Case Law Details

Case Name : Blue Coat Network (India) Private Limited Vs DCIT (ITAT Bangalore)
Appeal Number : IT(TP)A No. 78/Bang/2019
Date of Judgement/Order : 23/11/2020
Related Assessment Year : 2014-15
Courts : All ITAT (7623) ITAT Bangalore (465)

Blue Coat Network (India) Private Limited Vs DCIT (ITAT Bangalore)

The issue under consideration is whether TPO is correct in making an upward adjustment to the transfer price of the Appellant’s international transactions on account of imputation of notional interest on outstanding receivables?

ITAT states that this issue was considered by this Tribunal in the various cases which 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. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans an advances to international transaction would amount to double taxation. 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. 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. In view of the above, ITAT deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/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 such fresh proceedings. Accordingly, this ground raised by assessee stands allowed for statistical purpose.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal by assessee is directed against order of the Deputy Commissioner of Income-tax Circle-1(1)(2) passed u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 [‘the Act’ for short] dated 30.10.2018. The assessee has raised following grounds of appeal:-

A. General Ground

1. That the order of the learned, Deputy Commissioner of Income-tax, Circle 1(1)(2), Bengaluru (Assessing Officer’ or ‘learned AO’) and directions of Hon’ble Dispute Resolution Panel, Bangalore (“Hon’ble DRP”) to the extent prejudicial to the Appellant, is contrary to law, facts and circumstances of the case and liable to be quashed.

2. That the impugned order of the learned AO, as per the postal records has been issue beyond the time limit specified under sub-section (13) of section 144C of the Income-tax Act, 1961 (“the Act”) and therefore bad in law.

B. Transfer Pricing

3. That on facts and in the circumstances of the case, the learned AO/ learned TPO erred in making an upward adjustment to the transfer price of the Appellant’s international transactions of INR 10,508,698 in respect of software development services and INR 7,23,881 on account of imputation of notional interest on outstanding receivables. The learned DRP erred in further enhancing the adjustment in respect of Appellant’s software development services to INR 11,884,856 and confirming the adjustment of INR 723,881 in respect of notional interest on outstanding receivables.

Grounds for software development services

4. On the fact and in the circumstances of the case and in law, with respect to adjustment to the transfer price of the software development services, the learned DRP/ AO/ TPO erred in:

4.1. Rejecting the Transfer Pricing (`TP’) documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence.

4.2. Rejecting the comparability analysis carried out by the Appellant in the TP documentation and in conducting a fresh comparability analysis for the software development services based on the application of additional filters in determining the arm’s length price.

4.3. Using data, which was not contemporaneous and which was not available in the public domain at the time of preparing the TP documentation.

4.4. Not considering the multiple year/prior year data of comparable companies while determining the arm’s length price in relation to the Appellant’s international transactions with its AEs.

4.5. Using information under section 133(6) of the Act, which tantamount to choosing secret comparable companies whose information was not available in public domain while preparing the transfer pricing documentation for the relevant financial year.

4.6. Disregarding certain filters applied by the Appellant in selection of the comparable companies at the time of TP documentation.

4.7. Applying/ modifying the following filters while undertaking comparability analysis:

a) Rejection of companies whose employee cost is less than 25% of operating revenue;

b) Rejection of companies having export sales less than 75% of the total sales; and

c) Companies of different financial year ending or data of the company do not fall within 12 month period.

4.8. Including the following companies even though they are functionally different from operational profile of the Appellant:

a) Infosys Limited;

b) Persistent Systems Limited;

c) Mindtree Limited;

d) Thirdware Solutions Limited; and

e) Larsen & Tubro Infotech Limited

4.9. Excluding the following companies even though they are functionally comparable to the Appellant and passes all the filters applied by the learned TPO in its order:

a) Sasken Communication Technologies Limited;

b) Akshay Software Technologies Limited;

c) E-Zest Solutions Limited;

d) Sankhya InfoTech Limited;

e) I2T2 India Limited;

f) Daffodil Software Limited;

g) Kireeti Soft Technologies Limited;

h) Exiliant Technologies Private Limited;

i) Celstream Technologies Limited;

j) Maveric Systems Limited; and

k) Evoke Technologies Limited

4.1o.Not considering certain expenses such as provision for doubtful debts and write back of provision operating in nature on the premise that these are not the routine operating costs in determining the operating mark-up of the comparable companies.

4.11. Rejecting the segmental financial information as provided by the Appellant and reallocating the “other expenses” between the Software development services, Marketing and support services and Data center services segment on the basis of revenue by disregarding the documents/ information submitted by the Appellant before the learned Panel during the DRP proceedings, supporting the allocation methodology adopted by the Appellant for the segmentation.

4.12.Not providing adjustment for the differences in working capital of the Appellant and the comparable companies.

4.13.Not providing suitable adjustment to account for differences in the risk profile of the Appellant vis-a-vis the comparable companies.

4.14. Computing incorrect operating mark-up of certain comparable companies.

(Tax Effect: INR 3,621,178)

Grounds for imputation of notional interest on outstanding receivables

5. On facts and in the circumstances of the case, the learned DRP/AO/TPO erred in :

5.1. Considering overdue receivables from Associated Enterprises (‘AEs’) as an international transaction under the provisions of Section 92B of the Act.

