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Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI GEORGE GEORGE K. & SHRI B.R. BASKARAN
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The assessee has filed this appeal challenging the assessment order dated 27.10.2017 passed for assessment year 2013-14 by the A.O. u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 ['the Act' for short] in pursuance of directions given by Ld. Dispute Resolution Panel (DRP).
IT(TP)A No.2836/Bang/2017 M/s. IMS Health Analytics Services Pvt. Ltd., Bangalore
Page 2 of 8 2. The assessee has filed revised grounds of appeal which contains 25 grounds. However, at the time of hearing, the Ld. A.R. submitted that he is pressing ground Nos.9, 14, 16, 17, 23 & ground No.25. In respect of ground No.9 also, the Ld. A.R. submitted that the assessee is pleading for exclusion of only two companies, viz., Larsen & Toubro Ltd. and Persistent Systems Ltd. Accordingly, remaining grounds urged by the assessee are dismissed as not pressed. The grounds pressed by the assessee read as under: “Grounds: 9. The learned AO/learned TPO/Hon’ble DRP has grossly erred in not rejecting the following companies from the list of comparable companies: Larsen & Toubro Ltd. Persistent Systems Ltd. 14. The learned AO/learned TPO/Hon’ble DRP erred in not considering the fact that the appellant does not have any working capital risk, therefore, no negative working capital adjustment should be allowed. 16. The learned AO/learned TPO/Hon’ble DRP erred in levying interest on the outstanding receivables of the appellant. 16.1 The learned AO/learned TPO/Hon’ble DRP erred in making adjustment pertaining to interest on the outstanding receivables without appreciating that there is no real income arising to the appellant. 16.2 The learned AO/learned TPO/Hon’ble DRP erred in not considering the fact that outstanding receivables from the associated enterprise is not an international transaction within the meaning of section 92B of the Act.
16.3 The learned AO/learned TPO/Hon’ble DRP erred in not appreciating that the appellant had adopted TNMM at entity level and the net profit margin is tested to be on arm’s length price wherein all income and expenditures would have already been considered and benchmarked. 16.4 The learned AO/learned TPO/Hon’ble DRP erred in not appreciating that once working capital adjustment considering receivables/payables to associated enterprise are done, no separate adjustment for notional interest on outstanding receivables can be made.
IT(TP)A No.2836/Bang/2017 M/s. IMS Health Analytics Services Pvt. Ltd., Bangalore
Page 3 of 8 16.5 The learned AO/learned TPO erred in computation of interest by not following directions of the Hon’ble DRP while computing the TP adjustment in the final assessment order.
The learned AO/Hon’ble DRP erred in disallowing retention bonus of Rs.22,27,500, by considering the same to be in the nature of a contingent liability.
The learned AO/learned TPO/Hon’ble DRP has erred in short grant of TDS to the extent of Rs.861,102, which the appellant is eligible to claim for the AY 2013-14.
The learned AO/learned TPO/Hon’ble DRP has erred in levying interest under section 234C of the Act on assessed income, even though section 234C is applicable on returned income of the appellant.”
The assessee is engaged in the business of providing customised software development as required by its associated enterprises. The turnover of the assessee from software development activity was Rs.59.21 crores. The assessee adopted TNM method to benchmark the international transactions and adopted operating profit by operating cost (OP/OC) as profit level indicator. The assessee declared profit of 15.20%. The assessee had selected 11 comparable companies whose average margin was 12.45%. Accordingly, the assessee claimed that its international transaction relating to software development services is at arm’s length.
The TPO rejected the TP study of the assessee and selected the following 7 companies:
Company Name Si. Unadjusted Adjusted Margin No. (OP/OC) (OP/OC) 1 C G— V A K Software & Exports Ltd. 20.45% 21.84% 2 I C R A Techno Analytics Ltd. 17.10% 14.78% 3 Larsen & Tourbo Infotech Ltd. 26.06% 27.44% 4 Mind Tree Ltd. (Segmental) 20.23% 19.17% 5 Persistent Systems Ltd. (Segmental) 28.27% 28.77% 6 R S Software (India) Ltd. 17.41% 20.19% 7 Tech Mahindra Ltd. (Segmental) 19.93% 18.72% AVERAGE MARGIN 21.18% 21.73%
IT(TP)A No.2836/Bang/2017 M/s. IMS Health Analytics Services Pvt. Ltd., Bangalore Page 4 of 8 5. Accordingly, the TPO made transfer pricing adjustment of Rs.3,36,74,644/-. Ld. DRP directed for exclusion of M/s. Tech Mahindra Ltd. And confirmed the remaining comparable companies selected by the TPO.
Before us, the assessee seeks exclusion of two companies, viz,m M/s. Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. on turnover criteria, whose turnover for the year under consideration was Rs3613.42 crores and Rs.996.75 crores respectively. The Ld A.R submitted that the turnover of the assessee company was only Rs.59.21 crores falling under the category of 1 – 200 crores and hence companies having turnover exceeding two hundred crores have been held to be not comparable. In this regard, the Ld. A.R. placed his reliance on the decision rendered by the coordinate bench in the case of IGEFI Software India Pvt. Ltd. (IT TPA No.2614/Bang/2017 dated 4.9.2019).
