TaxTMI 
TaxTMI 
2023 (8) TMI 211
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....15,341/- with respect to interest on delayed receivables, under section 92CA of the Income-tax Act, 1961 ("the Act"). 2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act 3. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the economic and comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ('ALP') of the international transaction thereby following a non-transparent approach. Segmental Computation 4. The learned AO/ learned TPO/ Hon'ble DRP has erred in laws and on facts in computing the operating segmental margin of the Appellant by re- allocating the employee cost within the EDS segment on the basis of revenue. The Appellant submits that it has allocated/ apportioned the cost appropriately and hence, the segmental margin as computed in the documentation report is correct and ought to be accepted. Conceptual grounds and....
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....TES Segment 15. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in not rejecting the following companies: a) Datamatics Business Solutions Ltd. b) Microland Ltd. c) Manipal Digital Systems Pvt. Ltd. d) Inteq BPO Services Pvt. Ltd. e) SPI Technologies India Pvt. Ltd. f) Vitae International Accounting Services Pvt. Ltd. g) Infosys BPO Ltd. h) CES Ltd. 16. The learned AO/ learned TPO/Hon'ble DRP has erred in computing the margin of the following companies: a) Sundaram Business Services Ltd. b) Vitae International Accounting Services Pvt. Ltd. c) Manipal Digital Systems Pvt. Ltd. 17. The learned AO/ learned TPO/ Hon'ble DRP has grossly erred in not accepting the following companies as comparables: a) BNRUdyogLtd. b) R Systems International Ltd. c) Allsec Technologies Ltd. d) Cosmic Global Ltd. e) Digicall Teleservices Pvt. Ltd. f) Bhilwara Infotechnology Ltd, g) iSN Global Solutions Pvt. Ltd. h) I Service India Pvt. Ltd. Interest on Outstanding Receivables ....
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....further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided." 2. Ground Nos.1 to 3 are general in nature, which do not require any adjudication. 3. Ground Nos.5 to 7 and ground No.20 are not pressed and dismissed as not pressed. 4. Ground Nos.22 & 23 are consequential in nature. 5. Brief facts of the case are that the assessee has filed its return of income on 30.11.2017 declaring total loss of Rs. 11,89,93,421/-. Subsequently, on 30.3.2018, the return was revised declaring the very loss and the book profit u/s 115JB of the Income-tax Act,1961 ['the Act' for short] was declared at Rs. 77,76,68,972/-. The return was processed u/s 143(1) of the Act and the case was selected under CASS for scrutiny and statutory notices were issued to the assessee. The assessee filed documents and from those documents, the AO observed that the case should be referred to the TPO as per the CBDT instruction No.3/2016 dated 10.3.2016. Therefore, the case was referred to the TPO after obtaining approval from the competent....
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.... 775,13,225 TNMM Engineering services 1356,99,358 TNMM NA 933,54,860 TNMM Total 1708,68,085 1356,99,358 3065,67,443 5.3 From the TP study, the financial results were drawn by the TPO as under:- P&L as per TP Document Particulars Engineering Consulting Services Business Support Services Corporate/ Non-Operating Amount Third Party Domestic AE Overseas AE Overseas AE Operating Income Revenue from services 29,796 588 34,195 7,408 125 72,111 5.4 The following financials were drawn by the TPO:- 5.5. The assessee has submitted documents vide letter dated 19.2.2020, from the TP documents 11 comparables companies were selected for ITeS & Engineering Design Services(EDS) segments and applied TNMM method as a most appropriate method. The taxpayer selected comparables engaged in the very same industry vertical as the taxpayer. On 6th Jan, 2021 a show cause notice was issued to the assessee in respect of the ITeS & EDS segment. In the show cause notice, the....
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....g receivable appearing in the balance sheet at the year end, but the assessee has not made any adjustments. The TPO, after discussing the legal aspect in regard to interest on outstanding receivables, he noticed that the real income theory is not applicable in the context of Chapter "X" of the I.T. Act, which relates to special provision relating to Arm's length price. He also observed that as per terms of the service agreement, he observed that there is no payment terms specified in the agreement with its AEs, therefore, as per the prudent estimate for captive ITeS providers, payment period of 30 days was allowed for payment of sales/services and in delay beyond the aforesaid period, he considered for bench marking analysis. He further noted that as per chapter 10, it requires tax payer to carry out FAR analysis with regard to each of the transactions entered into with the AEs. Therefore, it was incumbent upon the tax payer to separately benchmark the arm's length price of the international transaction relating to interest on overdue receivables from the AE, by way of analysis of functions, assets and risks, whereas it was not done by the tax payer in its TP documentation. Accordi....
