Global Logic India Ltd., New Delhi V. DCIT, Circle-10(1), New Delhi

ITA 8726/DEL/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 9822 (ITAT-DELHI)
• Duration Of Justice: 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Assessment Year: 2015-2016
• Appeal Filed On: 08-11-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 92B; 144C; 13; 22

Judgement Text

, -1, IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI , . . , $ $ $ $ BEFORE MS. SUSHMA CHOWLA, VP & SHRI R.K.PANDA, AM [THROUGH VIDEO CONFERENCING] . / ITA NO.8726/DEL/2019 % % % % % % % % / ASSESSMENT YEAR 2015-16 M/S. GLOBAL LOGIC INDIA LTD., 207, GUPTA ARCADE LSC, PLOT NO.5, MAYUR VIHAR, PHASE I EXTENSION, NEW DELHI-110091. PAN-AABCI2526F .......... &' /APPELLANT VS THE ACIT, CIRCLE-10(1), DELHI. . ()&' / RESPONDENT &' * / APPELLANT BY : SH. AJAY VOHRA, SR. ADV., SH. NEERAJ JAIN, ADV. & SH. ABHISHEK AGARWAL, ADV. ()&' * / RESPONDENT BY : SH. SURENDER PAL, CIT DR * ,- / DATE OF HEARING : 11.06.2020 * ,- / DATE OF PRONOUNCEMENT: 29.06.2020 / ORDER PER SUSHMA CHOWLA,VP THE PRESENT APPEAL FILED BY ASSESSEE IS AGAINST ORD ER OF THE ACIT, CIRCLE-10(1), DELHI DATED 28.09.2019 RELATING TO ASSESSMENT YEAR 2015-16 AGAINST THE ORDER PASSED UNDER SECTION 143(3) R.W.S 144C(13) OF THE INCOME-T AX ACT, 1961 (IN SHORT THE ACT). 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL:- 2 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 1. THAT THE ASSESSING OFFICER ERRED ON [ACTS AND I N LAW IN PASSING ORDER UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT AT AN INCOME OF RS. 56,30,73,240 AS AGAINST RETURNED INCOME OF RS. 41,0 5,03,780 AFTER MAKING TRANSFER PRICING ADJUSTMENT OF RS. 15,25,69,460 UND ER SECTION 92CA(3) OF THE INCOME TAX ACT, 1961 ('THE ACT'). 1.1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADJUSTMENT OF RS.9,24,50,771 TO THE ARM'S LENGTH PR ICE OF THE INTERNATIONAL TRANSACTIONS' OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES UNDERTAKEN WITH THE ASSOCIATED ENTERPRISE ON THE BASIS OF ORDER PASSED BY THE TRANSFER PRICING OFFICER ('TPO')/ DISPUTE RESOLUTION PANEL ('DRP'). 1.2. THAT THE DRP/TPO ERRED ON FACTS AND IN LAW IN CONSIDERING FOLLOWING COMPANIES IN THE FINAL SET OF COMPARABLE COMPANIES ALLEGEDLY HOLDING THEM TO BE FUNCTIONALLY COMPARABLE TO THE APPELLANT: (I) LNFOBEANS TECHNOLOGIES LIMITED (II) LARSEN & TOUBRO INFOTECH LIMITED (III) MINDTREE LIMITED (SEGMENTAL) (IV) THIRDWARE SOLUTION LIMITED (V) TALA ELXSI LTD. (SEGMENTAL) (VI) CYBERCOM DATMATICS INFORMATION SOLUTIONS LTD. (VII) LNTEQ SOFTWARE PRIVATE LIMITED 1.3 WITHOUT PREJUDICE, THAT THE TPO ERRED ON FACTS IN CONSIDERING INCORRECT OPERATING PROFIT MARGIN OF FOLLOWING COMPANIES: (I) TALA ELXSI LIMITED (II) LARSEN & TOURBO INFOTECH LTD. ] 1.4 THAT THE DRP! TPO ERRED ON FACTS UND IN LAW IN NOT ALLOWING APPROPRIATE RISK ADJUSTMENT TO ESTABLISH COMPARABILITY ELL ACCO UNT OF THE APPELLANT BEING A LOW-RISK-BEARING CAPTIVE SERVICE PROVIDER AS OPPOSE D TO THE COMPARABLE COMPANIES WHO WERE INDEPENDENT SOFTWARE DEVELOPMENT SERVICE PROVIDER. 1.5 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP/ TPO ERRED IN REJECTING THE CONTENTION OF THE A PPELLANT REGARDING RISK ADJUSTMENT, HOLDING THAT IN ABSENCE OF ROBUST AND R ELIABLE DATA, BOTH FOR THE APPELLANT AND FOR THE COMPARABLES, RISK ADJUSTMENT CANNOT BE CONSIDERED FOR ENHANCING COMPARABILITY. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN PROPOSING AN ADJUSTMENT OF RS.6,01,18,689 TO THE ARM'S LENGTH PR ICE OF ALLEGED 'INTERNATIONAL 3 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 TRANSACTIONS' OF ACCOUNTS RECEIVABLE UNDERTAKEN WIT H THE ASSOCIATED ENTERPRISE, ON THE BASIS OF THE ORDER PASSED BY THE TPO/ DRP. 2.1 THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN RE-CHARACTERIZING THE ALLEGED TRANSACTION OF DELAY IN RECEIPTS OF RECEIVA BLES AS UNSECURED LOANS ADVANCED TO THE ASSOCIATED ENTERPRISES. 