M/S. MOOG CONTROLS (INDIA) PRIVATE LIMITED,BANGALORE vs. DCIT, CIRCLE-4(1)(1), BENGALURU

PER WASEEM AHMED, ACCOUNTANT MEMBER:

The present appeal of the assessee is directed against the Final Assessment order passed under section 143(3) r.w.s. 144C(13) r.w.s 144B of the Income Tax Act 1961 (hereafter the Act), dated 26th September 2024 by the Assistant Commissioner of Income Tax (HQ) & Secretary Dispute resolution pannel-2 Bengaluru (hereafter the AO) bearing DIN ITBA/AST/S/143(3(/2024-25/1069115381(1) passed in pursuance to the direction of the Learned Dispute Resolution Panel (Hereafter – Ld. DRP) vide order under section 144C(5) of the Act, dated 27th August 2024.

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Dotgo (p.) Ltd. v. Deputy Commissioner of Income-tax reported in 177 taxmann.com 450 (Bangalore - Trib.), Concur Technologies (India) (P.) Ltd. v. Assistant Commissioner of Income-tax reported in 180 taxmann.com 447 (Bangalore - Trib.) and ConnectWise India Private Limited vs. DCIT reported in IT(TP)A No. 2171/Bang/2024 where in the issue of exclusion of comparables applying the upper limit in case of software development segment was considered. Accordingly, the ld. AR prayed for the following exclusions of comparables having high turnover:

S.No. Name of Comparable Company Turnover (INR in Crores) 1 TCS Ltd. 1,35,963 2 Infosys Ltd. 85,912 3 Wipro Ltd. 50,299 4 Larsen & Toubro Infotech Ltd. 11,562.60 5 Mindtree Ltd. 7,967.80 6 Tata Elxsi Pvt. Ltd. 1,826.16 7 Cybage Software Pvt. Ltd 1,142.64 8 Nihilent Ltd. 334.63 9 Globant India Pvt. Ltd. 315 10 Great Software Laboratory Private Ltd 265.2

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11.1 It is an undisputed fact that the turnover of the assessee in the SWD segment is Rs. 7.55 crore, whereas several companies included in the final set of comparables have turnover running into hundreds and thousands of crores. Such a wide disparity in turnover clearly impacts economies of scale, brand value, market positioning and risk profile, which in turn materially affects the margins.

11.2 The Hon’ble ITAT Bangalore have consistently held that application of an upper turnover filter is justified in the case of captive software service providers. In the decisions relied upon by the assessee, namely Dotgo (P.) Ltd., Concur Technologies (India) (P.) Ltd. and ConnectWise India (P.) Ltd., it has been categorically observed that inclusion of giant companies with huge turnover distorts the comparability analysis, and such companies cannot be compared with small or mid-sized entities having limited turnover.

11.3 Respectfully following the aforesaid judicial precedents and considering the significant turnover gap between the assessee and the impugned comparables, we are of the considered view that companies having turnover far in excess of the assessee (more than 200 crores) cannot be retained in the comparable set. Accordingly, we direct the exclusion of TCS Ltd., Infosys Ltd., Wipro Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Tata Elxsi Pvt. Ltd., Cybage Software Pvt. Ltd., Nihilent Ltd., Globant India Pvt. Ltd. and Great Software Laboratory Private Ltd. from the list of comparables for the SWD segment. The list of such companies is listed above. Accordingly, the Assessing Officer / Transfer Pricing Officer is directed to re-compute the arm’s length price

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after excluding the aforesaid companies. Consequently, Ground No. 8 raised by the assessee is allowed.

Aptus Software Labs Pvt. Ltd. 13.1 The ld. AR for the assessee has enclosed the functional profile of this company at Pages 485 to 488 of the Factual PB. On analysis of the profile, it is observed that, this company is engaged in several diversified businesses which vastly differ from those of the assessee, i.e. infrastructure management, cloud computing, content management systems, network operations center, quality assurance services such as functional testing, security testing, performance scalability reliability testing, test automation. The provision of such services differs greatly from the software development services provided by the assessee company. This company is thus not functionally comparable

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13.2 Reliance in this regard is placed on the decision of the Hon'ble ITAT, Bangalore in the case of Dotgo (p.) Ltd. v. Deputy Commissioner of Income-tax reported in 177 taxmann.com 450 (Bangalore - Trib.) wherein it has been categorically held that: “company engaged in diversified business segments including testing and quality assurance services cannot be held as a comparable for a company which is a captive service provider providing SWD services to its AEs” 13.3 Regarding Consilient Technologies - Upon going through the functional profile of this company which is enclosed at Pages 479 to 482 of the Factual PB, it is noted that, this company is engaged in providing optimized software algorithms involved in voice, data, fax, solutions of speech processing, digital communication and video signal processing, high performance loud-based solutions, performance optimization services. Thus, it is not exclusively into software development, and the provision of its services is diversified than the SWD services provided by the assessee. This company is thus not functionally comparable. In view of the above detailed discussion, we direct the TPO to work out the PLI of the assessee, after excluding the above two companies as discussed above and workout the arm length price of the assessee with respect to the international transactions carried out by the assessee with its AE. Hence, the ground of appeal of the assessee is hereby allowed. 13.4 The issue raised by the assessee through Ground Nos. 17 to 24 is regarding the Notional interest on the delayed trade receivables 14. The brief facts of the case are that the learned TPO treated the delay in realization of trade receivables from the AEs as unsecured loans advanced to the AEs and, accordingly, computed notional interest for the period of such delay during the year under consideration. In doing so, the learned TPO placed reliance on the provisions of section 92B of the

