TaxTMI 
TaxTMI 
2025 (4) TMI 2189
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....013-14 2. The assessee has raised the following grounds : " TRANSFER PRICING MATTERS Rejection of transfer pricing documentation maintained and undertaking fresh search of comparables: 1) Rejection of the transfer pricing documentation maintained by the assessee in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("Rules") and undertaking a fresh economic analysis during the course of assessment proceedings and accordingly making a TP adjustment to the international transactions of providing software services to its AE; Rejection of use of multiple year data 2) Rejecting the use of multiple year data and using data for the FY 2012-13 only; Use of additional filters 3) Inter-alia use of the following additional/modified filters in undertaking the comparative analysis and rejecting comparable companies having: (a) Different financial year-end; and (b) Export sales less than 75% of the sales Selection of companies 4) Not undertaking an objective comparative analysis and inter-alia selecting the following companies without appreciating that the same are no....
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....rising the outstanding receivables as unsecured loans advanced to AES. (iii) Not appreciating the fact that the receivables are consequential/ closely linked to the principle transaction of provision of software services and hence have been aggregated for determination of ALP under TNMM. (iv) Not appreciating the fact that under TNMM, the impact of outstanding receivables on the working capital adjustments have already been taken into account in determining the arm's length margin hence there is no need of imputing interest on outstanding receivables again. 11. Without prejudice to the above, not undertaking an objective economic analysis to determine the arm's length price of the outstanding receivables by (i) Not appreciating that the receivables due from overseas AE's are in foreign currency and hence interest, if any, is to be benchmarked with the rates prevalent in the international market for foreign currency loans. (i.e. at USD "LIBOR plus"). (ii) Determining the arm's length credit period as 30 days without any basis and imputing interest on credit period provided for the invoices raised relating to provision of s....
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.... Infotech Limited and Persistent Systems Limited are concerned, the Ld. AR fairly invited our attention to the decision of this Tribunal in assessee's own case for A.Y. 201213 in ITA No. 309/Hyd/2017 dated 12/06/2024, wherein this Tribunal has rejected the claim of the assessee for the exclusion of these two companies from the list of comparables due to the reason that the assessee had included Larsen & Toubro Infotech Limited and Persistent Systems Limited in the list of comparables in their TP study. The Ld. AR further submitted that, inadvertently the assessee could not bring to the notice of the Tribunal during the appellate proceedings for A.Y. 2012-13, the decision of Special Bench of Tribunal in the case of DCIT v/s Quark Systems (P) Ltd. 4 ITR (Trib) 606, wherein the Tribunal has held that although the assessee has included some comparables in the TP study documentation, the assessee cannot be prevented from objecting to the same company being selected as comparable, if there are valid reasons for doing so. Accordingly, relying on the decision of Special Bench of Tribunal in the case of DCIT v/s Quark Systems (P) Ltd. (supra), the Ld. AR prayed before the bench not to r....
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....e validity of taxing the dividend during the year of assessment in question it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quit apart from it, it is incumbent on the Income-tax Department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year." 32. In the case of R.B. Jessaram Fatehchand v. CIT [1971] 81 ITR 409 (All.), it has been found and observed as under: "Mr. Brijlal Gupta appearing for the department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as against an unregistered firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a single assessment under section 26(1) ought to have been made. Now, there cannot be an estoppel aga....
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....sis, it would be appropriate for both taxpayers and tax administrations to take special care and to use restraint in relying on the burden of proof in the course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm's length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm's length principle regardless of where the burden of 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the ....
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..../06/2024, 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 Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited should be excluded from the list of comparables as their turnover exceeds the threshold determined by the ITAT. 8.1 Per contra, the Learned Department Representative ("Ld. DR") objected the exclusion of Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited and submitted that the turnover filter should not be considered in the selection of comparables provided the functional comparability is established. The Ld. DR further argued that, the assessee as well as comparable companies are operating in the field of human sources intensive industry, wherein increase in turnover is accompanied by a corresponding increase in the expenditure. Therefore, mere turnover difference should not be a ground for exclusion, if the core business function remains the same. Finally, the Ld. DR prayed that, Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited should not be excl....
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....arned AR, a consistent view is taken that the application of tolerance range of turnover of ten times on both sides of assessee's turnover was proper. Following the same, we direct the learned Assessing Officer to adopt the same for a fresh search. With this view of the matter, we set aside the findings of the authorities below and direct the learned Assessing Officer/learned TPO to take the range of turnover filter at ten times on both the ends and conduct search afresh to take a plausible view." 8.3 On perusal of above, we found that, this Tribunal has categorically held that, companies with proportionately high turnover should be excluded and the application of tolerance range of turnover of ten times on both sides of assessee's turnover was proper. There is no dispute about the fact that the turnover of Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtree Limited are more than 10 times than the turnover of the assessee, which clearly breaches the threshold set by this Tribunal in the case of Triniti Advanced Software Labs Private Limited(Supra). Therefore, in our considered opinion, Larsen & Toubro Infotech Limited, Persistent Systems Limited and Mindtre....
