GRIPTONITE GAMES INDIA PRIVATE LIMITED ,HYDERABAD vs. DEPUTY COMMISSIONER OF INCOME TAX ,CIRCLE-2(1) , HYDERABAD

The DRP vide its order passed under Section 144(5) of the Act, dated 28.01.2022 though scaled down the TP adjustment of Software Development Services (SDS) to Rs. 1,60,72,299/-, but upheld the TP adjustment to the interest paid on Indian Rupee (INR) denominated External Commercial Borrowings (ECB’s).

Thereafter, the A.O vide his final order of assessment passed under Section 143(3) r.w.s 144C(13) r.w.s 144B of the Act, dated 21/03/2022, determined the income of the assessee company at Rs. 4,18,47,696/-.

We have heard the Learned Authorized Representatives of both parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.

Sri S.P. Chidambaram, Learned Authorized Representative (in short, “Ld. AR”) for the assessee company, at the threshold of hearing of the appeal, submitted that the TPO has wrongly selected certain comparables for benchmarking the Arms Length Price (ALP) for the Software Development Services provided by the assessee company to its Associate Enterprise (AE). Elaborating further on his contention, the Ld. AR submitted that if five (5) of the comparables viz., (i). Infosys Ltd; (ii). Wipro; (iii). Larsen & Turbo Infotech Ltd; (iv). Mindtree Ltd; and (v). Tata Elxsi Ltd, which were incomparable, inter alia, for the very reason that they had substantially high turnover as in comparison to the assessee company were excluded, then, the margin of the assessee company would be at arm’s length.

Apropos the TP adjustment carried out by the TPO/DRP regarding the interest paid by the assessee company on the India Rupee

Per contra, the Learned Departmental Representative (in short “Ld. DR”) supported the order of the A.O/TPO. It was submitted by him that as the AO had applied the appropriate filters and the selected comparables were functionally comparable, therefore, there was no substance in the Ld. AR’s claim for exclusion of the aforesaid five (5) comparables for the solitary reason that they had a higher turnover as in comparison to the assessee company.

We have thoughtfully considered the contentions advanced by the learned Authorized Representatives of both parties in the backdrop of the orders of the lower authorities.

Controversy involved in the present appeal lies in a narrow compass, viz., (i). as to whether or not the TPO/DRP are justified in benchmarking the international transactions of providing of Software Development Services (in short “SDS”) by the assessee company by not applying the turnover filter and including the comparables with exceptionally high turnovers in the final list of comparables; and (ii). as to whether or not the TPO/DRP are justified in rejecting the benchmarking of the interest paid by the assessee on ECB denominated in India Rupees to its AE by applying SBI-PLR, and substituting the

As observed by us herein above, the assessee company is engaged in the business of providing Software Development Services (SDS). It had during the subject year carried out international transactions by providing SDS to its Associated Enterprises (in short “AE”), which was subjected to a TP adjustment of Rs. 1,60,72,299/- by the TPO.

The Ld. AR, at the threshold of hearing of the appeal, had submitted, that the TPO had grossly erred in law and facts of the case in not applying the turnover filter and including companies with substantial turnover which had vitiated the comparability analysis. It was submitted by him that if the aforesaid comparables are excluded, then, the margin of the assessee company will fall within the arm’s length price.

Considering the aforesaid contention of the Ld. AR, we shall first deal with the aforesaid issue i.e., as to whether or not the aforesaid 5 (five) comparables had rightly been included by the TPO for benchmarking the assessee’s international transactions of providing Software Development Services.

Ostensibly, a perusal of the record reveals that the TPO while benchmarking the aforesaid international transaction i.e., SDS had included in the final list of comparables the following 5 (five) entities:

Ostensibly, the financials of the assessee company reveal that its turnover for the subject year was 25.56 crore (approx.). Considering the turnover of the assessee company, we concur with the Ld. AR that the aforementioned five (5) comparable selected by the TPO having exceptionally high turnovers are typically the market leaders possessing significant brand value, economies of scale and access to advanced technology and larger client basis, which, thus, fundamentally differentiates them from a smaller or medium sized company like the assessee company before us. We are of the firm conviction that the TPO/ DRP had erred in not appreciating the significance of the “turnover filter” while identifying the appropriate parties for the SDS segment of the assessee company. Also, we find substance in the Ld. AR’s claim that the aforesaid comparables viz., (i). Infosys Ltd; (ii). Wipro; (iii). Larsen & Turbo Infotech Ltd; (iv). Mindtree Ltd; and (v). Tata Elxsi Ltd., having substantial turnovers, are the leaders of the industry, which are often engaged in high-end development, consulting, and diverse service offerings, unlike a SDS provider like the assessee company before us. Considering the aforesaid facts, we find substance in the Ld. AR’s claim

At this stage, we may herein above observe that the Courts/ Tribunals have consistently emphasized the relevance and the applicability of the “turnover filter”, specifically in a case where there is a substantial difference in the turnover of the assessee and the selected comparables, indicating a difference in their functional risk profiles. Our aforesaid view is supported by the judgment of the Hon’ble High Court of Bombay in the case of CIT vs. Pentair Water India (P) Ltd [2016] 381 ITR 216 (Bombay). The High Court had while confirming the view taken by the Tribunal, inter alia, held that as the comparables selected by the Department were no doubt large and distinct companies, therefore, the profit earned therefrom cannot be benchmarked or equated with that of the assessee company. In the case before them, the Tribunal had observed that the inclusion of certain comparables having substantial turnover by the TPO, viz., (i) HCL Comnet Systems & Services Ltd (turnover of Rs. 260.18 crores); (ii) Infosys BPO Ltd (turnover of Rs. 649.56 crores); and (iii) Wipro Ltd (turnover Rs. 939.78 crores) could not have been compared with the assessee company which had a turnover of around Rs. 11 crores. Also, we find that a similar view had been taken by the Hon’ble High Court of Punjab & Haryana in the 12 Griptonite Games India Pvt Ltd vs. DCIT Principal Commissioner of Income Tax vs. Equant Solutions India (P.) Ltd [2020] 421 ITR 655 (Punjab & Haryana). It was observed by the High Court that in the case of the assessee company which was providing SDS to its AE, a company that was a subsidiary of another company having a considerable brand value and turnover which was 24 times the turnover of the assessee company could not have been accepted as a comparable. Further, we find that the Hon’ble High Court of Delhi in the case of Principal Commissioner of Income Tax vs. Freescale Semiconductor India (P.) Ltd [2024] 169 taxmann.com 48 (Del.), had, inter alia, observed that where the selected company had a turnover that was significantly higher than that of the assessee company, the same was to be excluded from the list of comparables. Further, we find that the ITAT, Hyderabad “A” Bench in the case of Infor (India) Private Limited vs. DCIT [2022] 143 taxmann.com 212 (Hyd.), had held that where the selected company was having a huge turnover and high profit margin as compared to the assessee company, it could not be selected as a comparable. Also, a similar view had been taken by the Bangalore “B” Bench of the Tribunal in the case of Tektronix India (P.) Ltd vs. ACIT [2023] 153 taxmann.com 30 (Bangalore – Trib.). The Tribunal taking cognizance of the fact that the turnover of the assessee company was Rs. 90.90 crores, had directed that the companies having turnover of less than Rs. 1 Cr or turnover more than Rs. 200 crores were to be excluded from the comparability analysis.

Considering the principle laid down in the aforesaid judicial pronouncements, we are of the firm conviction that the TPO/DRP had grossly erred in including the aforesaid five comparables in the final list viz., (i). Infosys Ltd; (ii). Wipro; (iii). Larsen & Turbo Infotech Ltd; (iv). Mindtree Ltd; and (v). Tata Elxsi Ltd. We thus, in terms of our aforesaid deliberations direct the TPO/ DRP to exclude the aforesaid five comparables from the final list of comparables. With this view of the matter, we direct the TPO/AO to take the range of turnover filter at ten times on both the ends and conduct afresh search to arrive at a plausible view. We thus, in terms of our aforesaid deliberations restore the matter to the file of the TPO for carrying out a fresh benchmarking of the international transaction of SDS provided by the assessee company during the subject year.

