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2019 (11) TMI 1550 - AT - Income TaxTP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Assessee is engaged in the business of Software Development services - since the assessee company is primarily engaged in custom-built mobile platform, applications and software support and maintenance related services to M/s. Kony Group of Companies, we are of the view companies functionally dissimilar with that of assessee need to be deselected. Interest on outstanding receivables - As submitted that if interest was to be charged on receivables, then the advance received from the AEs should be first adjusted towards the receivables on FIFO basis and thereafter, interest may be charged on the balance receivables - HELD THAT - As amendment to section 92B covers interest on outstanding receivables as international transaction and hence, we do not find merits in the argument advanced by the ld. AR that interest on outstanding receivables is not an international transaction as per section 92B of the Act. In respect of the application of FIFO method on realization of outstanding receivables with advance received towards certain other transaction with AE, we agree with the Ld. AR s argument that primarily the advance received has to be adjusted against any advance received and thereafter, the interest has to be charged on the outstanding receivables. This methodology shall result in the exact outstanding invoices against which payment is not received. Accordingly, we remit the issue back to the file of Ld. TPO to consider the issue afresh in the light of the observations made by us hereinabove.
Issues Involved:
1. Selection of Comparable Companies by the TPO. 2. Arm's Length Adjustment towards Interest on Delayed Trade Receivables. Issue-wise Detailed Analysis: 1. Selection of Comparable Companies by the TPO: The assessee, a private limited company engaged in software development services, filed its return for AY 2014-15. The TPO conducted a fresh search for comparable companies and selected 12 companies, computing the Arm’s Length margin at 34.31%. The assessee contested the inclusion of five companies: E-Infochips Limited, Thirdware Solutions Limited, Infobeans Technologies Limited, Infosys Limited, and Persistent Systems Limited, arguing they were functionally dissimilar. - E-Infochips Limited: - Engaged in IT services, ITES, and product-based activities without segmental details. - Involved in R&D activities, earning super-profits, and benefiting from such activities. - The Tribunal found it functionally dissimilar due to its diverse activities and R&D involvement. - Thirdware Solutions Limited: - Product-based with revenue from product sales and no revenue from services. - Incurred marketing expenses and lacked segmental details. - The Tribunal concluded it was functionally dissimilar due to its product-based revenue and absence of segmental reporting. - Infobeans Technologies Limited: - Engaged in export of goods and services without segmental details. - Had MODVAT and sales tax deposits indicating involvement in goods sales. - The Tribunal found it functionally dissimilar due to its engagement in goods sales. - Infosys Limited: - Underwent extraordinary events like acquisitions impacting profitability. - Turnover of ?42,531 Crs, significantly higher than the assessee's ?163 Crs. - Involved in R&D activities and incurred substantial marketing expenses. - The Tribunal ruled it functionally dissimilar due to its large scale, R&D activities, and extraordinary events. - Persistent Systems Ltd: - Engaged in products, platforms, and services with R&D activities. - Lacked segmental details and had intangible assets. - The Tribunal found it functionally dissimilar due to its diverse revenue streams and absence of segmental data. The Tribunal excluded these five companies from the list of comparables. The final list of comparable companies included Tata Elxsi Ltd (Seg), Mindtree Ltd, R S Software (India) Ltd, Larsen & Turbo Infotech Ltd, and CG-VAK Software & Exports Ltd, with an arithmetic mean of 20.31%. Since the assessee's profit margin of 21.45% was above this Arm’s Length price, no TP adjustment was required. 2. Arm's Length Adjustment towards Interest on Delayed Trade Receivables: The TPO proposed an adjustment for interest on trade receivables, considering a 30-day realization period reasonable. The DRP directed the TPO to compute the ALP interest rate considering a 90-day credit period, reducing the TP adjustment from ?2,51,31,511/- to ?1,05,62,753/-. The assessee argued that interest on outstanding receivables is not an international transaction under section 92B and that the company is debt-free. The Tribunal disagreed, stating the amendment to section 92B covers interest on outstanding receivables. However, the Tribunal accepted the assessee's argument to apply the FIFO method for adjusting advances received against receivables and remitted the issue back to the TPO for fresh consideration. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, directing the TPO to reconsider the interest on receivables issue and excluding the five contested companies from the list of comparables. The final decision was pronounced on 20th November 2019.
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