M/s Trilar Video Technologies India Private Limited , Bangalore V. Assistant Commissioner of Income Tax Circle-7(1)(1) , Bangalore

ITA 3367/BANG/2018

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7286 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 20-12-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUZAFFAR HUSSAIN
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Question of law; Bad and doubtful debts
• Section: 92C; 143(3); 92; 133(6); 143(1); 250; 251; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “B” BENCH: BANGALORE BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SMT BEENA PILLAI, JUDICIAL MEMBER IT(TP)A. No. 3367/Bang/2018 Assessment Year: 2014-15 M/s. Synamedia India Pvt. Ltd. (Formerly known as Trilar Video Technologies India Pvt. Ltd.), Block 9A & 9B, Pritech Park, Survey No. 51-64/4, Sarjapur Outer Ring Road, Bellandur Village, Bangalore – 560 103. PAN: AACCN1140K vs. The Assistant Commissioner of Income Tax, Circle 7(1)(1), Bangalore. (Appellant) (Respondent) Assessee by : Shri Sharath Rao, CA Revenue by : Shri Muzaffar Hussain, CIT (DR) Date of Hearing : 07.10.2021 Date of Pronouncement : 30.11.2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the assessment order dated 29.10.2018 passed by the JCIT, Special Range-2, Bangalore for assessment year 2014-15 on following revised grounds of appeal. Page 2 of 23 IT(TP)A No. 3367/Bang/2018 Based on the facts and circumstances of the case and in law, Synamedia India Private Limited (Formerly known as Trilar Video Technologies India Private Limited) (hereinafter referred to as 'the Appellant'), respectfully craves leave to prefer an appeal against the order passed by the learned Assessing Officer (hereinafter referred to as the 'learned AO - ) dated October 29. 2018 under section 143(3) read with section 144C of the Income-tax Act. 1961 (the Act) pursuant to the directions dated September 12, 2018 issued by the 'Hon'ble DRP' under section 144C(5) of the Act ('the Impugned order') inter-alia on the following grounds: That on the facts and circumstances of the case and in law: A.Gr ou nd s re la tin g to t ra nsf e r pri c in g mat te rs : 1. The learned TPO/ learned AO have erred, in law and in facts. by not appreciating the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules. conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellants international transaction is not at arm's length. 2. The learned TPO/ learned AO have erred, in law and in facts, by determining the arm's length margin/price using only FY 2013-14 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 3.The learned TPO/ learned AO have erred, in law and in facts. by accepting/rejecting certain companies based on unreasonable comparability criteria. 3.1. Following companies should not be treated as comparable companies: a) Persistent Systems Limited b) Larsen & Toubro Limited c) Infosys Limited d) Mindtree Limited e) R S Software (India) Limited f) Thirdware Solutions Limited 3.2. Following companies should be treated as comparable companies: a) Akshay Software Technologies Limited b) E-Zest Solutions Limited c) Sagarsoft (India) Limited d) InfoMile Technologies Limited e) Cat Technologies Limited f) Evoke Technologies Limited g) Lucid Software Limited h) Maveric Systems Limited Page 3 of 23 IT(TP)A No. 3367/Bang/2018 i) Sasken Communication Technologies Limited 4. The learned TPO/ AO have erred, in law and in facts. by erroneously computing the operating margins of certain comparable companies identified in the transfer pricing order. 5. The learned TPO/ learned AO have erred, in law and in facts. by rejecting certain comparable companies identified by the Appellant using export sales less than 75% of the sales as a comparability criterion. 6. The learned TPO/ learned AO have erred, in law and in facts. by rejecting certain comparable companies identified by the Appellant using the employee cost less than 25% of the total revenues as a comparability criterion. 7. The learned TPO/ learned AO have erred, in law and in facts. by applying the filter of companies having different accounting year for rejecting the comparable companies (i.e.. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). 8. The learned TPO/ learned AO have erred, in law and in facts. by not applying turnover filters for rejecting companies 9. The learned TPO/ learned AO have erred, in law and in facts, by rejecting the filter of ratio of research and development expenses to sales less than 3% considered by the Appellant for the purpose of selecting the companies which do not own intangibles and are pure service providers. 