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2019 (3) TMI 1594 - AT - Income TaxTP adjustment - assessee pleaded to consider the internal TNMM as the most appropriate method - AO has rejected the said contention of the assessee on the ground that only 10% of the turnover was with non-AE and therefore it cannot be considered as the most appropriate method and also on the ground that the segmental results of the Non-AE companies are not audited and therefore they cannot be relied upon - HELD THAT - We find that in the case of Lummus Technology Heat Transfer BV 2014 (3) TMI 23 - ITAT DELHI was considering the case of an assessee which had both AE and non-AE transactions. It is not clear from the said case whether the non-AE transactions were also international transactions. As rightly pointed out by the DR the market conditions would not be the same for domestic and international transactions and therefore they cannot be considered on par with each other and particularly in the case before us as the assessee itself has not adopted the internal TNMM as the most appropriate method. Therefore no reason to direct the TPO to adopt the same and therefore confirm the order of the TPO on this issue. Thus ground of appeal is rejected. Errors in computation of operating profit margins of companies selected by the TPO as comparables - as submitted that in the case of CG-VAK Software Exports Ltd L T Infotech and Persistent Systems Ltd the TPO has not considered the provision for doubtful debts as operating expense and in the case of Mindtree Ltd the unallocated expenses have been erroneously considered - HELD THAT - On the issue of Mindtree Ltd the ld DR did not object to the remand of the issue to the AO. We therefore direct the AO to follow the directions of the DRP on this issue and recompute the margin of the said company. Provision for bad and doubtful debts we find that in the case of Alliance Global Services IT India Pvt. Ltd 2015 (3) TMI 883 - ITAT HYDERABAD in the case of M.s Kenexa Technologies (P) Ltd 2014 (11) TMI 587 - ITAT HYDERABAD has held that the provision for bad and doubtful debts is part of operating expenses. The Tribunal has directed the TPO to allow the same. Similarly in the case of TNS India Pvt. Ltd the Tribunal has directed the TPO therein to treat the provision for bad and doubtful debts as operating expenses. Respectfully following the same we direct the TPO to treat the provisions of bad and doubtful debts in the case of the assessee as well as comparables as part of the operating expenses. Ground of appeal accordingly treated as partly allowed. Treating the outstanding receivables from Associated Entity as a separate international transaction and bringing the interest thereon to tax - HELD THAT - We find that this Bench in a number of cases has held that when the outstanding receivables have factored in computation of working capital adjustment no separate adjustment is required. The average credit period of the comparables is 81 days whereas in the case of the assessee it is 79 days and therefore there is no need for any adjustment towards outstanding receivables. Further we also agree with the contention of the assessee that when the assessee is not paying interest on its payables assessee is also not justified in charging interest on outstanding receivables. Comparable selection - RS Software India Ltd have huge turnover and also has brought out the ownership of non-routine intangibles of RS Software India Ltd which could be a factor for its high turnover. We find that in the case of M/s. GT Nexus Software (P) Ltd i 2017 (4) TMI 1375 - ITAT BANGALORE the Coordinate Bench of the Tribunal has considered the turnover filter of 10 times tolerance range of assessee s turnover to direct exclusion of RS Software India Ltd. Minidtree Ltd - The assessee s objections to this company are almost similar to the objections in the case of RS Software India Ltd such as diversified activities; incomparable scale of operations the Revenue being Rs. 1608 crores and ownership of non-routine intangibles branding and payments etc. As held in the case of RS Software India Ltd this company has to be excluded from the final list of comparables due to its high turnover and also owning of non-routine intangibles. Infobeans Technologies Ltd - we agree with the contention of the learned DR that the assessee has to prove the impact of the merger/demerger of the said company on its margin for the relevant financial year. Since the assessee has failed to prove the same even before us we reject the assessee s contention on the comparability of this company with the assessee. Larsen Toubro Infotech Ltd - the company is functionally dissimilar and that it develops in-house intangibles has strong brand value is involved in diversified operations which includes products and also performs R D Activities. He submitted that the Revenue of the L T ranges to Rs. 3, 613/- crores and therefore the scale operation is incomparable. As we have already held that the turnover filter of 10 times of the tolerance range is a relevant filter we direct the AO/TPO to exclude this company also from the final list of comparables. Since we have already excluded the four companies we direct the TPO to recompute the ALP of the comparables and if the average margin falls within 3% then no further companies are to be taken. However if it does not fall within the said range the TPO shall reconsider the assessee s contentions on comparability of the companies in Ground and pass a reasoned order on their comparability after giving the assessee a fair opportunity of hearing.
Issues Involved:
1. Use of multiple year data as prescribed under Rule 10B. 2. Rejection of the appellant's Transfer Pricing (TP) study. 3. Rejection of Internal Transactional Net Margin Method (TNMM). 4. Application of specific filters by the TPO. 5. Acceptance and rejection of certain companies as comparables. 6. Computation of operating profit margins of comparable companies. 7. Treatment of outstanding receivables from Associated Entity as a separate international transaction. 8. Exclusion and inclusion of specific companies as comparables. Detailed Analysis: 1. Use of Multiple Year Data: The assessee did not press this ground, and it was accordingly rejected. 2. Rejection of the Appellant's Transfer Pricing Study: The assessee did not press this ground, and it was accordingly rejected. 3. Rejection of Internal Transactional Net Margin Method (TNMM): The assessee argued that the internal TNMM should be considered as the most appropriate method. However, the TPO and DRP rejected this on the grounds that the non-AE transactions were only 10% of the total turnover and were not audited. The Tribunal upheld this decision, stating that the market conditions for domestic and international transactions are not the same, and thus, the internal TNMM cannot be accepted. 4. Application of Specific Filters by the TPO: The assessee did not press this ground, and it was accordingly rejected. 5. Acceptance and Rejection of Certain Companies as Comparables: - RS Software India Ltd: The Tribunal found that the company has a significantly higher turnover and owns non-routine intangibles, making it not comparable to the assessee. It was directed to be excluded. - Mindtree Ltd: Similar objections were raised as for RS Software, and the Tribunal directed its exclusion due to high turnover and ownership of non-routine intangibles. - Persistent Systems Ltd: The Tribunal directed its exclusion based on high turnover and ownership of intangibles. - Infobeans Technologies Ltd: The Tribunal rejected the assessee's contention for exclusion due to lack of evidence on the impact of demerger on margins. - Larsen & Toubro Infotech Ltd: The Tribunal directed its exclusion due to high turnover and functional dissimilarity. 6. Computation of Operating Profit Margins of Comparable Companies: The Tribunal directed the AO to follow the directions of the DRP regarding Mindtree Ltd and recompute the margin. It also directed the TPO to treat provisions for bad and doubtful debts as operating expenses, following previous Tribunal decisions. 7. Treatment of Outstanding Receivables from Associated Entity as a Separate International Transaction: The Tribunal found that the average credit period of the assessee (79 days) was within the range of comparables (81 days) and industry average (114 days). It held that when outstanding receivables are factored into working capital adjustment, no separate adjustment is required. Grounds of appeal Nos. 13 to 18 were allowed. 8. Exclusion and Inclusion of Specific Companies as Comparables: The Tribunal directed the TPO to recompute the ALP of the comparables and if the average margin falls within ±3%, no further companies need to be included. If not, the TPO should reconsider the comparability of the companies listed in Grounds Nos. 8 & 9 and pass a reasoned order after giving the assessee a fair opportunity of hearing. Conclusion: The appeal was partly allowed, with specific directions given for the exclusion and inclusion of certain companies as comparables, and adjustments in the computation of operating profit margins and treatment of outstanding receivables.
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