TaxTMI 
TaxTMI 
2022 (7) TMI 1400
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....private limited company engaged in the business of software development (SWD) services. It filed return of income for AY 2016-17 on 29.11.2016 declaring a loss of Rs.31,02,84,450. The case was selected for scrutiny through CASS and a notice u/s. 143(2) was served on the assessee. Since the assessee had international transactions, reference was made to the TPO in order to determine the arm's length price [ALP] of the international transactions with Associated Enterprises [AE]. The TPO made TP adjustment in SWD segment and interest on receivables for an amount of Rs.11,50,59,080. The AO passed the draft assessment order incorporating the TP adjustment. In addition to TP adjustment, the AO also made a disallowance of depreciation on goodwill claimed by the assessee. The assessee filed objections before the DRP. 4. The DRP confirmed the TP adjustment and the addition towards depreciation on goodwill. The DRP's directions with respect to interest on delayed receivables resulted in an increase of TP adjustment by Rs.34,35,189. Consequently, the AO passed the final assessment order against which the assessee is in appeal before the Tribunal. TP adjustment in SWD segment 5. During the ....
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....oncerned. 11. Before us the ld. AR reiterated the submissions made before the lower authorities and also drew our attention to the decision of the coordinate Bench of the Tribunal in the case of BORQS Software Solutions P. Ltd. v. ITO in IT(TP)A No.310/Bang/2021 by order dated 25.10.2021 for AY 2016-17 in this regard. This Tribunal in the case of ON Semiconductor Technology India P. Ltd. in IT(TP)A No.291/Bang/2021 dated 21.72.2022 following the decision of BORQS Software Solutions P. Ltd. (supra) has held as follows:- "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 cons....
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....bove conclusions of the DRP have not been countered by the Assessee and by merely relying on findings in earlier AY that this company was held to be not a comparable company, the Assessee cannot seek exclusion of this company from the list of comparable companies. The only direction that the Assessee can get is that the margins for AY 2015-16 in which year this company was regarded as not comparable have to be ignored in arriving at the average of three years profit margin of this company. We direct accordingly." 16. Respectfully following the above decision of the Tribunal, we direct the AO to exclude the margin for AY 2015-16 of while arriving at the 3 year average profit of Infobeans Technologies Ltd. 17. The next issue contended is with regard to the working capital adjustment. The TPO did not allow any adjustment on the working capital [pg. 51 of TP order] and the same is upheld by the DRP [pg. 58 & 59 of DRP directions]. The ld. AR submitted that it is a settled principle that working capital adjustment is to be granted as per actuals and in this regard placed reliance on the decision of Huawei Technologies India (P) Ltd. v. JCT reported in [2019] 101 taxmann.com 313 (Bang....
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....pending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that worki....
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....capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 20. We therefore direct the AO/TPO to co....
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....echtel India P. Ltd. (supra), the Delhi Tribunal has held that if the assessee is a debt free company, it is not justifiable to presume that borrowed funds have been utilized to pass on the facility to its AEs. In the present case, the ld. AR submits that the assessee is a debt free company. We also notice that the coordinate Bench of this in Barracuda Networks India Pvt. Ltd. in IT(TP)A No.229/Bang/2021 has held that - "41. We have carefully considered the rival submissions. On the question whether delayed realization of trade receivables from the AE constitutes an international transaction or not, there are conflicting decisions of various benches of the Tribunal, which we shall point out. section 92B of the Act defining what is an international transaction was amended by Finance Act, 2012, way of insertion of an Explanation to section 92B with retrospective effect from 1-4-2002 and the same reads thus:- "Explanation- For the removed of doubts, it is hereby clarified then-(i) the expression "international transaction" shall include- (a) to (b). ** ** ** (c) capital financing, including any type of long-term or short- term borrowing. lending or guarantee, purchase or sa....
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....eivable partake the character of capital financing and consequently, overdue outstanding is an "international transaction". The natural corollary would be of imputing interest on such "capital financing" if same is not charged at arm's length. The ITAT concluded that if outstanding receivables are within the terms of agreement, then it may be argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement does not specify the term of the payment, even then assessee must be given benefit of credit period which is accepted business practice in the trade. The ITAT confirmed 30 days as the normal credit period adopted by the TPO. 42. The foregoing discussion discloses that non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivab....
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....interest on the delay in realizing such invoices along with the first three and a half pages in which there is an absolute and identified delay in realization of invoices beyond the stipulated period. When the interest for realization of trade advances up to 150 days is part and parcel of the price charged from the AE, then the delay up to this extent cannot give rise to a separate international transaction of interest uncharged. Rather interest for the period in excess of normally realizable period in an uncontrolled situation upto 150 days needs to be considered in the determining the ALP of the international transaction of the 'Provision of IT Enabled data conversion services'. This can be done by increasing the revenue charged by the comparable companies with the amount of interest for the period between that allowed by them in realization of invoices and 150 days as allowed by the assessee, so as to bring such comparables at par with the assessee's international transaction of provision of the ITES. To illustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 day....
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....re of the view that the issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down in the decision referred to in the earlier paragraph, after affording Assessee opportunity of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. We hold and direct accordingly. All issues on determination of ALP of the transaction are kept open." 24. Respectfully following the decision of the coordinate Bench of the Tribunal in the case of Barracuda Networks (I) P. Ltd. (supra), we hold that interest on receivables is a separate international transaction and separate benchmarking is required to be done. We therefore remit the issue to the TPO for fresh examination and take into consideration the guidelines laid down in the aforesaid decision of the Tribunal. The TPO is also directed to verif....
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....f the amalgamating companies the depreciation on goodwill would have been zero there cannot be deprecation in the hand of the amalgamated company. In support reliance was placed on the decision of the coordinate bench of the Tribunal Bangalore in ITA No. 722, 801 and 1065/Bang/2014. Once again the DR is not appreciating the facts of the case in hand in their true perspective. It has to be understood that there was no goodwill in the books of amalgamating companies and only after the scheme of amalgamation, when the amalgamating companies amalgamated, goodwill came into existence being the difference between the consideration paid by amalgamated company over and above the net asset value of the amalgamating companies. The reliance placed on the judgment of coordinate bench is misplaced in as much as in that case the value of the goodwill in the books of amalgamating company was only Rs. 7.45 crores which has been shown by the assessee at Rs. 62.30 crores and on this it was held by the appellate authority that the assessee has failed to justify the valuation of goodwill at Rs. 62.30 crores. The facts of the case in hand clearly show the valuation of goodwill as per the valuation repo....