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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’, NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 11/10/2018 passed by the Ld. Additional Commissioner of Income Tax, Special Range-1, New Delhi (hereinafter referred to as ‘the Assessing Officer’) for assessment year 2014-15, pursuant to the direction of Ld. Dispute Resolution Panel (DRP). The grounds raised by the assessee in the appeal are reproduced as under:
That, the final assessment order framed by the learned Additional Commissioner of Income-tax, Special Range - 1, Delhi (hereinafter referred to as “the Ld. AO”) pursuant to the directions of the Hon’ble Dispute Resolution Panel - I (hereinafter referred to as “the Hon’ble DRP”) under section 143(3) read with section 144C of the Income-tax Act, 1961 (“the Act”), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab- initio.
2. That, in framing the impugned assessment order, the reference made by the Ld. AO under section 92CA(1) of the Act suffers from jurisdictional error, as the Ld. AO had not recorded any reasons nor he had any material whatsoever on the basis of which he could even reach a prima-facie opinion, that it was 'necessary or expedient’ to refer the matter to the learned Assistant Commissioner of Income Tax, Transfer Pricing Officer - l(1)(1), New Delhi (hereinafter referred to as “Ld. TPO”) for computation of arm’s length price (“ALP”). TP adjustment in relation to software services [INR 20,55,61,108] 3. That on the fact of the case and in law, the Ld. AO/ TPO /Hon’ble DRP have erred, in making an adjustment of INR 20,55,61,108 to the total income of the Appellant in respect of international transaction pertaining to provision of software Services by the Appellant to its associated enterprise (“AE”). 3.1 That on the fact of the case and in law, the Ld. AO/ TPO / Hon'ble DRP has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (‘the Rules’), and conducting a fresh economic analysis for the determination of the ALP of the Appellant’s international transaction pertaining to provision of software services by the Appellant and holding that the said international transaction is not at an arm’s length without sharing the detailed accept reject matrix for selection or rejection of companies evaluated by him.
3.2 That on the facts of the case and in law, the Ld. TPO / Hon’ble DRP has erred in rejecting the Appellant’s claim to use multiple year data for computing the arm's length price and, I instead, has adhered to the use of single year (i.e. FY 2013-14) updated data to conclude I the ALP of the international transaction which was not available to the Appellant at the time of undertaking transfer pricing study required to be maintained under Section 92D of the Act. 3.3 That on fact of the case and in law, the Ld. TPO/ Hon’ble DRP has erred in application of inappropriate filters such as different financial year end and export service income filter for identifying companies comparable to the Appellant. 3.4 That on the facts of the case and in law, the Ld. TPO / Hon’ble DRP have erred, in law and on facts and circumstances of the case, by wrongfully rejecting comparable companies and including certain non- comparable companies to the final set of comparable companies for the purpose of determining the ALP of the impugned international transactions on an ad-hoc basis, thereby resorting to cherry picking of comparable companies. 3.4.1 That on the facts of the case and in law, the Ld. TPO, in particular, erred in selecting Thirdware Solutions Limited without appreciating the fact that DRP directed to include the same only if segmental data is available. However, the Ld. TPO erroneously included it based on geographical segment data available in annual report of the company for FY 2013-14. 3.4.2 That on the facts of the case and in law, the Ld. TPO/ Hon’ble DRP, in particular, erred in selecting Infobeans Technologies Limited, Persistent Systems Limited, Larsen & Toubro Infotech Limited, Cigniti Technologies Limited, RS Software (India) Limited and Mindtree Limited as comparable companies without appreciating that these companies are not functionally comparable to the Appellant in relation to the international transaction pertaining to provision of software services.
