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Facts
Atmecs Technologies Pvt. Ltd., engaged in software development services, filed its return of income at Rs. 5,00,90,640/-. The assessment order, passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B, included significant transfer pricing adjustments for software development and imputed interest on delayed receivables, leading to an assessed income of Rs. 13,85,41,440/-. The assessee appealed these adjustments, primarily challenging the comparability analysis and the imputation of interest.
Held
The Tribunal held that an upper turnover filter of Rs. 200 crores should be applied for selecting comparable companies in the software development segment, leading to the exclusion of 9 specific companies. It also directed the exclusion of 'Conciliant Technologies Private Limited' if it failed the 75% export turnover filter. Regarding the imputed interest on overdue trade receivables from associated enterprises, the Tribunal found that the due dates for several invoices fell into the subsequent financial year and thus directed the deletion of the interest adjustment of Rs. 693,923/-.
Key Issues
1. Whether an upper turnover filter should be applied for selecting comparable companies in transfer pricing analysis for software development services. 2. Whether specific companies are functionally dissimilar or fail export turnover filters, warranting their exclusion from the comparable set. 3. Whether interest on overdue trade receivables from associated enterprises was correctly imputed, considering the actual due dates for payment.
Sections Cited
143(3), 144C(13), 144B, 144C, 92CA, 92CA(3)
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Income Tax Appellate Tribunal, “C” BENCH: BANGALORE
Before: SHRI PRASHANT MAHARISHI & SHRI PRAKASH CHAND YADAV
Per Prashant Maharishi, Vice President
This appeal is filed by Atmecs Technologies Pvt. Ltd. (the assessee/appellant) for assessment year 2020-21 against the assessment order passed by the Assessment Unit [ld. AO] u/s. 143(3) r.ws. 144C(13) r.w.s. 144B of The Income-tax Act, 1961 [The Act] dated 23.7.2024, in pursuance of the direction of the IT(TP)A No.1681/Bang/2024 Page 2 of 17
Dispute Resolution Panel-1, Bangalore [ld. DRP] dated 04.6.2024 in draft assessment order passed u/s. 144C(13) r.ws. 144C of the Act dated 22.9.2023, wherein the TP adjustment of software segment and interest on delayed receivable of Rs. 9,11,44,667/- and Rs. 6,93,92,250/- respectively made by the Assistant Commissioner of Income Tax (Transfer pricing) (1)(1)(1), Bangalore [ the ld. TPO] u/s. 92CA (3) of the Act dated 8.2.2023 was reduced to software development adjustment of Rs. 5,77,56,579 and interest on delayed receivable of Rs. 6,93,925 respectively was retained as revised TP adjustment totaling to Rs.8,84,50,801/-, resulting into returned income of Rs. 5,00,90,640/- against assessed income of Rs.13,85,41,441/-.
Assessee is aggrieved and has raised the following grounds of appeal: -
1. The Learned (Ld) Assessing Officer (AO)/Ld Dispute Resolution Panel (DR P) are erroneous in law and on the facts of the case.
2. The Ld. DRP/AO have erred in rejecting the transfer pricing study of the Company and Further erred in conducting a separate benchmarking exercise without appreciating the facts and circumstances of the Assesses company.
3. The Ld. DRP/AO are not legally justified in rejecting the transfer pricing study of the assessee company and the reasons recorded for rejection arc factually incorrect.
4. The Ld. DRP/AO are not justified in law in considering wrong comparables and consequently arriving
IT(TP)A No.1681/Bang/2024 Page 3 of 17 at a high operating profit margin of 23.9% as a ratio of OP/OC.
5. The Ld. DRP/AO are not justified in law in making an adjustment u/s 92CA of Rs 8,77,56,879/- to the price received by the appellant.
6. The Ld. TPO, while including the Companies as comparables has erred in applying the appropriate filters.
7. Without prejudice to the above grounds, the Ld DRP/AO erred in selecting the below mentioned companies as comparables which are in real inappropriate on the basis of functional dissimilarity, super profit, high turnover or other similar inappropriate filter etc. S.No. Name of the Company 1. Mindtree Ltd.
