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Income Tax Appellate Tribunal, BENGALURU “B” BENCH, BENGALURU
Before: Shri George George K. & Ms. Padmavathy S.
IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “B” BENCH, BENGALURU Before Shri George George K., Judicial Member and Ms. Padmavathy S., Accountant Member IT(TP)A No. 268/Bang/2021 (Assessment Year: 2016-17)
M/s. Finastra Software Solutions vs DCIT, Circle 3(1)(1) (India) Pvt. Ltd. 2nd Floor, BMTC Building 4th to 6th Floor, Virgo Building 80 Feet Road, Koramangala Bengaluru 560095 Bagmane Constellatin Business Park, Other Ring Road, Dodanekundi, Bangalore 560037 PAN – AAACK9067G (Assessee) (Respondent) Assessee by: Shri T. Suryanarayana, Adv Revenue by: Shri Manjunath Karkihalli, CIT-DR Date of hearing: 21/11/2022 Date of pronouncement: 28/11/2022 O R D E R Per: Padmavathy, A.M.
This is an appeal filed by the assessee against the order of the Assessing Officer, National e-Assessment Centre, Delhi passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (the Act) dated 30.04.2021 for AY 2016-17.
The assessee is a subsidiary of Finastra India Holdings Ltd., UK, which is a part of the Finastra Group. The assessee is engaged in the business of providing software development services (SWD), ITE services and marketing support services primarily to its AEs. For AY 2016-17 the assessee filed the return of income on 30.11.2016 declaring total income of Rs.33,49,61,550/-.
2 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. The case was selected for scrutiny under CASS and statutory notices under Sections 143(2) and 143(1) were issued and served upon the assessee. During the previous year relevant to the assessment year 2016-17, the relevant international transactions that took place between the assessee and its AE was the provision of SWD services by the assessee at a price of Rs.192,08,08,541/- and the provision of ITESservices at a price of Rs. 19,98,81,854/-. The assessee was compensated on a cost plus mark up basis, and in the TP study maintained by the assessee, the assessee concluded the international transactions as being at arm’s length. On a reference being made by the Assessing Officer, the TPO passed an order dated 29.10.2019 determining the following TP adjustment
(i) SWD services segment - Rs. 20,53,36,725/- (ii) ITES segment - Rs.1,60,93,297/- (iii) Notional interest in respect of the delayed receivables - Rs. 7,29,62,864/-
Initially, a draft assessment order dated 26.11.2019 came to be passed by the Assessing Officer, in which the aforesaid TP adjustments were incorporated. Further, the Assessing Officer proposed a disallowance of the claim made by the assessee under Section 80G, on the ground that the expenses incurred were in furtherance of CSR activities.
Aggrieved, the assessee filed its objections before the DRP which, vide its directions dated 16.03.2021disposed of the objections by granting marginal relief to the assessee. In line with the directions issued by the DRP, the Assessing Officer passed the impugned final assessment, in which the aggregate TP adjustment was reworked to Rs. 30,14,89,323/-, and the disallowance of claim made under Section 80G of the Act was sustained.
Aggrieved by the final assessment order, the assessee has preferred the above appeal to this Hon’ble Tribunal.
3 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 6. The issues arising for consideration through various grounds raised by the assessee are given below: - (a) Transfer Pricing adjustment of Rs.22,14,30,022/- made by the Transfer Pricing Officer towards the international transactions of provision of software development services and information technology enabled services to the Assessee’s Associated Enterprises (“AEs”), and an adjustment of Rs. 7,29,62,864/-being notional interest in respect of outstanding receivables, the aggregate of which was subsequently reworked to Rs. 30,14,89,323/-on giving effect to the directions of the Dispute Resolution Panel (“DRP”); and (b) Disallowance of Rs. 14,17,500/- made by the Assessing Officer, being deduction claimed under Section 80G of the Income-tax Act, 1961 (“the Act”) in respect of contributions made towards corporate social responsibility (“CSR”), as not being an allowable deduction. Software Development Services 7. Net mark-up on cost earned by the Assessee as computed by the TPO Operating Income (including forex gain) Rs.198,79,89,853/- Operating Cost Rs.173,57,76,019/- Operating Profit (Op. Income – Op. Cost) Rs. 25,22,13,834/- Operating/Net mark-up (OP/TC) 14.53%
The assessee selected the following comparables Sl. No. Name of the company Weighted average (in %) 1. I2T2 India Limited -0.28 2. Minvesta Infotech Ltd. 3.85 3. Sasken Communication Techs Ltd 6.96 4. Kals Information Systems Ltd. 8.11 5. Bells Softech Ltd. 10.37 6. E-Zest Solutions Ltd. 11.65 7. CG-VAK Software and Exports Ltd. 12.37 8. Exilant Technologies Pvt.Ltd. 17.82 9. Otco International Ltd. 17.83 10. Agilisys IT Services India Pvt. Ltd. 18.72 11. RS Software (India) Ltd. 20.96 35th Percentile 8.11 Median 11.65 65th Percentile 17.82
Out of the 11 comparables selected by the Assessee, the TPO accepted 4 compatables, viz. Kals Information Systems Ltd., E-Zest Solutions Ltd.,
4 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. CG-Vak Software & Exports Ltd.and RS Software (India) Ltd. and rejected the other 7. The TPO applied fresh filters and arrived at the below comparables.
