DCIT-1(1), Hyderabad V. EPAM Systems India Private Limited (Previously known as Alliance Global Services IT India Pvt Ltd), Hyderabad

CO 23/Hyd/2016

AI Insights

The case involves M/s. EPAM Systems India Private Limited, which appealed against the transfer pricing adjustments made by the Deputy Commissioner of Income Tax, Hyderabad, for the assessment year 2011-12. The Tribunal examined the functional comparability of various companies used in the transfer pricing analysis and the appropriateness of the interest rate applied on overdue receivables from associated enterprises. The Tribunal's decision was influenced by precedents and the functional profiles of the companies involved.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133329 (ITAT-HYDERABAD)
• Duration Of Justice: 7 year(s) 3 month(s) 4 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 30-08-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB-B
• Next Hearing Date: 02-08-2023
• Assessment Year: 2011-2012
• Appeal Filed On: 26-05-2016
• Other Referred Cases: Logix Micro Systems Ltd. vs. ITA No. 524/Bang/2009, Zeta Interactive Systems (India) (P.) Ltd. vs. ITO [2022] 142 taxmann.com 202 (Hyderabad \\u2013 Trib.), McKinsey Knowledge Centre India (P) Ltd vs. DCIT (2018) 96 Taxmann.com 237 (Delhi), AMD India Pvt. Ltd vs. PCIT in ITA No. 274/2018 dated 31/8/2018, Zeta Interactive Systems (India) (P) Ltd vs. ITA No. 1812 /Hyd/ 2017 dated 7/6/2022, Apache Footwear India Pvt. Ltd vs. ACIT in ITA-TP No. 568 /Hyd/ 2022 dated 16/1/2023, Symantec Software & Services India Pvt. Ltd vs. DCIT (ITA No. 614/Mds/2016), Zynga Game Network India (P) Ltd vs. ACIT (ITA No. 360/Bang/2016), Alcatel-Lucent India Ltd vs. DCIT (ITA No. 6856/Del/2015)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Rectification of order; Search and seizure; International transaction; Notional interest
• Section: 143(3); 13; 92CA

Judgement Text

आयकर अपीलीय अधिकरण, हैदराबाद पीठ में IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”, HYDERABAD BEFORE SHRI RAMA KANTA PANDA, VICE PRESIDENT & SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER आ.अपी.सं / ITA No. निर्धारण वर्ा / A.Y. अपीलधर्थी / Appellant प्रत्‍यर्थी / Respondent 189/Hyd/2016 2011-12 M/s. EPAM Systems India Private Limited, (Formerly known as Alliance Global Services IT India Private Limited) Hyderabad [PAN No. AAACW2012R] Deputy Commissioner of Income Tax, Circle- 1(1), Hyderabad 317/Hyd/2016 2011-12 Deputy Commissioner of Income Tax, Circle- 1(1), Hyderabad M/s. EPAM Systems India Private Limited, (Formerly known as Alliance Global Services IT India Private Limited) Hyderabad [PAN No. AAACW2012R] सी.ओ./ C.O. No. 23/Hyd/2016 (Arising out of ITA No. 317/Hyd/2016) निर्धारण वर्ा / Assessment Year: 2011-12 M/s. EPAM Systems India Private Limited, (Formerly known as Alliance Global Services IT India Private Limited) Hyderabad [PAN No. AAACW2012R] Vs Deputy Commissioner of Income Tax, Circle- 1(1), Hyderabad क्रॉस ऑब्जेक्टर / Cross-Objector प्रत्‍यर्थी / Respondent ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 2 of 20 निर्धाररती द्वधरध/Assessee by: Shri Aliasgar Rampurwala and Shri Pratik, ARs रधजस्‍व द्वधरध/Revenue by: Shri Jeevan Lal Lavidiya, CIT-DR सुिवधई की तधरीख/Date of hearing: 03/08/2023 घोर्णध की तधरीख/Pronouncement on: 31/08/2023 आदेश / ORDER PER K. NARASIMHA CHARY, JM: Aggrieved by the final assessment order(s) passed consequent to the directions of Hon'ble Dispute Resolution Panel, Bengaluru (“DRP”), in the case of M/s. Alliance Global Services IT India Pvt. Ltd., (formerly Alliance IT Consulting (I) Pvt. Ltd.) (“the assessee”) for the assessment year 2011-12, under section 143(3) r.w.s. 92CA of the Income Tax Act, 1961 (for short “the Act”), both Assessee and Revenue filed these appeals. Assessee also filed cross objections 2. Briefly stated relevant facts are that the assessee is a company that develops computer software to provide Software Development Services (SWD) to Alliance Global Services, LLC, USA. Such services include consultancy services in the areas of system specifications, system design, systems development, programming, implementation, maintenance and such other areas as may be agreed upon between the assessee and Associated Enterprise (AE) from time to time. AE will purchase all of the computer software development services to be produced by the assessee as per the specifications and design provided by the AE. The parties undertake to exchange technical information necessary to achieve the objectives under this agreement. Assessee shall take such precautions as AE deem appropriate to protect all confidential and proprietary information furnished by the AE in connection with this agreement. All technical information and intellectual property provided to assessee for the purpose of ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 3 of 20 development of computer software required by the AE, and all derivatives thereof, shall remain the property of AE. 3. During the year under consideration, as per Form 3CEB, the assessee valued the international transaction of providing software development services at Rs. 46,34,75,390/- and the analysis of the TP study shows that the operating cost of the assessee was Rs. 40,97,63,606/- and operating profit was Rs. 5,37,11,784/- and the margin was 13.11%, whereas the margin of the 12 comparables selected by the assessee was 12.78%. Therefore, according to the assessee, the transaction is at Arm’s Length Price (ALP). 