2022 (11) TMI 1336 - AT - Income Tax

Tribunal directs exclusion of comparables, remits interest issue for fresh consideration. Importance of detailed analysis emphasized.

The Tribunal partially allowed the appeal, directing the exclusion of certain comparables for not meeting the turnover filter and for functional ... Comparability - functional analysis - transactional net margin method - arm's length price - working capital adjustment - international transaction - range concept under Rule 10CA - use of multiple year data - remand for fresh considerationFunctional analysis - comparability - captive service provider - Characterisation of the assessee and acceptance that it is a captive service provider performing routine functions and bearing limited risk - HELD THAT: - The Tribunal examined the functions performed, assets employed and risks assumed across SWD, ITeS and MSS segments and accepted the parties' common position that FireEye India is a captive service provider providing routine services to its associated enterprises and bearing limited risk, while the AEs perform principal functions and bear non routine intangibles and significant risks. That characterisation informs the comparability analysis and filters to be applied. [Paras 6]Assessee characterised and accepted as a captive service provider performing routine functions and bearing limited risk.Comparability - functional analysis - exclusion of comparables - Exclusion of specified comparables from the SWD comparable set on grounds of functional dissimilarity or failure of filters - HELD THAT: - Applying functional comparability and turnover/RPT/segmental information filters, and following precedents cited, the Tribunal found Persistent Systems Ltd., Thirdware Solution Ltd., Larsen & Toubro Infotech Ltd., Infosys Ltd., Nihilent Ltd., Aspire Systems (India) Pvt. Ltd., Infobeans Technologies Ltd., R.S. Software (India) Ltd. and Microland Ltd. are not functionally comparable (or fail relevant filters) for bench marking the assessee's SWD segment. The Tribunal explained that where segmental information, material non routine intangibles, divergent business mix or turnover mismatches exist, those companies must be excluded. The Tribunal directed the AO/TPO to exclude these companies from the final comparable list for SWD. [Paras 7, 9]Directed exclusion of the listed comparables from the SWD final set for being functionally dissimilar or failing applicable filters.Comparability - turnover filter - exclusion of comparables - Exclusion of specified comparables from the ITES comparable set for failing turnover/functional tests - HELD THAT: - Having regard to functional dissimilarities, diversification, absence of segmental financials and the turnover criterion (companies exceeding the turnover threshold for comparability), the Tribunal directed exclusion of Tech Mahindra Business Services Ltd., Infosys BPM Ltd., SPI Technologies India Pvt. Ltd. and Eclerx Services Ltd. from the ITES comparable set. The Tribunal relied on earlier coordinate bench decisions applying similar functional and turnover analyses. [Paras 8]Directed exclusion of the listed comparables from the ITES final set for failing turnover or functional similarity tests.Comparability - inclusion of comparables - statistical completeness - Reconsideration (inclusion) of certain comparables omitted from the TPO's search matrix for SWD and ITeS segments - HELD THAT: - The Tribunal found that several comparables proposed by the assessee were not part of the TPO's search matrix and ordered the TPO to reconsider these companies afresh on the basis of the annual reports placed on record. The order allows these comparables to be considered for statistical purposes and requires fresh analysis by the AO/TPO. [Paras 10]Allowed the assessee's request to have the listed comparables (for SWD and ITeS) reconsidered by the AO/TPO for possible inclusion.Comparability - de novo consideration - Marketing and Support Services (MSS) - Remand for de novo benchmarking of the Marketing and Support Services (MSS) segment - HELD THAT: - The Tribunal held that the TPO had not properly considered the assessee's actual functions in the MSS segment and observed that many of the selected comparables perform higher end advertising activities not akin to the assessee's MSS functions. The Tribunal therefore remitted the MSS segment to the AO/TPO for de novo selection and computation of comparables, instructing that functionally similar comparables be chosen in light of tribunal precedent. [Paras 11]MSS comparable selection and margin computation remitted to AO/TPO for de novo consideration.Remand for fresh consideration - examination of exceptional profitability and turnover - Remittal of Cybage Software Pvt. Ltd. for fresh consideration on functionality and turnover grounds - HELD THAT: - Because Cybage showed unusually high profitability and turnover (contentions of super profit and turnover exceeding Rs.200 crores), the Tribunal did not decide its comparability on the papers and remitted the matter to the AO/TPO to examine whether Cybage is functionally comparable or should be excluded for excessive turnover or other functional dissimilarities. [Paras 7]Comparable Cybage Software Pvt. Ltd. remitted to AO/TPO for fresh consideration on functionality and turnover criteria.International transaction - working