2019 (5) TMI 737 - AT - Income Tax

Determination of the ALP - ITeS services - selection of comparable - HELD THAT - Looking to the functions performed by the Accentia technology and the various kinds of advanced assets in the form of software etcetera utilized, it is apparent that functionally the above company is not comparable with the assessee company. Hence we direct the learned transfer pricing officer /learned AO to exclude the above company from the comparability analysis. Infosys BPO Ltd - board of directors in that meeting held on 06/10/2008 approved subject to the approval of the Karnataka and mothers High Court of scheme of amalgamation to amalgamate PAN financial services India private limited which is engaged in providing business process management services with the Infosys BPO Ltd with effect from 01/04/2008. Therefore even if there is an amalgamation or merger, it has happened in financial year 2008 09, and impugned financial year before us is financial year 2009 10 , hence it does not pertain to this year and therefore for this reason Infosys BPO cannot be excluded. The reasons given by us above, we direct the learned TPO/AO to exclude the Infosys BPO Ltd from the comparability analysis for the reasons of having huge brand value. TCS E serve international Ltd - annual Report of the above comparable company. Apparently TCS E serve international is a subsidiary of Tata consultancy services Ltd. Behind the above comparable company, there is a Tata brand , which is almost 10 times bigger than Infosys brand ( on market cap basis) . On the perusal of schedule M of the profit and loss account there is a payment of 3738 000s towards the Tata brand equity contribution. For this reason that it belongs to Tata group and has also contributed to Tata brand which is one of the largest brand in the information technology segment, there is a definite impact on the pricing capacity of the comparable which the assessee lacks. Hence, we find that TCS E serve international Ltd deserves to be excluded. Accordingly we direct the learned TPO AO to exclude the above comparable. TCS E serve limited - it is functionally dissimilar engaged in the transaction processing and technical services like software testing, verification and validation of the software. It was further stated that like TCS E serve international Ltd it also belongs to the Tata group and owns significant intangible as well as makes payment for Tata brand equity. It is further stated that the scale of operation of this company itself makes it not comparable with the assessee.Transfer pricing officer rejected the arguments of the assessee similar to TCS E serve international Ltd. The learned dispute resolution panel also rejected the objection of the assessee. On identical facts and circumstances we have excluded TCS E serve international Ltd that it belongs to a Tata group and has paid contribution for Tata brand. We have also perused the annual report of the comparable company which is placed on careful analysis of the annual report it is found that in schedule N , Tata brand equity contribution of this comparable companies is ₹ 46065 (in thousands) - we direct the learned transfer pricing officer to exclude the above comparable from the comparability analysis. E4e healthcare business services Ltd - as perused schedule 16 notes to the accounts wherein commitments and contingent liabilities company it is referred that company s software development centers in India are 100 % export oriented units under the software technology Park guidelines. But that does not make that assessee is engaged in the business of software development activities also, unless, the accounts, revenue stream, relevant cost, directors report, management discussion and analysis shows otherwise. It is also not mentioned anywhere in the report that assessee is engaged in medical transcription, according services. We reject the contention of the learned authorised representative and uphold the order of the learned TPO as well as the learned dispute resolution panel, that this company is functionally comparable as it is engaged in the outsourcing services as assessee is engaged in. Working capital adjustment - no working provided - HELD THAT - Assessee has only relied upon the submissions made before the learned dispute resolution panel for allowability of the working capital adjustment, however, it did not provide any working of the same. In view of the absence of proper working and the reasons given by the assessee before the lower authorities or before us, we do not find any reason to accept the contention of the learned authorised representative. Therefore we reject the argument of the working capital adjustment while computing the margins. Judicial decisions on the transfer pricing adjustment not followed by the lower authorities - HELD THAT - comparability analysis is a complete factual analysis and therefore any comparable which is held to be not comparable for consideration in case of any other assessee cannot be held to be not comparable with the whole world, as that would make that comparable which has been excluded on the basis of the judicial precedent as a unique comparable and only one alien existing in the whole corporate world. Such is not the mandate of the income tax act and rules there under. The comparability is to be tested only with the functional analysis of the assessee viz a viz the comparable contested. The judicial decisions, unless otherwise warranted, cannot be relied upon for exclusion of such comparables. Hence we reject the ground number 3 of the appeal. Receivables outstanding beyond 30 days from the associated enterprise - deemed as loan and charging notional interest at the rate of one month LIBOR 400 basis points resulting into the interest rate of 4.78% for the period of delay in receipt of payment beyond 30 days of the invoice - HELD THAT - The issue has been squarely covered in favour of the assessee by the decision of the honourable Delhi High Court wherein it was found that though there is a credit period allowed by the assessee to the associated enterprise of only 180 days however the associated enterprise are allowed to linger for long and interest was computed by the AO/TPO, the honourable Delhi High Court KUSUM HEALTH CARE PVT. LTD. 2017 (4) TMI 1254 - DELHI HIGH COURT deleted the above adjustment. Therefore respectfully following the decision of the honourable Delhi High Court we direct the learned AO/TPO to delete the above adjustment to the arm s-length price on account of delayed receivable from its associated enterprise as the facts are similar as stated in the decision of the honourable Delhi High Court.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Determination of the arm's length price (ALP) for international transactions.
3. Inclusion/exclusion of specific comparables in the transfer pricing analysis.
4. Working capital adjustment.
5. Adherence to judicial pronouncements in transfer pricing adjustments.
6. Initiation of penalty proceedings under section 271(i)(c).
7. Computation of interest under sections 234A, 234B, 234C, and 234D.
8. Adjustment for delayed realization of receivables.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the validity of the assessment order passed by the Assessing Officer (AO) pursuant to the directions of the Dispute Resolution Panel (DRP). The Tribunal dismissed this ground as general in nature, with no specific arguments advanced by either party.

