Deputy Commissioner Of Income Tax, Circle- 6(1)(2), Bengaluru V. M/s. Symbol Technologies India Private Limited, Bengaluru

ITA 2221/BANG/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 1746 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2022
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 16-10-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Question of law
• Section: 92B; 205; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA No. and Assessment Year Appellant Respondent 2221/Bang/2019 2011-12 Deputy Commissioner of Income Tax, Circle – 6(1)(2), Bengaluru. M/s. Symbol Technologies India Pvt. Ltd., 201, No.3, Prestige Sigma, Vittal Mallya Road, Ashok Nagar, Bengaluru – 560 001. PAN: AAECS 7171 H 2057/Bang/2019 2011-12 M/s. Symbol Technologies India Pvt. Ltd., Bengaluru – 560 001. PAN: AAECS 7171 H Joint Commissioner of Income Tax, Bellary Range, Bellary. Assessee by :Shri.Aliasgar Rampurwala,CA Revenue by:Shri.Pradeep Kumar, CIT(DR)(ITAT), Bengaluru. Date of hearing:18.05.2022 Date of Pronouncement:20.05.2022 O R D E R Per N. V. Vasudevan, Vice President : IT(TP)A No. 2221/Bang/2019 is an appeal by the Revenue while IT(TP)A No. 2057/Bang/2019 is an appeal by the assessee. Both these appeals are directed against the order dated 10.07.2019 of the CIT(A), Bengaluru - 6, Bengaluru, relating to AY 2011-12. 2. The learned Counsel for the assessee, at the time of hearing, submitted that he wishes to press for adjudication ground Nos.7 to 9. The relevant grounds raised by the assessee in its appeal reads as follows: ITA Nos.2057, 2221/Bang/2019 Page 2 of 31 7.On the facts and circumstances of the case, the learned CIT(A) erred in not accepting that the learned TPO arbitrarily arrived at a set of companies as comparable to software development services that are functionally not comparable to the Appellant and fails the test of functional comparability: 1.Acropetal Technologies Limited; 2.Infosys Limited; 3.L&T Infotech Limited; 4.Persistent Systems Limited; and 5.Sasken Communication Technologies Limited; 8.On the facts and circumstances of the case, the learned CIT(A) erred in upholding the learned TPO's approach of not providing appropriate working capital adjustment towards difference in level of working capital of the Appellant vis-a-vis the comparable companies; 9.On the facts and circumstances of the case, the learned CIT(A) erred in upholding the actions of the learned TPO in treating interest on delayed receivable as a separate international transaction and making an adjustment towards it. 3. Ground Nos.7 and 8 raised by the assessee and grounds raised by the Revenue in its appeal are in relation to the determination of ALP in respect of an international transaction for rendering software development services by the assessee to its AE and therefore can be adjudicated together. 4. The assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company. In terms of the provisions of Sec.92-A of the Act, the assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services was an “international transaction” i.e., a transaction between two or more associated enterprises, either or both of whom are non- ITA Nos.2057, 2221/Bang/2019 Page 3 of 31 residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm’s length price. In this appeal by the assessee, the dispute is with regard to determination of Arms’ Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 5. As far as the provision of Software Development services are concerned, the assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the assessee was arrived at 12.05% by the assessee in its TP study. The operating income was Rs.66,88,41,798/- and the Operating Cost was Rs.59,69,34,645/-. The Operating profit (Operating income – Operating cost was Rs.7,19,07,153/-. Thus the OP/TC was arrived at 12.05%. The assessee chose companies who are engaged in providing similar services such as the assessee. The assessee identified 16 companies whose average arithmetic mean of profit margin ITA Nos.2057, 2221/Bang/2019 Page 4 of 31 was comparable with the Operating margin of the assessee. The assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm’s Length. 6. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from database. The TPO accepted 2 companies chosen by the assessee as comparable companies. The TPO on his own identified 11 other companies as comparable with the assessee company and worked out the average arithmetic mean of the set of 13 companies profit margins as follows: Sl. No. Name Sales Cost PLI 1 Acropetal Technologies Ltd.(seg) 814,016,893616,754,87631.98% 2 e zest solutions (from Capitaline) 11286609893255341 21.03% 3E-infochips Ltd26038425116644752756.44% 4 Evoke (from Capitaline) 1448699121339965688.11% 5 I C R A Techno Analytics Ltd. (in 000) 15840100012689400024.83% 6Infosys Ltd253850000000177,030,000,00043.39% 7 Larsen & Toubro Infotech Ltd. 2331812209619,764,861,28919.83% ITA Nos.2057, 2221/Bang/2019 Page 5 of 31 8Mindtree Ltd.