ITAT Bangalore: Tally Solutions Excluded as Functionally Dissimilar to Wipro

Wipro HR Services India Private Limited Vs ACIT (ITAT Bangalore)

The Bangalore Bench of the ITAT partly allowed the appeal of Wipro HR Services India Private Limited against the final assessment order passed under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 for AY 2018-19. The assessee provided BPO, software development and human resources outsourcing services to its Associated Enterprises in the US, UK, Canada and Singapore. The TPO initially proposed transfer pricing adjustments of Rs.41.20 crore for software development services, Rs.22.42 crore for BPO/ITeS services and Rs.53.92 lakh towards interest on delayed receivables. Following the DRP’s directions, these were reduced to Rs.33.47 crore, Rs.13.83 crore and Rs.53.92 lakh respectively.

For the software development segment, the assessee had adopted TNMM and reported an operating margin of 14.89%. The Tribunal considered the assessee’s objections to selected comparables. In respect of Wipro Ltd. and Infosys Ltd., it noted their diversified operations, R&D expenditure and the DRP’s exclusion of these companies in the assessee’s own AY 2017-18 proceedings based on differences in FAR. Since these aspects had not been considered by the TPO, both issues were remitted for fresh consideration.

Tally Solutions Pvt. Ltd. was directed to be excluded. The Tribunal noted that 75.90% of Tally’s FY 2017-18 revenue arose from software product sales, whereas the assessee’s operating revenue comprised business process and technology outsourcing and consulting income. Tally also had an in-house R&D centre. The Tribunal therefore found it functionally dissimilar, including in assets employed and risk profile. Eclerx Services Ltd. was also excluded because the DRP’s own findings treated it as an ITeS/KPO service provider, making it unsuitable as a comparable for the software development segment.

Regarding Cybage Software P. Ltd., the Tribunal found that its functionality was not clear from the financials, that segmental information was unavailable, and that other activities were indicated. The issue was therefore remitted to the AO/TPO for verification of its activities and availability of segmental details. Consilient Technologies P. Ltd. was similarly remitted because the TPO and DRP had not adequately examined its functions, assets and risks through a FAR analysis. The remaining comparables challenged in Ground 4 were left open in view of these directions.

For the ITeS segment, the Tribunal noted that the assessee’s operating margin was 15.16%, while the 35th and 65th percentiles of the 14 comparables considered by the TPO were 10.43% and 19.54%. Since the assessee’s margin was within the arm’s-length range, the Tribunal found that the TP adjustment made despite this position was not warranted and directed the TPO to consider the assessee’s rectification petition dated 22.8.2022 under Section 154. Other ITeS-related grounds were treated as academic.

On working capital adjustment, the Tribunal, following the coordinate Bench decision in Capco Technologies P. Ltd. v. DCIT, held that the adjustment should be allowed and directed the AO/TPO to examine the issue afresh after giving the assessee an opportunity of being heard. The assessee did not press the risk adjustment ground, which was dismissed as not pressed.

On interest on outstanding receivables, the Tribunal held that interest on delayed receivables was to be calculated at LIBOR + 2%, following the cited coordinate Bench decision and the judgment of the Karnataka High Court referred to in the order. The AO/TPO was also directed to consider correct margins while computing the ALP in accordance with the Tribunal’s directions. The appeal was consequently partly allowed.

Recent Cases Discussed

• Tio-Tech Pvt. Ltd. v. DCIT (ITAT Bangalore), IT(TP)A 237/Bang/2021 dated 12.10.2022
• Capco Technologies P. Ltd. v. DCIT (ITAT Bangalore), IT(TP)A No.204/Bang/2021 dated 18.11.2021
• Telcordia Technologies India P. Ltd. v. ACIT (ITAT Mumbai), ITA No.7821/Mum/2021

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal is against the final order of assessment passed by the ACIT, Circle 7(1)(1), Bangalore u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 23.7.2022 for the assessment year 2018-19.

2. The assessee is engaged in the business of providing business process outsourcing (BPO), software development (SWD) services and human resources outsourcing services. The assessee renders these services to its Associated Enterprises (AE) located in US, UK, Canada and Singapore. For the AY 2018-19, the assessee filed the return of income on 30.11.2018 declaring an income of Rs.175,42,60,930. The case was selected for scrutiny under CASS and a notice u/s. 143(2) was duly served on the assessee. The case was referred to the TPO for determination of ALP of the international transactions the assessee is having with its AE. The TPO made the following TP adjustments :-

(i) Software development services – Rs.41,20,89,204

(ii) BPO Services (ITeS Services) – Rs.22,42,68,187

(iii) Interest on delayed receivables – Rs.53,92,838

3. Aggrieved, the assessee raised its objections before the DRP pursuant to which, the TP adjustments were modified as under:-

