Appeal Details
Counselvise Citation
[2022] 106 COUNSELVISE.COM (IT) 9783 (ITAT-HYDERABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
4 year(s) 7 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
06-06-2022
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
DB-A
Assessment Year
2013-2014
Appeal Filed On
05-11-2017
Judgement Text
ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 1 of 50 IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ A ‘ Bench, Hyderabad Before Shri R.K. Panda, Accountant Member AND Shri Laliet Kumar, Judicial Member ITA No.1812/Hyd/2017 Assessment Year: 2011-12 Zeta Interactive Systems (India) Pvt. Ltd, Hyderabad PAN:AAACZ2688N Vs. Income Tax Officer Ward 17(4) Hyderabad (Appellant) (Respondent) Assessee by: Sri P.V.S.S. Prasad Revenue by: Sri T. Sunil Goutam, DR Date of hearing: 01/06/2022 Date of pronouncement: 07/06/2022 ORDER Per Laliet Kumar, J.M. This is assessee’s appeal for the A.Y 2011-12 against the order of the CIT (A)-5, Hyderabad, dated 28.02.2017. 2. At the outset the learned AR submitted that the assessee is not pressing Ground No.4 and Grounds 1 to 3 are being general in nature. Therefore, these grounds are rejected as not pressed. 3. Grounds 5 & 6 of the assessee appeal 4. Brief facts of the case are that the assessee is a private limited company operating in two business segments viz., Software development services and IT enabled services and the assessee is ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 2 of 50 providing its services to its holding company namely, Zeta Interactive, US. 5. Assessee filed its return of income for the A.Y 2011-12 on 30.11.2011 declaring income of Rs.5,89,150/- under normal provisions and Rs.2,66,64,328/- under MAT. 6. The assessee company applied TNNM method as most appropriate method for benchmarking the services provided to its AEs and the operating profit/operating cost was used by the assessee company as the profit level indicator to test the assessee company’s OP/OC with respect to international transactions with AEs with reference to uncontrolled comparables identified as a result of searches carried out in external databases. 7. Assessee company used capitaline databases to search for the comparables and identified 11 comparables under Software Development Services and arrived at the arithmetic mean of 13.49% as against its own margin of 15.02%. The assessee company’s margin being within +5/-5% range, it was concluded that the international transactions with its AEs were at Arm’s Length. For transactions under ITES assessee company shortlisted 7 comparables with arithmetic mean PLI OP/OC at 19.24% as against PLI of the taxpayer at 20.02%, it was contented that the international transactions with its AEs were at Arm’s length. 8. The learned TOP took operating cost of Rs.8,74,49,838/- for software development segment against the actual operating cost of Rs.8,58,03,836/-. The learned TPO carried out fresh search under software development services and ITES and held that the international transactions pertaining to ITES were at arm’s length ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 3 of 50 price. However, with respect to software development services, the learned TPO after carrying fresh search, arrived at an arithmetic mean of 20.82% (OP/OC) by considering 18 companies and after making working capital adjustment of -0.47%, adjusted arm’s length margin at 20.35% and made an adjustment of Rs.62,56,174/- under software development services. The TPO selected the following comparables as under: S.No Name of company Operating Revenue OP/OC 1 Acropetal Technologies Ltd (Seg) 81,040.16,893 34.59 2 Akshay Software Technologies 11,47,22,877 0.85 3 CTIL Ltd 19,55,81,589 9.73 4 Evoke Technologies P Ltd 14,48,69,912 8.33 5 E-Zest Solutions Ltd 12,70,06,696 38.03 6 ICRA Techno Analytics Ltd 16,02,91,000 25.36 7 Igate Global Solutions Ltd 11,92,93,17,000 24.58 8 Infosys Ltd 2,54,46,00,00,00 0 43.74 9 Kals Information Systems Ltd (Seg.) 2,17,49,052 10.35 10 L & T Infotech Ltd 23,36,29,52,834 18.08 11 Mindtree Ltd 8,88,02,00,861 11.79 12 Persistent Systems & Solutions Ltd 18,94,90,457 21.51 13 Persistent Systems Ltd 6,29,15,80,000 26.68 14 R S Software (India) Ltd 1,88,23,82,369 16.35 15 Sankhya Infotech Ltd 42,53,23,163 17.64 16 Sasken Communication Technologies Ltd 4,02,87,78,000 26.99 17 Tata Elxsi Ltd 3,61,27,43,012 13.77 18 Zylog Systems Ltd 9,15,97,68,067 26.21 Total 374.58 Average 20.82 Less:Working Capital Adjustment 0.47 Adjusted Arm’s Length Margin 20.35 9. It was submitted that out of 18 companies selected by the TPO, two comparables were in common which were selected by the assessee company during its initial TP study i.e. Kals Information Systems Ltd (Seg) and Sankhya Infotech Ltd. 10. The assessee company objected 8 companies out of 16 selected companies by the TPO before the CIT (A) and the assessee argued that 8 comparables which were selected by the TPO having turnover of more than Rs.350 crores and also operated in different ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 4 of 50 functions. The list of comparables objected by the assessee before the CIT (A) are as follows: S.No Name of company Operating Revenue OP/OC 1 Igate Global Solutions Ltd 11,92,93,17,000 24.58 2 Infosys BPO Ltd 2,54,46,00,00,00 0 43.74 3 L & T Infotech Ltd 23,36,29,52,834 18.08 4 Mindtree Ltd 8,88,02,00,861 11.79 5 Persistent Systems Ltd 6,29,15,80,000 26.68 6 Sasken Communication Technologies Ltd 4,02,87,78,000 26.99 7 Tata Elxsi Ltd 3,61,27,43,012 13.77 8 Zylog Systems Ltd 9,15,97,68,067 26.21 11. The CIT (A) excluded three companies out of the 8 above companies as under: S.No Name of company Operating Revenue OP/OC 1 Infosys BPO Ltd 2,54,46,00,00,00 0 43.74 2 L & T Infotech Ltd 23,36,29,52,834 18.08 3 Tata Elxsi Ltd 3,61,27,43,012 13.77 12. Aggrieved by the order of the Ld CIT CA), the assessee is in appeal before the Tribunal by raising the following grounds of appeal: 1. The Ld. CIT (A)/ Ld.AO are not justified in law in considering wrong comparables and consequently arriving at a high arithmetic mean of 20.35% as a ratio of OP/OC as against the margin of 15.02% of the appellant. 2. The Ld. CIT (A) has erred in upholding the order of Ld. TPO/AO which is not legally correct in rejecting the TP study of the assessee company and conducting the fresh TP analysis for benchmarking the international transaction. The Ld. TPO/Ld.AO erred in adopting erroneous and unjustified search filters for selection of comparables. The Ld. TPO/Ld.AO erred in selecting the following comparables. i. Acropetal Technologies (Seg). ii. Akshay Software Technologies Ltd. iii. CTIL Ltd. iv. Evoke Technologies v. E-Zest Solutions Ltd. vi. ICRA Techno Analytics Ltd. vii. Igate Global Solutions Ltd. viii. Mindtree Ltd. ix. Persistent Systems & Solutions Ltd. x. Persistent Systems Ltd xi. RS Software (India) Ltd. xii. Sasken Communication Technologies Ltd. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 5 of 50 xiii. Zylog Systems Ltd. 13. Assessee company’s objections are as under against the following comparable companies: 13.1 Acropetal Technologies (Seg): According to the assessee, the segmental income for this company from Information Technology Services is Rs. 81.40 crores out of total income of Rs. 141.65 crores. Hence, it is clear that the income from Information Technology services being less than 75 per cent of total revenue this company does not satisfy the filter of information technology services revenue being more than 75 per cent of total revenues, applied by the TPO. In this regard, the learned Counsel for the assessee was of the view that in the case of Assistant Commissioner of Income-tax, Circle-4 (1) (2), Bangalore v. Marvel/India (P.) Ltd [2017J 84 taxmann.com 212 wherein the Hon'ble Bangalore Tribunal held that : " 14.3.1 We have heard both parties and perused and carefully considered the material on record; including the judicial pronouncement cited. We find that as per the segmental reporting at page 53 of the Annual report of this company, the income from Information Technology Services is Rs. 81.40 crores out of total income of Rs. 141.65 crores. Therefore, it is amply clear that the income from Information Technology Services is less than 75% of total revenues and consequently this company does not satisfy the filter of information technology services revenue being more than 75% of total revenues, applied by the TPO himself. We find that on similar facts for the year under consideration i.e. Assessment Year 2011-12, a co-ordinate bench in the case of GT Nexus Software (P.) Ltd. (supra) has upheld the DRP's exclusion of this company from the list of comparables on account of it failing to satisfy the filter of 75% revenues to be from software technology services revenue. In the said order the co-ordinate bench has also held this company to be functionally not comparable to a provider of pure software development services to its AE's. Following the decision of the coordinate bench in the case of GT Nexus Software (P.) Ltd. (supra), we direct the TPO/AO to exclude this company, M/s. Acropetal Technologies Ltd. from the list of comparables." 13.2 E-Zest Solutions Ltd: E-Zest Solutions Limited is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, IT design services ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 6 of 50 and in Technology Consulting Services including product development consulting services. These services are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company's website which should be considered while evaluating the company's functional profile. Since KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and prayed that in view of the above reasons, this company Le. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 13.3 The above view has been upheld by the Hon'ble Bench of ITAT Delhi in the case of Cadence Design Systems (I) (P.) Ltd. v. Assistant Commissioner of Income Tax, Circle- 5 (2), New Delhi as under: “We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6} of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co- ordinate bench of this Tribunal in the case of Capitall-Q Information Systems (India) (P) Ltd. (supra) that KPO services are not comparable to software development services and are therefore not comparable." ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 7 of 50 13.4 Similar view has been taken in the case of Symantech Software & Services (I) Pvt, Ltd. v. DCIT ITA No. 614/Mds/2016, as under: 'The comparable company E-Zest Solutions Ltd. is engaged in product engineering services in the nature of high-end knowledge process outsourcing and also in product engineering software Development Company having expertise in emerging technologies cloud Saas, Business Intelligence and mobility for more than 10 years and serving 8 industries across the globe with over 200 software professionals. Whereas, the assessee-company is in the software development and also ITES services and cannot be considered as functionally comparable. In the decision of Bangalore Tribunal in the case of 3DPLM Software Solutions Ltd. v. Dy. C1T [2014J 42 taxmann.com 333 this comparable was considered and it was held that while the assessee is into software development services, this company i.e. E-Zest Solutions Ltd., is rendering product development services and high-end technical services which come under the category of KPO services and hence was to be omitted from the set of comparables. Thus, considering these facts and the decision of the Tribunal, TPO was to be directed to exclude the E-Zest Solutions Limited from the list of comparables.