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Income Tax Appellate Tribunal, MUMBAI BENCHES “J”, MUMBAI
Before: Shri C. N. PRASAD, & Shri G. MANJUNATHA
आदेश / O R D E R Per G. Manjunatha (Accountant Member)
These cross appeals filed by the assessee as well as the Revenue are directed against directions of the Dispute Resolution Panel-3, Mumbai, dated 27/11/2015, u/s 144C(5) of the Act, for AY 2011-12, which, in turn, arised out of order of the TPO/AO u/s 143(3) r.w.s 144C(1) of the Act ,dated 11/02/2015. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this consolidated order.
The assessee, in its memorandum of appeal has taken following grounds of appeal.
Adjustment I Addition to Total Income INR 3,64,56,910/- 1. on the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (AO) erred in proposing and the Hon'ble Dispute Resolution Panel ('DRP') further erred in confirming the proposed addition to the Appellant's total income of INR 3,64,56,910/- based oil provisions of Chapter X of the Income-tax Act, ('the Act'). Requisite Conditions under Section 92C(3) - Not Satisfied 2. On facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned AO and learned TPO in not stating any reasons to show that either of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied before making all to the income of the Appellant. Software Development Services (INR 3,55,82,325) Cherry picking of comparable companies 3. On facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRIP further erred in upholding / confirming the action of the learned AO and learned
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TPO in arbitrarily selecting certain companies to benchmark the international transaction of payment for software services merely on the premise that the companies were forming part of the accept-reject matrix of the Appellant thereby resorting to cherry picking of comparable companies. In light of the aforesaid, the Appellant prays that the action of the learned TPO and the Hon'ble DRP is liable to be quashed or alternatively ignored. Incorrect selection of comparable companies 4. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO in selecting certain companies thereby ignoring Appellant's submission with respect to rejection of those companies. The Appellant prays that since the action of the learned TPO and the Hon'ble DRP is against the established principles of benchmarking exercise, is liable to be rejected Incorrect rejection of the comparable companies selected by the Appellant in the transfer pricing report 5. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned AO and learned TPO in rejecting one of Appellant's comparable viz. CG-V AK Software & Exports Limited by erroneously stating that the company is a persistently loss making company and further erred in ignoring Appellant's submission that the company has earned profits during FY 2010-11 and it is not a persistently loss making company. The Appellant prays that since the action of the learned TPO and the I Hon'ble DRP is against the established principles of benchmarking exercise, is liable to be rejected Inconsistency in approach while selecting/rejecting comparable companies 6. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO of rejecting one of the Appellant's comparable viz. Varna Industries Limited on the grounds that the company is engaged in providing Engineering Services however erroneously erred in accepting E-Infochips Limited providing hi- tech engineering services, which clearly brings out the inconsistency in the approach adopted by the learned TPO as well as the Hon'ble DRP. In view of the above, the Appellant prays that the aforesaid inconsistency in the approach of the learned TPO as well as the Hon'ble DRP lacks
4 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. consistency and contains inherent contradictions being against the established principles of benchmarking exercise and is liable to be rejected/appropriately corrected. Incorrect application of an arbitrary filter to select functionally different companies 7. On the facts and in the circumstances of the case and in law, the Hon'ble DRP further erred in arbitrarily applying a filter of software development services more than 50 per cent to select two companies viz. e-lnfochips Limited and Wipro Technologies Limited to the final set thereby ignoring all the submissions of the Appellant with respect to deletion of the said companies and demonstrating a prejudicial mind-set to make an adjustment to the total income of the Appellant. In view of the above, the Appellant prays that action of the learned TPO and the Hon'ble DIZP of adopting an arbitrary filter without any basis is unwarranted and the companies should be excluded from the final set. Incorrect Margin Calculations: 8. On the facts and in the circumstances of the case and in law and without prejudice to Appellant's contentions, the learned TPO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO of incorrectly calculating margins of few comparable companies. In view of the above, the Appellant prays that learned AO as well as the learned 'ITO be directed to consider the correct margin of comparable companies. Disregarding no intention of shifting profits 9. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in not appreciating the fact that the Appellant was claiming tax exemption under Section 10A of the Act and accordingly had no intention to shift profits outside India by manipulating the prices charged in its international transactions which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. Use of Multiple Year data 10. On the facts and in the circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in rejecting the plea for use of multiple year data as specified in Proviso to rule 10B(4) of the Income Tax Rules, 1962; Adjustment as per Rule 10B(1)(e)(iii) of the Rules
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11. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the learned AO and learned TPO in not making appropriate adjustments to the comparable companies as is required by Rule 10B(1)(e)(iii) of the Rules, which has rendered the benchmarking exercise carried out by the learned TPO inconsistent with the requirement of law and hence is liable to be rejected. Interest on outstanding debtors (1NR 8,74,585) 12. On the facts and in circumstances of the case and in law, the learned TPO and the learned AO under the directions of the Hon'ble DRP erred in making an adjustment of INR 8,74,585 by using the LIBOR plus 2% for the purpose of benchmarking the notional interest cost to the Appellant by erroneously ignoring the fact that the Appellant is a zero debt company and it does not have any borrowings / loans from external sources, therefore no actual interest cost borne by the Appellant, thereby disregarding the factual explanations submitted by the Appellant during the course of assessment proceedings. In view of the above, the Appellant prays that the addition of notional interest on account of the delay in receipts from the AEs made by the learned AO, learned TI'0 and confirmed by the Hon'ble DRP is erroneous, unwarranted and should be deleted. Initiation of Penalty Proceedings under section 271(1)(c) of the Act 13. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the learned AO be directed to drop the penalty proceedings initiated under section 271(1)(c) of the Act. Computation of Interest under Sections 234B, 234C and 2341) of the Act 14. On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under Section 234B, Section 234C and Section 234D of the Act. The Appellant prays that the learned AO be directed to re-compute the interest under aforesaid sections of the Act.
The Revenue in its memorandum of appeal has taken following grounds of appeal.
