CAP GEMINI TECHNOLOGY SERVICES INDIA LIMITED(FORMERLY KNOWN AS IGATE GLOBAL SOLUTION LIMITED)-M/S PATNI TELECOM SOLUTIONS PVT LTD, CHANGED NAME TO M/S.IGATE INFORMATION SERVICES PRIVATE LIMITED MERGED WITH IGATE GLOBAL SOLUTIONS LIMITED ,HYDERABAD vs. ITO, WARD - 2(1), HYDERABAD

Facts of the case, in brief, are that the assessee is engaged in the business of Software Development filed its return of income for the A.Y 2010-11 on 01.10.2010 declaring total income at Rs ‘NIL’ and claiming deduction u/s 10A amounting to Rs.7,69,85,754/-. The case was selected for scrutiny under CASS and notice u/s 143(2) was issued on 27.08.2011 and served on the assessee. In response to the said notice, the A.R of the assessee appeared before the Assessing Officer and furnished the requisite details as called for from time to time. Based on the material furnished by the assessee, the Assessing Officer completed the assessment and assessed the net tax demand at Rs.1,66,66,539/-.

The assessee has international transaction with its Associated Enterprises amounting to Rs.24,69,512,177/-. The assessee has carried out the economic analysis and TP documentation which was filed along with Audit Report in Form 3CEB. The assessee short listed 13 comparables with an arithmetic mean PLI (OP/OC) at 9.67% as against the margin of the ass at (-) 12.38%.

The TPO rejected the TP study of the assessee. The profit of the assessee to the cost is worked out to 1.47% (OP/OC) as per the order of the TPO. The TPO arrived at the figure after adjusting arms length margin of 23.87% by considering 18 comparables as per TPO order page No.28. The TPO rejected 9 comparables selected by the assessee and arrived at Arms Length Price on provision of SDB, Receivables and Reimbursements at Rs.21,41,97,287/- enhancing the income by Rs.4,01,10,496/-.

The assessee filed its objection before the DRP and challenged rejection of 9 comparables selected by it. The assessee also challenged the inclusion of (i) E-Infochips Bangalore Ltd, (ii) Kals Information Systems Ltd (Seg.), (iii) Persistent Systems Ltd, (iv) Infosys Technologies Ltd, (v) L&T Infotech Ltd and (vi) Mind Tree Ltd. The assessee also challenged the benefit of standard deduction u/s 92C(2) of the Act imputing interest on receivables and reimbursements of Rs.14,10,695/- and Rs.1,51,36,893/-.

The learned DRP deleted the 9 comparables selected by the assessee. TheDRP in respect of comparables selected by the TPO (i) Infosys Technologies Ltd and (ii) L&T Infotech Ltd. The DRP retained 16 comparables selected by the TPO. The DRP did not interfere with the findings of the TPO on the receivables and reimbursements.

Aggrieved by the order of the learned TPO, the assessee filed appeal before the Tribunal broadly on four issues viz. (a) Inclusion of 4 comparables viz (i) E-Infochips Bangalore Ltd, (ii) Kals Information Systems Ltd (Seg.), (iii) Persistent Systems Ltd and (iv) Mindtree Ltd. (b) Standard deduction of (+) or (-) 5% as available u/s 92C(2) of the Act. (c) Imputing interest on receivables and treating reimbursements as operative revenue and cost and (d) Setting off of the loss of Rs.8,53,79,564 suffered by the Hyderabad Unit against the profit of Rs.7,69,85,754/- earned by the Pune Unit. The non-granting of deduction u/s 10A of the Act for Pune Unit independently and allowing carried forward of loss suffered in the Hyderabad Unit.

The assessee in this regard relied upon the decision of the ITAT Pune Bench in the case of ACIT vs. MSS India (P) Ltd reported in (2009) 123 TTJ 657.

It is the submission of the assessee that the assessee is a fully funded company and does not bear working capital risks. The assessee submitted that it neither collects interest nor was charged interests and therefore, should not be imputed with notional interest.