5.2. Without prejudice to ground nos. 3 & 5.1 above, ignoring the fact that the Appellant does not pay interest to the AEs in relation to outstanding payable to AEs.

5.3. Without prejudice to ground nos. 3 & 5.2 above, charging interest in respect of all invoices raised during the year and outstanding at the beginning of the year, after allowing a credit period of only 3o days.

5.4. Without prejudice to ground nos. 3 & 5.2 above, charging interest for the full year instead of restricting it till March 31, 2014, i.e. while computing the notional interest on overdue receivable the interest should be computed only from the date of raising invoices, after allowing credit period of 180 days, up till the date of realization of such invoices or March 31, 2014, whichever is earlier.

5.5. Without prejudice to ground nos. 3 & 5.2 above, imputing the notional interest invoice-wise and disregarding the weighted average method of computing the credit period for the outstanding receivables from the AEs.

(Tax Effect: INR 234,864)

C. Other than Transfer Pricing

Disallowance of depreciation claimed in respect of additions made during  the previous year

6. That on the facts and circumstances of the case, the learned AO erred in disallowing excess depreciation amounting to INR 465,396 in respect of fixed assets additions in the previous year 2013-14 of INR 775,660 on account of failure to furnish invoices.

7. That on the facts and circumstances of the case, the learned AO erred in disallowing excess depreciation amounting to INR 1,560,735 in respect of fixed addition in the previous yea? 2013-14 of INR 2,601,225 by considering such addition to be pertaining to previous year 2014-­15.

8. Without prejudice to the above, in respect of assets belonging to Computers (including computer software) block of INR 3,009,941, which has been put to use for less than 180 days in the previous year, the learned AO erred in disallowing depreciation in respect of such assets at the rate of 6o% instead computing depreciation as per second proviso to subsection (1) of section 32 of the Income-tax Act, 1961 at rate of 3o% (i.e., 5o% of 6o%).

(Tax effect: INR_657,378)

Disallowance of travelling expenses and legal and professional expenses

9. That on the facts and circumstances of the case, the learned AO and Hon’ble DRP erred in disallowing travelling expenses and legal & professional expenses together amounting to INR 4,000,000 on account of failure to furnish invoices.

10. That the proceedings before the learned AO/ Hon’ble DRP suffered from lack of natural justice as the learned AO/ Hon’ble DRP did not give an opportunity to rebut the estimate of arriving at the disallowance.

(Tax effect: INR 1,297,800)

D. Other miscellaneous grounds

11. The consequential relief is to be granted in computation of interest under section 234B and section 234C of the Act.

(Tax effect: INR 3,414,676)

12. The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act despite the fact that the Appellant has acted in a bona fide manner and provided all necessary details called for by the Assessing Officer.

2. Facts of the case are that Blue Coat India is the subsidiary of Blue Coat Systems BV, Netherlands, which in turn is a subsidiary of Blue Coat US, Blue Coat India has been set up as a captive contract software development unit of the Blue Coat Group. Pursuant to a Research and Development Services agreement (“SWD Agreement”) effective April 1, 2013, executed between Blue Coat Switzer and Blue Coat India, Blue Coat India provides software development services in relation to Blue Coat Switzerland’s products. Further, pursuant to the Marketing Support Services agreement (“MISS Agreement”), effective April 1, 20:13, executed between Blue Coat India and Blue Switzerland, Blue Coat India provides marketing support services in the nature of marketing and after-sales support functions for customers in India in relations to Blue Coat Switzerland’s products. These services focus on increasing the awareness of the Blue Coat brand, educating the market on issues and challenges associated with WAN Application Delivery and Secure Web Gateway products and creating demand for its products and technology. Additionally, with effect. from April 1, 2013, Blue Coat India entered into a Data Center Services Agreement (“DC Agreement”) with Blue Coat US, pursuant to which Blue Coat India provides data center support to Blue Coat U.S. The Services provided include making available the data center equipment and other support that enable Blue Coat US to /support Blue Coat Group’s global customers. TPO’s analysis recognized that Blue Coat India was engaged in primarily three activities during FY 2013-44:

  • Software Development: Services: Provisions for software design and development services to Blue Coat Switzerland.

Marketing Support Services: Provision of marketing support services with respect to Blue Coat Switzerland’s products in India.

Data Center Services: Provision of data center equipment and other support to Blue Coat Group’s global customers:

2.1 Blue Coat Group owns all the valuable intellectual property rights and other commercial or marketing intangibles and involved in complex operations of developing proprietary technologies and marketing of the same. Blue Coat India leverages on all valuable intellectual property rights (know-how, copyrights etc.) and other commercial or marketing intangibles (brand names, trademarks, etc.) owned by the Blue Coat Group. Based on the functional analysis Blue Coat India has lesser complex operations and bears lesser share of risks and was accordingly selected as the tested party for the economic analysis. During the year ended March 31, 2014 Blue Coat India had the following international transactions with its associated enterprises;

a) Receipt for provision of software development services,

b) Receipt for marketing support services,

c) Receipt for provision of data center equipment and other support, and

d) Recovery of restructuring costs.