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.... 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 receivables should be benchmarked at LIBOR +200 basis points. Accordingly, the Ld. AR prayed before the bench to direct the Ld. TPO to apply the LIBOR + 200 basis points on trade receivables. 10.2 Per contra, the Ld. DR relied on the order of Ld. AO/TPO and submitted that this Tribunal in the case of Hetero Lab Limited Vs. ACIT in ITA Nos. 312 & 313/Hyd/2023 has upheld the application of SBI short term deposit rate for benchmarking the interest on trade receivables. Accordingly, the Ld. DR argued that the rate applied by the Ld. TPO is correct and should be upheld in accordance with the decision of this Tribunal in the case of Hetero Lab Limited (supra). 10.3 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. The core issue before us is to decide the appropriate interest rate to be applied for trade receivables from foreign AEs. We find that an identical issue has been dealt by this T....
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....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 international transaction between the assessee and its AEs, then the transaction would have to be looked upon by applying the commercial principles in regard to the international transactions. Therefore, the domestic prime lending rate or domestic deposit rate would have no applicability on international transaction, but the international rate being London Interbank Offered Rate (LIBOR) or similar rate i.e. Euro Interbank Offered Rate (EURIBOR) would govern the international transactions of lending by the assessee to the AEs. This issue also came up for consideration before the Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Private Ltd, reported in 276 CTR 445 (Del.) and the Hon'ble Delhi High Court has held in para 35 to 40 as under: "35. The LIBOR rate plus markup or the interest rate prevailing in the United States at that time, i.e. 2003 have not been examined and are not the basis on whi....
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....iaries 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. 38. The DRP referred to the PLR rates fixed in India. It is evident that the PLR rates were not the basis for fixing the arm's length price. Both TPO and the DRP have referred to the PLR rates only by way of analogy so as to state the prevailing interest rates in India, but while applying CUP method for comparability, they had applied LIBOR rates prevailing and had applied a mark-up of 700 points on account of low credit rating of the subsidiary AE and the cost of transaction. 39. The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that....
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....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 in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refr....
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....ee 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. CIT [IT Appeal No. 673 (Mum.) of 2006] and Dy. CIT v. Tech Mahindra Ltd. [2011] 12 taxmann.com 132/46 SOT 141 (Mum.) (URO) to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). ....
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....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 rate prevalent in the country in which the loan is received, should be considered for determining the ALP of transaction of interest received. We find that there is almost judicial consensus ad idem at the higher appellate forums on the question of which country, that is the borrower or the lender, should be considered for determining the arm's length rate of interest on loans advanced to the AEs. The Hon'ble Bombay High Court in CIT v. Tata Autocomp Systems Ltd . [2015] 56 taxmann.com 206/230 Taxman 649/374 ITR 516 has held that the ALP in case of loan advanced to AEs should be determined on the basis of rate of interest charged in the country where loan is received. The Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 has also held that the currency in which the ....
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....IBOR 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. Therefore, LIBOR, as such, can also not be construed as a comparable uncontrolled transaction. The Hon'ble Bombay High Court in CIT v. Aurionpro Solutions Ltd. [2017] 99 CCH 70 approved the action of the Tribunal in considering LIBOR +2% as the arm's length rate as against the TPO applying LIBOR plus 3%. Drawing an analogy from this position, we hold that EURIBOR+2% should be considered as arm's length rate of interest for determining the ALP of the international transaction of interest received by the assessee from Mascot Systems GmbH, Germany. 10. Before parting with this issue, we would like to clarify that the ld. CIT(A) has considered 4.42% as EURIBOR applicable for the assessment year under consideration by relying on an order of the Tribunal, in which the average LIBOR was considered at this level. Equality of LIBOR and EURIBOR could not be substantiated from any material on record. In t....
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....in the Tribunal has held that provision for bad and doubtful debts should be considered while calculating the operating cost for comparable companies. Accordingly, the Ld. AR prayed before the bench to direct the Ld. AO/TPO to include the provision for bad and doubtful debts while computing the operating cost in the case of comparable companies. 11.2 Per contra, the Ld. DR objected the contention of the assessee stating that while the term "operating cost" is not explicitly defined under the Act, it is defined under Rule 10TA(j) of Income Tax Rules, 1962 meant for Safe Harbor Rules, which does not recognise provision for bad and doubtful debts as part of operating cost. The Ld. DR further contended that provision for bad and doubtful debts is not an allowable expenditure u/s.36 of the Act, as it does not represent actual expenses but merely an estimate of potential future losses. It was further argued by the Ld. DR that, the provision for bad and doubtful debts does not meet the criteria of operating expenses, as operating cost should include only those expenses that are actually incurred and crystalised. Finally, the Ld. DR submitted that, the provision for bad and doubtful deb....
