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2023 (4) TMI 58 - AT - Income TaxTP Adjustment - Comparable selection - application of upper turnover filter - HELD THAT - We notice that the coordinate bench of the Tribunal in the case BORQS Software Solutions Pvt. Ltd 2021 (10) TMI 1351 - ITAT BANGALORE has considered the issue of TPO failing to apply upper turnover filter and has excluded the following comparable companies on this ground. We notice that in the above decision the Hon ble Tribunal has excluded all the seven comparable companies from the upper turnover filter. Respectfully following the decision of the coordinate bench of the Tribunal we direct the TPO to exclude the above listed companies based on upper turnover filter and recomputed the ALP accordingly. Inclusion of R S Software Ltd., the margins for the assessment years in which the upper turnover filter would fail should be ignored and should not be regarded as comparable. It is ordered accordingly. Exclusion of Rheal Software Pvt Ltd. - We notice that the coordinate bench of the Tribunal in the case of Barracuda Network India Pvt. Ltd 2022 (5) TMI 322 - ITAT BANGALORE has considered exclusion of companies on the ground that related party transactions are more than 15% and has also held that the RPT filter is to be considered on the upper threshold limit of 15% by relying on the decision of the Hon'ble Karnataka High Court in the case of PCIT and Anr. Vs. M.s YODLEE INFOTECH PVT LTD. 2018 (6) TMI 1783 - KARNATAKA HIGH COURT Thus we remit the issue back to the TPO with a direction to verify the RPT transaction of Rheal Software Pvt Ltd and decide the comparability of the company considering the decision above. Exclusion of CG VAK Software and Exports Ltd. - We notice that the coordinate bench of the Tribunal in the case of 3DPLM 2014 (12) TMI 612 - ITAT BANGALORE has held that in the absence of segmental information or details the companies cannot be taken for comparable analysis. As noticed that the assessee has not contended the exclusion of this company before the TPO/DRP - we remit the issue back to the TPO/AO with a direction to consider the issue of exclusion of C G VAK Software and Exports Ltd., afresh. Inclusion of I2T2 India Limited rejected stating that the company fails the turnover filter - We notice that in the case of Huawei Technologies 2021 (7) TMI 1401 - ITAT BANGALORE relied on by the assessee I2T2 was included on that ground that the non-availability of Related Party Transaction (RPT) in the annual report cannot be a reason for exclusion. It is also noticed that in the current year, the turnover of the company is less than Rs.1crore and fails the lower turnover filter. We therefore uphold the exclusion of I2T2. Computation of net margin at the entity level by the TPO - TPO rejected the segmental financials of the assessee and worked out the entity level margins of the assessee while arriving at the TP adjustment for the reason that the cost allocated are not proportionate to the revenue reported in each of the segments - HELD THAT - TPO had stated that the head count of cost allocation basis has resulted in skewed results and that the assessee has not furnished the details of nature of employees under each segment. Considering the decision of the coordinate Bench and the facts of the present case, we remit the issue back to the TPO/AO for considering the issue afresh keeping in mind the ratio laid down by the coordinate Bench in the case of Cisco Systems India Pvt. Ltd. 2014 (11) TMI 849 - ITAT BANGALORE The assessee is directed to furnish required details and cooperate with the proceedings. Interest on delayed receivables - TPO considered the outstanding receivable as a separate international transaction and charged notional interest using 6 months LIBOR 450 basis points which worked out to 5.386% and arrived at TP adjustment - HELD THAT - As decided in case of Barracuda 2022 (5) TMI 322 - ITAT BANGALORE determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down, after affording Assessee opportunity of being heard - the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. Thus we remit the issue back to the TPO/AO for bench marking of the transaction of interest on delayed receivables and recomputation of ALP.