Sl. Name of the Company Mark-up on Total Costs No. (WC–unadj) (in %) 1. Kals Information Systems Ltd. 8.60 2. E-Zest Solutions Ltd. 10.87 3. Rheal Software Pvt. Ltd. 14.50 4. Sybrant Technologies Pvt. Ltd. 14.74 5. CG-VAK Software & Exports Ltd. 18.50 6. R S Software (India) Ltd. 20.87 7. Larsen & Toubro Infotech Ltd. 24.83 8. Nihilent Technologies Ltd. 26.36 9. Inteq Software Pvt. Ltd. 28.20 10. Persistent Systems Ltd. 30.89 11. Infobeans Technologies Ltd. 32.42 12. Thirdware Solution Ltd. 36.90 13. Infosys Ltd. 38.61 14. Aspire Systems (India) Pvt. Ltd. 39.28 15. Cybage Software Pvt. Ltd. 66.45 35th Percentile 20.87 Median 26.36 65th Percentile 30.89
Accordingly the TPO arrived the TP adjustment as under
Taxpayers operating revenue 1,98,79,89,853/- Taxpayer operating cost 1,73,57,76,019/- Taxpayers operating profit 25,22,13,834/- Taxpayers PLI 14.53% 35th Percentile Margin of comparables set 20.87% Adjustment required (if PLI<35th Percentile) Yes Median margin of comparable set 26.36% Arm’s length price 2,19,33,26,578/- Price received 1,98,79,89,853/- Shortfall being adjustment u/s. 92CA 20,53,36,725/-
The assessee raised objections before the DRP. The DRP, accepting the contentions of the Assessee, directed inclusion of Exhilant Technologies Pvt. Ltd. However, all the other contentions of the Assessee seeking
5 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. exclusion of incomparable companies and inclusion of comparable companies came to be rejected. The final list of comparables post the directions of the DRP is as follows:
Sl. No. Name of the Company 1. Kals Information Systems Ltd. 2. E-Zest Solutions Ltd. 3. Rheal Software Pvt. Ltd. 4. Sybrant Technologies Pvt. Ltd. 5. CG-VAK Software & Exports Ltd. 6. Exhilant Technologies Pvt.Ltd. 7. R S Software (India) Ltd. 8. Larsen & Toubro Infotech Ltd. 9. Nihilent Technologies Ltd. 10. Inteq Software Pvt. Ltd. 11. Persistent Systems Ltd. 12. Infobeans Technologies Ltd. 13. Thirdware Solution Ltd. 14. Infosys Ltd. 15. Aspire Systems (India) Pvt. Ltd. 16. Cybage Software Pvt. Ltd. 35th Percentile 17.87% Median 25.60% 65th Percentile 30.89%
The assessee raised 15 common grounds in respect of the TP adjustments in SWD and ITES. In the SWD segment, during the course of hearing the learned AR pressed for only the following grounds –
a. That the TPO while applying the turnover filter rejected companies having turnover less than Rs. 1 Crore, erred in not applying upper limit on sales turnover filter.(Ground No. 5)
b. That without prejudice,Persistent Systems Ltd., Nihilent Ltd., Aspire Systems (India) Pvt. Ltd., Infosys Ltd., Thirdware Solution Ltd.,Cybage Software Pvt. Ltd. and Larsen & Toubro Infotech Ltd. ought to be excluded on account of the companies being functionally dissimilar to the Appellant. (Ground No. 9)
6 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. c. That Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. ought to be excluded on account of the companies being functionally dissimilar to the Appellant. (Ground No. 9)
d. That Minvesta Infotech Ltd. ought to be included in the final list of comparables as the company is functionally comparable to the Appellant. (Ground No. 10)
e. That Sagarsoft (India) Ltd. and Evoke Technologies Pvt. Ltd. ought to be included in the final list of comparables as the companies are functionally comparable to the Appellant. (Ground No. 11)
f. The TPO erred in computing the margins of CG-Vak Software&Exports Ltd., Kals Information Systems Ltd. and Cybage Software Pvt. Ltd. in the Order Giving Effect to DRP directions. (Ground No. 14) Ground – 5 13. The learned A.R. submitted that out of the final list of comparables post-DRP directions Sr. Nos. 8, 9, 11, 13 to 16 should be excluded based on the upper turnover filter. In this regard the learned A.R. submitted that the TPO erred in not applying a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the assessee. In this regard, it is submitted that application of turnover filter is a relevant criteria in choosing comparable companies. It is submitted that the difference in the scale of operations have a direct impact on the profitability. An increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service project delivered, and therefore, the per unit fixed cost of a small scale company would be much higher than that of a medium/large size organisation. Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the turnover of the Assessee from rendering SWD services is Rs. 198,79,89,853/- (including forex gain). This being so, the TPO ought to have applied the upper turnover
7 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. filter while selecting companies comparable to the assessee. Reliance in this regard is placed on the decision of the coordinate bench of the Tribunal in the case of Autodesk India (P.) Ltd. vs. DCIT 96 taxmann.com 263 (Bang. Trib.)
The learned DR relied on the order of the lower authorities
We have heard the rival contentions and perused the material on record. We notice that the the coordinate bench in the case of Autodesk (supra) has considered the issue of application of upper turnover filter and held that –
17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.
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
8 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 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 is not relevant 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).
The assessee’s turnover for the year under consideration in software development segment is Rs.198 crores. Therefore, respectfully following the decision of we hold that the companies whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. Accordingly Larsen & Toubro Infotech Ltd., Nihilent Ltd., Persistent Systems Ltd., Thirdware Solution Ltd., Infosys Ltd., Aspire Systems (India) Pvt Ltd., and Cybage Software Pvt Ltd., are excluded from the list of comparables.
9 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. Ground - 9 17. The learned A.R., without prejudice, also presented a detailed written submission with regard to exclusion of Persistent Systems Ltd., Nihilent Ltd., Aspire Systems (India) Pvt. Ltd., Infosys Ltd., Thirdware Solution Ltd., Cybage Software Pvt. Ltd. and Larsen & Toubro Infotech Ltd., on the ground that these companies are functionally not comparable with the assessee. Since we have already excluded these companies from the list of comparables on the basis of turnover filter Ground No. 9 in this regard does not warrant a separate adjudication.
The assessee sought for exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. on the basis that these companies are functionally dissimilar to the assessee. In this regard the learned A.R. submitted that Inteq Software Pvt. Ltd. (“Inteq”) The company is functionally dissimilar to the assessee. The company is engaged in diversified business lines such as Microsoft dynamics, data warehousing, EI & EDI services, Healthcare BPO and consulting services including provision of end-to-end solutions to clients in the nature of back office services, transaction-based services, MIS and analytical reporting services. Thus, Inteq is not comparable to the software development functions of the assessee. It is further submitted that the segmental details attributable to the various services rendered by the company is not available and is instead shown as “software development and service charges” under one head. Detailed submissions are available at pages 1911-1914 of the paper book. Significant related party transactions: The company’s related party transactions (sales) for the FY 2013-14 stand at 79.49% of sales, and therefore the company ought to be excluded. Wide fluctuation in the margin: It is submitted that the company’s margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company’s margin stood at 47.21%, for the FY 2014-15 32.14% and for the FY 2015-16 7.56%. Detailed submissions in this regard are placed at pages 419-436 of the paper book.
