9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2022 (6) TMI 1383 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - E-Zest Solutions Ltd - we deem it fit and proper to remand this issue back to the file of the CIT (A) for the purpose of considering afresh whether E-Zest Solutions Ltd is having functional dissimilarities with that of the assessee or not. The assessee is directed to produce all the financials including the Annual General Report and other documents to prove that E-Zest Solutions Ltd is functionally dissimilar to that of the assessee. Comparables Acropetal Technologies (Seg)., ICRA Techno Analytics Ltd. and Persistent Systems Solutions Ltd. Acropetal Technologies (Seg.) - Admittedly, once the assessee itself is making a case of inclusion of these 3 companies before the lower authorities and the CIT (A) based on the submission of the assessee is passing the order, then it cannot be stated that the assessee is aggrieved by the order passed by the CIT (A). Since the assessee is not aggrieved by the order passed by the CIT (A) with respect to inclusion of these three companies, therefore, the assessee does not have a right to challenge the order of the CIT (A) for exclusion of these companies before us. Interest on receivables - CIT (A) fixing the interest at 8% - HELD THAT - Outstanding receivable by the assessee from its AE, is required to be benchmarked, so as to ensure that they should not be any shifting of profit from assessee to its AE. Application of 8% interest, though in strict sense, would be contrary to the principles of TP analysis as the transfer pricing officer was required to bring the comparable either internal comparable or the external comparable by applying CUP method and then fix the rate of interest on the delayed receivables from the AE. However, with a view to give a quietus to the issue , we are of the opinion that instead of 8% interest rate, rate of interest of 6% be applied on outstanding receivable at the year end . In our considered opinion, the submission of the assessee that LIBOR 200 points require to be applied, cannot be upheld in these facts of the case , as it will amount to shifting of profit from assessee to its AE, which cannot be countenanced under Chapter X of the I.T. Act. Moreover, the rate of interest on loan transaction ( LIBOR points ) cannot be equated with delayed receipt of the outstanding amount by assessee from its AE, as both stands on different premises having different purpose and nature. In fact if outstanding receivable are due for a longer period, then assessee would be required to deploy more resources either in the form of debt/equity to meet out the cash flow/working capital requirements. Ground partly allowed.
Issues Involved:
1. Rejection of certain grounds by the assessee. 2. Determination of Arm's Length Price (ALP) for international transactions. 3. Selection of comparable companies for benchmarking. 4. Treatment of outstanding receivables from Associated Enterprises (AEs) and determination of interest rate. Detailed Analysis: 1. Rejection of Certain Grounds by the Assessee: - The learned AR submitted that Ground No.4 and Grounds 1 to 3 were not being pressed by the assessee, leading to their rejection as not pressed. 2. Determination of Arm's Length Price (ALP) for International Transactions: - The assessee, a private limited company, applied the Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking services provided to its AEs. - The operating profit/operating cost (OP/OC) was used as the profit level indicator. - The assessee identified 11 comparables with an arithmetic mean of 13.49% for Software Development Services and 7 comparables with an arithmetic mean of 19.24% for ITES, concluding that the transactions were at Arm's Length. 3. Selection of Comparable Companies for Benchmarking: - The learned TPO conducted a fresh search and selected 18 companies for Software Development Services, arriving at an arithmetic mean of 20.82% (adjusted to 20.35% after working capital adjustment) and made an adjustment of Rs.62,56,174/-. - The assessee objected to 8 of the 16 selected companies, arguing that they had turnovers exceeding Rs.350 crores and operated in different functions. - The CIT (A) excluded three companies (Infosys BPO Ltd, L & T Infotech Ltd, and Tata Elxsi Ltd) from the list of comparables. - The assessee challenged the inclusion of 4 comparables (Acropetal Technologies (Seg), E-Zest Solutions Ltd, ICRA Techno Analytics Ltd, and Persistent Systems & Solutions Ltd) and requested the exclusion of additional 5 companies (Igate Global Solutions Ltd, Mindtree Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd, and Zylog Systems Ltd). 4. Treatment of Outstanding Receivables from Associated Enterprises (AEs) and Determination of Interest Rate: - The CIT (A) fixed the ALP interest rate at 8% for receivables from AEs, reducing it from the TPO's rate of 12%. - The assessee argued that receivables should not be treated as loans for interest levy and that the interest rate should be based on LIBOR plus 200 points. - The Tribunal noted that more than 60% of the assessee's total turnover was receivable from AEs and upheld the need for benchmarking interest on delayed receivables to prevent profit shifting. - The Tribunal reduced the interest rate from 8% to 6%, rejecting the application of LIBOR plus 200 points. Findings of the Bench: - The Tribunal remanded the issue of excluding E-Zest Solutions Ltd back to the CIT (A) for considering functional dissimilarities. - The Tribunal rejected the assessee's challenge to the inclusion of Acropetal Technologies (Seg), ICRA Techno Analytics Ltd, and Persistent Systems & Solutions Ltd. - The Tribunal dismissed the challenge to the inclusion of other 5 companies (Igate Global Solutions Ltd, Mindtree Ltd, Persistent Systems Ltd, Sasken Communication Technologies Ltd, and Zylog Systems Ltd) as the assessee did not challenge their functional dissimilarities before lower authorities. Conclusion: - The appeal of the assessee was partly allowed, with specific directions for reconsideration and adjustments. - The order was pronounced in the Open Court on 7th June 2022.
|
