Systems (India) Pvt. Ltd., of Incometax, 3rd Floor, Indraprastha Circle6(1)(1), Equinox, No.23, Bengaluru. 100 Ft. Inner Ring Road, Ejipura, Bengaluru. PAN AAEC S 2754 E APPLICANT RESPONDENT Applicant by : Shri Sharath Rao, C.A Respondent by : Shri C.H Sundar Rao, CIT Date of hearing : 28.11.2018 Date of : 21.12.2018 Pronouncement ORDER PER SHRI N.V.VASUDEVAN, JUDICIAL MEMBER : This appeal by the assessee is against the final order of assessment dated 30/1/2015 passed u/s 143(3) r.w.s 144C(13) of the Incometax Act, 1961 (in short 'the Act') by DCIT, Circle 6(1)(1), Bangalore relating to asst. year 201011. IT(TP)A No.552/B/15 2 2. Though the assessee has raised several grounds of appeal, the grounds that were pressed for adjudication were grounds Nos. 9, 11 and 15 which relates to determination of arms length price (ALP) in respect of international transaction between the assessee and its Associated Enterprise (AE) and ground No.16 which relates to disallowance u/s.40(a)(ia) of the Act and all other grounds and additional grounds were not pressed for adjudication. 3. As far as ground Nos.9, 11 and 15 are concerned these grounds read as follows: "9. The learned AO erred in adopting a threshold of 0% for applying the Related Party filter ('RPT") as per the directions of the Hon'ble DRP and thereby erred in rejecting the functional comparable companies. 11. The learned AO/learned TPO erred in including companies that do not satisfy the test of comparability. Specifically, the following company should have been rejected: 15. The learned AO/learned TPO erred in re characterizing the debtors outstanding from the AE as loans extended to the AE and thereby erred in computing notional interest on the outstanding balance from the AE. While doing so, the learned AO/learned TPO erred: 15.1 By not appreciating that the debts were outstanding with the AE purely because of genuine business reasons and it was not with a malafide intention to extend indirect credit period to the debtors. IT(TP)A No.552/B/15 3 15.2 In computing the notional interest on the outstanding balances from the AE by adopting an adhoc threshold of 3 months as the arm's length benchmark for making the transfer pricing adjustment. 15.3 Without prejudice, by not computing notional interest only for the period exceeding the threshold interest free period of 3 months considered by the learned TPO. 15.4 By adopting an interest rate of 11.25% (being the prime lending rate) without giving any cogent reason for adopting the same." 4. As already stated these grounds relate to determination of arms length price in respect of international transaction entered into by the assessee with Sunquest Information Systems Inc (Sunquest US). The assessee is a company engaged in the business of rendering Software Development Services. It is wholly owned subsidiary of Sunquest US. The assessee had entered into a master Software Development Agreement with Misys Physicians Systems L.L.C dated 25/5/2005 for rendering software development services. Subsequently another agreement was entered into with Misys Hospital Systems Inc. which was successor in interest of Misys Physicians Systems L.L.C. Misys Hospital Inc was renamed as Sunquest Information Systems Inc (Sunquest US). As per the agreement, the assessee develops, creates, tests and delivers programming materials within the domain of software IT(TP)A No.552/B/15 4 development services. The assessee is compensated on a cost plus basis. 5. As per the provision of sec. 92 of the Incometax Act, income arising out of international transaction has to be determined having regard to