2022 (7) TMI 1401 - AT - Income Tax

Tribunal adjusts transfer pricing analysis, directs review of comparables & deduction under Income Tax Act

The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to re-examine the inclusion and exclusion of certain comparables, ... TP Adjustment - Comparable selection - HELD THAT:- Exclusion of companies as functionally dissimilar with that of assessee need to be deselected from final list. Adjustment on account of notional interest on outstanding receivables - Whether Outstanding receivables cannot be treated as a separate international transaction? - HELD THAT:- The assessee has provided IT enabled services to its AEs and amount outstanding as trade receivables merely represent the dues which are to be received by the Assessee against the services provided. As a business practice, the Assessee did not charge any interest on delayed realisation of invoice from AEs nor paid any interest on delayed payables. Early or late realization of service proceeds is incidental to the transaction of sale/ service, and not a separate transaction in itself. These represent the consequence of an international transaction and not an international transaction per-se. If the ALP in respect of an international transaction of service is determined, then there can be no question of treating non-receipt of interest in such transaction as separate international transaction warranting any further adjustment. Once ALP is determined in respect of the sale/ service transaction, it would be deemed to be covering all the elements and consequences of such transaction of sale/ service. Aggregation approach - All service related costs are embedded in the remuneration received from the AEs - It is to be appreciated that where companies are aware of the fact that customer will take longer than the agreed time to pay the outstanding dues, the same is factored in the price/ mark-up charged for the services rather than to levy of actual interest when the payment is eventually made by the customer. The principle of aggregation is well established rule in the transfer pricing analysis. This principle seeks to combine all functionally similar transactions wherein arm's length price can be conducted for a number of transactions taken together. The said principle is enshrined in the transfer pricing regulation itself. As per the Hon’ble DRP’s directions, the notional interest computation must be made on an Invoice-by-Invoice basis. The Hon’ble DRP directed the Assessee to furnish the TPO with InvoiceIT( wise details of period of delay for the computation of notional interest which was submitted with the TPO vide submission dated 23 April 2021. However, the TPO has not provided any workings for computation of the notional interest on delayed receivables to determine whether the directions of the DRP to compute interest on a Invoice-by-invoice basis has been followed and accordingly the Issue is remitted to AO/TPO for fresh consideration. Working capital adjustment appropriately takes into account the delayed/ outstanding receivable; separate TP adjustment is unwarranted - We direct the AO / TPO to redo the transfer pricing analysis in respect of interest on outstanding receivables by taking into account the directions of the Tribunal in assessee's own case. Deduction u/s 10AA - HELD THAT:- The claim of assessee to be verified by the AO/TPO in accordance with the return of income filed by the assessee. Accordingly, we direct the AO/TPO to consider claim of assessee u/s 10AA of the Act in accordance with law. The issue remitted to AO/TPO for fresh consideration Issues Involved:1. Adjustment to arm's length price (ALP) for international transactions.2. Inclusion and exclusion of comparable companies for determining ALP.3. Adjustment on account of notional interest on outstanding receivables.4. Deduction under section 10AA of the Income Tax Act.5. Levying interest under section 234B of the Act.6. Initiation of penalty proceedings under section 274 read with section 271(1)(c) of the Act.Issue-wise Detailed Analysis:1. Adjustment to Arm's Length Price (ALP) for International Transactions:The assessee challenged the adjustment to the ALP for international transactions of IT-enabled services with associated enterprises (AEs), amounting to INR 29,11,02,356. The assessee argued that the TPO/AO/DRP erred in not accepting the economic analysis undertaken by the assessee and instead conducted a fresh economic analysis. The Tribunal dismissed grounds related to this issue as not pressed by the assessee.2. Inclusion and Exclusion of Comparable Companies for Determining ALP:The assessee sought the exclusion of certain companies from the list of comparables, specifically Infosys BPO Ltd., Eclerx Services Ltd., and SPI Technologies India Pvt. Ltd., on the grounds of functional dissimilarity and other factors such as high brand value, subcontracting costs, and extraordinary events.- Infosys BPO Ltd.: The Tribunal directed the exclusion of Infosys BPO Ltd. from the list of comparables, citing its functional differences and significant intangibles.- Eclerx Services Ltd.: The Tribunal also directed the exclusion of Eclerx Services Ltd., noting its involvement in high-end KPO services, which are not comparable to the assessee's routine IT-enabled services.- SPI Technologies India Pvt. Ltd.: The Tribunal directed the exclusion of SPI Technologies India Pvt. Ltd., on the basis of functional dissimilarity and the presence of inventories.The assessee also sought the inclusion of BNR Udyog Ltd., Informed Technologies India Ltd., Sundaram Business Services Ltd., ACE Software Exports Ltd., and Hartron Communications Ltd. The Tribunal directed the AO/TPO to re-examine the inclusion of these companies based on segmental data and other relevant filters.3. Adjustment on Account of Notional Interest on Outstanding Receivables:The assessee contested the adjustment of INR 70,32,196 on account of notional interest on outstanding receivables, arguing that outstanding receivables should not be treated as a separate international transaction. The Tribunal referred to previous decisions and directed the AO/TPO to re-do the transfer pricing analysis, considering proper working capital adjustments and the industry-standard credit period.4. Deduction Under Section 10AA of the Income Tax Act:The assessee claimed that the deduction under section 10AA was erroneously omitted in the assessment order. The Tribunal directed the AO/TPO to verify the claim in accordance with the return of income filed by the assessee and to consider the deduction as per law.5. Levying Interest Under Section 234B of the Act:The assessee raised an issue regarding the levy of interest under section 234B amounting to INR 3,21,19,367. The Tribunal did not provide a specific ruling on this issue in the summary provided.6. Initiation of Penalty Proceedings Under Section 274 Read with Section 271(1)(c) of the Act:The assessee contested the initiation of penalty proceedings under section 274 read with section 271(1)(c). The Tribunal did not provide a specific ruling on this issue in the summary provided.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to re-examine the inclusion and exclusion of certain comparables, re-do the transfer pricing analysis for notional interest on outstanding receivables, and verify the deduction under section 10AA of the Act. The final list of comparables and the ALP determination were remitted to the AO/TPO for fresh consideration.