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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI ANIL CHATURVEDI & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
Appellant, M/s. GlobalLogic India Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 30.03.3021 passed by the Assessing Officer (AO) in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C (13) and 144C(13) read with sections 143(3A) & 143(3B) of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2016-17 on the grounds inter alia that :-
“1. That the assessing officer erred on facts and in law in passing order under section 143(3) read with Section 144C of the Act at an income of Rs.67,64,20,330 as against returned income of Rs.48,14,53,110 after making transfer pricing adjustment of Rs.19,49,67,216 under section 92CA(3) of the Income Tax Act, 1961 ('the Act'). 1.1 That the assessing officer erred on facts and in law in making an adjustment of Rs.14,18,95,876 to the arm's length price of the 'international transactions' of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ('TPO')/ Dispute Resolution Panel ('DRP'). 1.2 That the DRP/ TPO erred on facts and in law in considering the following companies as comparable companies not appreciating that such companies are not passing the test of comparability provided under Rule 10B(2) of the Income Tax Rules, 1962: (i) Infobeans Technologies Limited (ii) Larsen & Tubro Infotech Limited (iii) Mindtree Limited (segmental) (iv) Thirdware Solution Limited (v) Tata Elxsi Ltd. (segmental) (vi) Cybercom Datmatics Information Solutions Ltd. (vii) Inteq Software Private Limited (viii) Cigniti Technologies Limited (ix) Kelton Tech Solutions Limited 1.3 That the DRP/ TPO erred on facts and in law in rejecting the following companies from the final set of comparable companies allegedly holding them to be functionally dissimilar to the appellant: (i) E-Zest Solutions Ltd. (ii) Evoke Technologies Ltd. 1.4 That the DRPI TPO erred on facts and in law in not allowing risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent software development service provider.
1.5 That on the facts and in the circumstances of the case and in law, the DRP/TPO erred in rejecting the contention of the appellant regarding risk adjustment, holding that in absence. of robust and reliable data, both for the appellant and for the comparables, risk adjustment cannot be considered for enhancing comparability.
2. That the assessing officer erred on facts and in law in proposing an adjustment of Rs.5,30,71,340 to the arm's length price of alleged 'international transactions' of accounts receivable undertaken with the associated enterprise, on the basis of the order passed by the TPO/DRP.
2.1 That the DRP/TPO erred on facts and in law in re- characterizing the alleged transaction of delay in receipts of receivables as unsecured loans advanced to the associated enterprises.
2.2 That the DRP/TPO erred on facts and in law in not appreciating that delay in receipt of receivable is not an 'international transaction', per se, under section 92B of the Act but is a consequence of an 'international transaction' undertaken in the form of services rendered to the associated enterprise.
2.3 That the DRP/TPO erred on facts and in law in not appreciating that the appellant has received receivables from unrelated parties with similar delay of period and accordingly the delay in receipt of receivables from unrelated parties should be considered as a valid internal CUP for the purpose of benchmarking.
2.4 That the DRPI TPO erred on facts and in law in not accepting that in any case the transaction of delay in respect of receivables was closely linked to the 'international transaction' of export and since the profit earned by the appellant as a percentage of cost is higher than the profit earned by comparable companies, no transfer pricing adjustment was even otherwise required to be made in this regard.
2.5 That the DRP/TPO erred on facts and in law in not appreciating that working capital adjustment is more appropriate measure to benchmark the realisation of trade receivables of the appellant instead of application of an interest rate.
2.6 That the DRPI TPO erred on facts and in law in not appreciating that similar adjustment made in the preceding year, i.e. assessment year 2010-11 and 2012-13 has been deleted by the Hon'ble Income Tax Appellate Tribunal in their order dated 12.12.2017 passed in and 11151De1l2017 and subsequently followed in order passed for assessment year 2013-14 and 2015-16. 2.7 That the DRP/TPO erred on facts and in law in adding an adhoc mark-up of 400 points on the Libor rate of interest, arbitrarily on account of credit rating risk, security risk, transaction cost etc. 2.8 That the DRP/TPO erred on facts and in law in not appreciating that the in terms of Master Direction No.16/2015- 16, Reserve Bank of India allows a period of 12 months to all companies for receiving repatriation of export sales proceeds, and therefore, interest if any, ought to be imputed on the period of delay beyond 12 months.
