2023 (4) TMI 77 - AT - Income Tax

Tribunal directs exclusion of high turnover comparables, working capital adjustment, and remits operating margin issue for re-computation.

Xchanging Solutions Limited, Versus. The Assessing Officer, National Faceless Assessment Centre, Delhi [/ DCIT, Circle 7 (1) (1), Bangalore]

The Tribunal partly allowed the appeal by directing the exclusion of high turnover comparables, excluding Infobeans Technologies Ltd., reconsidering ... TP Adjustment - comparable selection - HELD THAT:- We direct the AO/TPO to exclude the comparables with high turnover of more than Rs.200 crores Infobean Technologies Ltd. should be excluded from the list of comparables as this company is rendering services to non-AE customers also, whereas the assessee before us is a captive service provider only catering to the requirements of its AE. Aptuse Software Labs P. Ltd. - DRP while concluding has stated that the objection of the assessee with regard to exclusion is rejected. Since there seems to be a disconnect between the justification given by the DRP and the final conclusion, we are of the considered view that this issue should be remitted back to the DRP for reconsideration of the conclusion. Akshay Software Technologies Ltd. and Evoke Technologies - As relying on Radisys India Ltd [2023 (3) TMI 598 - ITAT BANGALORE] we remit the issue of inclusion of Akshay Software and Evoke Technologies back to the AO/TPO with similar directions. Insummation Technologies Ltd - Tribunal has allowed the inclusion of the company in the AY 2016-17 based on the fact that the DRP in AY 2017-18 has accepted the inclusion of the company. Accordingly, respectfully following the decision of the coordinate Bench, we hold that the company be included for AY 2017-18 in assessee’s case. Working capital adjustment - As relying on case of Huawei Technologies India Pvt. Ltd [2018 (10) TMI 1796 - ITAT BANGALORE] we direct the AO/TPO to allow working capital adjustment claimed by the assessee. Adjustment made Towards notional interest on loans advanced to AE - TPO treated the loan as a separate international transaction by stating that the assessee has provided benefit to its AE by way of advancement of interest free loan and accordingly proposed a TP adjustment by computing a notional interest of Rs.7,31,76,246 at the rate of 6 months LIBOR + 400 basis points - HELD THAT:- There cannot be an adjustment towards interest on loan when the loan amount itself is NIL during the year under consideration. Accordingly we hold that the notional interest charged on the loan given by the assessee to its AE which is written off and reflected as NIL in financials is to be deleted. Before parting, we would like to make a mention that the provision created towards the loan which is routed through the profit and loss account in the first year of creation i.e. during FY 2010-11 should have been part of the operating cost whereby the same should have been considered for the purpose ALP in that year. Issues Involved1. Transfer Pricing Adjustment2. Exclusion of High Turnover Comparables3. Functional Non-Comparability of Infobeans Technologies Ltd.4. Inclusion of Specific Comparables5. Working Capital Adjustment6. Re-computation of Operating Margin7. Limitation of Transfer Pricing Adjustment to International Transactions8. Adjustment for Notional Interest on Loans to AEDetailed Analysis1. Transfer Pricing AdjustmentThe assessee, a public limited company engaged in software development services, filed a return declaring an income, later revised to a loss. The TPO made an adjustment of Rs.12,01,05,614, which the AO incorporated in the draft assessment order. The DRP reduced this adjustment to Rs.11,45,97,470. Grounds 3 to 17 of the appeal pertain to this TP adjustment, questioning the rejection of the assessee's economic analysis, application of inappropriate filters, and incorrect computation of operating margins.2. Exclusion of High Turnover ComparablesThe assessee argued for the exclusion of comparables with a turnover exceeding Rs.200 crores, citing the decision in Radisys India Ltd. The Tribunal, referencing previous decisions, agreed that companies with turnover significantly higher than the assessee's should be excluded. Thus, comparables like Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., Infosys Ltd., Cybage Software Pvt. Ltd., Nihilent Technologies Ltd., Mindtree Ltd., and R Systems International Ltd. were directed to be excluded.3. Functional Non-Comparability of Infobeans Technologies Ltd.The assessee argued that Infobeans Technologies Ltd. should be excluded due to its engagement in diverse segments and lack of segmental details. The Tribunal, referencing the decision in Radisys India Ltd., agreed that Infobeans Technologies Ltd. is not functionally comparable and directed its exclusion.4. Inclusion of Specific ComparablesThe assessee sought the inclusion of Akshay Software Technologies Ltd., Evoke Technologies Ltd., and Insummation Technologies Pvt. Ltd. The Tribunal remitted the inclusion of Akshay Software and Evoke Technologies back to the AO/TPO for reconsideration. Insummation Technologies Ltd. was directed to be included, following the decision in EIT Services India P. Ltd.5. Working Capital AdjustmentThe TPO did not allow working capital adjustment, a decision upheld by the DRP. The Tribunal, referencing the decision in Huawei Technologies India Pvt. Ltd., directed the AO/TPO to allow the working capital adjustment claimed by the assessee.6. Re-computation of Operating MarginThe assessee contended that the TPO incorrectly considered certain items as non-operating. The Tribunal remitted this issue back to the TPO/AO for examination and decision in accordance with the law.7. Limitation of Transfer Pricing Adjustment to International TransactionsThe Tribunal noted that this ground became academic in light of the decisions on other grounds and left it open.8. Adjustment for Notional Interest on Loans to AEThe TPO imputed notional interest on loans advanced to AE, which was upheld by the DRP. The assessee argued that the loans were either inherited through a merger or provided as quasi-equity. The Tribunal held that no notional interest is chargeable on the loan inherited through a merger as it was a book entry without realisable value. For the loan given directly by the assessee, the Tribunal held that since the loan amount is shown as NIL in financial statements due to provisions created, no notional interest adjustment is warranted.ConclusionThe appeal was partly allowed. The Tribunal directed the exclusion of high turnover comparables, exclusion of Infobeans Technologies Ltd., reconsideration of specific comparables, allowance of working capital adjustment, and deletion of notional interest on loans to AE. The issue of re-computation of operating margin was remitted back to the TPO/AO for further examination.