10. The learned TPO/ learned AO have erred, in law and in facts, by rejecting the filter of ratio of fixed to sales greater than 200% considered by the Appellant. 11. The learned TPO/ learned AO have erred, in law and in facts. by rejecting the filter adopted by the Appellant for selecting companies having a ratio of sum of advertising, marketing and distribution expenses to sales less than 3%. 12. The learned TPO/ learned AO have erred. in law and in facts. in computing the arm's length price without giving the benefit of 3 percent under the proviso to section 92C of the Act. 13. The learned TPO/ learned AO have erred. in law and in facts, by not making suitable adjustments to account for Page 4 of 23 IT(TP)A No. 3367/Bang/2018 differences in the risk profile of the Appellant vis-a-vis the comparables. 14. The learned TPO/ learned AO have erred. in law and in facts, by using the information by exercising powers under section 133(6) of the Act. 15. The learned TPO/ learned AO have erred in law and in fact. in charging interest amounting to INR 5.55.77.244 in relation to outstanding receivables due from Associated Enterprise ('AE'). 16. The learned TPO/ learned AO have erred, in law and in facts, by not appreciating that the outstanding receivables from AEs arise from the provision of services and shall be considered as closely linked to such transaction and should not be considered as a separate international transaction. 17. The learned TPO/ learned AO have erred in law and in fact by re-characterizing the outstanding receivables as loan transaction and not considering the business/ commercial expediencies of the arrangement. thereby computing notional interest on the same. 18. The learned TPO/ learned AO have erred in law and in fact by imputing interest on outstanding receivables without appreciating the fact that the Appellant is a debt-free company and has not been subject to any interest. 19. The learned TPO/ learned AO have erred. in law and in facts, by not providing working capital adjustment (in place of imputing interest on outstanding receivables) while such outstanding receivables would be subsumed in the working capital adjustment. 20. Without prejudice to ground no. 15, the learned TPO/ AO have erred. in law and in facts. in not objectively selecting the interest rate while computing the interest due on outstanding receivables. B. Grounds of appeal relating to other matters 21. The learned AO has erred in law by levying interest under section 234B of the Act, which is on account of the adjustments proposed to the returned income Page 5 of 23 IT(TP)A No. 3367/Bang/2018 2. Brief facts of the case are as under: The assessee is a private limited company incorporated in India, with its registered office in Bangalore. The assessee primarily engaged in developing interactive TV applications and broadband technologies that support the communications solutions of NDS UK. It also provides pre-sales and Marketing Support Services to NDS UK. For the subject Assessment Year under consideration, the assessee filed its return of income on 30.11.2014 declaring the taxable income of Rs. 1,27,83,54,130/-. The return was processed u/s. 143(1) of the Act and was subsequently selected for scrutiny assessment. In response to statutory notices, representative of assessee appeared before Ld.AO and filed requisite details as called for. Ld.AO observed that assessee had international transaction exceeding Rs.15 crores and therefore case was referred to transfer pricing officer for determining arms length price of international transaction as per section 92CA of the Act. Upon receipt of reference, Ld.TPO called upon assessee to file economic details of transaction in Form 3 CEB. Representative of assessee appeared before Ld.TPO and filed requisite details as called for. 3. The assessee for the financial year 2013-14 relevant to Assessment Year 2014-15, had entered into the following international transaction with its Associated Enterprises(“AE”) outside India: Particulars Amt (Paid) Amt (Recd) Method Purchase of Fixed Assets 9,98,25,801 TNMM Provision of Software Development Services 431,22,97,754 TNMM Page 6 of 23 IT(TP)A No. 3367/Bang/2018 Provision of Marketing and Sales Support Services 139,37,80,333 TNMM Services availed for distribution 15,82,38,841 TNMM Reimbursement of expenses 12,50,84,433 TNMM 4. Ld.TPO observed that assessee used OP/TC as PLI for determining margin at 14.53% for software development service segment. TNMM was used as