2023 (12) TMI 862 - AT - Income Tax

TP Adjustment - comparable selection - Tech Mahindra Business Services Ltd. and Infosys BPM Services Pvt. Ltd. fails in upper turnover filter which has not been applied by the Ld.TPO - HELD THAT - Respectfully following the case of Mindteck (India) Ltd. 2022 (11) TMI 1367 - ITAT BANGALORE we direct the Ld.TPO to exclude Tech Mahindra Business Services Ltd. and Infosys BPM Services Pvt. Ltd. from the final set. whose turnover in the current year is more than Rs. 200 Crores. Determination of arms length price (ALP) - Asset received free of cost received by the assessee from its AE being capitalised by the Ld.AO u/s. 28(iv) and considering depreciation in operating cost under all segments proportionately - HELD THAT - There is no doubt that the equipments received by the assessee are custom made which are used for the business of the assessee and are not available in the open market for purchase for commercial purposes. The AEs provided these equipments to the assessee in respect of the projects undertaken by assessee on their behalf. On a query being raised by the bench to the Ld.AR regarding the return policy of these assets, the Ld.AR very fairly admitted that the assets or goods or equipments received by it has never been returned in the past assessment years. Under such circumstances, it definitely amounts to enduring benefit in the hands of the assessee. In our view, the asset received free of cost has been rightly capitalised in the hands of the assessee. It was also the correct approach by the TPO by granting depreciation in respect of the same. However, the double disallowance made in respect of the cost of asset received free from the assessee is not acceptable. TPO increased the operating cost base by allocating the depreciation at 60% on the cost of the assets under the three segments based on the operating revenue to compute the markup. This approach by the Ld.TPO are not based on sound principles of transfer pricing adjustments. The assessee has been submitting that the assets received free of cost from its AE are utilised for the purposes of rendering services under software development segment. Therefore we direct the Ld.TPO to consider the entire cost for the purposes of computing the margin of assessee under the software development segment as per the following directions. While computing the ALP of assessee, the depreciation as per schedule to Companies Act, is to be included as an element of operating cost. In the event, there is a difference in the rate of depreciation between the assessee vis-a-vis the comparables, suitable adjustments are to be granted in accordance with law. (Ref. Rule 10B(e) (i) to (iii)). We also direct the Ld.AO to delete the disallowance made u/s. 28(iv) as the same has been considered in the transfer pricing adjustment. Comparability analysis - R D filter applied by the Ld.TPO is without granting any opportunity to the assessee - We note that for applying the R D filter, to select the comparables under SWD segment, assessee was issued one notice by the Ld.TPO on 09.01.2021. However on perusal of the said notices we note that the query raised was in respect of ITeS and MSS segment. There is no specific query raised by the Ld.TPO regarding application of R D filter to the SWD segment for which assessee could have furnished any submissions. In the interest of justice, we remand the selection of comparables under SWD segment to the Ld.TPO for fresh consideration based on the filters that has been consistently applied in case of assessee in the preceding and subsequent assessment years. Datamatics Business Solutions Ltd. - As the assessee has made significant investment which can be seen from the paper book at page Nos.1336 1359 and the assessee is engaged in diversified range of activities. In our opinion, these are to be relooked into by the AO/TPO while examining the functionality of the comparable. Accordingly, this issue is remitted to the file of AO/TPO for fresh consideration. Manipal Digital Systems Pvt. Ltd be deselected from list of comparable. Inteq BPO Services Pvt. Ltd is involved in business process management services and cannot be considered as a comparable to a company providing ITeS such as the assessee. Informed Technologies Ltd. has been excluded by the Ld.TPO as there was no documentation and that this comparable was failing the service revenue filter of more than 75% - We note that the annual reports of the above comparables are to be verified before excluding them. The assessee is directed to furnish the annual reports before the Ld.TPO which shall be verified and the filters applied by the Ld.TPO shall be considered for its exclusion / inclusion as there is no dispute by the Ld.TPO regarding the functional dissimilarities the filters applied by the Ld.TPO are directed to be verified from the annual reports. All necessary data for such verification shall be provided by the assessee. Pressman Advertising Ltd.is functionally not similar to that of assessee as it is engaged in the business of advertising services, selling of space for advertisement in print media and public relations and engaged in providing market research services, which is nothing but knowledge process outsourcing services. Scarecrow Communications Ltd. is not functionally comparable with that of assessee as it is engaged in the business of advertising, communication, and public relations and lacks segmental information. Majestic Research Services Solutions Ltd.is not functionally similar with that of assessee as it is engaged in rendering knowledge process outsourcing services and it is a product company and also engaged in providing market research services which is knowledge process outsourcing services. Interest on delayed receivables - Assessee contends the outstanding receivables could not be made subject matter of TP adjustment as the same is not covered under the provisions of Section 92B - Alternatively, as also argued that working capital adjustment subsumes sundry creditors and in such situation computing interest on outstanding receivables and lones and advances to international transaction would amount to double taxation - HELD THAT - This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. 2016 (7) TMI 760 - ITAT KOLKATA held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Thus we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR 300 basis points which is in accordance with the principles laid down by Hon ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd., 2015 (3) TMI 1031 - DELHI HIGH COURT by considering a credit of 90 days. Disallowance of salaries paid and reimbursement of expenses made towards seconded employees - AR submitted that TDS has been deducted on the entire salary paid by assessee to the seconded employees and what is reimbursed is the payment which has been partly made by the AE to the families of such seconded employees and that though the 100% salary has been subjected to TDS assessee has paid only part of the salary to the seconded employees in India and balance of such salary has been reimbursed to the AE as the same has been paid by the AE to the employees - HELD THAT - We note that the evidences filed by assessee has not been considered by the revenue authorities. We therefore remand this issue to the Ld.AO to consider the claim in accordance with the decision of M/s. Toyota Boshoku Automotive India Pvt. Ltd. 2022 (4) TMI 1443 - ITAT BANGALORE , Goldman Sachs Services Pvt. Ltd. 2022 (4) TMI 1444 - ITAT BANGALORE having regard to the evidences filed by the assessee. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Nature of expenses - bonding and debonding charges - HELD THAT - We note that the bonding and debonding expenses have been incurred by assessee in respect of capital asset. Assessee is seeking depreciation on such charges as the same were disallowed u/s. 37 of the Act. The assessee has not filed any evidences in support of its claim however the Ld.AR has submitted that assessee may be provided an opportunity to substantiate the claim. We accordingly remand this issue to the Ld.AO to verify the evidences if any filed by the assessee and to consider the alternate claim of deprecation in accordance with law.