10 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. In view of the above, it is submitted that Inteq ought to be excluded from the final list of comparables. Infobeans Technologies Ltd. (“Infobeans”) The company is functionally dissimilar to the Assessee. The company is engaged in providing software engineering services primarily in Custom application development, Content Management Systems, Enterprise Mobility, big data analytics. Though the annual report of the company mentions that the company is earning 100% revenues from sale of software services, such services are in the nature of CAD,CMS etc., which are not pure software development. It is submitted that the software services provided by Infobeans are not pure software development services as defined in the safe harbour rules. This company came to be excluded by the TPO in the earlier years on the basis that it is engaged in product development. It incurred significant expenses towards software licenses and subscription fees worth Rs. 18.89 lakhs, whereas the Assessee had not incurred any expenses in such nature. The company further owned significant intangible assets as during FY 2013-14 to 2015- 16. Despite being engaged in such diversified activities, which are in the nature of high-end software development services, there are no segmental details provided and hence, Infobeans ought to be rejected. It also incurred significant expenditure in foreign currency, in the nature of onsite activities representing around 1.5% of the total sales. Further, the revenue increased from Rs. 35 crore (FY 2014-15) to Rs. 62 crore (FY 2015-16) in a period of 1 year (76%). Also, the company’s profitability increased by 147%. Detailed submissions are made at pages 1925-1927 of the paper book. 19. The learned AR in this regard placed reliance on (i) NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021), (ii) Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021). (iii) Global Logic India (P.) Ltd. V. DCIT [2022] (134 taxmann.com 35) (Del-Trib) (iv) ADP Pvt. Ltd. v. DCIT(Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 (v) Red Hat India Pvt. Ltd. v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021) 20. The ld DR relied on the order of the lower authorities.
11 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 21. We have heard the rival contentions and perused the material on record. We notice that the coordinate bench in the case of NTT Data FA Insurance Systems (India) Pvt. Ltd (supra) has considered the issue of exclusion of Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. and held as under: - “18. We have heard the rival submissions and perused the materials available on record. In our opinion, this comparable was considered by the Hyderabad Tribunal in the case of ADP Pvt. Ltd. in ITA No.227 & 228/Hyd/2021 dated 3.2.2022 at para 7 page 3678 to 3680 wherein held as under:- 7. “Infobeans Technologies Ltd.: The ld. AR of the assessee submitted that this company is functionally different for the following reasons: 1. It is engaged in diversified activities in the nature of custom application development, content management systems, enterprise mobility, big data analytics, 2. No change in the business as compared to last year 3. Leading provider of consulting technology & next generation service. 4. There is abnormal increase in percentage of revenue from 35.35 crore to 62.06 crore. 5. It is also into IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench of this Tribunal in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: 21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below:
12 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. "18. We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two activities carried on by the said concern were not available and in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee". 22. Respectfully following the same, we direct that Infobeans be excluded from the final list of comparables in this case also. 7.4 On perusal of the order of the coordinate bench of this Tribunal and on perusal of the financial statements of Infobeans Technologies Ltd., we observe that the company is functionally not comparable and no segmental details are available. Therefore, the coordinate bench did not consider this company as comparable in assessee’s own case for AYs 2014-15 & 2015-16. Respectfully following the decision of the coordinate bench, we direct the AO/TPO to exclude this company from the final list of comparables.” IT(TP)A No.261/Bang/2021 NTT Data FA Insurance Systems (India) Pvt. Ltd., Bangalore Page 21 of 37 18.1 Same view was taken by the Tribunal in the case of Global Logic India Pvt. Ltd. Vs. DCIT reported in (2022) 134 Taxmann.com 35 for the assessment year 2016-17. Respectfully following above judgement, we are inclined to direct the AO/TPO to exclude this company from the list of comparables.” 19.**** 20.**** 21. We have heard the rival submissions and perused the materials available on record. This comparable has considered in the case of Global Logic India Pvt. Ltd. Vs. DCIT (2022) 134 Taxmann.com 35 for the assessment year 2016-17, wherein held as under:- 46. “The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It
13 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit & loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis-a-vis the taxpayer which is a routine software development service provider working on costplus mark up model, hence ordered to be excluded from the final set of comparables.” 21.1 In view of the above order of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. 22. Respectfully following the decision of the coordinate bench we hold that Inteq Software Pvt. Ltd and Infobeans Technologies Ltd., be excluded from the list of comparables.
Ground No. 10
Through this ground the assessee is seeking inclusion of Minvesta Infotech Ltd. The TPO rejected inclusion of the company on the ground that it fails in the different financial year filters. The assessee submitted before the DRP that the company is functionally comparable and qualifies all filters applied by the TPO. The DRP did not accept the contentions of the assessee and upheld the decision of the TPO by quoting the same reason that the company fails different financial year filters.
Before us the learned A.R. submitted that Minvesta is engaged in business of software development and maintenance services which are comparable to the services rendered by the Assessee. The company came to be rejected by the TPO on the mere ground that the company fails different financial year ending filter, which was upheld by the DRP. In this regard, it is submitted that a company which is functionally comparable to the Assessee and passes all filters applied by the TPO cannot be rejected on the sole ground that it follows a different financial year
14 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. ending. Reliance in this regard is placed on the decision of the hon’ble Punjab and Haryana High Court in the case of CIT v. Mercer Consulting India Pvt. Ltd. [2017] (390 ITR 615).
The learned D.R. submitted that the ratio laid down in the case of Mercer Consulting India Pvt. Ltd. (supra) cannot be applied as it is since if there are enough number of comparables are available then the inclusion by extrapolating the data for the financial year need not entertained.
