2023 (4) TMI 79 - AT - Income Tax

Tribunal Adjusts Transfer Pricing, Export Filter, Operating Expenses & Margin Calculation

M/s. Zedo (India) Pvt. Ltd. Versus. Asst. Commissioner of Income Tax, Circle- 3 (3) (1) Mumbai

The Tribunal partly allowed the appeal, directing the Assessing Officer to rework the arm's length price of the international transaction. Specific ... TP adjustment - ALP determination - Comparable selection - Exclusion of Nihilent Anaytics Ltd. - HELD THAT:- Company having huge asset base would be able to command a better margin on the prices of goods or services rendered based on huge economies of scale and volume of operations. Hence, based on one of the parameters of FAR analysis i.e. assets employed, we hold that this comparable would not be a good comparable with that of the assessee company. Hence, the ld. TPO / AO is directed to exclude the same from the final set of comparables while re-working the ALP of the international transaction. Inclusion of Sasken Communications and Technologies Ltd. and TVS Infotech Ltd. - We find from the perusal of the financial statements of Sasken Communications and Technologies Ltd, its export turnover contributed 70.27% of its total turnover. TPO was justified in rejecting the same as a good comparable with that of the assessee company based on export filter application. Similarly, from the perusal of the financial statements of TVS Infotech Ltd as on 31/03/2016, its export turnover of Rs.1316,67,746/- worked out to 56.84% of total turnover of Rs.2316,46,376/-. Yet another argument advanced that there is no sanctity of applying 75% is concerned, we find that the Hon’ble High Court in the case of Pr. Commissioner of Income Tax vs. Convergys India Services Pvt. Ltd., in 142 taxmann.com 276 (Delhi) has already approved the applicability of 75% export filter. Apparently this is done primarily to exclude predominantly domestic companies which cannot be compared with the companies having major earning from exports. This is because economic circumstances of such companies would be different which is also recognised by Rule 10B(2) of the Income Tax Rules 1962. Thus we hold that the ld.TPO /ld. AO was justified in excluding TVS Infotech Ltd. from the list of comparables chosen by the assessee. TPO is directed to re-work the arm’s length price of international transaction in view of the aforesaid observations. Accordingly, the ground No. 1 raised by the assessee is partly allowed for statistical purposes. Issues Involved:1. Transfer pricing adjustment for software development services.2. Correction of margins for CG-VAK Software and Exports Ltd.3. Exclusion of Nihilent Analytics Ltd.4. Inclusion of Sasken Communications Technologies Ltd. and TVS Infotech Ltd.5. Levy of interest under Section 234B.Issue-Wise Detailed Analysis:1. Transfer Pricing Adjustment for Software Development Services:The primary issue in this appeal was whether the Assessing Officer (AO) was justified in making a transfer pricing adjustment of Rs.1,14,91,999/- concerning the international transaction of software development services provided by the assessee to its Associated Enterprises (AE). The assessee used the Transactional Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) in its Transfer Pricing Study Report (TPSR). The assessee's PLI of 15.04% was compared with the margins of six comparables ranging from 9.01% to 15%, concluding the transaction to be at arm's length.2. Correction of Margins for CG-VAK Software and Exports Ltd.:The AO adopted a margin of 14.05% for CG-VAK Software and Exports Ltd by excluding the provision for doubtful debts as non-operational expenses. The assessee argued that if the provision for doubtful debts is considered as operating expenses, the margin would be 9.43%. The Tribunal held that the provision for doubtful debts, arising from sales made by the assessee, should be considered an operating expense. The Tribunal directed the AO to rework the operating margin by including the provision for doubtful debts as operating expenses.3. Exclusion of Nihilent Analytics Ltd.:The assessee contended that Nihilent Analytics Ltd. should be excluded as it is functionally not comparable and lacks segmental data. The Tribunal found that Nihilent Analytics Ltd had a significant asset base of Rs.14.14 Crores compared to the assessee's Rs.1.34 Crores. It was held that a company with a large asset base would command better margins due to economies of scale, making it not a good comparable. Therefore, the Tribunal directed the AO to exclude Nihilent Analytics Ltd. from the final set of comparables.4. Inclusion of Sasken Communications Technologies Ltd. and TVS Infotech Ltd.:The AO applied an export revenue filter of more than 75% of sales to accept or reject comparables. Sasken Communications Technologies Ltd. had an export turnover of 70.27%, and TVS Infotech Ltd. had 56.84%, both below the 75% threshold. The Tribunal upheld the AO's application of the 75% export filter, citing the Delhi High Court's approval in the case of Pr. Commissioner of Income Tax vs. Convergys India Services Pvt. Ltd. The Tribunal agreed that companies with predominantly domestic sales should be excluded due to different economic circumstances.5. Levy of Interest under Section 234B:The issue of interest levy under Section 234B was deemed consequential and did not require specific adjudication.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, directing the AO to rework the arm's length price of the international transaction considering the Tribunal's observations. The decision to include or exclude specific comparables was based on detailed functional, asset, and risk (FAR) analysis, ensuring that only suitable comparables were considered for benchmarking the assessee's international transactions.