2021 (9) TMI 1463 - AT - Income Tax

TP adjustment to back office support service segment - Comparable selection - TPO made adjustment to transaction of merchanting trade of Agri-comodities and provision of back office support services - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected. Addition of outstanding receivable - Classifying the international transaction of merchandising trade as a finance arrangement - assessee has alternatively requested to take interest rate of 2.74% which the assessee had used to pay interest on advance received from associated enterprises - As per DR assessee has paid money out of Indian rupees and therefore suffered loss on interest in Indian Rupees and thus learned TPO justified in holding the arrangement as financial arrangement and benchmarking invoking the SBI prime lending rate 300 basis point - HELD THAT - Since the payment from LD Asia was received after a delay of 65 days it is in international transaction in the nature of outstanding receivable simpliciter without any allegation of arrangement of colluded finance transaction. TPO has though alleged it as financial arrangement to benefit AE but benchmarked it is outstanding receivable. But in both ways the currency of transaction is US Dollar. In first way it is US Dollar have been sent to AE; in second way US Dollar was outstanding to be received for 65 days. Neither the loan has been given in Rupees nor outstanding was to be received in Rupees. Benchmarking of the transaction we agree with the learned Counsel of the assessee that in view of transaction of sale in US dollar adjustment for interest should be benchmarked on the basis of currency of transaction following the decision of Cotton Naturals (I) P Ltd 2015 (3) TMI 1031 - DELHI HIGH COURT accordingly the Learned TPO is directed to recompute the adjustment. The ground No. 4 of the appeal is dismissed however the alternative ground 4.1 is allowed for the statistical purposes. Disallowance u/s 14A - Whether addition should be made on average investment and not on turnover? - HELD THAT - During the year under consideration assessee has made purchase and sale of mutual funds of huge amounts and therefore incurring of expenditure for earning exempt income cannot be denied in terms of section 14A of the Act. However if Rule 8D of the Rules is invoked there would not be any disallowance in view of no opening and closing stock value of mutual funds. In the circumstances we accept the alternative claim of the assessee to restrict the disallowance to the extent of exempted income following the decision of Joint Investment Private Limited 2015 (3) TMI 155 - DELHI HIGH COURT and accordingly direct to restrict the disallowance to the amount of Rs. 94, 929/-. The ground of the appeal of the Revenue is accordingly allowed partly.

Summary

Issues Involved:
1. Legality of the order passed by the Assessing Officer pursuant to the directions of the Dispute Resolution Panel (DRP).
2. Adjustment to the income of the appellant by holding that international transactions do not satisfy the arm's length principle.
3. Specific adjustments in the back-office support services segment.
4. Classification of the international transaction of merchanting trade as a financing arrangement.
5. Initiation of penalty under section 271(1)(c) of the Income-tax Act.
6. Deletion of disallowance made under section 14A of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Legality of the Order by Assessing Officer:
The assessee contended that the order passed by the Assessing Officer (AO) pursuant to the directions of the DRP is bad in law. However, this ground was considered general in nature and was not specifically adjudicated.

2. Adjustment to Income by Holding International Transactions Not at Arm's Length:
The DRP confirmed the AO/Transfer Pricing Officer’s (TPO) adjustment of Rs. 1,14,09,377/- to the income of the appellant, holding that the international transactions did not satisfy the arm's length principle under the Income-tax Act, 1961. The DRP upheld the adjustment of Rs. 49,25,116/- for the transaction of merchanting of commodities and granted partial relief of Rs. 2,64,448/- for back-office support services by allowing working capital adjustment.

3. Specific Adjustments in Back-Office Support Services:
The TPO made adjustments to the back-office support services segment, which were upheld by the DRP with minor relief. The assessee's transfer pricing study reported an operating profit margin of 10.00%, which was within the arm's length range. The TPO, however, rejected some comparables and added others, resulting in a final average margin of 22.76%. The DRP directed the AO to allow working capital adjustment, reducing the adjustment to Rs. 64,84,261/-.

Comparables Analysis:
- Aptico Limited: Excluded by the Tribunal on grounds of functional dissimilarity, as it provides high-end technical consultancy services.
- Global Procurement Consultants Ltd.: Retained as comparable, as it provides procurement management services, which are akin to back-office support services.
- HCCA Business Services: Retained as comparable, as its payroll processing services are similar to the assessee's accounting support services.
- Quippo Valuers and Auctioneers Pvt. Ltd.: Retained as comparable, as its asset management services are considered business support services.
- TSR Darashaw Ltd.: Excluded on grounds of functional dissimilarity, as its primary income is from registry and share transfer business, not back-office support services.

4. Classification of Merchanting Trade as Financing Arrangement:
The TPO classified the international transaction of merchanting trade as a financing arrangement, adding Rs. 49,25,116/- as adjustment. The DRP upheld this classification. The assessee argued that the transaction was not a financing arrangement but a normal trading transaction with a built-in credit term. The Tribunal agreed with the TPO's classification but directed the adjustment to be recomputed using the LIBOR rate for benchmarking, following the Delhi High Court's decision in CIT vs. Cotton Naturals (I) P Ltd.

5. Initiation of Penalty under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c) of the Act. The Tribunal did not specifically adjudicate this ground.

6. Deletion of Disallowance under Section 14A:
The Revenue challenged the DRP's deletion of disallowance under section 14A, which the AO had calculated based on the turnover of mutual funds. The DRP held that disallowance should be based on the average investment value, not turnover, and deleted the disallowance. The Tribunal upheld the DRP's decision, restricting the disallowance to the amount of exempt income earned, following the Delhi High Court's decision in Joint Investment Pvt. Ltd. vs. CIT.

Conclusion:
Both the assessee's and the Revenue's appeals were partly allowed for statistical purposes. The Tribunal directed specific adjustments and recomputations, particularly in the classification of merchanting trade and the disallowance under section 14A. The Tribunal's detailed analysis focused on ensuring that the adjustments and disallowances were made in accordance with the principles of arm's length pricing and relevant judicial precedents.