3.4.3 That on the facts of the case and in law, the Hon’ble DRP, in particular, erred in rejecting Sasken Communications Technologies Ltd, as comparable to the Appellant in relation to the international transaction pertaining to provision of software services on the ground that the FAR of the company is different than that of the Appellant. 3.4.4 That on the facts of the case and in law, the Hon’ble DRP, in particular, erred in rejecting Caliber Point Business Solutions, as comparable to the Appellant in relation to the international transaction pertaining to provision of software services on the ground that the company has different financial year ending. 3.4.5 That on the facts of the case and in law, the Ld. TPO/ Hon’ble DRP, in particular, erred in rejecting Cat Technologies Limited, as comparable to the Appellant in relation to the international transaction pertaining to provision of software services on the ground that the company fails to qualify the persistent loss filter without appreciating that the company had operating profit for FY 2011-12 and had operating losses only for FY 2012-13 and FY 2013-14. 3.4.6 That on the facts of the case and in law, the Hon’ble DRP, in particular, erred in not adjudicating on inclusion of additional companies argued before the Hon’ble DRP namely Lucid Software Limited and Maveric Systems Limited as comparable to the Appellant in relation to the international transaction pertaining to provision of software services. 3.5 That on the facts of the case and in law, the Ld. TPO / Hon’ble DRP have erred, in law and on facts and circumstances of the case, by selecting companies which are earning supernormal profits as compared to the Appellant. 3.6 That on the facts of the case and in law, the Ld. TPO / Hon’ble DRP have erred, in law and on facts and circumstances of the case, by treating foreign exchange ALP of the subject international transaction. 3.7 That on the fact of the case and in law, the Ld. TPO / Hon’ble DRP has erred in not allowinga risk adjustment to the Appellant on account of the fact that the Appellant is a captive service provider for its associated enterprises and is remunerated on a cost plus basis irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full- fledged risk taking entrepreneurs. TP adjustment in relation to notional interest on outstanding receivables [INR 3,81,58,172] 4. That on the fact of the case and in law, the Ld. AO/ TPO /Hon’ble DRP have erred, in making an adjustment of INR 3,81,58,172 to the total income of the Appellant in respect of notional interest on outstanding receivables. 4.1 That on the facts of the case and in law, the Ld. TPO/ Hon’ble DRP has erred in making TP adjustment of INR 3,81,58,172 on account of notional interest on receivables from AE without application of any method as prescribed under section 92C of the Act. 4.2 That on the facts of the case and in law, the Ld. TPO/ Hon’ble DRP has erred in recharacterizing the inter- company receivables as a separate international transaction of an unsecured loan and imputing interest on such transaction. 4.3 That on the facts of the case and in law, the Ld. TPO/ Hon’ble DRP has erred in not appreciating that inter- company receivables arising out of provision of services by the Appellant to its AE is closely linked to such transaction and if such services transaction is determined at an arm’s length price after considering working capital adjusted margins of comparable companies, no separate adjustment can be made for such inter-company receivables.
4.4 That on the facts of the case and in law, the Ld. TPO/Hon’ble DRP has erred in determining the arm’s length interest rate for inter-company receivables at LIBOR plus 400 basis points on an arbitrary basis without any cogent reasons. 4.5 That on the facts of the case and in law, the Ld. TPO/Hon’ble DRP has erred in granting the credit of period of 60 days instead of 90 days having regard to the provisions of Section 92CE of the Act. 4.6 That on the facts of the case and in law, the Ld. TPO/Hon’ble DRP has erred, by not appreciating that Appellant has earned more than arm’s length return in its other segments, and such excess remuneration should be “set off with the proposed adjustment. Corporate Tax adjustment in relation to TDS Reconciliation [INR 34,72,945] 5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in making addition amounting to INR 34,72,945 on account of difference in the income credited to profit and loss account and offered to tax by the Appellant in its return of income filed for AY 2014-15 vis-a-vis the amount of receipts as appearing in the Form 26 statement for AY 2014-15. Non-grant of additional TDS credit amounting to INR 94,054 6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not granting the additional TDS credit amounting to INR 94,054, without appreciating the fact that corresponding income has been offered to tax by the Appellant in the return of income filed for AY 2014- 15. Levy of interest under section 234A and 234B of the Act 7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A and section 234B of the Act.
Initiation of penalty proceedings 8. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. The above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the above grounds of appeal and the facts and circumstances of the case.
Briefly stated facts of the case are that the assessee, i.e., M/s Avaya India Private Limited (in short ‘the Avaya India’) is an Indian company incorporated on 03/04/2000 having offices in Mumbai, Gurgaon, Pune, Bangalore, Kolkata, Chennai and Hyderabad. The assessee company was engaged in the business of software services, back-office support and technical services segments. For the year under consideration, the assessee filed return of income on 28/11/2014, declaring total income of Rs.148,64,57,280/-. The case was selected for scrutiny and statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) were issued and complied with. The Assessing Officer observed following International transactions carried out by the assessee with Associated Enterprises (AEs) within the meaning of section 92B of the Act.