We have heard the rival contentions and perused the material on record. We notice that the Hon'ble P & H High Court in the case of Mercer Consulting India Pvt. Ltd. has dealt with the issue of exclusion of comparables on failure of different financial year end filters wherein it was held as under: - 28. We are unable to agree with the decision of the TPO and of the DRP that affirmed it. The view taken by the Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. ***** 30. This view is not contrary to Rule 10(B)(4) which reads as under:- “10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into”. 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial
15 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. year followed is different. In the case before us the data relating to the relevant financial year of R.Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B.
The ratio laid down in the above decision of the Hon’ble High Court is that the company cannot be excluded merely because its financial year is different from the financial year of the assessee and that so long as the data relating to the financial year is available even if the financial year followed is different the company should be included for the purpose of comparables. Respectfully following the above decision we are not in agreement with the decision of the lower authorities to exclude Minvesta Infotech Ltd only on the basis that the company fails different financial year filter. The learned AR during the course of hearing submitted that the financial data are available in pages 2066, 2067 and 2075 of the paper book. We therefore remit the issue back to the AO/TPO to examine the relevant financial data from which the details can be extrapolated for the purpose of comparison and accordingly decide the inclusion of the company after giving a reasonable opportunity of being heard to the assessee. Ground No. 11
This ground is with regard to the inclusion of Sagar Soft (India) Ltd. and Evoke Technologies Pvt. Ltd. The assessee sought inclusion of these companies before the TPO which were not accepted by the TPO. The TPO rejected the inclusion of Evoke Technologies Pvt. Ltd., by stating that the annual report of the company include the unaudited revenue and net profit from a foreign branch which is not reliable and therefore the company cannot be included. With regard to Sagar Soft (India) ltd., the TPO held that the company fails SWD service revenue filter and hence rejected.
16 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 29. On the objections raised by the assessee, the DRP did not accept the inclusion by stating that these companies are not there in the TPO’s search matrix and selection of these companies by the assessee would amount to cherry picking. The DRP further held that the assessee has not placed any documentation on the basis for selection of these companies and why they were not originally considered in assessee’s TP analysis. The DRP further held that in the absence of accepted/rejected matrix without any clarity as to why these companies are being captured as additional comparables by the assessee the same cannot be included.
Before us the learned A.R. submitted that - (i) As regards Evoke, it is submitted that the company is functionally comparable and passes all the filters applied by the TPO. It is submitted that the TPO and the DRP erred in rejecting the company on the ground that the financials of the company includes financials of a foreign branch, which is unaudited, and therefore the data is unreliable. It is submitted that the financials of the company having been audited, and in the absence of any negative qualification being assigned to the financials of the foreign branch by the auditor, there was no reason for the lower authorities to hold the data to be unreliable. Without prejudice and in any event, the data pertaining to the foreign branch may be excluded and the company’s margin may be computed accordingly. Therefore, the company ought to be included in the final list of comparables. Submissions in this regard are placed at pages 2034-2038 of the paperbook. It is submitted that this company was directed to be included in the final list of comparables in the assessee’s own case by this Hon’ble Tribunal for the assessment year 2011-12. Further, reliance is also placed on the decision of the Hyderabad Bench of the Hon’ble Tribunal in ADP Pvt. Ltd. v. DCIT (order dated 03.02.2022 passed in ITA Nos. 227&228/Hyd/2021) and the decision of this Hon’ble Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021]). It is submitted that this company is consistently included in the final list of comparables in cases of similarly placed assessees, and therefore the company ought to be included. (ii) As regards Sagarsoft, it is submitted that the company is engaged in rendering software development and consultancy services, and is
17 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. functionally comparable to the Assessee. Further, the company passes all the filter applied by the TPO. While so, the TPO erroneously held that the company fails the SWD service filter. The DRP upheld its rejection on an altogether different ground that the company was not there in the search matrix of the TPO. It is submitted that undisputedly, the company is functionally comparable to the Assessee. The entire service income of the company is from rendering SWD services, and therefore it clearly passes the service revenue filter applied by the TPO. Submissions in this regard are placed at pages 2009-2011 of the paperbook. It is submitted that this company is consistently included in the final list of companies in cases of similarly placed assessees. Reliance in this regard is placed on the decision of the Mumbai Bench of this Hon’ble Tribunal in Red Hat India Pvt. Ltd. v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021). 31. We heard both the parties. We notice that the coordinate Bench in the case of Mindteck India Ltd. IT(TP)A No.252/Bang/2021 dated 27.6.2022.has considered the issue of inclusion of Evoke Technologies P. Ltd. and held that- “21. As far as the plea of the assessee for inclusion of Evoke Technologies Pvt. Ltd. is concerned, this company was rejected by the TPO on the ground that the financials of this company includes figures from outside branches which are unconnected. The DRP agreed with the view of the TPO. The learned Counsel for the assessee placed reliance on the decision of the ITAT, Hyderabad Bench in the case of Infor India P. Ltd. Vs. DCIT (2019) 109 taxmann.com 435 (Hyderabad – Tribunal ) wherein it was held that availability unaudited accounts cannot be the reason to reject the comparability of the company which satisfies all filters. Reliance was also placed on the decision of the ITAT, Bengaluru Bench in the case of Zynga Game Network India Pvt. Ltd. Vs. DCIT in IT(TP)A No.2573/Bang/2019, order dated 23.03.2021 for Assessment Year 2015-16 in which the comparability of this company was remanded to the TPO for fresh consideration. We are of the view that the comparability of this company has to be remanded to the TPO for fresh consideration in the light of the decision brought to our notice as above.” 32. Considering the facts being identical for the year under consideration, we respectfully follow the decision of the coordinate Bench and remit the issue to the TPO for consideration in the light of the decision stated above. 33. With regard to the inclusion of Sagarsoft (India) Ltd., the TPO has rejected the inclusion by stating that the company fails SWD service revenue
18 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. filter. On perusal of the annual report in Note no.15 (page 2174 of paper book) it is noticed that the entire revenue of the company is from software development. Given that the basis on which the TPO came to the conclusion that the company fails the SWD service revenue filter is not clear. Further the assessee has made the submission before the TPO bringing the above fact to his notice (page 532 of paper book). However we notice that the TPO has not examined this. The DRP has rejected stating that the assessee has not brought any documentary evidences. We notice that in the case of Redhat India Pvt. Ltd. (supra) which was also an appeal in relation to Assessment Year 2016-17, the Mumbai Bench of the Tribunal held that the comparability of the company requires to be examined afresh. Considering the facts of the present case and respectfully following the decision in the case of Redhat India Pvt. Ltd. (supra) we remit the issue back to the TPO with a direction to examine the facts properly and decide the issue afresh after giving a reasonable opportunity of being heard to the assessee.