3. That the assessing officer erred in not granting credit of tax deducted at source aggregating to Rs.7,21,038 in respect of amalgamating companies viz., IP Unity Communications Ltd. and GL Software Ltd.
4. That the assessing officer erred on facts and in law in levying excess interest under section 234B of the Act.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. GlobalLogic India Private Limited (GL India), the taxpayer is a subsidiary of Global Logic Inc.. The taxpayer is into the provisions of Software Development Services (SDS) to its customers including Global Logic Group Companies which includes delivery, finance 7 legal, human resources (including employee services, recruitment, resourcing and learning & development and operations). During the year under assessment, there were approximately 1,575 employees on the payroll of the taxpayer. The taxpayer has offices in Noida, Bangalore and Nagpur. The services delivered by the taxpayer include future planning, platform selection/adoption strategy, development, test engineering, development, delivery & integration of specialized items, product testing, migration & porting, product maintenance & support and product extensions.
During the year under assessment, the taxpayer entered into international transactions as per transfer pricing document, with its Associated Enterprises (AEs) as under :-
No. Nature of Method Applied Value of transactions transaction (in Rs.) 1. Provision of software TNMM 260,02,47,347 development services 2. Recovery of expenses Other Method 9,86,05,927 by AE
The taxpayer in its TP study to benchmark its international transactions qua provision of software development services, applied Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI), chosen 16 comparable companies with mean margin of 17.93% as against taxpayer’s own OP/OC margin as 14.37% and found its international transactions at arm’s length.
Ld. TPO in order to benchmark the international transactions qua SDS after applying various filters retained 7 comparable companies chosen by the taxpayer and introduced 6 new comparable companies to benchmark the international transactions and arrived at OP/OC of comparable companies at 24.37% and proposed the TP adjustment to the tune of Rs.14,18,95,876/-.
Ld. TPO also proposed addition of Rs.5,30,71,340/- on account of transfer pricing adjustment qua interest on delay against receipt of interest receivables from AEs and thereby made cumulative adjustment at Rs.19,49,67,216/- as under :-
S.No. Nature of international Adjustment u/s transactions 92CA (Rs.) 1. Provision of software 141,894,876 development services 2. Receivables 53,071,340 Total 194967216
The taxpayer carried the matter before the ld. DRP by way of filing the objections who has rejected all the objections.
Consequently, in compliance to the order passed by the ld.TPO/ld.
DRP, AO framed assessment u/s 143 (3) read with section 144C(13) of the Act as under :-
Sl. Particulars Amount Amount No. 1 Total income shown by the 48,14,53,110 assessee Add : Upward adjustment on 19,49,67,216 account of Arm’s Length Price Total income 67,64,20,326 Rounded off to 67,64,20,330
Feeling aggrieved by the order passed by the ld.DRP/TPO/AO, the taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the Revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1, 1.1, 1.2, 1.4 & 1.5
Undisputedly, TNMM with OP/OC as a PLI applied by the taxpayer to benchmark its international transactions has been accepted by the ld. TPO/ld.DRP. Ld. TPO, after applying various filters, otherwise acceptable to the taxpayer, has come up with final set off of comparables consisting of 13 companies with mean margin of 24.37% in order to benchmark the international transactions qua software development services entered into by the taxpayer with its AEs which are as under :-
S.No. Name of Company OP/OC OP/OC OP/OC Weighted 2014 2015 2016 Average 1 Akshay Software 0.09 0.05 -5.24 -1.90 Technologies Ltd. 2 Sagar Soft India Limited 0.09 -0.17 10.64 3.82 3 CG-VAK Software & 4.90 16.89 16.38 9.24 Exports Ltd. 4 Maveric Systems Ltd. 12.6 24.87 - 13.76 5 Mindtree Ltd. 21.17 24.87 18.49 21.25 6 Cigniti Technologies Ltd. 27.89 6.83 30.32 21.79 7 Inteq Software Limited 35.58 29.87 6.82 24.37 8 Tata Elxsi Limited 19.77 24.16 30.40 25.34 9 Larsen & Toubro Infotech 34.09 28.01 22.33 27.65 Ltd. 10 Infobeans Technologies 41.85 20.39 34.28 31.96 Ltd. 11 Kelton Tech Solutions Ltd. - 28.4 37.99 33.46 12 Thirdware Solutions Ltd. 50.45 40.28 29.14 39.20 13 Cybercom Datamatics 73.28 73.60 66.57 71.69 Information Solutions Ltd. 35th Percentile 21.25% 65th Percentile 27.65% Median 24.37%
