OAKTON GLOBAL TECHNOLOGY SERVICES CENTRE (INDIA) PRIVATE LIMITED,HYDERABAD vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD

(ii) Not appreciating the facts and circumstances surrounding the receivables and re- characterising the outstanding receivables as unsecured loans advanced to AES. (iii) Not appreciating the fact that the receivables are consequential/ closely linked to the principle transaction of provision of software services and hence have been aggregated for determination of ALP under TNMM.

(iv) Not appreciating the fact that under TNMM, the impact of outstanding receivables on the working capital adjustments have already been taken into account in determining the arm's length margin hence there is no need of imputing interest on outstanding receivables again.

11. Without prejudice to the above, not undertaking an objective economic analysis to determine the arm's length price of the outstanding receivables by (i) Not appreciating that the receivables due from overseas AE's are in foreign currency and hence interest, if any, is to be benchmarked with the rates prevalent in the international market for foreign currency loans. (i.e. at USD "LIBOR plus"). (ii) Determining the arm's length credit period as 30 days without any basis and imputing interest on credit period provided for the invoices raised relating to provision of services. CORPORATE TAX ISSUES 12) Levy of interest u/s 234B on the TP adjustment. 13) Levy of interest u/s 234C of the Act. 14) Initiating proceedings u/s 271AA and 271BA of the Act. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”

(i) exclusion of Infobeans Technologies Limited, Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited from the list of comparables. (ii) benchmarking of interest on trade receivables. (iii) Issue on account of provision for bad and doubtful debts. (iv) Issue on account of negative working capital adjustment.

7. Further, as far as exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited are concerned, the Ld. AR fairly invited our attention to the decision of this Tribunal in assessee's own case for A.Y. 2012- dated 12/06/2024, wherein this Tribunal has rejected the claim of the assessee for the exclusion of these two companies from the list of comparables due to the reason that the assessee had included Larsen & Toubro Infotech Limited and Persistent Systems Limited in the list of comparables in their TP study. The Ld. AR further submitted that, inadvertently the assessee could not bring to the notice of the Tribunal during the appellate proceedings for A.Y. 2012-13, the decision of Special Bench of Tribunal in the case of DCIT v/s Quark Systems (P) Ltd. 4 ITR (Trib) 606, wherein the Tribunal has held that although the assessee has included some comparables in the TP study documentation, the assessee cannot be prevented from objecting to the same company being selected as comparable, if there are valid reasons for doing so. Accordingly, relying on the decision of Special Bench of Tribunal in the case of DCIT v/s Quark Systems (P) Ltd. (supra), the Ld. AR prayed before the bench not to reject their claim for exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited on the basis of the decision of ITAT in assessee's own case for A.Y. 2012-13(supra).

7.1 Per contra, the Ld. DR relied on the decision of Ld. AO/Ld. TPO.

7.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through the order of this Tribunal in assessee's own case for A.Y. 2012-13(supra), wherein this Tribunal has rejected the claim of the assessee for exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited from the list of comparables. We also found that the decision of Special Bench of ITAT in the case of DCIT v/s Quark Systems (P) Ltd. (supra) was not brought before this Tribunal during the appellate proceedings in assessee's own case for A.Y. 2012-13(supra), wherein the Special Bench at par no. 30 to 38 of its order has held as under :

“ 30. Learned Special counsel for the revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT (Appeals) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable exercise. This has not been done in this case. We would only say that prima facie, as per the material, to which reference has been drawn by Shri Aggarwal. Datamatics does not appear to be comparable. Even if the taxpayer or its counsel had taken Datamatics as comparable in its I P audit, the testedyer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius the question as per the statutory regulations.

"It is true that the assessee itself had included that dividend income in is return for the year in question but there is no estoppel in the Income-tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quit apart from it, it is incumbent on the Income-tax Department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year."

"Mr. Brijlal Gupta appearing for the department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as against an unregistered firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a single assessment under section 26(1) ought to have been made. Now, there cannot be an estoppel against statute. If in fact the procedure adopted by the Income-tax Officer was incorrect, the defect is not cured by the attitude taken up by the assessee."

