M/S. TRIANZ HOLDINGS PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-7(1)(1), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against final assessment order passed by NFAC, National e-Assessment Centre, Delhi dated 28.7.2022 u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act,1961 ['the Act' for short] for the assessment year 2018-19. The assessee has raised following grounds: “The grounds mentioned hereinafter are without prejudice to one another. A. Assessment order passed by the Learned Assessing Officer is bad in law 1. The final assessment order passed by the Learned Assessing Officer (‘learned AO’) is bad in law and liable to be quashed for the reason that the same is not in line with statutory procedure prescribed in section 144C(13) of the Act, wherein assessment order shall be issued in conformity with the direction of the Honourable Dispute Resolution Panel (‘DRP’).

Page 2 of 23 2. The learned AO had failed to comply with the rules framed by the Central Board of Direct Taxed (‘CBDT’) under section 144C(14) of the Act i.e., rule 12 of Income tax (Dispute Resolution Panel) Rules, 2009, under which the learned AO is required to pass an order in conformity with the directions of the DRP. 3. The Learned AO/ Learned TPO has erred in not adhering to the directions of the Hon’ble DRP in computing the weighted average operating profit/operating cost (“OP/OC”) of the following companies: • Harbinger Systems Private Limited; • Great Software Laboratory Private Limited; • Black Pepper Technologies Private Limited; • Mindtree Limited; • Nihilent Limited; • Wipro Limited; • ThreesixtyLogica Testing Services Private Limited; • Infosys Limited; • Cybage Software Private Limited; 4. The learned AO had erred in not adhering to the directions of Hon’ble DRP wherein the DRP directed the learned AO to grant the set-off of brought forward business loss and unabsorbed depreciation. B. Transfer Pricing 5. The Learned AO, Learned Transfer Pricing Officer (“Learned TPO”) and the Honourable Dispute Resolution Panel (“Hon’ble DRP”) grossly erred in adjusting the transfer price of the Appellant’s international transactions with its Associated Enterprises (“AEs”) by INR 570,690,537 under Section 92CA of the Income-tax Act, 1961 (“the Act”). 6. The Learned AO/ Learned TPO/ Hon’ble DRP has erred in rejecting the Transfer Pricing (“TP”) documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act. Adjustment pertaining to provision of software development (“SWD or IT”) services 7. The Learned AO/ Learned TPO/ Hon’ble DRP has grossly erred in rejecting the scientific allocation of costs in preparing the segmented financial without providing any cogent reasons and has arbitrarily resorted to using entity level financials of the Appellant for comparability analysis. 8. Without prejudice to the ground that segmental financial statements maintained by the Appellant should be accepted, the Learned AO/ Learned TPO/ Hon’ble DRP has grossly erred in not excluding expenses relating to discontinued operations of Dubai branch in calculation of entity level PLI of -6.17% Page 3 of 23 9. The Learned AO / Learned TPO / Hon’ble DRP has grossly erred in not restricting the transfer pricing adjustment to the value of international transactions undertaken by the Appellant. 10. The Learned AO / Learned TPO / Hon’ble DRP has grossly erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the ALP of the international transaction. 11. The Learned AO/ Learned TPO / Hon’ble DRP has erred in selecting comparable companies only if the data pertaining to Financial Year 2017-18 is available in the public database. 12. The Learned AO/ Learned TPO / Hon’ble DRP has erred in considering 2 years loss out of 3 years as 'persistent loss' while applying the persistent loss filter. 13. The Learned AO / Learned TPO / Hon’ble DRP has erred in rejecting companies having different financial year ending (i.e., financial year ending other than 31 March 2018 or companies whose data do not fall within 12 month period). 14. The Learned AO/ Learned TPO / Hon’ble DRP has erred in not applying an upper limit to the turnover filter. 15. The Learned AO/ Learned TPO / Hon’ble DRP has erred in the methodology applied in calculating the Related Party Transaction (“RPT”) filter. 16. 13. The Learned AO / Learned TPO / Hon’ble DRP has erred in applying the threshold of 75% in the core service income filter instead of 50%, thereby leading to a narrower set of comparable companies. 17. The Learned AO / Learned TPO / Hon’ble DRP has erred in rejecting the following independent comparables that ought to have been accepted: • Orion India Systems Private Limited; • R Systems International Limited; • K Cube Consultancy Services Private Limited; and • Kals Information Systems Ltd; 18. The Learned AO/ Learned TPO/ Hon’ble DRP has erred in not rejecting the following companies: • Exilant Technologies Private Limited; • Tech Mahindra Limited; • Larsen & Toubro Infotech Limited; • Great Software Laboratory Private Limited; • Black Pepper Technologies Private Limited;