11. Consequently, ld. TPO proposed the adjustment on account of ALP of international transactions entered into by the taxpayer with its AE qua Software Development Services (SDS) as under :-
Particulars Amount Operating Cost 2,57,88,48,179 Arm’s Length margin (%) 24.37% Arm’s Length margin (%) 62,84,65,301 Arm’s Length Price 3,20,73,13,480 Price charged by assessee 3,04,13,53,391 Difference between ALP and price charged by 16,59,60,089 assessee Total Transaction with AE related to software 2,60,02,47,347 service % of Transaction 85.50 Proportionate Adjustment 14,18,95,876
12. Ld. AR for the taxpayer in order compress the controversy raised by filing the present appeal sought exclusion of 9 companies, namely, (i) Mindtree Ltd., (ii) Cigniti Technologies Ltd., (iii) Inteq Software Limited, (iv) Tata Elxsi Limited, (v)
Larsen & Toubro Infotech Ltd., (vi) Infobeans Technologies Ltd., (vii) Kelton Tech Solutions Ltd., (viii) Thirdware Solutions Ltd. & (ix) Cybercom Datamatics Information Solutions Ltd. out of 13 companies chosen as comparables by the ld. TPO and sought to include 2 companies viz. E-Zest Solutions Ltd. & Evoke Technologies Ltd..
Now, we would examine suitability of the aforesaid companies challenged by the taxpayer as comparable to benchmark its international transactions qua software development services rendered by the taxpayer to its AE during the year under assessment one by one.
COMPARABLE COMPANIES SOUGHT TO BE EXCLUDED BY THE TAXPAYER LARSEN & TOUBRO INFOTECH LTD. (L&T) 14. The taxpayer sought to exclude L&T from the final set of comparables chosen by the ld. TPO for the purpose of benchmarking its international transactions qua SDS on the grounds inter alia that it is functionally dissimilar; that its segmental data is not available; that L&T is a huge brand with ownership of intangibles and on account of extra ordinary event; and on the ground that this company was rejected in taxpayer’s own case in for AY 2014-15 vide order dated 01.05.2020.
15. However, on the other hand, ld. DR for the Revenue opposed the contentions raised by the taxpayer to exclude L&T as a comparable on the grounds inter alia that this comparable was chosen by the taxpayer itself and in case of TNMM applied for benchmarking the international transactions minor dissimilarities are not to be taken into account; that the taxpayer cannot be taken as a captive entity as its spectrum is much more and it is also a global brand having presence in many countries and relied upon the order passed by the ld. TPO/ld. DRP.
16. When we examine profile of L&T from its financials, available at pages 6, 7 & 11 of the paper book, it is into providing application development and maintenance services providing digital solutions such as big data analytics, enterprise computing, cognitive computing, infrastructure management services and enterprise solutions. It has also been awarded and recognized by various forums for providing such niche services in the field of innovation in information technology category, analytics solutions/services etc., explained at page 11 of the paper book.
17. When we examine Notes forming Parts of Accounts at page 116 of the paper book, it is evident that L&T is having two segment accounts, namely, (i) Services Cluster Segment which includes Banking and Financial Services, Insurance, Media & Entertainment, Travel & Logistics and Healthcare, and (ii)
Industrial Cluster Segments which consists of Hi Tech and Consumer Electronics, Consumer Retail & Pharma, Energy & Process, Automobile & Aerospace, Plant Equipment & Industrial Machinery, Utilities and E&C. But aforesaid various segments do not indicate profit earned from provisions of SDS. Apart from it, L&T is a huge brand having ownership of significant intangibles to the tune of Rs.7.42 millions, as is evident from its financials at page 8 and 103 of the paper book.
18. Coordinate Bench of the Tribunal rejected L&T in taxpayer’s own case for AY 2014-15 (supra), available at pages 61 to 63 of the case law paper book, by returning following findings :-
“6.6 The next objection of the assessee is regarding multiple segments. From segment reporting on page S-1258 of the Annual Report (page 129 of PB-2) , we find that the assessee has reported three business segments. The first segment is service cluster which includes banking, financial services, insurance, media and entertainment, travel and logistics and healthcare. The second segment industry cluster which includes Hi Tech and consumer electronics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB-2), it is reported as under:
"TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs.489.53 crs based on ITA No.4740/Del./2018 fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year."