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....ccept the contentions furnished by the assessee and after invoking Rule 8D of the I.T. Rules, 1962 and relying on the judgement of Hon'ble Supreme Court of India in the case of Maxopp. Investments Ltd. Vs. CIT reported in (2018) (91 taxmann.com 154), he calculated as per Rule 8D(2)(ii) of the I.T. Rules at Rs. 1,51,32,000/- as disallowance u/s 14A r.w. Rule 8D and it was added back into the total income of the assessee and he completed the draft assessment on 18.4.2021. 5.10 Aggrieved from the above order, the assessee filed objections before the ld. DRP. He filed detailed written submissions and they gave relief on the EDS segment and in case of ITeS segment the addition was increased to Rs. 22,45,36,880/- and interest on delayed receivables was reduced to Rs. 2,57,15,341/-. The assessee did not get any relief on the disallowance made by the AO u/s 14A of the Act. The assessing officer passed the final assessment order on 24.2.2022. Aggrieved from the above order, the assessee filed appeal before this Tribunal. Ground No.4 6. The ld. A.R. in ground no.4 submitted that the lower authorities have wrongly calculated the segmental profit. The assessee has been earning 15% pro....
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....r out to have allocated all expenses on the basis of revenue of each segment and not adopt a selective approach. The approach directed by the DRP has led to absurdity as the margins of the assessee in the BSS segment has become 'loss' making segment. The assessee prayed that the segmental profit disclosed in the TP study is reflecting of the actual expenses incurred by the assessee under each segment and hence the same should be adopted for computing the ALP of the transactions. Without prejudice to the above, in case the expenses allocated by the assessee in the TP Study is not satisfactory then all expenses may be directed to be allocated on the basis of revenue without adopting a selective approach of actual for some segments and revenue basis for other segments. The AR of the assessee produced segmentwise allocation of expenses, which was produced. He also relied on the self-computation of allocation of expenses. 6.5 The ld. D.R. relied on the order of the lower authorities. He further submitted that the ld. DRP has rightly given the direction for distribution of expenses. The AR of the assessee is unable to point out any mistake on the DRP direction. He further subm....
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....enses" we did not find separate employee benefit expenses, each head of expenses have been characterized and debited with the amount incurred by the assessee and the assessee has also not provided detail of employee cost of Rs. 55.36 crores, in view of this it cannot be said that the employee cost of Rs. 55.36 Crores of expenses are included under the head of "Other Expenses" in schedule 19. With this direction, we are sending back the file to the ld. TPO for fresh apportionment/distribution of the expenses among the segments of the assessee and re-calculate the margins. Accordingly, this ground of appeal is allowed for statistical purposes. Ground Nos. 8, 13,15 & 17: 7. The submission of ld. AR. of the assessee is as under: GROUND NO. 8 - TURNOVER FILTER GROUND NO. 13 - WORKING CAPITAL ADJUSTMENT GROUND NO. 15 AND 17 - EXCLUSION / INCLUSION OF COMPANIES IN ITES SEGMENT These 4 grounds are dealt together hereunder: 7.1 AS PER TP STUDY: During the FY 2016-17, the Appellant has received Rs. 74,07,50,417/- for rendering back-office support services (BSS or ITES) to its AE in Singapore i.e., Quest Global Services Pte Limited. 7.2 The back-office support se....
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....ss than Rs 1 crore were excluded 4 Companies whose ITES income was less than 75 percent of the total operating revenues were excluded 5 Companies who have more than 25 percent related party transactions were excluded 6 Companies who have export service income less than 75 percent of the sales were excluded 7 Companies with employee cost less than 25 percent of turnover were excluded 7.6 The TP Officer determined the 35th to 65th percentile at 22.37% to 27.41% with median at 24.37% based on the weighted average operating profit/total cost of the 13 comparable companies in ITES segment. S No. Company Name Average of 3 years 1 Sundaram Business Services Ltd. 2.08% 2 Jindal Intellicom Ltd. 7.41% 3 Fuzen Software Pvt Ltd. 15.93% 4 Microland Ltd (seg) 17.53% 5 Tech Mahindra Business Services 22.37% 6 Datamatics Business Solutions Ltd. 22.64% 7 Infosys BPM Services Ltd 24.37% 8 Vitae International Accounting Services Pvt Ltd. 27.13% 9 Manipal Digital Systems Pvt Ltd. 27.41% 10 CES Ltd, 29.00% 11 Ultramarine & Pigment Ltd. (seg) 34.41% S No. Company N....