4. Larsen & Toubro Infotech Ltd.
8. The ld. DRP/AO erred in rejecting the following companies for inclusion by failing to appreciate the fact that the following companies are engaged in Software Development Services (SDS) and are functionally similar: S.No. Name of the Company 1. Ace Software Exports Ltd. 2. CGI Information System and Management Consultants Pvt. Ltd. 3. Aptus Software Pvt. Ltd.
9. The 1d. DRP/AO ought to have appreciated that the receivables arise in the normal course or business and are not to be treated as loans for levy of interest.
IT(TP)A No.1681/Bang/2024 Page 4 of 17
10. The 1.d. DRP/A0 ought to have appreciated that the Assessee did not charge any interest on receivables from its non-AEs and that not charging any interest to its AEs is consistent with the arm's length principle while applying the CUP method for determining the ALP.
11. The Ld. DRP/AO has erred in applying the rate of interest on Prime Lending Rate of SBI (prevailing in F.Y. 2019-20) on the trade receivables from its associated enterprises by equating it incorrectly with Domestic Rank Loans and proposing an adjustment of Rs.6,93,923/- as interest on trade receivables. 13. Any other ground that may be urged at the time of hearing with the prior approval of the Hon’ble Tribunal.”
Facts of the case show that assessee is engaged in providing information technology, consultation services & software development and distinct services. It is outsource resource provider helping businesses to accurately and technically develop business and team composition, while supporting them through variety of team project models ranging from contract staffing to project based staffing.
Assessee company filed its return of income on 5.2.2021 at a total income of Rs. 5,00,90,640/-. Return of income was selected for scrutiny where one of the reason was large value of international transaction in services based on TP risk parameter.
Assessee has entered several international transactions including provision of software development services amounting to Rs. 95,57,55,355/-. The assessee has computed its margin of IT(TP)A No.1681/Bang/2024 Page 5 of 17
Operating Profit / Operating Cost [OP/OC] at 13.54% which was recomputed by the ld. TPO at 14.53%. For benchmarking of the international transactions, assessee adopted Transactional Net Margin Method [TNMM] as the most appropriate method [MAM] selecting the assessee as tested party adopting Profit Level Indicator [PLI] of OP/OC, selecting One comparable company where the margin of the comparable was stated to be at arm’s length, as the margin of the assessee was stated to be 13.54% and average margin of comparable company was 9.36%, Per Transfer pricing study report [TPSR] assessee submitted that the international transaction is at arm’s length.
The ld. TPO noticed that assessee has considered the data available of the comparable company upto April, 2020 only. He also examined the various filters adopted by assessee and found them deficient, therefore rejected the TPSR. So, ld. TPO Carried out fresh search by applying new filters including Export Turnover filter of 75 %, selected 17 comparable. The assessee’s objections were sought for. Assessee objected about not applying higher turnover filter and objected the comparable on various other parameters such as functional dissimilarities and other parameters. Ld. TPO rejected the same and thereafter seventeen comparable were retained whose weighted average median margin was 24.3%, whereas the taxpayer’s margin of 13.54% was compared and arm’s length price [ALP] of the international transaction of Rs. 96,16,10,439/- was determined at Rs.
IT(TP)A No.1681/Bang/2024 Page 6 of 17
105,27,55,106/- resulting into a shortfall of Rs. 9,11,44,667/-. So adjustment on account of ALP in software development segment was made of Rs. 9,11,44,667/-.
The ld. TPO also found that there are 5 invoices which are raised on 31.3.2020, out of which 3 invoices have delay beyond the credit period of 60 days and thereafter computed interest @ 13.27% p.a. amounting to Rs.6,93,92,250.
Thus, by the TP order the total adjustment of Rs.16,05,36,917 was made. Draft assessment order was passed on 22.9.2023 determining total income of assessee at Rs.21,06,27,557.
Assessee filed objections before ld. DRP . It objected to LD. TPO not considering the upper turnover filter of Rs 200 Crores and also including certain companies which are functionally dissimilar. The Ld. DRP Passed direction whereby set of comparable remained 16 and shortfall was worked out at Rs. 87756879/- of Software development segment. On the issue of outstanding receivable , arithmetic calculation were corrected and adjustment was confirmed of Rs 693922/-.