Ground 14
The assessee is seeking recomputation of margins of certain comparables vide this ground. In this regard we direct the AO/TPO to consider the correct margins with respect to the final list of comparables after giving effect to the directions in this order. It is ordered accordingly.
IT Enabled Services 35. Net mark-up on cost earned by the Assessee as computed by the TPO: Operating Income Rs. 20,68,72,829/- Operating Cost Rs. 18,06,27,127/- Operating Profit (Op. Income – Op. Cost) Rs. 2,62,45,702/- Operating/Net mark-up (OP/TC) 14.53%
The Assessee selected the following comparables and the range of weighted average of OP/TC of comparable companies:
19 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. Sl. No. Name of the company Weighted average (in %) 1. Sundaram Business Services Ltd. -5.20 2. Informed Technologies India Ltd. -3.13 3. ACE BPO Services Pvt. Ltd. 0.89 4. Allsec Technologies Ltd. 4.79 5. Digicall Global Pvt. Ltd. 5.20 6. e4e Healthcare Business Services Pvt. Ltd. 8.48 7. Jindal Intellicom Ltd. 9.72 8. Cosmic Global Ltd. 14.15 9. Microland Ltd. 17.19 10. Tech Mahindra Business Services Ltd. 21.50 35th Percentile 4.79 Median 6.84 65th Percentile 9.72
Out of the 10 comparables selected by the Assessee, the TPO accepted Tech Mahindra Business Services Ltd. and rejected the other 9. The TPO applied fresh filters and chose the following list of comparables
Sl. No. Name of the Company Mark-up on Total Costs (WC–unadj) (in %) 1. Bhilwara Infotechnology Ltd. (Seg) 13.39 2. One Touch Solutions (India) Pvt. Ltd. 15.33 3. Tech Mahindra Business Services Ltd. 20.44 4. Infosys BPM Ltd. 26.44 5. SPI Technologies India Pvt. Ltd. 37.77 6. Eclerx Services Ltd. 56.44 35th Percentile 20.44 Median 23.44 65th Percentile 26.44 38. According the TPO arrived at the TP adjustment as under
Taxpayers operating revenue 20,68,72,829/- Taxpayer operating cost 18,06,27,127/- Taxpayers operating profit 2,62,45,702/- Taxpayers PLI 14.53% 35th Percentile Margin of comparables set 20.44% Adjustment required (if PLI<35th Percentile) Yes Median margin of comparable set 23.44% Arm’s length price 22,29,66,126/- Price received 20,68,72,829/- Shortfall being adjustment u/s. 92CA 1,60,93,297/-
20 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 39. The DRP rejected the various contentions of the assessee and upheld the order of the TPO. The assessee is in appeal against the final order of assessment passed in accordance with the directions of the DRP.
The effect grounds of appeal with regard to the IT Enable Services are as given below: -
a. That the TPO while applying the turnover filter rejected companies having turnover less than Rs. 1 Crore, erred in not applying upper limit on sales turnover filter while selecting Tech Mahindra Business Services Ltd., Infosys BPM Ltd., SPI Technologies India Pvt. Ltd. and Eclerx Services Ltd. (Ground No. 5) b. That without prejudice, Infosys BPO Ltd., Eclerx Services Ltd. and SPI Technologies India Pvt. Ltd. ought to be excluded from the final list of comparables as the companies are functional dissimilar to the Assessee. (Ground No. 9) c. That Ace BPO Services Pvt. Ltd., Microgenetic Systems Ltd., and R Systems International Ltd. ought to be included in the final list of comparables as the companies are functionally comparable to the Assessee.(Ground No. 10) d. That Informed Technologies India Ltd. and Crystal Voxx Ltd. ought to be included in the final list of comparables as the companies are functionally comparable to the Assessee. (Ground No. 11) e. That without prejudice, the TPO erred in computing the margin of Eclerx Services Ltd.in the Order Giving Effect to the DRP directions. (Ground No. 14) 41. Ground No. 5 is with regard to application of upper turnover filter while selecting the comparables. The learned A.R. reiterated the same submission made with regard to application of upper turnover filter in Software Development segment. It is submitted that if the upper turnover filter is applied the following companies would stand excluded: - i.Tech Mahindra Business Services Ltd. ii.Infosys BPM Ltd. iii. SPI Technologies India Pvt. Ltd. iv.Eclerx Services Ltd.
21 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 42. After hearing both the parties and respectfully following the ratio laid down by the coordinate bench of the Tribunal in the case of Autodesk (supra) we hold that the companies whose turnover is more than Rs.200 crores should be excluded from the comparables. In the given case it is noticed that the turnover of the above company is more than Rs.200 crores and therefore we direct the A/TPO to exclude these companies by applying the upper turnover filter of Rs.200 crores.
Through Ground No. 9 without prejudice the learned A.R. made a detailed written submission with regard to exclusion of Infosys BPO Ltd., Eclerx Services Ltd. and SPI Technologies India Pvt. Ltd on the basis of functionality. Since we have excluded these companies on the basis of upper turnover filter the contentions with regard to exclusion on the basis of functionality does not warrant separate adjudication.
Ground No. 10 is with regard to inclusion of Ace BPO Services Ltd., Microgenetic Systems Ltd. and R Systems International Ltd.
Ace BPO Services Ltd.
