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Income Tax Appellate Tribunal, HYDERABAD BENCH “B”, HYDERABAD
Before: SMT. P. MADHAVI DEVI & SHRI A. MOHAN ALANKAMONY
PER A. MOHAN ALANKAMONY, AM.:
This appeal is filed against the final assessment order of the Ld. AO dated 29/10/2018 passed U/s. 143(3) r.w.s 92CA(4) r.w.s 144C (5) and (13) of the Act for the assessment year 2014-15.
The assessee has raised several grounds and additional grounds in its appeal, however the cruxes of the issues stated in the two set of concise grounds dated 16/10/2019 which were argued before us on the date of hearing is that
(i) The ld. TPO has erred by selecting the following comparable: -
(a) E-Infochips Limited (b) Thirdware Solutions Limited (c) Infobeans Technologies Limited (d) Infosys Limited (e) Persistent Systems Limited
(ii) The Ld. DRP has erred in upholding the order of the Ld. TPO who had computed the Arm’s Length Adjustment towards interest on delayed trade receivables at Rs. 2,51,31,511/-.
The brief facts of the case are that the assessee is a private limited company engaged in the business of Software Development services files its return for the AY 2014-15 on 30/11/2014. From the Form-3CEB report, it was observed that the assessee has entered into international transaction with its Associated Enterprises for Rs. 157,90,55,448/-. Therefore, the case was referred to the TPO. The TPO passed order U/s. 92CA (3) of the Act on 31/10/2017 recommending upward adjustment of profit by Rs. 19,75,16,812/-. Thereafter, draft assessment order was passed on 19/12/2017. Subsequently, the petition was filed in Form-
35A by the assessee raising objections regarding the draft assessment order passed on 04/09/2018 U/s. 143(3) r.w.s 92CA(3) r.w.s 144C of the Act however, the Ld. Members of the DRP upheld the entire upward adjustment of profit by Rs. 16,96,77,951/- and added to the income of the assessee based on which final assessment order was passed on 29/10/2018 aggrieved by which the assessee is in appeal before us.
The Ld. TPO observed in his proceedings that the assessee had declared profit margin on cost @ 21.45%. It was further observed that the TP document maintained by the assessee was based on multiple year data due to non-availability of contemporaneous data at the time of preparation of the TP document. It was further observed that the appellant had selected Transaction Net Margin Method (TNMM) as the most appropriate method to determine the ALP with respect to its business of software development services. It was further noticed that the assessee had selected eight comparable companies whose profit margin ranged from 3.39% to 19.76% with an arithmetic mean of 13.88%. Since, the assessee company had declared margin of 21.45% during the previous year which was above the arithmetic mean of the margins of the comparable companies the assessee company claimed that the international transaction with its AE was at Arm’s Length.
