2023 (2) TMI 1425 - AT - Income Tax

IT and ITES comparables excluded for dissimilarity; interest on receivables treated as international transaction with LIBOR+300bps

NTT DATA Information Processing Services Private Limited Versus The Dy. Commissioner of Income-tax, Circle-3 (1) (1) Bengaluru.

ITAT held that several software-segment comparables were properly excluded due to excessive onsite revenue and differing business models; two other ... TP Adjustment - Comparable selection - Software Development Segment -HELD THAT:- Exclusion of Infosys Ltd., Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. & Mindtree Ltd. from the final list of comparables for presence of onsite revenue over and above the threshold limit of 25% of total revenue and because of its business model as diiference from assessee. Two companies named Nihilent Technologies Private Limited & Infobeans Technologies Ltd - Assessee has relied on the judgments of SanDisk India Device Design Centre Pvt. Ltd [2022 (6) TMI 1299 - ITAT BANGALORE] the co-ordinate bench has directed to exclude these two companies . Since this judgment relates to the AY 2016-17 and case on hand relates for the AY 2017-18, therefore we think fit to send back to the file of the AO/TPO/DRP for the re-consideration. ITES Segment - Exclusion of SPI Technologies India Pvt. Ltd. Functionally dissimilar. Adjustment towards outstanding receivables - Interest on receivables is an international transactions, therefore we reject the arguments if the ld. AR on this issue. We further noted from the order of theDRP, the assessee did not provide the details and also could not comply the direction of DRP for filling the document before the ld.TPO within 10 days. Considering the totality of facts we also direct to the assessee for following the direction the ld. DRP. TPO is directed to calculate interest, using LIBOR-6 months+300 basis points. The will decide the issue as per law. The ld. AR of the assessee has relied the recent judgment of the co-ordinate bench of the Tribunal [2022 (9) TMI 449 - ITAT BANGALORE] and other judgments quoted in his written synopsis is not applicable in present facts of the case. This grounds of appeal is allowed for statistical purpose. ISSUES PRESENTED AND CONSIDERED 1. Whether the transfer-pricing adjustments made by the Transfer Pricing Officer/AO (following TPO/DRP directions) by rejecting the assessee's comparable set and selecting an alternative comparable set under TNMM were correct in law and on facts. 2. Whether specific quantitative and qualitative comparability filters applied by the TPO (financial year filter, employee-cost, export/onsite revenue, turnover thresholds, related-party transaction (RPT) filter, database/search matrix reliance) were correctly applied. 3. Whether selected comparable companies (notably large diversified or product/IP-led firms) ought to be excluded for lack of functional/asset/risk comparability; and whether certain comparables should be excluded based on coordinate-bench precedents. 4. Whether computation of operating margins of comparables should follow figures as per annual reports (as directed by the DRP) and whether the AO/TPO complied. 5. Whether interest on outstanding inter-company receivables constitutes a separate international transaction requiring a notional interest adjustment; if so, the appropriate benchmark rate to be applied. 6. Whether the AO erred in denying deduction under section 80G (corporate tax ground) and whether the AO should consider the revised return while finalising assessed income. 7. Procedural/consequential grounds (interest under section 234B; initiation of penalty under sections 274 read with 270A) raised but not independently adjudicated beyond being consequential. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of TPO/AO transfer-pricing adjustment and replacement comparable set (TNMM): Legal framework: ALP determination under TP regulations using most appropriate method (here TNMM); comparability analysis per functions, assets, risks and appropriate application of Rule 10B/10C filters and percentiles (median/percentiles). Precedent treatment: The Tribunal followed/co-ordinated with prior coordinate-bench decisions concerning comparability exclusions for large diversified/product/IP-led firms. Interpretation and reasoning: The Tribunal examined TPO's fresh search and application of filters and DRP's reassessment. It found that TPO's re-search and resultant median/percentile computations were within authority but required certain modifications: (a) some large diversified/product/IP-led companies were to be excluded following earlier coordinate-bench decisions; (b) two companies (Nihilent & Infobeans) required de novo reconsideration by the TPO/AO/DRP in light of a coordinate-bench decision for statistical fairness. Ratio vs. Obiter: The direction to exclude specific comparables (Infosys, Persistent, Mindtree, L&T Infotech) is ratio in the context of this appeal (binding on the parties here); the remand for de novo consideration of Nihilent & Infobeans is interlocutory/directional (procedural ratio for remand). Conclusions: Transfer-pricing adjustment upheld in part but recalibrated: Tribunal directed exclusion of four specified comparables from final set, remand for reconsideration of two others, and otherwise affirmed that DRP/TPO approach was largely sustainable subject to directed modifications; appeal partly allowed for statistical purposes. Issue 2 - Application of quantitative/qualitative filters by TPO (year-end, employee cost, export/onsite revenue, turnover limits, RPT filter, database limitations): Legal framework: Filters must be reasonable, aimed at achieving comparability; RPT filter rationale linked to associated enterprise threshold; turnover and onsite/export filters aim to exclude economic models not comparable to captive/offshore service provider. Precedent treatment: Tribunal accepted the validity of RPT and onsite/export filters consistent with prior Tribunal decisions (including Trilogy and coordinate-bench cases). The 25% RPT threshold and exclusion of companies with predominant onsite revenue were held as acceptable filters in prior jurisprudence cited. Interpretation and reasoning: The Tribunal endorsed application of the RPT filter at ~25% and the onsite/export revenue filter to exclude companies with substantially different operating models and market/geographic mix. However, it required TPO to adopt annual-report