2.2 As per the Transfer Pricing (TP) document furnished for the FY 2013-14, the Taxpayer company has entered into the following International Transactions with its Associated Enterprises (AEs):

As per the 3CEB

Particulars Amt (Recd) Method
Software Development
Services
4,69,09,496 TNMM
Marketing and Sales Support Services 10,12,55,499 TNMM
Date Centre Services 38,55,055 TNMM
Recovery of  restructuring costs 12,48,076 TNMM
Total 15,32,68,126

As per the TP study

Particulars Amount
Receipt from Software development services 4,69,09,496

Particulars Amount
Receipt from marketing support services 10,12,55,499
Receipt from data centre services 38,55,055
Recovery of restructuring costs 12,48,076
Total 15,31,68,126

3. While completing the TP study, the TPO rejected certain comparables selected by the assessee and included his own comparables and by applying TNMM method as most appropriate method to determine the arm’s length price and made an adjustment of Rs.1,12,32,579/- by considering following comparables:

1. Infosys Ltd.

2. Larsen & Toubro Infotech Ltd.

3. Mindtree Ltd.

4. Persistent Systems Ltd.

5. S. Software (India) Ltd.

6. Cigniti Technologies Ltd.

7. SQS India B F S I Ltd.

8. Thirdware Solution Ltd.

3.1 Accordingly the TPO had worked out the OP/OC at 29.4%. The assessee filed objection before DRP. DRP given partial relief. Accordingly, A.O. passed the final order by making following additions:

i. Revised TP adjustment as per Hon’ble DRP direction Rs.1,18,84,856/-

ii. Disallowance of depreciation on addition to fixed asset Rs.20,26,131/-

iii. Disallowance expenses claimed in P&L Account

(travel, legal professional) Rs.40,00,000/-

Rs.1,79,10,987/-

4. Ground Nos.A.1, A.2, B.3 and B.4.1 to B.4.7 are not pressed before us. Accordingly, dismissed as not pressed. Now coming to ground No.B.4.8. The assessee wants exclusion of the following comparables:

a) Infosys Limited;

b) Persistent Systems Limited;

c) Mindtree Limited;

d) Thirdware Solutions Limited; and

e) Larsen & Toubro Infotech Limited

Infosys Limited:-

5. The contention of the Ld. A.R. is that it is not functionally comparable as the company is engaged in product development and R&D activities. Further, there are diversified activities carried on by that company with segmental data relating to business of consulting technology, engineering and outsourcing services and there was happening of merger of Infosys Consulting India Limited with Infosys Limited as such, this comparable to be excluded.

6. On the other hand, Ld. D.R. submitted that on perusal of the annual report of the company, this company is engaged in providing IT technology services comprising Application Outsourcing, Infrastructure Management, Independent validation, Business service management, consulting and systems integration services. The service delivery is through various platforms and solutions such as Infosys IT Service Management Platform, Infosys Agile and Vscrum Methodology, Infosys command centre frame work, Infosys cloud and co-system hub, Infosys Big-data edge. (Ref. Executive Vice Chairman message in the annual report) As per the management report these accelerated and agile service delivery has enabled the company for better project execution, cost-reduction and enhanced business value. The company provides end to end solutions, to the clients through the various platforms / products or solutions. These platforms / products and solutions are not off the shell products as argued by the assessee. As a per the P& L account, the company has revenue from software services of Rs.42,531/- crores and from software products of Rs.18,101/- crores, and that the product revenue constitute meagre 4.08% of total operating revenue. Therefore, taking into consideration the various information available in the annual report, and the fact that the company in predominately having revenue from software services, this company can be considered as functionally comparable to the assessee.

6.1. It was pointed out that the merger of Infosys Consulting India Limited has been accounted for under pooling of interest method, and that the assets and liabilities of ICIL have been transferred to Infosys Limited on a going concern basis. On account of such merger, it was pleaded that this company should be excluded. But the assessee could not point any information from the annual report to indicate that such merger has affected and impacted the revenue of the comparable company. As ICIL is also engaged in same line of business, there is no difference in functional comparability. As there is no revenue impact on account of such merger, revenue do not find any reasons to exclude this company as comparable on this plea.

6.2. It was also pleaded that this company has a huge brand which has contributed to its growth in revenue and hence not comparable. A perusal of the annual report (the messages of Executive Vice Chairman, Senior Vice President, whole time director in the annual report) show that the growth in revenue was on account of various business initiatives taken to accelerate growth such as implementing cost effectiveness through reducing cost of operation, improving utilization percentage of employee, restricting the organization for agility by creating smaller and nimbler sales regions, redesigning supply chain functions, . Thus, the growth in revenue is not on account of its brand or any exceptional event, and hence cannot be a reason for rejecting this company, which is otherwise found to be functionally comparable.

6.3. The perusal of the details in the annual report show that the company has incurred R & D expenditure to the tune of Rs.873 crores, which constitute meagre 1.96% of its total operating revenue, and which is much less than the generally acceptable tolerable limit of 3% of the total revenue. It is further seen that the value of generally acceptable intangible assets declared in the Asset schedule was Rs.13 crores. Further as per note 1.1 of the annual report, at page 50, software product developments costs are expensed as incurred unless the technical and commercial feasibility of the project enable to use or sell the software. Such a development is not reflected in the Asset schedule. Thus, it can be inferred that the development of intangibles and its impact on the revenue and profitability is meagre. The assessee has failed to establish that such differences, if any, on account of R&D, brand and intangibles have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 10B, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, Ld. D.R. contended that these pleas may be rejected.

6.4 Being so, Ld. D.R. contended that it has to be considered as comparable to assessee’s case and order of the lower authorities to be confirmed.