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.... Page 80-81 8 ISN Global Solutions Pvt Ltd Rejected Page 81 9 I Services India Pvt Ltd Rejected Page 81 7.12 The DRP directed the TP Officer to verify and recompute the margins of the following comparables: Sl. no. Comparable 1 Sundaram Business Services Ltd 2 Vitae International Accounting Services Pvt 3 Manipal Digital Systems Pvt Ltd 7.13 The TP Officer has passed the order dated 22.02.2022 to give effect to the directions of the DRP. The TPO re-computed the profit margin of the Appellant at (-)5.19% against the margin of 8.75% determined in the TP order and the margin of 15.01% determined by the Appellant in the TP study. S No. Company Name Average of 3 years (OP/OC) 1 Sundaram Business Services Ltd. 2.08% 2 Crystal Voxx Ltd 5.48%" 3x Jindal Intellicom Ltd. 7.41% 4 Fuzen Software Pvt Ltd. 15.93% 5 Microland Ltd (seg) 17.53% 6 Tech Mahindra Business Services 22.37% 7 Datamatics Business Solutions Ltd, 22.64% 8 Infosys BPM Services Ltd 24.37% 9 Vitae International Accounting Services Pvt Ltd. 27.13% 10 Manipal Digital Systems Pvt ....
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....ome academic. The Appellant however prayed that liberty may be reserved to contest the same at appropriate time. 8. The ld. D.R. relied on the order of the lower authorities. He submitted that merely if the turnover is more than Rs. 200 crores as decided by the various coordinate benches if the comparable companies are functionally comparables as filter supplied by the TPO, it should not be excluded only on the basis of turnover that the turnover is more the specified limits and the turnover criteria is not a particular criteria for excluding companies. He also reiterated the order of the ld. DRP on this issue. 9. After hearing rival contentions and perusing the entire materials on record, we notice that the turnover of the assessee is Rs. 76.48 crores on back-office support service (BSS or ITeS) segment. The ld. A.R. submitted that the ld. TPO has applied lower turnover filter, whereas the upper turnover filter has not been applied for selecting comparable companies. He further submitted that the coordinate benches have decided this issue on various cases that the upper turnover filter should be applied as per the turnover classification done in the case of BORQS Software So....
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....ell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs. 200 cro....
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....t is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs. 200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 13. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the H....
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....utions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.8.7....
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....al on the costs, price or profits. The working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its. market share etc. all of which cannot be captured in -the year end Receivable or Payable position. Besides, the 'Payable' and 'Receivable'", position stated in the Balance Sheet may not exactly reflect as to whether It arises from transaction relating to Revenue Account or Capital Account as there is no uniformity in the accounting or reporting requirements, and an intermixing is generally possible. The cost ascribable to the working capital would be different -to different enterprises depending on the cost" of "fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is based on various assumptions. Besides, we also note that the assessee had failed to demonstrate such material differences so as to warrant an adjustment. In these circumst....
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....tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: • A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) • This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (o....
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....usiness 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 working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there....
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....e 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. 12.1 Respectfully following the above judgements, we direct the assessee for providing necessary data for substantiating its claim before the AO/TPO. Accordingly, this groun....
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....v) The TP Officer and the DRP have selectively considered interest on trade receivables without considering the interest on payables (page 1810 of paper book). The Appellant submits that the interest on payables to the AE required to be netted-off while computing the notional interest on receivables. 13.4 As per agreement, the credit-limit of 120 days is agreed with the AE (page 1544 paper book). The TPO has allowed only 30 days credit period. The Appellant relies on the decision of this Hon'ble ITAT in the case of Verifone India Technology Private Limited [IT(TP)A No.290/Bang/2021] wherein, the Hon'ble ITAT under similar circumstances has remitted the issue to the TP Officer for determining the ALP, i.e., interest on delayed receivables by following the Rules. The Appellant submits that this Hon'ble Tribunal has been consistently adopting LIBOR rates for computing interest on receivables. The matter therefore requires to be remanded to the TP Officer to adopt LIBOR rate as per the decisions of this Hon'ble Tribunal. \ The Appellant relies on the decision of this Hon'ble Tribunal in the case of I5G Novasoft Technologies Ltd [IT(TP)A....
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....hes of the Tribunal the interest on receivables have been upheld that it is an international transactions and separate bench markings are required to be done for interest on delayed receivables. In view of this we direct to the AO/TPO for calculating afresh after applying 6 months LIBOR plus 300 basis points with a mark-up of 100 basis points and decide the issue as per law. The assessee is directed to provide the necessary documents. This ground of appeal is allowed for statistical purpose. 16. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 13^th Mar, 2023. ============= Document 1 Particulars Engineering Services P&L as per TP Document* consulting Business Support Services (ITeS) AE Non-AE Total Revenue from services 34,908 29,796 7,408 72,112 Add: Exchange 1,106 O 240 1346 differences Total Operating 36,014 DEP 29,796 7,648 73,458 Revenue Expenses Employee benefit 21206 10,611 4500 36317 expenses Depreciation 2741 2339 582 5662 Other expenses 9189 7844 1950 18984 To....