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" On the facts and in the circumstances of the case and in law, the Dispute Resolution Panel has erred in including the comparable namely (i) R. System International Ltd as the comparable company for benchmarking ALP for International Transaction of the assessee with the AE.
2. On the facts and in the circumstances of the case and in law, the Dispute Resolution Panel has erred in not considering the TP adjustments made @ SBI PLR + 3% of Outstanding Receivables/Sundry Debtors in respect of Interest on Sundry Debtors. 3. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid ground of appeal
at any time before or at the time of hearing of appeal.
4. The appellant prays that he direction of the DRP, Mumbai on the above directions be set-aside and that of the assessing officer be restored."
4. The brief facts of the case are that the assessee M/s Mobileum (India) Pvt.
Ltd. was incorporated in India on 11th April 2000 and is a wholly owned subsidiary of UnwiredSoft, USA. The assessee renders software development services in the field of telecom and communication segments to its parent AE Uniwiredsoft USA. The conceptual framework, technical specifications and basic design for development of software is provided by Uniwiredsoft, USA to the assessee and on the said design and specifications, assessee designs, develops and tests the software. The assessee has entered in to an agreement with the AE for provision of software development service in the nature of providing roaming solutions. The assessee operates as a software development service provider for which it earns remuneration at cost plus 15% markup from its AE. In its transfer pricing study report (TPSR), the assessee had selected TNMM as the most appropriate method for determining Arm’s Length Price of its transaction and selected 14 comparables companies which were 7 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. engaged in providing similar software services as derived from the Prowess and Capitaline database. The assessee has selected 14 comparables with average margin of 13.35% and then compared to the margin earned by the assessee of 14.89% and stated that international transaction with its AE is at ALP. The details of comparables with margin selected by the assessee are as under:-
NCP Sr. No. Company Name 2011(%) 1 Akshay Software Technologies 0.69 Ltd. 2 CG-Vak Software & Exports Ltd. 5.44 3 Evoke Technologies Pvt. Ltd. 8.11 4 Goldstone Technologies Ltd. 5.92 Helios & Matheson Information 5 15.16 Technology Ltd. 6 LGS Global Ltd. 13.57 7 Mindtree Ltd. 8.86 8 Persistent systems Ltd. 25.88 9 Powersoft Global Solutions Ltd. NA 10 R S Software (India) Ltd. 16.18 11 R Systems International Ltd. 6.50 12 Sasken Communication 27.22 Technologies Ltd. 13 Tata Elxsi Ltd. 8.59 14 Vama Industries Ltd. 14.59
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Arithmetic Mean 12.05
For the year under consideration, the assessee had filed its return of income on 23/11/2011 declaring total income at Rs.3,50,22,946/-. The case was selected for scrutiny and during the course of assessment proceedings, the AO referred the TP study to the TPO for computing Arm’s Length Price in respect of international transactions of the assessee with its Associate Enterprises. The TPO, in the proceedings, before him, accepted seven out of fourteen comparables as selected by the assessee in TPSR and further included eleven other companies as appropriate comparables that had been rejected by the assessee in TPS, thus, the TPO has selected final set of 18 comparables with arithmetic mean of their margin at 27%. Accordingly, an adjustment of Rs.5,26,55,987/- was recommended by the TPO in its order passed u/s 92CA(3) of the Act, dated 07/01/2015. The details of final set of comparables selected by the TPO are as under:-
No. Name OP/OC 1 e-Infochips Ltd. 62.58 TPO 2 Igate Global Solutions Limited 24.03 TPO 3 KALS Information Systems 8.88 TPO Ltd. (Seg) 4 LGS Global Ltd. 14.11 Assessee 5 Mindtree Ltd. 13.38 Assessee
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6 Persistent Systems Ltd. 25.87 Assessee 7 Thirdware solutions Ltd. 17.45 TPO 8 Acropetal technologies Ltd. 36.69 TPO 9 L & T Infotech Ltd. 18.00 TPO 10 Powersoft Global Solutions 19.91 Assessee Ltd. 11 R S Software (India) Ltd. 16.2 Assessee 12 Sasken Communication 29.36 Assessee Technologies Ltd. 13. Tata Elsxi (seg) 11.4 Assessee 14 Zylog Systems Ltd. 28.74 TPO 15 Wipro tech Ltd. 54.42 TPO 16 Sankhya infotech 26.2 TPO 17. Infosys Ltd. 43.53 TPO 18 E Zest solutions Ltd. 34.83 TPO Mean 27
The AO has passed draft assessment order u/s 143(3) r.w.s. 144C(1) of the Act, dated 11/02/2015 and made additions towards Transfer Pricing adjustment suggested by the TPO with regard to international transactions of the assessee with its AE. Against draft assessment order, the assessee has filed objections before the Ld. DRP -3, Mumbai. The DRP, vide its directions u/s 144C(5) of the Act, dated 27/11/2015 excluded certain comparables selected by the TPO and also included
10 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. certain fresh comparables and thus, selected final set of eighteen comparables with arithmetic mean margin of 23.07% and suggested TP adjustment of Rs.3,55,82,325/- . The details of final set of comparables selected by the DRP with average arithmetic mean margin of 23.07% is as follows:-
Sr Name No. 1 e-Infochips Ltd. 0.69 DRP 2 Igate Global Solutions Limited 8.11 DRP KALS Information Systems 3 14.11 DRP Ltd. (Seg) 4 LGS Global Ltd. 13.38 DRP 5 Mindtree Ltd. 25.87 DRP 6 Persistent Systems Ltd. 19.91 DRP 7 Thirdware solutions Ltd. 16.20 DRP 8 Acropetal technologies Ltd. 6.50 DRP 9 L & T Infotech Ltd. 29.36 DRP 10 Powersoft Global Solutions 11.40 DRP Ltd. 11 R S Software (India) Ltd. 62.60 DRP 12 Sasken Communication 8.88 DRP Technologies Ltd.