"On the question of the admissibility of the deduction of Rs. 1,23,719, the contention of the appellant is that as the respondent had itself split up the commission of Rs. 3,12,699 paid to the managing agents, and appropriated Rs. 1,23,719 thereof to the profits earned at Karachi and had debited the same with it, it was not entitled to go back upon it, and claim the amount as a deduction against the Indian profits. We do not see any force in this contention. Whether the respondent is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which it might take of its rights, and consequently, if the whole of the commission is under the law liable to be deducted against the Indian profits, the respondent cannot be estopped from claiming the benefit of such deduction, by reason of the fact that it erroneously allocated a part of it towards the profits earned in Karachi. What has, therefore, to be determined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statements, the deduction is admissible under the law."

"The decision in Amarendra Narayan Roy v. CIT AIR 1954 Cal. 271 has no bearing on the question raised before us. There the concessional scheme tempted the assessee to disclose voluntarily all his concealed income and he agreed to pay the proper tax upon it. The agreement there related to the quantification of taxable income but in the present case what is sought to be taxed is not a taxable income. The assessee in such a case can certainly raise the plea that his income is not taxable under the Act. We, therefore, reject this plea."

"In practice, neither countries nor taxpayers should misuse the burden of proof in the manner described above. Because of the difficulties with transfer pricing analysis, it would be appropriate for both taxpayers and tax administrations to take special care and to use restraint in relying on the burden of proof in the course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm's length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm's length principle regardless of where the burden of

36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer.

37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part.

38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make

no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the Assessing Officer. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the Assessing Officer for consideration of claim of the taxpayer and make a de novo adjudication of the arm's length price after providing reasonable opportunity of being heard to the assessee. We order accordingly.”

7.3 On perusal of above, we found that, although the assessee has included some comparables in the TP study documentation, the assessee cannot be prevented from objecting to the same company being selected as comparable, if there are valid reasons for doing so. Respectfully following the decision of Special Bench in the case of DCIT v/s Quark Systems (P) Ltd. (supra), we accept the submission of the assessee and proceed to adjudicate the exclusion of Larsen & Toubro Infotech Limited and Persistent Systems Limited from the list of comparables.

8. With regard to exclusion of Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited, the Ld. AR has submitted that these comparables are liable to be excluded from the list of comparables as their turnover is significantly higher than that of the assessee. He further submitted that, the turnover of the assessee is Rs.25.61 Crores, however, the turnover of Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited are Rs.3,609 Crores; Rs.996 Crores and Rs.1640 Crores respectively, which is more than 10 times of the turnover of the assessee. The Ld. AR placed reliance on the decision of this Tribunal in the case of Triniti Advanced Software Labs Private Limited in dated 20/06/2024, wherein this Tribunal has held that the turnover filter of 10 times (both upward and downward) is a valid filter to determine the comparability. Therefore, the Ld. AR contended that Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited should be excluded from the list of comparables as their turnover exceeds the threshold determined by the ITAT.

8.1 Per contra, the Learned Department Representative (“Ld. DR”) objected the exclusion of Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited and submitted that the turnover filter should not be considered in the selection of comparables provided the functional comparability is established. The Ld. DR further argued that, the assessee as well as comparable companies are operating in the field of human sources intensive industry, wherein increase in turnover is accompanied by a corresponding increase in the expenditure. Therefore, mere turnover difference should not be a ground for exclusion, if the core business function remains the same. Finally, the Ld. DR prayed that, Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited should not be excluded from the list of comparables merely on the ground of significant difference in turnover.

