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

Per Padmavathy S., Accountant Member This appeal by the assessee is against the order of the National e- assessment Centre, Delhi passed u/s. 143(3) r.w.s. 144C(13) r.w.s. 143(3A) & 143(3B) of the Income-tax Act, 1961 [the Act] for the assessment year 2016-17.

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• Turnover Filter - Ground No. 2.5 • Exclusion of Companies - Ground No. 2.8 • Inclusion of Companies - Ground No. 2.9 & 2.10 • Working Capital Adjustment - Ground No. 2.13 • Interest on Receivables - Ground No. 3.1 to 3.7 • Disallowance of Depreciation on Goodwill - Ground No. 4.1 to 4.8

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TP adjustment in SWD segment

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Technology India P. Ltd. in IT(TP)A No.291/Bang/2021 dated 21.72.2022 following the decision of BORQS Software Solutions P. Ltd. (supra) has held as follows:- “13. We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. v. ITO (supra) has considered a host of rulings on this issue including that of Hon’ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that the application of the turnover filter is justified on the basis of the classification of companies as per the report of Dun and Bradstreet. Since the assessee, in the present case, has disclosed an operating income of RS.39,91,36,436, companies reporting turnover above a threshold are considered not comparable. Accordingly, by following the order of the Tribunal, we direct the AO / TPO to apply the appropriate upper turnover filter and exclude the following 7 companies having turnover in excess of Rs.200 crores:- (i) Larsen and Toubro Infotech Limited (ii) Nihilent Technologies Limited (iii) Persistent Systems Limited (iv) Thirdware Solutions Limited (v) Infosys Limited (vi) Aspire Systems (India) Private Limited (vii) Cybage Software Private Limited Therefore, grounds 5.2(f) and 5.4(a) is partly allowed as indicated above. ” Respectfully following the decision of the Hon’ble Tribunal we hold that the above 7 companies be excluded.

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“26. The next argument is that by applying RPT filter this company cannot be regarded as comparable for FY 2013-14 and therefore while working the margin of this company the margin for FY 2013-14 should not be considered. We have already upheld similar argument while deciding on the exclusion of margins of R.S.Software on the ground of application of turnover filter for FY 2013-14 and 2014-15. Those reasons given will equally apply to this comparable company also and accordingly, we direct that the margins of this company for FY 2013-14 should not be taken for working out the average profit margins of this company which is to be included in the dataset.” 14. Following the above decision of the Tribunal, we hold that the margin of Inteq Software Ltd. for AY 2014-15 should not be considered and therefore direct to exclude this company from the comparables. 15. The next issue raised is with regard to exclusion of Infobeans Technologies Ltd. on the basis that it is functionally not comparable for AY 2015-16 and therefore the margin of that year should be exclude while computing the average margin of that company. The ld. AR placed reliance on the decision of BORQS Software Solutions P. Ltd. (supra) wherein it was held that – “28. The above conclusions of the DRP have not been countered by the Assessee and by merely relying on findings in earlier AY that this company was held to be not a comparable company, the Assessee cannot seek exclusion of this company from the list of comparable companies. The only direction that the Assessee can get is that the margins for AY 2015-16 in which year this company was regarded as not comparable have to be ignored in arriving at the average of three years profit margin of this company. We direct accordingly.” 16. Respectfully following the above decision of the Tribunal, we direct the AO to exclude the margin for AY 2015-16 of while arriving at the 3 year average profit of Infobeans Technologies Ltd.

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therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact

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science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:

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"(3) An uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.” 20. We therefore direct the AO/TPO to consider the working capital adjustment in the light of the aforesaid ruling and allow appropriate adjustment in arriving at an arm’s length price.

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embedded in the remuneration received from the AEs. The ld. AR has also state that outstanding receivables from AEs cannot be characterized as loan advanced as receivables arising from international transactions closely linked to the main transaction and should be benchmarked using a combined transaction approach. Without prejudice to the above, the ld. AR submitted that if interest on receivables is treated as a separate international transaction, the TPO has did not conduct any separate benchmarking analysis and not considered the principle that if working capital adjustment is done and also if the company is debt free, no separate adjustment is required for interest on receivables. He brought to our attention the fact that in the case of the assessee the payable amount outstanding to AE is more than the receivable and this fact has not been considered by the TPO while computing the interest adjustment. He therefore submitted that no adjustment towards interest on receivables is warranted. Reliance was placed on the decision of the Delhi Bench of the Tribunal in Bechtel India P. Ltd. in ITA No.1478/Del/2015 which was confirmed by the Delhi High Court and the SLP before the Supreme Court was dismissed. Therefore, the principle laid down by the Delhi Tribunal with regard to interest on receivables has reached finality.

