2023 (8) TMI 24 - AT - Income Tax

TPA - comparable selection - Exclusion of Infosys BPO - HELD THAT - Admittedly, in the present case, the TPO has applied the export turnover filter of 75% as seen from the record. However, the assessee before us demonstrated that this company fails in the export turnover. In our view, it would be appropriate, if the TPO examine afresh and find out whether this comparable fulfills the export turnover filter or not. Needless to say that the above said exercise shall be carried out by the Assessing Officer / TPO after granting the opportunity of hearing to the assessee. Capgemeni Business Services India Ltd - AO/TPO applied the RPT filter of 25% - HELD THAT - Before the TPO no such objection was raised. However, this specific objection was raised by the assessee before the learned DRP, but for the reason best known to the DRP, it failed to adjudicate the ground raised by the assessee in so much so whereby it was submitted that comparable company fails on account of non fulfilment of RPT filter. As the case may be, since the facts has not been analysed by the DRP/TPO, it would not be possible for us to decide the issue of failure of RTP filter at the appellate stage. In the light of the above, we remand the issue back to the file of the Assessing Officer/TPO with a direction to examine the functional similarities / dissimilarity of Capgemeni Business Services India Ltd having regard to the application of RPT filters. Informed Technology India (P) Ltd is deriving revenue from ITES business and is not deriving income from software development - In our view, this is a factual finding which required examination of facts by the lower authorities and therefore, we deem it proper to remand this issue of inclusion of Informed Technologies to the file of TPO with a direction to find out from the record, whether Informed Technologies Ltd derives its revenue only from the BPO or not. Besides that, the learned TPO is also directed to examine the financial profile of the Informed Technologies Ltd and whether this company is functionally similar with the assessee company. Jindal Intellicom Ltd. - The lower authorities on examination has come to the conclusion that this company is not comparable with that of the assessee as it is into software development and is deriving revenue from call centre. However, the above said aspect has not been examined by the lower authorities. Therefore, we deem it appropriate to remand back this issue to the file of the TPO/Assessing Officer with a direction to examine the financials of the Jindal Intellicom Ltd and whether this comparable is with the assessee or not. TPO is directed to find out after using its power as available under the law whether this company is earning revenue from the software development services or not. TP ground raised by the assessee are decided. It is made it clear that the TPO shall include inclusion/exclusion after affording reasonable opportunity of being heard to the assessee and pass a speaking order considering the decisions of the Tribunal / Judicial High Courts in this regard. Interest delayed receivable - DRP had issued directions to the TPO that 'deferred receivables' would constitute international transaction and has to be benchmarked in regard to delay beyond the reasonable credit period and accordingly we reject the various pleas raised - Also examine the assessee's claim of credit period of 120 days, and if it is so, allow credit period of 120 days - HELD THAT - The law is fairly settled with respect to the binding nature of the DRP u/s 144C(13)(10) whereby the TPO/AO are directed to give effect to the issues and directions given by the DRP. Despite specific directions issued by the DRP, the TPO/Assessing Officer are not complying with the same in letter and spirit. Therefore, we reiterate and repeat the directions issued by the DRP and direct the TPO to give effect to the directions given by the DRP forthwith.

Summary

Issues Involved:
1. Computation of Arm's Length Price (ALP) for IT-enabled services.
2. Charging of notional interest on delayed receipts and outstanding balances from Associated Enterprises (AEs).

Detailed Analysis:

1. Computation of Arm's Length Price (ALP) for IT-enabled services:

A. Rejection of Comparable Companies:
The Transfer Pricing Officer (TPO) erred in rejecting the comparable companies selected by the assessee on unjustifiable grounds. The assessee restricted the Transfer Pricing issues to the exclusion of Infosys BPO and Capgemeni Business Services India Ltd and the inclusion of Informed Telecom India Ltd and Jindal Infotech (P) Ltd.

Exclusion of Infosys BPO:
The assessee argued that Infosys BPO should be excluded as it failed the export turnover filter of 75%. The TPO had incorrectly included it despite directions from the Dispute Resolution Panel (DRP) to exclude it if the filter was not met. The Tribunal remanded the issue back to the TPO for fresh examination, directing the TPO to grant the assessee an opportunity for a hearing.

Exclusion of Capgemeni Business Services India Ltd:
The assessee contended that Capgemeni Business Services India Ltd should be excluded as it failed the Related Party Transaction (RPT) filter, with RPT exceeding 25%. The Tribunal remanded the issue back to the TPO to examine the functional similarities and RPT filter application after affording the assessee an opportunity to be heard.

Inclusion of Informed Technology India (P) Ltd:
The TPO rejected Informed Technology India (P) Ltd due to unavailability of current year financial information. The DRP also did not consider the assessee's submissions. The Tribunal remanded the issue back to the TPO to verify if the company derives revenue only from ITES and to examine its financial profile.

Inclusion of Jindal Intellicom Ltd:
The TPO rejected Jindal Intellicom Ltd due to functional dissimilarities. The Tribunal remanded the issue back to the TPO to examine the company's financials and determine if it earns revenue from software development services or not.

B. Functional and Risk Profile Comparison:
The TPO erred by comparing the assessee with companies having entirely different functional and risk profiles. The Tribunal directed the TPO to re-examine the functional similarities and differences of the comparables.

C. Application of RPT Filter:
The TPO applied an RPT filter of 25% instead of the 15% applied by the assessee. The Tribunal remanded the issue back to the TPO to apply the correct RPT filter after a detailed examination.

D. Adjustments for Risk Profile Differences:
The TPO did not make suitable adjustments for differences in the risk profiles of the assessee vis-à-vis the comparable companies. The Tribunal directed the TPO to consider these differences and make appropriate adjustments.

2. Charging of Notional Interest on Delayed Receipts and Outstanding Balances from Associated Enterprises (AEs):

A. Basis for Charging Notional Interest:
The TPO charged notional interest on delayed receipts and outstanding balances from AEs without any basis. The Tribunal noted that the DRP had directed the TPO to examine the assessee's claim of a 120-day credit period and to restrict the imputation of interest to delays beyond this period. The TPO failed to comply with these directions.

B. Imputation of Interest:
The TPO charged notional interest for the entire year, disregarding the actual credit period. The Tribunal reiterated the DRP's directions and instructed the TPO to recompute the interest based on the actual delay beyond the credit period, using SBI rates for short-term deposits as the ALP interest rate.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remanding various issues back to the TPO for fresh examination and compliance with the DRP's directions. The TPO was directed to provide the assessee with an opportunity to be heard and to pass a speaking order considering relevant judicial decisions.