However, the Ld. TPO on his independent analysis of the international transaction of the assessee rejected the TP study of the assessee because the assessee had taken into consideration of 3 years data which is not in accordance with Rule 10B(4) of the IT Rules, 1962. Therefore, the Ld. TPO conducted a fresh search for the comparable companies by holding that the assessee’s business as software development service provider. Thereafter, the Ld. TPO accepted the contention of the assessee that the most appropriate method is TNMM method and selected 12 comparable companies as follows:-
Sl No. Company Name OP/OC 1 SQS INDIA BFSI LTD 22.25 2 MINDTREE LTD 21.64 3 R S SOFTWARE (INDIA) LTD 24.03 4 e-INFOCHIPS LTD 81.00 5 LARSEN & TURBO INFOTECH LTD 24.04 6 CIGNITI TECHNOLOGIES LTD 27.64 7 INFOSYS LTD 36.36 8 PERSISTENT SYSRTEMS LTD 36.06 9 INFOBEANS TECHNOLOGIES LTD 42.08 10 THIRDWARE SOLUTIONS LTD 50.51 11 TECH MAHINDRA (Seg) 23.82 12 TATA ELXSI LTD (Seg) 22.29 AVERAGE 34.31
The Ld. TPO based on the above 12 comparable companies computed the Arm’s Length margin at 34.31% and since, the Arm’s Length Margin computed by the assessee was only 21.45% which fell outside the + / - 3% range, the Ld. TPO adopted the margin computed by him at 34.31% and proposed to make TP adjustment U/s. 92C(3) of
the Act and enhanced the profit by Rs. 19,75,16,812/-. The Ld. TPO further observed that the assessee company had not charged interest on trade receivables from its AE as per the agreement executed between the assessee-company and its AE since the realization period in the agreement was 90 days. The Ld. TPO was of the view that the realization period of 30 days was reasonable and for the balance period the assessee ought to have charged interest on the receivable from its AE and since it was an international transaction susceptible to Arm’s Length adjustment, proposed to make adjustment by enhancing the profit by Rs. 2,51,31,511/-. However, the Ld. DRP though held that the trade receivables is an international transaction requiring TP adjustment, and the short term deposit rates of interest of State Bank of India prevailing in the previous year applied by the TPO as the ALP interest rate is in order, finally concluded by directing the Ld. TPO to compute the ALP interest rate taking into consideration of the credit period of 90 days as stipulated in the inter-company agreements and thereby reduced the TP adjustment on interest receivables from 2,51,31,511/- to Rs. 1,05,62,753/-. Accordingly, the Ld. TPO reduced the enhancement of Rs. 19,75,16,812/- to Rs. 16,96,77,951/-.
At the outset, Ld. AR submitted before us that the TNMM method adopted by the Revenue is acceptable. The Ld. AR also submitted that the DRP had excluded M/s. SQS India BFSI Limited, M/s. CIGNITI Technologies Limited and M/s. Tech Mahendra as the comparable
however, included CG-VAK Software and Exports Ltd., as comparable company. However, he argued stating that the assessee-company is a captive service provider to its AE and considering the nature of comparable companies selected by the Ld. TPO, such as (i) E-Infochips Limited (ii) Thirdware Solutions Limited (iii) Infobeans Technologies Limited (iv) Infosys Limited and (v) Persistent Systems Limited, have to be excluded for the following reasons:-
(i) E-Infochips Limited:- (a) The Ld. TPO had wrongly observed that M/s. E-Infochips Limited has passed all filters and was functionally comparable. (b) M/s. E-Infochips Limited is functionally dissimilar because it is engaged in Information technology services (IT), Information Enabled services(ITES), Software products and physical product-based, company and the segmental details are not disclosed in the annual report. (c) M/s. E-Infochips Limited had earned super-profit and it was also involved in R & D Activities and derives benefits from such activities. (d) The Ld. Members of the DRP had erred by holding that the comparable is mainly a software service provider company because only to the extent of 2.5% of the turnover pertains to sale of products and the rest of the turnover was
attributable towards service provided when the fact remains that the company was involved in various other nature of activities.
(ii) M/s. Thirdware Solutions Limited: (a) The Company is a product-based company and functionally dissimilar. During the previous year the company had revenue from sale of products and there was no revenue from sale of services. (b) The company has various sources of revenue such as receipts from training and subscription, sale of licenses. The company has also incurred marketing expenses such as commission paid to selling agents. (c) The company has not furnished segmental details of software development services and products in its Annual Report. (d) The company has also acquired intangibles during the year.
(iii) M/s. Infobeans Technologies Limited:-
(a) The company is engaged in export of goods and services and no segmental details are available in the Annual Report. Hence, the company is not functionally similar.
(b) It is apparent from the Annual Report that the company has MODVAT deposit amounting to Rs. 25,000 and sales tax deposit amounting to Rs. 10,000 which establishes the fact that the company is engaged in sale of goods.