6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs.205,80,17,445/- ( page 129 of PB-2) , which has not been allocated into three segments, and thus the segmental result are distorted.
6.8 During the year, the extraordinary event of demerger of product engineering service business (PES) has occurred with effect from 01/01/2014, which has also impacted the profit of the company at the entity level. In the decision of the Tribunal in case of Xchanging Technology Service India Private Limited (ITA No.1897/Del./2004), which has been approved the Hon'ble High Court in , the company is held to be not valid comparable on account of extraordinary events. Thus, In view of the extraordinary event in the year under consideration also, this company is liable to be excluded from the set of the comparable.”
In taxpayer’s own case in for AY 19.
2015-16 order dated 29.06.2020, L&T was excluded by the coordinate Bench of the Tribunal by returning following findings :-
Para 20 available at pages 89-90 of the paper book
“20. The Tribunal in assessee's own case in relating to Assessment Year 2014-15 vide order dated 01.05.2020 has directed the exclusion of the said concern from the final list of comparables while benchmarking the ALP of the international transaction by the assessee with its AE. Before parting, we may also refer to an extraordinary event under which Larsen & Toubro Infotech Ltd. initiated and completed transfer of its Product Engineering Services Business (PES) Unit to L&T Technology Services Ltd. w.e.f. January 1, 2014 as part of the business restructuring undertaken within the Larsen & Toubro group. Though the initiation started from 01.01.2014 but the whole effect of the transaction was during the year under consideration. Further, Larsen & Toubro Infotech Ltd. during the year under consideration acquired Information Systems Resource Centre Private limited ("ISRC") thereby making it wholly owned subsidiary and because of such extraordinary event of acquisition, the said concern cannot be held to be a valid comparable and thus has to be excluded from the final set of comparable. Accordingly, we hold so.”
In view of the facts inter alia that L&T is into various segments having no segmental financials, having huge brand value and intangibles is not a suitable comparable vis-à-vis taxpayer which was working as a captive entity and that contention raised by the ld. DR that under TNMM minor dissimilarities do not affect the overall comparability is not sustainable because though it is a taxpayer’s own comparable but there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture qua profit earned by the company from provisions of SDS. L&T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the higher profitability. So, we are of the considered view that L&T is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded.
TATA ELEXI LTD. (TATA ELEXI) 21. The taxpayer sought exclusion of Tata Elexi from the final set of comparable on the grounds inter alia that it is functionally dissimilar; that it has generated intangibles in the form of technical know-how for rendering services to its customers; that this comparable has already been held to be not suitable vis-à-vis
AY 2007-08 in ITA taxpayer in its own case for No.5809/Del/2011 vide order dated 22.01.2015 by the Tribunal in the identical facts and circumstances of the case. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable.
We have perused the financials of Tata Elxsi, available at pages 596 & 597 highlighting its profile and page 643 highlighting its ownership of intangibles. Business analysis highlighted in the financials of Tata Elexi goes to prove that Tata Elexi is into system integration & support and software development services. Software development services segment further constitutes three major sub-segments viz. embedded product design, industrial design and visual computing labs whereas taxpayer is a routine software development services provider working on cost plus mark-up model.
Furthermore, when we examine Note 9 - Fixed Assets forming part of the financial statement, available at page 643 of the annual reports paper book, it shows that Tata Elexi is having intangibles in the form of internally generated technical know-how and acquired intangibles computer software which certainly gives edge to Tata Elexi over other players operating in software development services provisions.
Moreover, when undisputedly taxpayer has not undergone any change in its business model vis-à-vis AYs, 2007-08, 2014-15 & 2015-16 in 4740/Del/2018 & 8726/Del/2019 respectively, Tata Elexi was held to be non- comparable by the Tribunal.
In view of the matter, we are of the considered view that on account of functional dissimilarity and having ownership of internally generated intangibles in the form of technical know-how for rendering services to its customers make Tata Elexi not a suitable comparable vis-à-vis the taxpayer who is a routine software development service provider working on cost plus markup model having no intangibles of its own, hence we direct to exclude Tata Elexi from the final set of comparables.
