Case Law Details

Case Name : Zynga Game Network India Pvt. Ltd. Vs DCIT (ITAT Bangalore)
Appeal Number : ITA No. 2573/Bang/2019
Date of Judgement/Order : 23/03/2021
Related Assessment Year : 2015-16

Zynga Game Network India Pvt. Ltd. Vs DCIT (ITAT Bangalore)

We note that Ld.AO/TPO has applied filter of more than Rs. 1 crore, but did not put an upper limit to the filter. This Tribunal in case of Genesis Integrating Systems India Pvt Ltd vs DCIT reported in (2012) 53 SOT 159 and various other decisions have held that, companies having turnover in excess of Rs.200 crores cannot be compared with companies having turnover less than Rs.200 crore. This preposition has been accepted by Hon’ble Bombay High Court in case of CIT vs Pentair Water Pvt.Ltd., by order dated 16/09/2015 in ITA No. 18/2015. Hon’ble Court upheld rejection of companies having turnover holding that turnover is a relevant factor in considering comparability of companies.

Objection raised by Ld.CIT.DR has been dealt with by this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT in (2018) 96 taxmann.com 263 for assessment year 2005-06. This Tribunal reviewed gamut of case laws to consider, whether companies having turnover more than Rs.200 crores should be regarded as comparable with a company having turnover less than 200 crore. This Tribunal held as under:

“17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon’ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon’ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon’ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.

17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).”

Ld.AR submitted that though this decision was rendered with reference to AY 2005-06 and 2006-07, same reasoning would apply to AY 2015-16 also and in this regard. Based upon above discussions and the decision relied by Ld.AR herein above. We are of opinion that objection raised by revenue cannot withstand the test of law.

Accordingly we direct Ld. AO/TPO to exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. for having high turnover as compared to a captive service provider like assessee.

FULL TEXT OF THE ITAT JUDGEMENT

Present appeal has been filed by assessee against final assessment order passed by Ld.DCIT dated 30/10/2019 under

section 143 (3) read with section 1 44C (13) of the Act on following grounds of appeal:

“A. TRANSFER PRICING GROUNDS:

The grounds mentioned hereinafter are without prejudice to one another.

1. GROUNDS IN RELATION TO ADJUSTMENT MADE IN THE SOFTWARE DEVELOPMENT SEGMENT:

1.1. The learned Assessing Officer (“Ld AO”), learned Transfer Pricing Officer (“Ld TPO”) and the Hon’ble Dispute Resolution Panel (“Hon’ble DRP”) (together referred to as “lower Authorities”) have erred in facts and in law in determining transfer pricing (“TP) adjustment of Rs 7,76,58,654/- with respect to the international transaction rendered by the Appellant in the software development segment;

1.2. The lower Authorities erred in invoking provisions of section 92C(3) of the Income-tax Act, 1961 (“Act”) and rejecting comparability analysis undertaken by the Appellant in the TP documentation maintained under section 92D of the Act;

1.3. The lower Authorities have acted in an arbitrary manner in selecting comparable companies only if the data pertaining to FY 2014-15 was available;

1.4. The lower Authorities erred in not considering companies having different financial year ending (i.e., not March 31) without appreciating that the relevant data for the concerned financial year could be deduced from the corresponding quarterly financials>, 7

1.5. The lower Authorities erred in facts and in law in considering foreign exchange gain / loss as operating in nature;

1.6.The lower Authorities erred in not considering provision of bad and doubtful debts as operating in nature while computing the operating margin of the Appellant and the comparable companies;

1.7. The lower Authorities erred in applying the following filters for the comparability analysis:

1.7.1 excluding companies whose service income was less than 75 percent of total sales;

1.7.2 exclude companies whose export earning was less than of 75 percent of total sales;

1.7.3 exclude companies whose employee cost was less than 25 percent of total sales;