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“41. We have carefully considered the rival submissions. On the question whether delayed realization of trade receivables from the AE constitutes an international transaction or not, there are conflicting decisions of various benches of the Tribunal, which we shall point out. section 92B of the Act defining what is an international transaction was amended by Finance Act, 2012, way of insertion of an Explanation to section 92B with retrospective effect from 1-4-2002 and the same reads thus:- "Explanation- For the removed of doubts, it is hereby clarified then-(i) the expression "international transaction" shall include— (a) to (b). ** ** ** (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 of receivable or any other debt arising during the course of business: …………" The amendment is to the effect that "international transaction" would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business' and hence non-charging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. It was so held by the ITAT Delhi Bench in the case of Bechtel India (P.) Ltd v. Asstt. CIT [2017] 85 taxmann.com 121. It is important to note that the Bench while arriving at the said conclusion distinguished its earlier order in the case of Kusum Healthcare (P.) Ltd. (supra) and rejected the contention that interest gets subsumed in the working capital adjustment. The Hon'ble Bombay High court in the case of CIT v. Patni Computer Systems Ltd,[2013] 33 taxmann.com 3/215 Taxman 108 dealt, inter alia, with the following 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

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Income-tax Act, 1961 refers to any Other transaction having a bearing on the profits, income, losses or assets of such enterprises?" While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1-4-2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. In the case of BT e - Serv (India) (P.) Ltd. v. ITO [2017] 87 taxmann.com 251 (Delhi - Trib) the ITAT Delhi Bench held that undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 1-4-2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an "international transaction". The natural corollary would be of imputing interest on such "capital financing" if same is not charged at arm's length. The ITAT concluded that if outstanding receivables are within the terms of agreement, then it may be argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement does not specify the term of the payment, even then assessee must be given benefit of credit period which is accepted business practice in the trade. The ITAT confirmed 30 days as the normal credit period adopted by the TPO. 42. The foregoing discussion discloses that non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. 43. Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising during the course

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of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench in the case of Techbooks International (P.) Ltd. v. Dy. CIT , [2015] 63 taxmann.com 114, wherein the Tribunal laid down guidelines on the manner of determination of ALP, as follows: "13.11 Now, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. 13.12 In so far as the first aspect is concerned, we find that the TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing adjustment for the period in excess of 60 days. In our considered opinion, transfer pricing adjustment on account of interest for the entire period of delay beyond 60 days cannot be treated as a separate international transaction of trading debt arising during the course of business. It is noticed that the assessee entered into an agreement with its AE for realization of invoices within a period of 150 days. This implies that the interest amount on non-realization of invoices up to 150 days was factored in the price charged for the services rendered. Annexure-1 to the TPO's order gives details of the instances of late realization or non-realization of advances up to the year ending. First three and a half pages of this Annexure indicate number of days for which there was delayed realization. Such delay ranges from 175 days to 217 days. The remaining pages disclose no realization of invoices up to 31st March, 2010. When we consider the dates of invoices in the remaining pages, it is manifested that in certain cases these invoices have been raised on 31st August, 30th or September or 31st October, 2009. In all such cases, the period of 150 days already stood expired as on 31st March, 2010 and the assessee ought to have charged interest on the delay in realizing such invoices along with the first three and a half pages in which there is an absolute and identified delay in realization of invoices beyond the stipulated period. When the interest for realization of trade advances up to 150 days is part and

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parcel of the price charged from the AE, then the delay up to this extent cannot give rise to a separate international transaction of interest uncharged. Rather interest for the period in excess of normally realizable period in an uncontrolled situation upto 150 days needs to be considered in the determining the ALP of the international transaction of the 'Provision of IT Enabled data conversion services'. This can be done by increasing the revenue charged by the comparable companies with the amount of interest for the period between that allowed by them in realization of invoices and 150 days as allowed by the assessee, so as to bring such comparables at par with the assessee's international transaction of provision of the ITES. To illustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B stipulates that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged, inter alia, with reference to the : '(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions …' . Then sub-rule (3) mandates that an uncontrolled transaction shall be comparable to an international transaction if 'reasonably accurate adjustments can be made to eliminate the material effects of such differences'. Applying the prescription of rule 10, it becomes vivid that difference on account of the 'contractual terms of the transactions', which also include the credit period allowed, needs to be adjusted in the profit of comparables. As the TPO has taken the entire delay beyond that normally allowed as a separate international transaction, which position is not correct, we hold that the effect of delay on interest up to 150 days over and above the normal period of realization in an uncontrolled situation, should be considered in the determination of the ALP of the international transaction of 'Provision of IT Enabled data conversion services' and the period of delay above 150 days, namely, 30 days in our above illustration (180 days minus 150 days) should be considered as a separate international transaction in terms of clause (c) of Explanation to section 92B.