2.2. THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT DELAY IN RECEIPT OF RECEIVABLE IS NOT AN 'INTERNATIONAL T RANSACTION', PER SE, UNDER SECTION 92B OF THE ACT BUT IS A CONSEQUENCE OF AN 'INTERNAT IONAL TRANSACTION' UNDERTAKEN IN THE FORM OF SERVICES RENDERED TO THE ASSOCIATED ENTERPRISE. 2.3 THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE APPELLANT HAS RECEIVED RECEIVABLES FROM UNRELATED P ARTIES WITH SIMILAR DELAY OF PERIOD AND ACCORDINGLY THE DELAY IN RECEIPT OF RECE IVABLES FROM UNRELATED PARTIES SHOULD BE CONSIDERED AS A VALID INTERNAL CUP FOR TH E PURPOSE OF BENCHMARKING. 2.4 THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN NOT ACCEPTING THAT IN ANY CASE THE TRANSACTION OF DELAY IN RESPECT OF RECEIVA BLES WAS CLOSELY LINKED TO THE 'INTERNATIONAL TRANSACTION' OF EXPORT AND SINCE THE PROFIT EARNED BY THE APPELLANT AS A PERCENTAGE OF COST IS HIGHER THAN THE PROFIT EARN ED BY COMPARABLE COMPANIES, NO TRANSFER PRICING ADJUSTMENT WAS EVEN OTHERWISE R EQUIRED TO BE MADE IN THIS REGARD. 2.5. THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT WORKING CAPITAL ADJUSTMENT IS MORE APPROPRIATE MEAS URE TO BENCHMARK THE REALISATION OF TRADE RECEIVABLES OF THE APPELLANT I NSTEAD OF APPLICATION OF AN INTEREST RATE. 2.6 THAT THE DRP/ TPO ERRED OIL FACTS AND IN LAW I N NOT APPRECIATING THAT SIMILAR ADJUSTMENT MADE IN THE PRECEDING YEAR, I.E. ASSESSMENT YEAR 2010-11 AND 2012-13 HAS BEEN DELETED BY THE HON'BLE INCOME TAX APPELLATE TRIBUNAL IN THEIR ORDER DATED 12.12.2017 PASSED IN ITA NO. 1104 /DEL/2015 AND 1115/DEL/2017. 2.7 THAT THE DRP/ TPO ERRED ON FACTS AND IN LAW IN ADDING AN ADHOC MARK-UP OF 400 POINTS ON THE LIBOR RATE OF INTEREST, ARBITR ARILY ON ACCOUNT OF CREDIT RATING RISK, SECURITY RISK, TRANSACTION COST ETC. 2.8 THAT THE RP/ TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE IN TERMS OF MASTER CIRCULAR NO.14/2014-15, RESERVE BAN K OR INDIA ALLOWS A PERIOD OF 12 MONTHS TO ALL COMPANIES FOR RECEIVING REPATRI ATION OF EXPORT SALES PROCEEDS, 4 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 AND THEREFORE, INTEREST IF ANY, OUGHT TO BE IMPUTED ON THE PERIOD OF DELAY BEYOND 12 MONTHS. 3. THE FIRST ISSUE RAISED IN THE PRESENT APPEAL IS AGAINST THE ADDITION OF RS.9.24 CRORES (APPROX.) IN RELATION TO INTERNATIONAL TRANS ACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE TO IT S ASSOCIATED ENTERPRISES (IN SHORT AE). 4. BRIEFLY IN THE FACTS OF THE CASE THE ASSESSEE HA S FURNISHED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS.41.05 CRORES (APPROX.) . THE ASSESSEE WAS WHOLLY OWNED SUBSIDIARY OF GLOBAL LOGIC INC. AND IS ENGAGED IN T HE PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO GLOBAL LOGIC GROUP AND UNRELATED CUSTOM ERS. THE COMPANY OPERATES THROUGH EXPORT ORIENTED UNITS REGISTERED WITH THE S OFTWARE TECHNOLOGY PARKS OF INDIA SCHEME (IN SHORT STPI). 5. THE CASE OF THE ASSESSEE WAS PICKED UP FOR SCRUT INY. THE ASSESSING OFFICER MADE REFERENCE U/S 92CA(1) OF THE ACT FOR DETERMIN ATION OF ARMS LENGTH PRICE (IN SHORT ALP) OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE. AFTER CONSIDERING THE PROFILE OF M/S. GLOBAL LOGIC INC., THE TRANSFER PRICING OFFICER (IN SHORT TPO) NOTED THE PROFILE OF THE ASSESSEE UNDER PARA 2.4 OF THE T POS ORDER. IT WAS FURTHER NOTED THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSAC TION WITH ITS AE. IN RELATION TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES, THE ASS ESSEE HAD APPLIED TRANSACTIONAL NET MARGIN METHOD (IN SHORT TNMM) AS THE MOST APP ROPRIATE METHOD AND THE PROFIT LEVEL INDICATOR (IN SHORT PLI) WAS