13. Tata Elsxi (seg) 17.45 DRP 14 Zylog Systems Ltd. 36.69 DRP
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15 Wipro tech Ltd. 28.74 DRP 16 Sankhya infotech 54.42 DRP 17. Infosys Ltd. 26.20 DRP 18 E Zest solutions Ltd. 34.83 DRP Mean 23.07 DRP
The AO has passed final assessment order u/s 143(3) r.w.s. 144C(1) of the Act, dated 30/12/2015 and made TP adjustment as suggested by the DRP-3, Mumbai, at Rs.3,55,82,325/-. The AO has also made adjustment towards interest on sundry debtors as suggested by the TPO at Rs.8,74,585/-.
Aggrieved by the order of DRP-3, Mumbai, the assessee as well as the Revenue are in appeal before us.
The assessee has taken various grounds in its memorandum of appeal challenging TP adjustment suggested by the DRP on various grounds including cherry picking of comparable companies, incorrect selection of comparable companies, incorrect rejections of comparable companies selected by the assessee in TP report, inconsistency in approach while selecting or rejecting of comparable companies, incorrect application of arbitrary filter to select functionally different companies and so on, but the main issue revolves around from ground taken by the assessee is exclusion/inclusion of certain comparables. The assessee has filed a 12 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
chart with an option to include and exclude certain comparables as per which, it has given four options. The Ld. AR for the assessee submitted that if, E-infochips Ltd., Wipro tech Ltd. and E-Zest solutions Ltd. are excluded from the final set of comparables and CG-Vak Software & Export Ltd. is included in the final set of comparables, then the arithmetic mean of finial set of comparables workout to 16.81% which falls within ±5% variation range and, hence, no adjustment is required in respect of international transaction with Associate Enterprises. Therefore, we shall proceed to discus the comparables chosen by the assessee for inclusion/exclusion from the list of final set of comparables.
(i) E-infochips Ltd.
The Ld. AR for the assessee submitted that the TPO has rejected one of the comparable vis Vama Industries Ltd. selected by the assessee in the TP study stating that company is engaged in providing engineering services that is more akin to KPO, however, he had accepted E-infochips Ltd. thereby ignoring all the submissions made by the assessee that the margin earned by the company is 62.60% which is abnormally high. The TPO himself has rejected the companies which are making losses as comparable, therefore, this approach of the TPO shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also for abnormal profit making companies. The AR further submitted that E-
13 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. infochips Ltd. hold inventories which clearly denotes that E-infochips Ltd. is also a product developer unlike assessee who is only into provision of software services.
Further, the segmental data with regard to bifurcation of revenue into products and services is not available. He further submitted that various Tribunals have considered and held that when companies which are loss making are excluded from the final set of comparables, then the super profit making companies should also be excluded.
Since, E-infochips Ltd. is functionally different from the assessee and also has abnormal profit of 62.60%, the same cannot be considered s comparable to the assessee. In this regard, he relied upon the decision of ITAT Delhi, in the case of Cadence Design Systems (I)(P.) Ltd. (2018) 93 taxmann.com 227(Del. Trib.). The assessee has also relied upon the following judgments: i. Alcatel Lucent India Pvt. Ltd. [2016] 74 taxmann.com 105 (Del. Trib.) ii. Adobe Systems India Pvt. Ltd. [2018] 96 taxmann.com 15 (Del. Trib.) iii. Radknee (India) P. Ltd. (2019] 102 taxmann.com 08 (Pune Trib.) iv. Ness Technologies India P. Ltd. [2016] 76 taxmann.com 209 (Mum. Trib.) v. Zynga Game Natework India P. Ltd. [2017] 85 taxmann.com 11 (Bang. Trib.)
The Ld. DR, on the other hand, strongly supported the order of the Ld. DRP and submitted that the Ld. DRP has brought out clear facts to the effect that E- infochips Ltd. is functionally comparables to the assessee and also the company
14 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. satisfies filter of receipt of similar nature of more than 50%. In so far as, other arguments of the assessee with regard to extraordinary events, the DRP has negated all argument of the assessee in the light of decision of Bangalore ITAT, in the case of Genisys Information Systems India Pvt. Ltd. vs ITO, IT(TP)No.17/Bang/2014 to come to the conclusion that acquisition of other entities by a company will have impact only on the consolidated accounts of the company and its subsidiaries, but not on the standalone accounts of the company. Therefore, there is no merit in the argument of the assessee that E-infochips Ltd. cannot be comparable to the assessee.
We have heard both parties, perused the material available on record and gone through orders of the authorities below. We find that E-infochips Ltd. provides product engineering services and solutions for outsourced and offshore product development to product companies in India and internationally. The company also provides ITeS services, hardware maintenance and products along with provision of software development. Further, on perusal of the financials, it was found that the quantum of the ITeS and other services is more than 25%, however, segmental data is not available. The company hold inventories which clearly denotes that E-Infochips Ltd. is also a product developer unlike assessee who is only into provision of software services. Further, During Financial Year 2009-10, it has acquired a company into hi-tech Networking Software and protocol stacks, solutions & services
15 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. provider for telecom OEMs. On account of such acquisition, during the current and previous year, the company experienced sudden growth, which is peculiar to E- Infochips Ltd. and since the assessee did not experience such economic circumstances, the company cannot be accepted as a comparable. Further, the operating margin of the company is varies from 0.2% in FY 2009-10 to 77.8 FY 2011-12 which clearly shows that this company earns abnormal high margin, therefore, the same cannot be considered as comparable to the assessee which is mainly engaged in providing software development services to its AE. We further noted that the ITAT, Delhi Bench in the case of Cadence Design Systems (I)(P.) Ltd. (2018) 93 taxmann.com 227(Del. Trib.).had considered E-Infochips Ltd. in the light of profile of the company which is providing software development services to its AE and by following the decision of ITAT, Mumbai Bench in the case of Ness Technologies India P. Ltd. [2017] 188 TTJ 8 (Mum. Trib.) held that this company is not a good comparable and deserves to be excluded from the final set of comparables for benchmarking the international transactions of Provision of software development services. The relevant findings of the Tribunal are as under:-
“31. Assessee resisted the inclusion of this company in the list of comparables mainly contending that the company's revenue from software development services is less than 75% of its operating revenue and also that it is engaged into diversified activities as could be seen from the annual report of this company. Earning of super normal profits was also contended before the ld. TPO. However, ld. TPO observed that the assessee is also engaged in Semantics, under two heads of income i.e. income from software development and income from IT services which put together amounts to 86% of the total income, as such the assessee
16 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. cannot insist on considering the income only from software development. He further observed that the other activities are of very small volume and integrally connected with the function of providing software services.
