2023 (3) TMI 1487 - AT - Income Tax

TP Adjustment - comparable selection - as submitted TPO in selecting comparables applied filter of companies with turnover of more that one Crore however failed to apply the upper turnover limit - HELD THAT - High turnover is a ground for excluding companies as not comparable with a company that has low turnover - 10 companies are directed to be excluded for failing turnover filter. Great software Laboratory Pvt. Ltd. the services rendered by the assessee under a contract with its AE cannot be compared with a company that renders various services under SWD segment. We do not find any reason to include this comparable in the final list. Elveego Circuits Pvt. Ltd. company is in the business of Chip and semiconductor design services where as the assessee before us is into basic SWD services of coding an documentation Testing and quality assurance software patches and maintenance. There is no similarity between the functions performed by the assessee vis- -vis that of this company. We therefore at the threshold reject this company being functionally not similar with that of the assessee. See Sprinklr India Pvt. Ltd 2023 (1) TMI 1356 - ITAT BANGALORE . Blackpepper Technologies Pvt. Ltd. - On perusal of the P L account of the company we notice that for the year ended 31.3.2007 the company has generated revenue only from sale of services and no revenue is generated from sale of products. We therefore tend to agree with the above findings of the DRP and accordingly we see no reason to interfere with the decision of the DRP - we uphold the inclusion of this company. Aptus Software Labs Pvt. Ltd. company is deriving revenue from both domestic as well as foreign company. The notes to the account being note 24 reveals the revenue is recognised by this comparable from service transactions. The NIC code being 6201 as appearing at page 3383 of paper book reveals the description to be information technology services as against computer programming consultancy and related activities as submitted by the assessee in the synopsis. We therefore do not find any reason to exclude this company from the final list. We direct the Ld.AO/TPO to retain this company in the list. Acewin Agritech Ltd. company has invested in enlarging its business development team and also has the product development vertical the income recognition is only from the sale of services being export and therefore this company does not have a segmental details of the variety of services rendered by it. Moreover the company is a leading software development and information technology outsourcing company and therefore as the entire revenue is categorised under one single segment it is not comparable with the captive service provider like that of assessee before us that renders its services on a cost plus model with its AE. We accordingly reject this comparable and direct the Ld.AO/TPO to exclude from the final list. Infobeans Technologies Ltd. company is functionally not comparable and no segmental details are available. Therefore the coordinate bench did not consider this company as comparable in assessee s own case for AYs 2014-15 2021 (1) TMI 25 - ITAT HYDERABAD 2015-16 2021 (4) TMI 1290 - ITAT HYDERABAD . Threesixty Logica Testing Services Pvt. Ltd. company derives 100% income from writing modifying testing of computer program to meet the needs of a particular client excluding webgage and designing. In the annual report the revenue recognition by this company is stated to be primarily from software testing QA and related services which is also supported from the notes to account being note 1 wherein the company overview also states that it is primarily engaged in providing information technology services being software testing and QA services and it also stated in the segmental report and operating segmental details that there are no other reportable segments. Thus we see merit in the arguments of the Ld.AR that this company is not comparable functionally since the assessee is a contract service provider rendering limited services to its AE alone. Kcube Consultancy Services Private Limited and Jindal Intellicom Limited rejected for the reason that they did not feature in the search matrix of the TPO - As submitted that the companies cannot be rejected solely on the ground that the same were not featuring in the search matrix of the TPO. It is submitted that above companies are functionally comparable to the assessee and passes all filter applied by the assessee. Reliance in this regard is placed on the decision of Prism Networks Private Limited 2022 (2) TMI 1296 - ITAT BANGALORE - Thus we remand this comparable to the Ld.TPO to consider it based on FAR analysis in accordance with law. Isummation Technologies Private Limited Virinchi Limited Evoke Technologies Private Limited, CG-Vak Sagarsoft Limited Software Exports Ltd. and Maveric Systems Limited - We note that all the above comparables requires to be considered afresh by the Ld.AO/TPO in the light of the respective annual reports. Needless to say that the FAR analysis has to be verified with that of the assessee in order to come to a conclusion of the same being functionally similar with that of assessee. Accordingly we remand the above comparables sought for inclusion by the assessee to the Ld.AO/TPO to carry out necessary verification. Computing interest on outstanding receivables - AR submitted that the Ld.TPO proposed transfer pricing adjustment in respect of outstanding receivables in respect of trade creditors being the AEs by using SBI rate and CUP as the most appropriate method - HELD THAT - Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. 2016 (7) TMI 760 - ITAT KOLKATA held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE. hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively it has been argued that working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation. In view of the above we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables no separate characterisation is to be made. However for those receivables 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 bin case of CIT vs. Cotton Naturals (I) Pvt. Ltd 2015 (3) TMI 1031 - DELHI HIGH COURT .

Summary

Issues Involved:
1. Incorrect appreciation of facts and interpretation of law by AO/TPO and DRP.
2. Natural justice in passing the order.
3. Transfer pricing adjustment relating to software development segment.
4. Transfer pricing adjustment relating to interest on notional receivables.
5. Inclusion and exclusion of specific comparables.
6. Consequential relief of interest under section 234B & 234C.

Summary:

Issue 1: Incorrect Appreciation of Facts and Interpretation of Law
The Tribunal addressed the general grounds raised by the assessee, which included the claim that the AO/TPO and DRP's order was based on an incorrect appreciation of facts and misinterpretation of law. The Tribunal noted that these grounds did not require specific adjudication.

Issue 2: Natural Justice
The Tribunal dismissed the grounds related to natural justice, specifically the need to provide a copy of the reference to the assessee and the claim that the AO erred in referring the case to the TPO without proper approval.

Issue 3: Transfer Pricing Adjustment Relating to Software Development Segment
The Tribunal considered the assessee's request to exclude certain comparables based on the turnover filter and functional dissimilarities. It directed the exclusion of comparables like Great Software Laboratory Pvt. Ltd., Elveego Circuits Pvt. Ltd., and Threesixty Logica Testing Services Pvt. Ltd. due to lack of segmental details and functional dissimilarities. However, it upheld the inclusion of Blackpepper Technologies Pvt. Ltd. and Aptus Software Labs Pvt. Ltd., finding them functionally comparable.

Issue 4: Transfer Pricing Adjustment Relating to Interest on Notional Receivables
The Tribunal addressed the issue of interest on outstanding receivables, considering it an international transaction as per the retrospective amendment to section 92B. It remitted the matter to the AO/TPO for fresh consideration, directing that if working capital adjustment subsumes the outstanding receivables, no separate adjustment is needed. For receivables outside the working capital adjustment, interest should be charged at LIBOR + 300 basis points.

Issue 5: Inclusion and Exclusion of Specific Comparables
The Tribunal remanded the inclusion of comparables like Kcube Consultancy Services Pvt. Ltd., Jindal Intellicom Ltd., Isummation Technologies Pvt. Ltd., Virinchi Ltd., Evoke Technologies Pvt. Ltd., CG-Vak Software & Exports Ltd., Sagarsoft Ltd., and Maveric Systems Ltd. to the AO/TPO for fresh verification based on FAR analysis.

Issue 6: Consequential Relief of Interest under Section 234B & 234C
The Tribunal noted that the ground related to consequential relief of interest under section 234B & 234C did not require adjudication.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific directions for the exclusion and inclusion of comparables and remanding certain issues for fresh consideration by the AO/TPO. The Tribunal emphasized the need for a detailed functional analysis and adherence to judicial precedents in transfer pricing matters.