LG SOFT INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against final assessment order passed u/s 143 r.w.s. 144C(13) r.w.s. 144B of the Act by DCIT Central Circle-4(1)(1) Bengaluru for the assessment year 2018-19 dated 29.7.2022. The assessee has raised following grounds of appeal: Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. Software Development Services 1.1 The Learned Assessing Officer ("Learned AO"), Learned Transfer Pricing Officer ("Learned TPO") and Honourable Dispute Resolution Panel ("Hon'ble DRP") grossly erred in determining an adjustment of INR 20,31,61,491/- with respect to the international transaction entered by the Appellant u/s 92CA of the Income-tax Act, 1961 ("the Act").

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1.2 The Learned AO/ Learned TPO erred in adopting an erroneous approach with respect to the treatment of Re-measurement loss / (gain) on defined benefit plan.

1.2.1The Learned AO/ Learned TPO erred in treating the 'Remeasurement loss / (gain) on defined benefit plan' disclosed under Other Comprehensive Income ("OCI") as a non-operating item. 1.2.2 The Learned AO/ Learned TPO erred in not giving cognizance to the fact that such remeasurement loss / (gain) is disclosed under 00 as per the requirement of IND-AS adoption, which was earlier recorded as part of 'Employee Benefit Expenses' in the Statement of Profit & Loss under IGAAP and consistently treated as operating item in the computation of operating profitability for Transfer pricing purposes. 1.3 The Learned AO/ Learned TPO erred in treating notional rent expenses computed under IND-AS in respect of interest free security deposit as an operating item. 1.3.1 The Learned AO/Learned TPO failed to appreciate the fact that the corresponding notional interest income with respect to the security deposit is treated as non- operating item. 1.3.2 The learned AO/ Learned TPO erred by not giving cognizance to the fact that these expenses / were offered to tax in the return of income of the Appellant. 1.4 The Learned AO/ Learned TPO erred in treating notional employee cost computed under 1ND-AS in respect of Loan to employees as an operating item. 1.4.1. The learned AO/ Learned TPO erred by not giving cognizance to the fact that these expenses were offered to tax in the return of income of the Appellant.

1.5 The Learned AO/ Learned TPO/ Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act.

1.6 The Learned AO/ Learned TPO/ Hon'ble DRP erred in rejecting comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing

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various filters while determining the Arm's Length Price ("ALP").

1.7 The Learned AO/Learned TPO/Hon'ble DRP erred in applying the core service income filter of 75% to sales, leading to a narrower comparable set.

1.8 The Learned AO/Learned TPO/Hon'ble DRP erred in applying export earning filter of 75% of the total sales, leading to a narrower comparable set.

1.9 The Learned AO/ Learned TPO/ Hon'ble DRP erred in not considering the financial data of the preceding two years in case of the comparable companies wherein the data for the current year is unavailable, while determining the ALP. 1.10 The Learned AO/Learned TPO/Hon'ble DRP erred in rejecting companies having ratio of employee cost to sales of less than 25%. 1.11 The Learned AO/ Learned TPO/ Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies. '1.12 The Learned AO/ Learned TPO/ Hon'ble DRP erred in the manner of computing the related party transaction ("RPT") filter for selecting the comparable companies. Without prejudice to the arguments raised by the Appellant with respect to the manner of computing the RPT filter, the Learned AO/ Learned TPO erred by not excluding Tech Mahindra Limited despite failing the RPT filter even in the manner computed by the Learned TPO. 1.13 The Learned AO/ Learned TPO/ Hon'ble DRP erred in accepting companies that ought to have been rejected as comparable:

• Exilant Technologies Private Limited • Larsen & Toubro Infotech Limited • Great Software Laboratory Private Limited • Elveego Circuits Private Limited • Black Pepper Technologies Private Limited • Mindtree Limited • Aptus Software Labs Private Limited • Persistent Systems Limited • Wipro Limited

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• Tata Elxsi Limited • Infobeans Technologies Limited • Nihilent Technologies Limited • ThreesixtyLogica Testing Services Private Limited • Infosys Limited • Cybage Software Private Limited 1.14 The Learned AO/ Learned TPO/ Hon'ble DRP erred in rejecting companies that ought to have been accepted as comparable:

EC Info Systems India Private Limited • Evoke technologies Private Limited • Logesys Solutions India Private Limited • Orion India Systems Private Limited • • Qualitykiosk Technologies Private Limited • R Systems International Limited Rheal Software Limited • Sasken Communication Technologies Limited • Sure IT Solutions India Private Limited • • Supreme Netsoft Private Limited • Blue cloud Softech Solutions Limited • Indianic Infotech Limited Minvesta Infotech Limited • Synfosys Business Solutions Limited • • IECS Consultancy Limited • Kals Information System Limited • E-zest Solutions Limited 1.15 The Learned AO/ Learned TPO erred in computing the operating mark- up earned by the comparable companies selected in the TP order for determination of ALP: • Exilant Technologies Private Limited • Tech Mahindra Limited • Great Software Laboratory Private Limited • Black Pepper Technologies Private Limited • Mindtree Limited • Aptus Software Labs Private Limited Nihilent Technologies Limited • • Wipro Limited

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• Infobeans Technologies Limited Threesixty Logica Testing Services Private Limited • • Infosys Limited • Cybage Software Private Limited 1.16 The Hon'ble DRP erred in rejection of additional companies introduced by the Appellant based on the ground that the same is not appearing in the search matrix of the Learned TPO, without analyzing functional comparability of the said companies. 1.17 The Learned AO/ Learned TPO/ Hon'ble DRP erred in not considering provision of bad and doubtful debts as operating in nature. 1.18 The Learned AO/ Learned TPO/ Hon'ble DRP ought to have allowed the appropriate adjustment towards working capital between the Appellant vis-a-vis the comparable companies. 1.19 The Learned AO/ Learned TPO/ Hon'ble DRP ought to have allowed an adjustment towards n differential between the Appellant and the comparable companies. 1.20 he Learned AO/ Learned TPO/ Hon'ble DRP erred in considering the loss/gain arising from fluctuation in foreign exchange as operating in nature. Interest on Delayed Receivables

1.21 The Learned AO and Learned TPO grossly erred in determining an adjustment of I NR 8,88,303/- with respect to interest on delayed receivables u/s 92CA of the Act thereby:

a. Erred in not considering that receivables cannot be considered as an international transaction and it does not fall within the purview of capital financing as section 92B of the Act.

b. Erred in not appreciating the fact that the Act provides for taxing only real income whether received or accrued under the normal provisions. c. Erred in not appreciating the fact that transfer pricing adjustment cannot be made on a hypothetical and notional basis unless there is material on record that there has been under charging of real income. d. Erred in imputing interest on delayed receivables without giving cognizance to the fact that the primary transaction for rendering of software development services has been tested by the Learned TPO and the receivables are arising out of the primary transaction itself.

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1.22 Without prejudice to the above grounds, the Hon'ble DRP erred in not considering the fact that the Appellant is a debt free company and no notional interest is to be computed on the delayed receivables. Levy of interest under section 234B of the Act

2.1 The learned AO has erred in computing interest under section 234B of the Act which is consequential to the above grounds of appeal.

2.1 Hence, other than the above grounds are dismissed as not pressed.

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• During AY. 2018-19, the international transactions are:

Value (INR) International transaction Software development 3,03,34.22,788/ Availing Accounting Services 42,21,186/- Payment of Communication Link 67,42,094/- Recovery Expenses 90.55,901/- Reimbursement of Expenses 85,37,149/- Trade Receivables 23,19,19,317/- 5,79,111/- Expenses Recoverable Unbilled Revenue 1,93,45,020/- Trade Payable 19,36,492/-

The OP/OC as per TPO is 14.85%. Approach of the TPO

TPO's Comparables — SWD Segment

3.1 The TPO rejected the TP study done by the appellant, conducted his own TP analysis and selected the following set of comparables.

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SI. Company Weighted No Name Average 1 Infomile Technologies Ltd. 9.69% 2 Harbinger Systems Pvt. Ltd. 11.65% 3 Exilant Technologies Pvt. Ltd. 17.17% 4 Tech Mahindra Ltd. 18.57% 5 Larsen & Toubro Infotech Ltd. 18.94% 6 Great Software Laboratory Pvt. Ltd. 19.73% 7 Elveego Circuits Pvt. Ltd. 20.19% 8 Black Pepper Technologies Pvt, Ltd. 20.62% 9 Mindtree Ltd. 21.21% 10 Aptus Software Labs Pvt. Ltd. 22.70% 11 Acewin Agriteck Ltd. 24.51% 12 Persistent Systems Ltd. 24.98% 13 Wipro Ltd. 26.83% 14 Tata Elxsi Ltd. 28.24% 15 Infobeans Technologies Ltd. 28.52% 16 Nihilent Ltd. 30.17% 17 Thirdware Solutions Ltd. 30.94% 18 Threesixty Logica Testing Services Pvt. 36.58% 19 Infosys Ltd. 37.38% 20 Cybage Software Pvt. Ltd. 56.81% 35th Percentile 20.19% Median 23.60% 65th Percentile 26.83%

