2022 (8) TMI 1388 - AT - Income Tax

TP Adjustment - adjustment in respect of outstanding trade receivables - HELD THAT - As the receivables are closely associated to the primary rendering of software development services, a credit period has to be granted to the AE and has to be considered along with the main international transaction being the sale of software service development. The adjustment proposed by the Ld.TPO in respect of outstanding trade receivables has to be considered along with the main transaction being the software development service rendered by the assessee to the AE by considering a credit period of 90 days. AO shall verify if the same is subsumed in the computation of the Working Capital Adjustment. In the event, the receivables stands subsumed, no adjustments deserves to be made. On the contrary, if any trade payables falls outside the credit period of 90 days, adjustment on such receivables would be restricted to LIBOR 300 basis points.

Issues Involved:

1. Incorrect appreciation of facts and wrong interpretation of law.
2. Adjustments/disallowances to the returned income.
3. Determination of balance tax demand.
4. Transfer Pricing adjustments and related grounds.
5. Levy of interest under section 234B.
6. Initiation of penalty proceedings under section 271(1)(c).
7. Additional grounds related to corporate tax matters.

Detailed Analysis:

1. Incorrect Appreciation of Facts and Wrong Interpretation of Law:
The assessee claimed that the final assessment order and directions of the Hon'ble DRP were based on an incorrect appreciation of facts and a wrong interpretation of law, making them bad in law.

2. Adjustments/Disallowances to the Returned Income:
The learned AO made adjustments/disallowances aggregating to INR 11,94,62,783, assessing the total income of the Appellant at INR 24,38,80,173, which the assessee contested.

3. Determination of Balance Tax Demand:
The AO determined a balance tax (including interest) demand payable by the Appellant amounting to INR 6,06,03,330, which was challenged by the assessee.

4. Transfer Pricing Adjustments and Related Grounds:
The primary issue revolved around the adjustment of INR 11,03,17,720 to the total income on account of the arm's length price of software development services transactions with associated enterprises.

4.1 Economic Analysis:
The DRP/AO/TPO did not accept the economic analysis undertaken by the Appellant and conducted a fresh analysis, holding the transactions not at arm's length.

4.2 Operating Margin Computation:
The DRP/AO/TPO incorrectly computed the operating margin of the Assessee by considering certain operating items as non-operating, resulting in a margin of 5.12%.

4.3 Comparable Companies Rejection:
The DRP/AO/TPO rejected certain comparable companies based on various quantitative and qualitative filters, such as different accounting years, employee cost criteria, and export sales percentage.

4.4 Use of Section 133(6):
The DRP/AO/TPO used powers under section 133(6) to obtain non-public information for comparability purposes, which was contested.

4.5 Rejection of Specific Companies:
The DRP/AO/TPO rejected companies like Akshay Software Technologies Limited, R Systems International Limited, and TVS Infotech Limited based on unreasonable comparability criteria.

4.6 Acceptance of Non-Comparable Companies:
The DRP/AO/TPO accepted companies like Tata Elxsi Ltd, Mindtree Ltd, and Infosys Ltd as comparables, which the assessee argued were not functionally comparable.

4.7 Interest on Outstanding Receivables:
The DRP/AO/TPO determined a transfer pricing adjustment on account of interest on outstanding receivables amounting to INR 91,45,063, re-characterizing the outstanding receivables as a loan transaction.

4.8 Working Capital Adjustment:
The DRP/AO/TPO did not make suitable adjustments for differences in working capital positions, comparing full-fledged risk-bearing entities with the Assessee's captive operations without adjustments.

4.9 Internal TNMM Application:
The assessee argued that internal TNMM should be considered for benchmarking the international transaction, which was not accepted by the DRP.

The Tribunal noted that the DRP's rejection of internal TNMM was based on the TP study report, which stated that internal comparable data could not be obtained. However, the Tribunal allowed the assessee's ground for statistical purposes, remanding the matter for fresh consideration.

5. Levy of Interest under Section 234B:
The AO levied interest of INR 2,15,04,395 under section 234B, which was a consequential ground and did not require separate adjudication.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c), which was also a consequential ground and did not require separate adjudication.

7. Additional Grounds Related to Corporate Tax Matters:
The assessee raised additional grounds related to the exclusion of provisions for onerous lease and litigation from book profit computation under section 115JB, and the reversal of such provisions. The Tribunal admitted these additional grounds, remanding them to the AO for fresh consideration based on the directions in the assessee's own case for previous assessment years.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remanding several issues for fresh consideration by the AO, particularly focusing on the application of internal TNMM and the treatment of outstanding receivables. The additional grounds related to corporate tax matters were also admitted for fresh consideration.

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