(iv) M/s. Infosys Limited:
(a) The company underwent extraordinary events during the previous year such acquisition of M/s. Lodestone Holdings Space AG and merger of M/s. Infosys Consulting India P Ltd. These acquisitions had impact on the profitability of the company during the previous year. (b) The company’s turnover of Rs. 42,531 Crs approximately during the previous year which cannot be compared with the appellant company’s turnover as it is only Rs. 163 Crs approximately. (c) The company has also incurred expenditure of Rs. 59 crs towards development of Intellectual Property Rights. (d) The company spent huge amount on R & D Activities and had filed 79 patterns in its name. In the case of the appellant, it is only a captive service provider to its parent company rendering ITES services and do not undertake any R & D Activities.
(e) The company has also incurred huge expenditure of Rs. 2,390 Crs towards selling and marketing and therefore, has a wide market but in the case of the assessee company no such expenses is incurred, and its scope is limited to the work assigned by the parent company.
(v) M/s. Persistent Systems Ltd:-
(a) The company is product based, developing products which have been outsources by clients. The product development is nothing but software development services.
(b) The company does not own the IP of the products developed.
(c) The company also services the product developed by it.
(d) The company has incurred an expenditure of Rs. 3.96 Crs towards R & D Activities.
(e) The mainstream of revenue earned by the company is from products (IP Business), platforms (Solutions Integration) and services (Product Engineering).
(f) The main segments disclosed in the Annual Report are – Telecom & Wireless, Life-sciences & Health care, and Infrastructure & systems.
(g) However, the company has not reported segmental details in the Annual Report. (h) For the above-stated reasons, the company is functionally different that of the assessee company because the assessee company does not have all these features.
The Ld. DR on the other hand, relied on the orders of the Ld. Revenue Authorities.
We have heard the rival submissions and carefully perused the materials on record. From the paper book furnished by the assessee as well as the arguments advanced by the Ld.AR, we find merit in his contention because of the following reasons:-
(i) E-Infochips Limited:- (a) As per the annual report of M/s. E-Infochips Limited for the period 1/4/2013 to 31/3/2014 (Page No.98 of the paper book-Volume- II) it is evident that the company is primarily engaged in software development, IT Enables Services and product-based company. Further, no segmental details are available in the Annual Report. While as the assessee’s company’s only activity is Captive Software Development Services.
Extraction from page-98 of PB-II “The company is primarily engaged in Software Development and IT Enable Services and products which is considered the only reportable business segment as per Accounting Standard-AS 17 Segment Reporting prescribed in Companies Accounting standards notified under Section 211(3C) (Which continues to be applicable in terms of General Circular 15/2013 dated September 13, 2013 of the Ministry of Corporate afairs in respect of Section 133 of the companies Act, 1961.” (b) The company also manufactures products such as electronic boards and printer circuits by importing raw materials and holding inventory, as apparent from Page No. 119 of the PB-II. The assessee company is not engaged into any activity of producing physical goods. Page No. 119 of the PB-II
(c) The company has also incurred expenses in R & D and therefore generated intangible assets as apparent from page no. 65 & 121 of PB-II, while as the assessee company is not involved in any R & D activity. In the case of the assessee company neither such expenses are incurred, or any intangibles are acquired during the relevant period.
Extraction from page no. 65 of PB-II
Extraction from page No.121, PB-II:
(d) The company has also earned revenue from Information Technology consultancy of Rs. 29.07 Crs as apparent from page no.123 of PB-II. However, the assessee company have not earned any income from information technology consultancy activities. Extraction from page No.123 of PB-II:
Considering the nature of activities carried out by M/s. E- infochips Limited discussed hereinabove and since the assessee company is primarily engaged in custom-built mobile platform, applications and software support and maintenance related services to M/s. Kony Group of Companies, we are of the view that M/s. E- infochips Limited cannot be considered as a comparable company because of the reasons stated hereinabove.
