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2022 (11) TMI 1493 - AT - Income TaxTP Adjustment - Comparable selection - international transaction of provision of software development services and addition with respect to interest on delay in receipt of receivables from AEs - Assessee is a wholly owned subsidiary of Global Logic Inc. and is engaged in the provision of software development services to its customers including Global Logic Group entities. Additionally the assessee also provides IT enables Services ( ITeS ) to certain third party entities HELD THAT - Larsen Tourbro Infotech Ltd. - This company is not functionally comparable to that of the assessee as there has been an extraordinary event that has occurred even during the relevant AY in the form of amalgamation of GDA Technologies Ltd. and AugmentIQ with the assessee company L T Infotech. Further we tend to agree with the submission of the assessee that this company owns significant intangibles and no segmental data is available in respect of the revenue generated from provision of software development services. Perusal of the orders of the Hon ble ITAT for the preceding years (supra) shows that all these aspects have been duly considered in arriving at the conclusion for exclusion of this company from the final list of comparable companies. Department has not challenged the finding of the Hon ble Tribunal in any of the earlier years. In view of this the objections raised by the Ld. CIT(DR) in our opinion are not sustainable. We therefore hold that this company is not a good comparable and accordingly direct the Ld. AO/TPO to exclude this company from the final set of comparable companies. Tata Elxsi Ltd. - As perusal of the order of the Hon ble Tribunal for AY 2014-15 shows that the Hon ble Tribunal has passed a well reasoned order holding this company to be functionally dissimilar and having ownership of internally generated intangibles and therefore not a suitable comparable to that of the assessee company. Further the finding of the Hon ble Tribunal in AY 2016-17 in favour of the assessee has not been controverted by the Ld. CIT-DR. Keeping in view order of the Hon ble Tribunal for preceding years (supra) we are of the considered view that this company is not functionally comparable to that of the assessee and therefore we direct the Ld. AO/TPO to exclude this company from the final list of comparable companies. Infobeans Technologies Ltd. - This company has been rejected as a comparable to that of a captive software development services provider. In light of the above respectfully following the decision of the Coordinate Bench for AY 2016-17 we direct the Ld. AO/TPO to exclude it from the final set of comparables Cybercom Datamatic Information Solutions Limited - This company not to be a good comparable and accordingly direct the Ld. AO/TPO to exclude this company from the final set of comparable companies. Having held the above after excluding the four comparable companies namely i) Larsen Tourbro Infotech Ltd. ii) Tata Elxsi Ltd. iii) Infobeans Technologies Ltd. and iv) Cybercom Datamatics Information Solutions Ltd. as per our direction the assessee s margin in respect of international transaction of provision of software development services would fall within the arms length range and no transfer pricing adjustment would thus be required. TP addition - interest on delay in receipt of receivables from AE - TPO in his order re-characterized the delay in receipt of receivables as unsecured loans advanced to the AE and imputed a notional interest at the rate of 4.485% being Libor 400 bps on the period of delay exceeding 60 days. The TPO accordingly computed an interest - HELD THAT - In the absence of any change in the facts and the legal position respectfully following the decisions of the coordinate bench of the Tribunal AY 2010-11 and 2012-13 in the assessee s own case for the preceding year we hold that the transfer pricing adjustment with respect to interest on delay in receipt of receivables from AEs ought to be deleted wherein it is held that the expression added in Explanation to section 92B does not mean that de hors the context every item of receivables appearing in the accounts of an entity which may have dealing with foreign AE would automatically be characterized as an international transaction and decided the issue in favour of the taxpayer. In view of the law laid down in Pr. CIT-V vs. Kusum Health Care Pvt. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT we are of the considered view that no adjustment can be made on account of notional interest on receivables by relying upon Explanation (i) (a) (c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company there is no question of charging any interest or receivables. This issue has also been decided by Hon ble Delhi High Court in case of Pr. CIT-1 vs. M/s. Bechtel India Pvt. Ltd. 2016 (9) TMI 196 - DELHI HIGH COURT Thus we hold that the transfer pricing adjustment with respect to interest on delay in receipt of receivables from AEs ought to be deleted. Assessee appeal allowed.
Issues Involved:
1. Addition on account of transfer pricing adjustment concerning international transactions of software development services. 2. Addition with respect to interest on delay in receipt of receivables from Associated Enterprises (AEs). Issue-Wise Detailed Analysis: 1. Addition on Account of Transfer Pricing Adjustment: The assessee, a wholly-owned subsidiary of Global Logic Inc., engaged in software development services, reported international transactions with AEs for AY 2017-18. The primary transactions included software development services to Global Logic Inc. and Global Logic Israel Ltd. The assessee used the Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP) and reported an operating margin of 14.72%, which it claimed was within the comparable companies' range of 11.66% to 16.54%. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO), who accepted TNMM but applied additional filters, resulting in a final set of 15 comparable companies with a median operating profit margin of 17.24%. The TPO made adjustments, leading to an additional Rs. 7,44,36,493/- on the international transaction of software development services. The assessee objected to the inclusion of nine comparables, arguing functional dissimilarity, lack of segmental data, and ownership of significant tangibles. The Dispute Resolution Panel (DRP) retained these comparables, leading the assessee to appeal. The Tribunal examined the comparability of four specific companies: Larsen & Toubro Infotech Ltd., Tata Elxsi Ltd., Infobeans Technologies Ltd., and Cybercom Datamatics Information Solutions Ltd. The Tribunal found these companies functionally dissimilar due to factors like brand leverage, segmental data issues, and extraordinary events. Consequently, these companies were excluded from the final set of comparables, leading to the assessee's margin falling within the ALP range, negating the need for a transfer pricing adjustment. 2. Addition with Respect to Interest on Delay in Receipt of Receivables from AEs: The TPO re-characterized the delay in receipt of receivables as unsecured loans to AEs and imputed a notional interest of 4.485%, resulting in an addition of Rs. 7,12,59,891/-. The assessee argued that this issue was covered in its favor by previous Tribunal decisions for AYs 2010-11 and 2012-13, where it was held that no adjustment could be made for notional interest on receivables, especially when the company was debt-free and had similar delays with unrelated third parties. The Tribunal, referencing its earlier decisions and the Delhi High Court's ruling in Kusum Health Care Pvt. Ltd., reiterated that not every item of receivables constitutes an international transaction. It emphasized that the impact on working capital must be considered, and if the operating margins are within the arm's length range, no further adjustment is warranted. The Tribunal found no change in the factual or legal position for AY 2017-18 and directed the deletion of the transfer pricing adjustment concerning interest on delayed receivables. Conclusion: The Tribunal allowed the appeal, directing the exclusion of specific comparables and the deletion of the transfer pricing adjustment related to interest on delayed receivables, aligning with previous rulings and the Delhi High Court's guidance on similar issues.
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