Page 4 of 23 • Elveego Circuits Private Limited; • Mindtree Limited; • Nihilent Limited; • Aptus Software Labs Private Limited; • Persistent Systems Limited; • Infobeans Technologies Limited; • Wipro Limited; • Tata Elxsi Limited; • ThreesixtyLogica Testing Services Private Limited. • Infosys Limited; • Cybage Software Private Limited; 19. The Learned AO/ Learned TPO/ Hon’ble DRP has erred in computing the weighted average OP/OC of the following companies: • Isummation Technologies Private Limited; • Sagarsoft (India) Limited; • Exilant Technologies Private Limited; • Tech Mahindra Limited; • Aptus Software Labs Private Limited; • Infobeans Technologies Limited; • Ace Software Exports Limited; • Maveric Systems Limited

Adjustment pertaining to Corporate Guarantee 20. The Learned AO/ Learned TPO / Hon’ble DRP erred in not appreciating the fact that the issuance of corporate guarantee is not an international transaction as per section 92B of the Act. 21. The Learned TPO/ Learned AO/ Hon’ble DRP has erred in not considering the fact that corporate guarantee provided to its AE has been given in the capacity as parent company and with the purpose of furthering its own business interest. 22. The Learned TPO/ Learned AO/ Hon’ble DRP has erred in assuming that the credit rating of the Associated Enterprise (“AE”) is low and that the AE could not find any other third party to give guarantee, thereby requiring a corporate guarantee from the Appellant without considering the fact that the provision of guarantee by the Appellant is a shareholding activity. 23. The Learned TPO/ Learned AO/ Hon’ble DRP has erred in not considering the fact that the promoters of the Appellant have also provided personal guarantee for the line of credit sanctioned by State Bank of India, California to the AE, thereby evidencing the fact that the corporate guarantee by the Appellant and Page 5 of 23 personal guarantee provide by the promoters is to further the business interests of the Appellant. 24. The Learned TPO/ Learned AO/ Hon’ble DRP has erred in applying an arbitrary approach to benchmark the corporate guarantee transaction by erroneously using Comparable Uncontrolled Price (“CUP”) method as the most appropriate transfer pricing method, although the said method applied is not in accordance with the first proviso to section 92C (2) of Act and Rule 10B (1) (a) of the Income- tax Rules,1962 (“the Rules”). 25. The Learned TPO/ Learned AO / Hon’ble DRP has erred in determining the arm’s length guarantee fee rate at 1.715 percent arbitrarily without undertaking benchmarking analysis as required under the Rules. Adjustment pertaining to interest on delayed receivable 26. The Learned TPO/ Learned AO/ Hon’ble DRP has erred in considering outstanding receivables as an international transaction and have erred in not accepting the contention of the Appellant that it does not fall within the purview of capital financing as stated by Section 92B of the Act and thereby erred in imputing an interest on the same during the year. 27. Without prejudice to the ground of appeal that outstanding receivables is not an international transaction, the Learned TPO/ Learned AO / Hon’ble DRP has erred in disregarding the fact that the receivables are arising out of transaction of rendering of services that are being determined to be at arm’s length by application of Transactional Net Margin Method (“TNMM”) and thereby separate adjustment for outstanding receivables is not warranted. 28. The Learned AO/ Learned TPO/ Hon’ble DRP have erred in not appreciating the fact that transfer pricing adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. 29. The Learned AO/ Learned TPO/ Hon’ble DRP has erred in considering delayed receipts as unsecured loans and interest ought not to be imputed on the same. 30. The Learned TPO/ Learned AO/ Hon’ble DRP has erred in imputing interest without carrying the benchmarking analysis as required under the Rules and arbitrarily using SBI short term fixed deposit rate as arm’s length price. 31. Without prejudice to the ground that benchmarking analysis was not carried for imputing the interest on delayed receipts, the Learned TPO/ Learned AO/ Hon’ble DRP has erred in not considering LIBOR as the appropriate benchmark interest rate considering the fact that the invoices were raised in foreign currency i.e., USD.

