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2019 (9) TMI 973 - AT - Income TaxTP Adjustment - comparable selection - functionally dissimilarity - HELD THAT - Assessee is a captive service provider to its AE, Infor Global Solutions Inc. Transaction of Software Development Services was at ALP because the margin of the assessee was higher than the average margin of the comparables and hence no adjustment was required. Hartron Communications Ltd be excluded on account of exceptional year of performance i.e. peculiar circumstances filter. Microgenetics Systems Ltd and particularly Schedule-F thereof placed in Paper Book filed by the assessee relating to production expenses, we find that during the relevant previous year the assessee has incurred ₹ 22,03,823 towards medical transcription charges. Though, it is not 23% of the expenses incurred by the assessee as observed by the DRP, the payments were for outsourcing of the activity and hence is involved in a different functional model as compared to the assessee Infosys Technologies Ltd is into ITeS and its entire revenue is from BPO services only. Therefore, factual findings of the DRP that it falls income of less than 75% of the total operating revenue filter is not correct. Therefore, we remand this issue of comparability of this company to the TPO for reconsideration of the issue by considering only the operating revenue. As regards inclusion of Ace BPO Services Ltd is concerned, it is the case of the assessee that this company satisfies all the filters applied by the TPO and therefore, is functionally comparable to the assessee company. He pointed out that the TPO and the DRP have rejected this company on the ground that no information as to the RPT filter has been reported in its Annual Report and therefore, complete information is not available. The learned Counsel for the assessee has drawn our attention to page 507 and 508 of the paperbook wherein details of the RPT transactions are given. Having regard to the fact that the details with regard to the RPT transaction of the company have been given, we are of the opinion that the findings of the DRP TPO are factually incorrect. Therefore, we remand the comparability of this company also to the AO/TPO for reconsideration. Needless to mention that the assessee should be given a fair opportunity of hearing. Company functionally similar with that of assessee ITeS Company need to be selected.
Issues Involved:
1. Determination of Arm’s Length Price (ALP) for international transactions. 2. Selection and rejection of comparables. 3. Interest on trade receivables. 4. Risk and working capital adjustments. 5. Computation of Profit Level Indicator (PLI). Detailed Analysis: 1. Determination of Arm’s Length Price (ALP) for International Transactions: The assessee, a captive service provider, engaged in various international transactions with its Associated Enterprises (AE). The transactions included software distribution, software development services, related IT services, shared services, and recovery and reimbursement of expenses. The Transfer Pricing Officer (TPO) was tasked with determining the ALP for these transactions. - Software Development Services: The TPO found the margin of the assessee higher than the average margin of comparables, hence no adjustment was needed. - Software Distribution Services: The TPO rejected the Resale Price Method (RPM) adopted by the assessee, applying the Transactional Net Margin Method (TNMM) instead, resulting in an adjustment proposal of ?4,22,90,359 due to a margin discrepancy. - Related IT Services: The TPO observed defects in the assessee’s TP analysis, leading to an independent analysis and aggregation of transactions under TNMM. 2. Selection and Rejection of Comparables: The TPO and the Dispute Resolution Panel (DRP) engaged in a detailed analysis of comparables, applying various filters and criteria to ensure functional similarity. - Filters Applied by TPO: Included criteria such as financial data availability, positive net worth, revenue thresholds, and functional similarity. - Rejection of Assessee’s Comparables: The TPO rejected several companies selected by the assessee due to reasons like insufficient financial information, functional dissimilarity, and failure to meet specific filters. - Final List of Comparables: The TPO selected a new set of comparables, leading to the assessee’s objections and subsequent appeals. 3. Interest on Trade Receivables: The TPO proposed an ALP adjustment for interest on trade receivables, considering it an international transaction under section 92B of the Act. The assessee argued that working capital adjustments already accounted for the impact of outstanding receivables, and no separate adjustment was necessary. - DRP’s Directive: The DRP directed the TPO to apply applicable interest rates instead of a fixed rate, considering the number of days of delay. - Final Adjustment: The TPO determined an ALP interest on receivables at ?5,59,43,523 for A.Y 2013-14 and proposed an adjustment of ?1,81,13,140 for A.Y 2014-15. 4. Risk and Working Capital Adjustments: The assessee sought risk adjustment in accordance with Rule 10B of the Income-tax Rules, 1962, to account for differences between the international transactions and those undertaken by comparables. - DRP’s Decision: The DRP upheld the TPO’s rejection of risk adjustment but directed the TPO to grant working capital adjustment. - Final Order: The TPO/AO was directed to grant working capital adjustment but not risk adjustment. 5. Computation of Profit Level Indicator (PLI): The assessee contested the TPO’s treatment of provision for bad and doubtful debts as non-operating expenditure while computing the PLI. - DRP’s Stand: The DRP upheld the TPO’s computation methodology. - Final Decision: The ground was rejected as not pressed by the assessee during the hearing. Conclusion: The appeals for A.Y 2013-14 and 2014-15 resulted in partial relief for the assessee. The Tribunal directed the exclusion of certain comparables like Hartron Communications Ltd and Microgenetics Systems Ltd due to functional dissimilarity and exceptional performance. The Tribunal also directed reconsideration of the comparability of certain companies and upheld the need for ALP adjustment on trade receivables, allowing working capital adjustments but rejecting risk adjustments. The final orders were pronounced on 6th August 2019.
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