2024 (10) TMI 861 - AT - Income Tax

ITAT applies turnover filter for comparables, upholds MPS inclusion, confirms notional interest benchmarking requirements

The ITAT Hyderabad ruled on multiple transfer pricing issues. The tribunal directed the AO/TPO to apply a turnover filter of ten times on both ends for ... TP Adjustment - Comparable selection - Applicability of the turnover filter - HELD THAT:- As referring to the decision of Obopay Mobile Technology India Private Ltd. [2018 (7) TMI 2129 - KARNATAKA HIGH COURT] we hold that the turnover is a relevant criteria for choosing companies as comparables in determining the ALP in Transfer Pricing cases. Choice of Appropriate turnover filter - We direct the learned Assessing Officer to adopt the same for a fresh search. With this view of the matter, we direct the AO/TPO to take the range of turnover filter at ten times on both the ends and conduct search afresh to take a plausible view. This finding is equally applicable for software development service as well as the IT enabled services. Comparability of InfoBean Technologies India Limited - Software as a service or software is a product has to be looked into before reaching a final conclusion. Since the learned DRP recorded that though the assessee claimed to have given certain information in CD about this company, on verification learned DRP did not find any such information was furnished in CD. Such information must be considered for reaching a conclusion as to comparability of this entity. We, therefore, restore this issue to the file of the learned Assessing Officer/learned TPO to verify whether the software services and software is a product or integral part of the same service and also consider the information to be furnished by the assessee on this aspect and take a plausible view. Exclude MPS Ltd in the ITeS segment - Both the authorities have carefully gone through the financials of this company, combat the same with the functional profile of the assessee and reached a right conclusion that MPS Ltd. is functionally comparable to the assessee and there are no reasons to exclude the same. We do not find any material to come to a different conclusion. MPS Ltd. is not a publisher on its own. MPS Ltd. only provides outsourced publishing services by providing typesetting and digitization services. For these reasons, we do not find anything contrary to the finding of the authorities. We accordingly uphold the same. Notional interest on the trade receivables is not covered in the definition of international transaction as defined u/s 92B - HELD THAT:- High Court and in the case of Bhatia Airtel services Ltd [2020 (10) TMI 294 - ITAT DELHI] Co-ordinate Bench of the Delhi Tribunal it was held that with the introduction of the explanation to section 92B of the Act by Finance Act, 2012 it is a determinable that if there is any delay in the realization of credit arising from the sale of goods or services rendered in the course of carrying on the business, it is liable to be visited with the transfer pricing adjustment on account of interest income short charged/uncharged. It is, therefore, not open for the assessee to agitate this question as to whether or not the interest on outstanding receivables is an international transaction requiring separate benchmarking. Determination of credit period - TPO allowed only 30 days as reasonable credit period - It is widely accepted that the normal credit period would be 60 days, and it is only when the assessee establishes any peculiar reasons concerned to the industry, in a further period is acceptable. Since there are no such peculiar circumstances connected to the activity of the assessee, we direct the learned Assessing Officer to allow 60 days as the credit period and to levy interest only in respect of the period beyond such 60 days. Rate of interest - Ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points. We direct the AO/ TPO to adopt the same. Grounds are partly allowed accordingly. Issues Involved:1. Applicability of the turnover filter in selecting comparables for Transfer Pricing.2. Inclusion of InfoBeans Technologies Limited and exclusion of MPS Ltd in the list of comparables.3. Treatment of notional interest on trade receivables as an international transaction.4. Determination of the appropriate credit period and interest rate for trade receivables.Issue-wise Detailed Analysis:1. Applicability of the Turnover Filter:The primary issue was whether the turnover filter should be applied in selecting comparables for determining the Arm's Length Price (ALP) in Transfer Pricing cases. The assessee suggested a turnover filter of Rs. 1 to Rs. 200 crores, which was rejected by the TPO. The Tribunal referred to various High Court decisions, including the Karnataka High Court in the case of Obopay Mobile Technology India Private Ltd., which upheld the use of turnover as a relevant criterion. The Tribunal directed the Assessing Officer to apply a turnover filter of ten times on both ends of the assessee's turnover for a fresh search, applicable to both software development and IT enabled services.2. Inclusion of InfoBeans Technologies Limited and Exclusion of MPS Ltd:For InfoBeans Technologies Limited, the DRP had included it as a comparable based on available information, despite the absence of certain data. The Tribunal remanded the issue back to the Assessing Officer/TPO to verify whether InfoBeans Technologies was engaged in software services or product sales, considering additional information from the assessee.Regarding MPS Ltd, the assessee argued for its exclusion due to functional dissimilarity, claiming it was involved in knowledge processing outsourcing services. The Tribunal, however, upheld the inclusion of MPS Ltd, noting that it provided outsourced publishing services, which are considered IT enabled services. The Tribunal found no evidence of MPS Ltd engaging in content or product development, thus supporting the TPO's decision to retain it as a comparable.3. Treatment of Notional Interest on Trade Receivables:The assessee contested the inclusion of notional interest on trade receivables as an international transaction. The Tribunal referred to the Delhi High Court's decision in DCIT vs. McKensey Knowledge Centre India Pvt. Ltd., which held that delays in realization of credit from sales are subject to transfer pricing adjustments. The Tribunal concluded that the interest on outstanding receivables is an international transaction requiring separate benchmarking, thus dismissing the assessee's argument against it.4. Determination of the Appropriate Credit Period and Interest Rate:The Tribunal addressed the appropriate credit period for trade receivables, directing the Assessing Officer to allow a 60-day credit period instead of the 30 days allowed by the TPO. Interest should be levied only for periods beyond 60 days. Regarding the interest rate, the Tribunal followed the judicial precedent set by the Bombay High Court in Tecnimont (P.) Ltd., determining that the interest rate should be LIBOR plus 200 basis points. This rate was deemed appropriate for foreign currency receivables/advances, aligning with international practices.Conclusion:The appeal was partly allowed, with the Tribunal directing adjustments in the turnover filter application, remanding the comparability of InfoBeans Technologies Limited for further verification, upholding the inclusion of MPS Ltd, and setting guidelines for the credit period and interest rate on trade receivables. The Tribunal's decision reflects a balanced approach, considering judicial precedents and the specifics of the case, ensuring fair and consistent application of Transfer Pricing rules.