Case Law Details
Clinasia Labs Private Limited Vs ITO (ITAT Hyderabad)
Interest on delayed outstanding payments is an international transaction; ITAT directs AO/TPO to to compute interest @6% of SBI rate.
The case of Clinasia Labs Private Limited vs ITO presented before the Income Tax Appellate Tribunal (ITAT) Hyderabad delves into the intricacies of transfer pricing, specifically focusing on the classification of interest on delayed outstanding payments as an international transaction. The Tribunal’s decision to benchmark this interest at 6% of the State Bank of India (SBI) rate rather than the initially adopted 7.5% by the Transfer Pricing Officer (TPO) forms the crux of this case.
Grounds and Arguments
1. Original Interest Rate Determination: Grounds No. 12 to 14 focused on trade receivables where the assessee’s representative (AR) contested the TPO’s application of a 7.5% interest rate on outstanding receivables for 11 months ending 31st March 2016. This rate was upheld by the Dispute Resolution Panel (DRP).
2. Assessee’s Argument: The AR referenced past ITAT decisions, particularly in the cases of Paegasystems Worldwide India Pvt. Ltd. and Open Text Corporation India (P) Ltd., where the Tribunal had applied the London Interbank Offered Rate (LIBOR) as the basis. The AR suggested that a similar approach should be taken in Clinasia Labs’ case.
3. Revenue’s Counter-Argument: The Departmental Representative (DR) relied on other Tribunal decisions involving Zeta Interactive Systems (India) Pvt. Ltd., Satyam Ventures Engineering Services, and Apache Footware India Pvt. Ltd. These cases upheld the classification of delayed outstanding payments as international transactions and benchmarked them at a rate derived from the SBI short-term deposit rate.
Tribunal’s Analysis and Rationale
1. Examination of Precedents: The Tribunal considered the referenced cases by both parties. The decisions consistently held that interest on delayed trade receivables constitutes an international transaction. This classification necessitates benchmarking to ensure compliance with transfer pricing regulations.
2. Consistency in Benchmarking: ITAT reaffirmed its stance from earlier cases, notably Apache Footware India Pvt. Ltd., where it determined that the interest should be benchmarked at the SBI short-term deposit rate, adjusted to 6%. This was in contrast to the TPO’s higher rate of 7.5%.
3. Interest Rate Adjustment: The Tribunal scrutinized the reasons behind applying a 6% interest rate. They noted that the lower authorities had provided substantial reasoning for concluding that delays in receivables warranted interest, which needed to be aligned with the SBI rate. The provided chart detailing Apache Footware’s export receivables reinforced the necessity of applying a standardized interest rate to benchmark the transaction accurately.
Key Considerations:
- Delayed Receivables: The Tribunal analyzed that out of 3,520 invoices, 519 were delayed beyond the 60-day credit period, amounting to Rs. 62,38,68,941. The lack of justification from the assessee for such delays further supported the need for interest benchmarking.
- Prudent Business Practice: The Tribunal emphasized that no prudent business would permit an associated enterprise (A.E.) to utilize its working capital without compensation, highlighting the inherent flaw in the assessee’s argument that being debt-free negates the need for interest on delayed receivables.
- TP Analysis Requirement: The Tribunal stressed that the Transfer Pricing (TP) analysis must confirm that transactions between associated enterprises are at arm’s length. The failure of the assessee to present comparable instances to support its claims necessitated the application of an appropriate interest rate.
Conclusion
The Tribunal’s ruling in the Clinasia Labs Pvt Ltd vs ITO case sets a significant precedent in the realm of transfer pricing. By mandating the application of a 6% interest rate on delayed outstanding payments as an international transaction, the ITAT underscores the importance of maintaining fair and consistent standards in related party transactions. This decision also highlights the critical need for companies to meticulously document and justify their financial transactions to avoid adverse rulings. Consequently, the appeal of the assessee was partly allowed for statistical purposes, directing the Assessing Officer/TPO to compute the interest at 6% of the SBI rate.
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
Aggrieved by the final assessment order passed consequent to the directions of Hon’ble Dispute Resolution Panel, Bengaluru (“DRP”), for the assessment year 2016-17, under section 143(3) r.w.s.144C(13) r.w.s. 143(3A) & 143(3B) of the Income Tax Act, 1961 (for short “the Act”), assessee filed this appeal raising the following grounds :
“1. The Learned (Ld.) Assessing Officer (“AO”)/Ld. Transfer pricing officer (“TPO”) and the Ld. Dispute Resolution Panel (“DRP”) are erroneous in law and on the facts of the case.
TP Grounds on Margins and Comparables
2. The Ld. AO/ Ld. TPO and the Ld. DRP are not justified in law in making an adjustment under section 92CA(3) of Rs.2,17,38,030/- to the price received by the assessee from its Associated Enterprise.
3. The Ld. AO/ Ld. TPO and the Ld. DRP ought to have accepted the Profit margin of the assessee company (OP IOC) of 11.57 % as having complied with the arm’s length principle.