Ld. DRP observed that the revenue from software services of this company is as high as 85% of total receipts and there was no earning from sale of software products. Only a small component of earning is from hardware. Following Chrys Capital Investment Advisors (India) (P.) Ltd. case (supra) he held that when the companies are otherwise comparables, earning of super normal profit is not a ground to reject the company.
33. It is the argument of the ld. AR that the ld TPO vide paragraph No.16(i) of order selected one of the filters as "companies who have export sales less than 75% of the sales from the software development are excluded", but E-Infochip Ltd. has got the ratio of service revenue to total operating revenue at 73.38% only. He further submitted that the significant accounting policy of this company vide item No.5 at page 43 of its annual report shows that the company is engaged in the software development and IT enable services and products which are considered the only reportable segment and, for want of segmental data relating to software development this company is not even comparable. Reliance is placed on the decision in Mumbai Tribunal in Ness Technologies (supra).
34. Ld. DR submitted that as could be seen from the scheduled income at page no.144 of the annual report paper book revenue from software development, hardware maintenance and information technology consultancy are part of the information technology services and it accounts for 86% of the revenue. He further submitted that even the assessee is having income from software development and ITES services. He submitted that for all practical purposes this company has only one segment that is software development and the revenue from this is about 86%, satisfying the filter.
We have gone through the annual report of this company for FY 2010- 11 and found that the revenue from software development was 19, 21, 09, 661/-, revenue from hardware maintenance was Rs. 3,92,48,562/-and revenue from information technology consultancy was Rs. 2,90,26,028/-. Ld. DR asks as to club all these items of revenue under the head revenue from information technology services. We find it difficult to accept this plea of the Ld. DR and to hold that the information technology consultancy service also falls under the head software development so as to bundle it under that head.
In Rampgreen Solutions (P.) Ltd.'s case (supra) on the aspect of employee cost it was held as under:— "38. ...even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's
17 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity."
In Ness technologies (India) (P.) Ltd. case (supra) this aspect was argued before the Mumbai Tribunal. Having considered the rival contentions in the light of the annual report of this company and also the decision of a coordinate bench of Delhi Tribunal in the case of Saxo India (P.) Ltd. (supra), it was held that this company is not a good comparable and deserves to be excluded from the final set of comparables for benchmarking the international transaction of provision of software development services undertaken by the assessee. Relevant portion of this division needs to be extracted hereunder for culling out the ratio:— "9.5 In our considered opinion, qualitatively speaking, the activities undertaken by M/s.E-Infochips Limited are not comparable to the pure software development services undertaken by the assessee as a captive service provider to its associated enterprises. Factually, it is also emerging that there is no segmental break-up available with respect to the production and sale of software products undertaken by the said concern, which is an aspect incomparable to the activities of the assessee. For the said reasons, we do not find any justification for inclusion of the said concern and the same is hereby directed to be excluded from the final set of comparables."
38. For similar reasons stated above we are of the considered opinion that insofar as the assessee is a captive software development service provider, M/s M/s.E-Infochips Limited is not a good comparable and while upholding the stand of the assessee, we direct the library ever to delete this from the list of comparables.
13. In this view of the matter and consistence with view taken by the Co-ordinate Bench of the Tribunal, we are of the considered view that E-Infochips Ltd. is not comparable to the assessee, which is mainly engaged in providing software
18 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. development services to its AE, hence, we direct the AO/TPO to exclude E-Infochips Ltd. from the list of comparables.
(ii) Wipro Technologies Limited (Wipro)
The TPO as well as the DRP has included Wipro Technologies Ltd. in the lit of final set of comparables on the ground that it is functionally similar to the assessee, although the size and area of operations are different. The Ld. AR for the assessee submitted that the Ld. TPO has rejected similar four comparables selected by the assessee in TP study stating that the company provides software development services alonwith other diversified activities, therefore, cannot be accepted as comparable, but when it comes to Wipro Ltd., the TPO has accepted as comparables ignoring all the submissions made by the assessee. The Ld. AR further submitted that this company provides diversified services comprising software development, software maintenance and technology infrastructure support services.
There is no segmental data available in so far as revenue from each segment. It derives more than 64% revenue from software development and related services.
The Ld. AR further submitted that it has abnormal high margin owing to huge brand value of its different economic scales. Wipro brand is amongst the top five Greenpeace International Ranking Guide which is one of the top position among Indian IT Brands. As per the annual report, the value of the brand as on 31St March
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2011 is 839 million. Therefore, this company cannot be compared with assessee which is mainly providing software development services to its AE.
The Ld. DR, on the other hand, submitted that the Ld. DRP has brought out clear facts to the effect that although this company is into diversified activities, but its source of revenue is from software development and related service which passes filter adopted by the TPO while selecting the comparables. The Ld. DR further submitted that the Ld. DRP has negated all arguments made by the assessee in light of brand value and high margins to come to the conclusion that scale of operations and brand value does not matter when functions carried out by comparables is similar to the assessee. Therefore, there is no reason to exclude Wipro Technology Ltd. from the final set of comparables and hence the order of the Ld. DRP should be upheld.
