NTT DATA FA INSURANCE SYSTEMS (INDIA) PRIVATE LIMITED ,BENGALURU vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-5(1)(1), BENGALURU

The brief facts of the case are that the assessee is a private limited company and a subsidiary of NTT Data FA Insurance Systems Pte Ltd., Singapore. The assessee is doing the business of providing software development services to its parent company. During the A.Y., the assessee had undertook the international transactions with its AE and the assessee also prepared a transfer pricing document and in the said document, the

For the A.Y., the assessee filed their return of income on 19/01/2021. The said return was processed u/s. 143(1) of the Act and some additions were made. Thereafter the return was selected for complete scrutiny due to the fact that large payments made u/s. 194J and high risk international transactions. Notice u/s. 143(2) was issued and the assessee had also filed their responses from time to time. After considering the said submissions made by the assessee, the AO had referred the case to the transfer pricing officer u/s. 92CA of the Act. The TPO also called for various details and the assessee also submitted the details as required by the TPO. Finally, the TPO rejected the transfer pricing document and passed an order u/s. 92CA of the Act on 27/06/2023 in which the TPO had made the following transfer pricing adjustments.  Software development services – Rs. 6,29,64,033/-  Notional interest at 13.62% on balance receivable Rs. 46,51,401/-

The AO incorporating the said adjustments had issued a draft assessment order. The assessee also filed their objections to the said draft assessment order u/s. 144C(2) of the Act before the DRP on 25/09/2023. The Hon’ble DRP considered the said objections and issued directions on 14/05/2024. The Ld.TPO considered the said directions and refixed the transfer pricing adjustment at Rs. 5,84,58,396/-. Thereafter the AO had passed the final assessment order on 27/06/2024 by incorporating the transfer pricing adjustment made by the TPO.

At the time of hearing, the Ld.AR submitted that the ground nos. 1 to 3 are general and therefore the same need not be adjudicated. Similarly, the Ld.AR also submitted that the assessee had not pressed ground nos. 4 to 6. The Ld.AR also submitted that the assessee had not pressed ground nos. 8 to 10 but requested the Tribunal to keep it as open as turnover is applicable. Similarly, the Ld.AR submitted that ground no. 17 may be kept open to decide at the appropriate time. Finally, the Ld.AR submitted that they are pressing ground nos. 7, 12 to 16. The Ld.AR filed a synopsis of arguments and also several paper books in support of their contention. The Ld.AR also relied on the directions issued by the DRP in which they have directed the exclusion of Threesixty logica testing services Pvt. Ltd. and inclusion of the Harbinger Systems Pvt. Ltd., Ksolve India Ltd. and Indianic Infotech Ltd. and Vrinchi Ltd.

The Ld.AR also submitted that authorities had erred in not applying the upper turnover filter to exclude the companies having higher turnover which was followed by this Tribunal in the assessee’s own case for the A.Y. 2016-17. The Ld.AR also listed out the companies mentioned in the ground no. 7 whose turnovers are in excess of Rs. 200 crores and therefore the same should be excluded while computing the arms length price. The Ld.AR also relied on several decisions of this Tribunal in which the Tribunal had directed to exclude the companies with turnovers more than Rs. 200 crores and if this turnover filter has been adopted, the companies listed out in ground no. 7 would go since the said companies would impact on the margin on account of difference in size and turnover. The Ld.AR further submitted that if the ground no. 7 has been adjudicated, all other grounds in respect of the software development would be an academic one.

The Ld.AR also submitted that the adjustment towards the outstanding receivables could not be made subject matter of the TP adjustment as the same is not covered under the provisions of section 92B

The Ld.CIT.DR submitted that the Ld.TPO had correctly computed the arms length price by including and excluding the companies which was also accepted by the DRP with some slight modifications and therefore prayed to confirm the order of the AO.

We have heard the arguments of both sides and perused the materials available on record.

The main grievance of the assessee is that the inclusion of the companies who have more turnover, by the TPO which was affirmed by the DRP is not in accordance with the several judicial precedence and also against the orders of the Tribunal in the assessee’s own case. No doubt, the TPO while searching the comparables can compare the companies who are all having similar turnovers. The companies who are all having more turnovers could not be compared with the small companies and on that basis, the arms length price arrived by the TPO would not reflect the true impact on the margin of the assessee company.