7. We have heard the rival submissions, perused the materials available on record and gone through the orders of the authorities below. The Tribunal in the case of LG Soft India Limited in IT(TP)A No.3122/Bang/2018 vide order dated 28.5.2019 considered the Infosys Limited as not comparable to the assessee’s case by observing as follows:

“6. We notice that the co-ordinate bench has excluded M/s. Infosys Ltd in AY 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd. (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd. (ITA No.1054/Bang/2011) was followed and it was held that M/s. Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the breakup of revenue from software services and software product is not available.

6.1 IT was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee’s own case in AY 2008-09, we direct exclusion of M/s. Infosys Ltd.”

8. In the present case also, the objection raised by the lower authority is similar to that one considered by LG Soft India Limited. Accordingly, in our opinion, Infosys Limited cannot be compared to the assessee’s case on similar reasons and it has to be excluded.

Persistent Systems Limited:-

9. Ld. A.R. submitted that Persistent Systems Limited is not functionally not comparable to assessee’s case, which is engaged in the significant product development and also it is engaged in diversified operation. Further, during the year, it has acquired another company by name Cloud Squads Inc. based in the USA in the relevant financial year. Even otherwise, the Persistent Systems Limited is having huge intangible assets to the tune of Rs.16.28 crores and high turnover at Rs.1184.1 crores as against the turnover of around Rs.15.20 crores of assessee company.

10. On the other hand, Ld. D.R. submitted that Persistent Systems Limited was considered by coordinate bench in the case of Goldman Sachs Services Limited in IT(TP)A No.3244/Bang/2018 dated 29.1.2020 and observed that it should be included as comparable.

11. We have carefully gone through the order cited by the Ld. D.R. It was observed in para 5.1.3 of IT(TP)A No.3244/Bang/2018 as follows:

5.1.3 This comparable was included by Ld.TPO and opposed by assessee. Ld.AR submitted that this company is functionally different with that of assessee, as it is involved in providing complete product life cycle service to its clients. It has been submitted by Ld.AR that this company specializes in software products, services and technology innovations. He referred to the information furnished by this company under section 133(6), which is placed at page 3020 of paper book wherein this company is identified to be carrying out services in telecom to telecom and wireless clients, life science and health care, infrastructure and systems.

On the contrary, Ld. CIT DR submitted that, this company should be remanded by following the view taken by coordinate bench of this Ttribunal in case of CGI Information Systems and management consultants (P) Ltd. vs DCIT reported in (2019) 101 Taxmann.com 294.

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

The decision relied upon by Ld.CIT DR in case of CGI Information Systems 86 Management Consultants (P) Ltd. vs DCIT has not considered details that has been obtained under 133 (6) in respect of this company for year under consideration. Therefore, in our opinion this decision cannot be of any help to revenue.

Coming to information received under section 133 (6) of the Act, it is observed that this company has acquired certain intellectual property products and generate revenue from licensing and support of such products. It is also observed that this company is involved in the entire life-cycle of software development which is not similar to what assessee caters to its associated enterprises. Assessee carries out only such functions which are required by associated enterprise under its supervision and guidance.”

12. The reading of that whole paragraph suggest that Persistent Systems Limited was excluded from the comparable. However, due to typographical error, it was mentioned as “included” instead of mentioning “excluded”. Accordingly, we direct the A.O/TPO to exclude Persistent Systems Limited from the list of comparables.

Mindtree Limited:-

13. Ld. A.R. submitted that Mind Tree Limited is engaged in end to end digital transformation and technology services to its clients and also in product development with assessee has owned intangible assets and open to different kinds of threats and risk and its turnover Rs.3031.6 crores. He relied on the case of Microsoft Research Lab India Pvt. Ltd. in IT(TP)A No. 3131/Bang/2018 dated 5.2.2020.

14. On the other hand, Ld. D.R. submitted that on perusal of the annual report of this company it is to be noted that this company is engaged in rendering of software development services in different verticals and not engaged in product sales as contended. As seen from the annual report of this company it is an international information technology consulting and implementation company delivering business solutions through global software development. Note 2.8.1 of the financial statement states that the company derives its revenue primarily from software services. Note 3.9 of the annual report mentions that the company is engaged in software development services not capable of being expressed in any generic unit. There is no reference in the P&L A/c as to any revenue from product sales. Therefore there is no merit in the argument that this company is engaged in sale of products and not functionally comparable. It is to be noted that the value of IPR shown in the Asset schedule of Rs.67 million was meagre compared to its Asset portfolio and operating revenue (constitutes 1.07% of asset base and 0.22% of operating revenue) and there is no specific debit towards R & D in the profit and loss account. Therefore, they do not have any impact on the revenue or profitability of this company and that the TPO is justified in retaining this as a comparable company. That the assessee has failed to establish that such differences, if any, on account of intangibles / patents have material effect on the margin of the above company, in terms of clause (i) of sub-rule (3) of Rule 1013, which provides that an uncontrolled transaction shall be comparable to an international transaction if none of the differences, if any, between enterprises entering into business transactions or likely to materially affect the profit arising from such transactions in the open market. Hence, he requested to reject these pleas of assessee and to uphold this company as comparable.