CYBERCOM DATAMATICS INFORMATION SOLUTIONS TLD. (CYBERCOM DATAMATICS 26. The taxpayer sought exclusion of Cybercom Datamatics from the final set of comparables vis-à-vis taxpayer on grounds inter alia that it is functionally dissimilar and led us to its financials, available at page 836 of the annual reports paper book and pages 88 to 90 of the appeal memo highlighting specialization of Cybercom Datamatics; that it has been excluded as a comparable by the Tribunal in taxpayer’s own case for AY 2015- 16 in following the order passed by the Pune Bench of the Tribunal in case of Pubmatic India (P) Ltd. in ITA No.655/Pun/2017 vide order dated 09.03.2018.
However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable.
We have perused the profile of Cybercom Datamatics in the Notes forming part of the financial statement for the year ending March 31, 2016 which shows that the company was originally incorporated as Innovative Internet Trading Private Limited on January 5, 2000 and thereafter pursuant to the joint venture agreement between Cybercom Group AB and Datamatics Global Services Ltd. w.e.f. June 1, 2006, it started working as consultants and advisors on information/internet system and surveyors of information services and to carry on the business of development, testing, implementation, migration of home grown and other applications, marketing and manufacturing of information technology products and services, software and hardware systems to enterprise and embedded technologies in the telecom and other industries.
The taxpayer also traced from the website of Cybercom Datamatics that it specializes in various fields such as, digitalization, secure connectivity, internet of things and cloud services. It also follows a full life cycle approach which consists of various steps like advisory, innovation, creation, management, testing etc..
Moreover, suitability of Cybercom Datamatics has already been examined by the Tribunal in AY 2015-16 (supra) and since then its business model has not undergone any change vis-à-vis year under consideration.
Aforesaid profile of Cybercom Datamatics leads to the conclusion that it is into diversified services and is also a product company providing software development to its associated enterprises and also selling developed software product whereas the taxpayer is a routine software development services provider working on a cost plus mark-up model and as such its margin cannot be compared with Cybercom Datamatics, hence Cybercom Datamatics is ordered to be deleted as a comparable.
CIGNITI TECHNOLOGIES LTD. (CIGNITI) 31. The taxpayer sought exclusion of Cigniti on the grounds inter alia that it is functionally dissimilar; that it is owner of Cigniti generated intangibles and relied upon the decisions of M/s. FIS Solutions (India) Pvt. Ltd. vs. DCIT in M/s. Microsoft Research Lab India Pvt. Ltd. vs. DCIT in ITA No.3131/Bang/2018, US Technology International Pvt. Ltd. vs. ACIT in ITA No.592/Coch/2018, M/s. Mercedes-Benz Research & Development India Pvt. Ltd. vs. DCIT in ITA No.1645/Bang/2016 & M/s. Advice America Software vs. ITO in ITA No.2531/Bang./2017. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld.
DRP to retain this comparable.
We have perused the profile of Cigniti and its financials, available at page 206 of annual reports paper book, claiming Cigniti as a market leader and expert in software testing. Cigniti has also evolved from testing traditional software to testing of cloud computing, big data analytics and mobile having world class testing infrastructure which is catering to diversified clientele across the world.
Perusal of financials of Cigniti, available at pages 227 of annual reports paper book, under the head ‘Cigniti Transformation Framework’ shows that it has designed and development its own gamut of IPs to deliver high maturity outcomes across engagements, namely, THRIVE, ADePT, CLASS & VERIFY. So the significant self generated intangible give edge to Cigniti over other players who are into providing routine software development services, hence its margin cannot be compared with the taxpayer.
Cigniti has been excluded in a number of cases by the coordinate Bench of the Tribunal vis-à-vis the routine software development service provider on account of functional dissimilarity as it provides specialized services in the field of software testing, as mentioned in the preceding paras, hence we find Cigniti not a suitable comparable vis-à-vis the taxpayer.
Accordingly, it is ordered to be excluded.
KELTON TECH SOLUTIONS LTD. (KELTON) 35. The taxpayer sought exclusion of Kelton on the grounds inter alia that it is functionally dissimilar; that it is into development of various products and mobile apps; that it has no segmental financials; that it is having different financial years; that it has ownership of intangibles; and that it has undergone extra ordinary events. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable.