(i) Software development services – Rs.33,47,10,065

(ii) BPO Services (ITeS Services) – Rs. 13,83,31,654

(iii) Interest on delayed receivables – Rs.53,92,838

4. Aggrieved the assessee is in appeal before the Tribunal raising the grounds with respect to the following issues:-

I. Ground No.1 & 2 – general.

II. Ground No.3 – Comparability analysis and determination of ALP.

III. Ground No.4 – TP adjustment with regard to software development segment (SWD).

IV. Ground No.5 – TP Adjustment with ITeS segment.

V. Ground No.6 – Not providing working capital adjustment and risk adjustment.

VI. Ground No.7 – Notional interest on outstanding receivables.

SWD Services Segment – Ground 4 (4.1)

5. In the SWD segment, the assessee had adopted TNMM method as the most appropriate method for determination of ALP. Operating Profit / Operating Cost is considered as the Profit Level Indicator. In the TP study, the assessee had declared a margin of 14.89% as per the below computation:-

Operating Income	Rs. 519,90,29,652/-
Operating Cost	Rs.452,50,95,852/-
Operating Profit (Op. Income — Op. Cost)	Rs.67,39,33,800/-
Operating/Net mark-up (OP / OC)	14.89%

6. The assessee chose the following comparables, where the 35^th percentile of average margin is at 5.93% and 65^th percentile is at 21.18%. Accordingly, the assessee concluded that the price charged by the assessee is within arm’s length:

S.No.	Company Name	Average OP/TC (%)
1.	Rheal Software Ltd	-4.25%
2.	Yudiz Solutions Pvt Ltd	2.88%
3.	Isummation Technologies Pvt Ltd	3.44%
4.	Maveric Systems Ltd	5.24%
5.	SagarSoft (India) Ltd	5.93%
6.	Sasken Technologies Ltd-Software Services	6.52%
7.	CG-VAK Software & Exports Ltd	9.29%
8.	E-Zest Solutions Ltd	10.20%
9.	R Systems International Ltd-Information technology services an	21.18%
10.	Tata Elxsi Ltd	24.17%
11.	InfoBeans Technologies Ltd	25.75%
12.	Bhilwara Infotechnology Ltd-Software & IT related	25.81%
13.	Mukand Engineers Ltd-Infotech	26.45%
	35th Percentile	5.93%
	Median	9.29%
	65th Percentile	21.18%

7. The TPO rejected some of the comparables of the assessee and carried out a fresh search to select new set of comparables and the final list of comparables as per the TPO is as given below:-

Sl. No.	Name of the Company	Average OP/ OC (in %)
1	Isummation Technologies Pvt. Ltd.	2.35
2	Yudiz Solutions P. Ltd.	4.95
3	Sasken Technologies Ltd.	6.44
4	CG Vak Software & Exports Ltd.	12.00
5	Mindtree Ltd.	12.87
6	E-Zest Solutions Ltd.	14.37
7	R Systems International Ltd.	15.66
8	Bhilwara Infotechnology Ltd.	16.46
9	Xavient Software Solutions (India) P. Ltd	17.19
10	Sagarsoft (I) Ltd.	21.25
11	Wipro Ltd.	23.33
12	Tally Solutions P. Ltd.	24.67
13	lnfobeans Technologies Ltd.	26.53
14	Tata Elxsi Ltd.	26.71
15	Infosys Ltd.	36.30
16	Quick Heal Technologies Ltd.	39.70
17	Eclerx Services Ltd.	45.86
18	Xchange Technology Services India Pvt. Ltd.	55.78
19	E-Infochips Pvt. Ltd.	56.95
20	Cybage Software Pvt. Ltd.	57.62
21	Consilient Technologies P. Ltd.	59.44
22	Ginni Systems Ltd.	66.51
35th Percentile		16.46%
Median		24.00%
65th Percentile		36.30%

8. Accordingly, the TPO computed the TP adjustment as below:-

Appellant’s PLI (OP / OC)	14.89%
35th Percentile	16.46%
Adjustment required	Yes
Median Margin of comparable set (`M’)	24.00%
Operating Cost of the Appellant	Rs. 452,50,95,852/-
Arm’s Length Price — (1 + M) * Operating Cost	Rs.561,11,18,856/-
Price Received,	Rs. 519,90,29,652/-
Shortfall being adjustment u/s. 92CA	Rs. 41,20,89,204/-

9. On further objections by the assessee, the DRP upheld most of the comparables chosen by the TPO and directed the exclusion of two companies i.e., Quickseal Technologies Ltd. and E-Infochips P. Ltd. as being functionally dissimilar to the assessee. The DRP further issued directions to the TPO to re-compute the margins of certain comparables as requested by the assessee. As a result of DRP directions, the TP adjustment was recomputed at Rs.33,47,10,065. Aggrieved, the assessee is in appeal before the Tribunal.

10. Ground No.4 reads as under:-

“Ground No. 4: Comparability analysis – SWD segment

4.1. The Ld. AO/Ld. TPO erred in including the following companies which are functionally dissimilar to the Appellant.

(i) Consilient Technologies Pvt. Ltd.