(ii) Thirdware Solutions Limited:
(a) As argued by the Ld. AR it is evident from the Annual Report (page No.235 of PB-II) that the company has derived revenue from sale of products amounting to Rs. 206.75 Crs. Further, there is no revenue from sale of services during the previous year. The
assessee has also purchased stock amounting to Rs. 40.21 Crs. While as the assessee company is not engaged into any activity of producing physical goods. page No.235 of PB-II
(b) It is also apparent that the company is receiving revenue from various streams and none of them were pertaining to software development services. As apparent from page 237 of PB-II, the company has received Revenue from training and subscription amounting to Rs. 59.32 lakhs and sale of licenses Rs. 7.98 lakhs. The assessee company is only engaged in ITES.
Extraction from page no.237 of PB-II:
(c) It is also apparent from page no. 217 of PB-II that the company has not disclosed segmental details between software development services and products. The relevant portion is extracted hereinbelow for reference:-
“34) Segment Reporting The company’s cooperation comprises of software development, implementation and support services. Primary segmental reporting is based on geographical areas viz., Domestic = India (Products & Services) and International = Rest of the world (Exports-software services). In primary segment, revenue and all expenses, which relates to a particular geographical segment, are reported. Fixed Assets, Current Assets, Loans and Advances, Current Liabilities and provisions are classified based on specific geographical segment’s business. The company maintains separate books of account for the reported segments. Wherever the costs are directly identifiable with the reported segment, it has been booked to that segment. Wherever common expenses are incurred, those expenses have already been conside3red for allocation and relevant entries in the books of account have been passed. Hence there are no un-allocable expenses. Further, cash, investment (net of provision) and bank balances are reported at the enterprise level. Current assets and current liabilities relating to the specific business segments are identified and reported. Those, which are not identifiable, are reported as common assets / liabilities.”
(d) As disclosed in the annual account it is also apparent that the company has acquired intangibles during the year. Relevant portion of page 210 of PB-II is extracted hereinbelow for reference:-
“d) Intangible Assets and Amortization
Acquired intangible assets relating to software purchased for company’s internal use are capitalised at the cost of acquisition and is amortised on the straight line method over its estimated useful life of three years, as perceived by the management or useful life of asset as per contract whichever is earlier. Depreciation on intangible assets is calculated on pro-rata basis with reference to date of addition over its useful life of three years, as perceived by the management or useful life of asset as per contract, whichever is earlier. The intangible assets acquired b the respective units of Thirdware Solution Limited are used in relation to the operation / services by the respective units only. Intangible assets internally developed by the company are capitalised at the total cost attributable towards the development of the product and is amortised on the straight-line method over its estimated useful life of three years, as perceived by the management.”
10.1. In the case of the assessee company neither such expenses are incurred, or any intangibles are acquired during the relevant period.
Since the assessee company is primarily engaged in custom-built mobile applications and software support and maintenance related services to M/s. Kony Group of Companies, we are of the considered view that M/s. Third-ware Solutions Limited cannot be considered as a comparable company because of the reasons stated hereinabove.
(iii) M/s. Infobeans Technologies Limited: - (a) From the Annual Report Page No.276 of the PB-II it is apparent that the assessee has also been engaged in sale of goods along with rendering of services because the turnover is reported on export of goods / services calculated on FOB basis. (b) The company also has MODVAT deposits and sales tax deposit.
(c) Therefore, the company is functionally dissimilar to the assessee company. (d) For reference the relevant portion of the Annual Report enclosed in paper book-II, page no.276 is extracted hereinbelow:
Note-27 EARNINGS IN FOREIGN EXCHANGE a. Export of goods / services 329,659883 216,854,891 calculated on F.O.B basis Total 329,659883 216,854,891
LONG TERM LOANS & ADVANCES Security Deposit – Secured considered Good Telephone Deposit 9,400 9,400 Other Deposit 9,153 3,500 Custom Deposit 10,000 10,000 Deposit with MPPKVVCL 140,850 73,150 Sales Tax Deposit (Kotak FDR) 10,000 - Deposit (M-VAT) 25,000 25,000 M.P.S.E.D.C. Ltd 10,121,460 - Total 10,325,863 121,050
11.1. Since, the company is functionally dissimilar it cannot be compared with the assessee company for the purpose of TP adjustment.
