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2023 (2) TMI 1188 - AT - Income TaxTP Adjustment - Comparable selection - TPO has not accepted these companies only on the basis of persistent loss company - HELD THAT - Since in this case the TPO has not accepted these companies only on the basis of persistent loss company the assessee has provided functional results for 3 companies i.e 31/03/2014 2015 2016 as above and in which we observe that in case of Sundram Business Service Ltd. the assessee has shown profit of Rs.69, 000/-. Further in case ACE Software Ltd. the assessee has shown profit continuously. In case of Hurton Communication Ltd. the assessee has calculated profit for three consequent financial years but while the filter applied the TPO has observed it as persistent loss company. However form the order of the TPO/DRP we did not find any where that the assessee raised any specific objection . Since the assessee raised this issue before us and these were included as comparables by the assessee and filed financial statements also therefore considering the totality of facts the issue is remitted back to the AO/TPO/DRP for a fresh consideration. The assessee is given liberty to file necessary documents for substantiating its case. The AO/TPO/DRP is directed to decide the issue as per law. Transfer pricing adjustment relating to notional interest on outstanding trade receivables - assessee has raised that the interest on receivable should not be made adjustment because the TPO himself allowed 90 days credit period and all the receivables were received within the period of 90 days then why the TPO has made adjustment under this head and he also submitted that this company is a debt free company therefore the adjustment should not be made - HELD THAT - We noted from the documents of the assessee that the TPO has allowed 90 days period in all the invoices are received within the 90 days of the period no adjustment can be made but the TPO has applied 6 months LIBOR 450 basis points as per many decision of the Tribunal with the interest on receivable beyond he credit period is an international transaction and it is termed as capital financing to its AEs. We remand this issue to the file of TPO/AO for the recalculation of the notional interest receivables if the TPO found that the invoices raised by the assessee is not received within the credit period of 90 days. The interest may be charged LIBOR rate of 6 months 350 points the assessee directed to provide necessary details for earlier disposal of the case therefore this issue is allowed for statistical purposes.
Issues Involved:
1. Validity of the assessment order under section 92CA of the Income-tax Act. 2. Transfer pricing adjustment relating to Information Technology Enabled Services (ITeS). 3. Selection and rejection of comparable companies for benchmarking international transactions. 4. Transfer pricing adjustment relating to notional interest on trade receivables. 5. Allowability of education cess and secondary and higher education cess as an expenditure. 6. Computation of interest under section 234B and 234C. 7. Initiation of penalty proceedings under section 271(1)(c). Detailed Analysis: 1. Validity of the Assessment Order: The assessee contended that the assessment order passed by the AO is bad in law due to non-compliance with mandatory conditions to invoke jurisdiction under section 92CA. However, the Tribunal did not specifically address this issue in detail, implying that the procedural requirements were deemed to have been met. 2. Transfer Pricing Adjustment Relating to ITeS: The AO, DRP, and TPO made a transfer pricing adjustment of INR 7,58,31,575, alleging that the services were not rendered at arm's length. The Tribunal observed that the assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method. However, the TPO rejected the assessee's transfer pricing study and applied arbitrary filters, leading to the selection of inappropriate comparables. 3. Selection and Rejection of Comparable Companies: The Tribunal addressed the following issues regarding comparable companies: - High Turnover Companies: The Tribunal directed the exclusion of Tech Mahindra Business Services Ltd., Infosys BPM Ltd., SPI Technologies India Pvt. Ltd., and Eclerx Services Ltd., based on their high turnover, which was significantly higher than the assessee's turnover of Rs. 171.38 crores. This decision was in line with previous Tribunal rulings that high turnover companies are not comparable to those with significantly lower turnovers. - Persistent Loss-Making Companies: The Tribunal remitted the issue back to the AO/TPO/DRP for fresh consideration regarding the inclusion of Sundaram Business Services Ltd., ACE Software Exports Ltd., and Harton Communication Ltd. The Tribunal noted that these companies had shown profits in some years and should not be excluded solely based on persistent losses without proper evaluation. 4. Transfer Pricing Adjustment Relating to Notional Interest on Trade Receivables: The Tribunal remanded the issue back to the AO/TPO for recalculating notional interest on trade receivables. The Tribunal noted that the TPO allowed a 90-day credit period, and if all receivables were received within this period, no adjustment should be made. The interest rate should be recalculated using a 6-month LIBOR rate plus 350 basis points if the credit period was exceeded. 5. Allowability of Education Cess and Secondary and Higher Education Cess: The Tribunal did not specifically address this issue, implying that it was not a significant point of contention. 6. Computation of Interest under Section 234B and 234C: The Tribunal noted that this issue is consequential in nature and did not provide a detailed analysis. 7. Initiation of Penalty Proceedings under Section 271(1)(c): The Tribunal noted that the initiation of penalty proceedings was mechanical and without adequate satisfaction, implying that the initiation may not have been justified. Conclusion: The appeal was partly allowed. The Tribunal directed the AO/TPO to exclude high turnover companies from the list of comparables and to reconsider the inclusion of certain companies previously excluded due to persistent losses. The issue of notional interest on trade receivables was remanded for recalculation. Other grounds were either dismissed as not pressed or noted to be consequential in nature. The Tribunal also acknowledged that there was no delay in filing the appeal due to the exclusion period granted by the Supreme Court.
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