(ii) Cybage Software Pvt. Ltd.

(iii) Eclerx Services Ltd.

(iv) Ginni Systems Ltd.

(v) Infosys Ltd.

(vi) Tally Solutions Pvt. Ltd.

(vii) Wipro Ltd.

(viii) Tata Elxsi Ltd.

(ix) Xchange Technology Services India Pvt. Ltd.”

11. Out of the above list of exclusions, during the course of hearing, the ld. AR presented arguments only with regard to comparables in Sl.No.(i), (ii), (iii), (v), (vi) & (vii) and therefore we will consider these comparables for adjudication

Wipro Ltd (“Wipro”).

12. The assessee submitted before the TPO that Wipro Ltd. is a leading India based provider of IT services and has other businesses i.e.. IT products, consumer care, lighting and infrastructure engineering. The assessee further submitted that due to diversified business operations and being a product company, having a significant brand value, Wipro is not comparable. The TPO did not accept the submissions by stating that the amounts from other operations are miniscule that would not have an effect in the overall margin and therefore considered Wipro as a suitable comparable.

13. The DRP upheld the decision by holding that the principal business activity of the company as given page 82 of the annual report and that the segmental information given in the consolidated financial statements also reflects that the substantial revenue is derived from IT services only. Therefore, the IT service segment of the company being the major revenue earning segment is very much comparable to the assessee on functional aspect. With regard to brand value the DRP held that the spend is only 0.58% and there is no indication that the brand value has any impact on the profitability of the company.

14. The ld. AR reiterated the submissions made before the lower authorities. The ld. AR drew our attention to the detailed submissions made before the DRP as given in page 787 to 795 of PB in this regard. The ld. AR also submitted that the DRP in assessee’s own case for AY 2017-18, has excluded Wipro as comparable on the ground that the company is not functionally comparable to assessee. The ld. DR relied on the order of the lower authorities.

15. We heard the rival submission and perused the material on record. We notice that Wipro is having diversified business operations such as digital strategy advisory, global infrastructure services, application services, product engineering, analytical services, research & development, hardware & software design, etc. which is clear from the extract of annual report as given in page 787 of PB Vol. III. It is also noticed that the company has spent INR 3041 million during FY 2017-18 on R&D activities. It is also noticed that the DRP in assessee’s own case for AY 2017-18 (PAGE 983 of caselaw compilation) has excluded Wipro on the ground that the FAR of the company is distinct and different from that of the assessee company. The FAR analysis in the light of the DRP’s decision to exclude Wipro in assessee’s own case has not been considered by the TPO and therefore we remit the issue back to the TPO for fresh consideration with a direction to keep in mind the directions issued by the DRP in assessee’s own case for AY 2017-18. Needless to say that the assessee may be given a reasonable opportunity of being heard.

Infosys Ltd (“Infosys”)

16. The assessee submitted before the TPO that the company is functionally dissimilar having diversified business operations with no segmental data. The assessee also submitted that the company is engaged in R&D activities and has a significant brand value and therefore cannot be compared with that of the assessee. The AO rejected the contentions and held that Infosys is a comparable.

17. The DRP, on further objections raised, upheld the inclusion on the ground that – (i) the product revenue from sale of software products is only 0.05% of total operating revenue and therefore the contention of the assessee that the company is involved in licensing of software products and hence functionally dissimilar is not acceptable. (ii) 98.5% of the revenue is from repeat business and therefore the growth of revenue is not attributable to the brand value. The expenses on brand constitute only 0.39% and therefore the assessee’s plea that the company is having huge brand value contributing to the revenue cannot be accepted. (iii) The R&D expenses constitute only 0.60% and there is no capital expenditure incurred towards R&D which goes to show that R&D initiatives are substantially routine for immediate business purposes for developing expertise and therefore the plea of the assessee would not find any merit.

18. Before us, the ld. AR reiterated that Infosys is having diversified business operation which is evident from the relevant extracts from the annual report as given in page 775 & 776 of PB Vol.III. The ld. AR further submitted that Infosys is engaged in development and ownership of software, proprietary product and provider of end to end solutions. It is further submitted that the company incurs significant expenses on onsite operations and therefore cannot be compared with the assessee. In this regard, the ld. AR drew our attention to the submissions made before the DRP in page 775 to 780 of PB Vol. III.

19. The ld. DR relied on the decision of the lower authorities.

20. We heard the rival submission and perused the material on record. We notice that Infosys Ltd. is having diversified business operations such as consulting, technology, engineering and outsourcing services etc. which is clear from the extract of annual report as given in page 775 of PB Vol. III. It is also noticed that the company has spent INR 3740 million during FY 2017-18 on R&D activities. It is also noticed that the DRP in assessee’s own case for AY 2017-18 (PAGE 983 of caselaw compilation) has excluded Infosys on the ground that the FAR of the company is distinct and different from that of the assessee company. The FAR analysis in the light of the DRP’s decision to exclude Infosys in assessee’s own case has not been considered by the TPO and the contention of the assessee that there is no segmental information available inspite of the diversified operations needs to be examined factually. Therefore we remit the issue back to the TPO for fresh consideration with a direction to keep in mind the directions issued by the DRP in assessee’s own case for AY 2017-18. Needless to say that the assessee may be given a reasonable opportunity of being heard.