4. Out of the 12 comparables selected by the assessee, learned TPO rejected 10 and accepted two only. Later on, learned TPO conducted search and selected 16 more comparables, whose margin was 23.71% (post working capital adjustment) and accordingly, suggested upward adjustment of Rs. 4,77,78.542/-. On account of interest on overdue receivables, according to the assessee, the interest on overdue receivables was Rs. 88,02,460/-. 5. Against the draft assessment order, assessee filed objections before the learned DRP. Assessee pleaded for exclusion of certain entities from the list of comparables, and having considered the contentions on either side, learned DRP excluded eight comparables, namely, (i) E-Zest Solutions Ltd.; (ii) Infosys Ltd.; (iii) Zylog Ltd.; (iv) ICRA Techno Analytics Ltd.; (v) Igate Global Solutions Ltd.; (vi) Acropetal Technologies Ltd (Seg.) (vii) L&T Infotech Ltd.; and (viii) Sankhya Infotech Ltd on the ground of functional differences with assessee’s SWD service segment, but at the same time, upheld the inclusion of (i) Persistent Systems Ltd.; and (ii) Sasken Communication Technologies Ltd. ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 4 of 20 6. In respect of the interest on overdue receivables, learned DRP placed reliance on the decision of Logix Micro Systems Ltd., in ITA No. 524/Bang/2009, and directed the learned Assessing Officer/learned TPO to adopt interest rate of 5% instead of 12% as adopted by the learned TPO and to restrict the adjustment till the end of the financial year. 7. After giving effect to the order of the learned DRP, both the adjustments were reduced to Rs. 2,48,49,577/- and Rs. 36,67,682/- respectively, and accordingly, final assessment order was passed. Subsequently, pursuant to the rectification order dated 24/03/2016, the TP addition on account of SWD was re-worked to NIL by rectifying the margins of comparables that were sustained in the final set of comparables. 8. Aggrieved by the exclusion of eight comparables by the learned DRP, Revenue preferred ITA No. 317/Hyd/2016 whereas challenging the inclusion of two comparables, assessee filed cross objections. Assessee also filed ITA No. 189/Hyd/2016, challenging the TP adjustment on account of the interest on receivables. 9. Coming to the exclusion of comparables, according to the learned DRP, eight comparables are not functionally similar to the assessee. According to the Revenue, they are functionally similar. Learned DR submitted that in the case of Zeta Interactive Systems (India) (P.) Ltd., vs. ITO [2022] 142 taxmann.com 202 (Hyderabad – Trib.), all these entities are considered, found functionally similar and, therefore, directed to the included. We now proceed to deal with these comparables in detail. 10. In respect of Acropetal Technologies Ltd (Seg.), assessee contended before the learned TPO that in the year in question, there was an acquisition and, therefore, on account of extraordinary events, effecting the profitability of the company, the same may not be ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 5 of 20 considered. Learned Assessing Officer observed that there was no acquisition during the year, but it was only planned. According to the learned Assessing Officer, under IT segment, Acropetal Technologies Ltd (Seg.) is providing end-to-end services, which are software development services and, therefore, such activities are not different from the activities of the assessee company. Learned DRP, however, observed that the substantial portion of software development of Acropetal Technologies Ltd (Seg.) is outsourced and the information relating to the employee cost or export sales is not available. 