AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (9) TMI 449
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..... For the assessment year 2016-2017, the return of income was filed on 30.11.2016 declaring total income of Rs.5,85,64,250. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued to the assessee. During the course of assessment proceedings, as the international transaction of the assessee with its Associated Enterprises (AEs) exceeded Rs.15 crore as per 3CEB report, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the said transactions. The TPO vide order dated 30.10.2019 passed u/s 92CA of the I.T.Act, determined the TP adjustment of Rs.4,58,98,195. Pursuant to the TPO's order, draft assessment order was passed. The assessee filed objections before the Dispute Resolution Panel (DRP) against the draft assessment order disputing the adjustment made under Software Development Services (SWD) Segment and interest on delayed receivables. The DRP vide its directions dated 18.03.2021, provided partial relief to the assessee. Consequent ot the DRP's directions, the transfer pricing adjustment was reduced to Rs.4,01,39,320 (instead of Rs.4,58,98,195 proposed by the TPO). The adjustment was incorporat....
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....ed to Rs.3,93,70,344 (instead of Rs.4,27,00,084 proposed by the TPO). 7. As regards the adjustment in respect of interest on delayed receivables, the TPO did not accept the submission of the assessee that the trade receivables are not a separate international transaction and are to be considered closely related to the main international transaction of SWD services. The TPO has further rejected the assessee's plea for working capital adjustment on the operating margins of the comparables. In this regard, the TPO has proceeded to re-characterize the trade receivable from AEs as loan to AEs and imputed interest on trade receivables (invoice wise) during the year for a period of 335 days (i.e., allowing a credit period of 30 days) at 6 month LIBOR plus 450 bps (resulting in 4.985%). The same has resulted in an adjustment amounting to Rs.31,98,111. 8. The DRP rejected the interest rate of LIBOR plus 45 bps points used to benchmark the interst on delayed receivables and has directed the TPO to adopt the SBI short term deposit interest rate for the subject year as the ALP interest rate on delayed receivables and re-compute the adjustment to be made to the total income. Further, the ....
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....d facts, by not making suitable adjustment to account for differences in working capital position of the Appellant vis-à-vis the comparable companies. 5.7 The Ld.AO/TPO/DRP have erred, in law and in facts, by wrongly computing the operating margins of some of the comparable companies considered in the TP order. 6. Adjustment on account of notional interest on outstanding receivables. 6.1 The ld.AO/TPO/DRP grossly erred in determining a transfer pricing adjustment on account of the interest on outstanding receivables. 6.2 Without prejudice to our ground of objection 6.1 above, the ld.AO/TPO/DRP have erred, in law and in facts, by not appreciating that the outstanding trade receivables from its AE's is arising from the provision of software development services transaction which is to be considered as closely linked to such transaction and should not be tested separately from arm's length perspective. 6.3 Without prejudice to our ground of appeal no.6.1 above, the ld.AO/TPO/DRP erred in law and facts, by recharacterizing the outstanding receivables as on 31 March 2016 as a loan transaction. 6.4 Without prejudice to our grou....
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....ar 2016-2017. 12. The learned Departmental Representative supported the orders of the Income Tax Authorities. 13. We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. v. ITO (supra) has considered a host of rulings on this issue including that of Hon'ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that the application of the turnover filter is justified on the basis of the classification of companies as per the report of Dun and Bradstreet. Since the assessee, in the present case, has disclosed an operating income of RS.39,91,36,436, companies reporting turnover above a threshold are considered not comparable. Accordingly, by following the order of the Tribunal, we direct the AO / TPO to apply the appropriate upper turnover filter and exclude the following 7 companies having turnover in excess of Rs.200 crores:- (i) Larsen and Toubro Infotech Limited (ii) Nihilent Technologies Limited (iii) Persistent Systems Limited (iv) Thirdware Solutions Limited ....
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....he DRP. 19. We have heard rival submissions and perused the material on record. In the view of the ruling in the case of M/s.Huawei Technologies India (P) Ltd. v. JCIT (supra), the basis of rejection of the relief by the DRP is no longer valid. The relevant findings of the Tribunal in the case of M/s.Huawei Technologies India (P) Ltd. (supra) read as follows:- "15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balan....
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....h has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment.....
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....appropriate adjustment in arriving at an arm's length price. We hold and direct accordingly. Grounds 6.1 to 6.6 21. With respect to the contentions on the issue of interest on outstanding receivables as contained in grounds 6.1 to 6.6, the assessee has submitted hat outstanding receivables cannot be treated as a separate international transaction and considering the aggregation approach, it is claimed that all service related costs are embedded in the remuneration received from the AEs. The learned AR has also stated that outstanding receivables from AEs cannot be characterized as loan advanced as receivables arising from international transactions are closely linked to the main transaction and should be benchmarked using a combined transaction approach. 22. Having noted the contentions of the assessee, in view of the amendment, the transaction of receivables has to be considered as an international transaction u/s 92B of the I.T.Act. Further, the learned AR has advanced an argument that it is only such receivable which is outstanding for a period exceeding the period allowed under the Master Service Agreement, is to be considered as an international transaction. On the ba....