most appropriate method. Assessee used following set of 10 comparables with average margin of 14.53% for software development services. Sl.No. Name of the Company (M/s) Weighted Average Margin (%) 1. Akshay Software Technologies Ltd. 7.46% 2. Bells Softech Ltd. 7.92% 3. Helios & Matheson Information Technology Ltd. 18.27% 4. Kals Information Systems Ltd. 9.81% 5. R S Software (India) Ltd. 16.75% 6. Larsen & Tourbo Infotech Ltd. 24.69% 7. Mindtree Ltd. 17.84% 8. Sonata Software Ltd. 9.97% 9. CSS Corp Pvt. Ltd. 20.01% 10. E-Zest Solutions Ltd. 12.60% Arithmetic mean 14.53% 5. Ld. TPO applied various search filters and rejected the comparables selected by assessee in its TP study. The final comparables selected by Ld.TPO was as under: Sl.No. Name of the Taxpayer OP/OC (in %) 1. Infosys Ltd. 36.13% 2. Larsen & Toubro Infotech Ltd. 24.61% 3. Mindtree Ltd. 20.43% 4. Persistent Systems Ltd. 35.10% 5. R S Software (India) Ltd. 24.25% 6. Cigniti Technologies Ltd. 27.62% 7. S Q S India B F S I Ltd. 22.37% Page 7 of 23 IT(TP)A No. 3367/Bang/2018 6. Ld.TPO thus proposed adjustment being shortfall at Rs.40,66,21,929/-. 7. The Ld.TPO also treated the delayed receivables from AEs as international transaction and computed notional interest on delayed receivables using 6 Months LIBOR +300/400 basis points and made an adjustment of Rs. 4,79,51,602/-. The Ld.TPO passed the order dated 31.10.2017 under section 92CA of the Act and determined the total TP adjustment of Rs.45,45,73,531/-. The Ld.AO passed the DAO dated 21.12.2017 proposing the above TP addition as determined by the Ld.TPO under section 92CA of the Act. 8. The assessee being aggrieved filed objections before the Dispute Resolution Panel. The DRP disposed of the objections filed by the assessee vide directions dated 12.09.2018. The directions provided by the DRP are summarized as under: (a) The DRP rejected the arguments of the assessee seeking exclusion of the following companies  R S Software (India) Limited;  Larsen & Toubro Infotech Limited  Persistent Systems Limited;  Mindtree Limited  Infosys Limited;  Thirdware Solution Limited. (b) The DRP however accepted the arguments of the assessee and directed the exclusion of following comparables 8. Thirdware Solution Ltd. 44.68% Average 29.40% Page 8 of 23 IT(TP)A No. 3367/Bang/2018  Cigniti Technologies Limited  S Q S India B F S I Limited (c) With regard to comparable Thirdware Solutions Limited, the DRP directed the Ld. TPO to adopt parity in the treatment of forex loss while computing the margin. (d) The DRP further rejected the arguments of the assessee seeking inclusion of the following companies  Akshay Software Technologies Limited  Sasken Communication Technologies Limited  Evoke Technologies Limited  E-Zest Solution Limited  Infomile Technologies Limited  Lucid Software Limited  CAT Technologies Limited  Maveric Systems Limited (e) With regard to Sagarsoft India Limited selected by the assessee the DRP directed TPO to examine if the company satisfies all the filters. (f) The DRP rejected the submissions of the assessee that provision for bad and doubtful debts are part of normal operating expenses and the same should be deducted while computing the margins. (g) The DRP also rejected the assessee’s argument seeking risk adjustment. (h) With respect to the issue of notional interest on delayed receivables, the DRP rejected the various arguments of the assessee that the same cannot be treated as a separate international transaction. Further, the DRP directed the Ld. TPO Page 9 of 23 IT(TP)A No. 3367/Bang/2018 to re-compute the ALP interest taking into account the short term deposit rates of interest of State Bank of India as against the LIBOR applied by the TPO, after allowing a credit of 60 days from the date of invoice. 9. On receipt of the DRP directions the Ld.AO passed the FAO dated 29.10.2018 giving effect to the directions wherein, the TP adjustment of Rs.51,79,43,378 was made. Aggrieved by the final assessment order passed, the assessee is in appeal before us. 10. The Ld.AR submitted that Ground no. 1 is general. Ground Nos. 2, 5 to 14 are not pressed. Accordingly, these grounds are dismissed as not pressed. 10.1 On the basis of above submissions, we adjudicate only Ground nos. 3, 4 and 15-20 under revised Grounds of Appeal raised by assessee. 11. Ld.AR at the outset, submitted that, assessee has filed revised grounds of appeal wherein, in Ground no. 3, assessee seeks exclusion / inclusion of following comparables: Seeking Exclusion of :  Persistent Systems Ltd.  Larsen & Toubro Ltd.  