(seg)8,783,000,000 7,937, 1 43,242 10.66% 9Persistent Systems & Solutions Ltd. 18 9,490,457 155,172,08922.12% 10 Persistent Systems Ltd. 6,101,270,0004,971,860,00022.84% IiR S Software (India) Ltd. 1,882,638,4711,617,804,170 16.37% 12Sasken Communication Technologies Ltd 3,941,962,0003,175,616,00024.13% 13Tata Elxsi Ltd (seg) 3,581,985,0002,962,533,35220.91% AVERAGE MARGIN24.82% 5. The TPO computed the Addition to total income on account of adjustment to ALP as follows: Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arm’s length margin. Please see Annexure B for details of computation of PLI of the comparables. Based on this, the arm’s length price of the services rendered by the taxpayer to its AE(s) is computed as under: SOFTWARE DEVELOPMENT SERVICES Arm's Length Mean Margin on cost 24.82% Less: Working Capital Adjustment (As per Annex. C)1.63% Adjusted margin23.19% Operating Cost 5969,34,645 Arms Length Price(ALP)123.19% of Operating Cost)7353,63,789 ITA Nos.2057, 2221/Bang/2019 Page 6 of 31 Price Received6688,41,798 Shortfall being adjustment u/s 92CA: 665,21,991 The above shortfall of Rs.6,65,21,991/- is treated as transfer pricing adjustment u/s 922A in respect of software development segment of the taxpayer's international transactions. 6. Thus a sum of Rs.6,65,21,991/- was added to the total income of the assessee on account of determination of ALP for provision of SWD services by the assessee to its AE. 7. The assessee did not file objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the assessee by the AO. The AO passed final order of assessment, against which the assessee filed appeal before CIT(A). To the extent the assessee did not get relief from the CIT(A), the assessee has preferred appeal before the Tribunal. The revenue is aggrieved by the order of the CIT(A) to the extent the plea of the assessee was accepted. 8. Ground No.7 raised by the Assessee and the grounds raised by the Revenue in its appeal deal with comparability of companies chosen by the TPO and that chosen by the CIT(A). The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C. ITA Nos.2057, 2221/Bang/2019 Page 7 of 31 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) to (d)...... (e)transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction]entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii)the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii)the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction]and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv)the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v)the net profit margin thus established is then taken into account to arrive at an arm's length ITA Nos.2057, 2221/Bang/2019 Page 8 of 31 price in relation to the international transaction [or the specified domestic transaction]; (f)...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— (a)the specific characteristics of the property transferred or services provided in either transaction; (b)the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c)the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d)conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if— (i)none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii)reasonably accurate adjustments can be made to eliminate the material effects of such differences. ITA Nos.2057, 2221/Bang/2019 Page 9 of 31 9. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 10. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the “TPG”) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm’s length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that:  None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or  Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called “comparability adjustments. 11. As far as the appeal of the assessee is concerned, the learned Counsel for the assessee submitted that in ground No.7, the assessee seeks exclusion ITA Nos.2057, 2221/Bang/2019 Page 10 of 31 of 5 comparable companies that remains after the order of CIT(A). Out of the aforesaid 5 comparable companies viz., Infosys Ltd., L & T Infotech Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd., have a turnover of more than 200 Crores whereas the assessee’s turnover is only Rs.66,88,41,798/-. 12. As far as comparability of the aforesaid 4 companies are concerned, the admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the assessee’s turnover is only Rs. 66,88,41,798/-. The TPO excluded from the list of comparable companies chosen by the assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the assessee before the CIT(A) was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The CIT(A) in rejecting the contention of the Assessee primarily relied on the decision rendered by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The CIT(A) therefore held that ITA Nos.2057, 2221/Bang/2019 Page 11 of 31 a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. 13. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt. Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon’ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): “41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet’s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- ITA Nos.2057, 2221/Bang/2019 Page 12 of 31 “9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.” 42. The Assessee’s turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon’ble High Courts of Bombay and Delhi and both are non- ITA Nos.2057, 2221/Bang/2019 Page 13 of 31 jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference.” 14. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 ITA Nos.2057, 2221/Bang/2019 Page 14 of 31 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). ITA Nos.2057, 2221/Bang/2019 Page 15 of 31 15. In view of the aforesaid decision, we hold that 4 companies listed in Grd.No.7 (exclusing Acropetal Technologies Ltd.) whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. 