On the basis of directions, assessment order was passed determining total income at Rs.13,85,41,440. This assessment order is challenged before us.
The learned authorized representative submitted facts of the case, discussed the international transaction and benchmarking of the IT(TP)A No.1681/Bang/2024 Page 7 of 17
assessee as well as the benchmarking methodology adopted by the learned transfer pricing officer which has resulted into the addition on account of arm's-length price of provision of software development services. He also submitted a written note. He arguing on ground number 4 – 7 of the appeal submitted that the learned transfer pricing officer has erred in not applying an upper turnover filter, thereby including comparable having huge turnover. He submits that the learned TPO has accepted the application of lower turnover filter by rejecting the companies having turnover of less than Rs. 1 crore. However he did not apply any upper turnover filter. He submits that many research studies establishes that there is clearly a difference between the large firms with huge turnover in operating efficiencies compared with small medium-sized entities. He further submitted that in the software industry, the size of a company affects its operations and thereby its profit margin. Therefore he submitted that in addition to setting up a lower turnover filter, there should also be an upper turnover filter on revenues for the better comparability analysis. He further referred to the OECD transfer pricing guidelines 2017, the ICAI transfer pricing guidance note, several judicial precedents as well the decision in assessee's own case for assessment year 2016–17 in IT(TP)A No.187/Bangalore/2021 dated 20/12/2021 wherein the coordinate bench has excluded the companies whose turnover is more than ₹ 200 crores. Therefore, it is submitted that in case of the assessee for comparability
IT(TP)A No.1681/Bang/2024 Page 8 of 17 analysis, upper turnover filter of ₹ 200 crores should have been applied by the lower authorities. It was further submitted that if same is accepted then nine comparable companies selected by the learned transfer pricing officer get excluded from the comparability analysis.
Ld. authorized representative also submitted that 11 comparable companies selected by the learned transfer pricing officer are functionally dissimilar over and above high turnover and are required to be excluded.
The learned authorised representative also objected to the company namely conciliant technologies private limited. It is the claim of the assessee is that this company is functionally not comparable as it is engaged in a different activities but even otherwise it fails the export filter of 75 % applied by the learned transfer pricing officer. It was submitted that the export turnover of this company is nil and therefore it could not have been included in the comparability analysis. He Support its case by submitting information of statement of profit and loss account of that comparable company wherein it is shown that there is no export turnover in the case of the comparable company. Thus , It should be excluded.
As per ground number 09 – 11 the assessee has also challenged the imputation of interest on overdue outstanding receivables from associated enterprises. It was the claim of the assessee that IT(TP)A No.1681/Bang/2024 Page 9 of 17
outstanding receivable arises in the normal course of business and are not to be treated as a separate international transaction treating as a loan for the levy of interest. It was further submitted that the assessee also did not charge any interest on outstanding from its non-associated enterprises and thereby not charging any interest to its associated enterprise is consistent with the arm's-length principle while applying the CUP method for determining the arm's-length price. Even otherwise, it was submitted that the lower authorities are not correct in applying the rate of interest of prime lending rate of state bank of India on the trade receivable from its associated enterprises and thereby making an adjustment of ₹ 693,923/–. Assessee has also objected that it is a closely linked transaction of provision of software development services and therefore it cannot be treated as a separate international transaction and then benchmark for imputing interest thereon.
The learned authorised representative referred to the details of those four invoices which are placed at page number 50 of the order of the learned transfer officer. It was stated that in one case the bill is due for payment on 31st of March 2020 whereas the receipt of sale consideration was received on 8/4/2020. Therefore, no adjustment on that account could have been made in this year. He further referred to another two invoices where due date of receipt of the consideration is 30 May 2020 and 29 April 2020. As the due date of payment itself is falling into next year and no adjustment could have been made in this year.
IT(TP)A No.1681/Bang/2024 Page 10 of 17
The learned CIT DR vehemently supported the orders of the learned lower authorities and submitted that upper turnover filter should not be applied in case of the software development industry because the turnover change in the company does not result in to change in profitability. This facts is established by the ld. TPO by empirical study. Thus it does not require much of the assets for provision of the services. Therefore, upper turnover filter has not been applied correctly.