4. The Ld. TPO / Ld. DRP erred in rejecting the Transfer Pricing Study prepared by the assessee company without giving any cogent reasons for such rejection.
5. The Ld. AO/ Ld TPO and the Ld. DRP are not justified in law in considering wrong comparables and consequently arriving at a median margin (ALP Margin) of 26.36 % as a ratio of OP/OC.
TP Grounds on Exclusion of Comparables
6. The Ld. AO / Ld. TPO and the Ld. DRP erred in not accepting the assessee’s contention of exclusion of following 10 companies on the grounds of functional dissimilarity, super profit and high turnover or on other filter etc.
i. Rheal Software Pvt. Ltd.
ii. Cigniti Technologies Ltd
iii. Larsen & Toubro Infotech Ltd. (Segmental)
iv. Tata Elxsi Ltd (Segmental)
v. Inteq Software Pvt. Ltd.
vi. Persistent Systems Ltd.
vii. Infobeans Technologies Ltd
viii. Aspire Systems (India) Pvt. Ltd.
ix. Infosys Ltd.
x. Thirdware Solution Ltd.
xi. Cybage Software Pvt. Ltd.
7. The Ld. AO/ Ld. TPO and the Ld. DRP erred in not excluding Nihilent Ltd / Nihilent Technologies Ltd as comparable though originally selected by assessee in its TP study.
TP Grounds on Inclusion of Comparables
8. The Ld. AO/ Ld TPO erred in not accepting the assessee’s contention of inclusion of Ace Software Exports Ltd even when the company satisfied the export filter of 75% as applied by the Ld. TPO. The Ld. DRP erred in rejecting the same on grounds of functional dis-similarity.
9. The Ld. AO/ Ld. TPO and the Ld. DRP erred in not accepting the assessee’s contention of inclusion of following 6 companies which were considered by assessee as its comparables in the TP study. The Ld. AO/ Ld. TPO and the Ld. DRP ought to have considered the availability of data and ought to have selected these companies as Comparable Companies.
i. SagarSoft (India) Ltd
ii. Evoke Technologies Pvt Ltd
iii. Sankhya Infotech Ltd
iv. Harbinger Systems Pvt Ltd
v . Maveric Systems Ltd.
vi. Agilisys IT Services India Pvt Ltd
10. The Ld. AO/ Ld. TPO, while including the Companies as comparables has erred in computations of the margins and has considered wrong margins of the companies in the final list of comparables.
11. The Ld. AO/ Ld. TPO and the Ld. DRP, while including the Companies as comparables has erred in applying the appropriate filters.
TP Grounds on Receivables
12. The Ld. AO/ Ld. TPO and the Ld DRP have erred by considering outstanding receivables as a separate international transaction.
13. The Ld. AO/ Ld. TPO and the Ld. DRP ought to have appreciated that the receivables arise in the normal course of business and are not to be treated as loans for levy of interest.
14. The Ld. AO/ Ld. TPO and the Ld. DRP has erred in applying the rate of interest at 7.5% on the receivables from its associated enterprises by equating it incorrectly with the Indian investment in bank deposits etc and proposing an adjustment of Rs. 32,52,061/- as interest on receivables.
General
15. The Ld AO erred in making an adjustment when the assessee company was claiming exemption ul s 10AA and hence there is no intention to shift profits outside India and more so when the tax rates in USA where the AE is located, were higher than those prevailing in India.
16. Any other ground that may be urged at the time of hearing with the prior approval of the Hon’ble Tribunal.
2. Brief facts of the case are that the assessee is a software development company and the profile of the assessee was captured by the Transfer Pricing Officer (TPO) in the order at paragraph No. 2, which is as under:
“2. Functional analysis of the taxpayer:
M/s. Clinasia Labs Private Limited is engaged in providing global technology services and solutions specializing in clinical operations, clinical data management and IT solutions. The company has its head quarters and development facilities in India and serves a global customer base through its associate company Maxis IT in USA.”
3. During the year under consideration, the assessee has entered into the following international transactions:
| Sl.No. | Name of the AE | International transactions |
Amount (in Rs.) |
Method applied |
| 1. | Maxis IT Inc, USA | Provision of software services | 159494796 | TNMM |
| 2. | Maxis IT Inc, USA | Outstanding balance as on March 31, 2016 | 47302709 | TNMM |
4. The assessee has computed the PLI OP/OC at 11.35%, as under:
| Description | Amount (in Rs.) |
| Operating Revenue | 161265267 |
| Operating Cost | 144826921 |
| OP/OR (%) | 10.19% |
| OP/OR (%) | 11.35% |
5. The assessee has compared the TP study, based on that the OP/OC was computed at 11.35% whereas the assessee has found that the Arm’s Length range of the comparables was between 10.84% to 16.97%. The TPO after considering the report of the assessee, had rejected the TP study filed by the assessee for the reasons mentioned in the order. The TPO after rejecting the TP study, has applied various filters and thereafter had selected the following 15 comparables:
1. Kals Information Systems Pvt. Ltd.
2. Rheal Software Pvt. Ltd.
3. C G-VAK Software & Exports Ltd.,
4. Cigniti Technologies Ltd.,
5. R S Software (India) Ltd.,
6. Larsen & Toubro Infotech Ltd., (Segmental)
7. Tata Elxsi Ltd. (Segmental)
8. Nihilent Ltd.,
9. Inteq Software Pvt. Ltd.,
10. Persistent Systems Ltd.,
11. Infobeans Technologies Ltd.,
12. Aspire Systems (India) Pvt. Ltd.,
13. Infosys Ltd.,
14. Thirdware Solution Ltd.,
15. Cybage software Pvt. Ltd.,
6. The assessee was put to show cause notice why the 15 comparables have not considered for benchmarking. At the TP study, however, the assessee filed the reply. The reply of the assessee was considered and thereafter, the TPO has rejected the objection of the assessee and has calculated the PLI of the assessee. In the final list of comparables, the TPO has found the following 15 comparables, which have come to the median of 26.36%:
1. Kals Information Systems Pvt. Ltd.
2. Rheal Software Pvt. Ltd.3. C G-VAK Software & Exports Ltd.,
4. Cigniti Technologies Ltd.,
5. R S Software (India) Ltd.,
6. Larsen & Toubro Infotech Ltd., (Segmental)
7. Tata Elxsi Ltd. (Segmental)
8. Nihilent Ltd.,
9. Inteq Software Pvt. Ltd.,
10. Persistent Systems Ltd.,
11. Infobeans Technologies Ltd.,
12. Aspire Systems (India) Pvt. Ltd.,
13. Infosys Ltd.,
14. Thirdware Solution Ltd.,
15. Cybage software Pvt. Ltd.,
7. Feeling aggrieved, the assessee has filed appeal on the basis of the order of the TPO and the AO passed draft assessment order. Challenging the draft assessment order, the assessee has raised objections before the DRP and the DRP has issued directions rejecting the claim of the assessee. At the stage of the DRP, the assessee had also submitted that various comparables which were selected by the assessee were wrongly rejected by the TPO on the pretext that the assessee were dealt with by the DRP at pg.2 of its directions.
In that order, the DRP was not convinced by the objection raised by the assessee and ultimately passed the order.
8. Based on the directions of the DRP, AO has passed the final assessment order and in the final assessment order, the AO has proposed an addition (TP adjustment) of Rs. 2,49,90,091/- to the total income of the assessee and besides that the AO has also made the addition on account of outstanding receivables.
Now, the assessee is in appeal before us for the grounds mentioned herein above.
9. Grounds No. 1 to 5 are general in nature and require no adjudication. With respect to Ground No. 6, learned AR for the assessee has submitted that the assessee divided the ground and submitted that the assessee is not pressing the exclusion of the companies i.e., Rheal Software Pvt. Ltd. and Inteq Software Pvt. Ltd. As the assessee is not pressing the exclusion of Rheal Software Pvt. Ltd., therefore, we dismiss the challenge of the assessee for Rheal Software Pvt. Ltd.
9.1. Besides that the assessee has sought the exclusion of the following comparables:
1. Larsen & Toubro Infotech Ltd., (Segmental)
2. Tata Elxsi Ltd. (Segmental)
3. Persistent Systems Ltd.,
4. Infobeans Technologies Ltd.,
5. Aspire Systems (India) Pvt. Ltd.,
6. Infosys Ltd.,
7. Thirdware Solution Ltd.,
9.2. In respect of the companies i.e., Larsen & Toubro Infotech Ltd., (Segmental), Tata Elxsi Ltd. (Segmental), Persistent Systems Ltd., Aspire Systems (India) Pvt. Ltd., and Infosys Ltd. It was submitted that the turnovers of the respective companies, are as under:
| Name of the company | Sales – Turnover (Rs. In Crores) |
| Larsen & Toubro Infotech Ltd., (Segmental) | 5568.5 |
| Tata Elxsi Ltd. (Segmental), | 1075.2 |
| Persistent Systems Ltd., | 1447.14 |
| Aspire Systems (India) Pvt. Ltd., | 230.81 |
| Infosys Ltd. | 54034 |
10. It is the contention of the learned AR for the assessee before us that these companies are required to be excluded on account of high turnover and the assessee has drawn our attention to the written submissions at pg. 12 to 17 of the paper book filed in this regard:
“3.1. During FY 2015-16, the Assessee has earned revenue of INR 16.13 crores (approx.) from provision of software development services. Hence, the Assessee submits that an upper turnover threshold of INR 200 crores should be accepted based on the classification provided in the Dun & Bradstreet report under the category of small firms.