The TPO rejected inclusion of the company on the ground that the data was not available in public domain. The DRP upheld the rejection on the ground that they fails persistent loss filter applied by the TPO and that it is difficult to ascertain the exact functionality of the company. 46. The learned AR submitted that the company is engaged in information technology and computer service activities which are in the nature of business process outsourcing services. Pertinently, it is submitted that the company was selected by the TPO for the assessment year 2015-16. The functions performed by the company continue to remain the same during the assessment year 2016-17, and therefore the finding of the DRP that the functionality of the
22 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. company cannot be ascertained is erroneous. Further, the company does not fail the persistent loss filter applied by the TPO. The company earned a margin of 5.85% during the financial year 2013-14, 1.99% during the financial year 2014-15, and incurred a loss of -0.27% during the financial year 2015-16. It is submitted that the loss incurred by the company during the year under consideration cannot lead to the conclusion that it is a persistent loss making company, and therefore the DRP’s finding is erroneous. Submissions in this regard are places at pages 2047-2049 of the paper book. 47. Reliance in this regard is placed on the decision of the Hyderabad Bench of the Hon’ble Tribunal in Infor (India) Pvt. Ltd. v. DCIT (order dated 06.10.2021 passed in IT(TP)A No. 198/HYD/2021). 48. The ld DR relied on the order of the lower authorities 49. We have heard the rival submissions and perused the materials available on record. The coordinate bench of the Tribunal has been consistently holding that if there is loss consistently in immediate previous 3 years then only the comparable would have to be excluded. On the other hand, if the loss is only in one assessment year out of 3 immediate previous assessment years, this company is to be considered as comparable. In assessee’s has it is submitted by the ld AR that the company has not made persistent loss and has in fact earned profits in two out of the three previous years. This needs to be examined factually before deciding the inclusion and therefore this issue is remitted to the AO/TPO for verification of afresh. The AO/TPO is directed to keep in mind the decisions of the coordinate bench with respect to persistent loss while considering the issue. It is ordered accordingly. Microgenetic Systems Ltd. 50. The company came to be rejected on the grounds of non-availability of data and failing different financial year ending filter. In this regard, the learned
23 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. AR submitted that as per Rule 10B(5)(i) of the Income Tax Rules, 1962 read with second proviso to Rule 10CA(2), it is mentioned that in case of a comparable company for which data relating to the current year is unavailable, then for the purpose of comparability analysis, the data for the immediately preceding two financial years preceding to the current year shall be adopted for the purpose of comparability. The learned AR further submited that Microgenetic is engaged in IT enabled services which are in the nature of medical transcription services and therefore, is comparable to the functional profile of IT enabled Services rendered by the assessee. Submissions in this regard are placed at pages 2052-2053 of the paper book. It is submitted that the company qualifies all the quantitative filter applied by the TPO. 51. The ld DR submitted that the company is excluded for the reason that the current year data is not available due to the closure of business of the company. The ld DR further submitted that the financial year of the company is different and therefore cannot be considered as a comparable. 52. We heard the rival submissions and perused the material on record. Rule 10B(5) reads as follows – (5) In a case where the most appropriate method for determination of the arm's length price of an international transaction or a specified domestic transaction, entered into on or after the 1st day of April, 2014, is the method specified in clause (b), clause (c) or clause (e) of sub-section (1) of section 92C, then, notwithstanding anything contained in sub-rule (4), the data to be used for analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be,—
(i) the data relating to the current year; or (ii) the data relating to the financial year immediately preceding the current, if the data relating to the current year is not available at the time of furnishing the return of income by the assessee, for the assessment year relevant to the current year: Provided that where the data relating to the current year is subsequently available at the time of determination of arm's length price of an international
24 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. transaction or a specified domestic transaction during the course of any assessment proceeding for the assessment year relevant to the current year, then, such data shall be used for such determination irrespective of the fact that the data was not available at the time of furnishing the return of income of the relevant assessment year.] 53. According to the above rule use of multiple year data would be used in the cases where TNMM, RPM or CPM is used as the most appropriate method to benchmark the transaction. The rule provides that where data for current year is not available at the time of furnishing the return of income, data of 2 preceding years out of 3 years would be used. Therefore we see merit in the argument that the company cannot be rejected merely for the reason that the current year data is not available. In the given case the company is excluded also for the reason that the financial year end is different. We have in earlier part of the order had considered the issue of comparable failing different financial year filter and by relying on the decision of the Hon’ble P&H High Court in the case Mercer Consulting India Pvt. Ltd (supra) had remitted the issue to TPO for examining the financial data for determining the comparability of the company. According the issue of inclusion of Microgenetic Systems Ltd is also remitted back to the TPO to examine the financial data from which the details can be extrapolated for the purpose of comparison and accordingly decide the inclusion of the company after giving a reasonable opportunity of being heard to the assessee. R Systems International Ltd 54. This company was excluded by the TPO for the reason that it did not appear in the search matrix. The DRP upheld the same on altogether different ground that the company failed different year ending filter applied by the TPO. 55. The learned AR submitted that this company is engaged in rendering customer care services, technical support services, back office services, analytics services and business process transformation services, which are
25 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. similar to the ITE services rendered by the Assessee. The company came to be rejected on the mere ground that the company fails different financial year ending filter. In this regard, it is submitted that a company which is functionally comparable to the Assessee and passes all filters applied by the TPO cannot be rejected on the sole ground that it follows a different financial year ending. It is submitted that when extrapolated data is available, the same ought to be taken into consideration and the company ought to be included in the final list of comparables. Reliance in this regard is placed on the decision of the hon’ble Punjab and Haryana High Court in the case of Mercer Consulting India Pvt. Ltd. (supra). 56. We notice that the Hon’ble Punjab and Haryana High Court in the case of Mercer Consulting India Pvt. Ltd. (supra)., has considered the issue of inclusion of R Systems International Ltd., and held that the company cannot be excluded merely because its financial year is different from the financial year of the assessee and that so long as the data relating to the financial year is available even if the financial year followed is different the company should be included for the purpose of comparables. The learned AR during the course of hearing submitted that the financial data are available in pages 2054-2056 of the paper book. We therefore remit the issue back to the AO/TPO to examine the relevant financial data from which the details can be extrapolated for the purpose of comparison and accordingly decide the inclusion of the company after giving a reasonable opportunity of being heard to the assessee. 57. Ground No. 14 is with regard to consideration of the correct margins of Eclerx Services Ltd. In this regard the TPO is directed to apply the correct margins to the final list of comparables after giving effect to the directions in this order. 58. The TPO is further directed to recompute the arms length price of the assessee in SWD segment and ITES segment in accordance with the directions given in this order. It is ordered accordingly.
