Tribunal grants appeals, orders fresh transfer pricing assessment with detailed analysis and legal precedents

The Tribunal allowed both appeals for statistical purposes, directing a fresh consideration by the Transfer Pricing Officer/Assessing Officer in light of the detailed analysis and legal precedents discussed, emphasizing the need for a proper benchmarking exercise and a thorough inquiry into the pattern of receivables for transfer pricing adjustments. The matter was remitted for a fresh decision ensuring a reasonable opportunity of hearing for the assessee.

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Issues Involved:
1. Transfer pricing adjustment for the provision of ITES and SDS.
2. Selection of comparables for benchmarking.
3. Transfer pricing adjustment for interest on receivables.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Provision of ITES and SDS:

The assessee, an Indian entity and part of the Orange group, was engaged in providing IT enabled network management/technical support and software development services to its group companies. The primary issue was the aggregation of IT enabled services (ITES) and Software Development Services (SDS) for benchmarking purposes. The Transfer Pricing Officer (TPO) aggregated both services and benchmarked them together, resulting in a transfer pricing adjustment of Rs. 16.91 crore. The assessee contended that these services should be benchmarked separately, citing the principle of consistency as reiterated in Radhasoami Satsang vs. CIT (1992) 193 ITR 321 (SC). However, the Tribunal found this contention without merit, emphasizing that the rule of consistency should not jeopardize the benchmarking process. The Tribunal held that the assessee did not have authenticated figures for revenue and costs for ITES and SDS separately, justifying the TPO’s aggregation approach.

2. Selection of Comparables for Benchmarking:

The TPO selected comparables rendering only ITES services, which the Tribunal found incompatible due to the functional differences between ITES and SDS. The Tribunal directed the TPO to select companies rendering both ITES and SDS for a proper benchmarking exercise. This decision was based on the need for a functional comparison that accurately reflects the combined nature of the services provided by the assessee.

3. Transfer Pricing Adjustment for Interest on Receivables:

The assessee reported an international transaction of ‘Interest on receivables’ amounting to Rs. 49.18 lakh. The TPO applied an interest rate of 12.87% per annum on the outstanding amount, resulting in a transfer pricing adjustment of Rs. 8.05 crore. The Dispute Resolution Panel (DRP) increased the reasonable number of days for realization from 30 to 60 days, but the TPO did not implement this direction. The Tribunal referred to the judgment of the Hon’ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. (2017) 398 ITR 66 (Del), which held that there must be a proper inquiry into the pattern of receivables and their impact on the working capital before treating them as an international transaction. The Tribunal set aside the impugned order and remitted the matter to the TPO/AO for a fresh decision in line with the Delhi High Court’s judgment.

Assessment Year 2012-13:

The only issue raised was the transfer pricing adjustment of Rs. 5.90 crore for interest on receivables. The Tribunal noted that the facts and circumstances were similar to the subsequent year (2013-14). Following the same rationale, the Tribunal set aside the impugned order and remitted the matter to the TPO/AO for a fresh decision, ensuring a reasonable opportunity of hearing for the assessee.

Conclusion:

Both appeals were allowed for statistical purposes, with the Tribunal directing fresh consideration by the TPO/AO in light of the detailed analysis and legal precedents discussed. The order was pronounced in the open court on 15.02.2018.

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