The learned Counsel for the assessee submitted that the TPO charges interest @ 12% is charged on receivables of Rs.1,17,55,791/- quantified at Rs.14,10,695/-. The DRP directed the TPO to adopt LIBOR Plus 250 basis points for charging interest on delayed receivables from its AEs.

The assessee reiterated its submission before the TPO and submitted that no specific method was followed in imputing interest and the assessee neither charged interest on recoverables from AE as well as from Non-AEs. In this regard, the assessee relied on the decision of Global Logic India Ltd vs. ACIT (2020) 185 ITD 795(Del.). It is the submission of the learned Counsel for the ass that the TPO treated reimbursement of Rs.1,51,36,893/- received from AEs as international transaction and considered the same as operating revenue and cost. The TPO rejected the contention of the assessee that they are purely recovery expenses from AEs and without any mark up.

The learned counsel for the assessee submitted that the Assessing Officer erred in setting off the profits of Rs.7,69,85,754/- of Pune STPI unit against the loss of Rs.8,53,79,564 of the Hyderabad Unit and in denying deduction u/s 10A of the Act to the Pune Unit. Further, the business loss of Hyderabad Unit of Rs.8,53,79,564 ought to have been allowed to be carried forward.

The learned Counsel for the assessee submitted that the issue is squarely covered by the judgment of Hon'ble Supreme Court in the case of CIT vs. Yokogawa India Ltd reported in (2017) 391 ITR 274 (S.C).

Aggrieved with such final assessment order assessee is in appeal before the Tribunal.

During the course of arguments, the ld.AR has made submissions in respect of comparables which are captured hereinbelow.

With regard to the inclusion of E-Infochips Bangalore Ltd, the assessee submitted that the this company is having extra ordinary margin and for this purpose the assessee has drawn out attention to Page 210 of the Paper Book and further submitted that the assessee is having diverse business interest and for that he has drawn our attention to Page 217 of the Paper Book and it is also the case of the assessee that this company E-Infochips Bangalore Ltd also owns intangible.

Though it is the contention of the assessee before the TPO that this company operates in 2 segments i.e. SDS and ITES. However, the TPO rejected the above submission of the assessee and thereafter has come to the conclusion that the income from consultancy services was only Rs.5.90 crores as against total revenue of Rs.43.05 crores. The income from consultency services was only 13.72% and the income from the software services was more than 75% of the total revenue. In our view, the TPO was correct in rejecting the contention of the assessee and has rightly, retained the comparable. Thus, this ground is dismissed.

The next comparable i.e. Kals Infosis, the learned AR drew our attention to page 238 of the Paper Book and it was the contention of the assessee that this company is having extra ordinary margin and is also into diverse business.

Per contra, the learned DR relied on the order passed by the TPO/DRP.

We have examined the record and documents referred to by the assessee. In this regard, the TPO at page 27 of its order had discussed the extracts of the annual reports and recorded that this company is into the development of computer software which is similar to the functions performed by the assessee and therefore, the functions performed by the company are broadly comparable to that of the assessee. In view of the above, we do not find any reason to exclude this company as a comparable. We may point out that merely because this company has earned some extra ordinary profit is no reason to exclude this company as long as this company continues to be comparable with that of the assessee on FAR analysis. In view of the above, we do not find any reason to exclude this company and accordingly, the ground raised by the assessee is dismissed.

With regard to Persistent Systems Ltd, the submission of the assessee that this company is a product development company and our attention was drawn to page 260 of the paper book. It was submitted that the assessee being into product development, therefore, this company is required to be excluded from the list of comparables.

Per contra, the learned DR drew our attention to the order passed by the lower authorities and supported the orders passed by the TPO/DRP.