We have heard both parties, perused the material available on record and gone through orders of the authorities below. The main contention of the assessee with regard to the comparability of Wipro technology Ltd. is that the said company provides diversified services comprising software development, software maintenance and technology infrastructure support services. Further, although company provides diversified services, but no segmental data is available. We further noted that Wipro Technologies Ltd. is a subsidiary of Wiporo Ltd. a giant company which had high brand value and derives a substantial portion of its profit
20 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. due to the brand and also scale of operations. It has substantial amount of third party transaction. We further noted that Wipro brand is amongst the top five Greenpeace International Ranking Guide which is one of the top position among Indian IT Brands.
Its brand value as on 31St March 2011 is 839 million. Its share price to book value demonstrate that the premium Wipro brand name derives in the market and the bargaining power to negotiate such high value premium contracts clearly proves that it carries a high brand value. Therefore, we are of the considered view that the TPO as well as the Ld. DRP were erred in including Wipro Technologies Limited in the final set of comparables to determine ALP of international transactions of the assessee with its AE. Further. this company has been considered by various Tribunals and Courts in light of functions carried out by assessee providing software development services to its AE and held that functional dissimilarity of Wipro to vis-a- vis assessee and the fact that Wipro has generated its entire revenue pursuant to the master service agreement having huge scale of operations as compared to the assessee which is providing mainly software development services to its AE as routine captive service provider cannot be compared. The Co-ordinate Bench of ITAT Delhi in the case of Clear 2 Pay India Pvt. Ltd. vs ITO(2018) 95 taxmann.com 284 (Del. Trib.) had considered Wipro Technology Ltd. in the light of facts of the assessee which is providing captive software services provide to its AE and held the 21 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
Wipro Technology Ltd. cannot be compared for benchmarking the ALP of international transactions. The relevant findings of the Tribunal are as under:-
“7. The ld. DR challenged the inclusion of Wipro by ld. CIT (A) on the ground that abnormally high margin and assuming entrepreneurial risk and marketing risk cannot be a ground to exclude any comparable and in such circumstances, only captive subsidiaries can be used as comparables which is not possible and relied upon findings returned by TPO.
However, on the other hand, ld. AR for the taxpayer supported the order passed by the ld. CIT (A) on the ground that the Wipro is functionally not comparable being into technology infrastructure; support products; and software related support services activities; that Wipro has generated entire revenue pursuant to the master service agreement between Wipro and Citi Group services; that Wipro has huge scale of operation and without prejudice, correct margin at 52.09% instead of 54.42% be taken; and relied upon Agilis Information Technologies (P.) Ltd. v. ITO [2017] 88 taxmann.com 6 (Delhi - Trib.).
Co-ordinate Bench of the Tribunal in case cited as Agilis Information Technologies Ltd. (supra) examined the comparability of Wipro vis-à-vis Agilis, routine software service provider and ordered to exclude the same on ground of functional dissimilarity being a software product company having launched its product in the name of 'FLOW' for the retail sector users in 2012, which is outcome of research and development.
Keeping in view the functional dissimilarity of Wipro vis-à-vis taxpayer, and the fact that Wipro has generated its entire revenue pursuant to the master service agreement having its huge scale of operation as compared to taxpayer and the fact that the taxpayer is a routine captive service provider, the ld. CIT (A) has rightly excluded Wipro as a comparable from final set of comparables for benchmarking the international transactions.”
In this view of the matter and by following the decision of ITAT, Delhi Bench in the case of Clear 2 Pay India Pvt. Ltd. vs ITO (supra), we direct the AO/TPO to exclude Wipro Technology Ltd. from the list of comparables.
(iii) E Zest solutions Ltd.
22 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
The TPO has selected E-Zest Solutions Ltd. in the final set of comparables on the ground that functions carried out by this company are similar to the functions carried out by the assessee. The Ld. AR for the assessee submitted that the Ld. TPO in his order has rejected one of the comparable, vis Vama Industries Ltd. selected by the assessee in the TP study stating that company is engaged in providing engineering services that is more akin to a KPO, but when it comes to selection of comparables, the TPO has accepted E-Zest Solutions Ltd. which is also engaged in engineering services ignoring all the submissions made by the assessee.
The Ld. AR further submitted that this company is functionally not comparable as it is engaged in software product development which is evident from the annual report where it carries inventory. This company is into software development services and software product development. It has super normal profits leading to high margins.
Further, E-Zest solutions Ltd. is into various business segments and an ISO 9001:2008 certified Product Engineering and Software Development Company, having special expertise in emerging technologies such as Cloud computing business intelligence, etc. Therefore, the same cannot be compared with the assessee company. In this regard, he relied upon number of judicial precedence including the decision of ITAT, Delhi in the case of Clear 2 Pay India Pvt. Ltd. vs ITO (2018) 95 taxmann.com 284 (Del. Trib.).
23 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
The Ld. DR, on the other hand, strongly supported the order of the Ld. DRP and submitted that the TPO as well as DRP has brought out clear facts to the effect that this is a best comparable for the purpose of determination of Arm’s Length Price of international transaction of the assessee with its AE by negating the arguments of the assessee that super normal profit companies cannot be considered for benchmarking of international transaction unless it is demonstrated that some exceptional circumstances during the year let to super normal rate of profits.
We have heard both parties, perused the material available on record and gone through orders of the authorities below. The main contention of the assessee is that this company is functionally not comparable as it is engaged in Software product development services including product design and development, product feature enhancement, product platform migration, software product testing, maintenance and support and license management etc. This company is into diversified activities and also an ISO 9001:2008 certified Product Engineering and Software Development Company, having special expertise in emerging technologies such as Cloud computing business intelligence, etc. Although, it is involved in diversified activities but no segmental information is available to compare revenue from each segment.
This company carries inventories and this clearly shows that it is a product development company. It has super normal profits leading to high margins.