8.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. The primary dispute before us is to decide whether Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited should be excluded only on the basis of their significantly higher turnover or not. It is well settled by various decision of co- ordinate benches of ITAT, including in the case of Triniti Advanced Software Labs Private Limited (supra) that the turnover filter of 10 times (both upward and downward) is a valid criteria for determining the comparability. This Tribunal in the case of Triniti Advanced Software Labs Private Limited (supra) at para no. 9 to 11 of its order has held as under :

“9. We have considered these contentions in the light of the decided case law. Insofar as the turnover filter is concerned, Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. (supra), held that huge profit or a huge turnover, ipso facto does not lead to its exclusion; whereas in the case of Pentair Water India Pvt. Ltd. (supra), the Hon’ble Bombay High Court held that turnover is a relevant criteria for choosing companies as comparables in determining the ALP in Transfer Pricing cases. Hon’ble Karnataka High Court, however, in the case of Obopay Mobile Technology (supra), having noticed the view taken by the Hon’ble Delhi High Court in the case Chryscapital Investment Advisors (India) (P.) Ltd. (supra), and also the decision of the Hon’ble Bombay High Court in the case of M/s. Pentair Water India Pvt. Ltd. (supra), upheld the Tribunal order excluding certain entities from the list of comparables on the ground of huge turnover, while following the principle that where two views are possible on an issue, the view favourable to the assessee has to be adopted.

10. In these circumstances, following the foot prints of the Hon’ble Karnataka High Court in the case of Obopay Mobile Technology India Private Ltd., (supra), we hold that the turnover is a relevant criteria for choosing companies as comparables in determining the ALP in Transfer Pricing cases.

11. Now turning to the next question as to the appropriate turnover filter, in all the decisions relied upon by the learned AR, a consistent view is taken that the application of tolerance range of turnover of ten times on both sides of assessee’s turnover was proper. Following the same, we direct the learned Assessing Officer to adopt the same for a fresh search. With this view of the matter, we set aside the findings of the authorities below and direct the learned Assessing Officer/learned TPO to take the range of turnover filter at ten times on both the ends and conduct search afresh to take a plausible view.”

8.3 On perusal of above, we found that, this Tribunal has categorically held that, companies with proportionately high turnover should be excluded and the application of tolerance range of turnover of ten times on both sides of assessee’s turnover was proper. There is no dispute about the fact that the turnover of Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited are more than 10 times than the turnover of the assessee, which clearly breaches the threshold set by this Tribunal in the case of Triniti Advanced Software Labs Private Limited(Supra). Therefore, in our considered opinion, Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited cannot be considered as good comparable companies.

8.4 As regards the argument of Ld. DR that turnover difference do not impact profitability due to the nature of the business, we find no merit in his contention. It is well accepted principle in Transfer Pricing (“TP”) that companies with significantly different scales of operations face different economic and market condition, which impact their margin, cost structure and pricing strategy. Hence the contention of the Ld. DR is rejected.

8.5 Further, we observe that, the Ld. TPO did not apply the turnover filter of 10 times (both upward and downward) to other comparables as well. Therefore, in the interest of justice, we deem it appropriate to remand the issue back to Ld. TPO, granting liberty to the Ld. TPO to apply the turnover filter uniformly to all the comparables and carryout the necessary verification.

8.6 Since we have decided the exclusion of Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited in favour of the assessee on account of turnover filter, therefore, we do not propose to adjudicate on the other arguments raised by the assessee on the basis of functional dissimilarity.

9. As far as the exclusion of Infobean Technologies Limited from the list of comparables is concerned, the Ld. AR invited our attention to the decision of this Tribunal in the case of EPAM Systems India Pvt. Ltd. Vs. ACIT in wherein this Tribunal had remanded the issue to Ld. TPO for fresh verification with regard to the inclusion of Infobean Technologies Limited as comparable. Accordingly, the Ld. AR prayed before the bench to remand back the issue to the file of Ld. TPO for fresh verification.

9.1 Per contra, the Ld. DR submitted that, he has no objection if the issue is remanded back to the Ld. TPO for fresh verification.

9.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. Since both the parties have agreed for a remand, we find it appropriate to restore the matter to the file of TPO for fresh verification.

10. The next issue of the assessee is related to adjustment made by the Ld. TPO on account of interest on trade receivables.

10.1 The Ld. AR submitted that, the Ld. TPO erred in applying the interest rate charged by SBI on short term deposits for benchmarking the interest on outstanding trade receivables relating to sale of services by the assessee to its Associated Enterprises (“AEs”). The Ld. AR further submitted that, this Tribunal in many cases has held that the interest on trade receivables should be benchmarked at LIBOR +200 basis points. Accordingly, the Ld. AR prayed before the bench to direct the Ld. TPO to apply the LIBOR + 200 basis points on trade receivables.