We have gone through page 260 of the Paper Book wherein it was sought to convince that this company is into product development wherein the income of the assessee was shown from sale of software services and products. If we look into schedule 11 where bifurcation of sales and software services and products are mentioned, then we find that this company does not have any inventories showing software products and though this company has classified as sales of software products. In view of the above, it is difficult to accept the contention of the assessee that this company is into product development. Further, if we look at the revenue recognition, then only we find that the Revenue the assessee is recognizing the income from software services only and there is no reference of making development of any products. For that purpose, we may rely upon the revenue recognition at column H which is to the following effect:

In view of the above, we do not agree with the contention of the assessee and accordingly, this ground is also dismissed.

In this regard, the learned AR submitted that Mindtree company owns intangible and our attention was drawn to the page No.376 of the paper book. Further, the learned AR drew our attention to page 360 to 366 and 374 of the paper book to show that the profit of this company has increased exponentially.

Per contra, the learned DR relied upon the order of the TPO and the DRP.

We have gone through the record and considered the documents filed before us. In this regard, it is relevant to mention here that the assessee has not objected to the inclusion of this company in the list of comparable selected by the TPO while filing objection in response to the show cause notice before the TPO. Before the learned TPO, the assessee has only raised objection with respect to E-Infochips Bangalore Ltd, Infosys Technologies Ltd, Kal Infosystems Ltd, L&T Infotech Ltd. No objection has been filed by the assessee with respect to any other comparables. In our view, once the assessee has forgone his right to raise objection before the TPO, it is not permissible in law to raise the objection before the Tribunal at this stage. Further, we are of the opinion that merely because the company is owning intangible and earned reasonable margin cannot be a ground to exclude this company if on FAR analysis, it is found to be otherwise comparable with that of the assessee. In view of the above, we do not find any reason to exclude this company. Accordingly, this ground is also dismissed.

In this regard, the learned DRP has directed the TPO to adopt LIBOR Plus 250 basis points for charging interest on delayed payments. Our attention was drawn to Para 12 of the DRP order. The ld.AR has submitted that LIBOR Plus 200 basis points may be taken for the purposes of computation of notional interest on trade receivables.

Per contra, ld.DR relied upon the orders of the authorities below and submitted that the Tribunal in the case of Satyam Ventures Engineering Services Vs. ACIT, has decided the issue in favour of the Revenue and held that the SBI rate of 6% would be reasonable rate for benchmarking interest on outstanding receivables.

We have heard the rival arguments and perused the material available on record. Admittedly, this Tribunal in the case of Satyam Ventures Engineering Services Vs. ACIT, Zeta Interactive Systems India Private Limited, M/s. Apache Footware India Private Limited etc has decided the issue in favour of the Revenue by holding that the SBI bank rate of 6% with a credit period of 60 days is to be applied for determining the interest on delayed trade receivables. However, in the present case, the Revenue is not in appeal against the finding given by the DRP and the assessee cannot be worsened off in the appeal filed by the assessee.

Further, if we look into the order passed by the DRP where the DRP has decided the issue in favour of the assessee by restricting the interest to be paid at LIBOR Plus 250-point basis, though the said decision of the DRP is contrary to the decision of the Tribunal. However, since the Revenue is not in appeal against the decision of the DRP, therefore, we deem it proper to dismiss the ground raised by the assessee and sustain the order passed by the DRP by reiterating that the delay on trade receivable will be restricted to LIBOR Plus 250 point basis, as there is no appeal of the Revenue and the assessee cannot be worsened off in its appeal by following the decision in the case of Satyam Ventures (Supra). Thus, this ground of appeal is dismissed.

Finally, the last ground raised by the assessee is with regard to the set off of losses of the Hyderabad Unit against the profit of the Pune Unit. In this regard the submission of the assessee is as under:

Per contra, the learned DR had submitted that the assessee has not raised this issue before the DRP and neither any additional ground has been raised before us.

We have heard the arguments of both side and perused the material available on record. Since in the present case, the assessee has not raised ground before the learned DRP and therefore, the grievance of the assessee is not emanating from the final assessment order or from the direction of the DRP.

In view of the above, we do not find any merit in this ground raised by the assessee. Accordingly, this ground is dismissed.

In the result, appeal raised by the assessee is dismissed.