Tally Solutions P. Ltd (“Tally”)

21. he assessee submitted that the company is engaged in business of software products and software subscription and earns revenue from the said operations. The assessee therefore submitted that the company would fail the service income less than 75% filter applied by the TPO. The assessee also submitted that Tally is engaged in R&D activities and has inhouse R&D centre. The TPO did not accept the submission of the assessee and held that Tally is providing software support services and the effect of other contentions are very miniscule not having impact on the overall margin and therefore the company is to be included as a comparable.

22. The DRP upheld the inclusion by stating that the company is into distribution and sale of ERP software similar to the distribution of software functioning undertaken by the assessee and expenses incurred on R&D is not significant enough to impact the margin.

23. Before us, the ld. AR reiterated the submissions made before the lower authorities and in this regard, drew our attention to page 784 to 787 of PB Vol.III where the submissions made before the lower authorities are reproduced. The ld. AR submitted that the functional profile of the assessee is available in page 224 of PB Vol. I from which it would become clear that the assessee is providing offshore development services to its AEs and is not engaged in any sale of software as has been held by the DRP. It is therefore prayed that the FAR analysis of the assessee would substantiate that Tally is not a comparable company with assessee.

24. The ld. DR relied on the order of the lower authorities.

25. We heard the rival submission and perused the material on record. The FAR analysis of the company as given in the TP study is extracted as below:-

“5.3.2. Functions performed by Wipro India

The diagrammatic representation of the various steps involved in the provision of software development services and the functions performed by Wipro India and AEs is provided below:

• Conceptualization of the software

The AEs are primarily responsible for the conceptualization of services based on regulatory changes, client needs and market inputs. This involves prioritizing new features and services to be developed. The function pertaining to the conceptualization and design of the software application is an important function performed by the AEs. Wipro India is not involved in this critical step of the value chain.

• Software specification

The AEs determine the exact scope of work to be performed by Wipro India and also provide the software module specifications, instructions of various tasks to be performed along with project content, delivery time, etc. for developing the particular software as a package. On a need basis, Wipro India provides its inputs in the requirement analysis phase of the software development process.

• Architectural/ high-level designing

The AEs are responsible to create core architectures/ high level technical designs which provides a roadmap for the development.

• Development/ Coding

Wipro India undertakes the preparation of detailed design based on the core architecture and then undertakes the coding function with respect to the software modules to be developed. These services only act as a support function to the overall software development activity being performed by the AEs.

• Project management

The project team of Wipro India works in close co-ordination with the project team of the AEs. This is to ensure that the software is available for use as per the prescribed delivery schedules. However a major part of project management is handled by the AEs. Wipro India on the other hand is responsible for the day to day project management of the software development process.

• Testing

Wipro India undertakes testing procedures with respect to the software codes written by it. Further, the AEs provide Wipro India with guidelines on the quality control procedures to be adopted for the IT services undertaken by Wipro India. After testing the modules and software which underwent maintenance and repairs, AEs validates the performance of the software.

• User acceptance testing

The AEs of Wipro India being the actual user of software test the software to check its performance and finally provide their sign off.

• Deployment of the software

Post the quality control procedures have been undertaken, the software is deployed by the AEs for its actual use by them. Since, Wipro India’s role is limited only to that of a back-end software developer, it is no-where involved in the actual deployment of the software.

• Maintenance & support services and IT Infrastructure

Wipro India also provides maintenance and support services for handling and troubleshooting any technical issue that user might face while using the software application. This also includes environmental updates during the course of use of the software by the end users. Wipro India also provides support around IT infrastructure of Alight Group which includes helpdesk support services, desktop support services, security services, engineering services etc.

5.4 Assets employed

Any business requires assets (tangible or intangible) without which it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by Wipro India provides an insight into the resources deployed by Wipro India and their contribution to the business processes/economic activities of Wipro India.

5.4.1. Tangibles Asset

Wipro India utilises its facilities, office premises, communication facilities, etc. for the purpose of its business. All assets of Wipro India such as equipment/ machinery, software tools etc. are either directly or indirectly used for the purpose of carrying out its business activity.

During FY 2017-18, Wipro India employed tangible assets such as furniture, fixtures, office equipment, and computer equipments.

5.4.2. Intangibles

Wipro India does not own any non-routine intangible asset with respect to the services rendered by it to the related parties.

Alight Solutions owns the key intangible assets utilized within the Alight group, including, but not limited to, proprietary technologies, processes, databases and trademarks.