[Para 8)" 13.5 Persistent Systems Ltd: Assessee’s main objection is that the company Persistent Systems Limited is engaged in software product designing and analytic services and has income from license fee. Hence the same is functionally different from that of Appellant company. Also, the segmental information is not available in the annual report of the company for the year under consideration. In absence of segmental details/ information a company cannot be taken into account for comparability analysis The above view has been upheld by the Hon'ble Chennai ITAT in the case of Symantec Software & Services India (P.) Ltd. (supra). Wherein the Hon'ble ITAT held that : "17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 8 of 50 the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly." 13.6 The similar view has been taken by Hon'ble Jurisdictional ITAT (Hyderabad Tribunal) in the case of Syniverse Technologies Service (India) (P.) Ltd Vs DCIT [2021J 123 taxmann.com 258 (Hyderabad - Trib.) wherein the Hon'ble ITAT held that " 9. We have considered the rival contentions. As seen from the orders placed on record and also consistent stand taken by the Tribunal in various such cases, we have no hesitation in excluding two companies, Persistent Systems Ltd., and Sasken Communication Technologies Ltd on functionality basis " 13.7 Sasken Communication Technologies limited: According to the assessee, this company is into multimedia product and the research and development in the said year in respect of multimedia wireless broad band and mobile value added services and the breakup of revenue is not available. The same was held good in the case of Symantec Software & Services India (P.) Ltd. (supra) wherein the Hon'ble ITAT held that. "The company Sasken Communication Technologies Ltd. is functionally non-comparable as they are into multimedia product and the research and development in the said year in respect of multimedia wireless broadband and mobile value added services and the breakup revenue is not available and cannot be considered as comparable. Thus, the TPO is directed to exclude this company from the list of comparables. [Para 12}." 13.8 Further, the learned Counsel for the assessee submitted that the above company owns intellectual property rights in the form of numerous patents and also has branded products and hence cannot be considered as a comparable. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 9 of 50 13.9 The similar view has been taken by Hon'ble Jurisdictional ITAT (Hyderabad Tribunal) in the case of Syniverse Technologies Service (India) (P.) Ltd Vs DCIT [2021) 123 taxmann.com 258 (Hyderabad - Trib.) wherein the Hon'ble ITAT held that "9. We have considered the rival contentions. As seen from the orders placed on record and also consistent stand taken by the Tribunal in various such cases, we have no hesitation in excluding two companies, Persistent Systems iid., and Sasken Communication Technologies Ltd on functionality basis.....” 13.10 Igate Global Solutions Ltd During the year under consideration, the company has acquired majority equity interest in Patni Computer Systems Ltd. resulting in an extra ordinary activity and also the company owns significant intangible in its name. Additionally, the company is engaged in diverse functions like software services & ITES, there is no segmental breakup of revenue available for the year. 13.11 The same has been held good by the Hon'ble ITAT Bench 'A' in the case of TRX Technologies India (P.) Ltd. v. Deputy Commissioner of Income Tax, Circle 5(1)(1), Bangalore for the AY 2011-12 as under: " It is seen that iGate is engaged in provision of varied services and no segmental breakup of the same is available in its Annual Report. Further, the company's' software services segment is clubbed with its ITES segment and there is no breakup between the revenues generated from the two segments. During the year under consideration the company has acquired majority equity interest in Patni Computer Systems Ltd. rendering it incomparable due to it failing the TPO's own filter of having peculiar economic circumstances. In addition, the company owns significant intangibles in its name, which is evident from the balance sheet of the company for the Financial Year 2010-11. For the reasons above, the company is not comparable to the Assessee and the DRP's findings on exclusion of iGate is right in law.” ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 10 of 50 13.12 Zylog Systems Ltd This company is engaged in provision of the various business activities and no segmental result for software development services is available. The company earns it revenue from software development services and also from sale of software products. Zylog Systems derives its revenue primarily from software development services, consultancy services, projects and e-governance projects. Also, it is pertinent to note that company does not meet the software development services to revenue filter adopted by the learned TPa as it consists of only 21.6%. 13.13 Based on the above fact the Hon'ble Delhi Tribunal in the case of Fiserv India (P.) Ltd Vs ACIT [2020J 121 taxmann.com 211 (Delhi - Trib.) has excluded this company from the final list of comparables. Further, during the year there is an extra-ordinary event in the company i.e., it has acquired M/s. Brainhunter Inc, Canada. 13.14 In the case of Agilis Information Technologies International (P.) Ltd. v. ITO [2017J 88 taxmann.com 6 (Delhi - Trib.}, this comparable was excluded from the list of comparables. The relevant findings of the co-ordinate bench read as under: " 4.6 We have heard both the parties and perused the records. The segmental data was not available for the assessment year under question of this company. The company is earning revenue from two business segments, namely, software services and software products. However, separate segmental data with respect to the aforesaid two segments is not available in the financial statement. The assessee company cannot be compared with this company as there is not segmental data available. Besides, this there was extraordinary events occurred during the year as the company has acquired M/s. Brainhunter lnc., Canada. Thus, as held by this Tribunal in various decisions companies having extraordinary event has to be excluded”. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 11 of 50 13.15 Persistent Systems & Solutions Ltd Persistent Systems and Solutions Limited is engaged in diversified services such as software consultancy, software product development and system integration services unlike the assessee who is only involved in CSD activities and is hence functionally different. It is seen that apart from functional dissimilarity, this company also own intangibles which is not so in the case of the assessee. Relying on the decision of the High Court of Andhra Pradesh in the case of Intoto Software India (P.) Ltd. (supra), wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider, the TPO is directed to exclude this company from the final set of comparables. 13.16 The Persistent Systems and Solutions Limited is a wholly owned subsidiary of Persistent Systems Ltd. This company is engaged in diversified services such as software consultancy, software product development and system integration services. It was further submitted that this company is a part of Special Economic Zone and is entitled to various incentives provided by the Government. We would also like to submit that segmental accounts in respect of various segments have not been disclosed in the accounts/annual report of this company, wherein the revenues and expenses have been presented in a consolidated form. 13.17 The learned Counsel for the assessee further submitted that in the notes to accounts for revenue recognition it was stated that this company is engaged in (a) Software Development, (b) Licensing of Products, (c) Sale of Software Products and (d) Maintenance Contracts. The Appellant also relies on the decision of ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 12 of 50 the Hon'ble High Court of Andhra Pradesh in the case of Intoto Software India (P.) Ltd.}, wherein it has been held that software product companies owning intangibles could not be compared with the software development services provider. 13.18 The similar view has been taken in the case of A/cate/- Lucent India Ltd. Vs DelT [2016] 74 taxmann.com 105 (De/hi - Trib.} [24-08-2016] 14. The learned AR for the assessee has submitted , that out of the 12 comparables, the assessee is challenging the inclusion of 4 comparables selected by the TPO and confirmed by the CIT (A). i. Acropetal Technologies (Seg). ii. E-Zest Solutions Ltd. iii. ICRA Techno Analytics Ltd. iv. Persistent Systems & Solutions Ltd. FINDINGS OF BENCH 14.1 Firstly we will take E-Zest Solutions Ltd. In this regard, our attention was drawn to Paragraph 165 of the Paper Book wherein the assessee has submitted the objection with regard to the functional dissimilarity and it was submitted as under: ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 13 of 50 1. apart from High Turnover of Rs.916 Crores, the activities carried on by Zylog are • v Elunctionally dissimilar to that of Assessee Company. 10.15. The following company is functionally dissimilar with that of the assessee company S. No Name of the Company ~ ./ 1 E-Zest Solutions Ltd /. /E-Zest Solutions ltd - Funtionallv Dissimilar Operating Revenue 12,70,06,696 op/OC 38.03 e-Zest "~I' --_._----------------------------------_.- The company is into Product Engineering Services / outsourced Product Development, Enrerprise Application Development, Custom software Development, Independent softwar,~ testing Startup services, Web and Mobile / iPhone ApplicQtion Development. E-Zest is a customer focused and technology··driven company providinfi product engineering and enterprise software/application development services that help clients In crofflng holistic value for their software development efforts. SinCE: it is evident from the above that the line of activity of £-lest Soluti(1f)s Led is different from the fine of activity of the assesses business E-Zest is not selected os comparable. Page 9 of 14 r Page 165 ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 14 of 50 14.2 It was the contention of the learned AR that E-Zest Solutions Ltd was held to be into KPO service and the issue has been considered by the Coordinate Bench of ITAT Bangalore, in the case of Blue Yonder India (P), reported in (2021) 123 taxmann.com 32 (Bang.Trib.). 5.2 We have heard the rival submissions and perused the material on record. The Annual Report of e-Zest Solutions Limited for assessment year 2010-2011 (placed at page 527 to 534of the paper book) clearly demonstrates that it is engaged in end to end product development, including product design and development. Thus, it is clearly incomparable to the assessee. Further it has significant inventory (nearly 15% of the income from its operations) which substantiates the assessee’s contention that it is a product development company, and thus incomparable to the assessee which is engaged in rendering routine IT services. In addition, the services rendered by e-Zest Solutions Limited are diverse such as product development, software services, web development, and support services. The company is also engaged in rendering business intelligence and analytical services, which are akin to IT enabled services / Knowledge Process Outsourcing (KPO) services. Since there are no segmental details available in its Annual Report for the above diverse activities, it is apparent that the company is not comparable and the same needs to be excluded from the final list of comparables. In this context, we rely on the order of the Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. v. DCT [(2014) 42 taxmann.com 333 (BangaloreTrib.)] wherein it has been held that e-Zest Solutions Limited is rendering product development and end to end technical services which comes under the category of KPO services and this cannot be compared to software development providers. The Bangalore Bench of the Tribunal in the case of 3DPLM Software Solutions Ltd. was dealing with the assessment year 2009-2009. However, identical situation remains for this assessment year also viz., 2011-2012. On perusal of activities mentioned in financial of e-Zest Solutions Limited, it is clear that the company continued to come under the KPO services. Therefore, the said company is directed to be excluded from the final list of comparables”. 14.3. Therefore, the submission of the learned AR that E-Zest Solutions Ltd be excluded from the list of comparables selected by the TPO/CIT (A). 