Accordingly, based on the above discussion, the Assessee wishes to submit that the following comparable companies should not be accepted as comparable companies since the sales turnover for all these companies exceed the upper limit of INR 200 crores:
| S No | Company Name | Total Revenue (Rs. In Crores) | Sales –Turnover (Rs. In Crores) | Weighted Average OP/OC |
| 1 | Tata Elxsi Ltd. | 1088.5 | 1075.2 | 25.69 |
| 2 | Larsen & Toubro Infotech Ltd. | 5799.4 | 5568.5 | 23.67 |
| 3 | Nihilent Ltd. | 258.08 | 251.22 | 26.36 |
| 4 | Cigniti Technologies Ltd. | 206.09 | 204.49 | 19.15 |
| 5 | Persistent Systems Ltd. | 1542.27 | 1447.14 | 30.09 |
| 6 | Aspire Systems (India) Pvt. Ltd. | 233.05 | 230.81 | 33.74 |
| 7 | Infosys Ltd. | 57365 | 54034 | 38.31 |
| 8 | Thirdware Solution Ltd. | 227.55 | 221.37 | 39.41 |
| 9 | Cybage Software Pvt. Ltd. | 754.55 | 722.25 | 65.91 |
From the above 9 Companies, Cigniti Technologies Ltd is to be excluded based on the Ld. DRP order. However, the Ld. TPO/ AO have not excluded the same while passing the final assessment order and we request the Hon’ble ITAT to exclude all 9 companies based on upper turnover filter.
Thus, the Assessee submits to apply the upper turnover filter for selecting the comparable companies for a captive service provider like the Assessee.
Out of 12 Companies asked for exclusion the following 9 Companies are having Turnover > 200 Crores and the same are to be excluded from the final list of comparables selected by the Ld.TPO/Ld DRP.
In this connection the Assessee Company would rely on the following case law:
3.2. The Hon’ble Bangalore Tribunal in the case of Prism Networks Private Limited Vs ACIT (ITAT Bangalore) IT(TP)A No.349/Bang/2021 pronounced on 11.02.2022 held as under:
13. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmanftcom 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not Comparable with a company that has low turnover. The following were the relevant observations: 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 CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 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 (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the 1TAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (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 (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 Pvt.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 M/S.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).
“14. In view of the aforesaid decision, we hold that 7 companies listed in SI.No.(ii), (iii), (v), (vi) to (x) of Grd.No.6 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.”
3.3. The Hon’ble Bangalore Tribunal in the case of Barracuda Networks India (P.) Ltd. V. DCIT [2021] 131 taxmann.com 337 (Bangalore – Trib.) IT(TP) APPEAL NO.229 (BANG.) OF 2021 for the same AY 2016-17 have excluded the above mentioned 7 companies from the Final list of comparables.
7. The main grievance of the Assessee projected in the concise grounds of appeal filed before the Tribunal which was argued before us was (i) choice of comparable companies by the TPO which was affirmed by the DRP (Ground No. 4 & 5) ; and Grd. No. 7 regarding exclusion of R.S. Software (India) Ltd., on the ground that the related party transaction is more than 15%; (ii) non acceptance of Assessee’s claim regarding non inclusion of certain companies comparable company. (Ground No. 6) (iii) Non grant of working capital adjustment (Grd.No.9). These grounds (except grd.No.7) read as follows:
“4. The lower authorities erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter:
(a) Infosys Ltd.
(b) Larsen & Toubro Infotech Ltd
(c) Persistent Systems Ltd
(d) Aspire Systems (India) Pvt Ltd
(e) Thirdware Solution Ltd.
(f) Cybage Software Pvt Ltd.
(g) Nihilent Ltd.
(h) R S Software Ltd. ( for FY 2013-14. FY 2014-15)
5. The Learned TPO/Hon’ble DRP erred in including the operating income and operating expense of FY 2014-15 and FY 2013-14 in computing the weighted average margin for RS Software Ltd, even though the same fails the upper turnover limit of Rs. 200 crores for the above-mentioned years.
14. In view of the aforesaid decision, we hold that companies listed in Sl. No.(a) to (g) of Grd.No.4 raised by the Assessee whose turnover in the current year is more than Rs. 200 Crores should be excluded from the list of comparable companies.”
11. It was submitted that since the turnover of these companies is huge vis-à-vis the turnover of the assessee, which is meagre, these companies are to be excluded. Besides that, it was submitted that these companies are functionally dissimilar to the assessee company and have intangibles and brand segmental information that are not available.
12. Learned DR relied upon the orders of the authorities below.
13. We have heard the rival contentions and perused the material available on record. Admittedly, these companies are having huge turnover, whereas the turnover of the assessee is meagre as compared to these companies. The turnover of the assessee company was only Rs. 16.12 crores, whereas the turnover of these companies is more than Rs. 200 crores. Thus, these companies are not at all comparable with the assessee. Besides that the issue has already been dealt with by the Co-ordinate Bench of the Tribunal, wherein it was held that these companies are not comparable with the assessee company. Therefore, we direct the AO/TPO to delete these companies Larsen & Toubro Infotech Ltd., (Segmental) Tata Elxsi Ltd. (Segmental), Persistent Systems Ltd., Aspire Systems (India) Pvt. Ltd. And Infosys Ltd.from the list of comparables.