10.2 Per contra, the Ld. DR relied on the order of Ld. AO/TPO and submitted that this Tribunal in the case of Hetero Lab Limited Vs. ACIT in & 313/Hyd/2023 has upheld the application of SBI short term deposit rate for benchmarking the interest on trade receivables. Accordingly, the Ld. DR argued that the rate applied by the Ld. TPO is correct and should be upheld in accordance with the decision of this Tribunal in the case of Hetero Lab Limited (supra).

10.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. The core issue before us is to decide the appropriate interest rate to be applied for trade receivables from foreign AEs. We find that an identical issue has been dealt by this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT in dated 06/03/2025, wherein at para no. 6 to 10 of the order this Tribunal has held as under :

“6. It is pertinent to note that, not following the decisions of the Tribunal in assessee’s own case amounts to judicial indiscipline on the part of the DRP. However, since the issue has now come up before the Tribunal, therefore, we will discuss the merits of this issue. The basic question before us is, whether for benchmarking the outstanding receivables from AEs, the comparable interest rate should be PLR rate/SBI short term rate or LIBOR rate/LIBOR+ mark up. This issue was considered by the Chennai Special Bench of this Tribunal in case of Shiva Industries & Holdings Ltd. v. Assistant Commissioner of Income- tax reported in 46 SOT 112/11 Taxmann.com 404 (SB) and held in para 11 as under: “11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares. Thus, it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted.”

8. The Hon'ble High Court has answered the question whether the interest rate prevailing in India should be applied for the lender who is an Indian Company/Assessee or the lending rate prevailing in the US, the place of the AE should be applied. The Hon'ble High Court has held that the interest rate should be the market determined rate applied to the currency concerned in which the loan has to be repaid. The interest rate should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of resident of either party. Once the loan or credit is given in foreign currency and also to be repaid in same currency, the interest applicable to loan granted and to be returned in Indian rupee would not be the relevant comparable. The Hon'ble High Court has held that the PLR rate would not be applicable and should not be applied for determining the interest rate in such cases where loan to be repaid in foreign currency. This issue was again considered by the Hon'ble Bombay High Court in the case of CIT vs. Tata Autocomp Systems Ltd reported in (2015) 56 Taxmann.com 206 (Bom.) and the Hon'ble Bombay High Court has upheld the decision of the Tribunal directing the Assessing Officer to benchmark the interest at the prevailing EURIBOR rate instead of rupee loan rate to be computed at Arms’ Length on the loan advanced to the AE. The relevant findings of the Hon'ble High Court in para 7 & 8 are as under: “7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT [IT Appeal No. 673 (Mum.) of 2006] and Dy. CIT v. Tech Mahindra Ltd. [2011] 12 taxmann.com 132/46 SOT 141 (Mum.) (URO) to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). 8. In view of the above we see no reason to entertain the present appeal as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order. Accordingly, we see no reason to entertain the proposed questions of law.”