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....side the issue to Ld. AO/TPO for fresh adjudication. 12.1 Per contra, the Ld. DR relied on the order of Ld. AO/TPO and contended that the negative working capital adjustment was correctly applied by the Ld. AO/TPO. The Ld. DR did not specifically dispute the assessee's claim that no such direction was given by the Ld. DRP but submitted that the adjustment made by the Ld. AO/TPO are in line with the TP principle. 12.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. It is observed that the Ld. AO/TPO made a working capital adjustment of 2%, however, no such direction for making any working capital adjustment was issued by the Ld. DRP. Since the negative working capital adjustment was applied directly by the Ld. TPO without a prior direction from the Ld. DRP, the assessee was denied an opportunity to raise objection before the Ld. DRP on this issue. Further, this Tribunal in the case of Adaptec India Pvt. Ltd. (supra) has held that when an assessee do not bear any working capital risk, a negative working capital adjustment is not required. In the present case, the assessee claims that it is fully funde....
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....s Limited (b) Caliber Point Business Solutions Limited (Seg) (c) Maveric Systems Limited (d) Sasken Communication Technologies Limited (Seg) (e) Sagar Soft India Ltd (f) Kellton Tech Solutions Ltd (g) Goldstone Technologies Limited (h) CAT Technologies Limited (i) Helios & Matheson Information Technology Limited (j) R Systems International Limited (Seg) (k) TVS Infotech Ltd (l) Accel Frontline Ltd (Seg) (m) Infomile Technologies Lts (n) Kals Information Systems Limited (o) Sankhya Infotech Limited (p) Zylog Systems Limited (q) Acropetal Technologies Limited 6. Erred in application of persistent loss filter and thereby not following the directions of Hon'ble DRP for including Sagar Soft India Limited in the final list of comparables. 7. Determination of operating margins of comparables. (a) Error in computing segmental margin of Tata Elsxi Limited (b) Considering Provision for Bad and Doubtful Debts (PBDD) as non-operating expenditure in determining the operating margins of companies considered compara....
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....tax effect relating to Transfer Pricing Grounds (i.e Ground 1 to 11) 13. Non-grant of MAT credit available to the Company. Without prejudice to the above grounds, that on facts and circumstances of the case, the Ld. AO has grossly erred in law as well as in facts, in non-grant of MAT Credit available, amounting to Rs. 33,95,196, as set-off to the Company against the tax liability determined for the captioned AY. 14. Erroneous levy of interest u/s 234A of 1 the Act. Without prejudice to the above grounds, that on facts and circumstances of the Case, the Ld. AO has grossly erred in law as well as in facts in computing the interest u/s 234A of the Act amounting to Rs. 8,33,858, as the Company has filed its ROI for the captioned AY before the due-date applicable as per Section 139(1) of the Act. 15. Erroneous calculation of interest 234B of the Act. u/s. 234B of the Act. That on facts and circumstances of the Case, the Ld. AO has grossly erred in law as well as in facts in computing the interest u/s 234B of the Act amounting to Rs. 1,89,21,854 and the same is consequential to the above grounds. 16. Erroneous calculation of ....
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....as well. Finally, the Ld. AR requested for exclusion of E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans Technologies Ltd., Infosys Ltd. and Persistent Systems Ltd. From the list of comparables. 17.1 Per contra, the Ld. DR objected the assessee's contention and argued that the assessee has not taken ADP Pvt. Ltd. as a comparable in its TP Study. The Ld. DR further submitted that, it is essential to first verify whether ADP Pvt. Ltd. is actually functionally comparable to the assessee before applying the decision of this Tribunal. The Ld. DR argued that, a proper FAR analysis is required to determine whether ADP Pvt. Ltd. and assessee are functionally similar or not. He further submitted that, unless the ADP Pvt. Ltd. is established as a good comparable to the assessee, the decision in ADP Pvt. Ltd. to exclude E-Infochips Ltd., Thirdware Solutions Ltd., Infobeans Technologies Ltd., Infosys Ltd. and Persistent Systems Ltd. cannot be blindly apply to the case of the assessee. Therefore, it was prayed before the bench that the issue may be remanded to Ld. AO/TPO for verification of FAR analysis of ADP Pvt. Ltd. with the assessee. 17.2 We have heard the rival contentions ....
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....tware India Pvt. Ltd. in the list of comparables. In this regards, the Ld. AR invited our attention to the order of Ld. DRP at para no.5.1.5, wherein the Ld. DRP has accepted the functional similarity of Sagar Software India Pvt. Ltd. and the assessee and directed the Ld. TPO to consider the Sagar Software India Pvt. Ltd. as comparable if on examination this company satisfy the other criteria adopted by the Ld. TPO. However, without considering the direction of the Ld. DRP, the Ld. AO/TPO excluded Sagar Software India Ltd. from the list of comparables. Accordingly, the Ld. AR prayed before the bench to make a suitable direction to the Ld. TPO to include Sagar Software India Pvt. Ltd. in accordance with the order of Ld. DRP. 18.1 Per contra, the Ld. DR had no objection if the matter is directed to Ld. TPO in accordance with the directions of Ld. DRP. 18.2 We have heard the rival contentions and also gone through the record in the light of the submissions made by either side. We have also gone through the para no.5.1.5 of the order of Ld. DRP which is to the following effect : 5.1.5 Sagar Soft India Ltd 5.1.5.1 It was argued that this company satisfies all fil....