Infosys Ltd.  Mindtree Ltd. Seeking Inclusion of :  Akshay Software Technologies Ltd.  E-Zest Solutions Ltd.  Sagarsoft (India) ltd.  InfoMile Technologies Ltd. Page 10 of 23 IT(TP)A No. 3367/Bang/2018  CAT Technologies Ltd.  Evoke Technologies Ltd.  Lucid Software Ltd.  Maveric Systems Ltd.  Sasken Communication Technologies Ltd. 11.1 Before we undertake the comparability analysis, it is sinequa non to understand functions performed, assets owned and risk assumed by assessee. (a) Functions: In TP study, it has been submitted that, there is a service agreement for provision of software research and development services entered into by assessee, with its associated enterprise in UK from 01/04/2006. As per the agreement, remuneration received by assessee on is cost +15% mark up. Main function performed by assessee, is in respect of R&D functions, wherein assessee focuses on developing existing technologies for direct customer application. It has been submitted in TP study that assessee has a small team which works on new initiative projects, wherein assessee primarily carries out limited documentation of designs and limited integration. In TP study, entire project is conceptualised, designed and codified by UK associated enterprise. (b) Assets owned Assessee owns routine assets like furniture fixtures, office space etc. Any intangible developed during the process of research carried out by assessee exclusively belongs to the associated enterprise. Page 11 of 23 IT(TP)A No. 3367/Bang/2018 (c) Risks assumed As per TP study, assessee has been held to be bearing limited risk of market and foreign exchange risks to the extent that, remuneration received by assessee is in foreign exchange. (d) Characterisation Based on the above discussions, assessee has been characterised to be working on a risk mitigated environment on a contract basis strictly providing services, as per needs/requirements of associated enterprise. Based on the above FAR analysis of assessee, we shall undertake the comparability of assessee with alleged comparables for inclusion / exclusion. 11.2 At the time of hearing, the Ld.AR submitted that exclusion of 4 comparable viz., L&T Infotech Ltd., Persistent Systems Ltd., and Mindtree Ltd. have been excluded by Hon’ble Delhi Tribunal in case of Avaya India Pvt.Ltd vs.ACIT reported in (2019) 112 taxmann.com 301 for AY 2014-15 will hold good the present case of assessee as well. “6.Larsen and Toubro Infotech Ltd 6.1 Learned TPO held the company functionally comparable in view of the observation that it offers end-to-end software solutions and services. The learned DRP retained the company is functionally similar to the assessee and rejected the contention of the assessee of effect of high turnover and intangibles owned by the company on margins as the assessee failed to demonstrate the same before the learned DRP. 6.2 The learned counsel of the assessee referred to page 251 and 252 of the paper book and submitted that the company is engaged in development of innovative solutions (i.e. products). He referred to page 253 of the paper book and submitted that service and products have been used interchangeably in the annual report and no sufficient segment information is available. He submitted that in segment Page 12 of 23 IT(TP)A No. 3367/Bang/2018 reporting expenses of Rs. 20,580 lakhs have not been allocated to the segment of service cluster, industrial cluster, telecom discontinued business. The learned counsel submitted that coordinate bench of the Tribunal in the case of Piteny Bowes Software India (P.) Ltd. v. Addl. CIT [2019] 101 taxmann.com 350 (Delhi - Trib.) has rejected the company as comparable on account of insufficient segmental information. 6.3 The learned DR, on the other hand, referred to page 250 of the assessee's paper book and submitted that revenue has been only shown from IT services and there is no sale of products by the company. He submitted that, the service cluster, industrial cluster telecom (PES) discontinued business are only verticals wherein the company has provided software services and thus the company is a valid comparable to the assessee. Decision 6.4 We have heard submission of the parties. On perusal of the extract of the annual reports filed in the paper-book by the assessee, we find that as far as function of the assessee is concerned, the word service and products have been used interchangeably and it cannot be ascertained from the part of the annual reports filed before us, that the company was engaged only in providing software services. In the circumstances, we feel it appropriate to restore the issue of deciding functional comparability to the learned AO/TPO with the direction to the assessee to file the complete annual report of the company. If required, the TPO may gather information u/s 133(6) of the Act form the company. He shall provide a copy of the information to the assessee also. If after inquiry , no separate segment data for sale of services and sale of product is available, then the company may be dropped from the set of the final comparable for software service segment. .......................... 