9. We further note that, the Pune Benche of the Tribunal in the case of DCIT vs. iGATE Global Solutions Ltd reported in (2019) 109 Taxmann.com 48 (Pune) has again discussed this issue elaborately in Para 4 to 10 as under: “4. We have heard both the sides and gone through the relevant material on record. It is observed from the order passed by the TPO that the assessee advanced loans to its two AEs, one in the USA and the other in Germany. Insofar as loan to Symphoni Interactive LLC, an Associated Enterprise in the USA is concerned, the assessee charged interest @ 6%. The ld. CIT(A) has recorded that the assessee also paid interest to another AE in the USA, namely, iGATE Corporation, USA at 5.9% on its External Commercial Borrowings (ECB). He further recorded in para 57 of the impugned order that the TPO accepted this transaction and made no transfer pricing adjustment on this score, thereby, he also impliedly accepting this transaction at ALP. The viewpoint of the ld. CIT(A) on this point is not fully correct. We have noted above that the TPO worked out the transfer pricing adjustment by considering the loans advanced by the assessee to both of its AEs, including Symphoni Interactive LLC, USA. Be that as it may, it is seen that the ld. CIT(A) also impliedly accepted the interest earned by the assessee from Symphoni Interactive LLC, USA, at 6% as at ALP, against which the Department has no grudge as the assail is only to the application of EURIBOR of 4.42%, which relates to the loan advanced by the assessee to Mascot GmbH, Germany. As such, we are confining ourselves only to international transaction of receipt of interest from Mascot GmbH, Germany. As against the assessee charging interest at the rate of 1.50% from Mascot GmbH, Germany, the TPO determined the arm's length rate of interest at 14%, which the ld. CIT(A) reduced to 4.42% by treating it as the average EURIBOR rate for the year under consideration. 5. There are two facets of the dispute raised by the Revenue on this issue. The first is that the rate of interest should be considered with reference to the prime lending rate prevalent in India and the second is that the reduction in rate to 4.42% by the ld. CIT(A) is not justified. 6. As against the TPO's point of view that since the assessee in India advanced loan to its AE in Germany, which if not given, would have fetched interest @14% in India, the ld. CIT(A) has held that interest rate prevalent in the country in which the loan is received, should be considered for determining the ALP of transaction of interest received. We find that there is almost judicial consensus ad idem at the higher appellate forums on the question of which country, that is the borrower or the lender, should be considered for determining the arm's length rate of interest on loans advanced to the AEs. The Hon'ble Bombay High Court in CIT v.Tata Autocomp Systems Ltd . [2015] 56 taxmann.com 206/230 Taxman 649/374 ITR 516 has held that the ALP in case of loan advanced to AEs should be determined on the basis of rate of interest charged in the country where loan is received. The Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 has also held that the currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. rate of interest. The Hon'ble Bombay High Court in CIT v. The Great Eastern Shipping Co. Ltd. [2018] 301 CTR 642 has reiterated that the arm's length rate of interest is to be considered with reference to the country in which the loan is received and not from where it is paid. In view of these precedents, it is palpable that the viewpoint of the AO in considering the rate of interest prevalent in India, being, the lender country, as determinative of the ALP of rate of interest charged by the assessee, is not correct. To this extent, we uphold, in principle, the view canvassed by the ld. CIT(A) that the rate of interest prevalent in Germany, being, the country in which the loan was consumed, is determinative of the arm's length rate of interest charged by the assessee-lender.

7. Now we espouse the second facet of the dispute relating to the determination of the arm's length rate of interest. It is seen that the ld. CIT(A) has held that average EURIBOR for the A.Y. 2007- 08 should be considered as a benchmark. In determining the average EURIBOR at 4.42%, he relied on an order passed by the Tribunal in which the average LIBOR was considered at 4.42%. In other words, the ld. CIT(A) considered EURIBOR as a comparable uncontrolled transaction for the purpose of benchmarking the rate of interest charged by the assessee.

10. Before parting with this issue, we would like to clarify that the ld. CIT(A) has considered 4.42% as EURIBOR applicable for the assessment year under consideration by relying on an order of the Tribunal, in which the average LIBOR was considered at this level. Equality of LIBOR and EURIBOR could not be substantiated from any material on record. In the given circumstances, we set aside the impugned order and remit the matter to the file of the AO for considering EURIBOR +2% as arm's length rate of interest to be applied on loan advanced by the assessee to Mascot Systems GmbH, Germany. In case EURIBOR +2% turns out to be lower than 4.42% as directed to be applied by the ld. CIT(A) on the understanding of the same being EURIBOR simplicitor, then the addition should be restricted with reference to 4.42% rate of interest, as the assessee is not in appeal on this issue. In the otherwise scenario, the relief allowed by the ld. CIT(A) will be restricted pro tanto.”