5.5. Risks assumed

The risk profile of Wipro India vis-à-vis its AEs is provided in the table below:

Table 4: Risk Profile

Risk Category and Description	Wipro India	A Es
Market Risk: Market risk arises for a business due to increased competition andrelative pricing pressures, change in demand patterns and needs of customers, inability to develop / penetrate in a market, etc.	For the RPT under review, Wipro India is a captive service provider and is assured of a specified return on its costs.  ipro India is unaffected by the market conditions except to the extent that the service requests from related parties will decline. Hence Wipro India bears indirect market risk	AEs are responsible for marketing, negotiating and entering into contracts with their customers. Consequently, the entire market risk rests with AEs.
Service Liability Risk: Risks associated with service failures including non-performance to generally accepted or regulatory standards or error in provision of services.	For the RPT under consideration, Wipro India is a captive unit engaged in providing services only to AEs in accordance with their instructions and specifications. It earns a fixed mark up on the costs incurred by it. In case the services provided by Wipro India do not meet the requisite standards, the same may require re-work; however, since Wipro India is reimbursed for all costs including re-work costs along with a specified mark up, Wipro India does not bear any cost related to re-work. Therefore, Wipro India is not liable for service liability risk except in cases of willful negligence.	The AEs will bear service liability risk in relation to their respective customer contracts.
Credit Risk: This is the risk arising from non-payment of dues by customers.	For the RPT under consideration, Wipro India does not bear credit and collection risk since it invoices only to AEs and payment to Wipro India is not contingent upon payment being received by AEs from its clients.	AEs provide services to a number of customer(s), which may result in non-payments and bad debts and hence, AEs bears this risk.
Foreign Exchange Risk: This risk relates to the potential impact on profits that may arise because of changes in foreign exchange rates.	Wipro India incurs expenses in INR and invoices in foreign currency and receives payment from its AEs ill foreign currency. However, any loss due to foreign exchange fluctuation is included in the cost base and charged back to AEs. Hence, Wipro India is not exposed to foreign exchange fluctuation risk.	AEs have business dealings with number of vendors & customers and deal in currency(s) which are different from their respective functional currency. Therefore, AEs are exposed to foreign exchange risks.
Capacity Utilisation Risk: This risk arises on account of under- utilisation of manufacturing/ service facility/personnel.	Wipro India is compensated on a full cost plus mark-up basis and hence is assured of the recovery of costs of any underutilized / unutilized resources. Wipro India is not exposed to this risk.	AEs bear this risk as they compensate Wipro India on all costs incurred by them.

26. We also notice that the functional profile of Tally as given in the annual report is extracted as below:-

“Corporate information

Tally Solutions Private Limited (‘the Company’ or ‘TOL’) and its subsidiaries and associates are hereinafter collectively referred to as ‘the Gray’. The Company and its subsidiaries are mainly engaged in the business of development and sale of accounting and business management software and incidental services. The associates of the Company are engaged in the business of imparting trainings on the job-oriented courses from strategic partnerships with the developer community to co-create applications, products for businesses, creating a platform that can process vast amounts of diverse data from various sources and analyse the data of businesses.

(Page 64 of the annual report for FY 2017-18)

Sale of products

Revenue front sale of software is recognised when all the significant risks and rewards of ownership of the goods have been passed to the buyer, usually on delivery of the goods. Under standard terms and conditions of sale, the Company transfers title and risk of loss to the buyer at the time product is delivered to the customer and revenue is recognised accordingly. The Company collects sales tax and value added taxes (VAT) on behalf of the government and, therefore. these are not economic benefits flowing to the Company and hence, they are excluded from revenue Excise duty deducted from revenue (gross) is the amount that is included in the revenue (gross) and not the entire amount of liability arising( during the year.

Sale of services

Revenue from rendering of software subscription service is recognised as soon as it is made available to customers. Under standard trims and conditions of sale. the Company transfers title and risk of loss to the buyer at the tune product is delivered to the customer and revenue is recognised accordingly The Company collects service tax and VAT on behalf of the government and, therefore, it is not an economic benefit flowing to the Company and hence, it is excluded from revenue.

Support and maintenance

Revenue from customization, support and maintenance service is recognised as and when service is rendered and acknowledged by the customer

Training fee

Revenue from training is recognised over the period of the training program as per the tenets of the training agreement.

(Page 143 of the annual report for FY 2017-18)”

27. It is also noticed that 75.90% of the revenue of Tally for FY 2017-18 is from sale of software products. We therefore see merit in the contention of the ld. AR that the service income filter would fail with respect to this comparable since on perusal of the annual report of the assessee, it is noticed that the revenue from operations include only business process and technology outsourcing and consulting income (page 192 of paper book Vol I). Therefore, it is clear that the assessee is not into software product sales whereas on perusal of the annual report of Tally, it is noticed that the company is having significant income from the sale of products. It is further noticed that Tally is having in-house Research & Development centre as per the annual report as extracted in page 787 of PB Vol.III. From the above discussion, it is clear that Tally is functionally dissimilar to the assessee and given the fact that the company is into sale of software products and services, the assets employed and the risk profile would also be dissimilar to the assessee. Therefore, in our considered view, Tally is not comparable to the assessee and it is directed that the company be excluded from the list of comparables.