14. Now, we deal with Infobeans Technologies Ltd., and Thirdware Solution Ltd. for which the assessee has also sought exclusion. TPO dealt these two companies in his order, as under:
Infobeans Technologies Ltd.,
“Functions of the comparable company
The company is a software services company specializing in business application development company’s business is primarily to provide custom software development services to offshore specializing in the business of providing software development services. Over 95% of company’s is from software development & services charges.
(Extracts from audited company’s financials)
Taxpayer’s objections
The company is not comparable to the Assessee on account of following reasons:
-
- Functionally different
- Diversified activities & no segmental available TPO’s comments
- Functionally different
The annual report clearly mentions that the company is completely engaged in providing development services (as seen in the extracts reproduced above).
From the information gathered through ARs, it is therefore established that the company is providing software development. Hence, it is functionally similar to taxpayer’s business activities.
-
- Diversified activities & no segmental available
The taxpayer has gathered information from company’s website and submitted that the company diversified activities like providing software engineering services primarily in Custom and development (CAD), Content Management Systems (CMS), Enterprise Mobility (EM), Big data (BDA) etc. Since no segmental margins are given for each of these segments the company is rejected.
Software development segment actually encompasses diversified activities which are essential nature of programming and hence broadly similar for TNMM comparability purpose. A detailed this is provided in succeeding paragraphs. Further, the very fact that the company itself has taxpayer are not actually different business segments. Hence, no segmental are required. The objection is not acceptable.”
Thirdware Solution Ltd.
The company’s operation comprises of software development, implementation and support services.
Taxpayer’s objections
-
- Functionally not comparable
- Lack of segmental information
- Functionally similar
The company’s operation comprises of software development, implementation and support services.
NOTES FORMING PART OF STANDALONE FINANCIAL STATEMENTS
1. CORPORATE INFORMATION
Thirdware Solution Limited (the Company) is a public company domiciled in India and incorporated under the provisions of the Companies Act, 1956. The Company is engaged in the business of Software Development and Consultancy services. The company caters to both domestic and international markets.
–
(Extract from annual report)
The combined revenue from sale of license, subscription & training amounts to Rs. 41.36 lakhs which constitute of the total operational income of Rs. 22136.09 lakhs. Therefore, the taxpayer’s objection that the company is functionally similar to the taxpayer is not accepted.
As per the annual report, the company is into Information Technology Software Services and is primarily involved in business of Implementaiton Services. Application Management Services and other Software Support Services around 95% of the total revenue belongs to Implemetnation services, Application Management Services Software Support Services. Hence, the taxpayer’s contention on functional comparability is rejected.
Segmental data not available
The company is engaged in providing software development services only. Therefore, the company in entirety considred as a comparable. Revenue from products is insignificant and less than 5%. Same has been explicitly annual report which was discussed above.”
15. The submissions of assessee in this regard are, as under:
a) “Ground No. 6(x) Thirdware Solution Ltd
The company Thirdware Solution Ltd is having high turnover of Rs. 221.36 Crores as compared to Assessee Company having turnover of Rs. 16.13 Crores.
In this connection we would like to rely on the following case laws for exclusion. In the case of ADP (P.) Ltd. v. Deputy Commissioner of Income-tax, Hyderabad [2022] 135 taxmann.com 44 (Hyderabad – Trib.) IT APPEAL NOS. 227 & 228 (HYD.) OF 2021 for the same AY 2016-17 held as under:
10.3 From the financial statements, we observe that it is functionally not comparable with respect to professional, technical and business services as well as IT consulting services. No segmental details between software services and consultancy services are available. Unallocable expenses are Rs. 2.16 crores therefore, not possible to calculate correct PLI. Purchase of goods Rs. 39.88 crore debited to P&L Account included in software services sales of Rs. 221.36 crores. Revenue From subscription & training was Rs, 32.59 lakhs, revenue from sale of licenses was Rs. 8,77,000. In view of these observations, the co-ordinate bench in assessee’s own case for AY 2014-15 directed to exclude this company as comparable. Respectfully following the said decision, we direct the AO/TPO to exclude this company from the final list of comparables.
Similar view has been taken in the case of Indeed India Operations (P.) Ltd. v. Deputy Commissioner of Income-tax [2022] 143 taxmann.com 212 (Hyderabad – Trib.) IT APPEAL NO. 254 (HYD.) OF 2021 AY 2016-17 Para 12 to 12.4 it has excluded Thirdware Solution Ltd from the list of comparables.
Further in the case of GlobalLogic India (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle – 10(1) [2022] 134 taxmann.com 35 (Delhi – Trib.) IT APPEAL NO. 868 (DELHI) OF 2021 AY 2016-17 the Hon’ble Tribunal held
“40. The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis-à-vis the taxpayer. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable.
41. Perusal of Notes – Additional Information and Profit & Loss account, available at page 570 of the annual reports paper book, shows that it has income earned from sale of licence and provision of training services also under the head ‘software services from local unit’, ‘export of software services’, ‘revenue from subscription & training’ and ‘sale of licence’ to the tune of Rs. 2809.62 lakhs, Rs. 19285.11 lakhs, Rs. 32.59 lakhs & Rs. 8.77 lakhs respectively. The taxpayer has also brought on record website of the company, available at pages 71 to 73 of the appeal memo, which shows that Thirdware is having competency in providing services in most advanced and niche area of technologies such as Robotic Process Automation, Big Data Analytics& Cloud Computing.
