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2017 (11) TMI 959 - AT - Income TaxTPA - comparable selection - Held that - The assessee was engaged in the following two segments - i) Provision of IT-enabled back-office services (ITeS Segment) Under this segment, the assessee provides Information Technology enabled back-office services such as industry, company and financial analysis which comprise business information, data gathering, analysis and delivery etc. to Bain USA s global operations through customized remote research and information support services. ii) Software development services Under this segment the assessee provides contract research development services to BAIN USA for internal uses. Thus companies functionally dissimilar with that of assessee need to be deselected from final list. Treating the delay in receipt of payments from the AE to be in the nature of unsecured loan advanced to the AE and thereby charging interest - Held that - Since the assessee is a debt free company and since it has neither received any interest from its creditors nor paid any interest to any of its debtors, it cannot be inferred that interest-bearing borrowed funds were utilised for extending any kind of loan to its AE and it cannot be reckoned that assessee has given any benefit to the AE by blocking its interest-bearing funds to the AE by extending the credit period. Accordingly, the transfer pricing adjustment, as made by the TPO, by imputing the interest on delay in receipt of payment is uncalled for on the facts of the present case and we direct that the same to be deleted.
Issues Involved:
1. Inclusion/Exclusion of Comparables 2. Interest on Receivables 3. Penalty Proceedings under Section 271(1)(c) 4. Minimum Alternate Tax (MAT) Set Off 5. Interest under Section 234B & 234C Issue-wise Detailed Analysis: 1. Inclusion/Exclusion of Comparables: The primary issue revolved around the inclusion/exclusion of specific comparables for determining the Arm's Length Price (ALP). The assessee contested the inclusion of TCS E-Serve Ltd. and Eclerx Services Limited and sought the inclusion of R Systems International Ltd. - TCS E-Serve Ltd.: The assessee argued that TCS E-Serve Ltd. was not comparable due to its large scale of operations, significant intangibles, and brand value, unlike the assessee, which was a captive service provider. Supporting judgments from the Delhi High Court and ITAT Delhi were cited, which had previously held TCS E-Serve as incomparable to ITES due to these factors. - Eclerx Services Limited: The assessee contended that Eclerx Services Limited followed an outsourcing model, significantly different from the assessee's captive service model. The ITAT Delhi Bench had previously ruled in favor of excluding Eclerx Services Limited in similar cases. - R Systems International Ltd.: The TPO and DRP excluded R Systems International Ltd. due to its different financial year ending. However, the assessee recalculated its financials based on quarterly results. The ITAT Delhi Bench and the jurisdictional High Court had previously ruled that comparables should not be excluded solely based on different financial year endings if data could be reasonably extrapolated. The Tribunal directed the inclusion of R Systems International Ltd. after verifying the recalculated financials. Consequently, the challenge against TCS E-Serve Ltd. and Eclerx Services Limited became academic. 2. Interest on Receivables: The second issue concerned the imputation of interest on receivables outstanding beyond 30 days, treated as unsecured loans to the AE. - The assessee argued that interest on receivables was embedded in the sale price and that the working capital adjustment accounted for the impact of outstanding receivables on profitability. The Delhi Bench of ITAT and the Delhi High Court had previously ruled that no separate adjustment for interest on receivables was warranted if the working capital adjustment was already factored in. - The Tribunal noted that the assessee was a debt-free company, and no interest was charged or paid on delayed payments to or from third parties. The Tribunal referenced previous ITAT rulings, which held that no transfer pricing adjustment was necessary for interest on receivables if the assessee was debt-free and had similar credit terms with third parties. The Tribunal directed the deletion of the transfer pricing adjustment for interest on receivables. 3. Penalty Proceedings under Section 271(1)(c): The assessee contested the initiation of penalty proceedings under Section 271(1)(c) of the Act. However, the Tribunal did not provide a detailed analysis or ruling on this issue within the judgment. 4. Minimum Alternate Tax (MAT) Set Off: The assessee argued that the Assessing Officer erred in not giving the benefit of MAT eligible for set-off while computing the income demand. The Tribunal did not provide a detailed analysis or ruling on this issue within the judgment. 5. Interest under Section 234B & 234C: The assessee contested the proposal to charge interest under Sections 234B and 234C of the Act. The Tribunal did not provide a detailed analysis or ruling on this issue within the judgment. Conclusion: The Tribunal partially allowed the appeal, directing the inclusion of R Systems International Ltd. in the final set of comparables and deleting the transfer pricing adjustment for interest on receivables. Other issues raised by the assessee were not explicitly addressed in the judgment. The order was pronounced on November 13, 2017.
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