TaxTMI 
TaxTMI 
2025 (6) TMI 41
X X X X Extracts X X X X
X X X X Extracts X X X X
....AO') in pursuance to the directions dated 08.06.2022 passed under section 144C(5) of the Act by the Learned Dispute Resolution Panel - 1, Bengaluru ('Ld. DRP') to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed. 2. On the facts and in the circumstances of the case and in law, the final assessment order dated 30.07.2022 passed by the Ld. AO in violation of section 144B of the Act is without jurisdiction, bad in law and is liable to be quashed. Grounds on Transfer Pricing issues: 3. On the facts and in the circumstances of the case and in law, the Ld. DRP erred in upholding the action of the Ld. AO / Learned Transfer Pricing Officer ('Ld. TPO') in making a transfer pricing adjustments amounting to Rs. 6,03,14.533 comprising of adjustments on account of: 3.1 International transaction pertaining to provision of Information Technology ('IT") enabled back-office services - R$. 5.97.75,244; and 3.2 Levying notional interest on trade receivables - Rs. 5.39,289. 4. On the facts and in the circumstances of the case and in law, the Ld. AO / Ld. TPO / Ld. DRP erred in rej....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stances of the case and in law, the Ld. AO/ Ld. TPO/ Ld. DRP erred in not correcting the errors in computation of margins for certain companies. 12. On the facts and circumstances of the case, and in law, without prejudice to the above grounds of objections, Ld. AO/ Ld. TPO/ Ld. DRP erred in computing the adjustment at an entity level instead of restricting to the segment pertaining to the international transaction with the AE. 13. On the facts and in the circumstances of the case and in law, Ld. AO / Ld. TPO/ Ld. DRP erred in: 13.1 Not granting working capital adjustment; and 13.2 Not granting risk adjustment. Ground with respect to levying of notional interest on trade receivables: 14. On the facts and circumstances of the case and in law, Ld. DRP/Ld. TPO / Ld. AO has erred in making an adjustment of INR 5,39,289 towards interest on receivables. In doing so, the Ld. DRP/Ld. TPO/ Ld. AO has erred in: 14.1 Treating outstanding receivables from AE as deferred; 14.2 Considering deferred receivables as separate international transaction for arriving at an arm's length price; 14.3 Not appreciating the fact that the working capital adjustment takes into account the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed." 21. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in not mentioning the fact of taking necessary approval in the final assessment order, for transferring of the matter to the Assessing Officer as per the provisions of section 144B(8) of the Act, thereby raising a presumption that no approval is taken, rendering the order under section 143(3) r.w.s. 144C(13) bad in law and liable to be quashed. Further, the Assessee craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. Further, this ground of appeal is independent of the grounds of appeal already filed by the Appellant. 22.On the facts and in the circumstances of the case, and in law, the learned Assessing Officer ('AO') /Transfer Pricing Officer ('TPO') erred by not giving effect to the rectified directions of the Dispute Resolution Panel dated 27 January 2023 to exclude Access Healthcare Services Pvt. Ltd. from the final set selected by the TPO for benchmarking of Information technology enabled services provided by the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bmitted that, they are pressing for exclusion of only 4 companies from the list of comparables i.e. Infosys BPM Limited ("Infosys BPM"), Inteq BPO Services Limited ("Inteq BPO"), Eclerx Services Limited ("Eclerx") and Tech Mahindra Business Services Limited ("Tech Mahindra") on the basis of turnover filter. The Ld. AR further submitted that the turnover of the assessee is Rs. 62.89 Crores, however, the turnover of (i) Infosys BPM, (ii) Inteq BPO (iii) Eclerx and (iv) Tech Mahindra are Rs. 3061 crores, 2.45 crores, 1144.02 crores and Rs. 703.6 crores respectively, which are significantly vary as compared to the turnover of the assessee. Accordingly, these comparables are liable to be excluded from the list of comparables. The Ld. AR placed reliance on the decision of this Tribunal in the case of iMedX Information Services (P.) Ltd Vs. DCIT (ITA-TP No.1755/Hyd/2019 dated 10.05.2023) and Benu Networks Packet Switch Pvt. Ltd. Vs. DCIT (ITA No.86/Hyd/2022 dated 25.11.2024), wherein this Tribunal has held that the turnover filter of 10 times (both upward and downward) is a valid filter to determine the comparability. Therefore, the Ld. AR contended that (i) Infosys BPM, (ii) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urt in the case of Chryscapital Investment Advisors (India) (P) Ltd. (supra) held that turnover filter is an inappropriate filter and when once the company is found functionally comparable, it cannot be rejected from the set of comparables on the ground of the turnover. 