Mavenir Systems Private Limited, Bengaluru V. Deputy Commissioner Of Income Tax, Circle-4(1)(1), Bangalore

ITA 453/BANG/2022

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The case involves M/s. Mavenir Systems Pvt. Ltd., a software development company, appealing against the final assessment order passed by the Deputy Commissioner of Income Tax, which included a transfer pricing adjustment. The primary contention revolved around the selection of comparables for determining the arm's length price of international transactions. The Tribunal examined the functional comparability of various companies and the appropriateness of the margins computed by the TPO. The Tribunal's decision led to the exclusion of some comparables and remanded others for re-evaluation, emphasizing the need for a detailed analysis of the functions, assets, and risks (FAR) of the comparables.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124407 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 04-01-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 26-05-2022
• Other Referred Cases: Arm Embedded Technologies Pvt. Ltd. v. DCIT, GlobalLogic India (P.) Ltd. V. DCIT, Infor (India) Pvt. Ltd. v. ACIT, Kusum Healthcare Pvt.Ltd vs. ACIT, Bechtel India vs DCIT, Ameriprise India Pvt. Ltd. vs. ACIT, CIT vs. Patni Computer Systems Ltd., Instrumentation Corpn. Ltd. v. Asstt. DIT, Orange Business Services India Solutions Pvt. Ltd. vs. DCIT, Avenue Asia Advisors Pvt. Ltd. vs. DCIT, CIT vs. Cotton Naturals (I) Pvt. Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Retrospective amendment; Question of law; Notional interest
• Section: 92; 92B; 133(6); 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(TP)A No. 453/Bang/2022 Assessment Year : 2017-18 M/s. Mavenir Systems Pvt. Ltd., Building Beach E1 2 nd Floor, Manyata Embassy Business Park, Outer Ring Road Hebbal Kr Puram Section, Bengaluru – 560 045. PAN: AAECM9663N Vs. The Deputy Commissioner of Income Tax, Circle – 4 (1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Smt. Tanmayee Rajkumar, Advocate Revenue by : Dr. Manjunath Karkihalli, CIT DR Date of Hearing : 05-01-2023 Date of Pronouncement : 23-03-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 29.04.2022 passed by the Ld.DCIT, Circle 4(1)(1), Bangalore for A.Y. 2017-18. The Ld.AR has relied on the specific grounds of appeal filed before this Tribunal which are as under: Page 2 of 32 IT(TP)A No. 453/Bang/2022 Page 3 of 32 IT(TP)A No. 453/Bang/2022 2. Brief facts of the case are as under: 2.1 The assessee is a wholly owned subsidiary of Mitel Mobility Inc. The assessee is engaged in the business of development of software and support activities with respect to broadband and voice over internet technology. Page 4 of 32 IT(TP)A No. 453/Bang/2022 2.2 The Ld.AO observed that assessee had international transaction with the associated enterprises exceeding Rs. 15 Crores and accordingly the case was referred to the transfer pricing officer to determine the arms length price of such international transactions. On receipt of the reference, the Ld.TPO called for economic details of the international transaction between assessee and the AE. The details are as under: Particulars Amount in Rs. Receipt towards provision of software development support services Rs. 2,50,05,79,788/- Recovery of expenses Rs. 1,90,02,567/- Reimbursement of expenses Rs. 4,09,87,160/- OTHER TRANSACTIONS REFLECTED IN THE TP STUDY Other Payables Rs. 2,66,38,856/- Other Receivables Rs. 8,55,46,525/- Trade Receivables Rs.56,29,06,887/- 2.3 The Ld.TPO noted that assessee had computed its margin at 15.02% by using OP/OC as the PLI. It was observed from the transfer pricing study that assessee had selected 12 comparables with median of 7.37% as under: Sl. No. Name of the company Weighted average (in %) 1. Evoke Technologies Pvt. Ltd. 4.77 2. Harbinger Systems Pvt. Ltd. 9.17 3. Threesixty Logica Testing Services Pvt. Ltd. 44.04 4. Maveric Systems Ltd. 0.37 5. CG-VAK Software and Exports Ltd. 8.65 6. OFS Technologies Ltd. 32.53 7. Isummation Technologies Ltd. 3.20 Page 5 of 32 IT(TP)A No. 453/Bang/2022 8. Rheal Software Ltd. 2.80 9. Sagarsoft (India) Ltd. 4.17 10. Cigniti Technologies Ltd. 17.50 11. R Systems International Ltd. 25.48 12. Sasken Technologies Ltd. 6.09 35 th Percentile 4.77 Median 7.37 65 th Percentile 9.17 2.4 The Ld.TPO recomputed the margin of assessee at 14.65% as under: Operating Income Rs. 252,09,28,788/- Operating Cost Rs. 219,87,86,149/- Operating Profit (Op. Income – Op. Cost) Rs. 32,21,42,639/- Operating/Net mark-up (OP/OC) 14.65% and based on following filters selected a set of 20 comparables as under: Step Description 1. Companies having different financial year ending (i.e. not March 31,2017) or data of the company which does not fall within 12-month period i.e. 01-04-2016 to 31-03-2017-rejected. 