8.Persistent Systems Ltd. 8.1 According to the learned TPO, the company passed all filters and is functionally comparable. The learned DRP also held that the company has only one stream of the revenue i.e. sale of software services and there was no stock in trade. Before us, the learned counsel of the assessee referred to page 284 to 290 of the paper-book submitted that the company was engaged in providing software products along with software services. He referred to page 287 the paper-book and submitted that the company specialized in building software products and has developed its own brand "Accelerite" for branding its products. He submitted that in view of no segmental data available, the company cannot be selected as comparable at entity level. 8.2 The Ld. DR, on the other hand, relied on the order of the TPO as well as direction of the learned DRP. 8.3 We have heard the rival submission of the parties. On page 290 of the paper-book, in the notes forming part of the financial restatement of the company, under the head segmental information, it is mentioned that the company operates predominantly for providing software products, services and technology innovation covering full life-cycle of Page 13 of 23 IT(TP)A No. 3367/Bang/2018 products to its customers. The segmental information, however, has been provided for the verticals in the field of 'telecom and wireless', 'life science' and 'healthcare and infrastructure and systems'. No segmental data of software products and services are available in the annual report of the company. In the circumstances, we are of the opinion that the company cannot be selected as comparable at entity level in absence of any segmental data of software product and software services. Accordingly, we direct the Ld. AO/TPO to exclude the company from the set of comparables. 9.Mindtree Limited. 9.1 The company was selected as comparable by the Ld. TPO. The learned DRP held the company as primarily from the software service in view of the revenue recognition mentioned in the annual report. The learned DRP held broad functions of the company as similar to the assessee and in view of the benchmarking under TNMM, found the company as comparable to the assessee. Before us, the learned counsel of the assessee referred to page 248 of the paper-book and submitted that in background to significant accounting policies, it is reported that the company is engaged in providing wide range of services and thus it is functionally dissimilar to the assessee. The learned counsel referred to page 245 and submitted that the company invested in products and platforms and it owns significant intellectual property. He referred to 19 patents filed by the company mentioned in annual report. The learned counsel submitted that in view of no segmental information available, the company should be excluded from the set of comparables. He submitted that the company has been excluded by the Tribunal in the case of Nokia Siemens Networks IndiaLtd. v. ACIT [IT Appeal No. 333 (Delhi) of 2013, dated 16-2-2018] on account of functional dissimilarity because of wide range of services. 9.2 The learned DR, on the other hand, relied on the order of lower authorities and submitted that though the company owned intellectual property right, however, the company was engaged only in providing software development services. He submitted that the assessee has not demonstrated as how owning of intellectual property rights has affected the margin of the company. 