15. Per contra, the learned DR had drawn our attention to the order of the TPO in page 186 of the paper book wherein it was mentioned as under: “V(B) Discussion on comparables : ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 15 of 50 The taxpayer did not file any objections to the set of comparables proposed by the TPO. The comparables selected by the TPO broadly perform functions similar to the taxpayer and are part of the 11 providers. The functional profile of the taxpayer and the functional profiles of all the comparables selected by the IPO are as under. The taxpayer is engaged in the business of provision of software research, development, implementation and consultancy (referred to as SDS). Zeta USA is involved in the conceptualization and design of the product. The taxpayer and the AE are involved in determining the requirement analysis and functional specifications for the modules to be developed. The taxpayer undertakes software coding and initial testing and is also responsible for the integration of the module developed into the final product. Similarly, the taxpayer is involved in interconnected digital marketing services (referred to as ITES) such as email marketing, search engine marketing, social media marketing and data mining services”. 16. The learned DR had further drawn our attention to page No.159 of the Paper Book, on the basis of this it was submitted by the learned DR that the only objection raised by the assessee before the learned CIT (A) was that E-Zest Solutions Ltd is having high turnover and the TPO adopted a filter of Rs.1.00 crore to infinity and therefore, this comparable namely E-Zest Solutions Ltd is required to be excluded. However, neither the profile, nor the functional similarity of E-Zest Solutions Ltd was disputed by the assessee before the lower authorities. 17. We have heard the rival contentions and perused the material available on record. It is clear from the record of the lower authorities that the assessee has not filed any objection to the comparables selected by the TPO namely E-Zest Solutions Ltd before the TPO. Further, before the CIT (A), the assessee has challenged the exclusion of the E-Zest Solutions Ltd on the basis of the turnover stating that the operating revenue of E-Zest Solutions was Rs.12,07,06,696/-. The primary challenge of the assessee was on account of the turnover and the learned CIT (A), while disposing the objections of the assessee, had categorically recorded the above in the findings at page 26 to this effect: ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 16 of 50 “Regarding functional differences I have observed that the search strategy depicted in the TP study of the appellant and the AO, both searched for comparables which are engaged in software development services immaterial of the vertical/functional or service line in which the company is engaged. Verticals are the industry segments, such as . Banking, Finance, Insurance, Health Care Insurance etc. to which the Company caters to. The horizontals are the functional or service lines which may include but may not be limited to application development and maintenance, package implementation service, independent Validation services, enterprise application services, embedded , software services, web development, internet based applications, e'commerce applications etc. Since the appellant has not considered the verticals & horizontals of the software sector while selecting the comparables, the TPO has also not gone into the verticals/horizontals of the comparable companies. Thus the main search strategy of the taxpayer as well as the TPO / AO has been to identify the companies which are engaged in the software development services. This also has to be kept in view that transfer pricing is not an exact science. It is difficult to find exact comparables particularly under TNMM. This constraint has been accepted by the ITAT, Delhi in the case of ST Microelectronics Ltd wherein the ITAT held: "ALP of an international transaction Cannot be determined 'accurately in accordance with a scientific formula. It is quite difficult to arrive at any firm conclusion with mathematic precision” The ITAT in the case of Deloitte Consulting India Pvt. Ltd (15 ITR (Trib.)573 (Hyd) has also held the same. The ITAT observed: “In our considered opinion, no two comparable companies can be replicas of each other. The application of Rule 108 should be carried out and judged not with technical rigor, but on a broader prospective” ITAT Delhi in the case of CRM Services (2011-TII-86-ITAT-DEL TP, 48 SOT $1 (Del.) has held: “that it is impossible to get comparables with no difference at all” Thus, I do not agree with the contention of the appellant and rejected the submission. Thus, ground No.2.3 is partly allowed”. 18. From the perusal of the above said discussions, it is abundantly clear that the primary focus of the assessee before the lower authorities was on account of higher turnover, and it was not its case of functional dissimilarities. However, as the case may be, the Coordinate Bench of ITAT Bangalore in the case of Blue Yonder India (P) Ltd (Supra) in para 5.2 have excluded the same by holding that E-Zest Solutions Ltd was into KPO Services. However, we may like to point out that from the perusal of the order of the Tribunal ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 17 of 50 in Para 5.2 (supra) Tribunal have only considered annual report for the A.Y 2010-11, whereas A.Y under consideration before us is 2011-12. There is no factual findings given before us or even before the Hon'ble Coordinate Bench in the case of Blue Yonder India (P) Ltd demonstrating on the basis of the financials of E-Zest Solutions Ltd , that the activities of the assessee are dissimilar to that of the E-Zest Solutions Ltd. 19. In the light of the above, we deem it fit and proper to remand this issue back to the file of the CIT (A) for the purpose of considering afresh whether E-Zest Solutions Ltd is having functional dissimilarities with that of the assessee or not. The assessee is directed to produce all the financials including the Annual General Report and other documents to prove that E-Zest Solutions Ltd is functionally dissimilar to that of the assessee. 20. Now we come to other comparables; i.Acropetal Technologies (Seg). ii. ICRA Techno Analytics Ltd. and iii Persistent Systems & Solutions Ltd. Acropetal Technologies (Seg.) In this regard, the learned AR had submitted that these 3 companies are also functionally dissimilar to that of the assessee and further, these three companies are also considered by the Coordinate Bench in the case of Blue Yonder India Ltd (Supra) whereby these 3 companies were also excluded by the Tribunal. 21 Per contra, the learned DR had submitted that the assessee had filed written submissions before the learned CIT (A) and drew our attention to para 10.16 at page 166 of the paper book whereby it was held as under: ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 18 of 50 “The final list of comparables after considering the above submissions would be: S.No Name of company Operating Revenue OP/OC 1 Acropetal Technologies Ltd (Seg) 81,040.16,893 34.59 2 Akshay Software Technologies 11,47,22,877 0.85 3 CTIL Ltd 19,55,81,589 9.73 4 Evoke Technologies P Ltd 14,48,69,912 8.33 5 ICRA Techno Analytics Ltd 16,02,91,000 25.36 6 Kals Information Systems Ltd (Seg.) 2,17,49,052 10.35 7 Persistent Systems & Solutions Ltd 18,94,90,457 21.51 8 R S Software (India) Ltd 1,88,23,82,369 16.35 9 Sankhya Infotech Ltd 42,53,23,163 17.64 Total 144.71 Average 16.08 Less:Working Capital Adjustment 1.02 Adjusted Arm’s Length Margin 15.06 Since the adjusted arms length margin is 15.06%, our margin is 15.02% and our operating revenue+5% works out to 20.77% which is more than the arms length margin of 15.06% as mentioned above, our transactions are benchmarked: Description Amount Arithmetic Mean+5% Operating Revenue 9,86,90,620 10,36,25,151 Operating Cost 8,58,03,836 8,58,03,836 Operating Profit 1,28,86,784 1,78,21,315 OP/OR (%) 13.06% 17.20% OP/OC (%) 15.02% 20.77% 22. It was submitted by the learned DR that the assessee itself has admitted the inclusion of these three companies, then it is not open for the assessee to make a prayer before the Tribunal for exclusion of these companies. 23. In rebuttal, the learned AR has not disputed the above stated fact that though the assessee has not challenged the inclusion of ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 19 of 50 these three companies. However, the assessee can always challenge the inclusion of the companies before the Tribunal. 24. We have heard the rival contentions and perused the available record. Admittedly, the Tribunal is required to decide an issue in accordance with law if the assessee is aggrieved by the order passed by the lower authority as per section 253 of the ACT. Admittedly, once the assessee itself is making a case of inclusion of these 3 companies before the lower authorities and the CIT (A) based on the submission of the assessee is passing the order, then it cannot be stated that the assessee is aggrieved by the order passed by the CIT (A). Since the assessee is not aggrieved by the order passed by the CIT (A) with respect to inclusion of these three companies, therefore, the assessee does not have a right to challenge the order of the CIT (A) for exclusion of these companies before us. In the light of the above, we do not find any error in the order passed by the CIT (A) with respect to these three companies namely I. Acropetal Technologies (Seg).II) ICRA Techno Analytics Ltd. and III) Persistent Systems & Solutions Ltd. Acropetal Technologies (Seg.) . Accordingly, we reject the argument of the assessee. 25. Now the assessee, had also submitted before us that in ground numbers 5 & 6, the assessee is not only challenging the inclusion of the 4 companies but also submitted in the written submission for exclusion of other 5 companies. “ Considering the above submissions and the case laws, we request the Hon'ble Tribunal to exclude the companies as mentioned in Ground No. 6 i Acropetal Technologies See Ground No. 6 v E-Zest Solutions Ltd. Ground No. 6 vi ICRA Techno Anal tics Ltd. and Ground No. 6(ix) Persistent Systems & Solutions Ltd. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 20 of 50 13.0 Without prejudice to the above grounds, we request the Hon'ble Tribunal for the exclusion of the following companies for which detailed submissions were also submitted before the Ld CIT(A) for exclusion of these companies. The list of comparable companies selected by the Ld. TPO and which are requested for exclusion are as under: ITAT Grounds No. Company Name Ground No. 6(vii) Igate Global Solutions Ltd Ground No. 6(viii) Mindtree Ltd Ground No. 6(x) Persistent Systems Ltd Ground No. 6 xii ies Ltd. Sasken Comm.Technologies Ltd Ground No. 6(xiii) Zylog Systems Ltd 14.0 During FY 2010-11 (AY 2011-12), the Assessee Company has earned revenue of INR 9.87 crores (approx.) from provision of software development services. Hence, the Assessee submits that an upper turnover threshold is to be accepted based on the classification provided in the Dun & Bradstreet report under the category of small firms. 15.0 Accordingly, the assessee company has submitted before the Ld CIT(A) to reject the companies having turnover in excess of INR 350 Companies. The Ld CIT(A) has excluded 3 companies and have not accepted the contentions of assessee company for the exclusion of following 5 companies. The turnover of these 5 companies along with their margins are as under: S.No Name of company Operating Revenue OP/OC 1 Igate Global Solutions Ltd 11,92,93,17,000 24.58 2 Mindtree Ltd 8,88,02,00,861 11.79 3 Persistent Systems Ltd 6,29,15,80,000 26.68 4 Sasken Communication Technologies Ltd 4,02,87,78,000 26.99 5 Zylog Systems Ltd 9,15,97,68,067 26.21 In this regard, the assessee submitted the following case law: 15.1 The Hon'ble Bangalore Tribunal in the case of Barracuda Networks India (P.) Ltd. V. DCIT f2021) 31 taxmann.com 337 (Bangalore - Trib.) IT(TP) APPEAL NO.229 (BANG.) OF 2021 held" 14. In view of the aforesaid decision, we hold that companies listed in SI. No.