(iv) M/s. Infosys Limited:
(a) From the profitability reported in the P & L Account (Page No. 324, 349 and 357 of PB-II) it is evident that the company had undergone extraordinary events as stated by the Ld. AR and
this acquisition had substantial impact on the profitability of the company during the previous year. Extraction from Page 324 “Lodestone Holding AG On October 22,2012. Infosys acquired 100%of the outstanding share capital of Lodestone Holding AG, a global management consultancy firm headquartered in Zurich, Switzerland. The acquisition was executed through a share purchase agreement for an upfront cash consideration of 1,187 crore and a deferred consideration of up to Rs. 608 crore. During the year, we invested in our subsidiaries, for the purpose of operations and expansion, as follows:
Subsidiary In foreign Crore currency Infosys USD O.1 million 1 Americas,Inc. Lodestone Holding CHF 20 million 136 AG Infosys Public USD 12.5 million 75 Services,Inc. Edgeverve Systems 1 Limited
(1) On April 15,2014,the Board of Directors of Infosys authorized the Company to execute a Business Transfer Agreement and related documents with Edgeverve (Refer to Note 2.10.2 of the standalone financials).
Refer to statement pursuant to Section 212 of the Companies Act,1956 for the summary financial performance of our subsidiaries. The audited financial statements and related information of subsidiaries will be available on our website,www.infosys.com.”
Extraction from page 349 of PB-II
2.10.1 Investment in Lodestone Holding AG On October 22, 2012, Infosys acquired 100% of the outstanding share capital of Lodestone Holding AG, a global
management consultancy firm headquartered in Zurich, Switzerland. The acquisition was executed through a share purchase agreement for an upfront cash consideration of Rs. 1,87 crore and a deferred consideration of up to Rs. 608 Cr.
The deferred consideration is payable to the selling shareholders of Lodestone on the third anniversary of the acquisition date and is contingent upon their continued employment for a period of three years. The investment in Lodestone has been recorded at the acquisition cost and the deferred consideration is being recognized on a proportionate basis over a period of three years from the date of acquisition. An amount of Rs. 228 Crore and Rs. 85 Cr representing the proportionate charge of the deferred consideration has been recognized as an expense during the years ended March 31, 2014 and March 31, 2013 respectively.”
Extraction from Page 357 of PB-II 2.26 Merger of Infosys Consulting India Limited The Honorable High Court of Karnataka sanctioned the scheme of amalgamation of Infosys Consulting India Limited (ICIL) with Infosys Limited with an effective date of August 23, 2013 and an appointed date of January 12, 2012 ICIL was a wholly- owned subsidiary of Infosys Limited and was engaged in software-related consultancy services. The merger of ICIL into Infosys Limited has been accounted for under pooling of interest method referred to in Accounting Standard 14. Accounting for Amalgamation (AS-14).
All the assets and liabilities of ICIL on an after the appointed date and prior to the effective date have been transferred to Infosys Limited on a going concern basis. As ICIL was a wholly-owned subsidiary of Infosys Limited, no shares have been allotted to the shareholders upon the scheme becoming effective.
11.2. However, in the case of the assessee company there are no such events leading to super profits.
(b) The company has a bumper turnover of Rs. 42,531 Crs which
cannot be compared with the turnover of the assessee company
which is only Rs. 163 Crs.
(c) The company has recognised Intellectual property rights (IPRs)
for Rs. 59 Crs as evident from Page 348 of PB-II.