Page 6 of 23 C. Corporate tax Non-grant of set-off of brought forward business loss and unabsorbed depreciation: 32. The learned AO failed to observe that the Appellant had brought forward business loss and unabsorbed depreciation in the return of income. 33. The learned AO ought to have granted the set-off of brought forward business loss of Rs. 10,96,145 and unabsorbed depreciation of Rs. 9,88,689 while computing the assessed income as per section 72 of the Act in accordance with directions of Hon’ble DRP. Non-grant of deduction under section 80G for donations made: 34. The learned AO failed to observe that the Appellant had made donation of Rs. 3,543,874 to funds eligible for deduction under section 80G of the Act as disclosed under the sub-head ‘Donations entitled for 50% deduction subject to qualifying limit’ of schedule ‘Details of Donations entitled for deduction under section 80G’ in the return of income. 35. The learned AO ought to have granted deduction amounting to Rs. 1,771,937 under section 80G of the Act. Levy of interest under section 234B of the Act: 36. The learned AO has erred in computing interest under section 234B of the Act which is consequential to the above grounds of appeal. Levy of Interest under section 234D of the Act: 37. The learned AO has erred in computing interest under section 234D of the Act which is consequential to the above grounds of appeal. The Appellant craves to leave/ to add to / to alter/ to amend/ to rescind/ to modify the grounds herein above or produce further documents, facts, and evidence before or at the time of hearing this appeal.

2.2 The assessee renders services to AEs (international transactions) and non-AEs in the domestic market. The Revenue from the AE segment and non-AE segment are as under:

Particulars Amount (Rs) Revenue from AEs 1,57,18,57,370 Revenue from non-AEs 33,11,26,784 Total Revenue 1,90,29,84,154 Percentage of AE 82.6 % revenue

2.3 In the TP study, the assessee had given the segmental financials related to the international transactions, working out the operating margin on cost at 37.89 %.

Page 8 of 23 Approach of the TPO

Computation of Margin

2.4 The TPO disregarded the segmental financials given in the TP study and worked out the operating margin on the entire revenue of Rs 1,90,29,84,154 and computed the margin at (-) 6.17 %.

TPO’s Comparables – SWD Segment 2.5 The TPO rejected the TP study done by the assessee, conducted his own TP analysis and selected the following set of comparables.

Sl. Company Name Weighted No. 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 36.58% Pvt. Ltd. 19 Infosys Ltd. 37.38% 20 Cybage Software Pvt. Ltd. 56.81% 35th Percentile 20.19% Median 23.60% 65th Percentile 26.83%

The TPO did not allow any working capital or risk adjustments. The TP Adjustment in the SWD segment was INR 60,67,09,927/-.

Page 9 of 23 Corporate Guarantee 2.6 The Assessee had an outstanding amount of INR 97,56,61,500/- towards the Guarantee provided to the loan received by the foreign AE. 2.7 The Assessee submitted that corporate guarantee was given to the AE and was given in the capacity as parent company and the same is in the nature of a stewardship activity. 2.8 The TPO applied CUP method to benchmark this transaction and determined the ALP for the amount of corporate guarantee and determined the rate of interest at 1.715% and proposed an adjustment of INR 1,67,32,595/- Interest on Outstanding Receivables 2.9 The TPO proposed an adjustment on Interest on Delayed Receivables which stood at INR 45,99,026/-. 2.10 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 SBI short term deposit rate. The TPO took the invoice wise details adopting a credit period of 30 days. Proceedings before the ld. Dispute Resolution Panel (‘DRP’) 2.11 With respect to computation of margin, the ld. DRP rejected the contention of the assessee that the segmental financials should be adopted, mainly on the ground that the segmental financials are not audited and therefore not reliable. 2.12 With respect to the Software Development Segment and the Assessee’s contention on inclusion of companies, the ld. DRP directed inclusion of five (5) companies i.e., • DCIS Dot Com Solutions Pvt. Ltd. • Issumation Technologies Pvt. Ltd. • Sagarsoft India Ltd. • Ace Software Exports Ltd. • Maveric Systems Ltd.

Page 10 of 23 2.13 The DRP also directed exclusion of two (2) companies i.e., • Thirdware Solutions Ltd. • Tech Mahindra Ltd. [In the OGE the same was not rejected as it did not fail RPT filter]

2.14 Further, the DRP had directed to recompute the weighted average OP/OC of the certain companies. The TPO recomputed the margins of few companies but omitted to recompute the margins of many other companies.

2.15 The companies whose margins were recomputed, as per the Order giving effect (OGE) are the following: • Aptus Software Labs Private Ltd • Infobean Technologies Ltd • Infosys Ltd • Cybage software Private Ltd. 2.16 The companies whose margins were not recomputed by the TPO, as per the directions of the DRP, are as under: • Harbinger Systems Private Ltd. • Great Software Laboratory Private Ltd. • Black Pepper Technologies Pvt. Ltd. • Aptus Software Labs Pvt. Ltd. • Infobeans Technologies Ltd. • Threesixty Logica Testing Services Pvt. Ltd. • Infosys Limited; and • Cybage Software Pvt. Ltd. 2.17 The TPO after giving effect to some of the directions issued by the ld. DRP in the Final Assessment Order the adjustment with respect to the SWD segment stood at INR 55,20,90,945/-.