16. The only other company that remains for consideration in Ground No.7 is exclusion of Acropetal Technologies Ltd. As far as comparability of this company is concerned, the learned Counsel for the assessee brought to our notice the decision of the ITAT, Bengaluru Bench rendered in the case of ACIT Vs. M/s. Marvell India Pvt. Ltd., IT(TP)A No.384/Bang/2016 for Assessment Year 2011-12, order dated 28.06.2017. In the above case, the assessee was a SWD service provider such as the assessee. In the aforesaid case, the very same 13 comparable companies chosen by the TPO in the present case also was chosen as the comparable companies and therefore there can be no doubt that the functional profile of the Assessee and the company M/S.Marvell India Pvt.Ltd., are one and the same. The comparability of the company M/s. Acropetal Technologies Ltd., was considered by the Tribunal in the aforesaid decision and the Tribunal held that Acropetal Technologies Ltd., cannot be regarded as a comparable company because 75% of the Revenue was not from rendering software services and therefore this company cannot be considered as a comparable company. The following were the relevant observations of the Tribunal: “14. Acropetal Technologies Ltd:- 14.1 This company was selected by the TPO for inclusion in the final set of comparables. According to the Id. AR for the assessee, the total employee cost of this company is 11.51% of the total operating revenue ITA Nos.2057, 2221/Bang/2019 Page 16 of 31 and therefore fails the employee cost filter of 25% applied by the TPO his TP study which fact was brought to the TPO's notice by assessee submissions placed at pages 263, 289, 366 and 389 of paper book. It is further pointed out that this compariy also fails the 75% software development services filter, also another filter applied by the TPO himself. Reference in this regard was invited to pages 39 and 53 of Annual Report to submit that income from software development services is Rs. 81.40 crores out of total revenue of Rs. 141 crores. It was also contended that this company is functionally different from the assessee the case on hand, as apart from software development services, this company also owns products, is engaged in R & D activities and owns its own intangibles. In support of its plea for exclusion of this company from the list of comparables, reliance was, inter alia, placed on the decision of the co-ordinate bench in the case of GT Nexus Software Pvt. Ltd in IT(TP)A No. 31 and 409/Bang/2016 also for the same assessment year 2011-12. 14.2 Per contra, the ld. DR for Revenue supported the orders of the authorities below in including this company in the final list of comparables. 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 Infonnation 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 Pvt. Ltd. in IT(TP)A No. 31 and 409/Bang/2016 for Assessment Year 2011-12 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. ITA Nos.2057, 2221/Bang/2019 Page 17 of 31 Following the decision of the co-ordinate bench in the case of GT Nexus Software Pvt. Ltd. for Assessment Year 2011-12 (supra), we direct the TPO / AO to exclude this company, M/s. Acropetal Technologies Ltd. from the list of comparables.” 17. Respectfully following the aforesaid decision of the Tribunal, we direct exclusion of Acropetal Technologies Ltd., from the list of the comparable companies. 18. In Revenue’s appeal, the Revenue has challenged the action of the CIT(A) in including 2 comparable companies viz., M/s. FCS Software Solutions Ltd., and M/s. Akshay Technologies Ltd. As far as FCS Software Solutions Ltd., is concerned, it was a comparable chosen by the TPO on his own. The reasons given by the TPO for rejecting this company as a comparable company though it was proposed to be included as comparable company by the TPO in its show cause notice was as follows: “Adjusted operating profit 0.62% whereas working capital us 3.56%. The profit margin before working capital adjustment in the case of FCS is 4.18%. On making working capital adjustment, the operating profit margin is calculated at 0.62%--- working capital component in the profit margin is worked out at 3.56%. In other words, the 85.20% of the profit in the case of FCS, is on account of Financial activities, and not due to operating activities, as operating profit is only 0.62%. Therefore, this case is not a comparable company as this company has majority of financial activity and only minimum part of operating activity.” ITA Nos.2057, 2221/Bang/2019 Page 18 of 31 19. On appeal by the assessee, the CIT(A) held that FCS Software Solutions Ltd., is functionally comparable to the assessee. Aggrieved by the order of the CIT(A), Revenue is in appeal before the Tribunal. 