42. From the profile of Thirdware it has come on record that Thirdware is functionally dissimilar vis-à-vis the taxpayer as it has been deriving income from sale of licence and software services export from SEZ unit and revenue from subscription and training etc. and it is also into sale of licence and its segmental financials are not available.
43. Thirdware has been ordered to be excluded by the coordinate Bench of the Tribunal in case of Fiserve India (P.) Ltd. v. ITO [2015] 60 taxmann.com 48 (Delhi – Trib.) on ground of dissimilarity to routine software development service provider which has been affirmed by Hon’ble Delhi High Court in ITA 17/2016 order dated 6-1-2016. So, we order to exclude Thirdware from the final set of comparables.”
16. Learned DR relied upon the findings of the DRP in this regard and our attention was drawn to page No. 31 and 39 of the DRP’s directions.
17. We have considered the rival contentions and perusal the material available on record. The profile of these companies as produced by the TPO and as discussed by the DRP clearly shows that these companies are into software development services and are comparable with the profile of the assessee. Since we do not find any glaring dis-similarity in the functioning of these companies, we do not find any reason to exclude these companies. Thus, we direct the AO/TPO to take these companies as suitable companies.
18. Now we are left with inclusion of Cigniti Technologies Ltd. In this regard, learned AR had pointed out that the DRP has given the direction to the AO/TPO to exclude this company, however, for the reasons best known to the AO/TPO. This company has not been excluded from the list of comparables. Our attention was drawn to para 2.5.2 of DRP’s order, which is as under:
“2.5.2 Cigniti Technologies Limited
> Functionally dissimilar
> Owns software tools and software licenses
> Development of IP and accelerators
> Incurred brand promotion expense
> Fails FE/Sales filter
2.5.2.1 Having considered the submissions, we note that as per the information in the annual report, this company is engaged in software a testing service which is a recognized software services activity. Hence, it is functionally comparable to the assessee. The assessee also in its TP report has recognized software testing activity to be functionally comparable and accordingly selected this company. A diametrically opposite plea is taken before us. It was argued that the testing services rendered by this company are not functionally similar to the services rendered by the Assessee Company, and does not fall within the ambit of software service defined in the safe harbor rules. We note that the testing service also forms part of software development services and clearly fall within the ambit of “software development services” as per industry classification and norms. Thus, there cannot be any dispute as to functional comparability. The argument that testing activity does not fall within the definition of software services given in the Safe Harbour Rules, has, no merits, as the purpose and ambit of Safe Harbour Regulation is totally different from the methodology prescribed for comparable analysis under the TNMM method, it is necessary that the services compared are broadly similar and fall within the same industrial classification. This requirement is satisfied in the present case, and hence, this company can be taken as functionally comparable to the assessee. Accordingly, this company is functionally comparable.
2.5.2.2 However, on perusal of the annual report it is seen from the page no. 54 of the Annual Report of the F.Y.2015-16 that income from export of software is Rs. 108 crores and total revenue as per page no. 119 is Rs. 204 crores. Therefore, it has an export revenue of 53.16% of total revenue and hence it is to be rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO. We have already upheld the export revenue filter adopted by the TPO vide detailed discussion made at para 2.1.12.1 to 2.1.12.2 above. As a result, this objection is found to be acceptable.
2.5.2.3 In view of the above, we direct the AO/TPO to exclude this company as comparable to the assessee.”
19. Per contra, learned DR had submitted that a fresh direction may kindly be issued to AO/TPO to comply with the directions of the DRP.
20. We have considered the rival contentions and perusal the material available on record. Since the issue had already been adjudicated by the DRP in favour of assessee, therefore, we reiterate the direction issued by the DRP and accordingly direct the AO/TPO to exclude the said company from the list of comparables.