Eclrex Services Ltd.

28. The assessee submitted that the company is mainly engaged in ITeS services i.e., KPO & BPO services such as data management and analytics solutions, therefore the company is not comparable. The TPO rejected the contentions and held that the company is a comparable since it provides software support services. On further objections, the DRP upheld the inclusion of the comparable.

29. Before us, the ld. AR submitted that the same company has been included as a comparable for ITeS segment also by the TPO and the DRP has upheld the inclusion on the ground that there should not be any distinction between KPO and BPO services. The ld. AR therefore submitted that it is clear from the findings of the DRP that the company is into ITeS services and therefore cannot be a comparable for software development segment. The ld. AR also drew our attention to page 13 of the DRP order where the DRP has extracted the same findings while confirming the inclusion of the company in the ITeS segment in page 19 of the same order.

30. On perusal of the DRP’s order, we notice that the findings given while confirming the inclusion in the Software development segment is same as what is given in ITeS segment. From this, it is clear that the DRP itself has treated that the company is into ITeS services. On perusal of records it is noticed that the company is into KPO services as per the corporate information given in the Annual Reports (page 764 of paper book Vol III) Therefore, there is merit in the contention of the ld. AR that this company cannot be used as a comparable for software development segment. Accordingly, we direct that the company be excluded as a comparable.

Cybage Software P. Ltd.

31. The assessee submitted before the TPO that the company is functionally dissimilar as it specialises in outsourced product engineering services. The assessee further submitted that the company provides ITeS and BPO services and there is no segmental data. The TPO held that the company provides software application development and maintenance services and therefore should be included as a comparable.

32. The DRP upheld the inclusion on the ground that principal business activity of the company is mentioned as software development services and no other reportable segments are mentioned.

33. Before us, the ld. AR submitted that the financials of the company does not have detailed information on functionality of services provided by the company and therefore the information is drawn from the website of the company from which it is mentioned that the company mainly focussed on product engineering services compared to software development services provided by the assessee. It is further submitted that Cybage is also engaged in provision of ITeS and BPO services and there is no segmental information available in the financials of the company. It is therefore erroneous on the part of the TPO to compare the assessee which is low risk captive software development service provider with that of a company which is involved in diversified activities where no segmental information is available. In this regard, the ld AR relied on the following decisions:-

a) Steria India Ltd. v. DCIT [2018] 92 com 120 (Del)

b) Telcordia Technologies India P. Ltd. v. ACIT, ITA No.7821/Mum/2021

34. We heard the rival submission and perused the material on record. We notice that the main contention of the assessee with regard to exclusion of the company is that the company is functionally dissimilar having diversified activities including ITeS and BPO services. On perusal of records, it is noticed that the segmental information is not available though it is mentioned as per the website of the company that it is involved in various other activities including order management, research & analysis, social media management and monitoring, etc. (page 761 & 762 of paper book Vol III) It is further noticed that the functionality of the company is not coming out clearly from the financials. In view of this discussion, we are of the considered view that the issue should go back to the AO/TPO for a fresh examination of facts. The AO/TPO is directed to verify the nature of activity of the company and the availability of segmental details and decide the inclusion in accordance with law.

Consilient Technologies P. Ltd.

35. The assessee submitted that this company is functionally dissimilar as it is a provider of licensable software products. The TPO rejected the submissions of the assessee and included Consilient as a comparable. The DRP upheld the order of the TPO on the ground that the company is involved in software publishing, consultancy, supply and documentation of ready-made non-customised software. Hence it is a software service provider and it is thus functionally comparable to the assessee. However, the DRP directed the TPO to verify the company’s margin and recompute it.

36. The ld. AR reiterated the submissions made before the lower authorities. We heard both the parties. We notice from the submissions made by the assessee before the DR (page 758 to 760 of paper book Vol III) that the company is an embedded solutions provider of video, voice and fax technologies and also offers a range of product related to the same. We also notice that the DRP and TPO have not gone into the details of functions, assets and risk profile of the company have held that the company is a comparable since it is a software service provider. This in our view is not correct without examining the facts and FAR analysis. We therefore remit this issue to the AO/TPO for fresh examination based on facts and to decide in accordance with law after giving a reasonable opportunity of being heard to the assessee.

37. The ld AR submitted that if the above comparables are held to be excluded, then the assessee’s margin in SWD segment would be within the arm’s length range and therefore the grounds with regard to rest of the comparables may be left open. In the light of our decision with regard to the comparables argued by the Ld AR, the rest of the comparables contended in Ground No.4 are left open.