20. Learned Counsel for the assessee brought to our notice decision of the Tribunal rendered in the case of Marvell India Pvt. Ltd., (supra) wherein comparability of this company was examined by the Tribunal. In that case also, the TPO refused to include this company as a comparable company for the very same reason that the working capital adjustment was very high and had an impact on the profits of that company. The Tribunal held that the reason given by the TPO cannot be the basis to exclude this company from the list of comparable companies as it is otherwise found to be functionally comparable. Following were the relevant observations of the Tribunal: “18. FCS Software Solutions Ltd.:- 18.1 This company was first proposed as a comparable by the TPO in the show cause notice. The TPO however excluded the same from the final set of comparables on the ground of the working capital adjustment being high and effecting the profit margin. According to the Id. AR for the assessee, a similar stand taken by the TPO in excluding this company as a comparable for the year under consideration i.e. Assessment Year 2011-12 was considered by a coordinate bench in the case of Informatica Business Pvt. Ltd. and its order in ITA No. 1285 & 1294/Bang/2014 dated 17.03.2017 the Tribunal had directed the TPO AO to include this company as a comparable to the assessee who is a provider of software development services. It is prayed that this company be included in the final set of comparables. 18.2 Per contra, the Id. DR for revenue supported the orders of the authorities below in rejecting this company as a comparable to the assessee. ITA Nos.2057, 2221/Bang/2019 Page 19 of 31 18.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. It is seen from a careful appreciation of the material on record that this company i.e. FCS Software Solutions Ltd., though into providing software development services, as is the assessee in the case on hand, was rejected by the TPO on the ground of its working capital adjustment being high, it would affect the profit margin and hence rendered as not, comparable to the assessee in the case on hand. We find that similar case- of rejection of this company as a comparable on grounds of high working capital adjustment affecting profits was considered by a co-ordinate bench in the case of M/s. Informatica Business Pvt. Ltd and in its order in IT(TP)A No.1285 & 1294/Bang/2014 dated 17.03.2017 the• bench had directed the TPO/AO to include this company in the set of comparables as it was found to be functionally comparable to a provider of software development services, as in the assessee in the case on hand. At para 26.2 of its order the co-ordinate bench held as under:- "26.2 we have heard the Id. DR as well as carefully perused the orders of the authorities below. We find that the TPO has rejected these two companies which were part of the initial proposal/show cause notice of the TPO but subsequently, the TPO decided not. to include these two companies in the final set of comparables on the ground that if the working capital of these two coMpanies is considered the profit margin get distorted. After giving our throught on this issue we are of the opinion that the limit of working capital is relevant for adjustment in the price and cannot be taken as a comparable for rejection or selection of the comparable company;. Therefore, the TPO was not justified in excluding these two companies from the set of comparables merely because these companies were having borrowed fund and the working capital impact is more than 4% on the profit of the company. Accordingly we direct the AO/TPO to include these two ITA Nos.2057, 2221/Bang/2019 Page 20 of 31 companies in the set of comparables when the TPO itself found functionally comparable with the assessee." 18.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Informatica Business Pvt. Ltd., in IT(TP)A No. 1285 & 1294/Bang/2014 dated 17.03.2017, we direct the TPO / AO to include this company in the final set of comparables for computing the ALP of the assessee's international transactions in software development services.” 21. In view of the aforesaid decision of the Tribunal, we do not find any merits in the grounds raised by the Revenue regarding inclusion of this company from the list of comparable companies. As far as the comparable company M/s. Akshay Technologies Ltd., is concerned, learned Counsel for the assessee submitted that he accepts the stand of the Revenue and therefore inclusion of this comparable company is held to be incorrect on the basis of the concession given by the learned Counsel for the assessee and the relevant grounds of appeal of the Revenue is allowed. 22. The only other issue that remains for consideration in the determination of ALP in the SWD services segment is ground No.8 with regard to the action of the Revenue authorities in not providing working capital adjustment. In this regard, the grievance of the assessee as projectrd in the aforesaid ground of appeal is that no adjustment towards working capital has been allowed to the assessee by the TPO and the action of the TPO was confirmed by the CIT(A) contrary to well settled principle in transfer pricing. On the issue of non granting of working capital adjustment, the TPO/CIT(A) gave its decision by observing that (i) The assessee has not demonstrated with any data or information as to the impact of working capital on the costs, price or profit. (ii) working capital requirements and ITA Nos.2057, 2221/Bang/2019 Page 21 of 31 impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc., all of which cannot be captured in the year end receivable or payable position. (iii) the year end receivables and payable may not reflect as to whether it arises from transactions relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and an intermixing is generally possible. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 23. The learned counsel for the assessee submitted that the conclusions of the DRP are identical to the conclusions arrived at by the revenue authorities in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). In the aforesaid decision on an identical issue, the Tribunal held that working capital adjustment has to be given. The tribunal reasoned in the aforesaid decision that a reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly show that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. The tribunal referred to Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on ITA Nos.2057, 2221/Bang/2019 Page 22 of 31 comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annexure to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. The Tribunal referred to Paragraphs 13 to 16 of the aforesaid OECD guidelines, wherein the need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the ITA Nos.2057, 2221/Bang/2019 Page 23 of 31 difference should be reflected in profits. The underlying reasoning is that: ♦ A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 24. The tribunal observed that examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The tribunal observed that the guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. The Tribunal further observed that the data available with the assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back ITA Nos.2057, 2221/Bang/2019 Page 24 of 31 upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. 25. We are therefore of the view that the issue with regard to the grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal referred to above, after affording opportunity of being heard to the assessee. 26. The TPO/AO is directed to compute the ALP of the international transaction of rendering of SWD services by the assessee to AE in the light of the directions given above, after affording assessee opportunity of being heard. 27. The other issue that remains for consideration is ground No.9 raised by the assessee in its appeal and this relates to treating the delay in realizing receivables over and above the normal credit period, by the assessee from its AE, as a separate international transaction and in determining ALP of interest that the assessee ought to have charged. The AO computed the addition in this regard as follows: “5.6 Computation of interest on delayed receivables ITA Nos.2057, 2221/Bang/2019 Page 25 of 31 5.6.1 As discussed in the preceding paragraphs, interest on the delayed trade receivables is computed under the weighted average method, using LIBOR- 6 months + 300 basis points applicable for the FY 2010-11, which works out to 3.53%. 5.6.2 Under weighted average method, the period of revenue receipt is 235 days. Credit period allowed only for 30 days. Actual delay in receivable over credit period is 205 days. Hence, interest will be charged on total invoice amount on delayed period of 205 days. Average recovery period. 235 Allowed credit period*30 delayed period 205 Invoice amount(USD) 6340,84,622 Rate of interest Per 3.53% Interest125,83,844 Interest 0 Difference being adjusted 1,25,83,844 Accordingly, an amount of Rs. 1,25,83,844/- is proposed as the transfer pricing adjustment on interest on trade receivables over credit period.” 28. On appeal by the assessee, the CIT(A) confirmed the order of the TPO. Aggrieved by the order of the CIT(A), the assessee is in appeal before the Tribunal. The learned Counsel for the assessee submitted that the TPO and the CIT(A) fell into an error in considering the delay in realizing the receivables by the assessee from its AE over and above the normal credit period agreed, was a separate international transaction. The learned Counsel for the assessee placed reliance on the decision of the ITAT, Mumbai Bench, rendered in the case of Vrushab Dia Vs. ACIT ITA No.840/Mum/2014, order dated 13.01.2016 wherein the Tribunal took the view that explanation ITA Nos.2057, 2221/Bang/2019 Page 26 of 31 to section 92B which was stated to be effective from 01.04.2002 has to be necessarily treated as effect from only Assessment Year 2013-14. On merits, it was submitted that the computation should be based on transaction to transaction applying libor rate and it should be restricted only to the transactions relating to the previous year relevant to Assessment Year 2010-11. 29. Before the Tribunal the learned counsel for the Assessee also submitted that the amounts outstanding from the AE will be settled with the AE on an ongoing basis in the normal course of business, having regard to commercial and economic factors. The arm’s length price determination for the said receivables is subsumed within the arm’s length price determination of the principal transaction itself. The outstanding receivables are in respect of the provision of software development services by the assessee and hence arise out of the primary transaction of rendering SWD services. Since the receivables are integral to the main transaction, the same ought to be aggregated with the said transaction and adjustment ought to be computed accordingly. Reliance in this regard was placed on the decision of this Hon’ble Tribunal in the case of Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 [Bangalore - Trib.)] which was upheld by the Hon’ble High Court of Karnataka in ITA No. 358/2016. It was further contended that that the Delhi Bench of ITAT in the case of Kusum Healthcare Pvt. Ltd. v. ACIT (Order dated 31.03.2015 passed by the Delhi Bench of the Hon’ble Tribunal in ITA No. 6814/Del/2014) held that if the working capital investment of the assessee and the comparables rather are considered than looking at the receivable independently is not necessary as the working capital adjustment takes into account the impact of outstanding ITA Nos.2057, 2221/Bang/2019 Page 27 of 31 receivables on the profitability. It was pointed out that this decision came to be upheld by the Hon’ble Delhi Court in PCIT v. Kusum Healthcare Pvt. Ltd. (Order dated 25.04.2017 passed in ITA No. 765/2016) (refer paras 10 and 11):- “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 de hors the context every item of “receivables” appearing in the accounts of an entity, which may have dealings with foreign AEs 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 TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international 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- à-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.” 30. It was argued that the above principles have been followed consistently by the various Benches of the Tribunal. In view of the above, it is submitted that the delayed receivables cannot be treated as an independent international transaction. ITA Nos.2057, 2221/Bang/2019 Page 28 of 31 31. Without prejudice to the above submissions, it was contended that even assuming that delayed realization of trade receivables is an international transaction, the delay in realization of the trade receivables in this case is not inordinate so as to warrant any benefit provided to the AE warranting determination of ALP. The ld. DR relied on the order of the DRP. 32. We have carefully considered the rival submissions. On the question whether delayed realization of trade receivables from the AE constitutes an international transaction or not, there are conflicting decisions of various benches of the Tribunal, which we shall point out. Sec.92B of the Act defining what is an international transaction was amended by Finance Act, 2012, way of insertion of an Explanation to sec.92B with retrospective effect from 1-4-2002 and the same reads thus:- “Explanation- For the removed of doubts, it is hereby clarified then-(i) the expression "international transaction" shall include— (a) ............. (b) .............. (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 of receivable or any other debt arising during the course of business: ............” 33. The amendment is to the effect that “international transaction” would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business’ and hence non-charging or under-charging of interest on the excess period of credit allowed to the AE ITA Nos.2057, 2221/Bang/2019 Page 29 of 31 for the realization of invoices would amount to an international transaction. It was so held by the ITAT Delhi Bench in the case of Bechtel India Pvt Ltd (in ITA No.6530/De1/2016 dated 16 May 2017). It is important to note that the Bench while arriving at the said conclusion distinguished its earlier order in the case of Kusum Healthcare Pvt. Ltd. (supra) and rejected the contention that interest gets subsumed in the working capital adjustment. The Hon`ble Bombay High court in the case of CIT vs. Patni Computer Systems Ltd, (2013) 215 Taxman 108 (Bom) dealt, inter alia, with the following question of law:- "(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any Other transaction having a bearing on the profits, income, losses or assets of such enterprises?" 34. While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. In the case of BT e Serv (TS-849-ITAT-2017(DEL)-TP) the ITAT Delhi Bench held that 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 ITA Nos.2057, 2221/Bang/2019 Page 30 of 31 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. The ITAT concluded that if outstanding receivables are within the terms of agreement, then it may be argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement does not specify the term of the payment, even then assessee must be given benefit of credit period which is accepted business practice in the trade. The ITAT confirmed 30 days as the normal credit period adopted by the TPO. 35. The foregoing discussion discloses that non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. 36. As far as the manner of determination of ALP is concerned, we accept the prayer of the learned Counsel for the assessee to apply libor rate on transaction-to-transaction basis and restrict the addition only with reference to international transaction undertaken by the assessee where there is delay in receivables in the previous year relevant to Assessment Year 2010-11 only. Thus, the grounds of appeal raised by the assessee are partly accepted. ITA Nos.2057, 2221/Bang/2019 Page 31 of 31 37. In the result, appeal by the assessee and that by the Revenue are treated as partly allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (LAXMIPRASAD SAHU)(N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 20.05.2022. /NS/* Copy to: 1.Assessees2.Respondent 3.CIT4.CIT(A) 5.DR 6. Guard file By order Assistant Registrar, ITAT, Bangalore.