2. Companies whose income was less than Rs. 1 Crore – rejected. 3. Companies whose SWD service income is less than 75% of its total operating revenues – rejected. 4. Companies who have more than 25% related party transactions of the sales – rejected. 5. Companies who have export service income less than 75% of the sales – rejected. 6. Companies with employee cost less than 25% of turnover – rejected. 2.5 Comparables selected by TPO Sl. No. Name of the Company weighted average (in %) 1. Rheal Software Pvt. Ltd. -1.85 2. Kals Information Systems Ltd. 3.62 3. Infomile Technologies Ltd. 10.43 4. Harbinger Systems Pvt. Ltd. 14.1 5. CG-VAK Software & Exports Ltd. 15.09 6. Larsen & Toubro Infotech Ltd. 21.14 7. Great Software Laboratory Pvt. Ltd. 21.24 8. Mindtree Ltd. 24.17 Page 6 of 32 IT(TP)A No. 453/Bang/2022 9. R Systems International Ltd. 24.40 10. Persistent Systems Ltd. 26.17 11. Tata Elxsi Ltd. 26.19 12. Infobeans Technologies Ltd. 26.44 13. Aptus Software Labs Pvt. Ltd. 26.46 14. Nihilent Ltd. 29.82 15. OFS Technologies Ltd. 29.93 16. Cygnet Infotech Pvt. Ltd. 30.19 17. Infosys Ltd. 39.50 18. Threesixty Logica Testing Services Pvt. Ltd. 41.94 19. Cybage Software Pvt. Ltd. 57.82 20. Consilient Technologies Pvt. Ltd. 65.14 35 th Percentile 21.24 Median 26.18 65 th Percentile 26.46 2.6 The Ld.TPO thus computed the shortfall being Rs.25,34,99,575/- as under: Taxpayers operating revenue Rs. 2,52,09,28,788/- Taxpayer operating cost Rs. 2,19,87,86,149/- Taxpayers operating profit Rs. 32,21,42,639/- Taxpayers PLI 14.65% 35 th Percentile Margin of comparables set 21.24% Adjustment required (if PLI<35 th Percentile) Yes Median margin of comparable set 26.18% Arm’s length price Rs. 2,77,44,28,363/- Price received Rs. 2,52,09,28,788/- Shortfall being adjustment u/s. 92CA Rs. 25,34,99,575/- 2.7 On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order on 02.06.2021 incorporating the proposed TP adjustment. On receipt of the draft assessment order, the assessee filed objections before the DRP. The DRP accepted the contentions of assessee in respect of inclusion of Sagarsoft India Ltd. and Isummation Technologies Ltd. and directed the TPO to reconsider the margins of certain companies. 2.8 The DRP however rejected the submissions of the assessee in respect of exclusion of comparables sought by the assessee. Post Page 7 of 32 IT(TP)A No. 453/Bang/2022 the DRP directions, the Ld.AO following were the comparables that remained. Sl. No. Name of the Company 1. Kals Information Systems Ltd. 2. Rheal Software Pvt. Ltd. 3. Isummation Technologies Pvt. Ltd. 4. Sagarsoft India Pvt. Ltd. 5. Infomile Technologies Ltd. 6. Harbinger Systems Pvt. Ltd. 7. CG-VAK Software & Exports Ltd. 8. Larsen & Toubro Infotech Ltd. 9. Great Software Laboratory Pvt. Ltd. 10. Mindtree Ltd. 11. R Systems International Ltd. 12. Persistent Systems Ltd. 13. Tata Elxsi Ltd. 14. Infobeans Technologies Ltd. 15. Aptus Software Labs Pvt. Ltd. 16. Nihilent Ltd. 17. OFS Technologies Ltd. 18. Cygnet Infotech Pvt. Ltd. 19. Infosys Ltd. 20. Threesixty Logica Testing Services Pvt. Ltd. 21. Cybage Software Pvt. Ltd. 22. Consilient Technologies Pvt. Ltd. 35 th Percentile 15.09% Median 23.79% 65 th Percentile 25.20% 2.9 The Ld.AO thus passed the final assessment order by recomputing the TP adjustment at Rs.20,12,85,769/-. Before this Tribunal, assessee has raised grounds challenging exclusion of various comparables however following are the issues that were pressed by the Ld.AR at the time of arguments. a. That Larsen & Toubro Infotech Ltd., Great Software Laboratory Pvt. Ltd., Mindtree Ltd., R Systems International Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., Infobeans Technologies Ltd., Aptus Software Labs Pvt. Ltd., Nihilent Ltd., OFS Technologies Ltd., Cygnet Infotech Pvt. Ltd., Page 8 of 32 IT(TP)A No. 453/Bang/2022 Infosys Ltd., Cybage Software Pvt. Ltd., and Consilient Technologies Pvt. Ltd. ought to be excluded on account of the companies being