Therefore, we are of the considered view that this company cannot be considered as 24 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. comparable to an assessee which is mainly engaged in providing software development services to its AE as captive service provider. Further, this company has been considered by the ITAT Delhi in of Clear 2 Pay India Pvt. Ltd. vs ITO (supra), where considering the functions carried out by a captive service provider held that this company cannot be comparables to assessee, which is mainly providing software development services to it AE as captive service provider. The relevant findings of the Tribunal are as under:-
“23. The taxpayer challenged E-Zest as a comparable before ld. CIT (A) on ground of functional incomparable. When we peruse annual report of E-Zest, available at page 737 of Paper Book-I, it is into diversified kind of activities viz. Product Engineering Services / Outsourced Product Development Services, Enterprise Application Development, IT Services, Industries Solutions and Technology Expertise. Furthermore, when we examine the segment reporting of E-Zest, available at page 781 of the Paper Book, it is mentioned that it has only one reportable segment. So, in the face of diversified kind of activities being carried out by E-Zest, it is not a valid comparable vis-à-vis the taxpayer which is a routine software development service provider.
24. Coordinate Bench of the Tribunal in Symantec Software & Services India (P.) Ltd. v. Dy. CIT [2017] 79 taxmann.com 208 (Chennai) examined comparability of the taxpayer with routine software service provider and ordered to exclude the same on the ground that it is providing high end technical services and as such, is a KPO and not a software development company. So, in view of the matter, we order to exclude E-Zest from final set of comparables.”
In this view of the matter and by following the decision of ITAT, Delhi Bench in the case of Clear 2 Pay India Pvt. Ltd. vs ITO (supra), we direct the AO/TPO to exclude E-Zest Solutions Ltd. from the list of final set of comparables.
(iv) C G VAK Software & Exports Ltd. (‘CG VAK’)
25 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
The assessee has included C G VAK Software & Exports Ltd. in the final set of comparables on the ground that the software services segment is comparable to the functions carried out by the assessee. The assessee further stated that as per financial of this company, 90% revenue is generated from software services and 10% from BPO. The TPO excluded CG WAK Software and Exports Ltd. on the ground that it is into both IT and ITeS services with IT forming a major part. The TPO further observed that it is persistent loss making company. The DRP excluded this company on the ground that although it is has profit but such profit has been arrived at after including FOREX gain as operating revenue. But if FOREX gain is excluded from operating income, then it will be under loss, hence, this company cannot be considered as comparable to the assessee.
The Ld. AR for the assessee submitted that the company has three business segments namely software services, BPO services and training. The software services segment is compared to assessee’s services. Therefore, the company is functionally comparable which is not even disputed by the TPO. The Ld. AR further submitted that although the TPO has observed that it has persistent loss making company but on perusal of margins of CG-VAK for last three years, it is observed that CG-VAK does not quality to be a persistent loss making company and the company has incurred profits in the current year 2011-12 and AY 2009-10. The TPO has ignored rule of consistency as this company was selected by the assessee for 26 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
earlier years and the same has been accepted by the TPO. Therefore, unless there is change in facts and circumstances, there is no reason to exclude this company from the list of final set of comparables for the year under consideration. In this regard, he relied upon the decision of the Hon’ble Delhi High Court in the case of Pr.
CIT vs B.C. Management Services Pvt. Ltd. (2018) 403 ITR 45 (Del.).
The Ld. DR, on the other hand, strongly supported the order of the TPO as well as DRP and submitted that the DRP has brought out clear facts to the effect that this company is persistent loss making company and hence cannot be compare with the assessee which is a costless entity. The DR further submitted that even though the AR for the assessee argued that if FOREX gain is included as part of operating revenue, then its turns into profit, but FOREX gain or loss cannot be considered as part of operating revenue in order to determine margin, therefore, there is no merit in the argument of the assessee and hence the same need to be excluded from the list of comparables.
We have heard both parties, perused the material available on record and gone through orders of the authorities below. There is no dispute with regard to the fact that functional similarity between the assessee and CG VAK Exports Ltd. In fact the TPO as well as DRP has accepted the fact that this company is into software development services alongwith BPO services and training. Further, this company has segmental information as per which the revenue derived from software
27 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. development services is clearly identifiable. The TPO as well as DRP has excluded this company only on the ground that it is persistent loss making company which is evident from financial statement for relevant year. Further, although this company is into profit if FOREX foreign exchange gain is considered as part of operational revenue, but such FOREX gain or loss cannot be considered as part of operating revenue to determine the operating margins. We find that the issue of foreign exchange gain is whether part of operating revenue has been considered by the Hon’ble Delhi High Court in the case of Pr. CIT vs B.C. Management Services Pvt. Ltd. (2018) 403 ITR 45 (Del.). and by following its earlier order in the case of Pr. CIT vs Cashedge India Pvt. Ltd. in of 2016 held that as far as the question of foreign exchange fluctuation element is concerned, the records clearly indicate that the safe Harbour rules came into force later, whereas the facts of the case pertains to AY 2010-11 as a consequence, the impugned order of the Tribunal cannot be interfere with, where the Tribunal held that FOREX gain is part of operating revenue for the purpose of determination operating margin. In this case, there is no doubt with regard to the fact that if FOREX gain is included as part of operating revenue, then this company is not a persistent loss making company. Further, various Courts and the Tribunals has consistently held that when functions carried out by two comparables are similar, then merely for the reason of loss in one or two years cannot be a good reason for rejection of comparables. Therefore, we are of the 28 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. considered view that the TPO as well as the DRP were erred in excluding CG VAK Software and Exports Ltd. from the list of final set of comparables even though there is no adverse remark about functional similarity between two companies, hence we direct the TPO to include CG-VAK Software and Exports Ltd. in the final set of comparables for determination of arithmetic mean margin to benchmark international transactions with its AE.
(v) R Systems International Ltd.
