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2022 (11) TMI 1493 - AT - Income TaxIssues Involved: 1. Transfer Pricing Adjustment on Software Development Services 2. Interest on Delay in Receipt of Receivables from Associated Enterprises (AEs) Summary: 1. Transfer Pricing Adjustment on Software Development Services: The assessee, a wholly owned subsidiary of Global Logic Inc., provides software development services to its AEs and third parties. For AY 2017-18, the assessee reported international transactions with AEs amounting to Rs. 3,38,36,82,742 and used the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC). The assessee's OP/OC margin was 14.72%, compared to the median margin of 13.43% for 13 comparable companies. The AO referred the case to the TPO, who accepted TNMM but included additional filters and selected 15 comparables with a median margin of 17.24%, resulting in a transfer pricing adjustment of Rs. 7,44,36,493/-. The assessee objected to the inclusion of 9 comparables, but the DRP upheld the TPO's selection. The Tribunal examined the inclusion of four comparables'Larsen & Toubro Infotech Ltd., Tata Elxsi Ltd., Infobeans Technologies Ltd., and Cybercom Datamatics Information Solutions Ltd.'and found them functionally dissimilar. The Tribunal directed their exclusion, which brought the assessee's margin within the arm's length range, negating the transfer pricing adjustment. 2. Interest on Delay in Receipt of Receivables from AEs: The TPO imputed notional interest of Rs. 7,12,59,891/- on delayed receivables from AEs, treating them as unsecured loans and applying an interest rate of 4.485%. The assessee argued that this issue was covered in its favor by the Tribunal's decisions for earlier years, where it was held that no adjustment is required if the operating margin is within the arm's length range, the company is debt-free, and there is similar delay in receivables from unrelated third parties. The Tribunal, following its earlier decisions and the Delhi High Court's ruling in Kusum Healthcare Pvt. Ltd., held that no adjustment can be made for notional interest on receivables if the assessee's margin is within the arm's length range and the company is debt-free. The Tribunal directed the deletion of the transfer pricing adjustment of Rs. 7,12,59,891/-. Conclusion: The Tribunal allowed the appeal of the assessee, directing the exclusion of four comparables for the software development services and deleting the adjustment for notional interest on delayed receivables.
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