Tribunal directs consideration of operating profit & internal TNMM for ITeS transactions, with 6% interest rate.

The Tribunal partially allowed the appeal by directing the AO/TPO to consider operating profit/operating cost of transactions and internal TNMM for benchmarking ITeS transactions. Additionally, the Tribunal instructed to apply a 6% interest rate on outstanding receivables for transfer pricing adjustment.

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Issues involved:
The judgment involves two main issues: (1) determination of the most appropriate method to benchmark international transaction in respect of IT enabled Services (ITeS), and (2) Transfer Pricing adjustment in respect of the interest on trade receivables.

Issue 1: Benchmarking of International Transaction in ITeS:
The assessee, engaged in providing computer-aided design and engineering solutions, reported international transactions in ITeS. The Transfer Pricing Officer (TPO) found trade receivables from Associated Enterprises (AEs) and non-AEs. The TPO rejected the internal Transactional Net Margin Method (TNMM) and made Transfer Pricing adjustment using Profit Level Indicator (PLI) from external comparables. The Dispute Resolution Panel (DRP) upheld the TPO's approach. The assessee contended that comparing segments of AE and non-AEs provides reliable results. Referring to a previous case, the Tribunal directed to consider only operating profit/operating cost of transactions and internal TNMM where services are similar to both AEs and non-AEs. The Tribunal remitted the issue to the AO/TPO to consider only the operating profit/operating cost of transactions and internal TNMM.

Issue 2: Transfer Pricing Adjustment on Interest on Trade Receivables:
The TPO computed interest on delayed trade receivables and made an adjustment. The DRP directed to adopt SBI short term deposit rates for interest calculation, following a precedent set by Bangalore-ITAT in a previous case. The assessee argued against the adjustment, stating it is a debt-free entity not charging interest to non-AEs. Referring to a previous case, the Tribunal applied a 6% interest rate on outstanding receivables at year-end. The Tribunal directed the AO/TPO to consider 6% interest rate on outstanding receivables and recompute the transfer pricing adjustment.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO/TPO to consider operating profit/operating cost of transactions and internal TNMM for benchmarking ITeS transactions, and to apply a 6% interest rate on outstanding receivables for transfer pricing adjustment.

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