functionally dissimilar to the assessee. (Ground No. 1.5) b. That Sasken Communication Technologies Ltd., Maveric Systems Ltd. and Evoke Technologies Pvt. Ltd. ought to be included in the final list of comparables as the companies are functionally comparable to the assessee. (Ground No. 1.6) c. The TPO erred in computing the margins of certain comparable companies. (Ground No. 1.7) d. That the lower authorities erred in computing an adjustment towards notional interest on outstanding receivables (Ground No. 2) 2.10 Before we undertake the comparability analysis it is sine qua non to understand the FAR of the assessee for the year under consideration, which is as under: Page 9 of 32 IT(TP)A No. 453/Bang/2022 Page 10 of 32 IT(TP)A No. 453/Bang/2022 Page 11 of 32 IT(TP)A No. 453/Bang/2022 Page 12 of 32 IT(TP)A No. 453/Bang/2022 Page 13 of 32 IT(TP)A No. 453/Bang/2022 Page 14 of 32 IT(TP)A No. 453/Bang/2022 2.11 Based on the above, we shall carry out the comparability in respect of the comparables sought for inclusion / exclusion by the assessee. 3. Ground no. 1.5 raised by the assessee seeking the following comparables to be excluded. a) Larsen & Toubro Infotech Ltd., b) Great Software Laboratory Pvt. Ltd., c) Mindtree Ltd., d) R Systems International Ltd., e) Persistent Systems Ltd., f) Tata Elxsi Ltd., g) Infobeans Technologies Ltd., h) Aptus Software Labs Pvt. Ltd., i) Nihilent Ltd., j) OFS Technologies Ltd., k) Cygnet Infotech Pvt. Ltd., l) Infosys Ltd., Cybage Software Pvt. Ltd., and m) Consilient Technologies Pvt. Ltd. 3.1 The Ld.AR submitted that from the above list, if following six comparables are considered for exclusion, the assessee would be within the acceptable margin. She however prayed that the remaining comparables may be left open with the liberty to argue in an appropriate circumstances. The six comparables that has been argued by the assessee are i) Larsen & Toubro Infotech Ltd. ii) R Systems International Ltd. iii) Persistent Systems Ltd. iv) Infobeans Technologies Ltd. v) Infosys Ltd. vi) Tata Elxsi Ltd. Page 15 of 32 IT(TP)A No. 453/Bang/2022 I. Larsen & Toubro Infotech Ltd.:- (a) The Ld.AR submitted that this company is engaged in functionally diversified activities including analytics, automation, blockchain, IoT, infrastructure management services, etc. which are not comparable to the services rendered by the assessee. It is also submitted that L&T is engaged in sale of products and licenses and segmental details as regards the same are not available. (b) The Ld.AR referring to page nos. 820, 833, 940 and 941 submitted that during the year under consideration, L&T has acquired AugmentIQ, and GDA Technologies Ltd. amalgamated with the company. It is submitted that the company has grown inorganically, and the inorganic growth is bound to have an impact on the margin of the company. (c) It was further submitted that this company has significant onsite activity and has also carried out substantial research and development activity during the year on latest technologies, the expenditure in respect of which amounts to Rs. 270 million. (d) The Ld.AR submitted that this company is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles, intellectual property rights and business rights. The company also owns proprietary software products which are developed in-house. Further, she submitted that L&T enjoys significant brand value. As a result of this high brand value, the company enjoys a high bargaining power in the market resulting in extraordinary profits. It was also submitted that this company incurs significant ‘consultancy charges’. Page 16 of 32 IT(TP)A No. 453/Bang/2022 (e) Reliance was placed on the following decisions of Coordinate Bench of this Tribunal to submit that this company has been consistently excluded for the above reasons. 1. Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021; 2. Hon’ble Delhi Bench of the Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17; 3. Hon’ble High Court of Delhi in the case of PCIT v. Saxo India P. Ltd. (reported in (2016) 74 taxmann.com 88)), and 4. Hon’ble Hyderabad Bench of this Tribunal in the case of Infor (India) Pvt. Ltd. v. ACIT (order dated 25.08.2022 passed in ITA-TP No. 228/Hyd/2022) for the assessment year 2017-18. II. Infosys Ltd. (a) The Ld.AR submitted that this company earns income from both rendering software services and development of products. The company provides end-to-end business solutions like business consulting, technology, engineering and outsourcing services. In addition, the company offers software products and platforms. She submitted that despite rendering diverse services, there are no segmental details in respect of the services rendered. The company also heavily focuses on research and development activity for developing new functionalities and patenting innovative technologies and incurred significant expenditure for this account, amounting to around Rs. 351 Crore during FY 2016-17. The Ld.AR thus submitted that the services rendered by the company are not functionally comparable to the routine SWD services rendered by the assessee. (b) The Ld.AR submitted that Infosys owns significant brand value and focuses on immense brand building. For this purpose, it incurs Page 17 of 32 IT(TP)A No. 453/Bang/2022 significant brand building expenses, which goes to help the company have a premium pricing for its services. The company owns non- routine intangibles which are different from the intangibles owned by the assessee. The company also invests in products which helped the company establish itself as a credible IP Owner. The company owns several Edge products/platforms and six other product-based solutions. (c) It is submitted that this company has significant activities based on onsite business model, generating around 54.2% of its revenue vide onsite location during FY 2016-17. (d) Relying on the following decisions of Coordinate Bench of this Tribunal, the Ld.AR submitted that this company has been consistently excluded for the above reasons. a) Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021), b) the decision of the Hon’ble Delhi High Court in the case of CIT v. Agnity India Technologies P. Ltd. (reported in (2013) 36 taxmann.com 289 (Delhi)), and c) on the decision of the Hyderabad Bench of this Hon’ble Tribunal in Infor (India) Pvt. Ltd. v. ACIT (order dated 25.08.2022 passed in ITA-TP No. 228/Hyd/2022) for the assessment year 2017-18. (e) On the contrary, the Ld.CIT.DR submitted that assessee is a product company and that assessee before us is also into a software development consultancy. Referring to various extracts from an internet search engines, the Ld.DR argued that the functions carried out by the assessee is similar to that of L&T and therefore cannot be excluded. The Ld.DR relied on the decision of Coordinate Bench of this Tribunal in case of Blue Coat Page 18 of 32 IT(TP)A No. 453/Bang/2022 Network (India) Pvt. Ltd. vs. DCIT in IT(TP)A No. 78/Bang/2019 by order dated 23.11.2020 for A.Y. 2014-15. (f) In respect of Infosys Ltd., the Ld.DR submitted that as assessee is a product company for the above reasons, the comparable should not be excluded. We have perused the submissions advanced by both sides in the light of records placed before us. (g) We note that the objections raised by the Ld.DR are based on the general industry classifications. The primary objection raised by the DR is that the assessee is a product company. However from the TP transfer pricing order, we note that the Ld.TPO has not categorised assessee to be a product company. We refer to page 44 of the TP order wherein the TPO himself prays the distinction between a software product company and a software service company and has concluded by observing that a product company should have off the shelf products which are commercially saleable. Further, the Ld.TPO himself has observed in page 41 that website is not a proper source of information and is only a tool being used by the company to attract new clients and customers. Further, the Ld.TPO referring to the annual reports of the comparables selected the companies that mentioned its activities to be in the nature of software development. We therefore do not find it appropriate to go by the website search carried out by the DR that is filed before us. (h) Coming to the decision of Coordinate Bench of this Tribunal in case of Blue Coat Network (India) Pvt. Ltd. vs. DCIT (supra), we note that L&T Infotech Ltd. was remanded to the Ld.TPO in the said decision by placing reliance on the decision of Goldman Page 19 of 32 IT(TP)A No. 453/Bang/2022 Sachs Pvt. Ltd. v. JCIT (Order dated 29.01.2020 passed in ITA No.3244/Bang/2018). (i) On perusal of the said decision, in case of Goldman Sachs Pvt. Ltd. v. JCIT (supra), we note that no argument in respect