1.8. The lower Authorities erred in not rejecting companies having abnormal profits;

1.9. The lower Authorities erred in not applying ‘onsite filter’ to exclude companies engaged in onsite activities;

1.10. The lower Authorities while applying a cap on the lower limit on turnover erred in not applying upper limit on sales turnover filter while selecting the comparable companies;

1.11. The lower Authorities erred in not allowing working capital adjustment to account for difference in the working capital of the Appellant vis-à-vis the comparable companies;

1.12. The lower Authorities erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-à-vis the comparable companies;

1.13. The lower Authorities have erred in including the following companies as comparable to the Appellant in the software development segment, despite the same failing the legally accepted criteria for comparability:

(1) Tata Elxsi Limited

(2) R S Software India Limited

(3) Mindtree Limited

(4) Persistent Systems Limited

(5) Infobeans Technologies Limited

(6) Nihilent Technologies Limited

(7) Aspire Systems India Private Limited

(8) Infosys Limited

(9) Third ware Solution Limited

(10) Cybage Software Private Limited

(11) Larsen & Toubro Infotech Limited

(12) Rheal Software Private Limited

(13) Inteq Software Private Limited

1.14 The lower Authorities have erred in not considering the following companies as comparable to the Appellant, despite being functionally comparable and qualifying the legally accepted criteria for comparability:

(1) Ingenuity Gaming Private Limited

(2) Indiagames Limited

(3) R Systems International Limited

(4) Akshay Software Technologies Ltd.

(5) TVS Infotech Limited

(6) Evoke Technologies Ltd.

(7) 12T2 India Ltd.

(8) FCS Software Solutions Limited

(9) Orion India Systems Private Limited

(10) DCIS Dot Corn Solutions Private Limited

(11)Harbinger Private Limited

2. GROUNDS IN RELATION TO ADJUSTMENT OF NOTIONAL INTEREST ON OUTSTANDING DEBTORS:

2.1 The lower Authorities have erred in facts and in law in imputing notional interest with regard to the trade receivables by the Appellant from its Associated Enterprises (“AE”) outside India when the Appellant has received all trade receipts for FY 2014-15 from its AE within the mutually agreed credit period of 90 days;

2.2 Without prejudice to the above, the lower authorities have erred in facts in not appreciating that no adjustment is warranted on account of notional interest even by adopting the credit period 60 days as considered by the TPO, as Appellant has received all trade receivables for FY 2014-15, within a maximum period of 37 days from the date of invoice;

2.3 The learned TPO has erred in computing the adjustment at Rs 121,372 post the DRP directions, by considering the credit period of 30 days despite himself having adopted a credit period of 60 days while passing the initial TP order which has not been modified by the DRP;

2.4 Without prejudice to the above, the lower Authorities have erred in law and on facts in arbitrarily adopting the rate of LIBOR plus 400 basis points to compute the notional interest on the trade receivables;

B. CORPORATE TAX GROUNDS:

3. INTEREST UNDER SECTION 234B OF THE ACT:

3.1 The learned AO has erred in levying interest under section 234B of the Act amounting to Rs 1,21,70,785/-which is consequential in nature. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds, which may be raised at the time of hearing, it is prayed that necessary relief may be provided.

Brief facts of the case are as under:

2. Assessee is a company registered under the Companies Act 1956 on 26/11/2009. It is a subsidiary of Zynga Luxembourg U.S Assessee is stated to be a software development service provider in the nature of development of modules for online games for testing and maintenance of online games, developed by Zinga Inc.

3. Assessee filed its original return of income for year under consideration on 28/11/2015 declaring total income of Rs. 12,70,81,983/-. The case was selected for scrutiny and notice under section 143(2) was issued to assessee in response to which representative of assessee appeared before Ld.AO. From the details filed by assessee, the Ld.AO observed that assessee entered into international transaction with its associated enterprises seeding this Rs. 15 crores. He therefore referred the issue to the Transfer Pricing officer for determining arms length price of the transaction.