Sl. Nature of Transaction Value Rs. No. 1. Rendering Software Services 2398249108
2. Rendering marketing support 711835390 Services 3. Rendering back office support 1451879992 services 4. Purchase of fixed assets and 108843969 miscellaneous items 5. Availing of technical services 45802045 6. Purchase of service stock 54526409 7. Sale of service stock 2035134 2.1 The learned Assessing Officer referred the determination of arm’s length price of the International transactions carried out by the assessee to the Ld. Transfer Pricing Officer (TPO). The Ld. TPO after considering submission of the assessee proposed adjustment to International transactions of ‘software development services’ and ‘marketing support services’. 2.2 Under ‘software development services’ segment, the Ld. TPO accepted the Transaction Net Margin Method (TNMM) as appropriate method for benchmarking Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI). The learned TPO Identified 16 comparables, including 3 comparables chosen by the assessee and computed net average margin (PLI) of the comparables at 23.92% and worked out adjustment of Rs.16,32,10,833/- to the price received by the assessee. 2.3 Similarly, under the ‘marketing support services’ segment, the learned TPO benchmarked the transaction using TNMM as most appropriate method and OP/OC as profit level indicator. The learned TPO Identified 10 comparables including one comparable chosen by the assessee and worked out their average profit margin (PLI) at 19.65% and accordingly, computed adjustment of Rs.6,93,82,803/-to the price received. 2.4 The learned TPO also held the interest on trade receivables pending at the year-end as International transaction and benchmarked the same at base rate of the State bank of India of 12.84% as arm’s length interest rate to be charged for deemed loan advanced for a period of the receivables outstanding beyond the stipulated period in the service agreement and made adjustment of Rs.45,39,58,537/-. In this manner, the learned TPO proposed total adjustment of Rs.68,65,52,173/-. In the draft assessment order issued on 29/12/2017, the Assessing Officer proposed transfer pricing adjustment of Rs.68,65,52,173/-alongwith addition on account of reconciliation of Tax Deducted at Source (TDS) of Rs.23,58,11,169/-. 2.4 Aggrieved, the assessee filed objections before the Ld. Dispute Resolution Panel (DRP), challenging the additions proposed by the learned Assessing Officer in draft assessment order. Under the software development services segment and marketing support service segment adjustments, the learned DRP issued direction for including/excluding of certain comparables. The learned DRP also upheld the finding of the learned TPO for treating the forex gain/loss as operating item, computing margin of both the assessee as well as the comparables. The learned DRP directed to allow working capital adjustment, however denied the request of allowing risk adjustment in view of the absence of reliable data. On the adjustment of the receivables, the learned DRP directed to apply rate of 6 months LIBOR + 400 basis point. The learned DRP further directed the TPO to charge interest beyond arm’s-length period for any delay beyond a period of 60 days. On the issue of TDS reconciliation, also the learned DRP directed the Assessing Officer to recomputed the addition made if any due to mismatch of form No. 26AS. 2.5 After giving effect of the direction of the learned DRP, the transfer pricing adjustment in the case of the assessee was computed as under:
Sl. No. nature of transaction amount of adjustment (INR) 1. Software development services 20, 55, 61, 108 2. Marketing support services NIL 3. Interest on receivables 3,81,58,172 Total 24,37,19,280 2.6 In the impugned assessment order, the Assessing Officer accordingly made addition of transfer pricing adjustment of Rs.24,37,19,280/- and addition on account of TDS reconciliation of Rs.34,72,945/-. 2.7 Aggrieved with the additions made, the assessee is before the Tribunal raising the grounds as reproduced above.
Before us, the Ld. counsel submitted that the ground No. 1 and 2, 3 and 3.1, 3.3 are general in nature. Accordingly, we are not required to adjudicate upon those grounds. 3.1 He also did not press ground No.3.2, 3.4.3 and 3.4.4. In ground No. 3.4.6, he did not press inclusion of ‘Lucid Software Ltd.’ for set of comparable companies. Accordingly, all these grounds are dismissed as infructuous to the extent not pressed on behalf of the assessee.
In respect of the balance grounds, the learned counsel submitted that there are only two issues involved. The first issue is regarding inclusion/exclusion of certain comparables under the ‘software development service’ segment and the second issue is regarding ‘interest on receivables’. 4.1 In support of the issues raised, the assessee filed paper books in volume No. I to Volume No. III, containing pages 1 to 964. 4.2 Regarding the issue of inclusion/exclusion of comparables under the software development service segment, the Ld. counsel of the assessee first referred to pages 47, 65, to 75 of the paper book to highlight the Functions, Assets and Risk (FAR) analysis of the assessee company. According to him, the assessee is engaged in providing software development support, programming and application support for various products sold and distributed by Avaya Group Entities. He submitted that software support service provided by the assessee are in the nature of development, coding, testing and documentation out of its three locations in India, i.e., Pune, Hyderabad and Bangalore. Regarding the assets, he submitted that Avaya India only own computer, furniture and fixtures and employed trained personals, but the intellectual property rights (IPR) and other intangibles are owned by Avaya group companies and not by the assessee. He also submitted that the assessee is a risk-free entity not having any kind of risk including market risk, ideal time risk, technology obsolescence risk, attrition risk, credit and collection risk, foreign exchange fluctuation risk. He summarized that assesses is a captive service provider with markup of 16.00% on the cost incurred. The learned DR could not controvert the FAR analysis referred by the Ld. counsel of the assessee.
