2021 (10) TMI 1351 - AT - Income Tax

TP Adjustment - comparable selection - application of turnover filter - HELD THAT - Companies functionally comparable cannot be excluded only on the basis of high turnover - Companies whose turnover in the current year is more than ₹ 200 Crores should be excluded from the list of comparable companies - RPT filter has to be applied adopting the threshold limit of 15%.Companies functionally dissimilar with that of assessee need to be deselected. Merely pointing out that there is a substantial increase in value of intangible assets, the Assessee cannot seek to exclude company from the list of comparable companies, unless the Assessee is able to show that the presence of intangibles is owing to factors which can affect the functional comparability of company with the Assessee. ALP determination - as per assessee international transaction in question would be at Arm's length when benchmarked with its transaction with unrelated parties on the basis of the internal TNMM - HELD THAT - We find that this issue has been raised by the Assessee for the first time before the Tribunal. The Revenue authorities did not have any occasion to examine this issue and therefore we deem it fit and proper to remand this issue to the AO/TPO for consideration afresh and in the light of the relevant applicable statutory provisions. Determination of ALP by construing the delayed realization of receivable by the Assessee from its AE as a separate international transaction and determining ALP of such delayed receivables - HELD THAT - Non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. We are of the view that the issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down in the decision referred to in the earlier paragraph, after affording Assessee opportunity of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. We hold and direct accordingly. All issues on determination of ALP of the transaction are kept open. Appeal by the Assessee is partly allowed.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD) provided to Associated Enterprises (AEs).
2. Choice of comparable companies for determining ALP.
3. Exclusion of certain companies based on turnover and related party transactions.
4. Treatment of delayed realization of receivables as a separate international transaction.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for SWD Services:
The Assessee, engaged in providing SWD services to its AE, filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Transfer Pricing Officer (TPO) accepted TNMM as the MAM and OP/OC as the PLI but identified additional comparable companies, arriving at a PLI of 24.83%. Consequently, an adjustment of ?2,78,16,697/- was made to the Assessee's total income.

2. Choice of Comparable Companies for Determining ALP:
The Assessee contested the TPO's choice of comparable companies, arguing that companies with high turnover should be excluded. The Tribunal noted that the Assessee's turnover was ?24,71,71,242/-, while the TPO included companies with turnovers exceeding ?200 Crores. The Tribunal referred to various decisions, including the case of Dell International Services India (P) Ltd. and Autodesk India Pvt. Ltd., which supported excluding companies with significantly higher turnovers. The Tribunal concluded that companies with turnovers exceeding ?200 Crores should be excluded from the list of comparables.

3. Exclusion of Certain Companies Based on Turnover and Related Party Transactions:
The Tribunal addressed the exclusion of R.S. Software (India) Ltd., whose turnover exceeded ?200 Crores in previous years, by examining Rule 10CA of the Income-tax Rules. It was determined that the profit margins of R.S. Software for earlier years should be ignored due to non-comparability. Additionally, the Tribunal upheld the application of a 15% threshold for Related Party Transactions (RPT), following the Karnataka High Court's decision in the case of Yodlee Infotech Pvt. Ltd., leading to the exclusion of R.S. Software due to its 17.52% RPT.

4. Treatment of Delayed Realization of Receivables as a Separate International Transaction:
The TPO treated delayed realization of receivables as a separate international transaction, applying an interest rate of 4.485% on the average net receivables, resulting in an adjustment of ?50,87,241/-. The Tribunal, considering conflicting decisions on this issue, referred to the amendment to Sec. 92B of the Act and various judicial pronouncements, including the case of Kusum Healthcare Pvt. Ltd. and Techbooks International (P.) Ltd. The Tribunal concluded that delayed realization of receivables constitutes an international transaction and directed the AO/TPO to re-examine the determination of ALP for this transaction, considering the currency in which the loan is to be repaid.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO/TPO to re-compute the ALP for the international transaction of rendering SWD services and the delayed realization of receivables, after excluding companies with high turnovers and applying the 15% RPT threshold. The Tribunal emphasized the need for a fresh examination of these issues, providing the Assessee an opportunity to be heard.