11. About E-Zest Solutions Ltd., assessee submitted before the learned TPO that such company is a product engineering and software development company, covering entire product development life cycle such as product design and development, produce feature enhancement, product platform migration, software product testing, product maintenance and support, Saas, etc., and by placing reliance on the decision of Agnity I. Technologies P. Ltd., and 3D PLM Software Solutions Ltd., assessee pleaded that this company is not a proper comparable. Learned TPO, however, observed that many software companies who are into product development offload or outsource their work to some companies like E-Zest Solutions Ltd., and as a matter of fact, E-Zest Solutions Ltd., is into development of software products as the assessee does and, therefore, it cannot be excluded. Learned DRP, however, observed that E-Zest Solutions Ltd., is a certified product engineering and software development company, has inventory/closing stock indicating that it is engaged in product development also and, therefore, since the Tribunal in the case of 3D PLM Software Solutions Ltd., directed this company to be excluded from the list of comparables to the SWD, learned DRP thought it fit to exclude the same. 12. In the case of ICRA Techno Analytics Ltd., assessee pleaded that this company is more an ITeS than SWD provider and also into ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 6 of 20 diversified business analytics and business process outsourcing. But the learned Assessing Officer was of the view that this company deals with IT software on other media and, therefore, a software development company. According to him, information contained in the website is usually general and wide spread to give a rosy picture of the company to attract the customers and the same cannot be given much weight. Learned DRP, however, found that ICRA Techno Analytics Ltd., earns its revenues from software development, consultancy, licensing and sublicensing, annual maintenance charges for software support, web development and hosting but not segmental information was available and, therefore, this company renders itself not a good comparable to the assessee. 13. As far as Igate Global Solutions Ltd., is concerned, assessee pleaded before the learned TPO that Igate Global Solutions Ltd., had extraordinary/exceptional events like acquisition of Patny computers creating multiplayer effects with the synergies of Igate Global Solutions Ltd., and Patny, and in view of the decision of the Tribunal in the cases of Capital IQ Information Systems IP Ltd., Excellent Data Research Pvt. Ltd., and Hyundai Motors India Engineering Pvt. Ltd., this company cannot be included in the list of comparables. According to the learned TPO, primarily this company is providing SWD services but though the terms used are generic in nature, indicating diversified activities, but the annual report makes it clear that the main business of the company is SWD and IT services and, therefore, it cannot be said that this company is not a good comparable. But, according to the learned DRP, Igate Global Solutions Ltd., is providing IT services as well as IT enabled services, but it financials do not contain the segmental information. On this ground, learned DRP directed to exclude this company from the list of comparables. 14. Coming to Infosys Ltd., the submissions of the assessee before the learned TPO were very long and sum and substance is that this ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 7 of 20 company deals in software products, and owns copyright product. Its comparability was questioned on the basis of its size, diversity of activities, sources of revenue, brand value, intangibles, premium pricing, so on and so forth. Learned TPO rejected all these reasons, and refused to exclude this company stating that when functions are similar, namely, providing SWD services, there is no linkage between turnover and profit or the scale of operations. According to him, brand comes with cost and, therefore, it cannot be a factor impacting the profitability. Since 75% of the revenues of Infosys Ltd., are from SWD services, Infosys Ltd., involving in products also is no ground to exclude it. According to the learned DRP, Infosys Ltd., is functionally dissimilar, and there are various judicial pronouncements making it clear that this is not a good comparable to the SWD services providers like the assessee. 15. In respect of L&T Infotech Ltd., also assessee advanced similar argument stating that 53% of the revenues of L&T Infotech Ltd., are from on site activities and no segmental information is provided in the financials. Further, L&T Infotech Ltd., develops in-house intangibles, apart from its huge turnover compared to the assessee. As in the case of Infosys Ltd., learned TPO rejected the argument of assessee in respect of L&T Infotech Ltd., also. Learned DRP, however, recorded that expenses incurred by L&T Infotech Ltd., in foreign currency are to the tune of Rs. 938.94 crores out of total expenses of Rs. 118.01 crores (48.84%) which indicates that company has on-site revenue; that the revenues of L&T Infotech Ltd., are from both software services and products; and that out of total software development expenses of Rs. 1488.30 crores, salary to overseas staff is 1200.28 crores which indicates company is engaged in development of software on-site and, therefore, L&T Infotech Ltd., is to be excluded from list of comparables. ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 8 of 20 16. In respect of Sankhya Infotech Ltd., contention of assessee before the learned TPO was that this company is a leading simulation and training solutions company, providing end-to-to simulation solutions customised to the end users, apart from which it also develops products, but no segmental information relating to the revenues is available. Learned TPO on a perusal of the profit and loss account recorded that the details of income from software, domestic and export, are available. Apart from this, he also recorded that the products are made for the end users and not for the general sale. Learned DRP excluded this company by finding that the functional profile of this company is not comparable to the software development functions, abnormal variation in the profit margins in various years indicate the existence of extraordinary circumstances and, therefore, this cannot be continued in the list of comparables. 17. Lastly coming to the case of Zylog Ltd., the assessee pleaded that this company had extraordinary events like acquisition of another company in Canada, thereby acquiring new customer database, new geographical area of business, new services and product offerings. Apart from this, it has a huge turnover as compared to the assessee with a specialised R&D wing possessing huge intangibles, which are the reasons to exclude this company from the list of comparables. Learned TPO, however, commented that this company is one of the verticals within the SWD services with the main activity of software development services and, therefore, no other parameter like hugeness of turnover, possessing intangibles etc., cannot be grounds to exclude the same. He draw analogy of Infosys Ltd., to retain this comparable. learned DRP, however, recorded that 45.2% revenue of this company is from solutions and products, 5.6% from IT services and 49.2% from consulting; that out of Rs. 899 crores revenue, Rs. 623 crores are coming from on-site activities; and that 50% of the expenses are incurred on-site, and, therefore, Zylog Ltd., being predominantly ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 9 of 20 engaged in rendering services on-site, to be excluded from list of comparables. 18. It is the submission of the learned DR that though the terms describing the functions performed by various entities excluded by the learned DRP are generic in nature and in a way suggest that such entity performs a different kind of functions are involved in diversified activities, what remains at the core of the functionality is the SWD services. According to him, information contained in the websites of any entity would be intended to give a very attractive picture of such company and its areas of activity will be mentioned in usually general and wide spread terms to attract the customers and the same cannot be given much weight. Learned DRP, however, missed this aspect while returning a finding that the eight entities involved in this matter were either functionally dissimilar or performing multifarious activities to render themselves as not comparables to the assessee. 19. He further submitted that all the entities, namely, (i) E-Zest Solutions Ltd.; (ii) Infosys Ltd.; (iii) Zylog Ltd.; (iv) ICRA Techno Analytics Ltd.; (v) Igate Global Solutions Ltd.; (vi) Acropetal Technologies Ltd (Seg.) (vii) L&T Infotech Ltd.; and (viii) Sankhya Infotech Ltd., were considered for the assessment year 2011-12 by a Co-ordinate Bench of the Tribunal in the case of Zeta Interactive Systems (India) (P.) Ltd. (supra) to be retained as a good comparable to the entities like assessee. 20. Per contra, counsel for the assessee submitted that all the entities rejected by the learned DRP and rightly so, are performing the functions not similar to that of the assessee and most of them of into diversified activities as found out by various adjudicatory authorities and, therefore, in the light of the observations of the Co-ordinate Benches of the Tribunal in such cases, the comparability could be decided. ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 10 of 20 21. We have gone through the record in the light of the submissions made on either side. Coming to Acropetal Technologies Ltd (Seg.), according to the annual report of this company, its key services include Engineering design services, Healthcare, Enterprise solutions and IT Infrastructure solutions. It offers technological expertise and commitment to deliver cost-effective software products. It indicates that this company is not a pure software development company, but is also engaged in product development. Even in the segment of Information technology service, no bifurcation figures are available between software development service and software product activity. As per segmental reporting, the income from Information Technology Services is Rs. 81.40 crores out of the total income of Rs. 141.65 crores, indicating that the income from software development services is only 57-46% of its total operating revenue. In the case of Symantec Software & Services India Pvt. Ltd. vs. DCIT (ITA No. 614/Mds/2016) there is a finding of the Tribunal that this company is into different business model being engaged in onsite development of software and it does not pass the filter applied by TPO of 75% export turnover and that ratio of onsite to total employee related expenses comes to 86.2%. In the case of Zynga Game Network India (P) Ltd. vs. ACIT (ITA No. 360/Bang/2016) there is a finding of the Tribunal that the income of this company from IT services is Rs. 81.40 crores out of total income of Rs. 141.65 crores, thus failing 75% of total revenue filter. In our opinion, these facts render Acropetal Technologies Ltd (Seg.) not a good comparable to the assessee. 22. Turning to E-Zest Solutions Ltd., the information available in the annual report shows that this company is a certified product engineering and software development company, having special expertise in emerging technologies such as Cloud SaaS, Business Intelligence and Mobility. Its business is diversified into product and service, the products being offered by it include product engineering ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 11 of 20 services, outsourcing product development services, enterprise application development, IT services, industries solution, technology expertise and delivery approach. Findings of the Tribunal and the Hon’ble High Courts are to the effect that the company engaged in product development services and high-end technical services, are to be categorized as KPO services, in general. Apart from this the annual report at page No. 50 under the head ‘segment reporting’ shows that, considering the nature of business and operations only one segment is reported and no detailed segmental information is available with respect to different business of this company. Annual report further shows that this company has inventories amounting to Rs. 1.65 crores. It was found in Symantec Software & Services India Pvt. Ltd. vs. DCIT (supra), that this company is engaged in product engineering services which is in nature of high end knowledge process outsourcing having expertise in emerging technologies such as Saas, mobility and business intelligence. For this reason it was found that E-Zest Solutions Ltd., was found not a suitable comparable. For the similar reasons, we also find that this company is not a suitable comparable. 23. Next comparable that falls for our consideration is ICRA Techno Analytics Ltd. As per the annual report incorporated in the paper book, ICRA Techno Analytics Ltd., is engaged in the software development & consultancy, engineering services, web development & hosting and subsequently diversified in the domain of business analytics and business process outsourcing (BPO). These functions are in variation with the functions of the assessee as a SWD services provider. Apart from this, revenues of this company from services consists of revenue earned from services performed for software development & consultancy, licensing & sublicensing fee, annual maintenance charges for software support, web development & hosting. Revenue from sales is recognized as and when delivery of the branded softwares is made and is booked net of trade discount. No separate segment information ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 12 of 20 available for different line of services as well as sale of traded goods. At Page No. 31 of the annual paper book, only one segment is mentioned as primary segment and no details of revenue in respect of the other activities is to be found. Further, this company had income from sale of traded goods. It was found in Zynga Game Network India (P) Ltd., (supra), that ICRA Techno Analytics Ltd., is engaged in diversified business activities and therefore functionally not comparable with that of pure software development services. in view of this specific finding of the Co-ordinate Bench of the Tribunal, we hold that this company is functionally not comparable with that of pure software development services provider like assessee. 