(a) to (g) of Ground.No.4 raised by the Assessee whose turnover in the current year is more than Rs. 200 Crores should be excluded from the list of comparable companies. " ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 21 of 50 15.2 In the case of Aptean India (P.) Ltd. V. DCIT [2021J 132 taxmann.com 253 (Bangalore - Trib.) the Hon'ble held as under: "15. In view of the aforesaid decision, we hold that companies listed in paragraph 8 of this order, whose turnover in the current year is more than Rs. 200 Crores should be excluded from the list of comparable companies. " 15.3 In Capital IQ Information Systems (India) (P.) Ltd v. DCIT [2013J 32 taxmann.com 21 (Hyderabad - Trib.) it was held that "21. On considering the submissions of the assessee in relation to these three companies, we find that the TPO has excluded the companies whose turnover is less than Rs. One Crore, on the ground that they may not be representing the industry trend. That very logic also applies to the companies having high turnover of over Rs.200 crores as against the assessee's turnover of only Rs. 60 crores, and therefore, it would be fair enough to exclude those companies also. " 16.0 Our Detailed submissions for exclusion of above 5 companies are as under: 16.1 Ground No. 6(vii) Igate Global Solutions Ltd: Igate Global Solutions Ltd During the year under consideration, the company has acquired majority equity interest in Patni Computer Systems Ltd. resulting in an extra ordinary activity and also the company owns significant intangible in its name. Additionally, the company is engaged in diverse functions like software services & ITES, there is no segmental breakup of revenue available for the year. Ground No. 6(viii) Mindtree Ltd. Mindtree Ltd: This Company is NSE listed Company. It Delivers technology services and accelerates growth for Global 1000 companies by solving complex business challenges with breakthrough technical innovations. It specializes in e-commerce, mobility, cloud enablement, digital transformation, business intelligence, data analytics, testing, infrastructure, EAI and ERP solutions. Among the fastest growing technology firms globally with more than 200 clients and offices in 14 countries. Data Services, Desktop Application Lifecycle Management, Enterprise & Consumer Product Support, Helpdesk Services, IBM Technologies, Independent Testing, Infrastructure Management and Technical Support, IP Led Services, ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 22 of 50 Knowledge, Knowledge Management Services, Lifecycle Management Services, Lifecycle Support Services, Modelling and Analytics, Performance Engineering. Private Labeled Services, Product Development, Product Engineering Services, Product Testing, Production Application Support, R&D, Semiconductor and Hardware Engineering, Software Engineering, Software Product Engineering, Sustenance Engineering Apart from High Turnover of Rs.888 Crores, the activities being carried out by Mindtree Ltd arc in different line to the activities of the assessee company, Mindtree Ltd is to be rejected as comparable. 16.3 Ground No. 6(x) Persistent Systems Ltd. Persistent Systems Ltd. The assessee company would like to submit that the company Persistent Systems Limited is engaged in software product designing and analytic services and has income from license fee. Hence the same is functionally different from that of assessee company. Also, the segmental information is not available in the annual report of the company for the year under consideration. In absence of segmental details/ information a company cannot be taken into account for comparability analysis. The above view has been upheld by the Hon'ble Chennai ITAT in the case of Symantec Software & Services India (P.) Ltd. [2017J 79 taxmann.com 208 (Chennai - Trib.). wherein the Hon'ble ITA T for the same AY 2011-12 held that "17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis. we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. " ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 23 of 50 S imilar view has been taken by Hon'ble Jurisdictional ITAT (Hyderabad Tribunal) in the case of Syniverse Technologies Service (India) (P.) Ltd Vs DCIT [2021J 123 taxmann.com 258 (Hyderabad - Trib.) wherein the Hon'ble ITAT held that "9. We have considered the rival contentions. As seen from the orders placed on record and also consistent stand taken by the Tribunal in various such cases, we have no hesitation in excluding two companies, Persistent Systems Ltd., and Sasken Communication Technologies Ltd on functional basis.....” 16.4 Ground No. 6(xii) Sasken Communications Technologies Ltd. Sasken Communications Technologies Ltd: We submit that the company is into multimedia product and the research and development in the said year in respect of multimedia wireless broadband and mobile value added services and the breakup of revenue is not available. The relevant screenshots evidencing the same are provided below for your goodselfs easy reference: 10. Research & Development The Company is in the process of setting up a Research & Development Centre at IIT Madras Research Park, Chennal (IITM) to carry out R&D activities towards Sasken's core business. The activities will be structured around, inter alia, various themes like wireless broadband accelerated migration of software to new silicon platforms, user experienced of software for mobile devices, context awareness of network applications, etc. Each theme will be pursued by a team comprising of a senior researcher and a development team”.. (Source: page no. 104 of Annual Report) The same was held good in the case of Symantec Software & Services India (P.) Ltd. (supra) wherein the Hon'ble ITA T held that. 'The company Sasken Communication Technologies Ltd. is functionally non-comparable as they are into multimedia product and the research and development in the said year in respect of multimedia wireless broadband and mobile value added services and the break-up revenue is not available and cannot be considered as comparable. Thus, the TPO is directed to exclude this company from the list of comparables. [Para 12]. " ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 24 of 50 The similar view has been taken by Hon'ble Jurisdictional ITAT (Hyderabad Tribunal) in the case of Syniverse Technologies Service (India) (P.) Ltd Vs DCIT [2021J 123 taxmann.com 258 (Hyderabad - Trib.) wherein the Hon'ble ITAT held that "9. We have considered the rival contentions. As seen from the orders placed on record and also consistent stand taken by the Tribunal in various such cases, we have no hesitation in excluding two companies, Persistent Systems Ltd., and Sasken Communication Technologies Ltd on functionality basis " 16.5 Ground No. 6(xiii) Zylog Systems Ltd. Zylog Systems Ltd: The company is engaged in provision of the various business activities and no segmental result for software development services is available. The company earns it revenue from software development services and also from sale of software products. Zylog Systems derives its revenue primarily from software development services, consultancy services, projects and e-governance projects. Also, it is pertinent to note that company does not meet the software development services to revenue filter adopted by the learned TPO as it consists of only 21.6%. Based on the above fact the Hon'ble Delhi Tribunal in the case of Fiserv India (P.) Ltd Vs A CIT [2020J 121 taxmann.com 2]] (Delhi - Trib.) has excluded this company from the final list of comparables. "15.3 We have heard rival submission of the parties and perused the relevant material on record. On perusal of the profit and loss account of the company which is available on page 1051 of the paperbook, we find that the Revenue of Rs. 899,11,06,874/- has been shown from Software Development services and the products and no separate revenue or segmental result for software development services have been reported in the annual report. In absence of any separate segmental result of software development services available in public domain, we reject the company as comparable on functional dissimilarity at entity level. Accordingly, we direct the Ld. AO/TPO to exclude this company from the set of the final comparables. " Extra Ordinary Event: We would like to submit that zylog has acquired M/s. Brainhunter Inc, Canada during the year. Hence, being an extra ordinary event, Zylog Systems Ltd cannot be considered as comparable. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 25 of 50 The relevant screenshots evidencing the same are provided below for your goodselfs easy reference: 3. The company acquired the business of Brainhunter Inc. and its wholly owned subsidiaries located in Canada in the year 2009-10 through its Canadian subsidiary Zylog Systems (Canada) Ltd. by a Court approved Companies' Creditors Arrangement Act. The consideration for acquisition includes a scheme satisfying the note holders who were.' owed SUIl1S aggregating to Canadian $ 10,249,262 by Zylog Systems (Canada) Ltd. issuing notes (The Affiliate Notes] which would eventually be taken over by Zylog System, Ltd. by an issue of notes (Zylog Notes) fc'pbcing the Affiliate Notes. Accordingly, Zylog Systems Ltd. undertook to take over the satisfaction of the liability by granting the note holders an option for being allotted shares in Zylog Systems Ltd. at a price of 991 subject to the approval of the shareholders and regulatory authorities on the "Due Date" which would fall after the end of the accounting year 2009-10.This would increase the equity capital of the company by 4,56,049 equity shares. If the notes were not convened into shares, Zylog Systems Ltd. will redeem the notes at 40% of the principle amount of Canadian $10.249262. ” 26. Bench had enquired from the learned AR for the assessee company, “ whether any submissions made before the learned CIT (A) ” . In response, the learned AR stated that these companies were not challenged on the basis of functional dissimilarities or otherwise before the lower authority . 27 Further, it was submitted by the learned DR that the assessee has not raised any ground in the grounds of appeal challenging the turnover filter applied by the TPO/CIT(A) in the ground of appeal. It was submitted by the learned DR in the light of the above that inclusion of these companies at this stage is not permissible. 28. We have heard the rival contentions and perused the material available on record. Undisputedly, there is no challenge by the assessee before us that the filter applied by the TPO in the TP study ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 26 of 50 was incorrect or inappropriate and does not have sanction of law. In our view, the assessee was required to maintain the TP analysis document in terms of law and even the assessee has not filed any TP study initially before the TPO and therefore provision of section 92C( 3) were invoked. Thereafter a show cause notice dated 14.7.2014 was issued to the taxpayer, in response thereof the reply along with TP study was filled . Further, the assessee has not challenged any of these comparable selected by the TPO during the proceedings before the TPO and even before the learned CIT (A) . the challenge of the assessee was only with respect to 8 comparable , out of which 3 were excluded by the CIT(A) and remaining 5 comparable were included by the CIT(A) . 29. The learned CIT (A) while passing the impugned order have considered the turnover filter in great details and after considering the turnover filter and the legality of the turnover filter, have excluded the three comparables namely Infosys, L&T Infotech and Tata Elexi Ltd. The CIT (A) in Para 13.5 of his order had mentioned as under: “13.5 With regard to remaining 5 companies, I do not agree with the contention of the appellant company and hold that those 5 companies are to be taken as comparables. The assessee argued that these companies are functionally different. Regarding functional differences I have observed that the search strategy depicted in the TP study of the appellant and the AO, both searched for comparables which are engaged in software development services immaterial of the vertical/ functional or service line in which the company is engaged. Verticals are the industry segments, such as - Banking, Finance, Insurance, Health care Insurance etc. to which the company caters to. The horizontals are the functional or service lines which may include but may not be limited to application development and maintenance, package implementation service, independent validation services, enterprise application services, embedded software services, web development, internet based applications, e-commerce applications etc. Since the ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 27 of 50 appellant has not considered the verticals & horizontals of the software sector while selecting the comparables, the TPO has also not gone into the verticals/ horizontals of the comparable companies. Thus the main search strategy of the taxpayer as well as the TPO / AO has been to identify the companies which are engaged in the software development services. This also has to be kept in view that transfer pricing is not an exact science. It is difficult to find exact comparables particularly under TNMM. This constraint has been accepted by the ITAT, Delhi in the case of ST Microelectronics Ltd wherein the ITAT held: "ALP of an international transaction cannot be determined 'accurately in accordance with a scientific formula. It is quite difficult to arrive at any firm conclusion with mathematic precision." The ITAT Hyderabad in the case of Deloitte Consulting India Pvt. Ltd (15 ITR )(Trib.)573 Hyd has also held the same. The ITAT observed: “In our considered opinion, no two comparable companies can be replicas of each other. The application of Rule 108 should be carried out and judged not with technical rigor, but on a broader prospective”. ITAT Delhi in the case of CRM Services (2011-TII-86-ITAT-DEL-TP, 48 SOT $1 (Del) has held: “that it is impossible to get comparables with no difference at all”. Thus, I do not agree with the contention of the appellant and rejected the submissions. Thus ground No.2.3. is partly allowed. 