Transfer pricing adjustments upheld with comparable company exclusions and trade receivables interest rate reduced to 6%

ITAT Hyderabad ruled on transfer pricing adjustments involving comparable company selection and trade receivables interest. The tribunal excluded high-turnover companies (Larsen Toubro Infotech, Tata Elxsi, Persistent Systems, Aspire Systems, Infosys) as non-comparable due to significant turnover disparity with assessee's Rs. 16.12 crores versus their Rs. 200+ crores. Infobeans Technologies and Thirdware Solution were retained as suitable comparables. Cigniti Technologies was excluded for failing export revenue filter. The matter regarding inclusion of six additional companies was remanded to AO/TPO for fresh consideration. Interest on trade receivables was held to be international transaction, with rate reduced from 7.5% to 6% SBI rate. Appeal partly allowed for statistical purposes.

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Issues Involved:
1. Adjustment under section 92CA(3) to the price received by the assessee from its Associated Enterprise.
2. Acceptance of the Profit margin of the assessee company as complying with the arm's length principle.
3. Rejection of the Transfer Pricing Study prepared by the assessee company.
4. Consideration of wrong comparables and arriving at a median margin.
5. Exclusion of specific companies on grounds of functional dissimilarity, super profit, and high turnover.
6. Inclusion of specific companies as comparables.
7. Computation errors in margins of included comparables.
8. Application of appropriate filters for comparables.
9. Consideration of outstanding receivables as a separate international transaction.
10. Application of interest rate on receivables from associated enterprises.
11. Adjustment despite the assessee company claiming exemption under section 10AA.

Detailed Analysis:

1. Adjustment under section 92CA(3):
The Tribunal noted that the TPO made an adjustment of Rs. 2,17,38,030/- to the price received by the assessee from its Associated Enterprise. The assessee argued that the TPO and DRP erred in making this adjustment and should have accepted the Profit margin of the assessee company (OP IOC) of 11.57% as complying with the arm's length principle. The Tribunal found that the TPO had rejected the TP study prepared by the assessee without cogent reasons and had considered wrong comparables, leading to an incorrect median margin of 26.36%.

2. Acceptance of Profit Margin:
The assessee contended that the TPO and DRP should have accepted its profit margin of 11.57% as it complied with the arm's length principle. The Tribunal observed that the TPO had rejected the TP study without proper justification and had applied various filters to select 15 comparables, resulting in a median margin of 26.36%. The Tribunal directed the AO/TPO to reconsider the profit margin in light of the correct comparables.

3. Rejection of Transfer Pricing Study:
The Tribunal noted that the TPO had rejected the Transfer Pricing Study prepared by the assessee without providing cogent reasons. The assessee argued that the TPO should have accepted its TP study, which showed an arm's length range of 10.84% to 16.97%. The Tribunal found that the TPO's rejection was not justified and directed the AO/TPO to reconsider the TP study.

4. Consideration of Wrong Comparables:
The Tribunal found that the TPO had considered wrong comparables, leading to an incorrect median margin. The assessee argued that the TPO should have excluded certain companies based on functional dissimilarity, super profit, and high turnover. The Tribunal directed the AO/TPO to reconsider the selection of comparables and exclude companies with high turnover and functional dissimilarity.

5. Exclusion of Specific Companies:
The Tribunal addressed the assessee's contention for the exclusion of specific companies such as Larsen & Toubro Infotech Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., Aspire Systems (India) Pvt. Ltd., and Infosys Ltd. due to high turnover and functional dissimilarity. The Tribunal agreed with the assessee and directed the AO/TPO to exclude these companies from the list of comparables.

6. Inclusion of Specific Companies:
The Tribunal noted that the assessee had sought the inclusion of companies like SagarSoft (India) Ltd., Evoke Technologies Pvt. Ltd., Sankhya Infotech Ltd., Harbinger Systems Pvt. Ltd., Maveric Systems Ltd., and Agilisys IT Services India Pvt. Ltd. The TPO had excluded these companies on various grounds. The Tribunal remanded the matter to the AO/TPO for fresh consideration, subject to the assessee providing specific documents to support the inclusion.

7. Computation Errors in Margins:
The Tribunal found that the TPO had made errors in computing the margins of the included comparables. The assessee argued that the TPO had considered wrong margins. The Tribunal directed the AO/TPO to correct the computation errors and recalculate the margins.

8. Application of Appropriate Filters:
The Tribunal noted that the TPO had applied inappropriate filters while selecting comparables. The assessee argued that the TPO should have applied the correct filters. The Tribunal directed the AO/TPO to apply appropriate filters and reconsider the selection of comparables.

9. Consideration of Outstanding Receivables:
The Tribunal addressed the issue of considering outstanding receivables as a separate international transaction. The assessee argued that receivables arise in the normal course of business and should not be treated as loans for the levy of interest. The Tribunal held that interest on delayed outstanding payments is an international transaction and directed the AO/TPO to compute interest at 6% SBI rate.

10. Application of Interest Rate on Receivables:
The Tribunal found that the TPO had applied an interest rate of 7.5% on receivables from associated enterprises, proposing an adjustment of Rs. 32,52,061/- as interest on receivables. The assessee argued that the interest rate should be based on LIBOR. The Tribunal directed the AO/TPO to compute the interest at 6% SBI rate, considering a credit period of 60 days.

11. Adjustment Despite Exemption under Section 10AA:
The Tribunal noted that the assessee company was claiming exemption under section 10AA and argued that there was no intention to shift profits outside India. The Tribunal did not find any merit in this ground and upheld the adjustment made by the AO.

Conclusion:
The Tribunal allowed the appeal of the assessee partly for statistical purposes, directing the AO/TPO to reconsider the selection of comparables, correct computation errors, and apply appropriate filters. The Tribunal also directed the AO/TPO to compute interest on outstanding receivables at 6% SBI rate.

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