2021 (10) TMI 1391 - AT - Income Tax

TP Adjustment - comparable selection - inclusion of E-clerx Services Ltd and TCS E-Serve Ltd. - HELD THAT - This Tribunal has excluded E-clerx Services Ltd and TCS E-Serve Ltd. from the final set of comparables. Respectfully following the decision of this Tribunal in own case 2021 (2) TMI 575 - ITAT DELHI , we direct the Assessing Officer/TPO to exclude E-clerx Services Ltd and TCS E-Serve Ltd. from the final set of comparables. Ground with its sub grounds is, accordingly, allowed. Addition on account of alleged interest on delay in collection of receivables from the AEs - invoices pertain to the year under consideration only and in most of the cases, the delay is NIL or less than 45 days. It is true that in some of the cases, the delay is more than the stipulated period of 45 days - HELD THAT - We have been told that in the subsequent year, no addition has been made on this account and in earlier Assessment Year small additions were made which were not contested on the smallness of the amount. In light of the aforementioned observations of the Hon'ble High Court of Delhi KUSUM HEALTH CARE PVT. LTD. 2017 (4) TMI 1254 - DELHI HIGH COURT we are of the considered view that the figure of receivables mentioned elsewhere do not reflect a pattern and, as held the assessee has already fettered the impact of receivable on the working capital which has been accepted by the DRP - we direct the Assessing Officer/TPO to delete the addition. Assessee appeal allowed.

Issues Involved:
1. Addition to the returned income by re-computing the arm's length price (ALP) of international transactions.
2. Jurisdictional error in the reference made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO).
3. Rejection of the assessee's claim of being a low-end IT support service provider.
4. Errors in applying filters and selecting comparables for transfer pricing.
5. Denial of economic adjustments in arriving at the ALP.
6. Notional addition on account of interest on delayed receivables.
7. Failure to give effect to directions passed by the Dispute Resolution Panel (DRP).
8. Initiation of penalty proceedings under section 274 read with 271(1)(C).

Detailed Analysis:

1. Addition to the Returned Income by Re-computing the ALP:
The assessee contested the addition of INR 103,601,764/- made by the AO/TPO by re-computing the ALP of international transactions under Section 92 of the Income Tax Act. The Tribunal noted that the assessee is a wholly-owned subsidiary providing IT-enabled support services exclusively to its group companies. The TPO had accepted only 3 out of the 14 comparables selected by the assessee and added 5 more, leading to an average operating margin of 29.53%.

2. Jurisdictional Error in the Reference to the TPO:
The assessee argued that the AO did not record any reasons in the draft assessment order for referring the matter to the TPO, as required under Section 92CA(1). However, this ground was not separately adjudicated as the assessee's counsel focused on specific grounds during the hearing.

3. Rejection of Assessee's Claim of Being a Low-End IT Support Service Provider:
The TPO recharacterized the assessee as a core software developer without providing sufficient opportunity to the assessee. The Tribunal found that the FAR analysis for the year under consideration was consistent with the subsequent assessment year, where the Tribunal had excluded certain comparables.

4. Errors in Applying Filters and Selecting Comparables:
The Tribunal examined the inclusion of E-clerx Services Ltd and TCS E-Serve Ltd as comparables. It was noted that these companies were excluded in the assessee's own case for the subsequent assessment year. E-clerx was found to be a KPO with significant intangibles and outsourcing activities, making it functionally dissimilar. TCS E-Serve had high turnover, brand equity contributions, and predominantly served Citi Group, making it incomparable. The Tribunal directed the AO/TPO to exclude these companies from the final set of comparables.

5. Denial of Economic Adjustments:
The Tribunal did not separately adjudicate this ground as it was related to the issue of interest on delayed receivables, which was addressed under Ground No. 6.

6. Notional Addition on Account of Interest on Delayed Receivables:
The TPO proposed an adjustment of INR 1,53,65,454/- for interest on delayed receivables, applying an interest rate of 11.69%. The DRP granted working capital adjustment and applied LIBOR + 200 basis points. The Tribunal, relying on the Delhi High Court's decision in Kusum Health Care, held that the impact of receivables was already factored into the working capital adjustment. The Tribunal directed the AO/TPO to delete the addition of INR 64,40,609/-.

7. Failure to Give Effect to DRP Directions:
The Tribunal did not separately adjudicate this ground as it was related to the issues already addressed.

8. Initiation of Penalty Proceedings:
The Tribunal did not specifically address this ground as the primary focus was on the substantive issues related to the transfer pricing adjustments.

Conclusion:
The Tribunal allowed the assessee's appeal, directing the exclusion of E-clerx Services Ltd and TCS E-Serve Ltd from the set of comparables and deleting the addition on account of interest on delayed receivables. The order was pronounced on 01.10.2021.

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