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2020 (2) TMI 78 - AT - Income TaxTP Adjustment - determination of arm s length price (ALP) in respect of an international transaction of rendering software development services - comparable selection - HELD THAT - 5 comparables to be excluded by the assessee in this appeal are; (1) Infosys Ltd., (2) L T Infotech Ltd., (3) Mindtree Ltd., (4) Persistent Systems Ltd. and (5) Thirdware Solutions Ltd. as the turnover of these companies is 10 times greater than the turnover of the assessee Sagarsoft India Ltd. - if Sagarsoft (I) Ltd. has made a profit, then it shall not be excluded by applying the persistent loss filter. The TPO/AO will verify this aspect and consider inclusion of this company in the final comparables in accordance with law, after due opportunity to the assessee. Evoke Technologies P. Ltd. - assessee contains the annual report of this company for FY 2014-15 in which there is a reference to the revenue of this company for the year 2014-15 to be ₹ 55,60,87,264 and the export turnover, out of this to be ₹ 55,44,99,764. Attention was also drawn to pages 2397 and 2395 to show that the export income as per financial statement was 79.60%. In the light of the above statements, we are of the view that it would be just and appropriate to remand the issue for fresh consideration by the AO/TPO in accordance with law, after due opportunity to the assessee. Maverick Systems Ltd. - Since the R D filter of 3% of revenue was not satisfied, this company deserved to be excluded. The ld. counsel for the assessee submitted before us that this was never a filter applied by the TPO in his TP analysis. Apart from the above submissions, it was also submitted that incurring of R D expenses excluding capital expenditure was only ₹ 95.25 lakhs and that constituted 1.12% of turnover. We are of the view that this aspect also needs to be looked into afresh by the TPO/AO and accordingly we set aside the order of the DRP on this issue and remand the question of comparability of this company to the TPO/AO for fresh consideration in accordance with the law, after due opportunity to the assessee. Determination of ALP in respect of an international transaction whereby interest income was attributed by the TPO/AO on the delayed recovery of trade receivables - HELD THAT - DR relied on the order of DRP wherein the DRP has placed reliance on the decision of Bectel India P. Ltd. 2015 (12) TMI 1560 - ITAT DELHI wherein the earlier decision of the ITAT was distinguished and it was held that the mere fat that working capital adjustment is done while determining the ALP in respect of enhanced credit period will not subsume the determination of ALP in respect of enhanced credit period given for trade receivables. He also brought to our notice retrospective amendment to section 92B of the Act w.e.f. 1.4.2002 whereby deferred payment on receivables or any other debt arising during the course of business was also included as an international transaction. In view of the aforesaid decision cited by the ld. DR, we are of the view that the order of DRP has to be upheld. Accordingly, we uphold the order of DRP and find no merit in the grievances projected by the assessee. No other arguments were advanced on this issue except the contention that the extended credit period allowed to AE on account of trade receivables will not constitute an international transaction attracting the provisions of Sec.92 of the Act.
Issues Involved:
1. Correctness of determination of Arm's Length Price (ALP) in respect of an international transaction of rendering software development services. 2. Determination of ALP in respect of an international transaction involving interest income on delayed recovery of trade receivables. Detailed Analysis: 1. Correctness of Determination of Arm's Length Price (ALP): The primary issue in this appeal is the correctness of the determination of the ALP for the international transaction of rendering software development services by the assessee to its Associated Enterprises (AE). It is undisputed that this transaction qualifies as an international transaction and that the ALP must be determined per Section 92 of the Income-tax Act, 1961. Both parties agree that the Transaction Net Margin Method (TNMM) is the most appropriate method, with the Profit Level Indicator (PLI) being OP/OC. The Transfer Pricing Officer (TPO) rejected the comparables chosen by the assessee and selected eight different comparables, resulting in an arithmetic mean profit margin of 29.40%. The assessee contested the inclusion of certain comparables and the exclusion of others. The TPO's final determination led to a transfer pricing adjustment of ?2,19,56,152. The Tribunal examined the inclusion of five comparables (Infosys Ltd., L&T Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., and Thirdware Solutions Ltd.) and found that their turnover was significantly higher than the assessee's, making them incomparable. Citing the Karnataka High Court's decision in Acusys Software (I) P. Ltd. v. ITO, the Tribunal directed the exclusion of these companies from the list of comparables. Regarding the inclusion of three companies (Sagarsoft India Ltd., Evoke Technologies P. Ltd., and Maverick Systems Ltd.), the Tribunal remanded the matter to the TPO/AO for fresh consideration. Specifically, the Tribunal instructed the TPO/AO to verify if Sagarsoft (I) Ltd. had profits in any of the three previous financial years, to reassess the export revenue filter for Evoke Technologies Ltd., and to reconsider the R&D expenses filter for Maverick Systems Ltd. 2. Determination of ALP for Interest Income on Delayed Recovery of Trade Receivables: The second issue pertains to the determination of ALP for interest income attributed to delayed recovery of trade receivables. The TPO rejected the assessee's argument that extended credit periods on trade receivables do not constitute an international transaction. The TPO computed the interest on delayed receivables using the weighted average method, resulting in an adjustment of ?8,08,957. The Dispute Resolution Panel (DRP) upheld the TPO's decision, referencing the retrospective amendment to Section 92B, which includes deferred payments or receivables as international transactions. The DRP also cited the ITAT Delhi's decision in Bechtel India Pvt Ltd., which supports the view that deferred receivables constitute international transactions requiring ALP determination. The Tribunal upheld the DRP's decision, noting that the retrospective amendment to Section 92B and relevant case law support the inclusion of extended credit periods on trade receivables as international transactions. The Tribunal found no merit in the assessee's arguments and dismissed the appeal on this issue. Conclusion: The appeal was partly allowed for statistical purposes. The Tribunal directed the exclusion of certain comparables with significantly higher turnovers and remanded the inclusion of other comparables for fresh consideration. The Tribunal upheld the determination of ALP for interest income on delayed trade receivables, affirming the DRP's decision.
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