4. On receipt of reference under 92 CA, the Ld.TPO called upon assessee to file economic details of international transaction in Form 3 CEB. The Ld. TPO from the details filed noted that assessee had entered into following international transaction:

Particular Amount Received Amount paid Method Used
Provision of SoftwareDevelopment services 961,414,277 TNMM
Reimbursement of expenses paid 15,199,390 TNMM
Taxes on equity plans paid onbehalf of the AE 12,788,057 Other
Trade receivables 137,516.837 TNMM
Trade Payables 2.315,295 TNMM
Unbilled Revenue 6.173,066 TNMM
Total 1,117,892,237 17,514,685 1,135,406,92 2

5. The Ld.TPO noted that assessee renders software development services for the games to its ultimate parent company being Zyngo US and not to any other independent 3rd parties in India or outside India. He noted that assessee computed its margin at 15.54% by using TNMM as most appropriate method and OP/OC as PLI. Assessee used 9 comparables with median margin of 10.06%. Following were the comparables were selected by assessee in the TP study:

S No Comparable
Weighted
average OP/OC
1 Ingenuity Gaming Private Limited 23.14
2 Indiagames Ltd 5.28
3 TVS Infotech Ltd 3.26
4 Akshay Software Technologies Ltd 3.28
5 Evoke Technologies Limited 6.13
6 CG-VAK Software & Exports Ltd 10.06
7 KALS Information Systems Limited 14.72
8 Ideavate Solutions Private Limited 19.24
9 R S stems International Ltd 21.67
Data place Range OP/OC
35th Percentile 6.13
Median 10.06
65th Percentile 14.72

6. The Ld.TPO accepted the MAM used by assessee, however he rejected the TP study to be unreliable due to application of in appropriate filters. The Ld.TPO also computed the operating margin of assessee at 15.54% by considering foreign exchange gain/loss as operating in nature.

7. The Ld.TPO thereafter applied following filters which included 14 new comparables along with 2 companies proposed by assessee during Transfer Pricing proceedings. The details of the filters applied by the Ld.TPO and the comparables selected are as under

8. Filters applied by the Ld. TPO

S. No. .Filter
1 Use of current year data where available
2 Companies having different FY ending (ie., not March 31,2014) or data of the Company does not fall within 12 month period ie, April 1, 2013 to March 31, 2014, were rejected
3 Companies whose income was < 1 crore were excluded
4 Companies whose Software Development Service is less than 75% of its total operating revenues were excluded
5 Related party transaction (“RPT”) greater than 25 percent of the sales were excluded
6 Export sales less than 75 percent of sales were excluded
7 Employee cost less than 25 percent of turnover were excluded

9. Comparables selected by the Ld.TPO

S No Comparable Weighted
average OP/OC
1 Kals Information Systems Ltd 11.88%
2 E-Zest Solutions Limited 14.05%
3 CG-VAK Software & Exports Limited 18.50%
4 Tata Elxsi Ltd. (Seg) 19.34%
5 Rheal Software Pvt. Ltd. 19.88%
6 Mindtree Ltd. 20.55%
7 R S Software (India) Ltd. 24.82%
8 Larsen & Toubro Infotech Ltd. 24.21%
9 Infobeans Technologies Ltd. 29.91%
10 Persistent Systems Ltd. 31.69%
11 Nihilent Technologies Ltd. 32.21%
12 Aspire Systems (India) Pvt. Ltd. 34.18%
13 Inteq Software Pvt. Ltd. 37.90%
14 Infosys Ltd. 38.59%
15 Thirdware Solution Ltd. 41.12%
16 Cybage Software Pvt. Ltd. 66.27%

10. The Ld.TPO further proposed the Transfer Pricing adjustment of Rs.37,24,095/- with respect of notional income received by assessee in respect of interest on delayed receivables.