26 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 59. The rest of the grounds with regard to the TP adjustments are dismissed as not pressed.
Ground Nos. 16 to 21 is with regard to the interest on delayed receivables. During the year under consideration, realizations in respect of certain invoices were made after the period of 30 days. The TPO equated the outstanding receivables from AEs to loans and accordingly proposed a notional interest on the outstanding balances (exceeding 30 days) amounting to Rs. 7,29,62,864/- taking Prime Lending Rate of SBI at 5.39% as arm’s length interest rate. The TPO computed the notional interest as given below
Particulars Amounts (in Rs.) Receivables from AE 222,30,18,112 ALP Interest rate 5.39 TP Adjustment (interest chargeable for 335 days) 7,29,62,864
In this regard, the learned AR made the following submissions in this regard – (i) The inclusion in the Explanation to Section 92B of the Act of the expression ‘receivables’ does not mean that every item of ‘receivables’ appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterized as an unsecured loan leading to benefit the AEs. (ii) The intent behind including the above clause within the ambit of Section 92B of the Act is to penalize the taxpayers who do not repatriate the money for an indefinite period and not to automatically characterize any debit balance in the books of accounts from the AEs as an unsecured loan. (iii) An outstanding balance cannot be treated as a loan or borrowing as it is not an independent transaction which can be viewed on standalone basis. (iv) Element of interest comes in only with respect to an indebtedness created out of a loan transaction. (v) The outstanding receivables are in respect of the provision of software development services and IT enabled services by the Assessee and therefore cannot be treated as a separate international transaction. (vi) The arm’s length price of the said transaction is subsumed in the principal transaction of rendering of SWD services and ITeS, and therefore the
27 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. outstanding receivable cannot be made subject matter of a TP adjustment. Reliance in this regard is placed on the following decisions (vii) The said amounts were outstanding with the AEs as well as Non-AEs for a period exceeding the credit period purely because of business reasons. (viii) The Assessee has not charged any interest for the receivables outstanding for a period exceeding 30 days even to Non-AEs. (ix) Relevant submissions in this regard are placed at pages 2106 – 2116 of the paper book. 62. The learned AR placed reliance on the following decisions in support of the above submissions
(i) Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 (Bangalore-Trib)). The appeal against the above order came to be dismissed by the Hon’ble High Court of Karnataka in PCIT and anr. V. Avnet India (P.) Ltd. (Order dated 01.08.2018 passed by the Hon’ble High Court of Karnataka in ITA No. 358/2016). (ii) Goldstar Jewellery Ltd. v. JCIT (reported in [2015] 53 taxmann.com 353 (Mumbai-Trib)): (iii) CIT Vs Indo American Jewellery Ltd. (order dated 08.01.2013 passed by the Hon’ble High Court of Bombay in ITA(L)No. 1053/2012)
We heard the rival submissions and perused the material on record. In our opinion, the impugned issues of whether the interest on receivable is a separate international transaction and the rate of interest to be considered has been considered in the decision of the coordinate Bench of the Tribunal in the case of Swiss Re Global Solutions India Pvt. Ltd. (Order dated 21.01.2022 passed in IT(TP)A No. 397/Bang/2021). wherein it was held as under:- “35. The only other issue that remains for adjudication is ground No.15 with regard to re-characterizing certain trade receivables as unsecured loans and computing notional interest on such trade receivables. The main contention of the ld. AR is that deferred receivables would not constitute a separate international transaction and need not be benchmarked while determining the ALP of the international transaction. In our opinion, this issue was considered by the Tribunal in assessee’s own case for AY 2014-15 and in para 23 to 23.9 of the order dated 21.5.2020 this Tribunal held as under:-
28 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. “23. Ground No. 14-17 alleged by assessee against adjustment of notional interest on outstanding receivables. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for.
23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction.
23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017.
23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances.
23.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support
29 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that:
(i) the expression "international transaction" shall include— . . . . . (c) capital financing, including any type of long-term or short- term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;. . . . ' 23.5. Ld.CIT.DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law:
"(c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?"
23.6. Ld.CIT.DR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act,
30 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing-up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined.
23.7. We have perused the submissions advanced by both the sides in the light of the records placed before us.
This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. - Trib.), held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per Explanation to section 92B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR.
23.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for
31 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions."
23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law.”
Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon’ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018.
Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly” 64. In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon'ble Delhi High Court in the case of Cotton Naturals (I) (P.) Ltd (supra) in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate.
32 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 65. The learned AR during the course of hearing drew our attention to the fact that the average debtor turnover ratio in the case of comparable companies as given below are 90 days and prayed that the similar credit period may be granted to the assessee.
Companies Sales (A) Average Debtors Debtors receivables turnover turnover (B) ratio ratio in C=(B/A) days D= 365/C AspireSystems 232,48,80,277 78,08,89,086 3.0 123 (India)Private Limited CG-VAK Software & 10,24,66,848 2,83,50,698 3.6 101 Exports Ltd Cybage Software Pvt Ltd 726,68,79,946 117,47,34,134 6.2 59 e-Zest Solutions Ltd 57,66,95,306 15,00,48,640 3.8 95 InfoBeans Technologies 61,93,29,688 11,54,20,642 5.4 68 Ltd Infosys Ltd 54,153 11,761 4.6 79 Inteq Software Pvt Ltd 17,47,55,743 3,29,87,716 5.3 69 Kals Information Systems 2,88,98,627 92,71,704 3.1 117 Ltd Larsen and Toubro 5847,24,10,000 1317,23,20,000 4.4 82 Infotech Ltd Nihilent Ltd. 252,08,10,000 69,19,55,000 3.6 100 Persistent Systems Ltd 14,638 3,374 4.3 84 Rheal Software Ltd 6,27,92,149 93,78,964 6.7 55 RS Software India Ltd 17,142 5,309 3.2 113 Thirdware Solution Ltd 22,465 5,114 4.4 83 Sybrant Technologies 4,28,45,240 1,37,10,219 3.1 117 Average debtors turnover ratio in days 90 days
Respectfully Following the order of the Tribunal and the judgment of the Hon’ble Delhi High we hold that the treatment of interest on deferred receivables is an independent international transaction and the interest rate to be adopted is LIBOR rate and it would be appropriate to take the LIBOR rate + 2. It is ordered accordingly
Ground Nos. 22-26 is with regard to disallowance of deduction claimed under Section 80G of the Act, of donations made in pursuance of CSR
33 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. policy. During the year under consideration, the assessee made donations amounting to Rs. 28,35,000/-, and accordingly, claimed a deduction of Rs. 14,17,500/-. The deduction so claimed came to be disallowed by the lower authorities on the ground that the donation being in pursuance of the CSR policy, is not voluntary in nature, and is therefore not eligible for deduction.