12. In this situation, the Co-ordinate Bench of this Tribunal took a view in the case of M/s. Galax E Solutions India Pvt. Ltd. vs. ACIT, (2022) 192 ITD 326 (Bang.)(Trib.) took a view that where two views are available on an issue, the issue favourable to the assessee has to be adopted and, therefore, followed the decisions of the Hon'ble High Court. 13. Even the ICAI TP guidance note on transfer pricing clearly lays down that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company and two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. Under these circumstances, while respectfully following the decision of the Hon'ble Bombay High Court, we hold that for a proper TP analysis, we need to apply the turnover filter. Now the question arises as to what....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is a relevant factor to be taken into account, but there should be some proper and reasonable parameter to apply the difference of turnover between the assessee and the comparable which may be a multiple in the range of 2 times, 3 times, X times or any other number of times which should be applied to all the comparable companies, instead of taking a slab from Rs. 1 crore to Rs. 200 crores...." 15. With this premise, the Co-ordinate Bench of this Tribunal in the case of M/s. Maxim India Integrated Circuit Design Pvt. Ltd. (supra) held that the turnover filter upto ten times can be applied. 16. Hon'ble Karnataka High Court in the case of Acusis Software India (P) Ltd. vs. ITO [2018] 98 taxmann.com 183 (Karnataka) approved the approach of the Tribunal in applying tolerance range of turnover of ten times on both sides of the turnover of the assessee to fix the turnover filter. In the case on hand, it could be seen from the order of the learned TPO that the learned TPO accepted the turnover filter selected by the assessee with companies, whose net sales are more than Rs. 1 crore, but failed to notice that without fixing the upper limit of such filter, it would lead to the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....X Information Services (P.) Ltd. Vs. DCIT (supra). Therefore, respectfully following the decision of this Tribunal in the case of iMedX Information Services (P.) Ltd. Vs. DCIT (supra), we hold that (i) Infosys BPM, (ii) Inteq BPO (iii) Eclerx and (iv) Tech Mahindra cannot be considered as good comparable companies. 7.4 Further, we observe that, the Ld. TPO did not apply the turnover filter of 10 times (both upward and downward) to other comparables as well. Therefore, in the interest of justice, we deem it appropriate to remand the issue back to Ld. TPO, granting liberty to the Ld. TPO to apply the turnover filter uniformly to all the comparables and carryout the necessary verification. 8. Ground no.13.1 of the assessee is related to the denial of working capital adjustment ("WCA") by the Ld. TPO while determining the ALP. The Ld. AR submitted that the Ld. TPO denied WCA on the ground that only year-end figures were available and the assessee failed to furnish detailed working capital cycle data during the year. The Ld. AR further submitted that the assessee is not in a position to obtain granular or daily/monthly working capital data of the uncontrolled comparable companies, as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unjustified, particularly when such data is admittedly not available in the public domain. The assessee cannot be expected to obtain information which is beyond its reach. Therefore, we are of the considered opinion that, WCA cannot be denied merely due to the absence of detailed working capital cycle data and the adjustment should be granted based on average of opening and closing balances. Hence, we direct the Ld. TPO to grant appropriate WCA to the assessee while determining the ALP, by adopting the average of opening and closing working capital balances of comparables, as available from their annual reports. Accordingly, the ground No. 13.1 of the assessee is allowed for statistical purpose. 9. Ground no. 14 of the assessee is related to adjustment made by the Ld. TPO on account of interest on trade receivables. 9.1 The Ld. AR submitted that, the Ld. TPO erred in applying the interest rate charged by SBI on short term deposits for benchmarking the interest on outstanding trade receivables relating to sale of services by the assessee to its Associated Enterprises ("AEs"). The Ld. AR further submitted that, this Tribunal in many cases has held that the interest on trade receiva....