11. In view of the above, the Ld.TPO determined the proposed adjustment as under:

12. The Ld.TPO did not grant working capital adjustment in the hands of assessee as under:

S.No Description Adjustment u/s 92CA(In Rs.)
1 Software development 9,89,92,432/-
2 Segment Interest on delayed receivables 37,24,095/-
Total adjustment Ws 92CA 10,27,16,527/-

13. Aggrieved by proposed adjustment, assessee raised objections before DRP.

14. DRP rejected assessee’s arguments with respect to the comparable companies. It is submitted that the DRP excluded one comparable, being Daffodil software Ltd. that was proposed as an additional comparable by assessee in the transfer prising study which the Ld.TPO did not consider. The Ld.TPO rejected this comparable as it failed export filter of 75%. The DRP observed from the annual reports that the export revenue of this comparable was 24.63 crores out of total revenue of Rs.30. 16 crore which amounts to 81.65%.

15. In respect of notional interest computed by the Ld.TPO, the DRP upheld the reasoning given by the Ld.TPO by holding that the deferred revenue receivables is a separate international transaction. The DRP upheld the action of the Ld.TPO as a justified, examining short charging or non-charging of interest on deferred receivables from AE.

16. It also did not consider the claim of assessee for working capital adjustment and upheld the notional interest computed by the Ld.TPO against delayed receivables based on actual realisation on each invoices.

17. On receipt of the directions by the DRP, the Ld.AO passed final assessment order by making addition in respect of transfer pricing adjustment amounting to Rs.7,77,80,026/-.

18. Aggrieved by order of the Ld.AO, the assessee is in appeal before us now.

19. The Ld.AR submitted that, assessee wishes to argue only certain comparables for inclusion/exclusion under both the segments. He submitted that, for year under consideration both assessee as well as revenue have considered median of 3 immediately preceding assessment years for computing margin as per newly inserted Rule 10 CA introduced w.e.f. 01/10/2015.

20. Referring to grounds raised by the assessee, the Ld.AR submitted that Ground No.1-1.4 are general in nature which do not require adjudication.

21. Ground 1.5, 1.7-1.9 are not pressed at the instruction of assessee.

22. Grounds 1.6 is raised for not considering provision of bad and doubtful debts as operating in nature while computing operating margin of assessee and the comparable companies.

23. The Ld.AR submitted that, the Ld.TPO has considered provision for doubtful debts and provision for doubtful advances are non-operating in nature and the action was upheld by the DRP. In this regard it was submitted that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence, and therefore it is not correct to contend that the same is non-operating in nature. The Ld.AR submitted that coordinate bench of this Tribunal in case of Brocade Communications Systems Pvt.Ltd., reported in (2020) 117 Taxmann.com 439 has held that provision for doubtful debts are operating in nature by relying on decision of Hon’ble Delhi Tribunal in case of Rolls-Royce India Pvt.Ltd., reported in (2016) 69 Taxmann.com 209.

24. The Ld.CIT.DR relied on the order of the Ld. DRP /AO/TPO. We have perused submissions advanced by both sides in light of records placed before us.

25. We are of the view that, in light of the decision of coordinate bench of this Tribunal in case of Brocade Communications Systems Pvt.Ltd. (supra) and decision of Hon’ble Delhi Tribunal in the case of Rolls-Royce India (P.) Ltd. (supra), the margin is to be reworked by considering the provision for doubtful debts as operating expenditure. The Ld.AO is directed to recompute the margin of assessee as well as comparables based upon the observations of this Tribunal in case of Brocade Communications Systems Pvt.Ltd. (supra) and decision of Hon’ble Delhi Tribunal in the case of Rolls-Royce India (P.) Ltd. (supra).

26. In terms of risk, we note that assessee is a no risk company and therefore risk adjustment should be provided to comparables is any. We direct the assessee to file all necessary details in respect of the same. In respect of the companies for which details could not be filed, the Ld.AO/TPO shall call for necessary information under section 133(6) in order to compute necessary adjustment.