24. Annual report of Igate Global Solutions Ltd., shows that this company’s operations predominantly relate to providing IT services, contact centre services and IT enabled services. The company considers all of these services to be relating to one segment i.e. IT enabled services and operates in this segment with respect to products and services. Except this no segmental information is available for its diversified business operations. Coming to its nature of operations, this company offers services in the fields of IT and IT enabled services, offshore outsourcing solutions and services to large and medium sized organizations using offshore and onsite model. IT and IT enabled operations offshore outsourcing solutions is delivered using the offshore centre. It further indicates that Igate Global Solutions Ltd., has huge intangibles in terms of acquired goodwill. No information is available as to how much percentage the other components of business occupy in the revenues of the Igate Global Solutions Ltd. Data is insufficient to conclude that the cumulative effect of the information available sets this company apart from the category of companies, in which the assessee falls. Learned TPO clearly found that though the terms used are generic in nature giving an impression that the company is engaged in diversified activities, the ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 13 of 20 core activity of the assessee is only SWD services. In the absence of any information to show that such diversified activities constitute a sizeable portion of its business so as to render it not comparable to the assessee, we are not inclined to accept the findings of the learned DRP that in the absence of any segmental information, this company cannot be retained in the list of comparables. Such a logic will not hold good if the other activities constitute a miniscule proportion to the core activity. We, therefore, direct that the Igate Global Solutions Ltd., shall be retained in the list of comparables. 25. As far as Infosys Ltd. and L&T Infotech Ltd., are concerned, undisputedly these companies own products and leverages, incurs huge amount of research and development expenses, revenue are primarily derived from software development and related services and from the licensing of software products. These companies provide end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. These companies provide solution that encompass technical consulting, design, development, re-engineering, maintenance, system integration, package evaluation and implementation, testing and infrastructure services. In addition, Company offers software products for sectors of industry. In assessee's own case for assessment year 2009-10 in ITA No. 58/Hyd/2014 Infosys was found functionally different from a company providing simple software development services as it owns significant intangibles and has huge revenues from software products. Likewise, in assessee's own case for assessment year 2013-14 in ITA No. 2122/Hyd/2017 it was found that on the grounds of huge intangibles and no availability of segmental information between software service and products, L&T Infotech Ltd. was found not suitable to be compared with assessee. It is not the case of the revenue that there is any change in the functional profile of assessee or Infosys Ltd. and L&T Infotech Ltd. We, therefore, in tune ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 14 of 20 with the findings of the Tribunal for the earlier assessment years, hold that Infosys Ltd. and L&T Infotech Ltd., are not good comparables. 26. In case of Sankhya Infotech Ltd., as per the annual report, Sankhya is a leading 'simulation and training solutions company'. It provides end to end simulation solutions which are customized to the end user and the company has developed customizable products for imparting training. Sankhya Infotech Ltd., deals the products like eLearning solution to State Bank of India's 3,00,000 employees and signed MOU with defence public sector company Bharat Electronics Ltd., to collaborate in the field of simulation and virtual training and recorded a successful execution of SILICON suite of products for the Indian Army. Thus, the services provided in terms of training by Sankhya Infotech Ltd., are not comparable to software development services provided by the assessee. Learned AR submitted that in the case of Alcatel-Lucent India Ltd. vs. DCIT (ITA No. 6856/Del/2015) for the assessment year 2011-12 was found to be a leading simulation and training solutions provider and also develops customizable products for training purposes and non-availability of segmental information. It makes the things clear that the purpose and the target users of Sankhya Infotech Ltd. are different from other receivers of SWD services, but it does not alter the core activity of Sankhya Infotech Ltd. being a software developing company. Even the products referred to in the annual report are software products and developing the same is within the realm of SWD services. This is not a ground to exclude Sankhya Infotech Ltd. from the list of comparables and we, therefore, do not agree with the learned DRP and direct the inclusion of this company in the list of comparables. 