X X X X Extracts X X X X
X X X X Extracts X X X X
....The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted." 7. Thus, a transaction of loan to the AEs in foreign currency is considered as in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....would have reference to the year in which the loan was granted in case of a long term loan. However, in such situations, question may arise whether the case would fall under the second exception mentioned in the case of E.K.L. Appliances (supra), when an AE has the right to recall and ask for repayment of loan. These aspects have not been considered and applied by the TPO, DRP and the Assessing Officer. Neither has this ground been argued before us on behalf the Revenue. We, therefore, would not proceed to examine the said aspect and leave the question open. Similarly, we have not expressed any opinion on the issue or question of "thin capitalization" which does not arise for consideration in the present case. 37. We observe that whatever the Revenue argues and submits in the case of outbound loans or for that matter what we have observed would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs. The parameters cannot be different for outbound and inbound loans. A similar reasoning applies to both inbound and outbound loans. Revenue has erroneously argued that different parameters would apply for inbound and outbound loans, which is not acceptable. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt- claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d not be computed on the basis of interest payable on the currency or legal tender of the place or the country of resident of either party. Once the loan or credit is given in foreign currency and also to be repaid in same currency, the interest applicable to loan granted and to be returned in Indian rupee would not be the relevant comparable. The Hon'ble High Court has held that the PLR rate would not be applicable and should not be applied for determining the interest rate in such cases where loan to be repaid in foreign currency. This issue was again considered by the Hon'ble Bombay High Court in the case of CIT vs. Tata Autocomp Systems Ltd reported in (2015) 56 Taxmann.com 206 (Bom.) and the Hon'ble Bombay High Court has upheld the decision of the Tribunal directing the Assessing Officer to benchmark the interest at the prevailing EURIBOR rate instead of rupee loan rate to be computed at Arms' Length on the loan advanced to the AE. The relevant findings of the Hon'ble High Court in para 7 & 8 are as under: "7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the ld. CIT(A) also impliedly accepted the interest earned by the assessee from Symphoni Interactive LLC, USA, at 6% as at ALP, against which the Department has no grudge as the assail is only to the application of EURIBOR of 4.42%, which relates to the loan advanced by the assessee to Mascot GmbH, Germany. As such, we are confining ourselves only to international transaction of receipt of interest from Mascot GmbH, Germany. As against the assessee charging interest at the rate of 1.50% from Mascot GmbH, Germany, the TPO determined the arm's length rate of interest at 14%, which the ld. CIT(A) reduced to 4.42% by treating it as the average EURIBOR rate for the year under consideration. 5. There are two facets of the dispute raised by the Revenue on this issue. The first is that the rate of interest should be considered with reference to the prime lending rate prevalent in India and the second is that the reduction in rate to 4.42% by the ld. CIT(A) is not justified. 6. As against the TPO's point of view that since the assessee in India advanced loan to its AE in Germany, which if not given, would have fetched interest @14% in India, the ld. CIT(A) has held that interest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....we consider it expedient to clarify that EURIBOR (Euro Inter-bank Offered Rate) is not a rate of interest, in itself, at which loans are advanced by banks in Euros to borrowers. EURIBOR is a reference rate which is calculated from the average interest rate at which Euro Zone Banks offer lending on inter-bank market. While calculating EURIBOR, 15% of the lowest and 15% of the highest interest rates collected by a panel of European banks are eliminated and the remaining 70% form the basis for its calculation. In such circumstances, EURIBOR, being, not an average rate at which the loans are advanced by European banks to borrowers, cannot per se be characterized as a comparable uncontrolled rate of interest at which loans are advanced in Germany. 9. On lines of EURIBOR, there is LIBOR (London Inter-bank Offered Rate), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered for determining LIBOR. Therefo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....supra) has given it's findings relying on the decisions Hon'ble Bombay high court. In our considered opinion the decision of hon'ble high court always prevails over the decision of Tribunal. Therefore, respectfully following the decision of this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT (supra), we hold that, the justice will be served by applying LIBOR + 200 basis points on trade receivables in the case of the assessee. Therefore, we direct the Ld. AO/TPO to apply LIBOR + 200 basis points for benchmarking of interest on trade receivables. 10. Ground Nos. 18 to 20, raised through additional grounds, pertain to a legal issue. During the course of hearing, the Ld. AR submitted that the legal issue involved in these grounds pertains to the question of judicial discipline and is identical to the issue raised in the case of Roca Bathroom Products Pvt. Ltd., which is currently pending adjudication before the Hon'ble Supreme Court. The Ld. AR, therefore, requested that these legal grounds be kept open and a suitable direction be issued to the Ld. AO/TPO to follow the outcome of the decision of the Hon'ble Supreme Court in the case of Roca Bathroom Products Pvt. Ltd., whi....