Extraction from Page 348 of PB-II
2.8 Fixed assets in ` crore, except as otherwise stated Particulars Original cost Depreciation and amortization Net book value As at Additions / Deductions As at As at For Deductions / As at As at As at April 1, Adjustments / March April 1, the Adjustments March March March 2013 during the Retirement 31, 2013 year during the 31, 31, 31, year during the 2014 year 2014 2014 2013 year Tangible assets : Land : Freehold 492 290 1 781 – – – – 781 492 Leasehold 348 1 – 349 – – – – 349 348 Buildings (1)(2) 4,878 1,754 3,124 4,053 825 – 1,467 287 – 2,586 Plant and 779 312 1 1,090 547 125 1 671 419 232 equipment (2) Office 276 117 – 393 159 56 – 215 178 117 equipment (2) Computer 1,525 672 19 2,178 1,053 520 19 1,554 624 472 equipment (2)(3) Furniture and 518 161 – 679 345 96 – 441 238 173 fixtures (2) Vehicles 10 3 – 13 5 2 – 7 6 5 8,001 2,381 21 10,361 3,576 1,086 20 4,642 5,719 4,425 Intangible assets : Intellectual 59 – – 59 31 15 – 46 13 28 Property Rights 59 – – 59 31 15 – 46 13 28 Total 8,060 2,381 21 10,420 3,607 1,101 20 4,688 5,732 4,453 Previous year (4) 7,173 1,422 535 8,060 3,112 956 461 3,607 4,453 (1) Buildings include ` 250/- being the value of 5 shares of ` 50/- each in Mittal Towers Premises Co-operative Society Limited. (2) Includes certain assets provided on cancellable operating lease to Infosys BPO, a subsidiary. (3) Includes computer equipment having gross book value of ` 1 crore (net book value Nil) transferred from Infosys Consulting India Limited (Refer note 2.26). (4) During the years ended March 31, 2014 and March 31, 2013, certain assets which were old and not in use having gross book value of Nil and ` 521 crore respectively
In the case of assessee company there is no accretion of such
kind of assets.
(d) The company has spent huge amount on R & D Activities amounting to Rs. 261 Crs during the previous year and also have filed 79 patterns in its name as pointed by the Ld. AR and apparent from the PB-II, page No.304 and 311. Extraction from Page 304 of PB-II
“Our research and development efforts focus on the twin goals of improving productivity and quality of our services, alongside working towards technology driven innovation and differentiation that will deliver greater value to our clients. At Infosys Labs, Service innovation is being achieved through enhanced automation, optimization, prevention and effective collaboration among described teams. Infosys Labs has established a set of service innovation groups focused on enhancing quality and productivity of six dominant Infosys services-Business Process Outsourcing; Infrastructure Management Services; Independent Validation Services; Application Development and Maintenance including Large Deals; Consulting and Systems Integration; and Modernization. These groups work on service platforms with a focus on automation, optimization, consolidation, and on enhancing the effectiveness of contextual collaboration for distributed teams. Under its Client Innovation umbrella, Infosys Labs has established six Centres of Excellence (CoE), namely Modernization, Advanced Analytics, Security and Dependability, Advanced Mobility, Experience, and Innovation Co-Creation. The CoEs work towards establishing technology- based client innovation and differentiation through the establishment of Client Innovation Centres, publishing focused technology points of view, implementing proofs of concepts driven by our focus on client value, and conducting client workshops. Additionally, we have set up innovation centres with a number of our clients, university partners, and industry research consortia to drive co-creation. Infosys Labs focuses on developing significant new intellectual property to enhance the productivity and quality of our services while enabling differentiation in client offerings. During fiscal year 2014, Inlosys Labs filed 79 unique patent applications in the United States Patent and Trademark Office(USPTO),the Indian Patent Office and other jurisdictions. On a standalone basis, our research and development expenses for fiscal years 2014, 2013
and 2012 were Rs. 873 crore, Rs. 907 crore and Rs. 655 crore, respectively.”