OPERATING PROF IT/OPERATING COST (OP/OC). THE ASSESSEE HAS SELECTED SET OF 08 COMPARABLE COMPANIE S WITH 35 TH PERCENTILE AND 65 TH 5 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 PERCENTILE MARGIN OF 4.83 %, 19.62%, WHILE USING MU LTIPLE YEAR DATA. THE PLI OF THE ASSESSEE WAS 14.30%. THE TPO ISSUED A SHOW CAUSE N OTICE TO THE ASSESSEE AND WAS OF THE VIEW THAT ENTITY LEVEL MARGIN WORKED OUT TO (-)5.12% OP/OC. THE TPO THEN WENT TO THE LIST OF COMPARABLES SELECTED BY THE ASSESSEE AND POINTED OUT THAT MULTIPLE YEAR DATA COULD NOT BE USED; AND ALSO COMPANY WHERE TURN OVER WAS LESS THAN RS.1 CRORE WAS TO BE DELETED. FURTHER COMPANIES HAVING PERSIS TENT LOSS AND NEGATIVE NETWORK ALSO COULD NOT BE SELECTED AND THE TPO ALSO APPLIED RPT FILTER OF 25% TO THE TURN OVER. CONSEQUENT THERETO, THE TPO SELECTED 11 CONCERNS AS COMPARABLE WHOSE 35 TH PERCENTILE AND 65 TH PERCENTILE WAS 18.54% & 28.81% RESPECTIVELY; MEDIA N 22.12%. THE TPO SHOW CAUSED THE ASSESSEE TO RECAST THE ALP OF THE INTERNATIONAL TRANSACTION RELATING TO PROVISION OF SOFTWARE DEVELOPMENT SERVI CES. THE ASSESSEE IN RESPONSE POINTED OUT THAT WHILE CALCULATING OP/OC MARGIN AT (-5.14%), THE EXCEPTIONAL ITEM OF ESOP EXPENSES HAS BEEN CONSIDERED, BUT THE SAME HAD TO BE EXCLUDED, WHICH WAS NOT ACCEPTED BY THE TPO. HOWEVER, EXPENSES RELATING TO THE EMPLOYEES OF SUBSIDIARY OF THE ASSESSEE WERE EXCLUDED AND THE MARGINS WERE RE- COMPUTED AT 10.48%. THE ASSESSEES OBJECTION ON THE COMPARABLES SELECTED BY THE TPO WERE CONSIDERED AND FINALLY 10 COMPANIES WERE SELECTED AS COMPARABLE, W HOSE 35 TH PERCENTILE AND 65 TH PERCENTILE WAS 19.36%-28.81%; MEDIAN 22.78%. CONSE QUENT THERETO, TP ADJUSTMENT OF RS.25,73,69,131/- WAS PROPOSED BY THE TPO. 6. SECOND ADJUSTMENT WHICH WAS MADE IN THE HANDS OF THE ASSESSEE WAS ON ACCOUNT OF DELAY IN RECEIPT OF PAYMENT FROM THE AE. THE TPO WAS OF THE VIEW THAT WHERE PAYMENT ON ACCOUNT OF SALES TO AE WAS REALIZE D, AFTER SIGNIFICANT TIME PERIOD, WHICH WAS BEYOND THE PERIOD SPECIFIED IN THE AGREEM ENT THEN THIS WAS AN INTERNATIONAL 6 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 TRANSACTION, WHICH HAD TO BE BENCHMARKED IN THE HAN DS OF THE ASSESSEE. THE TPO RELIED ON EXPLANATION (1)(C) TO SECTION 92B, WHICH WAS INSERTED BY FINANCE ACT, 2012, W.E.F. 01.04.2002 AND ALSO SECTION 92S(V) AND RULE 10B(2)(C), THE TPO OBSERVED THAT THE TRANSFER PRICING REGULATIONS WERE TO BE APPLIED KEEPING IN MIND THE OVERALL SCHEME OF THE ASSESSEES BUSINESS ARRANGEMENT. THE TPO HE LD IT TO BE INTERNATIONAL TRANSACTION WITHIN MEANING OF SECTION 92B(1) OF THE ACT AND PROPOSED AN UPWARD ADJUSTMENT OF RS.6,01,18,689/- ON ACCOUNT OF OUTSTA NDING RECEIVABLES. 7. THE ASSESSING OFFICER ISSUED DRAFT ASSESSMENT OR DER AGAINST WHICH THE ASSESSEE FILED OBJECTION BEFORE THE DRP WHICH IN TURN PASSED ORDER DATED 02.08.2019. THE DRP DIRECTED THAT SINCE THE EXTRAORDINARY EXPENDITURE I NCURRED BY THE ASSESSEE ON ESOP, WAS CHARGEABLE TO THE AE FOR PROVISION OF SERVICES, THEN FOR CALCULATING THE ENTITY LEVEL MARGIN OF THE ASSESSEE, SUCH ESOP EXPENSES WERE NON -OPERATING EXPENSES AND THE MARGINS OF THE ASSESSEE WAS RE-COMPUTED AT 18.06%, FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTW ARE DEVELOPMENT SERVICES. FURTHER, COMING TO THE COMPARABLES, DRP OBSERVED THAT IN RES PECT OF THE COMPARABLES MINDTREE LTD., LARSEN & TOUBRO INFOTECH LTD., INFOBEANS TECH NOLOGIES LTD, THIRDWARE SOLUTIONS LIMITED AND TATA ELXSI LTD. SELECTED BY THE TPO, DI RECTIONS OF DRP IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2014-15 SHALL APPLY MU TATIS MUTANDIS FOR THIS YEAR AS WELL. FURTHER, IN RESPECT OF CYBERCOM DATAMATICS IN FORMATION SOLUTIONS LTD., IT WAS OBSERVED THAT THE COMPANY REPORTS REVENUES FROM ONL Y SALE OF SERVICES. THE