The learned AR submitted that the amount of donation made has already suffered a disallowance under Section 37 of the Act. If a further disallowance is made under Section 80G of the Act, more so in view of such claimed not being prohibited by the said section, it would lead to double disallowance. Therefore the disallowance made by the Assessing Officer ought to be set aside. The learned AR placed reliance in this regard is placed on the decision of coordinate bench of the Tribunal in the case of First American (India) Pvt. Ltd. v. ACIT (Order dated 29.04.2020 passed in ITA No. 1762/Bang/2019).
We heard the rival submissions and perused the material on record. We notice that the impugned issue has been considered by the coordinate bench in the case of First American (India) Pvt. Ltd (supra) where it has been held that -
We have perused submissions advanced by both sides in light of records placed before us. 11. Section 135 of Companies Act, 2013 requires companies with CSR obligations, with effect from 01/04/2014. Finance (No.2) Act, 2014 inserted new Explanation 2 to subsection (1) of section 37, so as to clarify that for purposes of sub-section (1) of section 37, any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. 12. This amendment will take effect from 1/04/2015 and will, accordingly, apply to assessment year 2015-16 and subsequent years.
34 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 13. Thus, CSR expenditure is to be disallowed by new Explanation 2 to section 37(1), while computing Income under the Head 'Income form Business and Profession'. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income Tax Act in Explanatory Memorandum to The Finance (No.2) Bill, 2014 is as under: "The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existing provisions of section 37 of the Income-tax Act. Therefore, in order to provide certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be allowed deduction under those sections subject to fulfilment of conditions, if any, specified therein." 14. From the above it is clear that under Income tax Act, certain provisions explicitly state that deductions for expenditure would be allowed while computing income under the head, `Income from Business and Profession" to those, who pursue corporate social responsibility projects under following sections. • Section 30 provides deduction on repairs, municipal tax and insurance premiums. • Section 31, provides deduction on repairs and insurance of plant, machinery and furniture • Section 32 provides for depreciation on tangible assets like building, machinery, plant, furniture and also on intangible assets like know-how, patents, trademarks, licenses. • Section 33 allows development rebate on machinery, plants and ships. • Section 34 states conditions for depreciation and development rebate. • Section 35 grants deduction on expenditure for scientific research and knowledge extension in natural and applied sciences under agriculture, animal husbandry and fisheries. Payment to approved
35 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. universities/research institutions or company also qualifies for deduction. In-house R&D is eligible for deduction, under this section. • Section 35CCD provides deduction for skill development projects, which constitute the flagship mission of the present Government. • Section 36 provides deduction regarding insurance premium on stock, health of employees, loans or commission for employees, interest on borrowed capital, employer contribution to provident fund, gratuity and payment of security transaction tax. Income Tax Act, under section 80G, forming part of Chapter VIA, provides for deductions for computing taxable income as under: • Section 80G(2) provides for sums expended by an assessee as donations against which deduction is available. a) Certain donations, give 100% deduction, without any qualifying limit like Prime Minister's National Relief Fund, National Defence Fund, National Illness Assistance Fund etc., specified under section 80G(1)(i) b) Donations with 50% deduction are also available under Section 80G for all those sums that do not fall under section 80G(1)(i). Under Section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part of CSR responsibility, not eligible for deduction u/s80G. 15. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, 'Income form Business and Profession", where as monies spent under section 80G are claimed while computing "Total Taxable income" in the hands of assessee. The point of claim under these provisions are different. 16. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, "Income from Business and Profession". 17. For claiming benefit under section 80G, deductions are considered at the stage of computing "Total taxable income". Even if any payments under section 80G forms part of CSR payments (keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, "Income form Business and Profession". The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing "Total Taxable Income" cannot be denied to assessee, subject to fulfillment of necessary conditions therein.
36 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd. 18. We therefore do not agree with arguments advanced by Ld.Sr.DR. 19. In present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, "Income from Business and Profession". It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing "Total taxable income", which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing 'Total Taxable Income". If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature. 20. On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act. We also note that authorities below have not verified nature of payments qualifying exemption under section 80G of the Act and quantum of eligibility as per section 80G(1) of the Act. 21. Under such circumstances, we are remitting the issue back to Ld.AO for verifying conditions necessary to claim deduction under section 80G of the Act. Assessee is directed to file all requisite details in order to substantiate its claim before Ld.AO. Ld.AO is then directed to grant deduction to the extent of eligibility. 70. Respectfully following the above decision of the coordinate bench we remit the issue to the AO with a direction to verify the details and allow the deduction to the extent of eligibility. The assessee is directed to furnish the relevant details to substantiate the claim and cooperate with the proceedings. It is ordered accordingly
In the result, the appeal filed by the assessee is partly allowed. Dictated and pronounced in the open Court on 28th November, 2022. Sd/- Sd/-
(George George K.) (Padmavathy S) Judicial Member Accountant Member Bengaluru, Dated: 28th November, 2022
37 IT(TP)A No. 268/Bang/2021 M/s. Finastra Software Solutions (India) Pvt. Ltd.
Copy to:
The Assessee 2. The Respondent 3. The DRP-1, Bengaluru 4. The DR, ITAT, Bengaluru 5. Guard File By Order //True Copy//
Assistant Registrar ITAT, Bengaluru n.p.