3.2 The TPO did not allow any working capital or risk adjustments. The TP Adjustment in the SWD segment was INR 29,49,89,040/- Interest on Outstanding Receivables. The TPO proposed and adjustment on Interest on Delayed Receivables which stood at INR 8,88,303/-. The TPO held that the outstanding receivables from the AE are of the nature of loan facility given to the AEs and calculated the interest using the invoice wise details and arrived at 6 morphs LIBOR which was 6.724%.

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D. Proceedings before the Hon'ble Dispute Resolution Panel (`DRP')

With respect to the Software Development Segment, the DRP directed inclusion of eight (8) companies i.e., • CG-Vak Software Exports Ltd. • DCIS Dot Corn Solutions Pvt. Ltd. • Issumation Technologies Pvt. Ltd. • Sagarsoft India Ltd. • Ace Software Exports Ltd. • Batchmaster Software Pvt. Ltd. • Orangescape Technologies Ltd. • Inteq Software Pvt. Ltd.

3.3 The DRP had also directed inclusion of: • Sasken Communication Technologies Ltd. — which was not included in the OGE as it did not pass Export Revenue Filter • Athena Global Technologies Ltd. — which was not included as it did not pass the Networth filter.

3.4 The DRP had directed exclusion of two (2) companies i.e., • Thirdware Solutions Ltd. • Tech Mahindra Ltd.

3.5 Further, the ld. DRP had directed to recompute the weighted average OP/OC of the following companies.

• Exilant Technologies Pvt. Ltd. • Tech Mahindra Ltd. • Great Software Laboratory Private Ltd. • Infobeans Technologies Ltd. • Infosys Ltd.

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• Cybage Software Pvt. Ltd. • Black Pepper Technologies Pvt. Ltd. • Mindtree Ltd. • Nihilent Ltd. • Aptus Software Labs Pvt. Ltd. • Wipro Ltd. • Thirdware Solution Ltd. • Threesixty Logica Testing Services Pvt. Ltd.

3.6 The TPO after giving effect to some of the directions issued by the Hon'ble DRP in the Final Assessment Order the adjustment with respect to the SWD segment stood at INR 20,31,61,491/-.

3.7 With respect to the issue on Interest on Receivables, the DRP held that it was international transaction which has to be benchmarked separately and upheld the order of the TPO on this point.

3.8 The adjustment with respect to the Notional Interest on Delayed Receivables remained the same after the DRP Directions i.e., INR 8,88,303/-. The total TP adjustment post the DRP Directions stood at INR 20,40,49,794/-. Aggrieved, the assessee approached the ITAT. 4. First grounds for our consideration is with regard to ground Nos.1.2, 1.3 & 1.4, erred in computation of margin of the assessee.

4.1 The ld. A.R. for the assessee submitted that there has been error in computing the operating margin of the assessee and the submissions made in this regard before the TPO and the DRP has been simply disregarded. The assessee seeks a remand on this issue back to the TPO for a proper consideration of the submissions made in this regard.

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4.2 The errors in computation of the margin of the Assessee is with respect to the following issues:

i) Reimbursement loss / (gain) on "defined benefit plan" shown under "Other Comprehensive Income" (OCI) has been taken as non-operating whereas it is essentially "employee benefit expenses (Ground 1.2)

Notional expenses towards rent and deferred employee cost, ii) reported due to IND-AS requirement, has been reduced by the TPO even though the assessee had disallowed the same and offered it for tax (Grounds No. 1.3 & 1.4)

4.3 She submitted that the detailed submissions were made to the TPO on this issue, in the reply to the Show cause Notice (SCN) but the TPO did not consider the submissions made.

4.4 Further she submitted that the detailed submissions were made to the DRP on this issue, in the Form 35A submitted to the DRP and a specific Ground was raised before the ld. DRP as Ground No. 1 in the ld. DRP objections. Without examining the issue and giving any specific directions, the ld. DRP merely directed the TPO to re-verify the computation of margin correct the errors, if any. In the OGE, the TPO simply disregarded this direction as there is no mention of this direction in the OGE passed by the TPO. She submitted the gist of the submissions as under:

4.5 Reimbursement loss / (gain) on “defined benefit plan (Ground 1.2)

i) The assessee had adopted IND-AS for the first time, during this year.