Accordingly this ground raised by assessee stands allowed.

27. Ground No.1.10 & 1.13 is raised for not applying the upper limit of turnover on sales filter and for in appropriate inclusion/exclusion of comparables by Ld.AO/TPO in the final list.

28. He submitted that 9 comparables is sought to be excluded on turnover filter which are as under:

29. Tata Elxsi Ltd.(Seg.), mind tree Ltd., RS Software (India) Ltd., Larsen and Toubro Infotech Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Thirdware Solutions Ltd., Cybage Software Pvt. Ltd.

30. The Ld.AR submitted that assessee is seeking exclusion of Infobeans Technologies Ltd. on functional dissimilarities.

31. Before we undertake comparability analysis, it’s sine qua non to understand functions performed, assets owned and risk assumed by the assessee under both these segments.

The Ld.TPO observed as under:

Functions

32. Zynga India is an Indian Private Company registered under the provisions of the companies Act. 1956 on November 26, 2009 and is a subsidiary of Zynga Luxernhurg S. a. r. L. Zynga India Provides software development services in the nature of software development of modules for online games. testing and maintenance of online games developed by Zynga Inc. The company is a 00% export Oriented Unit and registered under Software Technology parks of India scheme at Bangalore with an employee strength of 275. Zynga India renders software development services for games to its ultimate parent company, Zynga US, and not to another independent third parties in India or outside India.”

33. It is observed that US associated enterprise play significant role in determining business strategy of group including assessee and is responsible for all top management functions of corporate strategy, Treasury, legal and regulatory affairs and designing the policy with respect to its group operations including assessee. At page _________ of paper book, it is observed that no strategic functions are performed by assessee and is primarily performing the tactical managerial functions regarding day-to-day management of business. At page _________ of paper book it is observed that assessee has been providing Ltd functions under software development service segment which includes limited functional specifications and requirement analysis,

Assets owned: Assessee owns routine tangible assets like office of equipment, furniture’s and fixtures, computer equipment etc.

Risks assumed: Under software development service segment assessee has been identified to be undertaking limited market risk only, and assessee is 100% risk mitigated.

Characterisation: On the basis of functional analysis, assessee has been characterised to be a risk mitigated contract service provider for both the segments. The assets scheduled substantiates that the performance of functions are linked to the assets employed which are routine in nature and does not carry out any significant enterprise in real activities nor does it bears any significant risk associated with such services rendered by assessee.

34. On the basis of above FAR analysis we shall undertake comparability of alleged comparables for inclusion/exclusion. Ground No.1.10 &1.13

35. The Ld.AR argued that, assessee seeks exclusion of Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. by applying turnover filter. The Ld.AR submitted that authorities below applied lower limit of turnover filter of Rs. 1 crore and ignored applying an upper turnover filter. It was submitted that, consistently revenue always took stand that turnover is not a relevant filter in software industry. It has been contended by revenue that in software industry size has no influence on the margins earned by a comparable company. What matters is a human capital. It was under these circumstances that The Ld.TPO applied only lower limit of turnover filter for excluding companies having turnover less than Rs. 1 crore. Assessee also relied on decisions of this Tribunal in case of Metric Stream Infotech (India) Pvt. Ltd., Vs. ACIT in IT(TP)A No.2347/Bang/2019 dated 24/4/2020 for asst. year 2014-15. 36. The Ld.CIT.DR submitted that when companies functionally similar to assessee, and is potentially comparable, the same cannot be ex+cluded merely because of high or low turnover.