of letter of segmental details in case of L&T Infotech has been argued and therefore it has been remanded which was followed in case of Blue Coat Network (India) Pvt. Ltd. vs. DCIT (supra). In the present facts, the Ld.AR categorically took us to the annual reports wherein this revenue from operations at page 911 has been shown to be from software services and Note no. 26 at page 932 reveals that there is revenue generated by this company from sale of products. Further at page 916, the value of intangibles reveals the amount of products i.e. generated and owned by this company which is not the case in the present assessee. The present assessee is found to be a captive service provider who carries out software development services in accordance with the direction of its associated enterprises and is compensated on a cost+mark-up basis. Therefore in our considered opinion, both the comparables cannot be considered to be fit for being included. Based on the above observations, we do not find any reason to uphold the inclusion of L&T Infotech Ltd. and Infosys Ltd. Accordingly we direct the Ld.AO/TPO to exclude L&T Infotech Ltd. and Infosys Ltd. from the final list. III. R Systems International Ltd. (a) It is submitted that R Systems fails the different financial year filter applied by the TPO. R Systems follows January to December as the financial year as opposed to March which is considered as the Page 20 of 32 IT(TP)A No. 453/Bang/2022 financial year end by the assessee. It is submitted that while the TPO applied a ‘different financial year ending' filter to reject companies which followed financial year ending other than March 31, this company came to be retained in the final list of comparables. Further, the DRP affirmed the application of the filter and held that companies following different financial year, including R Systems, ending cannot be included. While so, proceeding on an erroneous basis that the company is seeking the company’s inclusion in the final list, the DRP rejected the objection. It is submitted that in view of the DRP’s directions itself, the company ought to be excluded from the final list of comparables. (b) Further, it is submitted that R Systems was rejected by the TPO from the list of comparables for the assessment year 2012-13 on the ground that the financial year end that it follows differs from the financial year of the assessee. Submissions are placed at pages 154- 155 of the appeal set and 222-223 of the paperbook. (c) Pertinently, it is submitted that the extrapolated details of the company are not available, and therefore the margin of the company cannot be computed for the financial year ending March 31, and therefore the company ought to be excluded from the final list of comparables (d) Reliance in this regard is placed on the decision of this Hon’ble Tribunal in the case of ACI Worldwide Solutions Pvt. Ltd. v. ACIT reported in [2022] 140 taxmann.com 594. (e) The Ld.DR on the contrary relied on the observations of the DRP. We have perused the submissions advanced by both sides in the light of records placed before us. Page 21 of 32 IT(TP)A No. 453/Bang/2022 (f) This Tribunal in the above referred decision has restored R Systems International Ltd. with the direction to verify if the said company has prepared the financials for financial year ending on March 31 or if it could be reasonably extrapolated. We accordingly remand this comparable to the Ld.AO/TPO for reverification based on similar direction. IV. Persistent Systems Ltd. (a) It is submitted that Persistent is functionally dissimilar to the Appellant and hence cannot be considered as a comparable. The company is engaged in licensing and sale of products, technology innovation and also earns royalty income. However, segmental details as regards its diverse services are unavailable. Considering the same, it can be observed that Persistent is engaged in software product development unlike the Appellant which is a low-risk captive SWD service provider. Even going by the company’s reply to the TPO’s notice under Section 133(6) of the Act, the company is predominantly engaged in the business of providing outsourced product development services, which are vastly different from the services rendered by the Appellant. (b) The company undertakes significant R&D activities to develop technologies and intellectual property to differentiate themselves form the