On the issue of Interest receivable on overdue from AE, it was submitted that it is a separate international transaction to be benchmarked. Ld. DRP has corrected inaccuracy and therefore now there is no infirmity.
We have carefully considered the rival contentions and perused the orders of the learned transfer pricing officer as well as the directions of the learned dispute resolution panel. We find that the assessee has objected before the learned transfer officer for not applying upper turnover filter. As per paragraph number 9.1 of the order of the TPO this objection was raised. The learned TPO held that in software industry, sizes have no influence on the margins earned by the companies. Economies of scale are relevant only in capital intensive companies which have substantial fixed assets in the form of plant and machinery. In the service industry, size does not matter, what matters is the human capital. He further referred to an empirical study conducted by him wherein it is indicated
IT(TP)A No.1681/Bang/2024 Page 11 of 17 that margins do not show a proportionate increase with increase in the turnover. He specifically computed the margins in case of Infosys Ltd, Wipro Ltd and Tata consultancy services Limited taking their turnover details and profitability details from 2002 – 2022 and held that turnover does not have any significance on the profit margins in software industry. He relied upon the decision of the honourable Delhi High Court in case of Chris Capital Investment Advisors Private Limited 376 ITR 183 and held that when the comparable companies which are otherwise functionally comparable cannot be excluded merely on account of high turnover particularly when the assessee has not demonstrated as to how the turnover has materially affected the profitability or comparability. Thus, the learned transfer pricing officer rejected the objection of the assessee on applicability of upper turnover filter. Thus, in comparability analysis, the learned TPO selected the comparable companies who has multi times more turnover than the assessee company. Assessee objected before the learned dispute resolution panel as per objection number five. The learned DRP also rejected the contentions while considering each of the comparable company wherein high turnover of comparable company was demonstrated by the assessee. Thus, the companies which have many folds turnover compared to the assessee were retained in comparability analysis and adjustment was made to the arm's-length price.
IT(TP)A No.1681/Bang/2024 Page 12 of 17
Thus the question is that whether higher turnover companies are comparable with companies having relatively small turnover. It is undisputed that lower turnover filter of Rs 1 Crore is accepted by assessee as well as the learned transfer pricing officer to remove insignificant companies from comparability analysis. Therefore turnover filter should be applied for comparability analysis or not. If higher and lower turnover filter is applied, it truncates large number of comparables, by eliminating comparables which have fairly large turnover compared to the tested entity. Naturally, large turnover companies have economies of scale compared to lower turnover entity.
Para number 3.43 in OECD Guidelines on Transfer Pricing (2022) says that in practice, both quantitative and qualitative criteria are used to include or reject potential comparables. Examples of qualitative criteria are found in product portfolios and business strategies. The most commonly observed quantitative criteria are Size criteria in terms of Sales, Assets or Number of Employees. The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability. Naturally higher turnover multiple times also shows that comparable company has higher market share compared to the tested entity. Naturally, higher market share gives freedom of selling larger volumes even at strained margins. The various studies carried out by NASSCOM and Dun Bradstreet also IT(TP)A No.1681/Bang/2024 Page 13 of 17
supports it. Though such studies have compartmentalised turnover filter of Rs. 1-200 hundred crores. Naturally in transfer pricing analysis lower turnover filter and upper turnover filter cannot be fixed and how to adopt the same depends upon the facts of each case looking at the turnover of the tested entity. In fact, the purpose of applying a filter is to have a manageable level of independent business concern having broadly similar level of turnover, intangibles, employees, and other assets. Guidance note issued by ICAI also advocates the same reasoning for adopting turnover filter.