4.3 After referring to the FAR analysis of the assessee, the leaded counsel argued exclusion of following companies under the software service segment:
1. 1. Thirdware Solutions Ltd. 2. Larsen and Toubro Infotech Ltd. 3. Infobeans Technologies Ltd. 4. Persistent System Ltd. 5. Mind Tree Ltd. 6. Tata Elexi Ltd. 7. Cigniti Technologies Ltd.
8. R S software (India) Ltd. 4.4 The learned counsel challenged inclusion of following company in the set of comparables for software service segment finally selected after the direction of the learned DRP: 1. Cat Technologies Ltd 2. Mavric Systems Ltd. 4.5 We have heard rival submission of the assessee as well as of the Revenue on the exclusion/inclusion of the comparables challenged by the assessee. The arguments of the parties and our decision in respect of the each company are discussed below:
Thirdware Solutions Ltd. 5.1 The learned TPO held the company as functionally comparable in view of observation that it is engaged in the implementation and consulting services of software based on ERP and business intelligence, however, the learned DRP observed that company was engaged in different business segments and directed to retain this company as comparable only if segment data is available.
5.2 The learned counsel of the assessee submitted that the Ld. AO/TPO in the order passed in pursuant to the direction of the Ld. DRP, has not followed this direction of the learned DRP. He referred to various pages of the paper book, which contained extract of annual report of the company. He referred to page 259 and supplementary papers of annual report filed and submitted that in the statement of profit and loss, the entire revenue of Rs.20,675 lakhs was from sale of product and revenue from sale of services was shown at Nil. He also referred to page 256 of the paper-book and submitted that only geographical segment data of India and overseas is available in the annual report and no data of business-wise segment is available in the annual report. Accordingly, he submitted that according to the learned DRP this company is required to be excluded from the set of the comparables. 5.3 The learned DR on the other hand relied on the finding of the TPO. Decision 5.4 We have heard the parties on the issue in dispute. The perusal of the pages of the annual report cited by the learned counsel of the assessee, it is evident that the company has shown revenue only from sale of product and no segment data in respect of the software services is available in annual report of the company. In view of the facts, we hold that the Learned AO/TPO is not justified in including the company in the set of the comparables in the final assessment order passed. Accordingly, we direct the AO/TPO to exclude this company from the set of comparables.
Larsen and Toubro Infotech Ltd 6.1 Learned TPO held the company functionally comparable in view of the observation that it offers end-to-end software solutions and services. The learned DRP retained the company is functionally similar to the assessee and rejected the contention of the assessee of effect of high turnover and intangibles owned by the company on margins as the assessee failed to demonstrate the same before the learned DRP. 6.2 The learned counsel of the assessee referred to page 251 and 252 of the paper book and submitted that the company is engaged in development of innovative solutions (i.e. products). He referred to page 253 of the paper book and submitted that service and products have been used interchangeably in the annual report and no sufficient segment information is available. He submitted that in segment reporting expenses of Rs.20,580 lakhs have not been allocated to the segment of service cluster, industrial cluster, telecom discontinued business. The learned counsel submitted that coordinate bench of the Tribunal in the case of Piteny Bowes Software India Private Limited in for assessment year 2014-15 has rejected the company as comparable on account of insufficient segmental information. 6.3 The learned DR, on the other hand, referred to page 250 of the assessee’s paper book and submitted that revenue has been only shown from IT services and there is no sale of products by the company. He submitted that, the service cluster, industrial cluster telecom (PES) discontinued business are only verticals wherein the company has provided software services and thus the company is a valid comparable to the assessee.
Decision 6.4 We have heard submission of the parties. On perusal of the extract of the annual reports filed in the paper-book by the assessee, we find that as far as function of the assessee is concerned, the word service and products have been used interchangeably and it cannot be ascertained from the part of the annual reports filed before us, that the company was engaged only in providing software services. In the circumstances, we feel it appropriate to restore the issue of deciding functional comparability to the learned AO/TPO with the direction to the assessee to file the complete annual report of the company. If required, the TPO may gather information u/s 133(6) of the Act form the company. He shall provide a copy of the information to the assessee also. If after inquiry , no separate segment data for sale of services and sale of product is available, then the company may be dropped from the set of the final comparable for software service segment.