We have perused the profile of Kelton, available at page 300 of the annual reports paper book, which shows that Kelton is into providing diversified nature of services such as Internet of things, Social, Mobile, Analytics and Cloud (collectively referred as ‘ISMAC’ along with ERP) through research & development efforts and acquisition of complimentary competencies.
Perusal of its financials, available at pages 295, 297 & 300 of annual reports paper book, shows that it had evolved various products and mobile apps such as ‘KL Game’ and ‘mSehat’. But, at the same time, when we examine its profit & loss account, available at page 391 of the annual reports paper book, it has no segmental financials qua its diversified services being provided under head digital transformation, enterprise solution and consulting. In these circumstances, the revenue earned from software services which is considered as comparable vis-à-vis the taxpayer, cannot have tangible results being income earned from each services segment not available in its financials.
Perusal of Note 13 – Fixed Assets, available at page 398.1 of the annual reports paper book, shows that Kelton is having goodwill amounting to Rs.973,687,128 along with software of Rs.29,742,247.
So we are of the considered view that as discussed in the preceding paras, Kelton is not a suitable comparable vis-à-vis the taxpayer being into diversified nature of services having no financial segmental to arrive at the proper margin, also being into development of various products and mobile apps and having own intangibles and softwares giving it edge over other players in the field as against the taxpayer who is a routine software development services provider working on cost plus mark-up, hence ordered to be excluded.
THIRDWARE SOLUTION LTD. (THIRDWARE)
The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis-à-vis the taxpayer. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable.
Perusal of Notes – Additional Information and Profit & Loss account, available at page 570 of the annual reports paper book, shows that it has income earned from sale of licence and provision of training services also under the head ‘software services from local unit’, ‘export of software services’, ‘revenue from subscription & training’ and ‘sale of licence’ to the tune of Rs.2809.62 lakhs, Rs.19285.11 lakhs, Rs.32.59 lakhs & Rs.8.77 lakhs respectively. The taxpayer has also brought on record website of the company, available at paves 71 to 73 of the appeal memo, which shows that Thirdware is having competency in providing services in most advanced and niche area of technologies such as Robotic Process Automation, Big Data Analytics& Cloud Computing.
From the profile of Thirdware it has come on record that Thirdware is functionally dissimilar vis-à-vis the taxpayer as it has been deriving income from sale of licence and software services export from SEZ unit and revenue from subscription and training etc. and it is also into sale of licence and its segmental financials are not available.
Thirdware has been ordered to be excluded by the coordinate Bench of the Tribunal in case of Fiserve India Pvt. Ltd. vs. ITO in on ground of dissimilarity to routine software development service provider which has been affirmed by Hon’ble Delhi High Court in ITA 17/2016 order dated 06.01.2016. So, we order to exclude Thirdware from the final set of comparables.
INFOBEANS TECHNOLOGIES LTD. (INFOBEANS)
The taxpayer sought exclusion of Infobeans as a comparable again on ground of functional dissimilarity, it also being into providing services viz. software engineering services primarily in Custom Application Development (CAD), Content Management Systems, Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book.
The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e. services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis-à-vis the taxpayer which is a routine software development services provider. Infobeans has been excluded as a comparable on account of functional dissimilarity vis-à-vis routine software development service provider by the coordinate Bench of the Tribunal in case of PubMatic India (P) Ltd. vs. ACIT in ITA No.655/Pun/2017. So, in view of the matter, we order to exclude Infobeans from the final set of comparables.
INTEQ SOFTWARE LTD. (INTEQ)
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 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.
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-à-vis the taxpayer which is a routine software development service provider working on cost-plus mark up model, hence ordered to be excluded from the final set of comparables.
INCLUSION OF E-ZEST SOLUTIONS LTD. & EVOKE TECHNOLOGIES LTD.
However, ld. AR for the taxpayer has not pressed the inclusion of E-Zest Solutions Ltd. and Evoke Technologies Ltd., hence the contention of the ld. AR for inclusion of these comparables is hereby rejected.
GROUNDS NO.2 TO 2.8 49. Ld. TPO noticed from the perusal of invoice qua rendering services to the Associated Enterprises (AE) that remittance were received by the taxpayer after a considerable delay. Ld. TPO also noticed delay in receipt of the receivables qua transactions undertaken with unrelated parties during the year under consideration.
