Tribunal directs review of excluded company, upholds inclusion challenges.

Zeta Interactive Systems (India) Pvt. Ltd. Versus Income Tax Officer Ward 17 (4) Hyderabad

Zeta Interactive Systems (India) Pvt. Ltd. Versus Income Tax Officer Ward 17 (4) Hyderabad - TMI Issues Involved:
1. Rejection of certain grounds by the assessee.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Selection of comparable companies for benchmarking.
4. Treatment of outstanding receivables from Associated Enterprises (AEs) and determination of interest rate.

Detailed Analysis:

1. Rejection of Certain Grounds by the Assessee:
- The learned AR submitted that Ground No.4 and Grounds 1 to 3 were not being pressed by the assessee, leading to their rejection as not pressed.

2. Determination of Arm's Length Price (ALP) for International Transactions:
- The assessee, a private limited company, applied the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking services provided to its AEs.
- The operating profit/operating cost (OP/OC) was used as the profit level indicator.
- The assessee identified 11 comparables with an arithmetic mean of 13.49% for Software Development Services and 7 comparables with an arithmetic mean of 19.24% for ITES, concluding that the transactions were at Arm's Length.

3. Selection of Comparable Companies for Benchmarking:
- The learned TPO conducted a fresh search and selected 18 companies for Software Development Services, arriving at an arithmetic mean of 20.82% (adjusted to 20.35% after working capital adjustment) and made an adjustment of Rs.62,56,174/-.
- The assessee objected to 8 of the 16 selected companies, arguing that they had turnovers exceeding Rs.350 crores and operated in different functions.
- The CIT (A) excluded three companies (Infosys BPO Ltd, L & T Infotech Ltd, and Tata Elxsi Ltd) from the list of comparables.
- The assessee challenged the inclusion of 4 comparables (Acropetal Technologies (Seg), E-Zest Solutions Ltd, ICRA Techno Analytics Ltd, and Persistent Systems & Solutions Ltd) and requested the exclusion of additional 5 companies (Igate Global Solutions Ltd, Mindtree Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd, and Zylog Systems Ltd).

4. Treatment of Outstanding Receivables from Associated Enterprises (AEs) and Determination of Interest Rate:
- The CIT (A) fixed the ALP interest rate at 8% for receivables from AEs, reducing it from the TPO's rate of 12%.
- The assessee argued that receivables should not be treated as loans for interest levy and that the interest rate should be based on LIBOR plus 200 points.
- The Tribunal noted that more than 60% of the assessee's total turnover was receivable from AEs and upheld the need for benchmarking interest on delayed receivables to prevent profit shifting.
- The Tribunal reduced the interest rate from 8% to 6%, rejecting the application of LIBOR plus 200 points.

Findings of the Bench:
- The Tribunal remanded the issue of excluding E-Zest Solutions Ltd back to the CIT (A) for considering functional dissimilarities.
- The Tribunal rejected the assessee's challenge to the inclusion of Acropetal Technologies (Seg), ICRA Techno Analytics Ltd, and Persistent Systems & Solutions Ltd.
- The Tribunal dismissed the challenge to the inclusion of other 5 companies (Igate Global Solutions Ltd, Mindtree Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd, and Zylog Systems Ltd) as the assessee did not challenge their functional dissimilarities before lower authorities.

Conclusion:
- The appeal of the assessee was partly allowed, with specific directions for reconsideration and adjustments.
- The order was pronounced in the Open Court on 7th June 2022.