2023 (3) TMI 1218 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Infosys Ltd. functional profile of the company as in the annual report states that the company is rendering varied services under the umbrella of SWD services. It is also noticed that the company is having huge intangible assets being the brand value of the company. The assessee on the other hand is a captive service provider with no intangible asset as per the financials. Given the volume of revenue generated, different kinds of services within the SWD segment, brand value etc., of Infosys Ltd, it cannot be compared with a captive service provider like assessee. Therefore the grounds on which the company was excluded in earlier years are applicable to the year under consideration also and therefore respectfully following the decision of the coordinate bench we direct the AO/TPO to exclude Infosys Ltd as a comparable. L T Infotech is providing varied services under the umbrella of SWD services whereas the assessee is a captive service provider of routine software development. It is the submission of the ld AR that the L T is engaged in trading of goods and there is no segmental break-up for such services/ products. We also notice that the company has made several acquisitions during the year under consideration. There is no change to facts for the year under consideration also, we respectfully follow the decision of the co-ordinate bench and direct the AO/TPO to exclude L T Infotech Limited from the list of comparables. Interest on receivables - independent international transaction - TPO after allowing a credit period of 30 days computed the interest for 335 days to arrive at an adjustment - DRP directed the TPO to apply SBI short term rate and recompute the amount of adjustment - whether Outstanding receivables cannot be treated as a separate international transaction? - HELD THAT - Issues of whether the interest on receivable is a separate international transaction and the rate of interest to be considered has been considered in the decision of the coordinate Bench of the Tribunal in the case of Swiss Re Global Solutions India Pvt. Ltd. 2020 (5) TMI 512 - ITAT BANGALORE as held deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently Rate of interest - We find that this issue is no more res integra in view of the judgment of Cotton Naturals (I) (P.) Ltd 2015 (3) TMI 1031 - DELHI HIGH COURT in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. In assessee case the details with regard to Master Service Agreement, credit period allowed thereunder, invoicing details, the realization data, and such other particulars as may be relevant to adjudicate on this issue need to be examines. Therefore we remit the issue back to the AO/TPO for verification of the details. The AO/TPO is also directed to keep in mind the ratio laid down in the case of ON Semiconductor Technology India Private Limited ( 2022 (9) TMI 449 - ITAT BANGALORE ) by the coordinate bench while deciding issue. Needless to say that the assessee may be given a reasonable opportunity of being heard. This ground of the assessee is allowed for statistical purposes.

Summary

Issues Involved:

1. Transfer Pricing Adjustment in Software Development (SWD) Segment.
2. Interest on Delayed Receivables.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment in Software Development (SWD) Segment:

The case pertains to the final assessment order for AY 2018-19, where the assessee, a subsidiary of Huawei Tech Investments Co. Ltd., Hong Kong, engaged in software development (SWD) services and Information Technology enabled Services (ITeS), filed a return disclosing an income of Rs.85,57,77,213. The TPO ignored the segmental financials and considered the entire operations as SWD services, arriving at a TP adjustment of Rs.82,58,40,327. The DRP partially reduced the adjustment to Rs.55,69,83,890.

The Tribunal noted that the Transaction Net Margin Method (TNMM) was accepted as the most appropriate method for determining the Arm's Length Price (ALP), with the Profit Level Indicator (PLI) being Operating Profit/Operating Cost (OP/OC). The assessee's margins were compared to selected comparable companies, concluding that the margins of 13.10% for SWD services were within arm's length.

The TPO, however, considered the entity-level financials, resulting in a margin of 13.13%. A fresh search for comparables by the TPO led to a revised set of comparables with a median margin of 23.60%, resulting in a revised TP adjustment of Rs.55,69,83,890.

The Tribunal addressed the exclusion of Infosys Ltd. and L&T Infotech Ltd. as comparables. Infosys Ltd. was excluded due to its functional differences, brand value, R&D activities, and scale of operations, which were not comparable to the assessee's captive service provider model. Similarly, L&T Infotech Ltd. was excluded due to its varied services, insufficient segmental information, brand value, acquisitions, and significant foreign expenditure, making it functionally dissimilar to the assessee.

2. Interest on Delayed Receivables:

The TPO computed notional interest on outstanding receivables at LIBOR + 450 basis points, resulting in an adjustment of Rs.6,89,46,372. The DRP directed the use of the SBI short-term deposit rate, reducing the adjustment to Rs.6,49,06,385.

The assessee contended that outstanding receivables should not be treated as a separate international transaction and that all service-related costs were embedded in the remuneration received from the AEs. The assessee argued that it did not bear working capital risk as it was fully funded by its AEs and that delayed receivables were a consequence of the main transaction, not an independent one.

The Tribunal, referencing previous judgments, held that deferred receivables constitute an independent international transaction requiring separate benchmarking. The applicable interest rate should be based on the currency of the transaction, suggesting the use of LIBOR.

The Tribunal remitted the issue back to the AO/TPO for verification of details such as the Master Service Agreement, credit period, invoicing details, and realization data. The AO/TPO was directed to consider the average receivable days of comparable companies and ensure that no TP adjustment is required if the debtors' holding period of comparables is higher than that of the assessee.

Conclusion:

The appeal was partly allowed, with the Tribunal directing the exclusion of Infosys Ltd. and L&T Infotech Ltd. from the list of comparables and remitting the issue of interest on receivables back to the AO/TPO for further verification and appropriate adjustments.