COMPANY IS PRIMARILY ENGAGED IN PROVIDING SOFTWARE DEVELOPM ENT SERVICES AND ALL OTHER ACTIVITIES ARE INCIDENTAL TO PROVIDING SUCH SERVICES AND IT SH OULD BE RETAINED. CONSEQUENT THERETO, THE TPO PASSED AN ORDER CONSEQUENTLY TO DIRECTIONS OF DRP DATED 23.09.2019 AND THE 7 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 FINAL SET OF COMPARABLES AND THEIR MARGINS WERE RE- COMPUTED I.E 35 TH PERCENTILE AND 65 TH PERCENTILE IS 18.68%-25.22% RESPECTIVELY, MEDIAN 22 .78% AND PROPOSED AN ADJUSTMENT ON ACCOUNT OF ALP OF THE INTERNATIONAL TRANSACTION RELATING TO SOFTWARE DEVELOPMENT SERVICES WAS COMPUTED AT RS.9,24,50,771/-. THE ASS ESSING OFFICER PASSED FINAL ASSESSMENT ORDER U/S 143(3) R.W.S 144C(13) OF THE A CT. 8. THE FIRST ISSUE RAISED BY THE ASSESSEE BEFORE US IS AGAINST THE ADJUSTMENT MADE OF RS.9.24 CRORES (APPROX.) TO THE ALP OF INTERNATI ONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES UNDERTAKEN BY THE ASS ESSEE WITH ITS AE. THE ASSESSEE HAD RAISED SEVERAL ASPECTS IN RELATION TO THE AFORE SAID ADJUSTMENT BUT THE LD.AR FOR THE ASSESSEE POINTED OUT THAT INCASE THREE CONCERNS ARE EXCLUDED, THEN THE MARGINS OF THE ASSESSEE WOULD BE WITHIN 35 TH PERCENTILE AND 65 TH PERCENTILE OF THE MEAN MARGINS OF THE COMPARABLES. IT WAS FURTHER POINTED OUT BY THE LD. AR FOR THE ASSESSEE THAT THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2014-15 IN ITA NO.4740/DEL/2018 VIDE ORDER DATED 01.05.2020 HAS DIRECTED THE EXCLUSION O F TWO CONCERNS I.E LARSEN & TURBO INFOTECH LTD. AND TATA ELXSI LTD. IT WAS FURTHER P OINTED OUT BY THE LD.AR THAT INCASE TWO CONCERNS ARE EXCLUDED THE MARGINS OF THE ASSESSEE W OULD BE WITHIN 35 TH PERCENTILE AND 65 TH PERCENTILE OF MEAN MARGINS OF THE COMPARABLES. HE FURTHER POINTED OUT THAT THE THIRD CONCERN CYBERCOM DATAMATICS INFORMATION SOLUTIONS L TD. WAS FUNCTIONALLY NOT COMPARABLE AS IT WAS ENGAGED IN THE BUSINESS OF DEV ELOPMENT, TESTING, IMPLEMENTATION AND OTHER APPLICATION; THOUGH THE TPO OBSERVED THAT IT HAD CONSIDERED THE SEGMENTAL DETAIL, BUT THE PUNE BENCH OF TRIBUNAL IN PUBMATIC INDIA (P.) LTD. VS ACIT (ITA NO.655/PUN/2017) ASSESSMENT YEAR 2012-13 VIDE ORDER DATED 09.03.2018 HAD EXCLUDED THE SAID CONCERN ON ACCOUNT OF FINANCIAL D ISSIMILARITY WITH THE CONCERN 8 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES. HE THUS SUBMITTED THAT THE MARGINS OF THE SAID CONCERN ALSO SHOULD BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 9. THE LD.DR FOR THE REVENUE ON THE OTHER HAND STRO NGLY PLACED RELIANCE ON THE DIRECTIONS OF THE DRP AND FAIRLY CONCEDED THAT AS F AR AS EXCLUSION OF LARSEN & TOUBRO INFOTECH LTD. & TATA ELXSI LTD. ARE CONCERNED THEN THE DIRECTIONS IN ASSESSMENT YEAR 2014-15 WERE TO APPLY MUTATIS MUTANDI . COMING TO THE PROFILE OF THE ASSESSEE IN THE TP STUDY REPORT AT PAGE 46 TO 48, THE LD.DR FOR THE RE VENUE POINTED OUT THAT THE ASSESSEE WAS ENGAGED IN MUCH BROADER AREA OF OPERATION SO TH E COMPARABLE HAS TO BE INCLUDED, WITH REFERENCE TO CYBERCOM DATAMATICS INFORMATION S OLUTIONS LTD. 10. THE LD.AR FOR THE ASSESSEE IN RE-JOINDER POINTE D OUT THAT SOFTWARE SERVICE PROVIDER HAD DIFFERENT/VARIOUS SPECTRA OF SERVICE P ROVIDER ENGAGED IN DIFFERENT INDUSTRY. REFERRING TO PAGES 45 & 46 OF THE TP REPORT, HE FUR THER POINTED OUT THAT THE ASSESSEE WAS ENGAGED IN RELATION TO SOFTWARE DEVELOPMENT SER VICES. HE FURTHER STATED THAT THERE WAS NO CHANGE IN THE BUSINESS PROFILE OF THE ASSESS EE FROM THE PRECEDING YEAR AND ALSO THERE WAS NO CHANGE IN THE PROFILE OF COMPARABLES. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE WAS SUBSIDIARY OF GLOBAL LOGIC INC. AND WAS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO THE GLOBAL LOGIC GROUP AND UNRELATED CUSTOMERS. THE GLOBAL LOGIC INC. WAS US BASED COMPANY, WAS ENGAGED IN THE PRODUCT DEVELOPMENT SERVICES WORLDWIDE. IT CATERS TO NUMEROUS INDUSTRIES IN VAR IOUS SECTORS. THE ASSESSEE ON THE OTHER HAND WAS PROVIDING SOFTWARE DEVELOPMENT SERVI CES TO ITS CUSTOMER WHICH PRIMARILY WERE THE GROUP CONCERNS OF M/S. GLOBAL LOGIC INC. THE ASSESSEE HAS BEEN ENGAGED IN 9 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 THE SAID PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO ITS AE FOR THE PAST OF SEVERAL YEARS AND THERE IS NO CHANGE IN THE BUSINESS PROFIL E OF THE ASSESSEE. THE ASSESSING OFFICER/DRP HAS ALSO ACCEPTED THE SAME. 12. THE ASSESSEE HAS ADOPTED TNMM METHOD TO BENCHMA RK ITS INTERNATIONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SE RVICES TO ITS AE WITH OP/OC AS PLI. THE ASSESSING OFFICER HAD RE-CALCULATED THE MARGIN OF THE ASSESSEE, AGAINST WHICH OBJECTIONS WERE FILED BEFORE THE DRP AND CONSEQUENT TO THE ORDER OF DRP, MARGINS OF THE ASSESSEE HAS BEEN RE-COMPUTED AT 18.06% AND THE RE IS NO DISPUTE TO THE SAME. THE ASSESSEE HAD APPLIED CERTAIN FILTERS AND HAD AL SO APPLIED MULTIPLE YEAR DATA FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION OF PROVI SION OF SOFTWARE DEVELOPMENT SERVICES TO ITS AE. THE TPO HAD APPLIED REVISED FILTERS AND ALSO DATA FOR CURRENT YEAR AND HAS SELECTED A SET OF COMPARABLES AND FINALLY AFTER THE DIRECTIONS OF THE DRP, THE LIST OF THE COMPARABLES FINALLY SELECTED WAS AS UNDER:- S.NO. NAME OF COMPANY MARGIN AS PER TPO ORDER OP/OC 1. AKSHAY SOFTWARE TECHNOLOGIES LTD. 0.07% 2. CG-VAK SOFTWARE & EXPORTS LTD. 9.39% 3. E-ZEST SOLUTIONS LTD. 12.48% 4. TATA ELXSI LTD. (SEGMENTAL) 18.68% 5. MINDTREE LTD. (SEGMENTAL) 22.12% 6. INTEQ SOFTWARE PVT.LTD. 23.44% 7. LARSEN & TOUBRO INFOTECH LTD. 25.22% 8. INFOBEANS TECHNOLOGIES LTD. 33.06% 9. THIRDWARE SOLUTION LTD. 37.31% 10. CYBERCOM DATAMATICS INFORMATION SOLUTIONS LTD. 70.28% 35 TH PERCENTILE 18.68% 65 TH PERCENTILE 25.22% ASSESSEES MARGIN 18.06% 10 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 13. THE LIMITED ISSUE WHICH HAS BEEN RAISED BY THE ASSESSEE BEFORE US IS IN RESPECT OF INCLUSION OF CERTAIN CONCERNS AS FUNCTIONALLY CO MPARABLE TO THE ASSESSEE. FIRST SUCH CONCERN AGAINST WHICH THE ASSESSEE IS IN APPEAL BEF ORE US IS LARSEN & TOUBRO INFOTECH LTD. AND CASE OF THE ASSESSEE IS THAT THE MARGINS O F THE SAID CONCERN CANNOT BE INCLUDED BECAUSE OF FUNCTIONAL DISSIMILARITY AND DI STORTED SEGMENTAL ACCOUNT. THE COMPANY IS ENGAGED IN THE BUSINESS OF SOFTWARE PROD UCT, COMPUTER PROGRAMMING, CONSULTANCY AND RELATED SERVICES, WHICH IS FUNCTION ALLY DISSIMILAR TO THAT OF THE ASSESSEE. FURTHER, AS PER THE ANNUAL REPORT OF THE COMPANY, T HE COMPANY HAS THREE SEGMENTS: SERVICES, INDUSTRIALS CLUSTER AND TELECOM SEGMENT W HICH REFERS TO PRODUCT ENGINEERING SERVICES (PES). 14. THE SEGMENTAL REPORTING OF LARSEN & TOUBRO INFO TECH LTD. READ AS UNDER:- THE COMPANY HAD 3 BUSINESS SEGMENTS. SERVICES CLUS TER INCLUDES BANKING & FINANCIAL SERVICES, INSURANCE, MEDIA & ENTERTAINMEN T, TRAVEL & LOGISTICS AND HEALTHCARE INDUSTRIALS CLUSTER INCLUDES HI TECH AND CONSUMER ELECTRONICS, CONSUMER, RETAIL & PHARMA, ENERGY & PROCESS, AUTOMO BILE & AEROSPACE, PLANT EQUIPMENT & INDUSTRIAL MACHINERY, UTILITIES AND E&C . TELECOM SEGMENT REFERS TO PRODUCT ENGINEERING SERVICES (PES) WHICH IS A PART OF DISCONTINUED BUSINESS [REFER NOTE S.(12)]. THE COMPANY HAS PRESENTED ITS SEGMENT RESULTS ACCORDINGLY. 