Summary

Issues Involved:
1. Verification of margin computation.
2. Treatment of free-of-cost assets.
3. Exclusion of comparables based on turnover filter.
4. Grant of Working Capital Adjustment.
5. Application of R&D filter.
6. Exclusion of functionally dissimilar comparables.
7. Interest on delayed receivables.
8. Disallowance of salaries paid and reimbursement of expenses.
9. Bonding and debonding charges.
10. Incorrect computation of total income.

Summary:

1. Verification of Margin Computation:
The Tribunal remanded the issue to the AO to verify the margin of the assessee as per the DRP's directions, emphasizing the need for accurate computation as per the annual report figures.

2. Treatment of Free-of-Cost Assets:
The Tribunal upheld the capitalization of free-of-cost assets received by the assessee, granting depreciation. However, it directed the TPO to consider the entire cost for computing the margin under the software development segment and to delete the disallowance made under Section 28(iv) as it resulted in double addition.

3. Exclusion of Comparables Based on Turnover Filter:
The Tribunal excluded Tech Mahindra Business Services Ltd. and Infosys BPM Services Pvt. Ltd. from the final set of comparables, citing their failure to meet the higher turnover filter of Rs. 200 crores, following precedents set by similar cases.

4. Grant of Working Capital Adjustment:
The Tribunal directed the AO/TPO to compute the Working Capital Adjustment on actuals to determine the arm's length price of the transaction, allowing this ground for statistical purposes.

5. Application of R&D Filter:
The Tribunal remanded the selection of comparables under the SWD segment to the TPO for fresh consideration, noting that the R&D filter was applied without granting the assessee an opportunity to respond.

6. Exclusion of Functionally Dissimilar Comparables:
The Tribunal directed the exclusion of Datamatics Business Solutions Ltd., Manipal Digital Systems Pvt. Ltd., and Inteq BPO Services Pvt. Ltd. from the final list of comparables due to functional dissimilarity. Additionally, it directed the exclusion of Pressman Advertising Ltd., Scarecrow Communications Ltd., and Majestic Research Services & Solutions Ltd. from the marketing support service segment.

7. Interest on Delayed Receivables:
The Tribunal remanded the issue to the AO/TPO to decide in conformity with the judgment, considering whether the Working Capital Adjustment subsumes the outstanding receivables and applying LIBOR + 300 basis points for those not subsumed.

8. Disallowance of Salaries Paid and Reimbursement of Expenses:
The Tribunal remanded the issue to the AO to consider the claim in accordance with the decisions of the Coordinate Bench, granting the assessee an opportunity to substantiate the claim with evidence.

9. Bonding and Debonding Charges:
The Tribunal remanded the issue to the AO to verify the evidence and consider the alternate claim of depreciation, granting the assessee an opportunity to substantiate the claim.

10. Incorrect Computation of Total Income:
The Tribunal directed the AO to verify and correct the computation of total income as claimed by the assessee.

Conclusion:
The Tribunal's order resulted in partial relief for the assessee, with several issues being remanded for further verification and consideration by the AO/TPO. The appeal was partly allowed in terms of the grounds argued by the assessee.