The assessee has included R Systems International Ltd. in the final set of comparables in its TP study to bench mark its international transaction with AE on the ground that the functions carried out by this company are similar to the functions carried out by the assessee. The TPO has rejected this company from the list of final set of comparables on the ground that it is into IT solutions and BPO services. The TPO further observed that software development is not a made to order one but provided solely to a specific buyer, but not sold or provided to other buyers. He, further observed that even though functions carried out by this company are similar to the assessee, but asset and risk part is that of a captive service provider. During the current year, it has income from software development, customisation and BPO services, therefore, he opined that it is not a comparable to the assessee. The DRP directed the TPO to include this company in the list of final set of comparables in respect of software development and customization segment services, because in its 29 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
annual report, the company has provided segmental information in respect of all three segments mainly software development and customisation service, BPO services and corporate & other services.
We have heard both parties, perused the material available on record and gone through orders of the authorities below. The DRP has brought out clear facts to the effect that this company is functionally comparable to the assessee company because of availability of segmental data in respect of software development and customisation service segment in its annual report. We further noted that the TPO himself accepted the fact that this company is a captive service provider and is comparable to the assessee which is also captive service provider. Further, the TPO has accepted this company as comparable in earlier AY 2010-11 and later AY 2012-
Therefore, we are of the considered view that when functions carried out by this company are similar to the functions carried out by the assessee and also the TPO accepted this company in earlier years and subsequent years, there is no reason for the TPO to exclude this company for the year under consideration without their being any change in facts and circumstances. The DRP after considering relevant facts has rightly directed the TPO to include R Systems International Ltd. in the final set of comparables for determination of Arm’s Length Price of international transactions with AE. Hence, we are inclined to uphold the findings of Ld. DRP and dismissed the appeal filed by the Revenue.
30 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
The assessee has raised various grounds taking inclusion and exclusion of same more comparables and given three more options. At the time of hearing, the Ld. AR for the assessee submitted that if E-Infochips Ltd., Wipro Technologies Limited, E-Zest Solutions Ltd. are excluded and CG-VAK Software & Exports Ltd. is included in the final set of comparables, then arithmetic mean of comparables selected for bench marking international transaction comes to 16.81% which is within ± 5% variation range and no TP adjustment is required. We find that since we have already accepted assessee’s contention and directed the AO/TPO to include of E- Infochips Ltd., Wipro Technologies Limited, E-Zest Solutions Ltd. and exclusion of CG-VAK Software & Exports Ltd. and directed the TPO to re-compute arithmetic mean of comparables and then to compare margin earned by the assessee, we are of the considered view that the other grounds taken by the assessee challenging inclusion or exclusion of some more comparables does not require specific adjudication and hence all other grounds taken by the assessee are dismissed.
The next issue that came up for our consideration from the assessee as well as Revenue appeal is TP adjustment suggested by the TPO in respect of interest on sundry debtors. During the course of assessment proceedings, the TPO observed that there is time lag in receipt of sundry debtors. The TPO proposed to charge an arm’s length compensation in the form of interest taking 60 days as the normal credit period and adopting rate of interest at PLR of SBI for the relevant year as 12.5% plus
31 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
3% on account of exchange risk. Accordingly, the TPO applied rate of interest @ 15.50 and made an adjustment of Rs.54,07,290/-.
The DRP after considering the submissions filed by the assessee and also taken note of decision of the ITAT, Mumbai Bench in the case of Evonik Degussa India (P.) Ltd. vs ACIT held that transfer pricing adjustment made by the TPO by way of computing interest for delay in recovery of sundry debtors from the AE is in accordance with Transfer Pricing provisions of the I.T. Act. and hence there is no merit in the contention of the assessee that no adjustment could be made on notional and hypothetical manners. The Ld. DRP further observed that although he AO was right in benchmarking interest on delay of sundry debtors, but the rate applied by the TPO on the basis of SBI PLR with a markup of 3% as ALP is incorrect, because it has been held in various decisions of the Tribunals and the Hon’ble Delhi High Court that benchmarking of international transactions of interest on loans and advances in foreign currency to AE shall be made in LIBOR rate. The issue regarding quantum of spread over LIBOR is to be decided on the basis of peculiar facts of each case after evaluating terms of the loans i.e. period of loans, quantum of loans and creditworthiness of the borrower and the nature of collateral. The delay in realisation of debtors from the AE is akin to a transaction of advancing of a interest free loan to the AE, hence, the principle of benchmarking applicable and accordingly by taking note of the period of delay in realisation of sundry debtors wherein between 30 days
32 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. to 183 days as per the data furnished in the order of the TPO, the AO was right in considering reasonable period of 60 days but while applying the SBI PLR, the AO has ignored the fact that when loan is advanced to AE in foreign currency an appropriate rate for benchmarking interest is LIBOR plus reasonable mark up for risk factors. Therefore, after considering relevant facts, direct the AO/TPO to re-compute transfer pricing adjustment by considering the Arm’s Length rate of interest at LIBOR plus mark-up of 2%. The relevant findings of the DRP are as under:-
“7.2 We have considered the TPO's order and the submissions of the assessee. The main contention of the assessee is that TP adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. It was contended that since the assessee is a zero debt company and has no interest expenditure, there is no need to recover any interest from the AE in respect of delay in realization of sundry debtors. The assessee relied on the decision of the Hon'ble ITAT, Mumbai in the case of Evonik Degussa Indian (P) Ltd. In support of its contention. 7.3 We find that the assessee's contention is not in accordance with the Transfer Pricing provisions in the IT.Act. Explanation (c) to Section 92B(1) inserted by the Finance Act 2012 with retrospective effect from 01.04.2002 has clarified that the expression "International Transaction" shall include Capital Financing including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business. This explanation which is clarificatory in nature is squarely applicable to the transaction of realization of sundry debtors by the assessee from its AE and therefore this transaction falls within the ambit of an "International Transaction". 7.4 Once the transaction takes the character of an international transaction, the income arising from such transaction has to be completed having regard to Arm's Length Price as per the provisions of Section 92 of the I.T.Act. For this purpose, it is not material whether there is an agreement between the assessee and the AE for charging of interest on delayed recovery of sundry debtors or whether there is under charging of interest or whether assessee has incurred any cost of borrowing. The application of the provisions of Section 92 for 33 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd. determining the Arm's Length Price of the international transaction is mandatory regardless of these factors. 7.5 As regards the reliance placed by the assessee on the decision of the Hon'ble ITAT, Mumbai Bench, it is seen that though the said decision was rendered on 21.11.2012, the insertion of Explanation to Section 92B by the Finance Act 2012 with retrospective effect from 01.04.2002 has not been brought to the notice of the Hon'ble Tribunal. 7.6 In view of the discussion above, we hold that the transfer pricing adjustment made by the TPO by way of computing interest income with regard to the delayed recovery of sundry debtors from the AEs is in accordance with the transfer pricing provisions of the I.T.Act and is in order. 7.7 However, we do not agree with the benchmarking carried out by the TPO with regard to this international transaction by considering the PLR of SBI along with a mark up of 3% as the Arm's Length Price, it has been held in various decisions of the Hon'ble Tribunals and the Hon'ble Delhi High Court (in the case of M/s. Cotton Natural (India) Pvt. Ltd.) that benchmarking of international transactions of interest on loans advanced in foreign currency to AEs shall be made on LIBOR plus basis. The issue regarding the quantum of spread over the LIBOR rate is to be decided on the basis of peculiar facts of each case after evaluating the terms of the loan i.e. period of loan, quantum of loan, creditworthiness of the borrower and the nature of collateral (secured/unsecured loans). 7.8 The delay in realisation of debtors from the AE is akin to a transaction of advancing of a interest free loan to the AE. Hence, the principle of benchmarking applicable to a transaction of interest free loan to an AE is equally applicable to the international transaction of delay in recovery of debtors from the AE. In view of this, the benchmarking of the rate of interest on such delay in recovery is required to be made on the basis of LIBOR along with an appropriate mark up considering the risks involved.