2.18 With respect to the issue on Corporate Guarantee, the ld. DRP held that this is an international transaction and upheld the order of the TPO and the levy of 1.75% as interest on this transaction.

Page 11 of 23 2.19 With respect to the issue on Interest on Receivables, the DRP held that it was a separate international transaction which has to be benchmarked separately by relying on various rulings and upheld the order of the TPO on this point. Further the DRP directed the TPO to consider the invoice wise details submitted by the Assessee. 2.20 The TPO after giving effect to the directions in the Final Assessment Order, the adjustment with respect to Interest on Receivables stood at INR 18,66,997/-. 2.21 The total TP adjustment post the ld. DRP Directions stood at INR 57,06,90,537/-. Against this, the assessee is in appeal before us.

Ground Nos.1 to 3: 3. In ground Nos.1 to 3, the contention of the ld. A.R. is that assessment order is bad in law. The ld. A.R. submitted that the ld. DRP had directed the TPO to recompute the weighted average OP/OC of various companies. While the TPO recomputed the margins of few companies, he omitted to recompute the margins of many other companies, which are as under: • Harbinger Systems Private Ltd. • Great Software Laboratory Private Ltd. • Black Pepper Technologies Pvt. Ltd. • Three sixty Logica Testing Services Pvt. Ltd. . 3.1 The assessee submitted that the TPO has not given effect to the directions of the DRP and hence, the final assessment order is not in conformity with the DRP directions. 3.2 In this regard, the assessee submitted as under: (i) As per section 144C (13) of the Act, the AO is required to pass the final assessment order in conformity with the directions of the DRP. (ii) The FAO passed is also in violation of Rule 12 of the Income- tax (Dispute Resolution Panel) Rules, 2009 which require the Page 12 of 23 AO / TPO to pass the assessment order in conformity with the DRP directions. (iii) The TPO has consciously not followed the directions of the DRP, as can be seen from the fact that the TPO has recomputed the margins of few of the companies but has omitted to recompute the margins of other companies. There is therefore a conscious breach of the directions of the DRP. (iv) The assessee submitted that an order passed contrary to the provisions of Section 144C of the IT Act and a failure to follow the binding procedure laid down therein would render the order void ab initio and hence, the same deserves to be quashed. 3.3 The assessee relied on the following decisions in support of the argument that the FAO passed by the AO without following the directions of the DRP deserves to be quashed: a. Yokogawa India Ltd [IT(TP)A No.1715 & 692/Bang/2016] b. Xchanging Solutions Ltd [IT(TP)A No.2664/Bang/2017]

Page 13 of 23 7. After hearing both the parties, we direct the AO to grant set off of brought forward business loss and unabsorbed depreciation as per the direction of ld. DRP, if any after verifying the relevant records. Directed accordingly.

Page 14 of 23 i) Segmental financials shown in the TP study has been disregarded without assigning any reason and entity level financials have been adopted - Ground No. 7 ii) Even if the entity level financials have to be adopted, the costs related to the discontinued business, which have been provided in the Annual Report, should have been excluded – Ground No. 8 iii) The adjustment has to be restricted to international transactions only – Ground No. 9 9.5 She submitted that it is settled principle that when there is an AE segment and a non-AE segment then the segmental details have to be considered for comparability analysis and not the entity level data. This principle is affirmed in the case of Tieto IT Services India Pvt. Ltd. [2018] 92 taxmann.com 8 (Pune), wherein it was held that while benchmarking international transactions of the Assessee, the segmental detail of AE needs to be applied and not the results of entity level. 9.6 He further submitted that it is a well settled TP principle that adjustment, if any, should be limited to the international transactions alone. Further any adjustment beyond the value of international transactions is out of scope of transfer pricing. 9.7 She submitted that detailed submissions were made before the TPO by the assessee, vide letter dated 23 July,2021 on the issue. Detailed submissions were made before the ld. DRP by the assessee, giving the details of the adjustment to be made on the international transactions. However, the ld. DRP rejected the contention. 9.8 The Assessee submitted that the adjustment beyond the value of international transactions is out of scope of transfer pricing and places reliance on the following High Court and ITAT judgements in relation to the above contention raised by the Assessee.