27. As far as Zylog Ltd., is concerned, learned AR submitted that it is majorly an onsite service company which has earned more than 70% of its revenues from onsite activities being Rs. 623 crores out of total revenue of Rs. 899 crores. Zylog Ltd., incurs 99% of the total ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 15 of 20 expenditure in foreign currency which means that it is involved in providing on-site services to its clients and, therefore, following different business model. The company earns income from software development services as well as from sale of products and no segmental information available. The company earns revenues from software development services, consultancy services, projects and e- governance services, the company has also hired technical consultants on contract for software development activities which suggests a different business model. It also owns significant intangibles and carries on extensive research and development activities. Weare not impressed with this argument on behalf of the assessee. It could be seen from the consolidated profit and loss account of the company, out of the total revenue of Rs. 1,921 crores, the income from SWD services and products is upto Rs. 1,884 crores and other income constitutes only Rs. 5 crores. There is no reference to any closing stock, inventories or work in progress so as to infer that other than software development, this company is involved into some manufacturing products. Software product is also the result of software development only. Merely because the use of generic terms, a software development entity cannot be held as a non-comparable. Unless it is established that substantial portion of its work is outsourced, the off-site or in-house development of software will not impact the margins. We, therefore, direct the retention of this entity in the list of comparables. 28. Coming to the Persistent Systems Ltd., and Sasken Communication Technologies Ltd., assessee insists that these two entities shall be excluded from the list of comparable on the ground of functional dissimilarity. Learned Assessing Officer submitted that in assessee’s own case for the assessment year 2013-14 in ITA No. 2122/Hyd/2017, Persistent Systems Ltd., was directed to be excluded on the ground of its engagement in both software product, services ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 16 of 20 and technology innovation, but without disclosing the segmental details. Since no change of circumstances is brought to our notice, we deem it necessary to follow the view taken for the assessment year 2013-14 and accordingly, direct the learned TPO to exclude this company. 29. Insofar as Sasken Communication Technologies Ltd., is concerned, except stating that this company is involved in products also, as in the case of Zylog Ltd., no reference to any closing stock, inventories or work in progress is brought to our notice suggesting that other than software development, this company is involved into some manufacturing products. As held already, software product is also the result of software development only, and merely because the use of generic terms, a software development entity cannot be held as a non- comparable. We, therefore, direct the retention of this entity in the list of comparables. 30. In view of our above discussion, we uphold the direction of the learned DRP to exclude Acropetal Technologies Ltd (Seg.) L&T Infotech Ltd., E-Zest Solutions Ltd., ICRA Techno Analytics Ltd., Infosys Ltd., L&T Infotech Ltd., and Persistent Systems Ltd., but at the same time we, however, direct the inclusion of Igate Global Solutions Ltd., Sankhya Infotech Ltd., Zylog Ltd., and Sasken Communication Technologies Ltd. from the list of comparables. To this extent Ground No. 2 of Revenue’s appeal and the cross objections of the assessee are allowed in part. 31. Coming to the appeal of the assessee and Ground No 3 of Revenue’s appeal, it relates to the computing notional interest on the outstanding receivables. 32. Grievance of the assessee is that the Ld. TPO should not have made any adjustment on account of the notional interest on delay in ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 17 of 20 collection of dues from the associated enterprise, and if for any reason such an adjustment has to be made it has to be made only in respect of the debt outstanding for 180 day, that too at the rate of LIBOR +1.5%; whereas the case of Revenue is that the learned DRP should not have reduced the rate of interest on receivables fro 12% to 5%. On this aspect Ld. DRP referred to the view of the Bangalore Bench of the Tribunal in the case of M/s Logix Microsystems Ltd in ITA No. 524/Bang/2009 and also the view taken by the Delhi Bench of the Tribunal in the case of Kusum healthcare Pvt. Ltd in ITA No. 6814 /Del/ 2014, and directed the learned Assessing Officer/Ld. TPO to compute the ALP of the interest on the outstanding receivables at 5%, instead of 12% as determined by the Ld. TPO. 33. Assessee is contending that no transfer pricing adjustment need be made in respect of the notional interest on delay in collection of dues from the associated enterprise, because it is not an international transaction and secondly contending that if at all such an adjustment has to be made only such dues which are outstanding for more than 180 days shall be considered and the rate of interest shall be restricted to LIBOR +1.5%. 