9.3 We have heard the rival submission of the parties. The various segments mentioned in the annual report comprises of manufacturing, BFSI, hi-tech, travel and transportation and others, but the assessee is primarily engaged in providing global software development in these areas. In the background to significant accounting policies, however, mention other services offered by the company which also include business process management, business technology consulting, cloud, digital businesses, independent testing, infrastructure management services, product engineering and SAP services. The company also own intellectual property rights as pointed out by the learned counsel as against no intellectual property rights owned by the assessee, and thus, assets of the company cannot be compared with the assessee. In view of functional dissimilarity as well as the difference in the assets Page 14 of 23 IT(TP)A No. 3367/Bang/2018 owned by the company vis-a-vis the assessee, we direct the Learned AO/TPO to exclude the company from the set of the final comparables” We note that coordinate bench of this Tribunal in case of EMC Software India Pvt.Ltd vs.JCIT reported in (2021) 115 taxmann.com 293 have excluded Infosys Ltd., by observing as under: Infosys Limited : This company is functionally dissimilar and provides end to end business solutions like business consulting technology engineering and outsourcing services and no segmental details in respect of services are available and made investments and products to establish as a tradable IPO owner. Further the comparable owns significant brand value products and focus on brand building and incurred expenditure on R & D. The company owns 7 edge products / platforms and six other product based solutions. The company leverages on its premium banking solution and during the year the company merged with its wholly owned subsidiary Infosys Consulting India Limited. We found that the company was excluded from the final list of comparables in assessee's own case for the Assessment Year 2011-12 by the DRP and revenue has accepted. The learned Authorised Representative supported his arguments relying on the decisions in the case of CIT v. Agnity (India) Technologies (P.) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26/(Delhi) ; CGI Systems & Management Consultants (P.) Ltd. v. Asstt. CIT [2018] 94 taxmann.com 97 (Bang - Trib) The learned Authorised Representative also substantiated that for the Assessment Year 2014-15, the co- ordinate Bench of the Tribunal in the case of LG Soft India (P.) Ltd. v. Dy. CIT in IT(TP)A No. 3122/Bang of 2018 for the Assessment Year 2014-15 Dt. 28.5.2019. We support our views relying on the LG Soft India Pvt. Ltd. where the Tribunal has observed at paras 6 and 6.1 as under: "6. We notice that the co-ordinate bench has excluded M/s.Infosys Ltd in A.Y 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd. (ITA No.1054/Bang/2011) was followed and it was held that M/s. Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It was further observed that the break up of revenue from software services and software product is not available. 6.1 It was stated that there is no change in facts. Accordingly, following the decision rendered in the assessee's own case in A.Y 2008-09, we direct exclusion of M/s. Infosys Ltd." Page 15 of 23 IT(TP)A No. 3367/Bang/2018 We found that the Infosys Ltd. has significant intangibles and huge revenues from software products and was considered by the co- ordinate Bench of the Tribunal for exclusion in the Assessment Year 2014-15. Accordingly, we direct the TPO to exclude the Infosys Ltd. from the final list of comparables for determination of ALP. 11.3 We note that the assessee in the above referred case was also a contract service provider like assessee before us. The revenue has not placed anything contrary on record in order to take a different view. Respectfully following the decision of the Tribunal, we direct that the aforesaid 4 companies be excluded from the final list of comparable companies for the purpose of arriving at the arms length. Accordingly Ground No. 3.1 stands allowed. Comparables sought for inclusion 11.4 Akshaya Software Technologies (P.) Ltd., We note that income from commission on sale of software license constitute meager 0.5% of total revenue. The said company was rejected by the Ld.TPO for the reason that, the company is engaged in providing provisional services, procurement installation, employment support of ERP products. On perusal of the Annual Report at Page 659 to 661 of Paper Book, we note that major revenues are from operations as per Note 19 being income from software services and commission received on sale of software licenses. The earnings as per Note 28 as per the financial statements, the company has earning from export of software and in the F.Y. 2013-14 which constitute more than 95% of income. Therefore we find this comparable to be functionally not similar with that of a contract service provider like assessee. Page 16 of 23 IT(TP)A No. 3367/Bang/2018 