ITeS Segment –Ground 5 (5.1 to 5.3)

38. During the course of hearing, the ld. AR submitted that with regard to the TP adjustment in the ITeS segment, the TPO while passing the order giving effect to the directions of the DRP, had made the TP adjustment in the ITeS segment in spite of the fact that the profit margin of the assessee is within the 35^th percentile and 65th percentile of the average margin of the final list of comparables of ITeS segment. The ld. AR further submitted that the assessee has filed a rectification petition dated 22.8.2022 u/s. 154 before the AO/TPO and is awaiting the order. The ld. AR therefore prayed for a direction in this regard whereby there will not be any TP adjustments. Accordingly it is submitted that rest of the issues contended towards the TP adjustment in ITeS segment will become academic.

39. The ld. DR did not have any objection to the submissions of the AR.

40. We heard the parties and perused the material on record. We notice that in the order giving effect (pg.961 to 968 of PB Vol.III) to the DRP directions, the TPO had considered 14 comparables, the 35^th percentile of the average margin of which is 10.43% and the 65^th percentile is 19.54%. We also notice that the operating margin of the assessee as has been considered by the TPO (page 967 of PB Vol.III) works out to 15.16% (refer rectification petition filed u/s. 154 on page 971 of PB Vol.III). Therefore, we see merit in the submission of the ld. AR that the assessee’s margin is within the arm’s length even as per the TPO’s order. We also notice that the TPO in spite of the fact that the assessee’s margin is within the range, has proceeded to make a TP adjustment which, in our view, is not warranted. We therefore direct the TPO to consider the submissions made by the assessee in the rectification petition dated 22.8.2022 and pass the order accordingly.

41. Ground Nos. 5.2 & 5.3 are with regard to other contentions relating to TP adjustment in ITeS segment and have become academic in the light of the above directions and therefore no separate adjudication is warranted.

Working capital and Risk adjustment – Ground 6 (6.1 & 6.2)

42. Ground No.6.1 is regarding working capital adjustment reads as follows:-

“6.1 The Ld. AO/Ld. TPO erred both in law and facts in not providing working capital adjustment for determining the arm’s length price while relying on the judicial precedents based on a fact pattern which is not applicable to the Appellant. The Ld. Panel erred in upholding the same.”

43. The TPO did not give working capital adjustment for the reason that the assessee has demonstrated that there is a difference in the level of working capital employed by the assessee vis-à-vis the comparables. The DRP upheld the decision of the TPO.

44. The ld. AR submitted that it is a settled position that working capital adjustment should be given and in this regard relied on the decision of the coordinate Bench in the case of Capco Technologies P. ltd. v. DCIT, IT(TP)A No.204/Bang/2021 dated 18.11.2021.

45. We heard the rival submissions and perused the material on record. The coordinated bench of the Tribunal in the case of Capco Technologies P. Ltd (supra) held –

“20. The next ground that needs adjudication is with regard to the grievance of the assessee that no adjustment towards working capital has been allowed to the assessee. In this regard though the ground of appeal makes a reference to risk adjustment also, the point that was pressed for adjudication was only with regard to grant of working capital adjustment. On the issue of non granting of working capital adjustment, the DRP gave its decision by observing that (i) The Assessee has not demonstrated with any data or information as to the impact of working capital on the costs, price or profit. (ii) working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc., all of which cannot be captured in the year end receivable or payable position. (iii) the year end receivables and payable may not reflect as to whether it arises from transactions relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and an intermixing is generally possible. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results.

21. The learned counsel for the assessee submitted that the conclusions of the DRP are identical to the conclusions arrived at by the revenue authorities in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). In the aforesaid decision on an identical issue, the Tribunal held that working capital adjustment has to be given. The tribunal reasoned in the aforesaid decision that a reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly show that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. The tribunal referred to Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the “TPG”) contain extensive guidance on comparability analyses for transfer pricing purposes.

Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annexure to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. The Tribunal referred to Paragraphs 13 to 16 of the aforesaid OECD guidelines, wherein the need for working capital adjustment has been explained as follows:

“13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect.

14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect.

15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory)

16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that:

♦ A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers)

♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers – (less) the period granted to pay debts to suppliers.”

22. The tribunal observed that examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The tribunal observed that the guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. The Tribunal further observed that the data available with the assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore working capital adjustment has to be allowed.

23. We are therefore of the view that the issue with regard to the grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal referred to above, after affording the Assessee opportunity of being heard.”

46. Respectfully following the above decision of the coordinate bench we hold that the working capital adjustment should be allowed and direct the AO/TPO to examine the issue afresh in the light of the decision of the tribunal referred to above, after affording the Assessee opportunity of being heard.

47. During the course of hearing, the ld. AR did not press for ground No.6.2 with regard to risk adjustment and accordingly the same is dismissed as not pressed.

