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2023 (2) TMI 1160 - AT - Income TaxTP Adjustment - imputing interest on outstanding receivables due from AEs - HELD THAT - As the issue is already decided by the Coordinate Bench in favour of the assessee. In the circumstances the remaining unchanged as compared to the A.Y. 2017-18 this issue is squarely covered in assessee s own case for A.Y. 2017-18. So the addition made on account of transfer pricing adjustment on outstanding receivables amount is to be decided afresh in the light of above order in assessee s own case. Not considering export incentives as operating item while determining margin of the Appellant - assessee humbly submitted that export incentive income earned is directly linked to the provision of services by the entity to its group company. Accordingly. income earned by sale of SEIS scrips should be considered as operating in nature while determining the operating revenue of the assessee - HELD THAT - We consider that an item which relates to the international transaction in question be considered as an operating item for the purpose of computation of operating profit margin of such transaction. The income recognized for such scrips relates to the provision of IT enabled services as the entitlement to such scrips arises only on account of such IT enabled services rendered by the assessee to its AEs. Accordingly such income qualifies as a part of operating revenue for the purpose of computation of operating profit margin of the transaction pertaining to rendering of IT enabled services by the assessee. In this case it may be appropriate to consider export incentive as part of operating revenue in a TNMM analysis.
Issues Involved:
1. General Ground for Transfer Pricing (TP) adjustments. 2. Imputing interest on outstanding receivables due from Associated Enterprises (AEs). 3. Considering export incentives as an operating item while determining the margin. 4. Non-compliance with the directions of the Dispute Resolution Panel (DRP). 5. Selection of non-comparable companies. 6. Erroneous initiation of penalty under section 270A. 7. Shortfall in computation of interest under section 244A. Issue-wise Detailed Analysis: 1. General Ground for Transfer Pricing Adjustments: The assessee contested the economic analysis undertaken by the Assessing Officer (AO) and the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP), which resulted in a TP adjustment of INR 95,17,882. The Tribunal did not provide a separate analysis for this ground as it was included in the detailed discussion under the second issue. 2. Imputing Interest on Outstanding Receivables Due from AEs: The Tribunal examined the issue of imputing interest on outstanding receivables amounting to INR 95,17,882. The assessee argued that outstanding receivables should not be treated as a separate international transaction, referencing a prior decision in their own case for A.Y. 2017-18. The Tribunal referred to the Special Bench decision in Instrumentation Corpn. Ltd. and the Delhi Tribunal's decision in Orange Business Services India Solutions Pvt. Ltd., which held that outstanding receivables akin to loans advanced to foreign AEs are international transactions as per section 92B of the Act. The Tribunal directed the AO/TPO to reconsider the issue in light of these precedents, emphasizing that if working capital adjustments (WCA) subsume the outstanding receivables, no separate characterization is necessary. The interest rate should be LIBOR + 300 basis points with a credit period of 90 days. This ground was partly allowed for statistical purposes. 3. Considering Export Incentives as Operating Item: The assessee argued that export incentives of INR 7,74,02,570 should be considered as operating revenue. The Tribunal noted that the issue was settled in favor of the assessee by the Coordinate Benches of ITAT. The Tribunal referenced the Safe Harbour rules and OECD guidelines, which support the inclusion of items directly related to the controlled transaction as operating revenue. The Tribunal agreed that export incentives earned by the assessee are directly linked to the provision of services and should be considered as operating revenue for computing the operating profit margin. This ground was allowed in favor of the assessee. 4. Non-compliance with DRP Directions: The assessee raised concerns about the AO not following DRP directions regarding the inclusion of Sundaram Business Services Limited in the list of comparables and the credit period for computing interest on AE receivables. This issue was included in the discussion under the second issue and was not separately analyzed. 5. Selection of Non-comparable Companies: The assessee argued against the selection of certain companies as comparables, which were not functionally comparable. This issue was included in the discussion under the second issue and was not separately analyzed. 6. Erroneous Initiation of Penalty under Section 270A: The assessee contended that the AO erred in initiating penalty proceedings under section 270A for alleged under-reporting of income. The Tribunal noted that this ground was premature and did not require a detailed analysis at this stage. 7. Shortfall in Computation of Interest under Section 244A: The assessee pointed out a shortfall in the computation of interest under section 244A, amounting to INR 15,91,146. The Tribunal acknowledged this issue as consequential and did not provide a separate analysis. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to reconsider the issues related to imputing interest on outstanding receivables and treating export incentives as operating revenue. Grounds 1, 4, and 5 were not pressed by the assessee, ground 6 was deemed premature, and ground 7 was noted as consequential. The order was pronounced on 02nd February 2023.
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