industry and has established ‘Persistent Labs’ to focus on R&D activities. (c) Moreover, the company has also incurred significant expenses in foreign currency, demonstrating that it renders significant onsite services, which business model is different from that of the Appellant’s. Page 22 of 32 IT(TP)A No. 453/Bang/2022 (d) Reliance was placed by Ld.AR on following decisions in support of the above submissions. i) the decision of Hon’ble Delhi Court in the case of PCIT v. Cashedge India Pvt. Ltd. (Order dated 04.05.2016 passed in ITA No. 279/2016) ii) the decision of this Hon’ble Tribunal in Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021). iii) the decision of the Hyderabad Bench of the Hon’ble Tribunal in Infor (India) Pvt. Ltd. v. ACIT (order dated 25.08.2022 passed in ITA-TP No. 228/Hyd/2022) for the assessment year 2017-18. (e) We note that this company is mostly into product development and owns huge intellectual properties. It is also noted that there is no segmental details available in respect of the various systems of revenue earned by this company. Under such circumstances, we do not find it appropriate to be included in the final list. Accordingly we direct the Ld.AO/TPO to exclude this company. V. Tata Elxsi Ltd. (a) It is submitted that Tata Elxsi is functionally dissimilar to the Appellant and cannot be accepted as a comparable. The company is engaged in providing high end services in the nature of technology consulting, product design, development and testing services, design and technology services for consumer goods sector, high-end content development and 3D animation services for media and entertainment industry. It is submitted that the services rendered in the SWD segment are in the nature of embedded product design, industrial design and visual computing labs, which are not comparable to the services rendered by the Appellant. Further, it is Page 23 of 32 IT(TP)A No. 453/Bang/2022 submitted that the company renders services in niche areas as opposed to routine SWD services rendered by the Appellant. (b) Further, it is submitted that Tata Elxsi is focused on research and development activities and incurs expenses for developing new functionalities and patenting innovative technologies. (c) Detailed submissions are placed at pages 188-190 of the appeal set and 260-261 of the paperbook. (d) Reliance was placed on the decision of the Hon’ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. v. ACIT by order dated 25.08.2022 passed in ITA-TP No. 228/Hyd/2022 for the assessment year 2017-18. We have perused the submissions advanced by both sides in the light of records placed before us. Admittedly this company is into research and development activities and has developed various product design, industrial design etc. It is also noted that though this company is into software development services, in the process has developed various products that has been sold and revenue has been generated from sale of products. The segmental details in respect of software services rendered and product sale is not available in the financials of this company. It is noted that Hon’ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. vs. ACIT (supra) for similar reason has excluded this company from the final list. We therefore direct this comparable to be excluded from the final list as it is not comparable with a captive service provider like that of assessee. Page 24 of 32 IT(TP)A No. 453/Bang/2022 VI Infobeans Technologies Ltd. (a) It is submitted that Infobeans is functionally dissimilar to the Appellant. The company is engaged in providing software engineering services primarily in Custom application development (“CAD”), Content Management Systems (“CMS”), Enterprise Mobility, big data analytics. Though the annual report of the company mentions that the company is earning 100% revenues from sale of software services, such services are in the nature of CAD,CMS etc., which are not pure software development. It is submitted that the software services provided by Infobeans are in the nature of KPO services and not pure software development services as defined in the safe harbour rules. Further, it is submitted that Infobeans has not provided any segmental information bifurcating revenue generated from SWD services and that of KPO services. (b) Further, the company owns significant intangible assets. Further, the revenue increased from Rs. 35 crore (FY 2014-15) to Rs. 62 crore (FY 2015-16) in a period of 1 year (76%). This demonstrates that the company does not reflect the market standard, and therefore, the company ought to be excluded from the final list of comparables. (c) Detailed submissions are made at pages 173 of the appeal set and 242-243 of the paperbook. (d) The Ld.AR placed reliance on the following decisions. i) this Hon’ble Tribunal in the case of NTT Data FA Insurance Systems (India) Pvt. Ltd. (order dated 03.10.2022 passed in IT(TP)A No. 261/Bang/2021) ii) this Hon’ble Tribunal in the case of Arm Embedded Technologies Pvt. Ltd. v. DCIT (Order dated 30.08.