15. FURTHER IN THE SEGMENTAL RESULT, THE COMPANY HA S REPORTED UN-ALLOCABLE EXPENSES OF RS.1,93,89,60,396/-. THE REVENUE AND OPERATING P ROFIT OF SEGMENT IS AS UNDER:- PARTICULARS SERVICE CLUSTER INDUSTRIALS CLUSTER TEL ECOM (PES) DISCONTINUED BUSINESS TOTAL (RS.) REVENUE SEGMENTAL OPERATING PROFIT UNALLOCABLE EXPENSES (NET) 24,468,341,824 (20,191,107,744) 5,521,276,983 (4,855,234,977) 22,975,690,744 (22,577,483,587) 5,966,683,197 (6,984,817,534) - (3,670,811,848) - (870,021,098) 47,444,032,568 (46,439,403,178) 11,487,960,180 (12,710,073,609) 1,938,960,396 (2,058,017,445) 11 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 16. THE LD.AR FOR THE ASSESSEE POINTED OUT THAT THE SAID CONCERN HAS BEEN DIRECTED TO BE EXCLUDED ON THE GROUND THAT THE COMPANY WAS A LSO ENGAGED IN THE BUSINESS OF SOFTWARE PRODUCT AND SEGMENTAL INFORMATION WAS NOT AVAILABLE. 17. THE DELHI BENCH OF THE TRIBUNAL IN SAXO INDIA P VT.LTD. VS ACIT IN ITA NO.6148/DEL/2015 RELATING TO ASSESSMENT YEAR 2011-1 2 VIDE ORDER DATED 05.02.2016 HAS DIRECTED THE EXCLUSION OF LARSEN & TOUBRO INFOT ECH LTD. WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF SOFTWARE DEVELO PMENT SERVICES. THE HONBLE DELHI HIGH COURT IN ITA NO.682/2016 HAS DISMISSED THE APP EAL FILED BY THE REVENUE. 18. SIMILARLY IN CASE OF ALCATEL-LUCENT INDIA LTD. VS DCIT IN ITA NO.6856/DEL/2015 VIDE ORDER DATED 24.08.2016, THE DELHI BENCH OF TRI BUNAL HAS DIRECTED THE EXCLUSION OF LARSEN & TOUBRO INFOTECH LTD. ON THE GROUND THAT WH ERE THE CONCERN HAD THREE BUSINESS SEGMENTS THEN IT WAS NOT FUNCTIONALLY SIMILAR TO A CONCERN PROVIDING ONLY SOFTWARE DEVELOPMENT SERVICES. THE HONBLE DELHI HIGH COURT IN ITA NO.515/2017 ALSO DISMISSED THE APPEAL FILED BY THE REVENUE. 19. WE ARE OF THE VIEW THAT WHERE THE COMPANY I.E. LARSEN & TOUBRO INFOTECH LTD. WAS ENGAGED IN THREE BUSINESS SEGMENTS WHICH ARE AL SO REPORTED IN THE SEGMENTAL REPORTING IN THE ANNUAL REPORT OF THE SAID COMPANY, THEN SUCH A CONCERN CANNOT BE SELECTED AS FUNCTIONALLY SIMILAR TO THE CONCERN PRO VIDING ONLY SOFTWARE DEVELOPMENT SERVICES. COMING TO THE SEGMENTAL RESULT, THE COMP ANY ITSELF HAD REPORTED UNALLOCABLE EXPENSES OF RS.193.89 CRORES; THEN SUCH SEGMENTAL D ETAIL CANNOT BE RELIED UPON AS THE MARGINS OF THE SAID CONCERN CANNOT BE FINALIZED IN THE FINAL ANALYSIS. 12 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 20. THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.4 740/DEL/2018 RELATING TO ASSESSMENT YEAR 2014-15 VIDE ORDER DATED 01.05.2020 HAS DIRECTED THE EXCLUSION OF THE SAID CONCERN FROM THE FINAL LIST OF COMPARABLES WHILE BENCHMARKING THE ALP OF THE INTERNATIONAL TRANSACTION BY THE ASSESSEE WITH ITS AE. BEFORE PARTING, WE MAY ALSO REFER TO AN EXTRAORDINARY EVENT UNDER WHICH LARSEN & TOU BRO INFOTECH LTD. INITIATED AND COMPLETED TRANSFER OF ITS PRODUCT ENGINEERING SERVI CES BUSINESS (PES) UNIT TO L&T TECHNOLOGY SERVICES LTD. W.E.F. JANUARY 1, 2014 AS PART OF THE BUSINESS RESTRUCTURING UNDERTAKEN WITHIN THE LARSEN & TOUBRO GROUP. THOUG H THE INITIATION STARTED FROM 01.01.2014 BUT THE WHOLE EFFECT OF THE TRANSACTION WAS DURING THE YEAR UNDER CONSIDERATION. FURTHER, LARSEN & TOUBRO INFOTECH LTD. DURING THE YEAR UNDER CONSIDERATION ACQUIRED INFORMATION SYSTEMS RESOURCE CENTRE PRIVATE LIMITED (ISRC) THEREBY MAKING IT WHOLLY OWNED SUBSIDIARY AND BECAU SE OF SUCH EXTRAORDINARY EVENT OF ACQUISITION, THE SAID CONCERN CANNOT BE HELD TO BE A VALID COMPARABLE AND THUS HAS TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLE. ACCO RDINGLY, WE HOLD SO. 21. COMING TO THE NEXT CONCERN I.E TATA ELXSI LTD. THE CASE OF THE ASSESSEE WAS THAT THE SAID CONCERN WAS NOT FUNCTIONALLY COMPARAB LE. AS PER THE ANNUAL REPORT OF THE COMPANY, IT HAD TWO MAIN BUSINESS SEGMENTS, NAMELY, SYSTEM INTEGRATION & SUPPORT AND SOFTWARE DEVELOPMENT SERVICES. AS PER THE ANNUA L REPORT OF THE SAID COMPANY, IT HAD TWO MAIN BUSINESS: (A) SALE OF TRADED GOODS INC LUDING SALES OF COMPUTERS, NETWORKING AND STORAGE SYSTEMS AND (B) RENDERING OF SERVICES COMPRISING OF PRODUCT DESIGN, GRAPHICS ANIMATION AND GAMING AND SYSTEM IN TEGRATION AND SUPPORT. THE