Declining the contentions raised by the taxpayer, ld. TPO recharacterized the delay in receipt of receivables as unsecured loans advanced to the AE and attributed a notional interest @ 4.485% being Libor + 400 BPS on the period of delay exceeding 30 days and thereby proposed the adjustment of Rs.5,30,71,340/- on account of outstanding receivables.
At the very outset, ld. AR for the taxpayer contended that this issue is already covered in favour of the taxpayer by the coordinate Bench of the Tribunal in its own case for Assessment Year 2010-11 in order dated 12.12.2017, available at pages 97 to 115 of the case laws paper book, which is on identical facts and operative part thereof is extracted for ready perusal as under :-
“14. Provisions contained under Explanation (i), (a) & (c) of section 92B have been analyzed by Hon’ble Delhi High Court in case cited as Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. in ITA 765/2016 order dated 25.04.2017, wherein it is held that the expression added in Explanation to section 92B does not mean that de hors the context, every item of receivables appearing in the accounts of an entity, which may have dealing with foreign AE, would automatically be characterized as an international transaction and decided the issue in favour of the taxpayer by returning following findings :- “10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression ‘receivables’ does not mean that de hors the context every item of ‘receivables’ appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.
The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables
beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi).
Consequently, the Court is unable to find any error in the impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed.”
So, in view of the law laid down by Hon’ble High Court in Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. (supra), we are of the considered view that no adjustment can be made on account of notional interest on receivables by relying upon Explanation (i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company, there is no question of charging any interest or receivables. This issue has also been decided by Hon’ble Delhi High Court in case of Pr. CIT-1 vs. M/s. Bechtel India Pvt. Ltd. in ITA 379/2016 order dated 21.07.2016.
Furthermore when we examine the entity level margin of the taxpayer vis-à-vis comparable companies, the taxpayer has earned higher margin i.e. taxpayer earned 38.39% OP/OC margin vis-à-vis margin of comparable companies at 11.43%. In such circumstances, no separate adjustment on account of interest can be made. Because the credit period extended to AE cannot be considered as a standalone transaction without considering the main transaction of the sale.
Furthermore when the taxpayer is undisputedly a debt free company, as it is not the case of the ld. TPO that borrowed funds have been appropriated enabling the AE to make the delayed payment on receivables. So when outstanding receivables is not a separate international transaction, the delay in realization of the sale proceeds is incidental to the transaction of sale and as such no notional interest can be levied by treating the same as unsecured loan.
Furthermore it is the case of the taxpayer that when the taxpayer is not charging interest from unrelated third party / non-AE, in case of such delay, no adjustment on interest in case of AE can be made and drew our attention towards the details of invoices raised qua unrelated parties available at page 183A of the paper book wherein delay in realization of the receivables is also up to 218 days for AY 2010-11 and up to 417 days qua AY 2012-13 as per detail of invoices raised on unrelated parties qua AY 2012-13, available at page 236 of the paper book.”
Moreover, the interest can be charged only on loan and borrowing of money and not in case of sale, particularly when there is no penal provision in the agreement entered into between the taxpayer and its AE/non-AE to charge the interest on delayed receivables. Even otherwise, a transaction cannot be recharacterized merely on ground of delay in payment of receivables.
Following the order passed by the coordinate Bench of the Tribunal in taxpayer’s own case (supra), we are of the considered view that since the taxpayer has not incurred any interest cost nor has availed of any loan from AE or unrelated third parties, as is evident from audited financials at pages57 & 66 of the paper book, proposed adjustment on account of delay in receipt of receivables by the TPO/DRP is not sustainable, hence ordered to be deleted. Consequently, grounds no.2 to 2.8 are determined in favour of the taxpayer.
GROUND NO.3
The taxpayer challenged the action of the AO in not granting credit of Tax Deducted at source (TDS) to the tune of Rs.7,21,038/- in respect of amalgamating companies viz. IP Unity Communications Ltd. and GL Software Ltd. When TDS has been deducted AO has no option but to grant the credit thereof to the taxpayer. So, we direct the AO to give credit of TDS deducted in respect of amalgamating companies, namely, IP Unity Communications Ltd. and GL Software Ltd. after due verification.
Consequently, ground no.3 is determined in favour of the taxpayer in accordance with law. 55. Resultantly, the appeal filed by the taxpayer is partly allowed. Order pronounced in open court on this 12th day of November, 2021.