2022 (11) TMI 1336 - AT - Income Tax

TP Adjustment - Comparables - comparables to be excluded on functional dissimilarities - HELD THAT - We direct the Ld.TPO/AO to exclude Persistent Systems Ltd. Thirdware Solution Ltd. Larsen Toubro Infotech Ltd. Infosys Ltd. Nihilent Ltd. and Aspire Systems (India) Pvt Ltd. for not satisfying functional similarity under SWD segment. Cybage Software Ltd. - The main contention of the Ld.AR is that this assessee is having super profit in immediate two financial years and also having huge turnover is more that 200 crores in the assessment year under consideration. In our opinion these facts to be examined by the Ld.AO/TPO. Accordingly the issue remitted to the Ld.AO/TPO. If the functionality of the Cybage Software Pvt. Ltd. is not similar to the assessee and/or if the turnover is more that Rs.200 crores for the assessment year under consideration it deserves to be excluded on any one of the above reasons. Comparables i.e. Tech Mahindra Business Services Ltd. Infosys BPM Ltd. SPI Technologies India Pvt. Ltd. and Eclerx Services Ltd. to exclude from the final list for failing the turnover filter under ITES segment. R S Software (India) Ltd. - This comparable underwent a shift in the revenue generating segments. This comparable has made investments in developing tools and platforms and has also enhanced the sales and marketing activities. These are any ways not the functions performed by the assessee before us which is a captive service provider only catering to its AE. Thus we hold that R.S. Software(India) Ltd. should be excluded from the list of comparables. Microland Ltd. - As we have excluded various comparables that exceeded 200 crores turnover this comparable also deserves to be excluded on the same principle - we direct the Ld.TPO to exclude the above comparables from the Final list of SWD segment for failing in functionality tests. Interest on receivables - We direct the Ld.TPO that in the event the WCA subsumes the outstanding recievables no separate characterisation is to be made. However for those recievables that fall out of the WCA pertaining to year under consideration then the rate of interest to be charged must be LIBOR 300 basis points which is in accordance with the principles laid down by Hon ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt.Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT by considering a credit of 90 days. Assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.

Summary

Issues Involved:
1. Inclusion/Exclusion of Comparables for Transfer Pricing
2. Application of Upper Turnover Filter
3. Functional Dissimilarity of Comparables
4. Interest on Receivables as Separate International Transaction

Detailed Analysis:

1. Inclusion/Exclusion of Comparables for Transfer Pricing:
The primary issue in this appeal was the inclusion and exclusion of certain comparables for the Software Development (SWD), IT Enabled Services (ITES), and Marketing Support Services (MSS) segments. The assessee contended that the Transfer Pricing Officer (TPO) erred in including certain companies that did not meet the turnover filter and were functionally dissimilar.

2. Application of Upper Turnover Filter:
The assessee argued that the TPO should have applied an upper turnover filter to reject companies with significantly higher turnovers. Citing precedents like Autodesk India (P) Ltd. v. DCIT and Razorpay Software Pvt. Ltd. v. ACIT, the assessee contended that companies with turnovers exceeding Rs. 200 crores should be excluded. The Tribunal agreed with the assessee and directed the exclusion of companies like Persistent Systems Ltd., Thirdware Solution Ltd., Larsen & Toubro Infotech Ltd., Infosys Ltd., Nihilent Ltd., and Aspire Systems (India) Pvt Ltd. for not satisfying the turnover filter.

3. Functional Dissimilarity of Comparables:
The Tribunal examined the functional profiles of the comparables and the assessee. For instance, companies like Cybage Software Ltd. and Infobeans Technologies Ltd. were scrutinized for their diverse business activities and lack of segmental information. The Tribunal remitted the issue of Cybage Software Ltd. back to the TPO for fresh consideration, emphasizing the need to examine its functionality and turnover. Similarly, Infobeans Technologies Ltd. was excluded due to functional dissimilarity and lack of segmental financials. For the ITES segment, companies like Tech Mahindra Business Services Ltd., Infosys BPM Ltd., SPI Technologies India Pvt. Ltd., and Eclerx Services Ltd. were excluded for failing the turnover filter and functional dissimilarity.

4. Interest on Receivables as Separate International Transaction:
The TPO had proposed an adjustment for interest on outstanding receivables, treating it as a separate international transaction. The assessee argued that outstanding receivables should not be considered separately, and relied on precedents like Kusum Healthcare Pvt. Ltd. vs. ACIT and Bechtel India vs. DCIT. The Tribunal referred to the decision of the Special Bench in Instrumentation Corpn. Ltd. v. Asstt. DIT, which held that outstanding invoices are akin to loans and thus international transactions. However, the Tribunal also noted that if working capital adjustment subsumes sundry creditors, computing interest on outstanding receivables would amount to double taxation. Following the principle laid down in cases like Orange Business Services India Solutions Pvt. Ltd. vs. DCIT and Avenue Asia Advisors Pvt. Ltd. vs. DCIT, the Tribunal remitted the matter back to the TPO for fresh consideration, directing that the rate of interest should be LIBOR + 300 basis points with a 90-day credit period.

Conclusion:
The Tribunal allowed the appeal partly, directing the TPO to exclude certain comparables for not meeting the turnover filter and for functional dissimilarity. The issue of interest on receivables was remitted back for fresh consideration, with specific directions on the rate of interest and the treatment of working capital adjustment. The Tribunal emphasized the need for a detailed functional and risk analysis to ensure accurate transfer pricing adjustments.