2023 (11) TMI 1185 - AT - Income Tax

TP adjustment - Comparable selection - provision of software development services rendered by the assessee - assessee is primarily engaged in the business manufacturing of automotive components - HELD THAT - E-Infochips Bangalore Ltd should be excluded from the final set of comparables while benchmarking the software development services of the assessee as it is engaged in both IT as well as ITES. Further, the comparable company is also engaged in hard core reengineering apart from earning revenue from sales of computer software and products. The segmental data does not give break up of revenue bifurcating the revenue as well as the margins earned from aforesaid different streams of income. Hence, the margin on software development segment alone cannot be properly deduced from the data available in the audited financial statements of the comparable company. Exclusion of Sonata Software Ltd - We deem it fit to restore the inclusion of this comparable alone to the file of the ld AO/ TPO for verification of the facts of the aforesaid table i.e. partywise details submitted by the ld AR herein above. If on verification, it is found that the aforesaid details mentioned by the ld AR are correct, then the said comparable should be excluded from the final list of comparables while benchmarking the international transaction of software development segment of the assessee. Exclusion of Infosys Ltd - Infosys Ltd should not be treated as a comparable with low risk Captive Service Provider like that of the assessee company. Accordingly, we direct the ld AO/ TPO to exclude Infosys Ltd from the final set of comparables while benchmarking the international transaction of software development segment. Exclusion of Thirdware Solution Ltd - We find that the Hon'ble Delhi High Court in the case of PCIT Vs. Open Solution Software Service Pvt. Ltd 2020 (5) TMI 440 - DELHI HIGH COURT had upheld the findings of the Tribunal that in the absence of segmental data to work out the separate margins from software services, Thirdware Solutions cannot be held to be comparable with any assessee engaged in software development. Similar view was also taken in the case of PCIT Vs. FISERV India Pvt. Ltd 2016 (1) TMI 1276 - DELHI HIGH COURT Hence respectfully following the aforesaid decisions of Hon ble Jurisdictional High Courts, we hold that Thirdware Solution Ltd should be excluded from the final list of comparables while benchmarking international transaction of software development segment of the assessee. Exclusion of Persistent Systems Ltd to be functionally not comparable with that of the assessee company and also in the absence of segmental data. Accordingly, we direct the ld AO/ TPO to exclude the same from the final set of comparables while benchmarking international transaction of the assessee in respect of software development segment. Exclusion of E-Zest Ltd comparable company is rendering product development services and high end technology services which come under the Knowledge Process Outsourcing (KPO) services and cannot be comparable with Captive Software Development company like assessee. Exclusion of Tata Elxsi comparable company is engaged in the development of Niche product and had to be considered incomparable with the routine software service provider. TP adjustment - Comparable selection for international transaction of business support services rendered by the assessee - Exclusion of Alphageo (India) Ltd as not comparable from the final set of comparables while benchmarking the business support services of the assessee as the revenue has been generated predominantly out of six projects which was related to 3D seismic and 2D project seismic surveys which is a high value business and whereas, the assessee herein is engaged in providing low risk captive ITES services to its AEs. Exclusion of Mitcon Consultancy Services Ltd. as it is involved in high end consultancy services whereas, the assessee herein is low end captive service provider to its AEs. Hence, we hold that the said company is functionally not comparable with that of the assessee herein. Accordingly, we direct the ld AO/ TPO to exclude this comparable company from the final list of comparables while benchmarking the international transaction of the assessee in respect of its ITES segment. Exclusion of HCCA Business as the said company is involved in providing high end activities which required professional skill and domain expertise to render those services and accordingly would apparently fall under the category of Knowledge Process Outsourcing (KPO), thereby making it incomparable with the assessee company as it is low end Business Processing Outsourcing (BPO) services provider to its AEs. However, some of the activities carried out by this comparable company also falls within the ambit of BPO services. However, there is no segmental data available to ascertain the segmental margins from KPO services and BPO services separately. Hence, we hold that the said comparable company is required to be excluded from the final set of comparables while benchmarking the international transaction of the assessee in respect of its ITES segment. Exclusion of Cyber Media Online Ltd company is engaged in media and media services, thereby making it completely functionally incomparable with that of the assessee company which is engaged in low risk captive ITES service provider to its AEs. Hence, we direct the ld TPO to exclude this company from final set of comparables while benchmarking the international transaction of the assessee in respect of its ITES segment of the assessee company. Educational Consultants India Ltd as a comparable as excluded by the ld TPO - as pointed out by the ld DR that though this company is engaged in the business of provision of support services, it is also a company under the control of Govt. of India. As we have already held that the Govt company cannot be compared with the private concern like that of the assessee, we hold that this comparable company had been rightly excluded by the ld TPO. TP Adjustment - ALP of International Transactions of import of fixed assets - validity of Benchmarking carried out by the TPO for import of fixed assets - HELD THAT - TPO had not referred to any of the prescribed methods in section 92C of the Act to determine the ALP of international transaction in respect of import of fixed assets to be at Rs. Nil. The Ld. TPO is bound to follow any of the prescribed six methods as the most appropriate method for benchmarking the international transactions of the assessee. Without following any of the prescribed method, the Ld. TPO is prohibited from benchmarking the international transaction of the assessee. Even though the Ld. TPO had mentioned that he is following CUP method as the most appropriate method for benchmarking this transaction, in effect, he had not adopted CUP method as per Rule 10B of the Rules. This is because of the fact that he had not brought on record any comparable uncontrolled transactions to justify the basis of adoption under CUP. In view of the same, the benchmarking carried out by the TPO for import of fixed assets is hereby directed to be deleted. Accordingly, the ground raised by the assessee is allowed. TP Adjustment - delayed receipt of outstanding receivables from the AEs - TPO, in the order re- characterized the delay in receipt of receivables as unsecured loans advanced to the associated enterprise and imputed notional interest on the delay in receipt of receivable, at a rate of 14.88% being prevailing Prime Lending Rate issued by State Bank of India at 11.88% plus a mark-up of 300 bps - AR argued with regard to additional evidences, the opening balance of receivables as on 01.04.2009 was never asked by the ld TPO in the show cause notice. Whatever details that were called for were duly furnished before the ld TPO. The ld AR also submitted in rebuttal that details of amounts payable to AEs were duly furnished by the assessee before the ld TPO - HELD THAT - We deem it fit and appropriate that this is a fit case for admission of the additional evidences filed by the assessee. Accordingly, we admit the additional evidences and restore the entire issue in toto to the file of ld AO/ TPO for denovo adjudication in accordance with law after considering the entire additional evidences and decision of Hon ble Delhi High Court in the case of Kusum Healthcare 2017 (4) TMI 1254 - DELHI HIGH COURT The assessee is also at liberty to adduce further evidences, if any, in support of its contentions. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:

1. Transfer pricing adjustment related to software development services.
2. Transfer pricing adjustment related to business support services.
3. Transfer pricing adjustment related to the manufacturing segment.
4. Transfer pricing adjustment related to the purchase of fixed assets.
5. Transfer pricing adjustment related to delayed receipt of outstanding receivables from associated enterprises.

Summary of Judgment:

1. Transfer Pricing Adjustment - Software Development Services:

The Tribunal addressed the transfer pricing adjustment of Rs. 16,72,72,235 made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) order. The Tribunal reviewed the inclusion and exclusion of certain comparable companies. It excluded Infinite Data Services Pvt. Ltd, E-Infochips Bangalore Ltd, Sonata Software Ltd, Infosys Ltd, Thirdware Solution Ltd, Persistent Systems Ltd, and E-Zest Ltd from the final set of comparables due to functional dissimilarities and lack of segmental data. The Tribunal directed the AO/TPO to re-evaluate the comparables and adjust the transfer pricing accordingly.

2. Transfer Pricing Adjustment - Business Support Services:

The Tribunal examined the transfer pricing adjustment of Rs. 1,15,08,130 related to business support services. The Tribunal excluded Apitco Ltd, Alphageo (India) Ltd, Mitcon Consultancy Services Ltd, HCCA Business, and Cyber Media Online Ltd from the final set of comparables due to functional dissimilarities and the nature of services provided. The Tribunal upheld the exclusion of Educational Consultants India Ltd as it is a government-controlled company and not comparable to private enterprises.

3. Transfer Pricing Adjustment - Manufacturing Segment:

The Tribunal addressed the transfer pricing adjustment of Rs. 63,30,719 related to the manufacturing segment. The Tribunal found that the operating profit margin of the assessee was within the +/-5% range of the average margin of comparable companies. Therefore, the international transaction in the manufacturing segment was considered at arm's length price, and the adjustment was deleted.

4. Transfer Pricing Adjustment - Purchase of Fixed Assets:

The Tribunal reviewed the transfer pricing adjustment of Rs. 62,87,498 related to the purchase of fixed assets. The Tribunal found that the TPO did not follow any of the prescribed methods for benchmarking the international transaction. The Tribunal directed the deletion of the adjustment as the TPO failed to justify the basis of adoption under the Comparable Uncontrolled Price (CUP) method.

5. Transfer Pricing Adjustment - Delayed Receipt of Outstanding Receivables:

The Tribunal addressed the transfer pricing adjustment of Rs. 7,21,61,494 related to the delayed receipt of outstanding receivables. The Tribunal admitted additional evidence and restored the issue to the AO/TPO for a de novo adjudication. The Tribunal directed the AO/TPO to consider the additional evidence and the decision of the Hon'ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd.

Conclusion:

The appeal of the assessee was partly allowed for statistical purposes, with directions for re-evaluation and adjustments as per the Tribunal's findings.