Ground No. 8 to 11 of the assessee’s appeal
21. It is the contention of the assessee that these companies were selected by the assessee in its TP study. However, the Ld.TPO had excluded these companies from the list of comparables on the pretext as under:
| S.No. | Name of the Company | Reason for exclusion by the TPO |
| 1. | SagarSoft (India) Ltd. | The company is not appearing in the TPO’s search matrix. Further, the company fails SDS service income >75% filter. Hence, rejected. |
| 2. | Evoke Technologies Pvt. Ltd., | From Note 2.29 on page 29 of the annual report of the company, it is noticed that the standalone financials reported for the year 2015-16 include revenue and net profit figures of one branch outside India also. The relevant portion of annual report is reproduced as below:
Note 2.29 The Balance Sheet and Profit and Loss account include the unaudited financial statement of a Branch situated outside India, whose financial statements reflect liability of Rs. 4,75,78,953/- as at 31st March, 2016, revenue of Rs. 13,00,22,161 for the year ended as on date 31st March, 2016 and branch net loss of Rs. 27,33,756/- for the year ended 31st March, 2016. Since the financials include figures from an outside branch which are unaudited and hence not reliable. Hence the company is not acceptable as a comparable. |
| 3. | Sankhya Infotech Ltd., | The taxpayer has not furnished the annual report and not demonstrated the passage of this comparable through all the filters of the TPO. Hence, rejected. |
| 4. | Harbinger Systems Pvt. Ltd., | The taxpayer has not furnished the annual report and not demonstrated the passage of this comparable through all the filters of the TPO. Hence, rejected. |
| 5. | Maverick Systems Ltd., | The taxpayer has not furnished the annual report and not demonstrated the passage of this comparable through all the filters of the TPO. Hence, rejected. |
| 6. | Agilisys IT Services India Pvt. Ltd., | The company’s Annual Report does not mention the related party transactions entered into by the company during the FY 2015-16. Since the information is not disclosed in the Annual Report, the company is not considered as a comparable. Hence rejected. |
22. The assessee had preferred the appeal before the DRP. The DRP has rejected the inclusion of these companies in paragraph No. 2.1.1, at page No. 2, 13, 17, 54 and 57 of the DRP’s order. It was the contention of the ld.AR that the information in respect to these companies were available and even the assessee had raised the specific ground before the DRP and our attention was drawn to page No. 532 of the paper book, which the ground raised by the assessee before the DRP to buttress his argument.
23. On the other hand, the ld.DR relied upon the order passed by the TPO/DRP.
24. We have considered the rival contentions and perusal the material available on record. The DRP at page No. 13 of his order, has noted down that the assessee has not raised the plea of inclusion of these comparables before the TPO and has not raised the specific ground before the DRP. The finding of the DRP, that the specific plea was not raised by the assessee, is contrary to the record. As mentioned herein above at page No. 532, the assessee has raised a specific ground before the DRP, seeking inclusion of these companies. In view of the above, the finding recorded by the DRP that there is no specific ground raised by the assessee is factually incorrect. Further, we note that the DRP have also mentioned that the assessee had included various comparables which were selected after passing of the draft assessment order and hence, cannot be considered.
25. In our considered opinion, the assessee has raised the pleas of inclusion of the companies herein above in grounds No. 8 to 11 before the TPO and also before the DRP. However, the same has been rejected for the reasons mentioned there in the orders. In our considered opinion, as the assessee has raised the inclusion of these companies, therefore, we deem it appropriate to remand the inclusion of the companies to the file of the Assessing Officer/TPO for considering afresh, subject to the assessee satisfies that the inclusion of these companies were sought by the assessee by filing the specific documents.
26. In the result, these grounds of the assessee are allowed for statistical purposes.
Grounds No. 12 to 14 (grounds on trade receivables)
27. In this regard, the ld.AR submitted that the TPO had adopted interest rate for 11 months i.e., 7.5% on outstanding receivables as on 31st March, 2016. The DRP had upheld the findings of the TPO.
28. AR had submitted that in the cases of Paegasystems Worldwide India Pvt. Ltd., in ITA No. 1758/Hyd/2014 and in the case of Open Text Corporation India (P) Ltd., Vs. ITO (2021) 127 taxmann.com 399 (Hyd-Trib), the Tribunal had applied LIBOR basis. It was submitted that the similar view may be taken.
29. Per contra, the ld.DR relied upon the decision of the Tribunal in the cases of M/s Zeta Interactive Systems (India) Pvt. Ltd. For the AY 2011-12 in ITA No.1812/Hyd/ 2017 dated 07.06.2022, M/s. Satyam Ventures Engineering Services for the AY 2010-11 in ITA No.362/Hyd/2021 dated 28.06.2021 and M/s. Apache Footware India Pvt. Ltd. for the AY 2018-19 in ITA No.568/Hyd/2022 dated 16.01.2023.
30. We have heard the rival submissions and perused the material on record. We have examined whether the interest on delayed outstanding payments is an international transaction or not. This issue has come up for our consideration in the decisions referred by the ld.DR in the case of M/s Zeta Interactive Systems (India) Pvt. Ltd., M/s. Satyam Ventures Engineering Services and M/s. Apache Footware India Pvt. Ltd. (supra).
31. We have consistently held that the interest on delayed outstanding trade receivables is an international transaction and after holding so, we have benchmarked the international transactions at 6% SBI rate.