2. Determination of the Arm's Length Price (ALP):
The main issue was the transfer pricing adjustment of INR 14,283,265 for the assessment year 2010-11 and INR 27,848,043 for the assessment year 2011-12. The assessee argued that the international transactions pertaining to IT-enabled services did not satisfy the arm's length principle. The Tribunal examined the Transfer Pricing Officer's (TPO) methodology, including the selection of comparables and the application of filters.

3. Inclusion/Exclusion of Specific Comparables:
The Tribunal addressed the inclusion/exclusion of specific comparables as follows:

- Accentia Technologies Ltd: The Tribunal excluded Accentia Technologies Ltd for being functionally dissimilar and having significant brand value and extraordinary events during the year.

- Infosys BPO Ltd: Excluded due to its significant brand value and functional dissimilarity. The Tribunal noted that Infosys BPO belonged to the Infosys group, which impacted its profitability.

- TCS E-Serve International Ltd and TCS E-Serve Ltd: Both were excluded due to their association with the Tata brand, which significantly impacted their pricing capacity.

- e4e Healthcare Business Services Ltd: Retained as a comparable since it was engaged in healthcare outsourcing services similar to the assessee's services.

- Eclerx Services Ltd: Excluded for being a Knowledge Process Outsourcing (KPO) company, which was not comparable to the assessee's IT-enabled services.

4. Working Capital Adjustment:
The Tribunal upheld the TPO's decision to deny the working capital adjustment, as the assessee failed to provide a proper working for the same and did not demonstrate its impact on margins.

5. Adherence to Judicial Pronouncements:
The Tribunal rejected the ground that the TPO/DRP disregarded judicial pronouncements, stating that comparability analysis is a factual analysis and judicial decisions cannot be relied upon for exclusion unless warranted.

6. Initiation of Penalty Proceedings:
The Tribunal dismissed the ground related to the initiation of penalty proceedings under section 271(i)(c) as consequential in nature.

7. Computation of Interest:
The Tribunal dismissed the ground related to the computation of interest under sections 234A, 234B, 234C, and 234D as consequential in nature.

8. Adjustment for Delayed Realization of Receivables:
For the assessment year 2011-12, the Tribunal addressed the issue of notional interest on receivables outstanding beyond 30 days. The Tribunal directed the AO/TPO to delete the adjustment, following the decision of the Delhi High Court in similar cases, which held that interest on receivables is not an international transaction if the interest is already built into the sale price.

Conclusion:
The appeals for both assessment years were partly allowed, with specific directions to exclude certain comparables and delete the adjustment for delayed receivables. The Tribunal upheld the TPO's methodology in some aspects while providing relief to the assessee on others.