figures for margin computation per DRP directions and to revisit companies where prior coordinate-bench rulings warranted exclusion or reconsideration. Ratio vs. Obiter: Endorsement of filters and their reasonableness is ratio for this appeal; detailed application to specific companies partly ratio (where exclusion directed) and partly procedural (remand). Conclusions: Filters held permissible; Tribunal directed exclusion of certain comparables and remand/reaudit where coordinate precedents necessitated fresh consideration. Issue 3 - Functional/asset/risk comparability of specific large/diversified/product/IP-led companies: Legal framework: Comparability requires similarity in functions, assets and risks; presence of significant IP, product sales, R&D, brand value, onsite activity or mergers/acquisitions may vitiate comparability with a low-risk captive offshore service provider. Precedent treatment: Tribunal relied on earlier coordinate-bench authorities excluding such companies from comparable sets where material functional/asset/risk differences existed. Interpretation and reasoning: For Infosys, Persistent, Mindtree and L&T Infotech the Tribunal accepted submissions of functional dissimilarity (product/IP, R&D, brand, onsite mix, extraordinary events) and, following a coordinate-bench decision, directed their exclusion. For Nihilent and Infobeans the Tribunal found that a coordinate-bench decision for AY 2016-17 required de novo reconsideration for AY 2017-18 by the TPO/AO/DRP. Ratio vs. Obiter: Exclusions directed for the four named companies constitute operative ratio for this appeal; remand relating to others is procedural ratio. Conclusions: Directed exclusion of specified large/diversified/product/IP-led comparables; remand of two comparables for fresh consideration. Issue 4 - Computation of operating margins of comparables and DRP direction to use annual-report figures: Legal framework: Operating margins of comparables should be derived from reliable public information (annual reports) and computed consistently; DRP can direct verification and adoption of annual-report figures. Precedent treatment: DRP had directed that margins be computed from annual report figures; Tribunal accepted and directed TPO to comply. Interpretation and reasoning: Tribunal observed that DRP's direction to verify and adopt annual report figures was appropriate and remitted to TPO to compute margins in line with DRP. The point was allowed for statistical purposes. Ratio vs. Obiter: Direction to compute margins as per annual reports is ratio (operative direction to TPO/AO for recomputation). Conclusions: TPO/AO directed to compute operating margins using annual-report figures as per DRP direction; ground allowed for statistical purposes. Issue 5 - Interest on outstanding inter-company receivables: treatment as separate international transaction and benchmark rate: Legal framework: Outstanding receivables may be subject to transfer-pricing scrutiny where treatment is beyond ordinary credit terms; principles of aggregation/combined transaction vs. separate testing; choice of benchmark rate: LIBOR-linked market rates or domestic deposit rates (SBI) as directed by DRP. Precedent treatment: Authorities differ; where taxpayer failed to provide requested invoice/receivable-detail, TPO may impute interest using market benchmark (e.g., LIBOR + spread). DRP had directed opportunity cost consideration and suggested SBI short-term deposit rate; TPO had used LIBOR-6m +450bps. Interpretation and reasoning: Tribunal rejected the taxpayer's contention that receivables are not a separate international transaction and held that interest on delayed receivables can be treated as an international transaction when the taxpayer failed to supply requisite detail. Considering the facts (non-production of prescribed data), Tribunal directed recalculation of notional interest but moderated the benchmark: LIBOR-6 months + 300 basis points (reduced from TPO's +450 bps) to be used by TPO. Tribunal required assessee to comply with DRP directions for furnishing data. Ratio vs. Obiter: Holding that notional interest adjustment is permissible where necessary facts are not furnished and directing LIBOR-6m +300bps is ratio in context of this appeal; broader aggregation principle arguments treated as rejected on facts (obiter as to general principle but operative on facts). Conclusions: Interest adjustment on receivables sustained in principle; reassessed quantum to be recomputed by TPO using LIBOR-6 months +300 bps after any compliance directions; appeal allowed in part for statistical purposes on this point. Issue 6 - Section 80G deduction and consideration of revised return: Legal framework: Eligibility for deduction under section 80G is factual and documentary; revised return may be relevant to assessment computation if validly filed and applicable. Precedent treatment: The Tribunal remitted factual/documentary disputes to AO where records lacking. Interpretation and reasoning: Tribunal remitted the 80G denial to AO for fresh decision on eligibility upon production of necessary documents. Grounds alleging failure to consider revised return were not pursued and treated as not pressed. Ratio vs. Obiter: Remand for factual adjudication (ratio limited to ordering AO to examine documents). Conclusions: Ground allowed for statistical purposes and remitted to AO to decide 80G eligibility on production of documents; issues on revised return dismissed as not pressed. Issue 7 - Procedural/consequential grounds (interest, penalty): Legal framework & reasoning: Interest under section 234B and penalty initiation under sections 274/270A are consequential upon assessed income; since substantive TP adjustments were partly sustained/modified, these grounds were consequential and not separately adjudicated. Conclusion: Grounds treated as consequential; no independent relief granted in view of partial allowance of TP grounds. Overall Disposition: The Tribunal partly allowed the appeal: it sustained transfer-pricing adjustments generally but directed exclusion of four specified comparables, remand for de novo consideration of two comparables, directed recomputation of comparable margins from annual reports as per DRP, upheld in principle the notional interest on receivables but directed recalculation using LIBOR-6m +300bps and remitted factual issues (80G) to AO. Several grounds were dismissed as not pressed or treated as consequential.