30. In our view, once the assessee has not challenged the functional dissimilarities of these 5 companies before the lower authorities, now it is not permissible for the assessee to raise this issue at this stage, as the assessee was not aggrieved by the order passed by the CIT(A) qua these 5 companies . In our view, we do not find any merit of considering exclusion of these three companies and accordingly we dismiss the challenged raised by the assessee for the exclusion of these 5 companies. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 28 of 50 In the result the ground 5 & 6 is partly allowed. We remand the issue of exclusion of E-ZEST SOLUTIONS to the file of CIT(A) , however in respect to the claim of exclusion of other companies , we reject the ground raised by the assessee for the reasons mentioned herein above . Ground no 7 & 8 31. With regard to Grounds 7 & 8 pertains to the receivables, the learned AR had drawn our attention to the order passed by the CIT (A) whereby in page 44, the learned CIT (A) at para 15.3. held as under: “15.3 Reasonable Rate of Interest- The rate at which interest is levied continues to be a sore point. There is no unanimity on the rate of interest to be considered on such transaction. In my opinion a reasonable period may be provided as interest-free period and no interest be calculated for such interest free period. Interest is to be calculated for the period overflowing the interest free period. The ALP interest may be calculated after providing appropriate mark-up for the nature of loan, term of loan, credit standing of the AE, security of loan etc., The funds parked with Zeta Interactive USA is not in the nature of a loan with all the legal features of a loan transaction. This is in fact parking of funds with the AE by not collecting the receivables within the normal period. Therefore, the rates of interest are applicable to formal loans cannot be made applicable to the present case. As far as the present case is concerned, in calculating the cost factors of the assessee in India, it is more appropriate to consider the potential loss suffered by the assessee in India by not bringing the receivables within the normal period. In fact, the said potential loss of the assessee in India is the ALP factor which contributes to the additional income attributable to the assessee. Therefore, instead of the US rate or LIBOR, it will be justified in adopting the Indian rate. The TPO adopted rate of 12 %but did not give any basis for that. It will also not be proper to adopt PLR of the State Bank of India. This is because if the funds were brought in time and those funds were properly deployed, the assessee company may earn an income at the maximum rate applicable to deposits and not at the rate applicable to loans. Thus I hold that the period chargeable to interest has to be recomputed and it is appropriate to adopt a reasonable rate that would be available to the assessee on short-term deposits. Thus, I hold that the period chargeable to interest has to be recomputed and a reasonable deposit rate has to be applied for calculating the interest. Taking into consideration all aspects of the case like interest-free period and piece-meal remittance of the receivables, I fix the ALP interest rate at 8% and direct the Assessing Officer to compute the additional income at the rate of 8 % on Rs.5,84,94,810/- as against 12% adopted by the Assessing Officer”. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 29 of 50 32. It was submitted by the learned AR for the assessee that the CIT (A) had erred in fixing the interest at 8% without any basis. In this regard, the written submissions made by the assessee reads as under: “17.0 Trade Receivables 17.1 We would like to submit that the receivables arise in the course of business and arc not to be treated as loans for levy of interest. Whereas arm's length price adjustments can be made only in respect of an 'international transaction' as per section 92B of the Act. Outstanding receivables relates to principal transaction. The explanation brought by amendment in Finance Act, 2012 even though retrospective, does not cover outstanding receivable transaction as the word 'capital financing' used there particularly refers to loans or advances given for capital financing. 17.2 Whereas in Assessee's case, these are outstanding balances for the sale of services but not in the nature of capital financing. The words are to be interpreted invoking the principles ejusdem generis and thus the outstanding receivables from AE cannot be equated to capital financing as amended by the provisions of the Act. The relevant extract from Explanation (i) (c) of section 92B of the Act is given below for ready reference: Explanation: (i) ' .. , '.' .. , .. , , .. , .. , , , , '.' '.' , .. , .. ' , .. , . . , , . (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; ., .. ,. " The Hon'ble Tribunal in Pegasystems Worldwide India Pvt. Ltd ('Pegasystems') vide 1. T.A. No. 17581HYD12014 (para no. 17.3) held that outstanding receivables on account of services cannot be equated with capital financing as provided in the explanation by the amendment by Finance Act, 2012 retrospectively. The relevant extract is given below: ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 30 of 50 "17.3 As rightly pointed out by the Ld. Counsel, the outstanding receivables on account of services cannot be equated with capital financing as provided for in the Explanation by the amendment by Finance Act, 2012 retrospectively " 17.3 Accordingly, we submit that the amounts outstanding from AEs have been/shall be settled by it with the associated enterprises on an ongoing basis in the normal course of business having regard to economic and commercial factors. The arm's length price determination for the said consequential receivables is subsumed within the arm's length price determination of the principal international transaction itself. 17.4 We also submit that extending credit period for realization of revenue from the AE is a closely linked transaction with the transaction of selling products to the AB and therefore cannot be treated as separate international transaction. 17.5 Section 92(1) of the Act and the provisions of Chapter X can be applied only for computation of income arising from an international transaction having regard to the arm's length price. When a transaction does not result in any income or no income arises from the transactions then the same cannot be the subject matter of computation of arm's length price as per the provisions of Chapter X. The term "any income" arising from an international transaction and the computation of income under Chapter X at "Arm's Length" is subject to the condition that an income arises from the international transaction. The transaction of extending credit period to the AB does not give rise to income to Company and therefore in the absence of any income arising from the transaction, the same cannot be computed having regard to the arm's length price. The above view has been upheld by Hon'ble Bangalore ITAT in the case of Lotus Labs Pvt Ltd [TS-624-ITAT-2017(Bang)-TPJ wherein the Hon'ble Bangalore ITAT set aside matter back to AO/TPO with a direction "to reconsider the issue of transfer pricing by clubbing and aggregating this transaction with the main transaction of providing service to the AE. 17.6 The above view has been upheld in various cases by the Hon'ble jurisdictional Hyderabad Tribunal some of them are as follows: a. Dhanush Infotech Pvt Ltd Vs ACIT. ITA No. 2082/Hyd/2017 (AY 2013-14) ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 31 of 50 b. Open Text Corporation India Pvt Ltd Vs DCIT. ITA No. 232/Hyd/16 (AY 201112) c. M/s Hexagon Capability Centre India Private Limited Vs ACIT, ITA Nos. 251/HYD/2016 & 841HYD/2017 (AY 2011-12 and A~2.0~12- 13). 17.7 Further, once the TNMM method has applied it takes into account all the income and expenditure of the entity and takes the net margin as profit level indicated. Further, we wish to submit that TNMM takes care of the interest income if any forgone by the assessee on account of late payment received from the associated enterprise, therefore once the TNMM method and its results are accepted, no further adjustment on account of notional interest from associated enterprise shall be made. 17.8 The similar view has been taken in the recent case of Bisazza India (P,) Ltd Vs DCIT {2018) 97 taxmann.com 432 (Ahmedabad - Trib.) wherein the Hon'ble Tribunal held that: "9. By the same logic, even making an adjustment for interest on excess credit allowed on sales to AEs will vitiate the picture, inasmuch as what has already been factored in the TNMM analysis, by taking operating profit figure which incorporate financial impact of the excess credit period allowed, will be adjusted again separately as well. Of course, in the example used by Hon'ble Delhi High Court, the AMP expenses are deductibles in computation of operating profit but that does not make any material difference because the interest levy for late realization of debtors, being inextricably connected with the sales, is also part of operating income. In the case of Nirma Industries Ltd. v. Dy. CIT [2006J 283 ITR 402/155 Taxman 330 (Guj.), Hon'ble High Court has dealing with the nature of interest on debtors, held it to be integral to business income. The same is the principle for the transfer pricing cases to that extent interest is to be taken as integral to sale proceeds, and, as such, includible in operating income. When such an interest is includible in operating income and the operating income itself has been accepted as reasonable under the TNMM, there cannot be an occasion to make adjustment for notional interest on delayed realization of debtors. One can understand separate adjustment for excess credit period when the arm's length price for exports has been benchmarked on the CUP basis but not in a case when the arm's length price of the exports has been benchmarked on the basis of TNMM The very conceptual foundation, for separate adjustment for delayed realization of debtors and on the facts of this case, is thus devoid of legally sustainable merits. " 17.9 Further, we have relied on the following case laws wherein it was held that receivable from AE cannot be treated as an independent international transaction as it subsumed in the principal international transaction with the AE. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 32 of 50 17.10 In the case of ERM India (P.) Ltd. v. National e-assessment Centre, New Delhi {202l J 132 taxmann.com 220 (Delhi - Trib.) the Hon'ble Delhi Tribunal held: "11. From the above, it is, therefore, clear that when once the working capital adjustment is given, it subsumes the interest on receivables and no separate benchmark for it has to be made. Respectfully following the view taken by the Hon'ble jurisdictional High Court in the case of Kusum Healthcare (supra), we hold that the addition made on account of interest on receivables cannot be sustained. " • Kusum Healthcare Pvt. Ltd. Kusum Healthcare (P.) Ltd. Vs. ACIT [2015} 62 taxmann.com 79 (Delhi - Trib.)" (Para 7 to 10) "10. The above analysis empirically demonstrates that the differential impact of working capital of the assessee vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified . 13. Following the orders of the Tribunal, we set aside this issue to the record of the Assessing Officer / Transfer Pricing Officer and direct to re-do the exercise of determination of arm's length price in the light of the above decisions of the Tribunal. The grounds raised in this cross objection are allowed for statistical purposes. Further this view has been upheld by the Hon'ble Delhi High Court in ITA 765 of2016 order dated April 25, 2017. • The Hon'ble Jurisdictional Hyderabad Tribunal in the case of GSS Infotech Ltd vs. Assistant Commissioner of Income-tax, Circle-2(2), Hyderabad [2016} 70 taxmann.com 356 (Hyderabad - Trib.) in a recent judgment held that: "We are of the opinion that no interest can be levied, just because amounts are shown as 'outstanding'. Accordingly, we cancel the interest levied and allow assessee's contentions. Grounds are considered allowed. " • Dell International Services India Pvt. Ltd - I.T.(T.P.) A. No.308/Bang/2015 (para 7) "7 We make it clear that if after giving the necessary adjustment the international transaction of the assessee is found at arm's length then there is no question of any separate adjustment on account of allowing the credit period on the receivable from AE . " ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 33 of 50 • Tally Solutions Pvt. Ltd. - I.T.(T.P) A. No.1364/Bang/2011 (para no. 5) "5 Following the earlier orders of this Tribunal, we hold that extending credit period for realization of sales to the AE is a closely linked transaction with the transaction of providing services to the AE and therefore cannot be treated as an individual and separate transaction of advance or loan. Accordingly, we direct the A.O/TPO to redo the exercise of determination of ALP by considering the credit period allowed in realization of sales proceeds as closely linked transaction with the transaction of providing services to the AE and therefore both has to be clubbed and aggregated for the purpose of determination of ALP. " The Hon'ble Bangalore Tribunal in the case of Ingersoll Rand (India) Ltd Vs. DCIT Bangalore [2016) 67 taxmann.com 328 (Bangalore - Trib.) in a recent judgment held: "35. We have heard both the parties. We find that the coordinate Bench of this Tribunal in the assessee's own case for the AY 2006- 07 in Ingersoll-Rand (India) Ltd. v. Asstt. C1T [201 5/ 57 taxmann.com 413 (Bang.) while dealing with an identical issue, has held as follows:- "11.2.2 On the first issue of taxability of notional income, the assessee submitted that the TPO has tried to bring within the ambit of Section 92, a transaction that is non-existent and in the absence of any provision in the Act, the tax-payer cannot be subjected to tax in respect of 'hypothetical income'. In the case on hand, since no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AEs, the question of applying the provisions of Section 92 of the Act does not arise. In support of this proposition, the assessee placed reliance on the following judicial pronouncements :- 1. Vodafone India Services Pvt Ltd v. UOI (W.P No. 871 of 2014) 2. Evonik Degussa p.Ltd v. ACIT - OSD, Circle 3(1) (ITA No. 7653/Mum/2011) of 1TAT, Mumbai Bench 11.2.3 It was also submitted by the assessee that it had not charged any interest for delayed realisations even in the case of Non-AE transactions. It was submitted that the debts were outstanding with both the AEs and Non-AEs for a period exceeding the credit period purely because of business reasons and that this is a common business practice prevailing in the industry and the delay if any in the payment is not due to extension of credit period by the assessee to its AEs. In this regard, the assessee placed reliance on the ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 34 of 50 decision of the Hon'ble High Court of Bombay in the case of CIT v. Indo American Jewellery Ltd., in ITA No. 1053 of 2012. 11.2.4 The assessee further made the following submissions :- The TPO had mentioned, in his order under Section 92CA of the Act, that debts outstanding for more than 6 months is considered for making the T.P. Adjustment towards notional interest. However, the actual adjustment has been made on the total amount of receivables. In this regard, it was submitted by the learned Authorised Representative that there were no receivables from AEs outstanding for more than 6 months. It was submitted that if at all any adjustment had to be made, the notional interest is to be computed on the net receivables after netting off payables to all the AEs and not only to the holding company, as taken by the TPo. It was submitted that the TPO has erred in adopting an interest rate of 14% by stating that in terms of the financial health, the AEs of the assessee are not considered fit to be returned even as BBB (Moderate Safety) as per CRISIL rating. Having so stated, the TPO arbitrarily concluded that the interest rate for BBB rated corporate Bond rates at 11.45% and with an upward adjustment of 20% to arrive at the conclusion that the rate of interest of J 4% is reasonable. 11.3 Per contra, the learned Departmental Representative supported the orders of the authorities below. 11.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision cited and placed reliance upon. We find that the decision of the ITAT, Mumbai Bench, in the case of Evonik Degussa P. Ltd. v. AC1T - os/), Circle 3(1), Mumbai (ITA No. 7653/Mum/2011, dt.21.11.2012) of ITAT, Mumbai Bench is squarely applicable to the facts of the case in the case on hand. In this decision the ITA T, Mumbai Bench at para 28 thereof has held as under: "28. After carefully considering the rival submissions and the orders of the TPO as well as the direction of the DRP, we find that the assessee has no interest liability and it does not have any external borrowings. Even if the payments have been made by the AE beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment. From the summary of payment submitted by the learned Counsel, it is seen that the billing is done ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 35 of 50 on quarterly basis and, accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the AEs only. Moreover, the T.P. Adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case and is, accordingly, deleted. " 11.4.2 Following the above decision of the ITAT, Mumbai Bench in the case of Evonik Degussa India P. Ltd. (supra), we also hold that the addition on account of notional interest relating to alleged delayed payment in collection of receivables from AEs is not called for. However, as can be seen from the extract of the decision reproduced above, the above decision has been rendered in the factual context that there has been no agreement for charging interest on delayed payment. We, therefore, deem it appropriate to remand this issue back to the file of the Assessing Officer / TPO for examination as to whether there was any agreement for charging interest on late payments or not and if it is found that there was no such agreement, then the T.P. Adjustment made in this regard requires to be deleted. As this issue has been decided, in principle, in favour of the assessee by placing reliance on the aforesaid decision of the ITAT, Mumbai Bench (supra), it is not necessary for us to adjudicate on the other grounds of appeal raised on this issue. Consequently, the grounds raised at S. Nos. 1 0 to 13 relating to the issue of interest on receivables are disposed off accordingly. ' 36. Respectfully following the aforesaid decision of the coordinate Bench of this Tribunal cited supra in assessee's own case for the AY 2006-07, we are of the view that the lower authorities erred in making TP adjustment on account of notional interest on outstanding receivables from AEs and hence the assessee's ground(s) of appeal on this issue is allowed. • Det Norske Veritas AlS Vs. ADIT International Taxation Mumbai {2016] 67 taxmann.com 16 (Mumbai - Trib.) "The consideration as to how the assessee would have received interest if money was given to an outsider is irrelevant because it is not a case of extending loan or placing deposit, rather it is a case of amount becoming due as a result of commercial transaction. In any event, when international transactions have been benchmarked on the basis of TNMM, and interest on delay in realization of amounts ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 36 of 50 is only incidental to such transactions rather than a standalone transaction, such an adjustment cannot be made independently. For this proposition, we find support from a coordinate bench decision in the case of Micro Ink Ltd. v. Addl. e1T [2015/ 63 taxmann.com 353 (Ahd.). In the light of the above discussions, and bearing in mind entirety of the case, we deem it fit and proper to delete the impugned ALP adjustment of Rs 7,20,110. The assessee gets the relief accordingly. " • Micro Inks Ltd v. Asstt. CIT [2013] 36 taxmann.com 50/144 ITD 610 (Ahd.) The Hon'ble IT A T observed the following in the judgment: "Para 20 _ The only other ALP adjustment in appeal before us is with respect to what the authorities below have treated as, excess credit period allowed to Micro USA. This adjustment must be deleted for the short reason that it was part of the arrangement that specified credit period was allowed and thus the cost of funds blocked in the credit period was inbuilt in the sale price. " In view of the above, we reiterate that receivables cannot be considered as a separate international transaction, but arises as a result of the international transaction. Hence the same will have to be aggregated for the purpose of economic analysis. Thus, it is incorrect to consider it as a separate international transaction for determination of arm's length price since the receivables have already been accounted for and subsumed with the principal international transaction. 17.11 Also, in the recent case of Avnet India Ltd v. DCIT [TS-629- ITAT-2015(Bang)-TP), the Hon'ble Bangalore Tribunal ruled that interest on delayed realization of sale proceeds from AE is not a separate international transaction but an integral part of sale made to AE. It further holds that "there can be no separate international transaction of 'interest' in the international transaction of sale. Early or late realization of sale proceeds is only incidental to transaction of sale, but not a separate transaction in nature" 17. 12 Further, in the case of Mastek Ltd. v. Addl. CIT [TS-127-ITAT- 2012(Ahd)-TP), the Hon'blc Ahmedabad Tribunal held that OECD TP Guidelines subscribe that to ensure a healthy relationship and to maintain a long business transaction, such charging of interest is being ignored commonly by businessmen. In view of the above Guidelines and further, in view of the fact that the AEs were not ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 37 of 50 recovering interest from third parties for late recoveries, there was no rationale to inflict upon the assessee, merely on presumption that it ought to have charged interest from its AEs. Therefore, TP adjustment made by the TPO was to be deleted. 17.13 Based on the above we request your goodself not to consider receivables as a separate international transaction. 17.14 The Ld. CIT(A)/TPO ought to have appreciated that the receivables arise in the normal course of business and are not to be treated as loans for levy of interest. 17.15 Without prejudicial to our above submission, we would further like to submit that even if the interest on trade receivables is considered as separate international transaction the interest on delayed receivables shall be calculated only after allowing the credit period as specified in invoice. 17.16 Further, we would like to submit that considering the trade receivables as loan or advance given to AEs is not correct as per law, without prejudice to our above arguments even if the receivables are considered as loan or advance given to AE then the interest rate that to be charged shall not exceed average Libor rate existing at that period. 