10. Therefore, we find force in the assessee’s case to adopt LIBOR rate for benchmarking the transactions of outstanding receivables from the AEs. Accordingly, the Assessing Officer/TPO is directed to adopt the LIBOR + 200 basis as comparable rate for benchmarking the transaction of outstanding receivables from AEs after allowing a credit period of 60 days as a normal credit period without any interest.”

10.4 On perusal of above, we found that this Tribunal has adopted LIBOR rate for benchmarking the transactions of outstanding receivables from the AEs. We have also gone through the decision of this tribunal in the case of Hetero Lab Limited Vs. ACIT(supra) relied by the revenue and found that, the Tribunal has given it’s findings relying on the decisions of some Tribunals, however, this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT (supra) has given it’s findings relying on the decisions Hon’ble Bombay high court. In our considered opinion the decision of hon’ble high court always prevails over the decision of Tribunal. Therefore, respectfully following the decision of this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT (supra), we hold that, the justice will be served by applying LIBOR + 200 basis points on trade receivables in the case of the assessee. Therefore, we direct the Ld. AO/TPO to apply LIBOR + 200 basis points for benchmarking of interest on trade receivables.

11. The next issue is related to non-consideration of provision for bad and doubtful debts by the Ld. AO/TPO for the calculation of operating cost in the case of comparable companies.

11.1 The Ld. AR relying on the decision of this Tribunal in the case of Hyundai Motor India Engineering Pvt. Ltd. Vs. DCIT in wherein the Tribunal has held that provision for bad and doubtful debts should be considered while calculating the operating cost for comparable companies. Accordingly, the Ld. AR prayed before the bench to direct the Ld. AO/TPO to include the provision for bad and doubtful debts while computing the operating cost in the case of comparable companies.

11.2 Per contra, the Ld. DR objected the contention of the assessee stating that while the term “operating cost” is not explicitly defined under the Act, it is defined under Rule 10TA(j) of Income Tax Rules, 1962 meant for Safe Harbor Rules, which does not recognise provision for bad and doubtful debts as part of operating cost. The Ld. DR further contended that provision for bad and doubtful debts is not an allowable expenditure u/s.36 of the Act, as it does not represent actual expenses but merely an estimate of potential future losses. It was further argued by the Ld. DR that, the provision for bad and doubtful debts does not meet the criteria of operating expenses, as operating cost should include only those expenses that are actually incurred and crystalised. Finally, the Ld. DR submitted that, the provision for bad and doubtful debts should not be considered for calculation of operating cost of the comparables.

11.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have gone through the provisions of section 36(1)(vii) of the Act, which specifically states that, any provision for bad and doubtful debts is not an allowable expenditure unless it qualifies under the specific conditions mentioned therein. The legislative intent behind this provision is to allow only actual write off not merely provisions for future contingency. We have also gone through the Rule 10TA(j), which does not recognize provision for bad and doubtful debts as part of operating cost. Since operating cost meant to reflect actual expenses incurred, provision for uncertain liability cannot be included in such calculation. Following the above reasoning, we are of the considered opinion that the provision for bad and doubtful debts, being an uncertain liability and not an actual expenditure, cannot be considered for the purpose of calculation of operating cost. Accordingly, we reject the contention of the assessee and accept the approach of Ld. AO/TPO for excluding the provision for bad and doubtful debts while computing the operating cost. Accordingly, this issue of the assessee is dismissed.

1. Rejection of the transfer pricing documentation maintained by the assessee in accordance with the provisions of the Income Tax Act, 1961 ('Act') read with the Income Tax Rules, 1962 ('Rules') and undertaking a fresh economic analysis during the course of assessment proceedings and thereby making an adjustment of Rs.7,64,51,732 towards the international transactions with AEs.

2. Rejection of use of multiple year data: Rejecting the use of multiple year data and using data for the FY 2013-14 only in determining the arm's length price.

