2022 (3) TMI 1635 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Caliber Point Business Solutions Ltd. and R. Systems International Ltd. have been excluded on the ground that the Companies are having different financial ending and also non availability of coverage and reliability of data necessary for application of the method. In our opinion the said exclusion has been done by the TPO/DRP/AO in strict compliance with Rule 10B (4) and Rule 10C (2) (c) of the Rules and based on the settled principles of law therefore the same requires no interference. Accordingly we reject the Assessee s Appeal Grounds No. 5 to 8. BNR Udyog Ltd. be excluded as it provides medical transcription services which is not comparable to ITeS Service Provider. E-Clerx Services Ltd. had a different revenue recognition policy outsourcing expenditures having different business models and the same is non-comparable by applying principal laid down in the case of Rampgreen 2015 (8) TMI 931 - DELHI HIGH COURT Thus we found that the E-Clerx Services Ltd. becomes non comparable while computing ALP. Infosys BPO Ltd. company is having higher brand value and engaged in areas like insurance banking financial services manufacturing and telecom which are in the niche areas unlike the assessee thus be excluded. TCS E-serve Ltd. Company deserves to be excluded which provides KPO Services in the nature of core business processing services analytics and insides as well as support service for both data and voice process therefore the same is not a comparable. Interest on inter-company receivables - Realization of sale/service proceeds - international transactions and not an international transaction per-se - HELD THAT - Adjustment made by the TPO towards interest on receivables which is well within the definition of international transaction. Therefore we are not agreeing with the submission of the Ld. Counsel for the assessee. Interest at LIBOR plus 400 bps - I t would be noted that the decision of Hon ble Delhi High Court in the case of Kusum Healthcare 2017 (4) TMI 1254 - DELHI HIGH COURT is still the binding precedent on the issue of interest on outstanding receivables as held inclusion in the Explanation to Section 92B of the Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity which may have dealings with foreign AEs would automatically be characterized as an international transaction and (ii) With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis- -vis that of its comparables any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterized the transaction. Ergo Assessee s Grounds of Appeal No. 13 and 14 are being allowed. Grant foreign taxes credit in accordance with law after verifying the records. Appropriate MAT credit in accordance with law after verifying the records. Charging interest u/s. 234C is consequential and mandatory in nature which does not requires adjudication.

Summary

ISSUES PRESENTED and CONSIDERED

The core issues considered by the Tribunal in this judgment revolve around the determination of the arm's length price (ALP) for international transactions related to IT-enabled services provided by the assessee to its associated enterprises (AEs). The issues include:

• Whether the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) erred in making adjustments to the ALP of international transactions.
• Whether the exclusion and inclusion of specific comparable companies by the TPO/DRP were justified.
• Whether the interest on outstanding inter-company receivables constitutes a separate international transaction under Section 92B of the Income Tax Act.
• Whether the assessee was entitled to credit for foreign taxes and Minimum Alternate Tax (MAT).
• Whether the initiation of penalty proceedings under Section 271(1)(c) was justified.

ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Adjustments

The Tribunal examined the adjustments made by the TPO to the ALP of international transactions. The TPO had made an adjustment of INR 13,050,397, which was later reduced to INR 1,30,50,397 following directions from the DRP. The Tribunal considered whether the TPO's rejection of certain comparable companies and the inclusion of others was justified.

Legal Framework and Precedents

The Tribunal referred to Rule 10B and Rule 10C of the Income Tax Rules, 1962, which outline the methods for determining the ALP and the criteria for selecting the most appropriate method. The Tribunal also considered precedents from various cases, including CIT Vs. Mckinsely Knowledge Centre India Pvt. Ltd., BT-eserv India Ltd. Vs. ITO, and others.

Court's Interpretation and Reasoning

The Tribunal emphasized the importance of using current financial year data for comparability analysis as mandated by Rule 10B(4). It noted that the exclusion of companies with different financial year endings was justified due to the lack of reliable data for the relevant financial year.

Key Evidence and Findings

The Tribunal found that the TPO/DRP had correctly excluded certain companies, such as Caliber Point Business Solutions Ltd. and R. Systems International Ltd., due to their different financial year endings and lack of reliable data. The Tribunal also upheld the exclusion of companies like BNR Udyog Ltd., E-Clerx Services Ltd., Infosys BPO Ltd., and TCS E-serve Ltd. based on functional dissimilarity and other factors.

Application of Law to Facts

The Tribunal applied the principles of Rule 10B and Rule 10C to determine the appropriateness of the comparables used by the TPO. It concluded that the exclusion of certain companies was justified based on the lack of comparable financial data and functional dissimilarities.

Treatment of Competing Arguments

The Tribunal considered the arguments presented by both the assessee and the Revenue. It found that the Revenue's arguments for excluding certain comparables were supported by the applicable rules and precedents.

Conclusions

The Tribunal concluded that the TPO/DRP had correctly excluded certain companies from the list of comparables and upheld the adjustments made to the ALP.

Interest on Outstanding Receivables

The Tribunal considered whether the interest on outstanding inter-company receivables constituted a separate international transaction under Section 92B of the Act.

Legal Framework and Precedents

The Tribunal referred to the Explanation to Section 92B, which includes receivables as part of international transactions. It also considered judicial precedents, including Kusum Healthcare Pvt. Ltd. vs. ACIT and Ameriprise India P. Ltd. vs. ACIT.

Court's Interpretation and Reasoning

The Tribunal noted that the Explanation to Section 92B clarified that receivables are included in international transactions. It found that the adjustment made by the TPO towards interest on receivables was justified.

Key Evidence and Findings

The Tribunal found that the DRP's direction to impute interest at LIBOR plus 400 basis points was not supported by adequate reasoning. It noted that the working capital adjustment already accounted for the impact of outstanding receivables.

Application of Law to Facts

The Tribunal applied the principles from the Kusum Healthcare case, which held that receivables should not automatically be considered separate international transactions if they are already factored into the working capital adjustment.

Treatment of Competing Arguments

The Tribunal considered the assessee's argument that receivables should not be treated as separate transactions. It found that the existing judicial precedents supported the assessee's position.

Conclusions

The Tribunal allowed the assessee's grounds of appeal regarding the interest on outstanding receivables, directing the AO/TPO to exclude such adjustments.

Foreign Tax Credit and MAT Credit

The Tribunal directed the AO to grant foreign tax credit and MAT credit in accordance with the law after verifying the records.

Penalty Proceedings

The Tribunal found that the initiation of penalty proceedings under Section 271(1)(c) was premature at this stage.

SIGNIFICANT HOLDINGS

The Tribunal upheld the exclusion of certain companies from the list of comparables based on the lack of reliable data and functional dissimilarities. It emphasized the importance of using current financial year data for comparability analysis. The Tribunal also clarified that interest on outstanding receivables should not be treated as separate international transactions if they are already factored into the working capital adjustment.

The Tribunal's final determination was to partly allow the assessee's appeal for statistical purposes, directing the AO/TPO to exclude certain companies from the comparables and to grant foreign tax credit and MAT credit as per the law.