15. We have heard the rival submissions and perused the record. This issue was considered by the Tribunal in the case of Microsoft Research Lab India Pvt. Ltd. cited (supra) and observed as under:

This comparable has been included by Ld.TPO the final list. Ld. counsel submitted that it is functionally not similar with that of assessee. It is submitted that assessee engaged in providing services such as Agile, analytics and information management, application development and maintenance, business process management, business technology consulting, Cloud, Digital business, independent testing, infrastructure management services, mobility, product engineering and SAP services. Ld.AR referred to page 1088 in support. It is further been submitted that this company does not have segmental information on the basis of which revenue earned from different verticals could be identified. This company also owns huge intangibles and therefore deserves to be excluded.

On the contrary Ld. CIT DR placed reliance upon orders passed by authorities below.

We have examined the annual reports of this company and it is observed that this company carries out research and development activities and has created large intangibles. Under such circumstances we do not find this company to be comparable with that of a captive service provider like assessee.

We therefore direct the Ld. AO/TPO to exclude this comparable from the final list.”

16. In view of the above order of the Tribunal, we direct the A.O./TPO to exclude this as comparable.

Thirdware Solutions Limited:-

17. Ld. A.R. submitted that this is not comparable to assessee’s case as Thirdware Solutions Limited is engaged in sale of products, subscription contracts, sale of user license, etc. and are having huge intangible assets, besides segmental data of various activities not available in public domain. He relied on the following case laws:

1. McAfee Software (India) Ltd. (IT(TP)A  No.04/Bang/2012, IT(TP)A No.1388/Bang/2011

2. Cypress Semiconductor Technology India Pvt. Ltd. (IT(TP)A No.614/Bang/2013, CO No.166/Bang/2015

3. Microchip Technology India Pvt. Ltd. (IT(TP)A No.1247/Bang/2011, 34/Bang/2012, 40/Bang/2012

4. (2020) 113 com 214 (Hyderabad – Trib.) Kony IT Services (P) Ltd. Vs. Deputy Commissioner of Income-tax for AY 2014-15

18. On the other hand, Ld. D.R. relied on the order of the Tribunal in the case of Goldman Sachs Pvt. Ltd. in ITA No.3244/Bang/2018 dated 29.1.2020.

19. We have heard the rival submissions and perused the materials available on record. Admittedly, this Thirdware Solutions Pvt. Ltd. was considered by this Tribunal in the case of Goldman Sachs Services Pvt. Ltd. and observed in para 5.1.4 as follows:

“This comparable has been considered by Ld.TPO which has been objected by assessee. Ld.AR submits that this company is functionally different and earned revenues from export of services, subscription and training and sale of licensing. Ld.AR submitted that there are no segmental details in respect of this comparable.

Ld.CIT DR however placed reliance upon decision of Hon’ble Delhi High Court in case of Steria India Ltd vs DCIT reported in (2018) 92 Taxmann.com 120. She submitted that Hon’able Delhi High Court held this comparable to be a good company.

We have perused submissions advanced by both sides in light of records placed before. From the annual report of this company placed at page 2334-2444, it is observed that at page 2413, segment reporting of this company is set to be comprised of software development, implementation and support services. Further it has been submitted therein that primary segment reporting is based on geographical areas, viz Domestic = India (products and services) and International = rest of the world (exports-software services). It is also been submitted therein that this company maintains separate books of account for the reported segments. In profit and loss account at page 2431, it is observed that during the year under consideration, this company earned revenue from sale of products whereas, revenue from sale of services is shown to be at ‘nil’. Ld.TPO while considering this comparable only considered footnote at page 2433, wherein bifurcations of revenue from sale of products has been given as; export of software services has been recorded to be at Rs.20194.37, software services from local units amounting to Rs.414.07, revenue from subscription and training amounting to Rs.59.32 and sale of licenses amounting to Rs. 7.98. We therefore reject the contention of assessee that segmental details are not available in respect of this comparable. In our view Ld.TPO has considered the export of software service segment for purposes of comparability with that of assessee (refer computation of margin for this comparable at page 55 of order passed by Ld. TPO).

Respectfully following decision of Hon’ble Delhi High Court in case of Steria India Ltd us DCIT (supra) we do not find any infirmity in the view of authorities below in including this company.

Accordingly, we uphold the inclusion of this comparable to the finalist.”

20. Taking a consistent view, we uphold the order of the lower authorities on this comparable and it has to be included as a comparable in the list of comparables.

Larsen & Toubro Infotech Limited:-

21. Ld. A.R. submitted that assessee owns significant amount of intangible assets including IPR and business rights. It involves higher risk and higher profits. L&T is a huge company having high brand value. Further, an extraordinary event took place during the year i.e. transfer of business and winding up. Being so, it cannot be compared to the assessee’s case.

22. On the other hand, Ld. D.R. submitted that this comparable was considered by this Tribunal in the case of M/s. Goldman Sachs Services Pvt. Ltd. in IT(TP)A No.3244/Bang/2018 dated 29.1.2020, where it was remanded back to AO/TPO for reconsideration. Similar direction may be given.

23. We have heard the rival submissions and perused the materials available on record. This issue was considered by this Tribunal in the case of Goldman Sachs Services Pvt. Ltd. in IT(TP)A No.3244/Bang/2018 dated 29.1.2020 as follows:

“5.1.2 This comparable was upheld by authorities below and has been objected by assessee for its inclusion. Ld.AR submitted that this company is functionally not comparable with that of assessee and is engaged in providing consultancy and testing services. Further it has been submitted that there is no segmental information available in the annual reports of this company. Ld.AR submitted that this company owns its own brand and have products and are engaged in trading activity. This company also has R&D services and presence of huge intangibles and brands.