Infobeans Technologies Ltd.-Margin 48.97% 7.1 This company has been included by the learned TPO in the set of comparables. Before the learned DRP, the assessee submitted that insufficient financial data/segmental information was available in the annual report in respect of the nature of the services rendered. The assessee also contested the company is functionally non-comparable due to diversified high- end activity such as ‘automation engineering’, ‘service now’, ‘UX’ and ‘UI’, ‘customize software’, ‘storage and virtualization’, ‘publishing and SDO’, and ‘e-commerce’. The learned DRP however held that the company was engaged in software development services and the automation engineering mentioned on the website, was in the contracts of providing automated testing and there was no separate revenue from automation engineering and accordingly directed to retain the comparable. 7.2 Before us, the learned counsel referred to page 275 (Note- 20) and 276 (Note- 27) and submitted that no sufficient data to establish with certainty that assessee only was engaged in software development. He submitted that as per note 27, export of goods/services were calculated on FOB basis, thus the company was engaged in sale of products. The learned counsel referred to page 742, which is website details of the company and submitted that the company was engaged in providing diversified services. The learned counsel relied on the decision of the Delhi bench of the Tribunal in the case of Xchanging Technology Services India Pvt. Ltd. Vs DCIT, Circle-27(2),New Delhi, (Assessment Year: 2010-11), wherein it is held that the company cannot be accepted as comparable in absence of sufficient financial information. 7.3 The learned DR, on the other hand, relied on the order of the lower authorities. 7.4 We have heard rival submission of the parties. We find that the Note - 27 of the annual report has provided details of earning in foreign exchange, which mentioned that export of goods/services amounting to Rs.32,96,59,883/- have been calculated on FOB basis. The Note - 20 of the annual report mention revenue from operations earned on sale of software (export) amounting to Rs.32,96,59,883/-. Thus, in view of the Note 27, the quantum of export of the goods and export of the services cannot be ascertained and thus in view of no segmental data of export of the goods and export of the services available separately, we are of the opinion that the company cannot we selected as comparable at entity level. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of the comparables.
Persistent Systems Ltd. 8.1 According to the learned TPO, the company passed all filters and is functionally comparable. The learned DRP also held that the company has only one stream of the revenue i.e. sale of software services and there was no stock in trade. Before us, the learned counsel of the assessee referred to page 284 to 290 of the paper-book submitted that the company was engaged in providing software products along with software services. He referred to page 287 the paper-book and submitted that the company specialized in building software products and has developed its own brand “Accelerite” for branding its products. He submitted that in view of no segmental data available, the company cannot be selected as comparable at entity level. 8.2 The Ld. DR, on the other hand, relied on the order of the TPO as well as direction of the learned DRP. 8.3 We have heard the rival submission of the parties. On page 290 of the paper-book, in the notes forming part of the financial restatement of the company, under the head segmental information, it is mentioned that the company operates predominantly for providing software products, services and technology innovation covering full life-cycle of products to its customers. The segmental information, however, has been provided for the verticals in the field of ‘telecom and wireless’, ‘life science’ and ‘healthcare and infrastructure and systems’. No segmental data of software products and services are available in the annual report of the company. In the circumstances, we are of the opinion that the company cannot be selected as comparable at entity level in absence of any segmental data of software product and software services. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of comparables.
Mindtree Limited. 9.1 The company was selected as comparable by the Ld. TPO. The learned DRP held the company as primarily from the software service in view of the revenue recognition mentioned in the annual report. The learned DRP held broad functions of the company as similar to the assessee and in view of the benchmarking under TNMM, found the company as comparable to the assessee. Before us, the learned counsel of the assessee referred to page 248 of the paper-book and submitted that in background to significant accounting policies, it is reported that the company is engaged in providing wide range of services and thus it is functionally dissimilar to the assessee. The learned counsel referred to page 245 and submitted that the company invested in products and platforms and it owns significant intellectual property. He referred to 19 patents filed by the company mentioned in annual report. The learned counsel submitted that in view of no segmental information available, the company should be excluded from the set of comparables. He submitted that the company has been excluded by the Tribunal in the case of Nokia Siemens Networks India Ltd. in on account of functional dissimilarity because of wide range of services. 9.2 The learned DR, on the other hand, relied on the order of lower authorities and submitted that though the company owned intellectual property right, however, the company was engaged only in providing software development services. He submitted that the assessee has not demonstrated as how owning of intellectual property rights has affected the margin of the company. 9.3 We have heard the rival submission of the parties. The various segments mentioned in the annual report comprises of manufacturing, BFSI, hi-tech, travel and transportation and others, but the assessee is primarily engaged in providing global software development in these areas. In the background to significant accounting policies, however, mention other services offered by the company which also include business process management, business technology consulting, cloud, digital businesses, independent testing, infrastructure management services, product engineering and SAP services. The company also own intellectual property rights as pointed out by the learned counsel as against no intellectual property rights owned by the assessee, and thus, assets of the company cannot be compared with the assessee. In view of functional dissimilarity as well as the difference in the assets owned by the company vis- Learned AO/TPO to exclude the company from the set of the final comparables.