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13.13 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 jurisdictional 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. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of addition on account of transfer pricing adjustment towards interest not realized from its AE on the debts arising during the course of business in line with our above observations." 44. We are of the view that the issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down in the decision referred to in the earlier paragraph, after affording Assessee opportunity of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. We hold and direct accordingly. All issues on determination of ALP of the transaction are kept open.” 24. Respectfully following the decision of the coordinate Bench of the Tribunal in the case of Barracuda Networks (I) P. Ltd. (supra), we hold that interest on receivables is a separate international transaction and separate benchmarking is required to be done. We therefore remit the issue to the TPO for fresh examination and take into consideration the guidelines laid down in the aforesaid decision of the Tribunal. The TPO is also directed to verify and consider the fact that the payables from AE is more than the receivable from AE as submitted by the assessee. Needless to say that the assessee be given opportunity of being heard. It is ordered accordingly.

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Disallowance of Depreciation on Goodwill — Ground Nos. 4.1 to 4.8 — INR 4,56,52,308/-

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decision of Hon'ble Delhi Tribunal in the case of Aricent Technologies (Holdings) Ltd. (supra) as under : "60. The DR further emphasized that if the 6th proviso to section 32 (i) is considered the depreciation under this provision is to be restricted to the amount considering that amalgamation has not taken place and since in the hands of the amalgamating companies the depreciation on goodwill would have been zero there cannot be deprecation in the hand of the amalgamated company. In support reliance was placed on the decision of the coordinate bench of the Tribunal Bangalore in ITA No. 722, 801 and 1065/Bang/2014. Once again the DR is not appreciating the facts of the case in hand in their true perspective. It has to be understood that there was no goodwill in the books of amalgamating companies and only after the scheme of amalgamation, when the amalgamating companies amalgamated, goodwill came into existence being the difference between the consideration paid by amalgamated company over and above the net asset value of the amalgamating companies. The reliance placed on the judgment of coordinate bench is misplaced in as much as in that case the value of the goodwill in the books of amalgamating company was only Rs. 7.45 crores which has been shown by the assessee at Rs. 62.30 crores and on this it was held by the appellate authority that the assessee has failed to justify the valuation of goodwill at Rs. 62.30 crores. The facts of the case in hand clearly show the valuation of goodwill as per the valuation report and there is no quarrel in so far as the net asset value of the amalgamating companies is concerned. The same has the sanction of the Hon'ble High Court. 61. Another argument of the DR is that the assessee has not paid anything for the goodwill acquired in business reconstruction. No consideration can be ascribed to acquisition of goodwill. There was no goodwill before amalgamation. Hence, it is not a case that goodwill has been bought or purchased and therefore, the cost of acquisition of such goodwill in the hands of the assessee should be taken as nil. Once again the DR has erred in not understanding the scheme of amalgamation. In the order of the Hon'ble High Court itself it is clearly mentioned

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that anything paid over and above the net asset value of the amalgamating companies shall be towards goodwill. 62. The DR further referred to the decision relied upon by the counsel in the case of Smifs Securities 348 ITR 302 and stated that the Hon'ble Supreme Court has only laid down the ratio that goodwill is an intangible asset and eligible for deprecation but has nowhere the Hon'ble Supreme Court has given any finding in respect of deprecation on goodwill in the case of amalgamation. We do not find any merit in this contention of the DR. A conspectus reading of the Judgment of the Hon'ble Supreme Court clearly show that the Hon'ble Supreme Court was seized with the facts of amalgamation of one company with the assessee company and has held that the excess consideration paid by it over value of net asset acquired of the amalgamating company amounted to goodwill for which the depreciation was to be allowed. The Hon'ble High Court of Delhi in the case of Hindustan Coca Cola Beverages Private Limited 331 ITR 192 has upheld the findings of the Tribunal that payments made towards business acquired on slum price and a part of the price so paid was allocated to the intangible asset covered under the head goodwill." 10. Hon'ble Supreme Court in the case of Smifs Securities Ltd. (supra) while considering an identical issue, held that goodwill arising on amalgamation to be a capital asset eligible for depreciation. The facts in the case of Smifs Securities Ltd. (supra) were similar to that of the present assessee. The consideration paid by the amalgamated company over and above the net assets of the amalgamating company should be considered as goodwill arising on amalgamation. 11. Based on the above, we are of the opinion that the depreciation claimed by the assessee on goodwill acquired deserves to be allowed in accordance with law. Ld.AO is directed to compute depreciation in accordance with the principles laid down in case of Smifs Securities Ltd. (supra).” 29. Respectfully following the decision of the coordinate Bench of the Tribunal in assessee’s own case (supra), we hold that depreciation on

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goodwill deserves to be allowed. We direct the AO to recompute the depreciation with similar directions as in AY 2015-16.

Pronounced in the open court on this 27th day of July, 2022..

Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore, Dated, the 27th July, 2022.

/Desai S Murthy /

Copy to:

By order

Assistant Registrar ITAT, Bangalore.