Issues Involved:
1. Legality of the orders passed by lower income tax authorities. 2. Conformity with faceless assessment scheme under section 144B. 3. Incorrect addition to total income. 4. Reference to Transfer Pricing Officer (TPO) for determining arm's length price. 5. Transfer pricing adjustments. 6. Gathering of information under section 133(6). 7. Computation of net margin. 8. Rejection of segmental profitability. 9. Rejection of transfer pricing study. 10. Inclusion of companies exceeding turnover filter. 11. Inclusion of financials from previous years. 12. Acceptance of certain companies as comparable. 13. Rejection of I2T2 India Limited. 14. Rejection of filters for companies owning significant intellectual property. 15. Exclusion of functionally comparable companies. 16. Inappropriate computation of net margins. 17. Inconsistent application of filters. 18. Inclusion/rejection of comparable companies. 19. Notional interest adjustment for delayed receivables. 20. Re-characterization of net outstanding receivables. 21. Adoption of CUP method for interest on delayed receivables. 22. Adjustment for interest on delayed receivables. Detailed Analysis: 1. Legality of the Orders Passed by Lower Income Tax Authorities: The assessee argued that the orders passed by the Deputy Commissioner of Income-tax Transfer Pricing - 2(1)(1) and the Dispute Resolution Panel (DRP) were prejudicial and should be quashed. However, the tribunal did not find merit in this general ground and dismissed it as not pressed. 2. Conformity with Faceless Assessment Scheme under Section 144B: The assessee contended that the assessment order did not conform to the faceless assessment scheme under section 144B. This ground was also dismissed as not pressed. 3. Incorrect Addition to Total Income: The assessee argued that the addition of Rs. 5,18,74,725 to the total income was incorrect as the TPO had reduced the transfer pricing adjustment to Rs. 4,94,73,850 after DRP's directions. This ground was not pressed during the hearing. 4. Reference to TPO for Determining Arm's Length Price: The assessee contended that the reference to TPO was made without demonstrating its necessity. This ground was not pressed during the hearing. 5. Transfer Pricing Adjustments: The tribunal examined various grounds related to transfer pricing adjustments, including the inclusion/exclusion of certain companies as comparables, the methodology for computing margins, and the rejection of the assessee's transfer pricing study. Specific issues were addressed as follows: - Computing the Entity Level Margin Ignoring Segmental Margin (Ground 7): The tribunal remitted the issue back to the TPO/AO for reconsideration, directing them to keep in mind the ratio laid down by the coordinate Bench in the case of Cisco Systems India Pvt. Ltd. - Exclusion of Companies Based on Turnover Filter (Ground 10): The tribunal directed the TPO to exclude companies with turnover exceeding Rs. 200 crores, following the decision in BORQS Software Solutions Pvt. Ltd. - Exclusion of Margins of R S Software Ltd for Previous Years (Ground 11): The tribunal held that margins for assessment years where the upper turnover filter fails should be ignored. - Exclusion of CG-VAK Software and Export Limited (Ground 12(c)): The tribunal remitted the issue back to the TPO/AO for fresh consideration. - Exclusion of I2T2 India Limited (Ground 13): The tribunal upheld the exclusion of I2T2 based on the lower turnover filter. - Exclusion of Rheal Software Private Limited (Ground 14(b)): The tribunal remitted the issue back to the TPO for verification of related party transactions. 6. Gathering of Information under Section 133(6): The assessee argued that the information gathered under section 133(6) was not available at the time of preparing its transfer pricing documentation and was not in the public domain. This ground was not pressed during the hearing. 7. Computation of Net Margin: The tribunal remitted the issue back to the TPO/AO, directing them to reconsider the computation of net margin based on segmental financials. 8. Rejection of Segmental Profitability: The tribunal remitted the issue back to the TPO/AO, directing them to reconsider the rejection of segmental profitability. 9. Rejection of Transfer Pricing Study: The tribunal remitted the issue back to the TPO/AO for fresh consideration, directing them to provide cogent reasons for rejecting the transfer pricing study. 10. Inclusion of Companies Exceeding Turnover Filter: The tribunal directed the TPO to exclude companies with turnover exceeding Rs. 200 crores. 11. Inclusion of Financials from Previous Years: The tribunal held that margins for previous years where the upper turnover filter fails should be ignored. 12. Acceptance of Certain Companies as Comparable: The tribunal remitted the issue back to the TPO/AO for fresh consideration regarding the acceptance of certain companies as comparable. 13. Rejection of I2T2 India Limited: The tribunal upheld the exclusion of I2T2 based on the lower turnover filter. 14. Rejection of Filters for Companies Owning Significant Intellectual Property: The tribunal did not specifically address this issue as it was not pressed during the hearing. 15. Exclusion of Functionally Comparable Companies: The tribunal remitted the issue back to the TPO/AO for fresh consideration regarding the exclusion of functionally comparable companies. 16. Inappropriate Computation of Net Margins: The tribunal remitted the issue back to the TPO/AO for reconsideration of the computation of net margins. 17. Inconsistent Application of Filters: The tribunal did not specifically address this issue as it was not pressed during the hearing. 18. Inclusion/Rejection of Comparable Companies: The tribunal provided specific directions for the inclusion/exclusion of certain comparable companies. 19. Notional Interest Adjustment for Delayed Receivables: The tribunal remitted the issue back to the TPO/AO for fresh determination of the arm's length price for the notional interest on delayed receivables. 20. Re-characterization of Net Outstanding Receivables: The tribunal remitted the issue back to the TPO/AO for fresh determination of the arm's length price for the re-characterized net outstanding receivables. 21. Adoption of CUP Method for Interest on Delayed Receivables: The tribunal remitted the issue back to the TPO/AO for fresh determination of the arm's length price using the appropriate method. 22. Adjustment for Interest on Delayed Receivables: The tribunal remitted the issue back to the TPO/AO for fresh determination of the arm's length price for the interest on delayed receivables. Conclusion: The tribunal provided specific directions for the reconsideration of various issues related to transfer pricing adjustments, computation of net margins, and notional interest adjustments. The appeal was partly allowed, and the issues were remitted back to the TPO/AO for fresh determination in accordance with the tribunal's observations and directions.
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