Tata Elexi Ltd. 10.1 The Ld. TPO selected the company as comparable as according to him it is functionally similar in view of system integration and software development services provided. The Ld. counsel of the assessee referred to pages 732 and 733 of the paper-book and submitted that the company was engaged in development of the hardware and software for embedded products such as multimedia and some other electronics. He submitted that the company has been rejected in assessee’s own case by the ITAT in assessment year 2007-08 on account of similar reasoning. 10.2 On the other hand, the learned DR submitted that the company is primarily in software development and out of total revenue of Rs. 772 crores, the revenue from sale of services is of Rs. 725 crores. 10.3 We have heard the submission of both parties and also perused the order of the Tribunal in the case of the assessee for assessment year 2007-08 available on page 519 of the paper book. On perusal of the annual report of the company, we find that revenue from operations include sale of traded goods of Rs.47 crore and revenue from rendering of the services comprises of product design (Rs.664 crore), graphic animation and gaming (Rs.18.43 crores) and system integration and support (Rs.42.39 crores). In our opinion, in absence of any segmental result of trading as well as services rendered, the AO/TPO to exclude the company from the set of the comparables.
Cigniti Technologies Ltd. 11.1 The learned DRP observed that the company was included by the DRP in assessment year 2012-30 and, therefore, should be retained in the year under consideration also for the same reasons. The learned counsel of the assessee referred to Page No. 293 of the paper-book and submitted that the company has acquired ‘Gallop Solutions Inc., USA’ during the year under consideration and due to which, total Revenue has increased by 72% by way of addition of more than 50 new clients. He submitted that in view of this extraordinary event, the company is liable to be excluded from the set of the comparables. He also referred to page 295 of the paper book and submitted that the company was engaged in software testing business. The Ld. counsel relied on the decision of the tribunal in the case of Mercedes-Benz research and development India Private Limited in IT(TP)A No. 1645/Bang/2016, wherein it is held that software testing company cannot be compared with software development company. 11.2 The Ld. DR, on the other hand, submitted that the ground of acquisition and an extraordinary event was not contested before the learned DRP. 11.3 We have heard the rival submission and perused the relevant material on record. The fact that of extraordinary event resulted into rise in revenue of the company, has not been disputed. In our opinion, if any fact, which is evident from the record, then any party cannot be prohibited to present the said fact in pleading to support its claim. The Tribunal the case of Hyundai motors India engineering Private Limited in has excluded the company from set of the comparables on account of extraordinary event of acquisition. Respectfully, following the same ratio, in view of extraordinary event during the year under consideration, we direct the Ld. AO/TPO to exclude the company from the set of the comparables.
R. S. Software (India) Ltd. 12.1 The company was selected by the assessee in its transfer pricing study. The learned DRP retained the company in view of the fact that it was included by the DRP for assessment year 2012-13. 12.2 The learned counsel of the assessee submitted that company is engaged in on-site development of the software and cannot be compared with the assessee, which is an offside software developer. The Ld. counsel also referred to page No. 299 of the paper book and submitted the company was engaged in providing high-end technical services, including analytics services, testing services, dispute management, security management etc. He also submitted that company was engaged in significant R&D Activities in the areas of business intelligence, mobile payments, testing automation, cloud computing etc. According to the Ld. Counsel, the company being functionally dissimilar, cannot be compared with the assessee.
