TaxTMI 
TaxTMI 
2023 (2) TMI 1420
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....the assessee has the following international transactions with its Associated Enterprise ("AE"):- International transaction Received / Receivable Paid / Payable Method Provision of software development services and Technical support services 1,17,82,2,502 TNMM Reimbursement of expenses 49,29,001 TNMM Outstanding receivables 43,60,79,625 TNMM Outstanding payables 1,17,862 TNMM 3. The assessee had received Rs. 1,17,82,23,502/- from its AE in respect of the software development services and Technical support services provided. The assessee had selected Transaction Net Margin Method ("TNMM") as the Most Appropriate Method ("MAM") and had computed its margin at 20.59% on operating cost (page 1081 of paper book). The assessee further carried out the search for uncontrolled comparables using Prowess and Capitaline Database which yielded a set of 17 comparable companies with 35th and 6th percentile range of the weighted average operating profit/total cost of the comparable companies of 8.53% to 15.55% and median of 10.94%. Since the profit margin of the Assessee at 20.59% on operating cost was higher....
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....hnical support service segment. During the course of hearing the ld AR submitted that if ground no.2.13 pertaining to TPO not applying the upper turnover filter and Ground No.2.14 pertaining to working capital adjustments are adjudicated in favour of the assessee the rest of the grounds raised in this regard would become academic. Ground No.2.19 is related to notional interest charged on outstanding receivables. Ground No.3 is consequential. TP adjustment in Technical Support Services segment 8. The assessee in the Technical Support Services Segment provides assistance to Verifone Ireland in the configuration and maintenance of Oracle Applications production environment that are used by Verifone Group for its internal business functions (page 965 of paper book). The functions, asset and risk analysis ("FAR analysis") as per the TP study is available at pages 983 to 991 of paper book. The assessee was characterized as a risk mitigated service provider. For the AY 2018-19, the Assessee had received Rs. 1,17,82,23,502/- from its AE in respect of the software development services and Technical support services provided which included Rs. 18,28,49,028/- towards Technical support s....
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.... 12. Accordingly the TPO determined the ALP as follows:- Particulars - ITES segment As per TP Officer Total Operating Revenue (Rs) 18,28,44,758 Total Operating Expenses (Rs) 15,16,44,957 Operating Profit (Rs) 3,11,99,801 OP/ OC (percent) 20.57% Median (percent) 26.34% Arm's length price 19,15,88,239 TP adjustment (Rs) 87,43,481 13. The assessee filed its objections before the DRP. The DRP rejected the objections of the assessee seeking exclusion of Fuzen Software Pvt Ltd., Tech Mahindra Business Services Ltd., Infosys BPM Services Pvt Ltd., Manipal Digital Systems Pvt Ltd., Vitae International Accounting Services Pvt Ltd., Domex E Data Pvt Ltd., Inteq BPO Services Pvt Ltd., Eclerx Services Ltd and MPS Ltd. The DRP rejected the objections of the assessee seeking inclusion of Athena BPO Pvt Ltd., Allsec Technologies Ltd., Bhilwara Infotechnology Ltd., One Point Solutions Ltd., Cosmic Global Ltd., Cameo Corporate Services Ltd., and Surevin BPO Services Ltd. The DRP accepted the objections of the assessee and directed exclusion AGS Health Pvt Ltd., Ultramarine & Pigment Ltd., and Access Healthcare Services Pvt Ltd. The DRP accept....
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....Pvt Ltd(supra) has considered a similar issue and held that - 20. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-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 Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Cour....
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.... 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). 21. In view of the aforesaid decision, we hold that 7 companies listed in the earlier paragraph 7 of this order whose turnover in the current year is more than Rs. 200 Crores should be excluded from the list of comparable companies................" 19. In assessee's case the turnover of the assessee i....
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....ade debtors and creditors and IT(TP)A No.477/Bang/2021 Page 8 of 20 therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is conce....
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....(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions cho....
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....cing as stated under Sec. 92B of the Act. iii. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in not appreciating the fact that the Act provides for taxing only real income whether received or accrued under the regular provisions and does not provide for taxing notional income. iv. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in not appreciating the fact that transfer pricing adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. v. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in charging notional interest on delayed receivables without appreciating the fact that the Assessee does not have any cost of debt and not following the Supreme Court decision in the case of Bechtel India Private Limited. [TS-591-SC-2017 TP] vi. The learned AO/ learned TPO/Hon'ble DRP have erred in not appreciating that the Assessee did not charge interest on delayed receivables from non-AE's vii. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in imputing interest on delayed receivables once the prim....
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.... not provided the workings of the adjustment determined in respect of interest on outstanding receivables and the basis for considering SBI short term deposit rate for benchmarking. It was submitted that the assessee is debt-free and invited our attention to Pages 941-942 of paper book. Therefore, the assessee does not bear any working capital risk as there are no working capital contingencies. Accordingly, no borrowed funds are used to pass on any presumed benefit to AE. The assessee also does not pay any interest to its creditors or suppliers on delayed payments. Since, it is debt free company, it was submitted that no adjustment can be made towards notional interest on receivables. 29. Reliance is placed on the decision of the Delhi Bench of this Hon'ble ITAT in the case of Bechtel India Pvt. Ltd. v. DCIT ITA No.:1478/Del/2015. It is further submitted that the decision of the ITAT has been approved by the Hon'ble Delhi High Court in PCIT v. Bechtel India Pvt. Ltd. I74 No.379/2016 and the SLP' before the Hon'ble Supreme Court in this regard has been dismissed. 30. Without prejudice to the above, the ld AR submitted that the TPO adopted SBI Short Team I....
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..../TPO that the delayed receivable is an international transaction. He submitted that once it is considered to be international transaction, then it is imperative for the TPO to determine the ALP under one of the prescribed methods. The ld. AR further submitted that the TPO has not carried out any benchmarking analysis as per rules, but simply adopted 6 months LIBOR + 400 basis points which is against the TP provision. He also highlighted that the AO has committed computational errors where he has taken the payable figure taken as receivable for computing interest on delayed receivable and has wrongly considered the weighted average period of receipt of payments as 256 whereas the actual is 51 days. The ld AR further submitted that the assessee has filed a petition u/s. 154 [pg. 496 & 497 of PB] for rectification these mistakes apparent on record but the AO has not still passed any order in this regard. The ld. AR submitted that the TPO ignored the fact that the assessee did not charge interest on delayed receivables from nonAEs. The assessee has receivables as on 31st March for an amount of Rs. 24.35 crores whereas the receivable is Rs. 14.96 crores and if the same are netted off, i....