3. Use of additional filters: Inter-alia use of the following additional/modified filters in undertaking the comparative analysis and rejecting comparable companies: (a) 75% Export Revenue Filter, (b) Different Financial Year Filter; and (c) Using one sided turnover filter

4. Selection of additional companies: Not undertaking an objective and consistent comparative analysis and interalia selecting the following companies as comparable to the services of the assesse ignoring the fact that the same are not functionally comparable to the Assessee (a) Tata Elxsi Limited (Seg) (b) Mindtree Limited (c) RS Software (India) Limited

(d) E-Infochips Ltd (e) Larsen & Toubro Infotech Limited (f) Infosys Ltd (g) Persistent Systems Limited (h) Infobeans Technologies Limited (i) Thirdware Solutions Limited 5. Rejection of Comparables: Not undertaking an objective and consistent comparative analysis and inter- alia rejecting the following comparable companies: (a) Akshay Software Technologies Limited (b) Caliber Point Business Solutions Limited (Seg) (c) Maveric Systems Limited (d) Sasken Communication Technologies Limited (Seg) (e) Sagar Soft India Ltd (f) Kellton Tech Solutions Ltd (g) Goldstone Technologies Limited (h) CAT Technologies Limited (i) Helios & Matheson Information Technology Limited (j) R Systems International Limited (Seg) (k) TVS Infotech Ltd (1) Accel Frontline Ltd (Seg) (m) Infomile Technologies Lts (n) Kals Information Systems Limited (0) Sankhya Infotech Limited (p) Zylog Systems Limited (q) Acropetal Technologies Limited

6. Erred in application of persistent loss filter and thereby not following the directions of Hon'ble DRP for including Sagar Soft India Limited in the final list of comparables.

7. Determination of operating margins of comparables. (a) Error in computing segmental margin of Tata Elsxi Limited (b) Considering Provision for Bad and Doubtful Debts (PBDD) as non-operating expenditure in determining the operating margins of companies considered comparable. Which are:

1. 1. E-Infochips Ltd. 2. Larsen & Toubro Infotech Ltd. 3. Infosys Ltd 4. Persistent Systems Ltd

8. Working capital adjustments. Not adjusting the net margins of comparable companies for differences in working capital in accordance with the provisions of rule 10B(1) (e) of the Rules.

9. Adjustments for Risk differences. Not adjusting the net margins of comparable companies for functional and risk differences in accordance with the provisions of rule 10B(1) (e) of the Rules.

12. Not following the directions of Hon'ble DRP. Not following the directions of Hon'ble DRP in entirety in computing thee total adjustment. Note 1: Total tax effect relating to Transfer Pricing Grounds (i.e Ground 1 to 11) 13. Non-grant of MAT credit available to the Company. Without prejudice to the above grounds, that on facts and circumstances of the case, the Ld. AO has grossly erred in law as well as in facts, in non-grant of MAT Credit available, amounting to Rs. 33,95,196, as set-off to the Company against the tax liability determined for the captioned AY.

15. Erroneous calculation of interest 234B of the Act. u/s. 234B of the Act.

That on facts and circumstances of the Case, the Ld. AO has grossly erred in law as well as in facts in computing the interest u/s 234B of the Act amounting to Rs. 1,89,21,854 and the same is consequential to the above grounds.

(i) Exclusion of E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans Technologies Ltd. Infosys Ltd., Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. from the list of comparables. (ii) Inclusion of Sagar Soft India Limited as comparable company. (iii) Interest on trade receivables.

16. As far as the exclusion of Larsen & Toubro Infotech Ltd. is concerned, the assessee is seeking exclusion on the ground of high turnover. We found that, the turnover of the assessee is Rs.25.61 Crores, whereas the turnover of Larsen & Toubro Infotech Ltd. is 4548 crores, which is more than 10 times of the turnover of the assessee. We have decided the identical issue in para no.8 to 8.6 Of this order in . The same findings shall apply mutatis mutandis here also. Hence, we hold that Larsen & Toubro Infotech Ltd. is not comparable to the assessee and we direct the Ld. AO/TPO to delete Infosys Ltd. from the list of comparables. Further, we also grant liberty to the Ld. TPO to apply the turnover filter uniformly to all the comparables and carryout the necessary verification.