On the contrary, Ld.CIT DR submitted that, this company should be remanded by following the view taken by coordinate bench of this Tribunal in case of CGI Information Systems and management consultants (P) Ltd. vs DCIT reported in (2019) 101 Taxmann.com 294. We have perused submissions advanced by both sides in light of records placed before us. Ld.CIT DR placed reliance on decision of CGI Information Systems and management consultants (P) Ltd. vs DCIT (supra), wherein this Tribunal observed and decided as under:

9. In respect of the applicability of this Tribunal order for exclusion of Larsen & Toubro Infotech Ltd, this has been submitted by ld. AR of assessee in the chart submitted before us that on page no. 698 of Annual Report paper book, this company has debited an amount of Rs. 27,10,89,274/- as cost of bought-out items for resale. But this fact was not brought to the notice of the Tribunal in the case of Advice America Software Development Center (P.) Ltd. (supra). It has also been submitted that on page no. 706 of Annual Report paper book, this has been reported that this company is engaged in sale of services to its related parties and this fact was also not brought to the noticeof Tribunal in case of Advice America Software Development Center (P.) Ltd. (supra). When we examine paras 14 to 20 of this Tribunal order where there is discussion regarding inclusion/ exclusion of Larsen & Toubro Infotech Ltd, we find that there is no discussion on these two aspects that this company is having significant amount of cost of bought-out items for resale and it is engaged in sale of services and products to its related parties and hence, in our considered opinion, this Tribunal order cannot be considered as a binding precedence because this Tribunal order is silent on these two important aspects as to this aspect that this company is having sizeable amount of bought out items for resale and have related party transactions in respect of sales of services and products. We also find that in the case of remaining three Tribunal orders i.e. Microsoft Research Lab India Pvt. Ltd. ‘s case (supra), WM Global Technology Services (India) (P.) Ltd. (supra) and in the case of Tecnotree Convergence Pvt. Ltd. (supra), the matter was remanded to the TPO for fresh decision. Hence, we feel it proper that in the present case also, this issue should go back to the file of TPO for fresh decision after providing adequate opportunity of being heard to the assessee and while deciding the issue afresh, all the available Tribunal orders on this issue should be considered by the TPO in proper perspective.”

It is observed that the decision in case of CGI Information Systems Management Consultants Pvt.Ltd VS. DCIT(supra) was in respect of assessment year 2013-14. On perusal of annual report of this comparable placed at page 2012 of paper book volume 5, it is observed that during the year this company has not derived any revenue from sale of products.

The only revenue earned by this comparable during the relevant year under consideration is from /sale of services. It is observed at page 2022 that this company incurred overseas staff costs at Rs.15,46,46,82,017/-, reveals that revenue earned from software services is mainly from offshore services. In the present case of assessee, there is no such expenses incurred for overseas staff costs. At page 2022 of paper book Volume 5, it is clear that export revenue from software services amounts to Rs.44,14,84,25,372/- out of gross income of Rs.46,43,94,03,178/-. In view of the aforestated observations for year under consideration, the issue of comparability of this company should be examined by Ld.AO/TPO afresh.

Accordingly, we set aside this comparable back to Ld. AO/TPO.”

24. Accordingly, we remit this issue to the file of the AO/TPO on similar directions.

25. The assessee wants herein to include the following 5 comparables:

1. I2T2 India Limited

2. Daffodil Software Limited

3. Exilant Technologies Pvt. Ltd.

4. Maveric Systems Limited

5. Evoke Technologies Pvt. Ltd.

26. Further, assessee has not considered other comparables raised in its ground to be included. The other comparables assessee not pressed.

I2T2 India Limited:

27. First we will consider I2T2 India Limited. The Ld. A.R. submitted  that I2T2 Limited is engaged in the Software development services and passes all filters followed by the TPO.

28. Ld. D.R. submitted that the company is in the IT enabled Services industry and has not done transaction processing work which is not functionally comparable to assessee’s case.

29. We have heard the rival submissions and perused the materials available on record. We find force in the argument of Ld. D.R. as seen from the direct report of the I2T2 India Ltd. for the year ending on 31.3.2014, which is placed on record in page no.1837 that assessee is engaged in IT enabled services industry and it cannot be compared with assessee’s case, which is engaged in Software development services marketing support services and data centre services and accordingly, exclusion is justified. We confirm the findings of the loer authorities on this comparable.

Daffodil Software Limited:-

30. The Ld. A.R. submitted that the Daffodil Software Limited functionally comparable to assessee’s case and significantly engaged in software development services which contributes 92.82% and sale of product 7.18%. It passes all filters adopted by the TPO and it should be included as comparable.

31. The Ld. D.R. submitted that whether it fulfils all the filters or not to be verified by TPO and may go back to TPO for reconsideration.