In fact, the simplest way of explaining what an arm’s-length price is how independent parties price a particular transaction therefore that is how related parties should also price it. To arrive at such an arm's-length price, economies of scale should be similar/ comparable. Therefore, the upper turnover filter is necessarily required to be employed for better determination of arm's-length price. Honourable Bombay High Court in case of Pentair water India private limited and honourable Delhi High Court in Agnity India Private Limited has also accepted the fact that if the turnover of the comparable is multiple times compared to the turnover of the tested entity, such comparable company should be excluded from comparability analysis. Several decisions of the coordinate benches were also pressed before us wherein the upper turnover filter is upheld for comparability analysis. Further the issue before the Honourable Delhi High court in Chrys Capital
IT(TP)A No.1681/Bang/2024 Page 14 of 17
[supra] relied up on by the ld. TPO was with respect to super normal profits and Not applicability of filters of Turnover. In assessee's own case in for assessment year 2016–17 dated 20/12/2021 as per paragraph number 20 the upper turnover filter was accepted of Rs. 200 crores and those comparable which did not qualify, were directed to be excluded. In case before us, out of 17 comparable, 9 comparable i.e., Mindtree Limited, Great Software Laboratory Limited, Larsen & Toubro Infotech Limited, Wipro Limited, Nihilient Limited, Tata Elxis Limited, Infosys Limited, Tata Consultancy Services Limited and Cybage Software Limited does not pass the filter of upper turnover of Rs. 200 crores. Therefore, respectfully following the decision of the coordinate bench in assessee's own case in earlier year, we direct the learned transfer pricing officer to remove all these nine companies from comparability analysis. Though assessee has also argued that most of the above nine companies are also functionally dissimilar, but as those are being excluded based on turnover filter, we do not deal with the issue of functional dissimilarity of those comparable.
Coming to the contest of inclusion of Conciliant technologies Private Limited, we have carefully considered the issue and find that in case of the comparable company total export turnover is Rs. Nil whereas the domestic revenue is ₹ 42,798,682. As the turnover of this company is 100 % domestic turnover, does not IT(TP)A No.1681/Bang/2024 Page 15 of 17
have any export turnover, which is demonstrated by the standalone financial statement of the comparable company. Thius, this comparable could not have been taken into consideration in comparability analysis. This objection was also raised before the learned transfer pricing officer which is recorded at page number 46 of his order. There also it is categorically mentioned that the foreign exchange earnings and outgo activities relating to exports are ‘Not Applicable’ in case of comparable company. Therefore we direct the learned transfer pricing officer to peruse the annual account of comparable company for the year and if there is no export turnover, then it fails 75 % export turnover filter, it should be excluded from the comparability analysis.
No other issues were pressed before us with respect to ALP adjustment on software development segment. Accordingly ground number 4 – 7 of the appeal are partly allowed and Ground no 1 -3 and 8 are dismissed.
Now coming to ground number 9 – 11 of the appeal wherein the objection was with respect to imputing interest on outstanding receivable from associated enterprises made by the learned transfer pricing officer applying the state bank of India prime lending rate at the rate of 13.27% and thereafter making an adjustment of ₹ 693,923/– after correction from the learned dispute resolution panel. The learned transfer officer noted that four invoices where the actual credit period is of 60 days but the IT(TP)A No.1681/Bang/2024 Page 16 of 17
delay in collection of the receivable is beyond that, he imputed the interest wrongly of ₹ 6,93,92,250/–. However when the assessee objected before the learned dispute resolution panel that it is an incorrect figure, the TPO was directed to compute at ₹ 6,93,922/-.
We have carefully considered the rival contention and perused the orders of the learned lower authorities. We find that the learned transfer pricing officer has pointed out that in case of 4 invoices, the amount received by the assessee from associated enterprise is beyond the due date of receipt of sale consideration. On analysis of these 4 invoices we find that in one case the due date of receipt is 31st of March 2020 whereas the consideration is received on 8/4/2020 and therefore even if there is an imputation of interest on outstanding receivable, it does not fall in this financial year. With respect to the other two invoices, the due date of receipt is 29th of April 2020 and 30th of May 2020 respectively. Both these invoices falls due for receipt in the next year. Therefore no adjustment could be made in this financial year. With respect to the fourth invoice, the learned transfer pricing officer noted that the due date of receipt falls in the subsequent year, so no adjustment was made. Therefore on the same logic also he should not have made any adjustment with respect to other three invoices. Accordingly, allowing ground number 09 – 11, the learned AO/ TPO is directed to delete the adjustment of ₹ 693923/- as interest on overdue trade receivable from associated enterprises.
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In the result, the appeal of assessee is partly allowed.
Pronounced in the open court on this 02nd day of June 2025.