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

38. We note that Ld.AO/TPO has applied filter of more than Rs. 1 crore, but did not put an upper limit to the filter. This Tribunal in case of Genesis Integrating Systems India Pvt Ltd vs DCIT reported in (2012) 53 SOT 159 and various other decisions have held that, companies having turnover in excess of Rs.200 crores cannot be compared with companies having turnover less than Rs.200 crore. This preposition has been accepted by Hon’ble Bombay High Court in case of CIT vs Pentair Water Pvt.Ltd., by order dated 16/09/2015 in ITA No. 18/2015. Hon’ble Court upheld rejection of companies having turnover holding that turnover is a relevant factor in considering comparability of companies.

39. Objection raised by Ld.CIT.DR has been dealt with by this Tribunal in case of Autodesk India Pvt.Ltd. vs DCIT in (2018) 96 taxmann.com 263 for assessment year 2005-06. This Tribunal reviewed gamut of case laws to consider, whether companies having turnover more than Rs.200 crores should be regarded as comparable with a company having turnover less than 200 crore. This Tribunal held as under:

“17.7 We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon’ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon’ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon’ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.

17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).”

40. Ld.AR submitted that though this decision was rendered with reference to AY 2005-06 and 2006-07, same reasoning would apply to AY 2015-16 also and in this regard. Based upon above discussions and the decision relied by Ld.AR herein above. We are of opinion that objection raised by revenue cannot withstand the test of law.

Accordingly we direct Ld. AO/TPO to exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. for having high turnover as compared to a captive service provider like assessee.

Infobeans Technologies Ltd.

41. The Ld.AR submitted that this comparable was selected by authorities below as it passes all filters, based upon response received from this company under section 133 (6) of the Act. He submitted that this observation is contrary to the facts and figures appearing in annual report. Referring to page 1364 the Ld.AR submitted that this company is engaged in software engineering services. In the company overview this company has been stated to be primarily engaged in providing custom developed services to offshore clients and it provides software engineering services primarily in custom application development, content management systems, enterprise mobility, Big Data analytics. Ld.AR thus submitted that this company is functionally not at all similar with a captive service provider like assessee that this providing Ltd services to its associated enterprises.

42. On the contrary Ld. CIT DR, referring observations of DRP in para 19.1 submitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133 (6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to the Ld.AO/TPO for verification.

43. We have perused submissions advanced by both sides in light of records placed before us. It is observed that the annual report of this company categorises the diversify services provided by this company under software development segment. We also note that this company is basically into application development for web and mobile and provides customised services to its offshore clients comprising. Entire revenue received by this comparable ease under one single segment of sale of software. This company also owns software licenses.

44. In our considered opinion this comparable cannot be considered to be functioning in 100% risk mitigated environment and is a full-fledged enterprise. Such a comparable cannot be compared with a captive service provider like assessee.

Accordingly we direct this comparable to be excluded from finalist.

Accordingly grounds 1.10 and 1.13 as allowed.

45. Ground No. 1.14 is raised by assessee wherein assessee is seeking inclusion of following 6 comparables:

Evoke Technologies Ltd., I2T2 India Ltd., Indiagames Ltd., FCS Software Solutions Ltd., DCIS DOT COM Pvt.Ltd.

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

47. We note that comparables , FCS Software Solutions Ltd., DCIS DOT COM Pvt.Ltd. were rejected by the DRP for the reason that they were not showing in the search is carried out by the Ld.TPO. At the outset, the Ld.AR submitted that, these comparables formed part of reply filed by assessee as additional comparables. It was submitted that however these comparables were not considered by the Ld.TPO. As regards Evoke Technologies Pvt. Ltd., the Ld.AR submitted that the Ld.TPO rejected the same for the reason that the financials included figures from an outside branch which were unaudited and hence were considered to be unreliable.

48. As regards I2T2 India Pvt. Ltd., the same was rejected for the reason that it did not appear in the prowess database. It was submitted that assessee had filed all relevant details in regards to the same in order to verify the filters considered by the Ld.TPO however the authorities below have summarily rejected these comparables.