We heard Ld. D.R. on this issue and perused the record. We notice that both the above said companies have been excluded by the coordinate bench in the above cited case by following the decision rendered by another coordinate bench in the case of Genesis Integrating Systems India Pvt. Ltd. Vs. DCIT (ITA No.1231/Bang/2010). The relevant portion of the order passed by the coordinate bench in the case of IGEFI Software India Pvt. Ltd. (supra) are extracted below:
We heard the parties and perused the record. In the case of Genisys Integrating Systems (India) P Ltd vs. DCIT (ITA No.1231/Bang/2010), the co-ordinate bench of Tribunal has relied upon the opinion expressed by Dun and Bradstreet that the grouping of companies having turnover of Rs.1.00 crore to Rs.200 crores as comparable with each other was held to be proper. Since certain decisions were rendered by other co-ordinate benches fixing different criteria, the co-
IT(TP)A No.2836/Bang/2017 M/s. IMS Health Analytics Services Pvt. Ltd., Bangalore
Page 5 of 8 ordinate bench considered the divergent views expressed by various benches in the case of Autodesk India (P) Ltd vs. DCIT (2018)(96 taxmann.com 263) and expressed the view that the Ld CIT(A) was right on the issue of application of turnover filter by following the ratio laid down in the case of Genisys Integrating Systems (India) P Ltd (supra).”
In the instant case, the assessee’s exclusion of two companies since the turnover of the above said two companies are above Rs.Rs.200 crores and hence as per the decision referred supra, M/s Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. on turnover criteria are liable to be excluded on turnover criteria. Accordingly, we direct the TPO/AO to exclude the above said two companies
The next issue contested by the assessee relates to claim for working capital adjustment. It is the case of the assessee that it does not have any working capital risk and therefore no negative working capital adjustment should be made. In this regard, Ld. A.R. placed its reliance on the decision rendered by coordinate bench in the case of LAM Research (India) Pvt. Ltd. Vs. DCIT (IT TPA No.1437/Bang/2014 dated 30.4.2015) in support of his contentions.
We notice from the above said decision that the coordinate bench has held that a negative working capital adjustment cannot be carried out in case of captive service provider and in this regard the coordinate bench has followed the decision rendered by Hyderabad bench of Tribunal in the case of Adaptec India Pvt. Ltd. (ITA No.206/Hyd/2014 dated 25.3.2015). Accordingly, following the above said decisions, we hold that there is no necessity to make negative working capital adjustment in this case as the assessee is a captive service provider.
IT(TP)A No.2836/Bang/2017 M/s. IMS Health Analytics Services Pvt. Ltd., Bangalore
Page 6 of 8 11. The next issue relates to TP adjustment made in respect of outstanding receivables. The Ld. A.R. submitted that an identical issue was considered by the coordinate for which in the case of ISG Nova Soft Technologies Ltd. (IT TPA No.3284/Bang/2018 dated 18.3.2021) and the matter was restored to the file of TPO for examining it afresh.
We heard Ld. D.R. on this issue and perused the record. We notice that the coordinate bench has restored an identical issue to the file of AO/TPO in the case of ISG Nova Soft Technologies Ltd. (supra) with the following directions: “We have heard both the parties and perused the 24. material on record. The Id. AR fairly conceded that outstanding amount on account of sales/services billed to AE akin to loan advanced by assessee is an international transaction. As held by the Hon'ble Delhi High Court in the case of Avenue Asia Business Advisors (P.) Ltd. v. DCIT [2017] 398 ITR 120 (Del), there should be TP adjustment on this count after making proper TP study by the TPO after considering the period of credit enjoyed by the comparables and also applicable LIBOR rate in the place of AEs for benchmarking the rate of interest to arrive at the ALP. With these observations, we remit the issue in dispute to the file of AO/TPO to benchmark the interest rate in the light of the decisions cited by Id. DR. Further, we make it clear that the TPO should compute the interest only for the relevant assessment year after going through the relevant agreements entered by the assessee with AEs while computing the ALP.”
Following the above said decision, we restore this issue to the file of AO/TPO with similar directions.
The next issue relates to disallowance of retention bonus of Rs.22,27,500/- treating the same as contingent liability.
IT(TP)A No.2836/Bang/2017 M/s. IMS Health Analytics Services Pvt. Ltd., Bangalore
Page 7 of 8
We heard the parties on this issue and perused the record. The A.O. noticed that the assessee company has made a provision of Rs.22,27,500/- towards retention provision. It was submitted that the above said provision was made on the basis of promise given to employees that he shall be paid bonus if he continues in service for a specified period. It was submitted that the above said amount shall be paid on fulfillment of the conditions mentioned in the appointment letter. Hence, the A.O. asked the assessee to furnish a copies of appointment letters in order to verify the conditions for payment of retention bonus. However, the assessee did not furnish any evidence before the A.O. and hence he disallowed the claim. Before Ld. DRP also the assessee did not furnish any evidence and hence Ld. DRP also confirmed the disallowance.
We heard the parties on this issue and perused the record. Before us also, the assessee did not furnish any evidence in support of claim of provision for retention bonus. Under these set of facts, we have no other option but to confirm the disallowance made by the A.O.
The next issue relates to short grant of TDS to the extent of Rs.8,61,102/-. Since this matter requires verification at the end of the A.O., we restore this issue to the file of the A.O. to decide the same in accordance of law.
The last issue relates to computation of interest u/s 234C of the Act. The Ld. A.R. submitted that the A.O has computed interest u/s 234C of the Act on the “assessed income”, while the provisions of section 234C of the Act states that the interest should be computed on returned income.
IT(TP)A No.2836/Bang/2017 M/s. IMS Health Analytics Services Pvt. Ltd., Bangalore Page 8 of 8 18. We find merit in the said submission. A perusal of the provisions of sec. 234C would show that the interest is required to be computed on tax due on returned income. Accordingly, we direct the A.O. to compute interest u/s 234C of the Act on the returned income.
In the result, the appeal filed by the assessee is treated as partly allowed.
Order pronounced in the open court on 26th Aug, 2021
Sd/- Sd/- (George George K.) (B.R. Baskaran) Judicial Member Accountant Member
Bangalore, Dated 26th Aug, 2021. VG/SPS
Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.