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As part of the IND-AS reporting, the Actuarial Gain/ loss, ii) which were earlier grouped under “Employee Benefit Expenses” and allowed as an operating cost got reported under “Remeasurement of defined benefit obligation” iii) This was merely a disclosure requirement and is actually a part of operating cost Merely because it was shown separately due to IND-AS iv) reporting requirement, it should not be excluded while computing margin

4.6 Notional expenses accounted as IND AS requirement disallowed when assessee had disallowed the same in the computation

During the year, on adoption of IND-AS, the assessee has accounted an amount of Rs 70.42 lakhs towards rent (Rs 66.20 lakhs) and deferred employee cost (Rs 4.22 lakhs). These are notional expenses accounted as IND-AS requirement and were not actual expenses incurred. As these were notional expenses, the same were disallowed in the computation of income, which was already submitted to the TPO. The TPO has added the same to the operating expenses, which is incorrect.

4.7 She requested that the matter may be remanded back to the TPO with a direction that our submissions in this regard may be considered.

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taking correct margin of assessee in accordance with law. Ordered accordingly.

7.1 The ld. A.R. relied on the order of Tivo Tech Pvt. Ltd. In ITA No.862/Bang/2022 for the assessment year 2018-19 dated 30.3.2023, wherein these comparables were considered and exclude from the list of comparables.

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Tribunal in the case of BORQS Software Solutions (P.) Ltd. (supra) has considered various judicial pronouncements on this issue including that of the Hon'ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that application of turnover filter is justified on the basis of classification of companies as per the report of Dun and Bradstreet. As regards the specific plea of the learned DR that if turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company, we find this plea was rejected by the Bangalore Bench of the Tribunal in the case of Northern Operating Services (supra). The relevant submission of the parties and the finding of the Tribunal in case of Northern Operating Services (supra) read as follows:- '15. The Id. DR submitted that the Hon'ble High Court of Karnataka in the case of M/s. Acusis Software (I) P. Ltd. v. ITO in ITA No. 223/2017, judgment dated 14-8-A18, has taken the view that if the turnover of a comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company. The Id. DR drew our attention to the turnover of I 0 comparable companies which is as follows:—

SI. No. Name of the case Operating Income Operating cost OP./OC

Accentia 1 82,93,91,898 28.89% Technologies Ltd. 1,069,026,524

2 Acropetal 494,399,332 38,97,06,574 26.86%

Technologies Cosmic Global Ltd. 62,496,615 5,69,15,360 9.81% 3. e4e Healthcare 613,160,587 54,56,25,872 12.38% 4. (capitaline) ICRA Online Ltd. 156,691,000 11,67,49,267 34.21% 5. (seg) 6 Jeevan scientific 1,721,400,000 1,00,86,52,592 70.66% Technology Ltd. 7 Infosys B PO Ltd. 11,291,147,909 9,57,73,24,546 17.89% Jindal Intellicom 390,358,799 35,12,69,641 11.13% 8. (capitaline) Mindtree Ltd. (seg.) 5,653,000,000 5,10,39,05,999 10.76% 9. iGate Global 10 11,845,540,000 9,47,11,65,000 25.07% Solutions Ltd.

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He submitted that if such criterion is applied, then that would be the proper basis for excluding companies for the purpose of comparability based on turnover. 16. The Id: Counsel for the assessee, on the other hand, submitted that the Hon'ble. High Court of Karnataka in the case of Acusis Software (1) P. Ltd. (supra) merely dismissed the appeal of assessee on the ground that no substantial question of law arises for consideration. In particular. he drew our attention to the following paragraphs of the judgment of Hon'ble High Court:- "14. The findings of the learned Tribunal as regards the comparable namely, Mercury Outsourcing Management Ltd.. which too have been excluded by the Tribunal are quoted below for ready reference:— "(ii) Mercury Outsourcing Management Ltd. 13.1 The learned Authorised Representative has submitted that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost. 13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than Rs. 1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO. 13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is only Rs. 45.33 lakhs which is any case does not satisfy any filter of turnover in comparison to the assessee's turnover more than Rs. 27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee's turnover then the company which is having less than Rs. 2.7 Crores of turnover will be outside the said range of 10 times. Accordingly, we are of the view that this company which is having only Rs. 45.33 lakhs turnover cannot be considered as a good comparable to the assessee". 15. From the aforesaid findings of the learned Tribunal, we are satisfied that the reasons assigned by the learned Tribunal in excluding the aforesaid company as comparable is also reasonable and the same deserves to be accepted by us. It is analysed by the learned Tribunal in extenso which arrived at a decision that the company which is having only Rs. 45.33 lakhs turnover cannot be considered as comparable to the Assessee-company whose turnover is more than Rs. 27 Crores. 16. The decision of the learned Tribunal in the other cases referred to by the learned counsel for the Appellant-Assessee would not render the findings of the learned Tribunal in the present case nugatory or perverse for the reason that analyzing of the comparables may be in a different context and the same need not be blindly or generally adopted in all cases, irrespective of the context or the circumstances calling upon for the