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 235/Bang/2021); Page 25 of 32 IT(TP)A No. 453/Bang/2022 iii) this Hon’ble Tribunal in Airlinq (Order dated 28.07.2022 passed by this Hon’ble Tribunal in IT(TP)A No. 231/Bang/2021); iv) Hyderabad Bench of the Hon’ble in ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021 at para 7]; v) of the Delhi Bench of the Hon’ble Tribunal in GlobalLogic India (P.) Ltd. V. DCIT (reported in [2022] 134 taxmann.com 35)) for AY 2016-17, and vi) the decision of the Mumbai Bench of this Hon’ble Tribunal in Red Hat India Pvt. Ltd.g v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021). (e) We note that for the above submitted objections by the Ld.AR, this company has been excluded by Coordinate Bench of this Tribunal in case of Airlinq (supra) by observing as under: Accordingly, we direct the Ld.AO/TPO to exclude this company from the final list. In respect of the remaining comparables, we grant liberty to the assessee to argue in an appropriate circumstances as submitted by the Ld.AR. Accordingly, ground no. 1.5 raised by the assessee stands partly allowed. 4. Ground no. 1.6 is in respect of the following three comparables sought for inclusion. a) Maveric Systems Ltd. b) Evoke Technologies Pvt. Ltd. and c) Sasken Communication Technologies Ltd. 4.1 The Ld.AR relied on the following decisions. a) the decision of this Hon’ble Tribunal in Arm Embedded Technologies Pvt. Ltd. v. DCIT (order dated 30.08.2022 passed in IT(TP)A No. 235/Bang/2021) for AY 2016-17 b) the decision of the Hyderabad Bench of the Hon’ble Tribunal in ADP Pvt. Ltd. v. DCIT (order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021). Page 26 of 32 IT(TP)A No. 453/Bang/2022 4.2 The Ld.TPO rejected the above companies for the reason that they are functionally not similar though they are alleged to have been rendering SWD services. The Ld.AR submitted that in following decisions of Coordinate Bench of this Tribunal, above comparables have been directed to be included. 4.3 We therefore remand Maveric Systems Ltd. and Evoke Technologies Pvt. Ltd. to be readjudicated by the Ld.TPO based on the annual reports of these companies. The Ld.TPO is directed to verify the FAR analysis of these companies and to consider the claim of assessee in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 4.4 Sasken Communication Technologies Ltd. 4.4.1 It is submitted that this comparable has been excluded by the Ld.TPO as it is involved in R&D activities and owns huge patents. We have hereinabove excluded Infosys Ltd., L&T Infotech Ltd. for the reason that they are into research and development activities and owns huge intangibles which is not akin to a captive service provider. Applying the same principle, we do not find any infirmity in exclusion of Sasken Communication Technologies Ltd. by the Ld.TPO. Accordingly, we reject this comparable sought for exclusion by assessee. Accordingly ground no. 1.6 raised by assessee stands partly allowed. 5. Ground no. 1.7 has been raised by assessee seeking the correction in the margins of the comparable companies. It is submitted that assessee has filed all the relevant details in Page 27 of 32 IT(TP)A No. 453/Bang/2022 respect of the comparables that needs to be verified by the Ld.TPO/AO. We thus direct the Ld.AO/TPO to recompute the margins in accordance with law. Accordingly this ground stands allowed for statistical purposes. 6. Ground no. 2 is related to the transfer pricing adjustment with respect to outstanding receivables. Primarily the Ld.AR has objected by submitting that no interest is attributable as the same was not charged by the AEs on any delayed payment by the assessee. However, assessee submitted that only two invoices payment were delayed to be paid by the AE with respect to 15 days and one day. In any event, if at all any interest is to be computed, LIBOR rate is to be applied as submitted by the Ld.AR. The Ld.DR relied on the order passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. Admittedly attributing interest to the delayed payment is an international transaction. 