SAID CONCERN IS ENGAGED IN DEVELOPMENT OF HARDWARE AND S OFTWARE FOR EMBEDDED PRODUCTS SUCH AS MULTIMEDIA AND SOME OTHER ELECTRONICS ETC. 13 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 22. THE CASE OF THE REVENUE BEFORE US WAS THAT SEGM ENTAL OF M/S. TATA ELXSI LTD. WERE PICKED UP, THEN THE SAME WERE COMPARABLE FOR B ENCHMARKING THE ASSESSEES TRANSACTION OF SOFTWARE DEVELOPMENT SERVICES. HOWE VER, THE PERUSAL OF THE ANNUAL REPORT REFLECT THAT THE SOFTWARE DEVELOPMENT AND SE RVICES SEGMENT REPORTED BY THE COMPANY, INCLUDES INCOME EARNED FROM PRODUCT DESIGN SERVICES OF RS.76509.58 LACS AND GRAPHICS ANIMATION AND GAMING OF RS.1675.50 LAC S. IN SUCH A SCENARIO, THE SAID SEGMENT CANNOT BE SAID TO BE COMPARABLE TO THE PROV ISION OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS AE. 23. THE DELHI BENCH OF TRIBUNAL IN AGILIS INFORMAT ION TECHNOLOGIES INTERNATIONAL PVT. LTD. VS ITO (ITA NO.786/DEL/2015) VIDE ORDER DATED 26.06.2015 HAS LAID DOWN SIMILAR PROPOSITION. FURTHER, THE TRIBUNAL IN ASSESSEES OW N CASE FOR ASSESSMENT YEAR 2007- 08 ONWARDS AND VIDE PARAS 8.3 & 8.4 HAS DIRECTED E XCLUSION OF THE SAID COMPANY FROM THE FINAL SET OF COMPARABLES ON ACCOUNT OF FUNCTION AL DISSIMILARITY. 24. WE FIND MERIT IN THE PLEA OF THE ASSESSEE IN TH IS REGARD; AS THE BUSINESS PROFILE OF THE ASSESSEE AND OF THE COMPARABLE COMPANY SELECTED ARE SIMILAR AS IN EARLIER YEARS. FOLLOWING THE SAME PARITY OF REASONING, AS IN EARLI ER YEAR, WE DIRECT THE EXCLUSION OF TATA ELXSI LTD. FROM THE FINAL SET OF COMPARABLE. THE LD.AR FOR THE ASSESSEE HAD POINTED OUT THAT IN CASE THE MARGINS OF THE TWO CON CERNS I.E. LARSEN & TOUBRO INFOTECH LTD. AND TATA ELXSI LTD. ARE EXCLUDED FROM THE MARG INS OF THE FINALLY SELECTED CONCERNS, THEN THE 35 TH PERCENTILE AND 65 TH PERCENTILE OF THE COMPARABLE WOULD BE 12.48%-33.06 % AS AGAINST THE MARGIN OF THE ASSESSEE AT 18.06%. A CCORDINGLY, NO ADJUSTMENT HAS TO BE MADE IN THE HANDS OF THE ASSESSEE ON ACCOUNT OF ALP OF THE INTERNATIONAL TRANSACTION 14 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 UNDERTAKEN BY THE ASSESSEE WITH ITS AE. WE DIRECT THE ASSESSING OFFICER/TPO TO DELETE THE ADJUSTMENT MADE IN THE HANDS OF THE ASSESSEE. 25. BEFORE PARTING, WE MAY ALSO CONSIDER THE PLEA O F THE ASSESSEE FOR THE EXCLUSION OF THE CONCERN CYBERCOM DATAMATICS INFORMATION SOLU TIONS LTD. THE SAID CONCERN WAS INCLUDED IN THE FINAL SET OF COMPARABLE AND THE MAR GINS WERE APPLIED BY THE TPO REJECTING THE SUBMISSIONS OF THE ASSESSEE IN THIS R EGARD. 26. WE FIND THAT THE PUNE BENCH OF THE TRIBUNAL IN PUBMATIC INDIA (P.) LTD. VS ACIT IN ITA NO.655/PUN/2017 VIDE ORDER DATED 09.03.2018 HAD DIRECTED THE EXCLUSION OF THE CONCERN CYBERCOM DATAMATICS INFORMATION SOLUTIONS L TD. ON ACCOUNT OF FUNCTIONAL DISSIMILARITY FROM THE FINAL LIST OF COMPARABLES OB SERVING AS UNDER:- 15. SIMILARLY, THE CONCERN CYBERCOM IS ALSO A PROD UCT COMPANY AND WAS PROVIDING SOFTWARE DEVELOPMENT TO ITS ASSOCIATED EN TERPRISES AND WAS ALSO SELLING DEVELOPED SOFTWARE PRODUCTS. BOTH THE ACTI VITIES WERE CLUBBED UNDER ONE SOFTWARE SEGMENT. AS PER THE ANNUAL REPORT OF SAID COMPANY, IT WAS ENGAGED IN PROVIDING CONSULTANCY AND ADVISORY SERVICES AND WAS ALSO CARRYING OUT THE BUSINESS OF DEVELOPMENT, TESTING, MARKETING AND MAN UFACTURING OF INFORMATION TECHNOLOGY PRODUCTS AND SERVICES. THE ANNUAL REPOR T OF THE SAID CONCERN PLACED AT PAGE 918 OF PAPER BOOK DECLARES THE SAID FACTS A ND IT IS UNDISPUTED THAT THE SAID CONCERN IS ENGAGED IN SALE OF SOFTWARE PRODUCT S. FOLLOWING OUR REASONING IN THE PARAS HEREIN ABOVE IN RESPECT OF CYBERMATE, WE HOLD THAT CYBERCOME IS ALSO TO BE EXCLUDED FROM FINAL SET OF COMPARABLES. 