17. As far as the exclusion of E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans Technologies Ltd., Infosys Ltd. and Persistent Systems Ltd. are concerned, the assessee relied on the decision of this Tribunal in the case of ADP Pvt. Ltd. Vs. DCIT in dated 18.12.2020, wherein this Tribunal has excluded E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans Technologies Ltd. Infosys Ltd. and Persistent Systems Ltd. from the list of comparables based on functional dissimilarity. The Ld. AR further contended that, the functional profile of the assessee is identical to that of ADP Pvt. Ltd. and therefore the findings of the Tribunal in the case of ADP Pvt. Ltd. should be applied in the case of the assessee as well. Finally, the Ld. AR requested for exclusion of E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans Technologies Ltd., Infosys Ltd. and Persistent Systems Ltd. From the list of comparables. 17.1 Per contra, the Ld. DR objected the assessee's contention and argued that the assessee has not taken ADP Pvt. Ltd. as a comparable in its TP Study. The Ld. DR further submitted that, it is essential to first verify whether ADP Pvt. Ltd. is actually functionally comparable to the assessee before applying the decision of this Tribunal. The Ld. DR argued that, a proper FAR analysis is required to determine whether ADP Pvt. Ltd. and assessee are functionally similar or not. He further submitted that, unless the ADP Pvt. Ltd. is established as a good comparable to the assessee, the decision in ADP Pvt. Ltd. to exclude E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans Technologies Ltd., Infosys Ltd. and Persistent Systems Ltd. cannot be blindly apply to the case of the assessee. Therefore, it was prayed before the bench that the issue may be remanded to Ld. AO/TPO for verification of FAR analysis of ADP Pvt. Ltd. with the assessee.

17.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. It is undisputed fact that the assessee is seeking exclusion of E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans Technologies Ltd., Infosys Ltd. and Persistent Systems Ltd. from the set of comparables, relying on the decision of Tribunal in the case of ADP Pvt. Ltd.(supra). However, it is also fact that the assessee did not take ADP Pvt. Ltd. as a comparable in its own TP study. The key question before us is whether the functional profile of ADP Pvt. Ltd. and the assessee are identical, so that the decision of ITAT in the case of ADP Pvt. Ltd. can be applied to the case of the assessee. This requires a proper FAR analysis, which has not been conducted at this stage. The ITAT has consistently held that comparability analysis must be based on detail factual examination. Without verifying whether the assessee and ADP Pvt. Ltd. have the same functional profile, it would not be appropriate to blindly follow the decision of Tribunal in the case of ADP Pvt. Ltd. (supra). In view of the above, we accept the request of Ld. DR and remand the issue to the Ld. AO/TPO with the following direction :

(i) The Ld. AO/TPO shall verify the FAR analysis of the assessee and ADP Pvt. Ltd. to determine whether the ADP Pvt. Ltd. is a good comparable to the assessee or not. (ii) If, upon verification, the Ld. AO/TPO finds that ADP Pvt. Ltd. is having functional similarity to the assessee, then the decision of Tribunal in the case of ADP Pvt. Ltd. (supra) shall be applied to the assessee's case and E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans

Technologies Ltd., Infosys Ltd. and Persistent Systems Ltd. shall be excluded from the list of comparables. (iii) If the functional similarity between the assessee and the ADP Pvt. Ltd. is not established, then, the decision of the tribunal in the case of ADP Pvt. Ltd.(supra) shall not be mechanically applied and the Ld. AO/TPO may decide the comparability of E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans Technologies Ltd., Infosys Ltd. and Persistent Systems Ltd. based on its own functional analysis. The assessee is also directed to furnish all the necessary documents and co-operate with the Ld. TPO during the verification process.

18.1 Per contra, the Ld. DR had no objection if the matter is directed to Ld. TPO in accordance with the directions of Ld. DRP.

18.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have also gone through the para no.5.1.5 of the order of Ld. DRP which is to the following effect :

18.3 On perusal of above, we found that the Ld. DRP has directed the Ld. AO/TPO to consider Sagar Software India Pvt. Ltd. as comparable, if it satisfies the other filters. Hence, we direct the Ld. AO/TPO to follow the directions of Ld. DRP as provided under para no.5.1.5 of the order of Ld. DRP.