17.17 The similar view has been upheld by the Hon'ble Rajasthan High Court in the case of CIT vs Vaibhav Gems Ltd [2017] 88 taxmann.com 12 (Rajasthan) wherein the Hon'ble High Court held that "10. Regarding LIBOR rate plus 2% on account of interest free loans provided by the appellant to its associated enterprises, in the view of the observations made by the Delhi High Court in para no.14 as reproduced above, the same is required to be answered in favour of the assessee. 11. Regarding ITA no. 149/2015 preferred by the assessee in view of the Delhi High Court judgment (para no. 14), the international transaction is required to be accepted, therefore, tribunal has committed serious error. The assessee will be entitled for the benefit of average LIBOR rate existing at that time which was 0.79% and addition of adhoc 2% is not proper. In that view of the matter, the addition of 2% interest in the income is required to be quashed and set aside. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 38 of 50 12. The appeal and cross objection of the assessee stands allowed to the aforesaid extent. 13. All the issues are answered in favour of the assessee and against the department. Further, Supreme Court has endorsed the above judgment by dismissing the Special Leave Petition ("SLP") filed by the revenue in the case of CIT Vs Vaibhav Gems Ltd [2018) 99 taxmann.com 2 (SC). 17.18 Therefore, based on the above se decision even if your goodself consider the trade receivables as a separate international transaction, we pray your good office to consider average LIBOR rate for calculation of interest. 17.19 The similar view has been upheld in the recent case Open Text Corporation India (P.) Ltd Vs ITO [2021] 127 taxmann.com 399 (Hyderabad - Trib.) wherein the Hon'ble ITAT held that : "2. The assessee's sole substantive grievance pleads that the learned lower authorities have erred in law and on facts in making Arm's Length Price (ALP) adjustments of Rs. 7,32,48,576/- pertaining to interest on receivables qua its international transactions with the overseas Associated Enterprise (AE). Suffice to say, it transpires at the outset that we need not dwell deeper qua the relevant facts pertaining to the instant issue. We find that assuming but not accepting the learned lower authorities have rightly found the assessee's interest receivables as beyond the period involving uncontrolled transactions, the impugned adjustment is not liable to be sustained for the sole reason that the same has been made not as per LIBOR rate applicable in case of international loans but after taking State Bank of India's prime lending rate @14.75% in the Transfer Pricing Officer's (TPO) order and upheld to that @ 4% to 9.25% as applicable in case of the very bank's domestic short term deposits involving 7 - 554 days; as the case may be. 2.1 Learned CIT-DR's vehement contention is that the TPO as well as the DRP have rightly taken the foregoing SBI rate's benchmark involving the short term deposits. 2.2 We find no merit in the instant argument as such a short term deposit cannot be taken at par with an international transaction u/s.92B of the Act since the latter involves foreign currency and overseas market conditions. In addition to this, learned lower authorities have also not adopted any uncontrolled party/comparable in the very segment as well so as to come to the ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 39 of 50 conclusion that the assessee's receivables in case of overseas AEs involved more than the market practice of reasonable time period. We keep in mind all these clinching aspects and direct the TPO to delete the impugned ALP adjustment in issue. The assessee's former substantive ground stands accepted in the above terms. " Further, in the case of Value Momentum Software Services Private Limited fTS-213ITA T-2021 (HYD)-TP) the Hon'ble Jurisdictional ITAT observed that: "Hyderabad ITAT deleted ALP adjustment in respect of interest on receivables provided to overseas AEs for AY 2013-14. Assuming but not accepting, ITAI' found that the lower authorities had rightly found assessee's interest receivables as beyond the period involving un- comparable transactions. In this context, ITAI' stated that the impugned adjustment was not liable to be sustained for the sole reason that the same had been made not as per LIBOR rate applicable in case of international transactions but after taking SBI's prime lending rate (PLR) @14.45% in the TPO order and upheld to the extent between 6.5% to 8% as applicable in case of domestic term deposits. Regarding Revenue's contention that TPO as well as the DRP have rightly treated the foregoing benchmark as per the short term deposit rate in the SBI, ITAI' found no merit in the same on the premise that such a short term deposit cannot be taken at par with an international transaction u/s.92B since the latter involves foreign currency and overseas market conditions. ITAI' also stated that the lower authorities had not adopted any comparable in the very segment as well so as to come to the conclusion that assessee's receivables in case of overseas AEs involved more than the market practice of reasonable time period. Accordingly, ITAI' deleted the ALP adjustment of Rs.1. 20 crores. " 17.20 Further, without prejudice to our above arguments even if the receivables are considered as loan or advance given to AE then "No separate adjustment for overdue receivables from AE if TNMM is MAM". 17.21 The similar view has been taken in the recent judgement of Hon'ble Hyderabad Tribunal in the case of Axis Clinicals Ltd Vs ACIT [2021J ITA No. 436IHYDI2021 (Hyderabad - Trib.) wherein the Hon'ble Tribunal held that "5. Next comes the later issue of Interest-on receivables involving arm's length price (ALP) adjustment of Rs.20,20,420. Learned department representative fails to dispute that although the TPO has rightly quoted the foregoing statutory provision for treating interest ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 40 of 50 on trading receivables as an international transaction (supra), the fact remains that he had adopted assessee's inter company agreement with the Associated Enterprise (AE) concerned only as comparable(s). Case law Technimont Private Limited in ITA No.487/MUM/2017 (TS-880-HC 2018-Bom-TP) (Mum) and holds that an AE itself could not be taken as a comparable since lacking uncontrolled transactions Coupled with these facts that the impugned adjustment has been made as per 561 short-term deposit rates only which are not applicable in international transactions. We accordingly direct the TPO to delete the impugned assessment. 17.22 The similar view has been taken in the recent judgement of Hon'ble Hyderabad Tribunal in the case of Synergies Castings Ltd Vs ACIT [2021) ITA No. 285/HYD/2021 (Hyderabad- Trib.) wherein the Hon'ble Tribunal held that "4. Next comes the latter issue of ALP adjustment pertaining to interest on receivables to the tune of Rs.82,66,546/- emanating from the order of Transfer Pricing Officer's (TPO's) and DRP's directions going by interest rate@7.5% as per SBI domestic term deposits returns. Suffice to say, it transpires at the outset that we need not delve much deeper qua the relevant facts pertaining to the instant issue. We find that assuming but not accepting that the Id. lower authorities have rightly found the assessee's interest receivables as beyond the period involving uncontrolled transactions, the impugned adjustment is not liable to be sustained for the sole reason that the same has not only been made as per 'LIBOR' rate applicable in case of international transactions after taking State Bank of India's term deposit(s) rate only but also no comparable to this effect in the very segment has been found so as to form the necessary benchmarking in uncontrolled circumstances. The impugned ALP adjustment of Rs.82, 66,546/- is directed to be deleted therefore. " 33. Per contra, the learned DR had submitted that the total turnover of the assessee company was Rs.9,00,86,960 against which the trade receivable was Rs.5,84,94,810. It was submitted by the learned DR that more than 60% of the total turnover of the assessee was due and receivable from the AE and the contention of the assessee that the LIBOR+200 points is required to be charged as against the interest of 8% cannot be accepted. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 41 of 50 FINDINGS OF BENCH 34. We have heard the rival contentions and perused the material available on record including the documents and submissions made before us. Before we deal with the issue, we would like to record the three judgments passed by High Courts on this. 35. In the case of Kusum Health Care (P.) Ltd.* [2018] 99 taxmann.com 431 (Delhi), Delhi High court had held as under :- 10. The court is unable to agree with the above submissions. The inclusion in the Explanation to section 92B of the Act of the expression "receivables" does not mean that dehors the context every item of "receivables" appearing in the accounts of an entity, which may have dealings with foreign associated enterprises would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee will have to be studied. In other words, there has to be a proper inquiry by the Transfer Pricing Officer 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 associated enterprise, the arrangement reflects an international transaction intended to benefit the associated enterprise in some way. 11. The court finds that the entire focus of the Assessing Officer was on just one assessment year and the figure of receivables in relation to that assessment year can hardly reflect a pattern that would justify a Transfer Pricing Officer concluding that the figure of receivables beyond 180 days constitutes an international ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 42 of 50 transaction by itself. With the assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this court in CIT v. EKL Appliances Ltd.[2012] 209 Taxman 200/345 ITR 241/345 ITR 241(Delhi). 36. In another decision Mckinsey Knowledge Centre India (P.) Ltd. [2018] 96 taxmann.com 237 (Delhi), HIGH COURT OF DELHI held as under :- “ 33. It was similarly held in BT e-Serv (India) (P.) Ltd. v. ITO [2017] 87 taxmann.com 251 (Delhi - Trib.) as follows: "22...The argument that assessee is an interest free entity and does not pay any interest and therefore no interest shall be imputed in the outstanding invoices is also devoid of merit because it is not a case of allowance of interest expenditure in the hands of the assessee but an 'international transaction' to be benchmarked at arm's length. It is a case of determination of arm's length price of a transaction. Undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act, 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an 'international transaction'. The natural corollary would be of imputing interest on such 'capital financing', if same is not charged at arm's length. Therefore, ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 43 of 50 we reject the contention of the assessee that outstanding receivable is not an 'international transaction' and therefore, hence, according to us, interest on it requires to be imputed." Thus, this is a redundant contention, because as has been highlighted by the ITAT, by a plain reading of the (retrospectively applicable) amendment that introduced the Explanation to section 92B of the Act by Finance Act, 2012, it is determinable that if there is any delay in the realization of a trading debt arising from the sale of goods or services rendered in the course of carrying on the business, it is liable to be visited with transfer pricing adjustment on account of interest income short charged/uncharged. Hence, the assessee's contention that the ITAT erred in concluding that charging of interest on delayed receipt of receivables is a separate international transaction which requires to be benchmarked independently, is incorrect.” 