31.1. In the case of Apache Footware India Pvt. Ltd. (supra), we have held as under :
“9. We have heard the rival submissions and perused the material on record. From the perusal of the order passed by the TPO, it is clear that both the lower authorities have given an elaborate reasoning for coming to the conclusion that the delay in receiving the receivables is an international transaction and is required to be bench marked in accordance with law. We are reproducing hereinbelow the chart filed by the assessee which is to the following effect :
| APACHE FOOTWEAR INDIA PVT. LTD / AY 2018-19 | ||||
| Export Receivables Realisation pattern during A.Y. 2018-19 | ||||
| Particulars | Total Number of Invoices during the A.Y. 2018- 19 | Amount Export Invoice value in Rs. | % of invoices realized to total invoices raised during the year | |
| A) | Realised within credit period |
3,001 | 6,48,15,77,864 | 91.22 |
| B) | Realised beyond credit period of 60 days | |||
| <10 days | 241 | 36,27,20,363 | 5.10 | |
| 10-20 days | 204 | 18,88,04,889 | 2.66 | |
| 20-30 days | 45 | 7,11,80,351 | 1.00 | |
| 30-45 days | — | — | — | |
| 45-60 days | — | — | — | |
| >=60 days | 29 | 11,63,338 | 0.02 | |
| Sub total (B) | 519 | 62,38,68,941 | ||
| Total (A) + (B) | 3520 | 7,10,54,46,805 | ||
10. From the perusal of the Chart, it is absolutely clear that there were 519 invoices valued at Rs.62,38,68,941/- for which the payments were due beyond the credit period 60 days. In our view, the lower authorities have computed the Arm’s Length Price and have mentioned that the same being international transaction, the same is required to be bench marked by considering the SBI short term deposit interest rate.
11. The above-said issue of delay in receivables is no more res integra. The co-ordinate Bench in the cases relied upon by the Revenue examined the issue and thereafter directed the TPO / Assessing Officer to apply rate of interest of 6% on outstanding receivable at the year end. The assessee had relied upon various judgements. All these judgments have been considered by the coordinate Bench and thereafter, the above said direction was issued by the Bench. 12. The reliance of the assessee on the decision of Hon’ble Delhi High Court in the case of PCIT Vs. Boeing India Pvt. Ltd., reported in 2022 (10) TMI 498 is of no use to the assessee as in the said judgement, the Hon’ble Delhi High Court in Para 15 had mentioned that the issue receivable is essentially a question of fact. As mentioned hereinabove, in the present case, there is a delay in receiving the outstanding of Rs.62,38,68,941/-in respect of 519 invoices as mentioned hereinabove and there is no explanation given by the assessee for such a delay in receiving the amount. The very purpose of benchmarking the transaction is to ascertain whether assessee, who is similarly situated, would render the same kind of services at the same or similar price to a third party or not. If we examine the issue in the above-said 21 Apache Footwear India Pvt.Ltd. context, it would be clear that the assessee would charge bank interest or any other interest with a view to compensate itself on account of delay in making the payment. Hence, we do not find any error in the same.
13. The reliance of the assessee in the case of Betchal India Pvt Ltd (supra) is also not correct as A.Y. in that case was 2010-11. By the Finance Act, 2012, the Explanation was inserted in Sec.92B of the Act and by virtue of which “payment or deferred payment or receivable or any other debt arising during the course of business” has been considered to be an international transaction which is required to be benchmarked. Following the above said Explanation, the co-ordinate Bench for the subsequent assessment years vide order dt.16.05.2017 in the case of Betchal India Pvt. Ltd ITA No.6530/Del/2016 (supra) had decided the issue against the assessee. In view of the above, the decision relied upon by the assessee is of no help to assessee.
14. So far as the argument of the assessee that the assessee is a debt free company and therefore, no borrowed fund was used for making supplies to it’s A.E. and therefore, is not liable to be compensated for the delay in receiving the receivable is concerned, the same in our view, suffers from inherent flaw as in the T.P. analysis, the TPO is required to examine whether the assessee had supplied the product / services to it’s A.E. at Arm’s Length Price or not ? If by providing the services / goods at a discounted rate or permitting the assessee to receive the payment after a long period of 60 days or 90 days, then it will amount to permitting the A.E. to use the working capital of the assessee for the purposes of earning the profit. No prudent business man would venture into 22 Apache Footwear India Pvt.Ltd. this kind of activity and permit a third party to use the working capital of the assessee and earn profit thereon. In the present case, though the assessee was required to maintain the T.P. Study and file the same before the TPO to show that the assessee’s transactions with it’s A.E. were at Arms Length however, nothing has been brought to our notice that the assessee has brought any comparable instance. In these circumstances, the TPO had applied the banking rate as applicable to short term loans. In our view, the same is required to be corrected and instead thereof, ALP is to be computed by adding notional interest @ 6% on the receivable. Considering the totality of facts and circumstances, in view of the decisions cited supra and in view of foregoing discussion, we dismiss the appeal of the assessee. Accordingly, the appeal of the assessee is dismissed.”
14. Respectfully following our own decision, we direct the Assessing Officer to determine the ALP and compute the same by adding notional interest @ 6% on the receivable beyond a period of 60 days. Thus, ground nos. 5 to 10 are partly allowed.”
31.2. However, while holding the outstanding trade receivables as international transactions, we have granted a credit period of 60 days in the case of Apache Footware India Pvt. Ltd. In the present case, the assessee could not file any evidence to prove that it has provided more than 60 days credit period to non-AEs.
31.3. In the light of the above, we are of the opinion that the assessee is entitled to get some relief as against the interest computed by the TPO at SBI rate of 7.5%, we direct the Assessing Officer/TPO to compute the interest @6% of the SBI rate.
32. In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 11th June, 2024.
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