Based upon the above submissions by both sides, we set aside this issue back to Ld.AO/TPO for reconsideration of Evoke Technologies Ltd., I2T2 India Ltd., Indiagames Ltd., FCS Software Solutions Ltd., DCIS DOT COM Pvt.Ltd.

Accordingly ground 1.14 stands allowed for statistical purposes.

49. Ground No.2 is in respect of proposed adjustment of notional interest on outstanding debtors.

50. The Ld.AR submitted that the Ld.TPO imputed note additional interest with regard to trade receivables from the AE even when assessee has received all the trade receipts for year under consideration from its AE is within the mutually agreed period of 90 days. The Ld.AR submitted that, authorities below upheld the computation of notional interest at LIBOR +400 basis points that is 4.3836%, by using CUP as most appropriate method.

51. The Ld.AR submitted that assessee has actually received the trade receivables within the credit period and therefore no adjustment is called for. He submitted that invoice wise details were given before the authorities below however the same were not verified.

52. The Ld.AR further submitted that even otherwise adjustment is not called for as assessee is following TNMM as most appropriate method which is not been disputed by the authorities below and therefore working capital adjustment would subsumes all the trade receivables. He placed reliance on order passed by coordinate bench of this Tribunal in case of Ingersoll Rand (India) Ltd. vs DCIT in ITA No. 1378/Bang/201 1, wherein it is held that no interest liability arises even if payment is made beyond the credit period by AE. At this juncture, we would like to emphasise that subsequent Special Bench Kolkotta decisions of the Tribunal in case of Instrumentation corporation Ltd., Vs. ACIT in ITA No.1548 & 1549/Kol/2009 by order dated 15/7/20 16 has analysed interest on receivable to be an international transaction.

53. The submission of the Ld.AR, regarding non-verification of invoice wise details filed by assessee before authorities below cannot be ignored. Also the alternative plea regarding the trade receivables being subsumed by working capital adjustment under TNMM as most appropriate method is a valid point to be considered, in the event where there would be any trade receivables if any beyond the agreed credit period.

54. We note that at page 77 of ITO order, the Ld.TPO adopted 60 days as allowable credit period. However DRP at page 30 of their order observed that the Ld.TPO gave credit for payable due to AE and reduced it from the receivables. The DRP also observed that there is no basis for such method adopted by the Ld.TPO as there is no evidence that the payables and receivables are from same AE. The DRP thus directed that the Ld.AO/TPO to recompute interest without any reduction. The Ld.AO while passing final assessment order u/s 143(3) r.w.s 144(3) considered credit period of 30 days and adopted LIBOR + 400 basis points to be computed as notional interest on trade receivables.

55. The Ld.AR submitted that assessee received all trade receivables within the period of 37 days from the date of Invoice, which is verifiable. We note from the Master Service Agreement placed at page 146, clause 1.4(c) specifies a period of 90 days within which the payments has to be made to the assessee.

56. On these facts, action of the Ld.AO to treat credit period to be 30 days is not correct. At page 157 of paper book, we note that assessee filed invoice wise details of trade receivables along with master service agreement the before Ld.AO/TPO, which has not been looked into before making addition on account of interest on trade receivables.

57. Therefore in the light of the above, we direct Ld.AO/TPO to verify the invoices against which payments have been received by assessee within the credit period agreed between assessee and the AE. In the event, any trade receivable falls beyond the agreed period of 90 days, the Ld.AO/TPO shall verify, if the same is subsumed in the working capital adjustments. On verification, if found to be subsumed, then no adjustment deserves to be made. On the contrary if any trade payables falls outside the agreed credit period that is not subsumed, adjustment on such trade receivables would be restricted to LIBOR + 300 basis points.

Accordingly this ground raised by assessee stands allowed for statistical purposes.

58. Ground No.3 is consequential in nature and therefore do not require separate adjudication.

Accordingly, appeal filed by assessee stands allowed as indicated hereinabove.

Order pronounced in the open court on 23rd March, 2021

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