37. In the case of The Pr Commissioner Of Income-Tax vs M/S. Amd India Pvt. Ltd. in I.T.A.No.274/2018 DATED THIS THE 31ST DAY OF AUGUST 2018 Karnatka High Court had held as under :- 11. Hence, we first decide this aspect as to whether this is an independent international transaction or not. In our considered opinion, in respect of agreed credit period which is 30 days in the present case, there is no independent international transaction because the effect of the credit to that extent is factored in the agreed prices. But for extra credit, the effect of the credit to that extent cannot be factored in the agreed prices because it is not even known at the stage as to how extra credit will be allowed and therefore, that is an ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 44 of 50 independent international transaction and hence, separate bench making has to be done and TP adjustment is to be made as per law. This is worth noting that by allowing, extra credit in excess of agreed period of 30 days, profit shifting is there because if credit period is more, prices go up which is not done in the present case since, the prices are determined on the basis of 30 days credit period. 38. From the reading of these judgement and the explanation to section 92B, it is abundantly clear that the outstanding receivable by the assessee from its AE, is required to be benchmarked, so as to ensure that they should not be any shifting of profit from assessee to its AE. 39. In the present case, the total turnover of the assessee in respect of Software Development Services was Rs.9,86,90,620/- whereas the trade receivable during the present period was Rs.5,84,94,810/-. Thus, more than 60% of the total turnover is receivable from the AE by the assessee. If we apply the principles as submitted by the assessee that only the LIBOR+200 points are required to be charged, then the very purpose of benchmarking of the trade receivables would be lost and in fact, it will amount to shifting the profit of the assessee to its AE situated abroad. In fact the transactions of the assessee is required to be examined from the perspective of a prudent business man and required to be analyzed whether the assessee would give similar benefits to unrelated parties or not. In the present case, the trade receivables were 5.84 crores and if the assessee is required to bear the cost of Rs.5,84,94,810 without any carrying cost, then the assessee would be rendering the services at ALP at a lower rate than the comparable cases . undoubtedly the assessee would be incurring the infrastructure cost, manpower cost, raw material, bank ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 45 of 50 financial charges for the purpose of manufacturing or delivering of the services/goods to its AE , failing to receive Rs.5.86 crores from AE in time had economic consequences , hence assessee is required to be compensated for delay in receiving its outstanding . It needs no business sense, if a person rendering services or supply the goods after making the afront payment, then the services/goods would be available at a lower rate and in case of converse situation of delayed payment goods/services would be available at higher value , as the cost of delay/ upfront payment would be factored in the price . In the present case, TPO as well as the assessee have determined the ALP of the international transactions after considering the price charged by the assessee from its AE, albeit without factoring in interest to be chargeable on the delay in receiving the outstanding amount from the associated enterprises. Therefore, we do not find any error in bench marking the interest to be charged on delayed outstanding by the lower authority. In the present case, the learned CIT (A) in the facts of present case, noticed that 60% of the total turnover were receivables from the AE alone , CIT(A) had held that the interest rate at 8% was reasonable . In the present case, the assessee has not filed its transfer pricing study at the outset. However, the assessee has only filed TP study to benchmark the transaction in respect of two segments i.e. ITeS and SDW only after receipt of show cause notice and no separate study was filed with respect to interest chargeable from the AEs. Assessee has not submitted any details of raising of invoices and subsequent receipts of the receivables from the AE despite the receipt of the show cause notice before the TPO . The TPO, in the light of non cooperation of the assessee and also no objection of the taxpayer had computed the interest by applying interest @ 12%. However, the said rate of 12% was reduced as mentioned herein above to 8% by the learned CIT (A). In our ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 46 of 50 considered opinion, the application of 8% interest, though in strict sense, would be contrary to the principles of TP analysis as the transfer pricing officer was required to bring the comparable either internal comparable or the external comparable by applying CUP method and then fix the rate of interest on the delayed receivables from the AE. However, with a view to give a quietus to the issue , we are of the opinion that instead of 8% interest rate, rate of interest of 6% be applied on outstanding receivable at the year end . 40. In our considered opinion, the submission of the assessee that LIBOR+200 points require to be applied, cannot be upheld in these facts of the case , as it will amount to shifting of profit from assessee to its AE, which cannot be countenanced under Chapter X of the I.T. Act. Moreover, the rate of interest on loan transaction ( LIBOR + points ) cannot be equated with delayed receipt of the outstanding amount by assessee from its AE, as both stands on different premises having different purpose and nature. In fact if outstanding receivable are due for a longer period, then assessee would be required to deploy more resources either in the form of debt/equity to meet out the cash flow/working capital requirements. 41. The judgments relied upon by the assessee in support of its claim are not applicable to the facts of the present case. The first judgment relied upon by the assessee at page 157 of the Paper Book is Pegasystems Worldwide India P Ltd (ITA No.1758/Hyd/2014) reported in (2015) 64 Taxmann.com 470 (Hyd-Trib). In paragraph 17.3, the Tribunal had not granted the notional interest on the outstanding receivables. As a matter of fact, the said judgment pertains to the A.Y 2010-11 and by the Finance Act 2012 (Expenditure. i(c) was inserted with retrospective effect ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 47 of 50 from 1.4.2002 whereby the international transaction shall include receivables or any other debt arising during the course of business. In our view, the Tribunal was not having the benefit of the said change in law while deciding the issue. Therefore, the said decision of the Tribunal is not applicable to the facts of the present case. The second judgment relied upon by the assessee is in the case of Bisazz India (P) Ltd vs. Dy.CIT by the ITAT Ahmedabad Bench on 8/8/2018, wherein the Tribunal in Para 9.1 has held that “such interest is includible in operating income and the operating income itself has been accepted as reasonable under the TNMM, there cannot be an occasion to make adjustment for notional interest on delayed realization of debtors”. Admittedly, in the present case, it is not the case of the assessee before us that the delayed payment gets interest included in the operating income of the assessee or the price charged by the assessee had already factored in the interest, if any, on account of delayed payment. In the light of the above, the said judgment is also not applicable. The 3 rd judgment relied upon by the assessee is in the case of ERM India (P) Ltd vs. National E-assessment Centre, New Delhi reported in (2021) 132 taxmann.com 220 (Del.Trib) wherein in para 11, it is mentioned that once the working capital adjustment is given, then it subsumes the interest on receivables and no separate benchmark for it has to be made and for that purpose, the Tribunal had relied upon the judgment of the Hon'ble Delhi High Court in the case of Kusum Healthcare (P) Ltd. In the present case, it is not the case of the assessee or the Assessing Officer that the working capital adjustment was given to the assessee or sought by the assessee. Therefore, the said judgment is not applicable. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 48 of 50 The 4 th judgment relied upon by the assessee is in the case of Ingersoll Rand (India) Ltd vs. Dy.CIT reported in (2016) 67 taxmann.com 328 (Bang.Trib). This judgement pertains to the A.Y 2010-11. This judgment is also not applicable for the simple reason, that there is a change in law which was brought into by the Finance Act, 2012 and therefore, the Tribunal did not have the benefit of examining the interest on the receivables. The 5 th judgment relied upon by the assessee is in the case of GSS Infotech Ltd vs. ACIT reported in (2016) 70 taxmann.com 356 (Hyd.Trib). This judgement pertains to the A.Y 2010-11. This judgment is also not applicable for the simple reason, that there is a change in law which was brought into by the Finance Act, 2012 and therefore, the Tribunal did not have the benefit of examining the interest on the receivables. The 6 th judgment relied upon by the assessee is in the case of CIT vs. Vaibhav Gems Ltd reported in (2017) 88 taxmann.com 12 (Raj.). In this case, the Hon'ble Rajasthan High Court after relying upon the decision of the Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Pvt. Ltd (2015)231 Taxmann.com 401 had allowed the applicability or LIBOR+200 points interest free loan provided by the appellant to its AEs. In the present case, admittedly, the case is not pertaining to the loan transactions given by the assessee to its AEs. However, in the present case, there is a delay of receiving consideration from the AEs and the total amount due to the assessee from the AEs is more than 60% of its total turnover. Therefore, the LIBOR+200 points rate cannot be applied to a transaction where the cases of delay in receivables from the AEs. Hence, the above judgment is also not applicable. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 49 of 50 The 7 th judgment relied upon by the assessee is in the case of Open Text Corporation India (P) Ltd vs. Income Tax Officer reported in (2021) 127 taxmann.com 399 (Hyd.Trib), In this judgment at Para 2.2 had held that the short term deposit cannot take part with an international transaction. In our view, the issue before us is not with respect to short term deposit but is of receivables from the AEs to the assessee. Undoubtedly, the receivables from the AE have been held to be an international transaction in view of the decision of the Hon'ble Karnataka High Court in the case of CIT vs. AMD India (P) Ltd in ITA No.274/2018 decided on 31.8.2018 and also in the case of Mckinsey Knowledge Centre India (P) Ltd vs. CIT in ITA No.461/2017 wherein the Hon'ble Delhi High Court has held that the delay in realization of payment due would constitute an international transaction and the transfer pricing adjustment on account of delayed receipt of payment is required to be made. Therefore, this judgement is also not applicable to the present case in hand. Last judgment relied upon by the assessee is in the case of Axis Clinicals Ltd vs. ACIT in ITA No.436/Hyd/2021 dated 21.12.2021 wherein the Coordinate Bench of the Hyderabad Tribunal in Para 5 has held that the adjustment made as per the State Bank of India short term deposit are not applicable to international transaction. In our view, the said judgment is also not applicable to the facts of the present case. The Hon'ble High Court in the case of AMD India Pvt. Ltd , McKinsey Knowledge Centre India )Pvt. Ltd had already held that the delay in receiving the payments from the AE by the assessee would constitute an international transaction and the same is required to be benchmark. ITA No 1812 of 2017 Zeta Interactive Systems India P Ltd Hyderabad Page 50 of 50 42. In the light of the above, the ground nos. 7 & 8 are partly allowed 43. To sum up, appeal of the assessee is partly allowed. Order pronounced in the Open Court on 7 th June, 2022. Sd/- Sd/- (R.K. PANDA) ACCOUNTANT MEMBER (LALIET KUMAR) JUDICIAL MEMBER Hyderabad, dated 7 th June, 2022. Vinodan/sps Copy to: S.No Addresses 1 M/s. Zeta Interactive Systems (India) (P) Ltd C/o Prasad & Prasad, C.As, Flat No.301, MJ Towers, 8-2-698, Road No.12, Banjara Hills, Hyderabad 500034 2 Income Tax Officer Ward 17(4) Hyderabad 3 CIT (A)-5,Hyderabad 4 Pr. CIT -5, Hyderabad 5 DR, ITAT Hyderabad Benches 6 Guard File By Order
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