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inclusion/exclusion of the comparables which absolutely is a decision to be taken by the learned Tribunal as last fact finding authority. This view is supported by our judgment dated 25-8-2018 on Softbrands case (supra), which we find it appropriate to quote hereunder to its relevant extent:-" 17. He submitted that the question of law which the assessee sought to raise before the Hon'ble High Court was justification for excluding Mercury Outsourcing Management Ltd. as ,a comparable company. It is in that context that the aforesaid decision was rendered by the Hon'ble High Court. He pointed out that the Tribunal in excluding Mercury Outsourcing Management Ltd., had taken a view that its turnover was small compared to the assessee's turnover and therefore not comparable, even if the tolerance rare of turnover of 10 times on both the sides of assessee's turnover is applied. There is no positive finding by the Tribunal that the company can be excluded for the purpose of comparability on the basis of turnover, only if the turnover is 10 times on both the sides of assessee's turnover. On the conclusions of the Tribunal, the Hon'ble High Court only held that it is reasonable and deserves to be accepted. In para 16, the Hon'ble High Court has clearly observed that the decisions rendered in other cases referred to by the Id. Counsel for the assessee would not render the findings of the Tribunal in the case before the High Court as negatory or perverse for-the reason that analysing of the comparables may be in a different context. The same need not be blindly or generally adopted in all the cases, irrespective of the context or circumstances calling for exclusion/inclusion of the comparables. The finding in each case is therefore a finding of fact. He pointed out that the Tribunal in the case of Autodesk (I) P. Ltd. v. DCIT [2018196 taxmann.com 263 [Bang. Trib.1 after analysing the entire cases on the point, came to the conclusion that the decision rendered by the Tribunal in the case of Genesis Integrated Systems (1) P. Ltd. [2012] 53 SOT 159 lays down the correct law on the application of turnover filter and that decision has to be followed. He pointed out that the DRP in the present case has followed the ruling in the case of Genesis Integrated Systems (1) P. Ltd. (supra) and therefore the order of DRP has to be upheld. 18. We have given a careful consideration to the rival submissions and are of the view that as rightly submitted by the Id. Counsel for the assessee, the decision rendered by the Hon'ble High Court of Karnataka in the case of Acusis Software (1) P. Ltd. (supra) does not positively say that for a company to be excluded on the basis of high turnover, the tolerance range of turnover of 10 times on both the sides of assessee's turnover has to be seen. Even the Tribunal in the order against which the appeal was filed, did not proceed on application of turnover filter with any such condition. Therefore, it is not correct to say that for application of turnover filter, tolerance range of turnover of 10 times on both the sides of assessee's turnover has been laid down by the Hon'ble High Court. The Hon'ble High Court held that the order of Tribunal is correct and calls for no interference and further held that no question of law arose for consideration. The decision rendered in the case of Autodesk (I) P. Ltd. (supra) of the Tribunal after analysing every conflicting views has ultimately concluded that the law

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laid down in the case of Genesis Integrated Systems P. Ltd. (supra) has to be followed. The following were the relevant observations of the Tribunal:- "17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5-8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S. NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court' in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover isrelevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)." 19.In the given facts and circumstances of the case, we find no grounds to interfere with the order of DRP on this issue. Consequently, ground Nos.4 & 5 raised by the revenue are dismissed as without any merit. 20.In the result, the appeal by the revenue is dismissed.' 13.Accordingly, by following the above orders of the Tribunal, we direct the AO/TPO to apply appropriate upper turnover filter and exclude above mentioned seven companies from the list of comparables. It is ordered accordingly.”