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Act, wherein the definition of “international transaction” was retrospectively amended to include capital financing transactions arising in the course of business. 14.1 The learned TPO computed notional interest on the outstanding trade receivables by applying the SBI PLR applicable for the financial year 2020–21 at the rate of 12.27% and, on such basis, determined the total notional interest adjustment at Rs. 64,79,824/-. 15. Aggrieved by the order passed by Ld. TPO, the assessee raised objections before the Hon’ble DRP. 16. The assessee submitted that during the subjected AY, it has outstanding trade receivables to the tune of Rs. 14,72,28,662.00 only. It was further submitted that it is the consistent practice of the assessee not to charge any interest on delayed realization of dues from unrelated third parties and, therefore, no adverse inference of an advance or loan to the AEs can be drawn. 16.1 The assessee further submitted that the learned TPO erred in computing interest on delayed receivables by applying the SBI PLR applicable for the year under consideration. It was contended that the invoices were raised in foreign currency, namely USD and EUR, and therefore, if at all any adjustment is warranted, the same ought to be computed by adopting the interest rate applicable to foreign currency denominated loans rather than the SBI PLR. 16.2 The assessee further submitted that the mere inclusion of the term “receivables” in the Explanation to section 92B of the Act does not imply that every outstanding receivable is to be automatically characterized as an unsecured loan resulting in a benefit to the AEs.

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16.3 Assessee placed reliance on judicial precedents in the case of Kusum healthcare private ltd. reported in TS-412-HC-2017(Del)-TP wherein the Hon’ble Delhi HC held as follows: “The inclusion in the Explanation to section 92B of the Act of the expression "receivables" does not mean that dehors the context every item of "receivables" appearing in the accounts of an entity, which may have dealings with foreign associated enterprises would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case-to-case basis. Importantly, the impact this would have on the working capital of the assessee will have to be studied. In other words, there has to be a proper inquiry by the Transfer Pricing Officer by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an associated enterprise, the arrangement reflects an international transaction intended to benefit the associated enterprise in some way.” 16.4 The assessee also placed reliance on a plethora of judicial precedents wherein it has been consistently held that once the primary international transaction has been benchmarked, no separate adjustment on account of interest on receivables is warranted. It has been held that early or delayed realization of sale proceeds is merely incidental to the transaction of sale and does not constitute a separate international transaction in itself. 16.5 The assessee further submitted that the act provides for taxing only real income whether received or accrued under normal provisions and does not envisage taxation of hypothetical or notional income. 16.6 However, the ld. DRP after considering the contentions of the assessee and perusing the materials on record, upheld the action of the Ld. TPO. The learned DRP relied upon the amendment introduced by way of the Explanation to section 92B of the Act, observing that non- charging or under-charging of interest for the excess credit period allowed to the AEs for realization of invoices would constitute an

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international transaction. The learned DRP further observed that a similar view has been upheld in various judicial pronouncements. 17. Another connected issue raised by the assessee before the learned DRP pertained to the rate of interest applied, the learned DRP observed that the assessee had not placed any material on record to substantiate the currency in which the invoices were raised. Accordingly, the learned DRP directed the TPO to adopt LIBOR-based rates in the event the assessee is able to demonstrate that the invoices are denominated in foreign currency. 18. Aggrieved by the assessment order passed by the learned AO in conformity with the directions of the Hon’ble DRP, the assessee is in appeal before us. 19. The ld. AR of the assessee before us has requested to disregard the SBI PLR and instead the rate should be LIBOR + 200 basis point. The assessee relied on the plethora of judgement in this regard wherein the courts have held that the interest should be calculated at LIBOR + 200 basis points. 20. On the other hand, the ld. DR before us relied on the order of authorities below. 21. We have heard the rival submissions of both the parties and perused the materials available on record. At the outset we note that the adoption of the SBI PLR for benchmarking interest is misplaced, as the said rate is relevant only for domestic lending and has no application to transactions denominated in foreign currency. In cases involving foreign currency receivables or advances, the appropriate benchmark must reflect international lending conditions. Consistent with the judicial view taken in similar matters (supra), an arm’s length rate of interest is

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reasonably determined at LIBOR plus 200 basis points, after granting a standard credit period of thirty days or such period as stipulated in the relevant agreement or invoice. Regarding the issue in respect of the rate of interest, the Hon’ble Bombay High Court in the case of Pr. CIT v. Tecnimont (P.) Ltd. reported in [2018] 96 taxmann.com 223 (Bombay) wherein it was observed that: “in cases where any business enterprise is required to pay interest on delayed payment, it would examine the cost of interest and if the same is higher, then the amount of interest payable on funds obtained locally, it would take a loan from local sources and pay the amounts payable for exports and expenses within time. Therefore, extending of credit beyond the normal period of sixty days is in substance a granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay within the period of sixty days. On this premise, the High Court upheld the Tribunal order for computing interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE by observing that the same cannot be faulted. In view of the above, it is held that the PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate. Furthermore, the PLR rates are not applicable to loans to be re-paid in foreign currency. Following the judicial opinion stated supra, it is viewed that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points, by applying the credit period of thirty days or as per agreement or invoice. Accordingly, the Assessing Officer/TPO is to be directed to re-compute the same.”

Order pronounced in court on 1st day of January, 2026 Sd/- Sd/- (SOUNDARARAJAN K) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 1st January, 2026 / vms /

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Page 12 of 12 Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore

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