In these circumstances, we have gone through the Coordinate Bench order of this Tribunal in the assessee’s own case reported in (2023) 147 taxmann.com 250 (Bangalore). In the above said order, the Tribunal had discussed the exclusion of the companies based on the turnover criteria which reads as follows: “13. Ground No.11 in the appeal of the assessee is reproduced below:- 11. The Hon'ble DRP/Ld. AO/Ld. TPO erred in law and facts by accepting companies namely Persistent Systems Ltd. Aspire Systems (India) Pvt, Ltd. Infosys Ltd. Larsen & Toubro lnfotech Ltd. Thirdware Solutions Ltd, Nihilent Ltd, Inteq Software Pvt. Ltd. Infobeans Technologies Ltd and Cybage Software Pvt Ltd from the Ld. TP0's search as being comparable to the Appellant despite being functionally dissimilar to the Appellant. 13.1 The assessee wants exclusion of following comparables on turnover filter on the reason that these comparables have high turnover i.e. more than Rs.200 crores. Infosys Ltd. a) L&T Infotech Ltd. – 24.83 b) c) Persistent Systems Ltd. d) Asper System India Pvt. Ltd. e) Thirdware Solutions Ltd. f) Cybage Pvt Ltd. g) Nihilent Technologies Ltd. 14. We have heard the rival submissions and perused the materials available on record. This Tribunal consistently holding that the turnover filter to be applied between Rs.1 crore to Rs.200 crores and if the comparable from the software development segment exceeds Rs.200 crores, the same to be excluded from the list of comparables. Accordingly, we direct the AO/TPO to consider the segmental financials of the above company and if it is more than Rs.200 crores, those companies to be excluded in view of the order of the Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore – Trib), wherein held as under:- 17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.

We have also considered the another order of this Tribunal reported in (2018) 96 taxmann.com 263 (Bangalore) in the case of Autodesk India Pvt. Ltd. wherein the following companies were excluded from the list of comparable companies. 1) Flextronics Ltd. 2) L & T Infotech Ltd. 3) Infosys Technologies Ltd. 4) Satyam Computer Services Ltd. 5) IGate Global Solutions Ltd.

In all the above orders, this Tribunal had adopted the turnover filter and thereby excluded the companies whose turnovers are more than 200 crores. We have also perused the annual reports filed by the assessee and also gone through the Ld.TPO’s order in which the turnovers were mentioned. The turnovers of the companies based on the annual report as well as the findings of the Ld.TPO are as follows:

The another dispute raised by the assessee is about the outstanding receivables could not be subjected to TP adjustment since the same are not international transactions. We have also considered the judgments of the Hon’ble Delhi and Karnataka High Courts in support of their said submissions. We have also considered the another submission that the assessee is a debt free company and they are not charging any interest from its AE since there is no interest or borrowing cost borne by the assessee during the year. The submission of the assessee that the credit period agreed between the assessee and its AE is 90 days whereas the TPO, without any basis, had taken the 30 days as the credit period only to impute the notional interest.

We have also gone through the order of the Coordinated Bench of this Tribunal in assessee’s own case referred supra wherein the Tribunal had held that once the transaction between the assessee and its AE is in foreign currency with regard to the receivables, the said transactions are international transactions. In the said order, the Tribunal had relied on the Hon’ble Jurisdictional High Court judgment in the case of PCIT vs. AMD India Pvt. Ltd. in ITA No. 274 of 2018 dated 31/08/2018 to conclude that the transactions are international transactions. The Tribunal had finally concluded that the interest rate should be applied LIBOR + 2% in such transactions and remitted the said issue to the AO to pass orders accordingly.

Considering the said order passed by the Tribunal in the assessee’s own case for the A.Y. 2016-17, we also direct the AO to pass orders in accordance with the directions issued by this Tribunal on the interest rate applicable to the outstanding receivables.

In the result, we direct the AO to delete the companies mentioned in ground no. 7 whose turnovers exceeds Rs. 200 crores from the list of comparables and thereafter arrive the arms length price. Similarly, we also set aside the interest rate adopted by the AO on the outstanding receivables and direct the AO to adopt the interest rate at LIBOR + 2% as held by the Tribunal in the assessee’s own case cited supra.

As already submitted by the Ld.AR, the other grounds are not adjudicated and ground nos. 8 to 10 and 17 are kept open for deciding the same at the appropriate time, if required.

With the above directions, we allow the appeal filed by the assessee for statistical purposes.

In the result, the appeal filed by the assessee is allowed for statistical purposes.