Accordingly we uphold the exclusion of this comparable from the final list. CAT Technologies Ltd. 11.5 It is submitted by this comparable is functionally sililar with that od assessee. However, the Ld.TPO rejected this comparable by holding that segmental informations are not available. The Ld.AR has placed in additional paper book a decision by Hon’ble Delhi Tribunal in case of Avaya India Pvt.Ltd vs ACIT (supra) wherein there is a categorical finding as under: “14.4 We have heard rival submission and perused the relevant material on record. On perusal of page 380 of the paper book, which is a copy of profit and loss account of the company, we find that revenue receipts also include consultancy fee received and there is no separate segment for consultancy in the annual accounts of the company. In our opinion, in absence of any separate segmental date of software development services, the company cannot be treated as comparable at entity level. In view of the above, without examining the persistent losses filter, we uphold the rejection of the company by the lower authorities on functional dissimilarity at entity level.” Respectfully following the same we uphold the exclusion of this comparable form the final list. 11.6 We note that Sasken Communications Technologies Ltd., Evoke Technologies Ltd., Sasken Communication Technologies Ltd., E-Zest Solution Ltd., Lucid Software Ltd., Infomile Technologies Ltd., Maveric Systems Ltd., and Sagasoft (India) Ltd., were proposed by assessee during the transfer pricing proceedings as additional comparables. 11.7 We note that functional comparability of these comparables have not been considered by the Ld.TPO based on the annual reports and financial data. The Ld.TPO is rejecting these comparables holding that they are functionally not similar with assessee, where as the DRP is upholding the exclusion for not Page 17 of 23 IT(TP)A No. 3367/Bang/2018 satisfying the filters applied by the Ld.TPO. Reliance is placed on the various decisions of coordinate benches of this Tribunal in additional case law paper book as under:  M/s. ARM Embedded Technologies Pvt. Ltd. Vs. ITO (IT(TP)A No.3374/Bang/2018) - AY 2014-15 - November 24, 2020  M/s. Microsoft Research Lab India Pvt Ltd. Vs. DCIT (IT(TP)A No.3131/Bang/2018) - AY 2014-15 - February 5. 2020  M/s Yahoo Software Development India Pvt Ltd. Vs. JCIT (IT(TP)A No.2657 /Bang/2018) - AY 2014-15 & (IT(TP)A No.2365/Bang/2019) - AY 2015-16 - Order dated February 28, 2020  Brocade Communications Systems Private Limited Vs. DCIT (IT(TP)A No.79/Bang/2019) - AY 2014-15 - Order dated June 19, 2020  Citrix R&D India Private Ltd. Vs. DCIT (IT(TP)A No.3134/Bang/2018) - AY 2014-15 - Order dated January 29, 2020  M/s.Zynga Game Network India Pvt. Ltd. Vs. DCIT (IT(T.P)A. No.36/Bang/2019) - AY 2014-15 - Order dated January 22, 2020  Synamedia India Pvt. Ltd. Vs. ACIT (IT(TP)A No.184/Bang/2017) - AY 2012-13 - Order dated February 2, 2020  M/s Synamedia India Pvt. Ltd. Vs. DCIT (IT(TP)A No.2503/Bang/2017) - AY 2013-14 - Order dated March 19, 2020  M/s. Avaya India Pvt. Ltd. Vs. ACIT (ITA No.7290/De1/2018) - AY 2014-15 - Order dated September 24, 2019  Alcatel Lucent India Ltd. Vs. ACIT (ITA No. 4706/De1/2018) - AY 2014- 15 - Order dated November 29, 2019  M/s. Synamedia India Private Limited Vs. DCIT (IT(TP)A No.597/Bang/2016) - AY 2011-12 - Order dated November 5, 2020  M/s. Galax E Solutions India Pvt. Ltd. Vs. ITO (IT(TP)A No.184/Bang/2016) - AY 2011-12 - Order dated October 21, 2020  The ACIT Vs. M/s Alcon Laboratories (India) Pvt. Ltd (IT(TP)A No.221/Bang/2016) - AY 2011-12 - Order dated November 20, 2020 11.8 Therefore we remit these comparables to be considered with assessee based of FAR and in accordance with law and in light of observation by coordinate benches of this Tribunal in above refered decisions. Accordingly Ground 3.2 stands allowed for statistical purposes. 12. Ground no.4: It is submitted that the provision for doubtful advances should be considered as operating expenditure while computing its PLI. Page 18 of 23 IT(TP)A No. 3367/Bang/2018 However, the Ld.TPO and the DRP considered provision for doubtful debts as non-operating expenditure and hence excluded the same from the operating expenditure while computing the operating profit margin of the comparable companies. 12.1 In support of the above, the Ld.AR placed reliance on the following decisions which has upheld provision for bad and doubtful debts as operating expenditure.  