7.9 In the present case, the delay in realization beyond a reasonable credit period of 60 days is varying between 30 days to 183 days as per the data furnished in the order of the TPO. Hence the tenure of the period during which the debtors remain unpaid is very short. The maximum quantum of the amount of debtors outstanding at the end of each month during the relevant period is seen to be Rs.3.19 crores as per the data furnished in the order of the TPO and the same is considered to be a moderate amount. No information is however available with regard to the credit worthiness of the AE. Considering the nature of the transaction, the sundry debtors represents an unsecured amount. Having regard to these factors, it would be fair and reasonable to determine the spread over LIBOR at 2%.
34 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
7.10 In view of the discussion above, the TPO/ AO is directed to recompute the transfer pricing adjustment by considering the Arm's Length rate of interest at LIBOR plus a mark up of 2%.” 31. The ld. AR for the assessee submitted that the Ld. DRP was erred in making adjustment of Rs.8,74,585/- by using the LIBOR plus 2% for the purpose of benchmarking notional interest cost to the assessee by erroneously ignoring the fact that the assessee is a zero debt company and it does not have any borrowings/loans from external sources, therefore, no actual interest cost borne by the assessee, thereby disregarding the factual explanations submitted by the assessee during the course of assessment proceedings. The Ld. AR further submitted that extension of credit period to customers is a business decision which AO/TPO cannot interfere with, unless there is finding as to the fact that the assessee has given undue benefit to the AE by extending credit period over and above credit period given to the Non- AE, In absence of any finding in this regard, no adjustment could be made on hypothetical or notional basis.
32. The Ld. DR on the other hand, submitted that although the DRP has upheld the findings of the TPO in benchmarking interest receivables on sundry debtors for delay in remittance from the AE, but while adopting rate of interest erred in considering LIBOR plus 2% as against SBIPLR + 3% considered by the TPO without assigning any reason as to why LIBOR rate is applicable for benchmarking interest receivables from sundry debtors.
35 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
We have heard both parties, perused the material available on record and gone through the orders of authorities below. There is no dispute with regard to the fact that the assessee has not charged any interest receivables from both AE as well as non-AE for delay in receipt of sale proceeds. Further, there is complete uniformity in not charging interest from both AE and non-AE for delay in export proceeds. In absence of any findings as to the fact that the assessee has allowed undue benefit to the AE by extending credit period for realisation of sundry debtors and such extension of credit period benefits the AE, no adjustment could be made under the TP provisions of the Act to benchmark interest receivables on hypothetical or notional basis because late realisation of export receivable /sundry debtors cannot be considered as advancing loans and advance to the subsidiary or AE. This finding is fortified by the decision of the Hon’ble Bombay High Court in the case of CIT vs Indo American Jewellers Ltd. (2014) 223 taxman 8 (Bom.) where it was held that there was complete uniformity in act of assessee in not charging the interest from AE as well as non-AE debtors for delay in realisation of export proceeds, then no adjustment could be made towards interest on delayed realisation of sundry debtors in course of TP proceedings. Therefore, considering all facts and circumstances of the case and also by following the decision of the Hon’ble Bombay High Court in the case of CIT vs Indo American Jewellers Ltd.(supra), we are of the considered view that the AO as well as the DRP were erred in benchmarking interest receivables on 36 IT(TP)A Nos.945 & 2047/Mum/2016 Mobileum (India) Pvt. Ltd. (Formerly known as Roamware (India) Pvt.Ltd.
delayed recovery of sundry debtors from AE, hence, we direct the AO to delete adjustment made towards interest receivable on sundry debtors.
In the result, appeal filed by the Revenue in IT(TP)A No.945/Mum/2016 is dismissed and appeal filed the assessee in IT(TP)A No.2047/Mum/2016 is partly allowed.
Order pronounced in the open Court on 26/06/2019.
Sd/- Sd/- (C.N. Prasad) (G. Manjunatha) �या�यक सद�य /JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER मुंबई Mumbai; �दनांक Dated : 26/06/2019 f{x~{tÜ? f{x~{tÜ? P.S f{x~{tÜ? f{x~{tÜ? P.S //./././.�न.स. P.S P.S आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant (Respective assessee) 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai, 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,