2023 (3) TMI 1091 - AT - Income Tax

Tribunal partially allows appeal, orders transfer pricing re-computation, excludes comparables.

The appeal was partly allowed by the Tribunal, directing the re-computation of transfer pricing adjustments, exclusion of certain comparable companies, ... TP Adjustment - comparables selection - HELD THAT:- Accentia Technologies Ltd be rejected on the ground that it was functionally different since it was providing high-end software services which could not be compared to the functions of the assessee - this entity has been excluded by Tribunal in assessee’s own case for AY 2009-10 [2014 (9) TMI 126 - ITAT HYDERABAD] as well as in AY 2010-11 [2016 (9) TMI 1308 - ITAT HYDERABAD] Eclerx Services Ltd. - As this entity was involved in diverse nature of services and no segmental data was not available. In AY 2010-11.[2016 (9) TMI 1308 - ITAT HYDERABAD], Ld. DRP excluded this entity. The Tribunal dismissed the revenue’s plea on the ground that there was no change in activities of this entity in comparison to AY 2009-10 [2014 (9) TMI 126 - ITAT HYDERABAD] In AY 2011-12 [2018 (5) TMI 239 - ITAT HYDERABAD], this entity was excluded by Ld. DRP on functional differences and extra ordinary events. The action of Ld. DRP was confirmed by Tribunal. Therefore,we direct Ld. AO / TPO to exclude this entity. Infosys BPO Ltd. - We find that this entity has been excluded by Tribunal in AY 2009- 10 for the reason that this entity had brand value, high turnover, huge asset base and accordingly, not comparable. In AY 2011-12, this entity has been excluded by Ld. DRP by relying upon the decision of Tribunal in AY 2009-10. The same was upheld by Tribunal. TCS eServe Ltd - This entity is functionally different. This entity has presence of brand, having huge turnover, extreme profit margins and huge employee base. We find that this entity has been excluded by Tribunal in AY 2010- 11. In AY 2011-12, this entity has been excluded by Ld. DRP which has been confirmed by Tribunal. Therefore, considering the same, we direct Ld. AO / TPO to exclude this entity. Crossdomain Solutions Pvt. Ltd. - Before us, the Ld. AR has submitted that this entity is functionally different and this entity does not appear in the search carried out by Ld. TPO. For the said reason as well as following consistent stand of Tribunal in AYs 2009-10 to 2011-12, we direct Ld. AO / TPO to exclude this entity. Crystal Voxx Limited - Since this entity has failed service income filter at entity level and it is a persistent loss-making company, the same has rightly been rejected. We direct Ld. TPO / AO to re-compute the transfer pricing adjustments after revising comparability matrix as above. In case the margins of the assessee vis-à-vis the resultant comparable entities are more, the benefit of tolerance range of +5% as per proviso to Sec. 92C(2) would be considered. The corresponding grounds stands allowed. All the other connected grounds have been rendered infructuous. Interest on overdue receivables - HELD THAT:- We find that the transaction of overdue receivable would be covered under capital financing as per Explanation as inserted by Finance Act, 2012 to Sec.92B. The same has to be benchmarked separately irrespective of the fact whether any interest has been charged by the assessee from non-AEs or not. The Ld. DRP has already noted that substantial receivables have been outstanding during this year. Accordingly, we direct Ld. TPO to consider ALP rate of LIBOR+3% for delayed remittance beyond allowable credit period. The assessee is directed to provide the requisite information and computation. The ground stand partly allowed. Issues Involved:1. Transfer Pricing Adjustments2. Selection of Comparable Companies3. Computation of Margin of Comparable Companies4. Rejection of Comparable Companies5. Adjustment Restricted to International Transactions6. Negative/Working Capital Adjustment7. Use of Filters8. Rejection of Multiple Year Data9. Adjustment for Risk Differences10. Arm's Length Range of 5%11. Notional Interest on Receivables from AE12. Corporate Tax AdjustmentsDetailed Analysis:1. Transfer Pricing Adjustments:The appeal concerns the final assessment order dated 23-12-2016, confirming certain Transfer Pricing (TP) adjustments. The appellant contested the transfer pricing adjustment of Rs. 3,95,28,604, which includes Rs. 2,94,23,050 for margin adjustment on Information Technology enabled Services (ITeS) and Rs. 1,01,05,554 for notional interest on outstanding receivables from its Associated Enterprises (AEs).2. Selection of Comparable Companies:The appellant argued against the inclusion of certain companies as comparables. The Tribunal directed the exclusion of:- Accentia Technologies Ltd.: Excluded due to functional differences, peculiar economic conditions, and lack of segmental information, consistent with earlier years' decisions.- Eclerx Services Ltd.: Excluded for functional differences, super normal profits, and lack of segmental data, following previous Tribunal decisions.- Infosys BPO Ltd.: Excluded due to brand value, high turnover, and asset base, consistent with earlier decisions.- TCS eServe Ltd.: Excluded for functional differences, brand presence, and high turnover, following Tribunal's past rulings.- Crossdomain Solutions Pvt. Ltd.: Excluded due to functional differences and consistent Tribunal decisions in prior years.3. Computation of Margin of Comparable Companies:The Tribunal addressed the error in treating the provision for bad and doubtful debts as non-operating expenses for margin computation. The Tribunal directed the Ld. AO/TPO to re-compute the transfer pricing adjustments after revising the comparability matrix.4. Rejection of Comparable Companies:The Tribunal upheld the rejection of Crystal Voxx Limited due to it failing the service income filter and being a persistent loss-making company.5. Adjustment Restricted to International Transactions:The appellant argued that the TP adjustment should be restricted to the value of international transactions with the AE. The Tribunal directed the Ld. TPO/AO to re-compute the adjustments accordingly.6. Negative/Working Capital Adjustment:The appellant contested the negative working capital adjustment. The Tribunal directed the Ld. TPO/AO to consider the jurisdictional judicial precedents on the issue.7. Use of Filters:The appellant argued against the use of different financial year-end filters for rejecting comparable companies. The Tribunal directed the Ld. TPO/AO to re-evaluate the use of filters.8. Rejection of Multiple Year Data:The Tribunal upheld the rejection of multiple year data, directing the use of data for FY 2011-12 only.9. Adjustment for Risk Differences:The appellant argued for risk adjustment, which was disregarded by the AO/DRP. The Tribunal directed the Ld. TPO/AO to consider the risk profile differences as per Rule 10B(1)(e) of the Rules.10. Arm's Length Range of 5%:The Tribunal directed the Ld. TPO/AO to allow the benefit of the +/- 5% range as per the proviso to Section 92C(2) of the Act.11. Notional Interest on Receivables from AE:The Tribunal addressed the adjustment of Rs. 1,01,05,554 for notional interest on receivables, directing the Ld. TPO to consider the ALP rate of LIBOR+3% for delayed remittance beyond the allowable credit period.12. Corporate Tax Adjustments:The Tribunal directed the Ld. AO to grant MAT credit in accordance with the law and to give consequential effect to the interest liability under Section 234B of the Act. The initiation of penalty proceedings under Section 271(1)(c) was also noted.Conclusion:The appeal was partly allowed, with directions to re-compute the transfer pricing adjustments, exclude certain comparable companies, and consider the appellant's arguments on various grounds. The Tribunal's order was pronounced on 06th December 2022.