34. Ld. DR is placing reliance on the decisions of the coordinate benches in the cases of McKinsey knowledge Centre India (P) Ltd (2018) 96 Taxmann.com 237 (Delhi), decision of the Hon’ble Karnataka High Court in the case of PCITvs. M/s AMD India Pvt. Ltdin ITA No. 274/2018 dated 31/8/2018, view of the coordinate Bench of this Tribunal in the case Zeta Infrastructure in ITA No. 1812 /Hyd/ 2017 dated 7/6/2022, such ventures in ITA No. 362/Hyd/2021 dated 28/6/2022an Apache Footwear India Pvt. Ltd vs. ACIT in ITA-TP No. 568 /Hyd/ 2022 dated 16/1/2023and submitted that this issue is no longer res integra, it has only been examine in the above matters and in all these cases the consistent view is that outstanding receivables is an international transaction requiring separate benchmarking, extra ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 18 of 20 credit in excess of 30 days would amount to profit shifting and, therefore, 6% of interest would be proper rate of interest to be levied in respect of such interest on outstanding receivables. In reply, the Ld. AR submitted tha the matter may be reconsidered. 35. On a careful consideration of the matter in the light of the decisions relied upon by the Revenue we find that in the case of McKinsey knowledge Centre India Pvt. Ltd (supra) the Hon’ble High Court held that the outstanding receivables is an international transaction and requires benchmarking separately. In the case of Mrs AMD India private limited (supra) the Hon’ble Karnataka High Court found that allowing extra credit in excess of agreed period of 30 days, amounts to profit shifting and requires determination of arm’s-length price. In this case the Hon’ble Karnataka High Court found that application of 6% interest on such outstanding receivables would be just and proper. The coordinate benches of this Tribunal followed the above view, and in the cases of Zeta Interactive Systems (India) (P) Ltd., (supra), Satyam ventures (supra) and Apache Footwear India Pvt. Ltd (Supra) held that outstanding receivables is an international transaction, any extra credit in excess of 30 days requires a separate benchmarking and notional interest at 6% is a fair and reasonable one. In these decisions the request of the assessee to apply the interest at LIBOR + points was considered and rejected. 36. In this case, as against the direction of the Ld. DRP to the learned Assessing Officer to compute the arm’s-length price in respect of the interest on outstanding receivables at 5% both the Revenue and assessee are in appeal. Assessee did not bring in any material before us to take a contrary view from the view taken by various fora referred to above. The view taken in the above decisions is applicable to the facts of the case on hand. While respectfully following the line of decision cited by Ld. DR, we hold that interest at 6% is reasonable and accordingly direct the learned Assessing Officer to compute the ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 19 of 20 interest on the outstanding receivables for more than 30 days at 6% per annum. Ground No 2 of Revenue’s appeal and the appeal of the assessee accordingly allowed in part. 37. In the result, appeals of the Revenue and assessee and the cross objections of the assessee are allowed in part. Order pronounced in the open court on this the 31 st day of August, 2023. Sd/- Sd/- (RAMA KANTA PANDA) (K. NARASIMHA CHARY) VICE PRESIDENT JUDICIAL MEMBER Hyderabad, Dated: 31/08/2023 TNMM ITA Nos. 189 & 317/Hyd/2016 C.O. No. 23/Hyd/2016 Page 20 of 20 Copy forwarded to: 1. M/s. EPAM Systems India Private Limited (Formerly known as Alliance Global Services IT India Private Limited), Salarpuria Sattva Knowledge City, 10 th , 11 th and 12 th Floors, Unit 2 and Unit 3, Plot No. 2, Phase-1, Survey No. 83/1, Raidurg Village, Serilingampally Mandal, Hyderabad. 2. Deputy Commissioner of Income Tax, Circle-1(1), Hyderabad. 3. The Dispute Resolution Panel (DRP), Bengaluru. 4. The Director of Income Tax (IT & TP), Hyderabad. 5. The Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad. 6. DR, ITAT, Hyderabad. 7. GUARD FILE TRUE COPY ASSISTANT REGISTRAR ITAT, HYDERABAD