Hon'ble Delhi Tribunal in Rolls Royce India (P) Limited (2016) 69 taxmann.com 209 (Delhi-Trib);  Hon'ble Bangalore Tribunal in Brocade Communications Systems Private Limited (2020) 117 taxmann.com 439 (Bangalore-Trib); 12.2 We are of the view that in the light of the decision of the Tribunal in the case of Rolls-Royce India (P.) Ltd. (supra), the PLI should directed to be reworked by considering the provision for doubtful debts as operating expenditure. Accordingly Ground 4 stands allowed. 13. Ground no.15-20 13.1 These grounds are in respect of interest on receivables outstanding amounting to Rs.5,55,77,244/- in relation to transaction with AE. From TP study, it is observed that payments to assessee are not contingent upon payment received by AEs from their respective customers. Further Ld.AR submitted that working capital adjustment undertaken by assessee includes the adjustment regarding the receivables and thus receivables arising out of such transaction have already been accounted for. We note that Ld.TPO computed interest on outstanding receivables at the rate equal to 4.3836 % PLR (6 months LIBOR +300/400 basis Page 19 of 23 IT(TP)A No. 3367/Bang/2018 points. The DRP directed the LdAO to allow credit period of 60 days from the date of invoice to determine the delayed period and to apply short term deposit rate of SBI prevailing for financial year relevant to assessment year under consideration 13.2 The Ld.AR submitted that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT reported in (2015) 62 taxmann.com 79 deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. reported in (2017) 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Hon’ble Delhi Tribunal in case of Bechtel India v. Dy. CIT reported in (2016) 66 taxmann.com 6, which subsequently upheld by Hon'ble Delhi High Court vide order dated 21/07/16 in ITA No. 379/2016, also upheld by Hon'ble Supreme Court vide order dated 21/07/17, in CC No. 4956/2017. 13.3 It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. 13.4 On the contrary Ld.CIT DR submitted that interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. He referred to decision of Hon’ble Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at Page 20 of 23 IT(TP)A No. 3367/Bang/2018 length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. reported in (2013) 215 Taxman 108, which dealt with 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?' 13.5 He pointed out that while answering the above question, Hon'ble Bombay High Court noticed that amendment to section 92B has been carried out by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be determined by Ld.TPO. In so far as charging of rate of interest is concerned, he relied on decision of the Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. reported in (2015) 55 taxmann.com 523 holding that currency in which such amount is to be re-paid, determines rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined. Page 21 of 23 IT(TP)A No. 3367/Bang/2018 We have perused the submissions advanced by both the sides in the light of the records placed before us. 13.6 Finance Act, 2012 has inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression "international transaction" shall include— .......(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;....' 13.7 We note that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers Assessment Year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. 13.8 This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT in case of Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15- 7-2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., Page 22 of 23 IT(TP)A No. 3367/Bang/2018 hence it is an international transaction as per explanation to section 92 B of the Act. We also perused decision relied upon by the Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by the Ld.AR. 13.9 Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions (P.) Ltd. v. Dy. CIT reported in (2018) 91 taxmann.com 286 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." 13.10 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above Page 23 of 23 IT(TP)A No. 3367/Bang/2018 referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly Ground nos. 15 to 20 stands allowed for statistical purposes. In the result, the appeal filed by assessee stands allowed. Order pronounced in open court on 30 th November, 2021. Sd/- Sd/- (B.R. BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 30 th November, 2021. /MS/ Copy to 1. The Appellant 2. The Respondent 3. CIT(A) 4. Pr. CIT 5. DR, ITAT, Bangalore. 6. Guard File By order Assistant Registrar Income-tax Appellate Tribunal Bangalore