27. THE ASSESSEE BEFORE US IS SOLELY ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT CONCERN HENCE, WHERE THE CONCERN WAS AL SO A PRODUCT COMPANY, MARGIN OF THE SAID CONCERN CANNOT BE INCLUDED FOR BENCHMAR KING THE ALP OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE. ACCORDINGL Y, WE DIRECT ITS EXCLUSION FROM THE FINAL SET OF COMPARABLE. 15 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 28. THE LD.AR FOR THE ASSESSEE FAIRLY POINTED OUT T HAT ONCE THE ABOVE SAID CONCERNS ARE EXCLUDED THEN NO UPWARD ADJUSTMENT NEEDS TO BE MADE IN THE HANDS OF THE ASSESSEE WHILE DETERMINING THE ALP OF THE INTERNATI ONAL TRANSACTION OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO IT S AE AND THERE IS NO NEED TO ADJUDICATE ANY OTHER RELATED ISSUE RAISED IN THE GR OUNDS OF APPEAL. ACCORDINGLY, WE DO NOT ADJUDICATE THE RELATED ISSUE RAISED IN THIS REG ARD. GROUND OF APPEAL NOS. 1.1 & 1.2 ARE ALLOWED. 29. GROUND OF APPEAL NO.1 IS GENERAL AND DOES NOT R EQUIRE ANY ADJUDICATION. 30. GROUND OF APPEAL NO.1.3 IS WITHOUT PREJUDICE, H ENCE DOES NOT REQUIRE ANY ADJUDICATION. 31. GROUND OF APPEAL NOS. 1.4 & 1.5 ARE NOT PRESSED ; HENCE DISMISSED AS NOT PRESSED. 32. NOW COMING TO THE NEXT ISSUE RAISED IN THE PRES ENT APPEAL AGAINST THE TRANSFER PRICING ADJUSTMENT MADE ON ACCOUNT OF INTEREST DUE ON RECEIVABLES OUTSTANDING. THE SAID ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2010-11 IN ITA NO.1104/DEL/2015 AND FOR ASSESSMENT YEAR 2012-13 IN ITA NO.1115/DEL/2017 VID E ORDER DATED 12.12.2017. THE TRIBUNAL HAS RELIED ON THE DECISION OF HONBLE DELH I HIGH COURT IN PR. CIT-V VS KUSUM HEALTH CARE PVT.LTD. IN ITA NO.765/2016, JUDGEMENT DATED 25.04.2017 AND HELD THAT NO ADJUSTMENT IS TO BE MADE ON ACCOUNT OF NOTIONAL INT EREST ON RECEIVABLES BY RELYING UPON EXPLANATION (I), (A) & (C) OF SECTION 92B BY TREATI NG THE CONTINUED DEBT BALANCE AS AN INTERNATIONAL TRANSACTION. MOREOVER WHEN THE TAXPA YER IS DEBT FREE COMPANY, THERE IS NO 16 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 QUESTION OF CHARGING ANY INTEREST ON RECEIVABLES. THIS ISSUE HAS ALSO BEEN DECIDED BY HONBLE DELHI HIGH COURT IN CASE OF PR.CIT-1 VS M/S . BECHTEL INDIA PVT. LTD. IN ITA 379/2016 ORDER DATED 21.07.2016. THE RELEVANT FIND INGS OF THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA) IN PARAS 14 TO 18 WHICH ARE BEING REFERENCE BUT NOT BEING REPRODUCED FOR THE SAKE OF BREVITY. 33. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATIO N HAD NOT AVAIL ANY LOAN FROM AES OR UNRELATED THIRD PARTY AND WAS NOT INCURRING ANY INTEREST COST. FURTHER, THERE WAS SIMILAR DELAY IN RECEIPT OF RECEIVABLES FROM OTHERS AND THE ASSESSEE WAS NOT CHARGING ANY INTEREST ON DELAY IN RECEIPT OF RECEIVABLES AGA INST SERVICES RENDERED TO UNRELATED THIRD PARTY. 34. IN SUCH FACTS AND CIRCUMSTANCES AND FOLLOWING T HE RATIO LAID DOWN BY THE HONBLE DELHI HIGH COURT IN KUSUM HEALTHCARE LTD. (SUPRA) A ND ALSO IN LINE WITH THE FINDINGS OF THE TRIBUNAL IN ASSESSMENT YEARS 2010-11 & 2012-13, WE FIND NO MERIT IN MAKING ANY ADJUSTMENT ON ACCOUNT OF INTEREST DUE ON RECEIVABLE FROM ITS AE. GROUND OF APPEAL NOS. 2 TO 2.6 RAISED BY THE ASSESSEE ARE THUS ALLOWED. 35. GROUND OF APPEAL NOS. 2.7 & 2.8 ARE WITHOUT PRE JUDICE BASIS AND THE SAME ARE DISMISSED. 36. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JUNE, 2020. SD/- SD/- (R.K.PANDA) (SUSHMA CHOWLA) $ $ $ $ / ACCOUNTANT MEMBER / VICE PRESIDENT 17 ITA NO.8726/DEL/2019 ASSESSMENT YEAR 2015-16 / 1 DATED : 29 TH JUNE, 2020 * AMIT KUMAR * 1*1(,2132,4 COPY OF THE ORDER IS FORWARDED TO : 1. &'1 / THE APPELLANT 2. ()&'1 / THE RESPONDENT 3. 15 6 17 / THE CIT(A) 4. 81 151 / THE PR. CIT 5. 6. 1 29:1(, 1; 11 ; 1 / DR, ITAT, DELHI :%1<114 GUARD FILE. 1 / BY ORDER , )2,1(, // TRUE COPY // >?$@ >?$@ >?$@ >?$@ , 11 11 11 111; 1;1; 1; 1 1 1 1 ASSISTANT REGISTRAR, ITAT, DELHI