aforesaid decisions, we direct the AO/TPO to examine that if while making working capital adjustment outstanding receivable have been factored no separate adjustment is warranted for outstanding receivables as separate international transaction.

In ground no. 11 of appeal, the assessee has assailed levy of interest u/s. 234B and 234 C of the Act. Charging of interest under aforesaid sections is consequential and mandatory, hence, ground no. 11 of appeal is dismissed.

The ld. Counsel for the assessee made a statement at Bar, that he is not pressing ground no. 12 of appeal. In light of statement made by ld. Counsel for the assessee, ground no. 12 of appeal is dismissed as not pressed.

In ground no. 13 of appeal, the assessee has assailed initiation of penalty u/s. 270A of the Act. Challenge to penalty proceedings at this stage is premature, hence, ground of appeal no. 13 is dismissed.