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8.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude these comparables from the list of comparables as turnover of the assessee company is only Rs.303.24 crores as against the turnover of these companies as follows: 1. Tech Mahindra Ltd. 236612 Crores 2. L&T Infotech Limited 69064 Crores 3. Mind Tree Ltd. 53250 Crores 4. Persistent Systems Ltd. 17327 Crores 5. Wipro Ltd. 43270 Crores 6. Tata Elxsi Ltd. 31867 Crores 7. Nihilent Ltd. 2800 Crores 8. Infosys Ltd. 61941 Crores

8.2 The grounds in 1.11 & 1.13 are allowed.

10.2 However, the companies namely (i) Tech Mahindra Ltd. (ii) Infosys Ltd. (iii) Mind Tree Ltd. (iv) Wipro Ltd. & (v) Nihilent Ltd. are

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in infructuous in view of our finding in ground nos.1.12 & 1.13. Thus, the AO has to compute the correct margin in respect of following companies: 1. Exilant Technologies Pvt. Ltd. 2. Great Software Laboratory Private Ltd. 3. Infobeans Technologies Ltd. 4. Cybage Software Pvt. Ltd. 5. Black Pepper Technologies Pvt. Ltd. 6. Aptus Software Labs Pvt. Ltd. 7. Thirdware Solution Ltd. 8. Threesixty Logica Testing Services Pvt. Ltd. This ground of appeal is partly allowed. 11. Next ground No.1.18 is with regard to working capital adjustment

11.1 The ld. A.R. submitted that TPO did not allow any adjustment on working capital. Further, the DRP upheld the TPO's Order and did not allow any adjustment on working capital.

11.2 She submitted that it is settled principle that working capital adjustment is to be granted as per actuals. The Assessee placed reliance on the decision in the case of Huawei Technologies India [2019] 101 taxmann.com 313 (Bangalore) wherein the Tribunal has held that working capital should be allowed as per actuals.

“15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on

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account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. Disclose in the balance sheet does not contain break up of (iii) trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results.

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always an' element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever his been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 1011.(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if— (I) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison.

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Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.”

12.1 In view of the above order of the Tribunal, we direct the AO/TPO to give working capital adjustment as per actuals. 13. Next ground no.1.21 (a to d) is with regard to interest on receivables. 13.1 The ld. A.R. submitted that the TPO proposed an adjustment on Interest on Delayed Receivables which stood at INR 8,88,303/-. The TPO held that the outstanding receivables from the AE are of the nature of loan facility given to the AEs and calculated the interest using the invoice wise details and arrived at 6 months LIBOR plus 450 basis points, which was worked out at 6.724%. The ld. DRP upheld the order of the TPO. The DRP also mentioned that the TPO has not re-characterised the transaction as a loan transaction. After concluding that "interest on receivables" is an "international transaction", the TPO erred in not following the following principles while deciding the quantum of adjustment:

No Benchmarking analysis was done i) No separate adjustment for interest on receivables if Working ii) capital adjustment is done

After concluding that "interest on receivables" is an "international transaction", the TPO should have conducted a TP analysis to decide the Arm's Length Price (ALP) for the same, by considering various aspects like:

Whether interest has been charged on receivables from non- i) AEs Whether there were Outstanding Payables also from the AEs, ii) in which case the quantum of outstanding payables should be

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excluded7while computing the amount on which interest should be charged No adjustment warranted if the assessee is a debt free iii) company

13.2 Further, the ld. A.R. submitted that it is a settled principle that no separate adjustment on account of delay in realization of the receivables is warranted if the operating margin of the assessee is higher than the operating margin of the comparable companies after taking into account the difference in working capital.

13.3 Further, the ld. A.R. submitted that the Assessee has submitted before the TPO the details of trade receivable in the format requested vide letter dated 20 July 2021. Hence, the issue needs to be remanded back to TPO to calculate the interest on receivables considering the invoice-wise debtors ageing schedule furnished by the Assessee during the assessment proceedings. (Note: Credit period as per the inter- company agreement is 60 days from the receipt of invoices raised.)

13.4 She placed reliance on the ruling in the case of Verifone India Technology Pvt. Ltd. — IT (TP) A No. 290/Bang/2021 dated 25.4.2022.

13.5 She also placed reliance on the rulings in the case of Bechtel India Ltd. of the Hon’ble Supreme Court & High Court, where it has been held that separate adjustment towards interest on receivables is not warranted for a debt-free company.

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Hence, this issue is remitted back to the file of AO/TPO for fresh consideration on similar lines. Directed accordingly.

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 17th Aug, 2023. VG/SPS

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Copy to:

Asst. Registrar, ITAT, Bangalore.