Extraction from Page 311 of PB-II
“Research and development expenditure The R&D centers of the Company (Finacle and Infosys Labs) located at Bangalore, Bhubaneswar, Chandigarh, Chennai, Pune, Hyderabad, Mysore and Thiruvananthapuram have been accorded approval for weighted deduction by the Department of Scientific and Industrial Research (DSIR) effective November 23, 2011.
The eligible R&D revenue and capital expenditure on a standalone basis are Rs 261 crore and Nil respectively for the year ended March 31, 2014 and Rs. 247 crore and Rs. 3 crore respectively for the year ended March 31, 2013. On a standalone basis, the total R&D expenditure, including eligible R&D expenditure discussed above for fiscal years 2014 and 2013 is as follows: in ` crore 2014 2013 Revenue expenditure 873 907 – Capital expenditure 6 873 Total 913 2.0% R&D expenditure / total revenue 2.5% (%)
(e) It is also apparent from page No.326 of PB-II that the company has incurred huge selling and marketing expenses of Rs. 2,390 Crs.
Extraction from Page 326 of PB-II
III Results of operations The function-wise classification of the Standalone Statement of Profit and Loss is as follows: in ` crore Year ended March 31 2014 % 2013 % Income from software services and products 44,341 100.0 36,765 100.0 Software development expenses 26,738 60.3 21,662 58.9 Gross profit 17,603 39.7 41.1 15,103 Selling and marketing expenses 2,390 5.4 1,870 5.1 General and administration expenses 2,686 6.0 2,218 6.0 5.076 11.4 4,088 11.1 Operating profit before depreciation 12,527 28.3 11,015 30.0
While as in the case of the assessee company no such expenses have been incurred as it is catering only to its parent company.
Considering the above-mentioned factors, we are of the considered view that M/s. Infosys Limited is not a comparable company with respect to the assessee company for TP Adjustments.
(v) M/s. Persistent Systems Ltd:-
(a) It is evident from Page No. 533 of PB-II that the company is mainly engaged in three areas such as products (IP Business), platforms (Solutions Integration) and services (Product Engineering) and is also selling its branded products.
Extraction from Page 533 of PB-II
“Business overview Your company specializes in building computer software products. Your company’s business is organized with a focus on the following three areas: Products (IP Business), Platforms (Solutions Integration) AND Services (Product Engineering). Your company has decided to brand the product business separately from the Persistent brand and has named it ‘Accelerite’ (www.accelerite.com). Accelerite will be headquartered in the Silicon Vally and will help your Company provide clarity – the Persistent brand is for product development and the Accelerite brand is for products.
Your company has organized the development and engineering teams around three strategies. Account-Led, Platform-Led and Product-Led. Further, Account-Led teams are organized as Named Accounts and Growth Accounts.
Driven by growth in the platform based solutions and IP led business, the consolidated revenue of your Company recorded an increase of 15.2% in the US Dollar terms and 28.9% in the Rupee term during the year under review. The consolidated EBIDTA increased by 28.4% and the net profit after tax went up by 32.9% during the same period.”
(b) It is also evident from page no.701 of PB-II that the company is also engaged in R & D Activities and has incurred Revenue and Capital expenditure towards the same for Rs. 3.96 Crs.
Extraction from Page 701 of PB-II
“35. Research and development expenditure. The particulars of expenditure incurred on in-house research and development centre approved by the Department of Scientific and Industrial Research (DSIR) are as follows: For the year ended March 31, 2014 March 31, 2013 Capital 2.43 - Revenue 37.18 27.87 39.61 27.87
(c) Though the company’s revenue flows from the three streams viz., products (IP Business), platforms (Solutions Integration)
and services (Product Engineering), the main segments disclosed in the Annual Report are Telecom & Wireless, Life- sciences & Health care, and Infrastructure & systems. Thus, the segmental details in the annual report is absent.