32. We have heard the rival submissions and perused the materials available on record. The DRP observed on this comparable as follows:

5.2.18.1 Having considered the submissions, and on perusal of the annual report, it is noted that the company derives its revenue from product and technology licensing and software services. The P&L A/c shows purchase of stock in trade of Rs.1,32,74,933/-. As per the Asset Schedule, it has intangible assets of value of Rs.2,83,47,808/- of which Rs.2,80,59,023/- represent intangible developed by the said company. Its tangible asset excluding the flat acquired during the year was only Rs.1.92 Cr which indicate that the assets deployed by the company is more of intangibles, and hence not comparable to the assessee company. Accordingly the exclusion of this company is upheld.”

33. Contrary to this, submissions of the Ld. A.R. is that this comparable passes all filters adopted by TPO and the software development services revenue is more than 75% and hence in the interest of justice, we remit this issue to the file of TPO to see whether this comparable passes all filters adopted by TPO. Accordingly, this issue remitted back to AO/TPO for fresh consideration.

Exilant Technologies Pvt. Ltd.:

34. Next comparable is Exilant Technolgieis Pvt. Ltd. The Ld. A.R. submitted that this Exilant Technologies Pvt. Ltd. is engaged in software development services and passes all filters adopted by TPO and it is functionally comparable to assessee’s case.

35. Ld. D.R. submitted that financials for the relevant assessment year not available before the lower authorities. Hence, it was not considered.

36. We have heard the rival submissions and perused the materials available on record. Admittedly, assessee filed the financials for the assessment years 2015-16 which includes the financials relating to assessment year 2014-15 also. However, this was not considered by the TPO. Hence, in the interest of justice, we remit this issue to the file of AO/TPO for fresh consideration.

Maveric Systems Ltd.:-

37. Ld. A.R. submitted that this is functionally compared to assessee’s case as this assessee is engaged in rendering software development services and incurring substantial amount on R&D won’t effect is revenue. He relied on the order of the Tribunal Pune bench in the case of Xpanxion International Pvt. Ltd. in ITA No.666/Pune/2016 dated 14.5.2019 in support.

38. On the other hand, Ld. D.R. submitted that the company incurred substantial expenses to the tune of 6% of turnover towards R&D, which is beyond the generally acceptable tolerable limit of 3% of revenue, hence, it cannot be comparable to the assessee’s case. More so, before the DRP assessee has not controverted this finding of the TPO.

39. We have heard the rival submissions and perused the materials available on record. This comparable was considered by Pune bench in the case of Xpanxion International Pvt. Ltd. (supra) and observed as follows:

8. We have heard the rival contentions and perused the record. Briefly, in the facts of the case, the assessee was engaged in the business of provision of software development services. The assessee had picked up TNMM method to benchmark its international transactions with its associated enterprises. The margins shown by assessee were 12.48% and the margins shown by comparables after directions of DRP were 14.61%. It is the case of assessee that the said concern Maveric Systems Ltd. was engaged in development and testing and hence, is not comparable to the assessee. Our attention was drawn by the learned Authorised Representative for the assessee to page 1 of order of TPO, wherein he while mentioning the profile of assessee pointed out that the assessee develops designs and testing software for associated enterprises. However, at page 4 of TPO’s order while referring to the functions performed, the TPO mentioned the assessee to be involved in software development services, which includes coding and testing. It was the case of assessee before the DRP that the TPO had not analyzed functional activities of said concern properly, wherein Maveric Systems Ltd. was engaged in software development services only as is clear from its annual report. The DRP vide paras 3.3.2 and 3.3.3 at page 6 of its order has referred to the functionality of the said concern being in the field of software development services only and merely because certain expenses are mentioned as project expenses and capital work-in-progress in the financial statements, would not alter the functional profile of the company, which was clearly stated in the Schedule to the Profit and Loss Account and Notes to Accounts. Such expenses relate to either projects for creation of infrastructure for the company of R&D activities and the said information could not be used to hold the said concern to be functionally different.”

40. Being so, taking a consistent view, we direct the AO/TPO to include Maveric Systems Ltd. as a comparable.

Evoke Technologies Ltd.

41. Ld. A.R. submitted that revenue is identified geographical separate India and USA, hence financials related to India should be considered in the entirety and there after it should be included as a comparable.

42. On the other hand, Ld. D.R. submitted that one unaudited financial statement was made available to the lower authorities. Further, as per the geographical segmentation information, the revenue from India was given to be Rs.3621.72 lakhs and that the revenue from USA was given to be Rs.924.87 lakhs. Thus, it can be seen that the export revenue constitute only 20.34% of the total revenue. Therefore, this company cannot be considered as comparable.

43. He relied on the order of the Tribunal in the case of Goldman Sachs Research Pvt. Ltd. in IT(TP)A No. 3244/Bang/2018 dated 29.1.2020 for this proposition.

44. We have heard the rival submissions and perused the materials available on record. Admittedly, this comparable was considered by this Tribunal and observed in para 6.1 in the case of Goldman Sachs Research Pvt. Ltd. (supra) as follows:

Ld.AR submitted that the assessee prayed for inclusion of this company before DRP. However, DRP rejected the prayer of the assessee for the reason that financial results incorporated branch revenue and profit, which was based on unaudited financial statements of branch outside India. It was also observed by DRP that export revenue constituted only 20.34% which did not fulfill filter applied by Ld. TPO. Ld.AR placed reliance upon annual reports of this company placed at page 2491 of paper book volume 6 wherein at page 2511 geographic income has been tabulated for year under consideration and income from software services and products by this company has been shown to be at 3621.72 lakhs. It is observed at page 2512 that this company is earning Rs.35,99,47, 572/-in foreign exchange under software development segment.”