Page 15 of 23 9.9 The ld. A.R. submitted that this issue was examined by the Delhi High Court in CIT v. Keihin Panalfa Ltd. (381 ITR 407). The Delhi High Court found that the international transaction constitutes only 23.38% of the cost, therefore, the transfer pricing adjustment proportionate to that extent can be made in respect of such international transaction. 9.10 The Bombay High Court in the case of Alstom Projects India Limited (2016 (12) TMI 1408) found that Chapter X of the Income Tax Act is not triggered to make adjustment to considerations received or paid unless they are Specified Domestic Transactions. The transaction with non-Associated Enterprises is presumed to be at arm's length as there is no relationship which is likely to influence the price. 9.11 Reliance was also placed on the ruling in the case of IKA India Pvt. Ltd. IT (TP) A No. 2476/Bang/2017, wherein the above principle has been upheld. 9.12 In view of the above, the ld. A.R. prayed that the TP adjustment may be restricted to the international transactions with the AE. 9.13 Notwithstanding the above submissions on adopting segmental financials and restricting the adjustment only to international transactions, the ld. A.R. submitted that if at all the entity level financials have to be adopted, the expenses related to the discontinued business have to be excluded – Ground No. 9 9.14 The ld. A.R. submitted that the Revenues considered by the TPO for computation of the margin includes the Revenue of the Dubai branch which has been discontinued during the year and the expenses related to the same have been written off. The details of the Revenue and expenses related to the discontinued operations is shown at Note 37 of the Annual Report. She submitted that the Revenue and expenses related to the discontinued business should Page 16 of 23 be excluded from computation of margin, even if entity level financials are adopted.

“6. We have considered the rival submissions. We have perused the decision cited by the learned DR and we find that in that case, the assessee himself had offered 0.875% as the appropriate arm’s length guarantee commission and therefore the said decision will not be applicable as a precedent in other cases. We are therefore inclined to follow the decision of the Bengaluru Benches of the Tribunal in the case of United Spirits (supra) and hold that 0.5% of the amount of the loan for which the assessee stood as a guarantee would be the appropriate arm’s length guarantee commission that the assessee ought to have earned and this addition is accordingly directed to be restricted to 0.5% of the loan amount.”

17.1 In view of the above, we direct the AO to pass fresh orders in conformity with the above order of the Tribunal cited (supra). Ordered accordingly.

Page 19 of 23 18. Regarding ground Nos.26 to 31, the ld. A.R. submitted that the ld. DRP of its directions has relied on certain rulings on this point and upheld that order of the TPO on this point. 18.1 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: i) No Benchmarking analysis was done ii) No separate adjustment for interest on receivables if Working capital adjustment is done 18.2 The ld. A.R. submitted that 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: i) Whether interest has been charged on receivables from non- AEs ii) Whether there were Outstanding Payables also from the AEs, in which case the quantum of outstanding payables should be excluded, while computing the amount on which interest should be charged 18.3 Further, the ld. A.R. submitted that it is 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. 18.4 Further, the TPO while calculating the interest on receivables has contended that the Assessee has not submitted the details of trade receivable in the format requested which is contrary to the submission made by the Assessee before TPO dated 23 July 2021. Hence, the TPO is to calculate the interest on receivables considering the invoice-wise debtors ageing schedule furnished by the Assessee during the assessment proceedings.

Page 20 of 23 18.5 She submitted that the interest amount to be imputed considering the details of invoice wise trade receivables furnished by the Assessee amounts to INR 1,659,483/- whereas the interest imputed by the TPO in TP order is INR 45,99,026/-. She submitted that this issue is squarely covered by the order of the Tribunal in assessee’s own case for AY.2017-18 in IT(TP) A No. 322/Bang/2022 dated 22.11.2022. She also submitted that credit period as per the inter-company agreement is 60 days from the receipt of invoices raised.

20.1 In view of the above order of the Tribunal, we directed the AO/TPO to pass fresh order in conformity with the above direction of the Tribunal in assessee’s own case cited (supra). 21. Ground Nos.32 & 33 are similar to ground No.4 as discussed in earlier para no.7 above. Hence, it does not require any further adjudication. 22. In ground Nos.34 & 35, the assessee seeks deduction u/s 80G of the Act. 23. After hearing both the parties, we are of the opinion that if the assessee satisfies the condition laid down u/s 80G of the Act, deduction u/s 80G of the Act be granted. Ordered accordingly.

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

Bangalore, Dated 26th July, 2023. VG/SPS Copy to:

Asst. Registrar, ITAT, Bangalore