6.1 The Ld.AR submitted that the Ld.TPO proposed transfer pricing adjustment in respect of outstanding receivables in respect of trade creditors being the AEs by using 6 months LIBOR rate and CUP as the most appropriate method. The Ld.TPO thus proposed adjustment at 5.8749% amounting to Rs.3,37,183/-. 6.2 The Assessee wishes to submit that the delayed/ outstanding receivables should not be considered as a separate Page 28 of 32 IT(TP)A No. 453/Bang/2022 international transaction. Further, it is humbly submitted that determination of ALP in respect of delayed receivables from inter-company transactions is not required since ALP of inter- company transactions of provision of services has been already determined and no separate adjustment is necessary in this regard. 6.3 The Ld.AR placed reliance on decision of Hon’ble Delhi Tribunal in Kusum Healthcare Pvt.Ltd vs. ACIT reported in (2015) 62 Taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. 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 vs DCIT reported in (2016) 66 taxman.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. 6.4 It was submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction. He also submitted that into company agreements provides for extending credit period with mutual consent and it does not provide any interest clause in case of delay. He also argued that the working capital adjustment takes into account the factors related to delayed receivables as assessee adopted TNMM as the MAM for computing its margin, and therefore no separate adjustment is required to be made. Page 29 of 32 IT(TP)A No. 453/Bang/2022 6.5 On the contrary, Ld.CIT.DR submitted that, interest on receivables is an international transaction and Ld.TPO rightly determined its ALP. In support of her contentions, she placed reliance on decision of Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT (2015- TII-347-ITAT-DEL-TP) wherein it is held that, interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 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;....' . 6.6 Ld.CIT DR submitted 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. He referred to decision of Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at 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 referred to the Page 30 of 32 IT(TP)A No. 453/Bang/2022 decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 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?' 3.5.6. She submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B 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 vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) 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. He thus submitted that the Interest on outstanding receivables have been rightly constituted as independent international transaction 6.7 We have perused the submissions advanced by both the sides in the light of the records placed before us. This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15/07/2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it has been argued that working capital adjustment subsumes sundry creditors. In such situation Page 31 of 32 IT(TP)A No. 453/Bang/2022 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 Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 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. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." 6.8 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR + 300 basis points which is in accordance with the principles laid down by Hon’ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Page 32 of 32 IT(TP)A No. 453/Bang/2022 Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly this ground raised by the assessee stands allowed for statistical purposes. 7. Ground nos. 1 to 1.4 are general in nature and do not require adjudication. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 23 rd March, 2023. Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 23 rd March, 2023. /MS / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file By order Assistant Registrar, ITAT, Bangalore