45. Taking a consistent view, we are of the opinion that this should be excluded from the list of comparables. This ground of the assessee is rejected.

46. Now we take up ground No.B.4.10. We have heard the rival submissions and perused the materials available on record. In our opinion, it is appropriate to remit the issue to the file of the AO/TPO to give same treatment to these expenses as given by comparables finally considered by the AO/TPO. With these observations, we remit this issue to the file of AO/TPO for fresh consideration.

47. Now we take up Ground No.B.4.11. According to the Ld. A.R., this expenditure to be allocated on the basis of actual basis not on basis of revenue. However, Ld. D.R. submitted that no argument has been made before lower authorities on this issue.

48. We have heard the rival submissions and perused the materials available on record. In our opinion, this issue was not assailed by lower authorities, hence, we remit this issue to the file of AO/TPO for fresh consideration.

49. Regarding Ground Nos.B.4.12, B.4.13 & B.4.14, no argument was advanced by the Ld. A.R. Accordingly, not considered for adjudication and dismissed.

50. Ground No.B.5 relates to computation of notional interest on outstanding receivables. The relevant grounds are reproduced below:

5.1.Considering overdue receivables from Associated Enterprises (`AEs’) as an international transaction under the provisions of Section 92B of the Act.

5.2. Without prejudice to ground nos. 3 & 5.1 above, ignoring the fact that the Appellant does not pay interest to the AEs in relation to outstanding payable to AEs.

5.3. Without prejudice to ground nos. 3 & 5.2 above, charging interest in respect of all invoices raised during the year and outstanding at the beginning of the year, after allowing a credit period of only 3o days.

5.4. Without prejudice to ground nos. 3 & 5.2 above, charging interest for the full year instead of restricting it till March 31, 2014, i.e. while computing the notional interest on overdue receivable the interest should be computed only from the date of raising invoices, after allowing credit period of 180 days, up till the date of realization of such invoices or March 31, 2014, whichever is earlier.

5.5. Without prejudice to ground nos. 3 & 5.2 above, imputing the notional interest invoice-wise and disregarding the weighted average method of computing the credit period for the outstanding receivables from the AEs.

51. Ld. D.R. submitted that notional interest to be considered as operating income while computing the margin.

52. We have heard the rival submissions, perused the materials available on record and relied on the order of the Tribunal in the case of CGI Information Management Consultation Pvt. Ltd. in IT(TP)A No.505/Bang/2016 dated 30.10.2020. This issue was considered by this Tribunal in the above case as follows:

3.5.7.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 1“s Tribunal in case of Special Bench of. ITAT in case of Instrumentation Corpn.1 Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2b09, dated 157-2016, 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 92 B 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.

3.5.7. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and loans an advances to international transaction would amount to double taxation. Hon’ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DC/Pin ITA No. 6570/De1/2016 vide its order dated 15.2.2018 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. vs. 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 characterized as international. transactions.”

3.5.8. In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/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 such fresh proceedings. Accordingly, this ground raised by assessee stands allowed for statistical purpose.”

53. In view of the above order of the Tribunal, taking a consistent view, we remit the issue to the file of the AO/TPO for deciding the same in conformity with the order of the Tribunal in the case of CGI Information Systems & Management Consultants (P) Ltd. cited (supra).

54. Next ground C.6, C.7 & C.8 relates to disallowance of depreciation claimed in respect of additions made during the previous year. Ld. A.R. submitted that the learned AO erred in disallowing excess depreciation amounting to INR 465,396 in respect of fixed assets additions in the previous year 2013-14 of INR 775,660 on account of failure to furnish invoices. The Ld. A.O. further erred in disallowing excess depreciation amounting to INR 1,560,735 in respect of fixed addition in the previous yea? 2013-14 of INR 2,601,225 by considering such addition to be pertaining to previous year 2014-15. Without prejudice to the above, in respect of assets belonging to Computers (including computer software) block of INR 3,009,941, which has been put to use for less than 180 days in the previous year, the learned AO erred in disallowing depreciation in respect of such assets at the rate of 6o% instead computing depreciation as per second proviso to subsection (1) of section 32 of the Income-tax Act, 1961 at rate of 3o% (i.e., 5o% of 6o%).

55. On the other hand, Ld. D.R. submitted that issue may be remitted to A.O. to consider afresh.

56. We have heard the rival submissions and perused the materials  available on record. As rightly pointed out by the Ld. D.R., the DRP has already given a direction to A.O. to consider the additional information given by the assessee on this issue. However, assessee has not furnished all the bills & vouchers with regard to the acquisition of various fixed assets. Once again, we direct the assessee to furnish necessary information before A.O. and the A.O./TPO shall examine the same in the light of the bills & vouchers produced by the assessee.

57. The next C.9 & C.10 relates to disallowance of travelling expenses and legal & professional expenses. On this issue also, assessee has not produced all the bills & vouchers. Once again we direct the assessee to produce the same before A.O. On production of these evidences, A.O. shall re-examine the issue.

58. The next ground D.11 is with regard to the levy of interest u/s 234B & C of the Act, which is consequential in nature and do not require any adjudication.

59. Next ground D.12 is with regard to initiation of penalty u/s 271(1)(c) of the Act. At this stage it is preposterous and does not require any adjudication.

60. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 23rd Nov, 2020.

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