Interest on outstanding receivables –Ground 7(7.1 to 7.3)

48. Ground No.7 is as under:-

“7. Ground No. 7: Interest on outstanding receivables

7.1. That the Ld. AO/Ld. TPO erred in undertaking adjustment for interest on delayed receivables by ignoring the fact that outstanding receivables and notional interest on the same cannot be considered as separate international transactions. Further, the Ld. AO/ TPO erred in 14ot acknowledging the fact the Appellant is a debt free entity and accordingly no adjustment on receivables is warranted.

7.2. The Ld. AO/Ld. TPO has erred in not considering that, such differences should be adjusted through the appropriate mechanism of working capital adjustment and not looked at separately, being closely aligned to the primary international transactions of rendering of services to AEs. Thus, the outstanding receivables would not constitute an international transaction by itself.

7.3. Without prejudice to the above grounds, the Ld. AO/Ld. TPO erred in determining transfer pricing adjustment pertaining to interest on outstanding receivables, without taking into consideration that the weighted average collection period of the Appellant is 39 days in respect of invoices raised during the assessment year was within the credit period agreed as per the inter-company agreement between the Appellant and its Associated Enterprises.”

49. The TPO considered the interest on receivable as a separate international transaction and accordingly calculated the notional interest by applying 6 months LIBOR + 400 basis points and arrived at a notional interest of Rs.53,92,838 which is upheld by the DRP.

50. Before us, the ld. AR submitted that the company is having a master service agreement as per the terms of which there is a credit period of 45 days. The ld. AR also submitted that the average receivable period of the assessee is 39 days and therefore the notional interest levy is not warranted. The ld AR further submitted that the TPO had not considered any credit period while computing the interest. The ld. AR relied on the decision of the coordinate bench in the case of Tio-Tech Pvt. Ltd. v. DCIT, IT(TP)A 237/Bang/2021 dated 12.10.2022 wherein it was held that –

26. We have considered the rival submissions and perused the material on record. We have heard the rival submissions and perused the material on record. The impugned issue is squarely covered by the decision of the coordinate Bench of the Tribunal in the case of Swiss Re Global Business Solutions India Pvt. Ltd. (supra) wherein it was held as under:-

“35. The only other issue that remains for adjudication is ground No.15 with regard to re-characterizing certain trade receivables as unsecured loans and computing notional interest on such trade receivables. The main contention of the ld. AR is that deferred receivables would not constitute a separate international transaction and need not be benchmarked while determining the ALP of the international transaction. In our opinion, this issue was considered by the Tribunal in assessee’s own case for AY 2014-15 and in para 23 to 23.9 of the order dated 21.5.2020 this Tribunal held as under:-

“23. Ground No. 14-17 alleged by assessee against adjustment of notional interest on outstanding receivables.

From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. Alternatively, he submitted that working capital subsumes sundry creditors and therefore separate addition is not called for.

23.1. Ld.TPO computed interest on outstanding receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE’s, by holding outstanding receivables to be an independent international transaction.

23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon’ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon’ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon’ble Supreme Court vide order, in CC No. 4956/2017.

23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables and no separate adjustment is required in such circumstances.

23.4. On the contrary Ld.CIT.DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of the contentions, he placed reliance on decision of Delhi Tribunal order in Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that:

(i) the expression “international transaction” shall include—

. . . . . (c) 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;. . . . ‘

23.5. Ld.CIT.DR submitted that expression ‘debt arising during the course of business’ refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon’ble Delhi Bench in this case noted a decision of the Hon’ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law:

“(c) ‘Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?”

23.6. Ld.CIT.DR submitted that, while answering above question, Hon’ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon’ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. Insofar as charging of rate of interest is concerned, he relied on decision of the Hon’ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing-up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined.

23.7. We have perused the submissions advanced by both the sides in the light of the records placed before us.

This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT (IT) [2016] 71 taxmann.com 193/160 ITD 1 (Kol. – Trib.), held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per Explanation to section 92B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR.

23.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans and advances to associated enterprise would amount to double taxation. Hon’ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT [2018] 91 taxmann.com 286 has observed that:

“There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon’ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon’ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions.”

23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law.”

36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon’ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018.

37. Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly”

27. In view of the above discussion and considering the decision of the of the coordinate bench of the Tribunal and the judgment of the Hon’ble High Court of Karnataka in the case of AMD (India) Pvt. Ltd. (supra), we hold that the treatment of interest on deferred receivables is rightly considered as an independent international transaction and benchmarked separately by the revenue authorities. With regard to calculation of interest, respectfully following the above decision we hold that it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly.”

51. Respectfully following the above decision we hold that the interest on delayed receivable be calculated at LIBOR + 2%. It is ordered accordingly.

52. Ground No.1(1.1), Ground No.2 (2.1 & 2.2) and Ground No.3.1 are general in nature and does not warrant separate adjudication. Through ground No.3.2 the assessee is praying for consideration of the correct margins of comparable companies for software development segment and the ITeS segment. In this regard, we direct the AO/TPO to consider the correct margins while computing the ALP in accordance with the directions given in this order.

53. In the result, the appeal by the assessee is partly allowed.

Pronounced in the open court on this 9^th day of January, 2023.