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 fresh comparable selection in determining arm's length price. Regarding InfoBean Technologies, the matter was restored to verify whether software services constitute a product or integral service component. The tribunal upheld inclusion of MPS Ltd as a comparable, finding it functionally similar to the assessee's outsourced publishing services. For notional interest on trade receivables, the tribunal confirmed this constitutes an international transaction requiring benchmarking, allowed 60 days credit period instead of 30 days, and set interest rate at LIBOR+200 basis points. Appeals were partly allowed.

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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.

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