capital adjustment - arm's length price - Treatment of interest on outstanding inter company receivables remitted for fresh determination with guidance on approach and rate - HELD THAT: - The Tribunal considered competing authorities on whether outstanding trade receivables constitute a separate international transaction or are subsumed within a working capital adjustment (WCA). It set aside the impugned adjustment and remitted the question to the AO/TPO for fresh determination: the AO/TPO must investigate whether the WCA subsumes the receivables (in which case no separate characterization is permissible); if particular receivables fall outside the WCA for the year under consideration, the Tribunal directed that the appropriate interest rate for such receivables is LIBOR + 300 basis points (with a 90 day credit reference) and that the assessee be afforded a hearing. [Paras 12]Issue remitted to AO/TPO for fresh decision; if receivables fall outside WCA, interest to be computed at LIBOR + 300 bps (with hearing to assessee).Final Conclusion: The Tribunal partly allowed the appeal: it accepted the assessee's characterisation as a captive low risk service provider, directed exclusion of multiple specified comparables from the SWD and ITES final lists for functional dissimilarity or filter failure, ordered reconsideration of several comparables omitted from the TPO's search matrix, remitted Cybage and the MSS segment for de novo consideration by the AO/TPO, and set aside the interest on receivables adjustment for fresh adjudication (directing LIBOR + 300 bps where receivables fall outside the working capital adjustment), and accordingly remitted parts of the assessment for fresh action in conformity with the directions. Issues Involved:1. Inclusion/Exclusion of Comparables for Transfer Pricing2. Application of Upper Turnover Filter3. Functional Dissimilarity of Comparables4. Interest on Receivables as Separate International TransactionDetailed Analysis:1. Inclusion/Exclusion of Comparables for Transfer Pricing:The primary issue in this appeal was the inclusion and exclusion of certain comparables for the Software Development (SWD), IT Enabled Services (ITES), and Marketing Support Services (MSS) segments. The assessee contended that the Transfer Pricing Officer (TPO) erred in including certain companies that did not meet the turnover filter and were functionally dissimilar.2. Application of Upper Turnover Filter:The assessee argued that the TPO should have applied an upper turnover filter to reject companies with significantly higher turnovers. Citing precedents like Autodesk India (P) Ltd. v. DCIT and Razorpay Software Pvt. Ltd. v. ACIT, the assessee contended that companies with turnovers exceeding Rs. 200 crores should be excluded. The Tribunal agreed with the assessee and directed the exclusion of companies like Persistent Systems Ltd., Thirdware Solution Ltd., Larsen & Toubro Infotech Ltd., Infosys Ltd., Nihilent Ltd., and Aspire Systems (India) Pvt Ltd. for not satisfying the turnover filter.3. Functional Dissimilarity of Comparables:The Tribunal examined the functional profiles of the comparables and the assessee. For instance, companies like Cybage Software Ltd. and Infobeans Technologies Ltd. were scrutinized for their diverse business activities and lack of segmental information. The Tribunal remitted the issue of Cybage Software Ltd. back to the TPO for fresh consideration, emphasizing the need to examine its functionality and turnover. Similarly, Infobeans Technologies Ltd. was excluded due to functional dissimilarity and lack of segmental financials. For the ITES segment, companies like Tech Mahindra Business Services Ltd., Infosys BPM Ltd., SPI Technologies India Pvt. Ltd., and Eclerx Services Ltd. were excluded for failing the turnover filter and functional dissimilarity.4. Interest on Receivables as Separate International Transaction:The TPO had proposed an adjustment for interest on outstanding receivables, treating it as a separate international transaction. The assessee argued that outstanding receivables should not be considered separately, and relied on precedents like Kusum Healthcare Pvt. Ltd. vs. ACIT and Bechtel India vs. DCIT. The Tribunal referred to the decision of the Special Bench in Instrumentation Corpn. Ltd. v. Asstt. DIT, which held that outstanding invoices are akin to loans and thus international transactions. However, the Tribunal also noted that if working capital adjustment subsumes sundry creditors, computing interest on outstanding receivables would amount to double taxation. Following the principle laid down in cases like Orange Business Services India Solutions Pvt. Ltd. vs. DCIT and Avenue Asia Advisors Pvt. Ltd. vs. DCIT, the Tribunal remitted the matter back to the TPO for fresh consideration, directing that the rate of interest should be LIBOR + 300 basis points with a 90-day credit period.Conclusion:The Tribunal allowed the appeal partly, directing the TPO to exclude certain comparables for not meeting the turnover filter and for functional dissimilarity. The issue of interest on receivables was remitted back for fresh consideration, with specific directions on the rate of interest and the treatment of working capital adjustment. The Tribunal emphasized the need for a detailed functional and risk analysis to ensure accurate transfer pricing adjustments.