12.3 The Ld. DR, on the other hand, submitted that difference in business model cannot be a criterion for excluding the company from set of the comparables. He submitted that the company has been chosen as comparable in the assessment year 2012-13 also by the Ld. DRP. 12.4 We have heard rival submission of the parties. We find that in case of on-site development and off-site developments services are rendered in different geographical locations. In case of on-site development, the company charge higher revenue from the customers in view of the expenses incurred in foreign currency and higher input costs on human resources, whereas in case of off-site development all expenses on human resources are incurred domestically and thus revenue or fee charge from the customer would be generally less than what would be charged in case of on-site customers. This business model difference makes difference in FAR analysis. The company has been excluded in the case of Microsoft India (R&D) Private Limited in as it was involved in R&D activities for software development services. In view of the decision of the Tribunal (supra), the company becomes functionally dissimilar to the assessee. Accordingly, keeping in view the difference of business model and functional dissimilarity, we direct the Ld. AO/TPO to exclude the company from the set of the comparables.
The Ld. counsel has contested for inclusion of the following two companies into the set of comparables.
CAT Technologies Ltd. 14.1 The learned TPO and learned DRP rejected this company as comparable, as according to them it fails on the ground of persistent loss filter. 14.2 The Ld. counsel referred to Page No. 752 & 753 of the paper-book and submitted that company was having operating margin of 5.11% in financial year 2011-12 and as it was not a continuous loss-making for more than 3 years and thus, cannot be rejected on account of persistent operating losses in view of the decision of the Tribunal bench Pune in the case of Bost India (P) Ltd in ITA No. 1380/PN/2010. 14.3 The Ld. DR, on the other hand, objected and relied on the order of the lower authorities. 14.4 We have heard rival submission and perused the relevant material on record. On perusal of page 380 of the paper book, which is a copy of profit and loss account of the company, we find that revenue receipts also include consultancy fee received and there is no separate segment for consultancy in the annual accounts of the company. In our opinion, in absence of any separate segmental date of software development services, the company cannot be treated as comparable at entity level. In view of the above, without examining the persistent losses filter, we uphold the rejection of the company by the lower authorities on functional dissimilarity at entity level.
Mavrick Systems Ltd. 15.1 The learned counsel submitted that the company was originally introduced before the learned DRP, however, the DRP did not adjudicate on functional comparability of the company. According the Ld. counsel submitted that the matter of examining the comparability may be sent back to the learned DRP. 15.2 The Ld. DR, on the other hand, objected that no complete details of functional comparability of the company has been submitted by the assessee either before the learned DRP or before the Tribunal. He submitted that as per page 311 of the paper-book the company is engaged in testing services, which the assessee itself has contested to be different from the software development services. 15.3 We have heard the rival submissions of the parties. Before us the learned counsel has requested for sending the matter of examination of the comparability of the company to the learned DRP, however, the Ld. counsel has not filed complete annual report of the company before us for justifying, whether the company is functionally similar to the assessee. In view of no documentary evidence filed in support of its claim of functional similarity, we reject the request of the learned counsel for sending the matter of examining comparability of the company back to the learned DRP.
The grounds raised
by the assessee in respect of exclusion/inclusion of comparables, are accordingly allowed partly for statistical purposes.
17. In ground No.3.6, the assessee has objected for treating of foreign exchange gain/loss as non-operating items by the learned DRP while determining the ALP of international transactions. 17.1 The learned TPO stated that forex gain/loss arising on account of change in foreign exchange rate at the time of realization Foreign Exchange (Forex) rate. According to him, this does not have any bearing on the transaction that has already been undertaken and thus does not affect the ALP of the transaction. Further, he also observed that different companies follow different hedging policies to cover themselves against forex risk and it was not possible to find out the detail of hedging policies followed by all the comparable companies accordingly, he held the foreign exchange fluctuation as non-operating in nature. The Ld. DRP upheld the finding of the Ld. TPO in view of the decision of the Hon’ble Supreme Court in the case of Woodward Governor India Private Limited in Civil appeal No. 2006 of 2009, wherein the foreign exchange difference arising from foreign currency transaction has been held to be a deductible expenditure under section 37 of the Act i.e. non-operating item. The learned DRP accordingly, rejected the objection of the assessee. 17.2 Before us, the Ld. counsel of the assessee submitted that Ld. CIT(A) in the assessee’s own case for assessment year 2013-14, followed the principle of consistency and held that foreign exchange is to be considered as operating in nature. 17.3 The learned DR, on the other hand, submitted that it cannot be verified from the annual reports of the comparable company’s that the foreign exchange gain/loss relates only to revenue transaction and not capital transaction and in absence of which considering foreign exchange gain/loss as part of the operating margin will distort the true margin from the relevant segment. He further submitted that once the relevant International transaction has been booked in Indian rupees at exchange rate of foreign currency , prevalent at the time of the transaction, it take into account business circumstances at relevant time. According to him, taking into account any subsequent gain or loss on account of earlier transactions into year under consideration, definitely distorts the operating margins of the assessee or comparable. 17.4 We have heard rival submissions and perused the relevant material on record. We reject the contention of the learned counsel that finding of the Ld. CIT(A) might be followed. We have to adjudicate the issue after analysis of facts of the case and application of relevant laws. We agree with the contention of the learned DR that there are no details, whether the foreign exchange gain/loss appearing in the annual reports of the comparable is related only to the revenue transactions. We also agree with the contention that the transaction of overseas purchase or sales in foreign currencies are booked in books of accounts in Indian rupees at relevant foreign exchange rate. So once, a transaction has been converted into Indian rupees, it becomes at par with other transaction, removing the effect of transaction made in other currency. Now, if subsequently, in the year under consideration or in subsequent year, the taxpayer gains or loss on account of those overseas transaction, such forex gain or loss is purely on account of subsequent financial forex market and should not impact the value of the overseas purchase or sale transaction for the purpose of comparability with the International transaction of the assessee. Accordingly, we uphold the finding of the learned DRP on the issue in dispute and reject the ground of the assessee.