Extraction from Page 675 of PB-II
“(m) Segment reporting (i) Identification of Segment The Company’s operations predominantly relate to providing software products, services and technology innovation covering full life cycle of product to its customers. (ii) Allocation of income and direct expenses Income and direct expenses allocable to segments are classified based on items that we individually identifiable to that segment such as salaries and project related travel expenses. The remainder is considered as un-allocable expense and is charged against the total income. (i) Un allocated item Un allocated items include general corporate income and expense items which are not allocated to any business segment. Segregation of assets, liabilities, depreciation and other non-cash expenses into various reportable segments have not been presented except for trade receivables as these items are used interchangeably between segments and the company is of the view that it is not practical to reasonable allocate these items to individual segments and an adhoc allocation will not be meaningful.”
From the above, it is evident that M/s. Persistent Systems Ltd is functionally dissimilar to the assessee company, it also has intangibles unlike the assessee company and further segmental data are not available. Hence, M/s. Persistent Systems Ltd cannot be treated as a
comparable company with the assessee company for the purpose of TP adjustments.
Thus, the final list of comparable companies after excluding functionally dissimilar companies would be as follows:-
Sl Name of the company OP / OC No. 1 Tata Elxsi Ltd (Seg) 22.29% 2 Mindtree Ltd 21.64% 3 R S Software (India) Ltd 24.03% 4 Larsen & Turbo Infotech 24.04% Ltd 5 CG-VAK Software & 9.55% Exports Ltd Arithmetic Mean 20.31%
Since, the assessee had declared profit margin on cost @ 21.45% which is above the Arm’s Length price of 20.31% as per the second proviso to section 92C(2) of the Act, we are of the considered view that TP Adjustment is not required in the case of the assessee towards assessee’s international transaction with respect to software development services.
As regard to Ground no.8 in relation to interest on outstanding receivables the Ld AR submitted that interest on outstanding receivables is not an international transaction as per section 92B of the Act. Further, it was submitted that the company is a debt free company
and therefore, no interest should be charged. In this regard, Ld. AR relied on various case laws in support of the above contention. It was further argued that with respect to certain transactions with the AE the assessee had also received advances. Hence, it was submitted that if interest was to be charged on receivables, then the advance received from the AEs should be first adjusted towards the receivables on FIFO basis and thereafter, interest may be charged on the balance receivables. The Ld.AR also submitted the working in this regard. On examining the issue, we find that the amendment to section 92B covers interest on outstanding receivables as international transaction and hence, we do not find merits in the argument advanced by the ld. AR that interest on outstanding receivables is not an international transaction as per section 92B of the Act. In respect of the application of FIFO method on realization of outstanding receivables with advance received towards certain other transaction with AE, we agree with the Ld. AR’s argument that primarily the advance received has to be adjusted against any advance received and thereafter, the interest has to be charged on the outstanding receivables. This methodology shall result in the exact outstanding invoices against which payment is not received. Accordingly, we remit the issue back to the file of Ld. TPO to consider the issue afresh in the light of the observations made by us hereinabove. The assessee is also hereby directed to furnish the computation of interest in the afore-stated manner before the Ld. TPO
in order to facilitate the proceedings. Since all other grounds raised in the appeal are not pressed, they have not been considered.
In the result, appeal of the assessee is partly allowed for statistical purposes as indicated hereinabove.
Pronounced in the open Court on 20th November, 2019.
Sd/- Sd/- (P. MADHAVI DEVI) (A. MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 20th November, 2019. OKK Copy to:- 1) M/s. Kony IT Services Private Limited, 9 th Floor, B-6, South Power, Divyasree Orion, Sy. No. 66/1, Raidurgam, Hyderabad- 022. 2) DCIT, Circle-2(1), Room No. 514, 5th Floor, Signature Towers, Opp. Botanical Garden, Kondapur, Hyderabad – n500 084. 3) The DRP-1, Bangalore. 4) The DCIT (TPO-II), Hyderabad. 5) The DR, ITAT, Hyderabad 6) Guard File