We shall now deal with the benchmarking of the international transaction of the interest paid by the assessee company to its AE on the Indian Rupee denominated External Commercial Borrowings (ECB).

The TPO rejected the benchmarking approach adopted by the assessee company. It was observed by him that since the assessee company was required to discharge its interest and principal in Indian rupees only, therefore, the transaction was similar to “Masala Bonds”. Accordingly, the TPO held a conviction that the assessee company had wrongly compared its Indian rupee denominated ECB transaction with a domestic transaction i.e. SBI-PLR. The TPO was of the view that as the assessee company was required to discharge its interest liability and principal amount liability in terms of Indian Rupees only, which was popularly known as Masala Bonds concept. The TPO based on his

As observed hereinabove, the Ld. AR has assailed the rejection by the TPO/DRP of the benchmarking of its aforesaid international transaction, i.e interest paid on Indian Rupee denominated ECBs that was done by applying SBI-PLR, and thereafter substituted the same by applying the CUP Method taking the interest rate paid on Masala Bond transactions as comparable.

Controversy involved regarding the aforesaid issue in hand lies in a narrow compass i.e., as to whether or not the TPO/DRP are justified in rejecting the benchmarking of the interest paid on the Indian Rupee denominated ECBs by the assessee company to its AE by applying the SBI-PLR, and substituting the same by adopting the interest rate paid

Having given thoughtful consideration, we are of the view that in the case of Masala Bonds the foreign entities are allowed to raise funds in Indian rupees from overseas investors, the currency risk is primarily borne by the investor in foreign currency terms because the repayment in Indian rupees needs to be converted back to their home currency. However, from the perspective of the Indian borrower, the liability is purely in Indian rupees. Accordingly, the obligation of the borrower to pay interest and principal is fixed in Indian rupees which, thus, insulates him from the foreign fluctuation risks. Considering the aforesaid facts, we are of the firm conviction that now when the borrower’s liability is in Indian rupees, then, the appropriate benchmark should generally be an Indian Rupee denominated lending rate available in the Indian domestic market. We thus, are of the firm conviction that the risk profile of the borrower in Indian rupee denominated ECB is similar to a domestic Indian rupee loan and cannot be equated with a foreign currency loan.

We find that the ITAT, Hyderabad Bench in the case of Adama India Pvt Ltd vs. ITO (supra), had observed, that as in the case of an Indian rupee denominated loan the currency risk is not borne by the assessee as the loan is denominated in Indian rupees, therefore, the 17 Griptonite Games India Pvt Ltd vs. DCIT Indian domestic rates. We are of the view that the aforesaid order of the Tribunal supports the claim of the assessee company that for an Indian Rupee – denominated ECB, where the borrower’s liability is in Indian Rupees, the appropriate benchmark is the domestic Indian rupee lending rate.

Apart from that, we find that the “Special Bench” of the ITAT, Hyderabad in the case of Invesco (India) Private Limited vs. DCIT (supra), while deliberating on the issue of foreign currency denominated loans, had discussed the underlying principles for benchmarking different types of borrowings. It was observed, that there is a need to consider the currency of the loan and the currency risk bearer. Also, it was observed that for foreign currency loans the currency risk premium needs to be factored in, but this risk is absent for the borrower in Indian rupee denominated loan. We thus, in the back drop of the observations of the “Special Bench” of the Tribunal are of the view that a loan whose liability for a borrower is in Indian rupee should be benchmarked against domestic Indian rupee lending rates, and not against external Masala Bond rates which carry a different risk for the lender. We, thus, are of the firm conviction that as the assessee company had benchmarked its interest payment on INR denominated ECB of 10.45% against SBI-PLR of 13.75%, therefore, the same based on our aforesaid

Apropos the claim of the assessee company that the AO while computing the tax demand had erred in not granting the advance tax credit, despite the fact that the same was disclosed in its 26AS, we are of the view that as the said issue will require necessary verification, therefore, the AO is directed to look into the matter. If the claim of the assessee company is found to be in order, then credit of the amount of the advance tax deposited by the assesssee company be allowed as per the extant law.

Resultantly, the appeal filed by the assessee company is allowed in terms of our aforesaid observations.