Regarding Ground No. 3.7 of the appeal, the Ld. counsel of the assessee admitted that no comparative data to account for any risk adjustment was either provided before the lower authorities or provided before the Tribunal and hence, it was not possible to work out the risk adjustment. Accordingly, the ground of the appeal was dismissed.
In ground No. 4 to 4.6 of the appeal, the assessee has challenged transfer pricing adjustment in relation to notional interest on outstanding receivables of Rs.3,81,58,172/-. 19.1 Before us, the Ld. counsel of the assessee submitted that assessee is a debt free entity and since it does not carry any interest cost on its funds, therefore, it is not necessarily required to charge an interest on delayed realization. In this respect, the Ld. counsel relied on the decision of the Hon’ble jurisdictional Delhi High Court in the case of Bechtel India (ITA 379/2016). 19.2 On the other hand, the learned DR relied on the order of the lower authorities. 19.3 We have heard the rival submissions and perused the relevant material on record. On perusal of financial statements of the assessee placed on page 1 to 27 of the paper book, we find that assessee has not borrowed any money. We find that the Hon’ble Delhi High Court in the case of Bechtel India (supra) has observed that where the appellant is a debt free company, the question of receiving any interest in receivable did not arise. The relevant finding of the Hon’ble High Court is reproduced as under:
4. As far as question (B) concerning the adjustment for interest no receivables, the Court finds that the ITAT has returned a detailed finding of fact that the Assessee is a debt free company and the question of receiving any interest on receivables did not arise. Consequently, no substantial question of law arises for consideration as far as this issue is concerned.
19.4 Respectfully following above decision of the Hon’ble jurisdictional High Court, no adjustment on account of interest on outstanding receivable is warranted in the case of the assessee. Accordingly, the relevant grounds of the appeal are allowed.
As for as ground No. 5 of the appeal is concerned, the reconciliation of the revenue/receipts corresponding to TDS statement in form No. 26AS and the receipt shown in TDS claimed by the assessee, is concerned on the direction of the learned DRP, the Assessing Officer in final assessment order, verified the amount of Rs.23,23,38,224/- out of Rs.23,58,11,169/- related to Bharti Group and made addition for the balance amount of Rs.34,72,945/-, which the assessee could not reconcile. In our opinion, this is a matter of verification, whether the amount represented in in Form No. 26A-S, is income of the assessee for the year under consideration or advance or otherwise. 20.1 We, therefore, direct the assessee to produce all necessary documents in support of its claim that receipt of Rs.34,72,945/- are not income taxable in the year under consideration. The Assessing Officer may decide the issue in dispute in accordance with law. The ground of the appeal is accordingly allowed for statistical purposes.
In ground No. 6, the assessee has sought for allowing TDS credit of Rs.94,054/-. In our opinion, the matter is only of verification at the level of the Assessing Officer, and accordingly, we direct the Assessing Officer to verify the claim of the assessee and decide the issue in accordance with law. The ground of the appeal is accordingly allowed for statistical purposes.
The ground No. 7 in relation to interest in the section 234A and 234B of the Act, is consequential in nature and accordingly dismissed as infructuous.
The ground No. 8 in relation to initiating penalty proceedings under section 271(1)(c) of the Act, is premature at this stage and, accordingly dismissed as infructuous. 24. In the result, the appeal of the assessee is allowed partly for statistical purposes. Order is pronounced in the open court on 24th September, 2019.