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2024 (6) TMI 1135 - AT - Income TaxTP Adjustment - comparable selection - exclusion on account of high turnover - Larsen Toubro Infotech Ltd. (Segmental) Tata Elxsi Ltd. (Segmental) Persistent Systems Ltd., Aspire Systems (India) Pvt. Ltd. And Infosys Ltd.- HELD THAT - These companies are having huge turnover whereas the turnover of the assessee is meagre as compared to these companies. The turnover of the assessee company was only Rs. 16.12 crores whereas the turnover of these companies is more than Rs. 200 crores. Thus these companies are not at all comparable with the assessee. Besides that the issue has already been dealt with by the Co-ordinate Bench of the Tribunal wherein it was held that these companies are not comparable with the assessee company. Therefore we direct the AO/TPO to delete these companies from the list of comparables. Infobeans Technologies Ltd. and Thirdware Solution Ltd.- The profile of these companies as produced by the TPO and as discussed by the DRP clearly shows that these companies are into software development services and are comparable with the profile of the assessee. Since we do not find any glaring dis-similarity in the functioning of these companies we do not find any reason to exclude these companies. Thus we direct the AO/TPO to take these companies as suitable companies. Cigniti Technologies Ltd. - As it has an export revenue of 53.16% of total revenue and hence it is to be rejected as comparable as it is not satisfying the export revenue filter adopted by the TPO - We have already upheld the export revenue filter adopted by the TPO vide detailed discussion made above. As a result this objection is found to be acceptable. Thus we reiterate the direction issued by the DRP and accordingly direct the AO/TPO to exclude the said company from the list of comparables. Inclusion of SagarSoft (India) Ltd Evoke Technologies Pvt. Ltd., Sankhya Infotech Ltd. Harbinger Systems Pvt. Ltd., Maverick Systems Ltd. and Agilisys IT Services India Pvt. Ltd. - The assessee has raised a specific ground before the DRP seeking inclusion of these companies. In view of the above the finding recorded by the DRP that there is no specific ground raised by the assessee is factually incorrect. Further we note that the DRP have also mentioned that the assessee had included various comparables which were selected after passing of the draft assessment order and hence cannot be considered. As the assessee has raised the inclusion of these companies therefore we deem it appropriate to remand the inclusion of the companies to the file of the Assessing Officer/TPO for considering afresh subject to the assessee satisfies that the inclusion of these companies were sought by the assessee by filing the specific documents. Interest on Trade receivables - International transaction or not? - TPO adopted interest rate for 11 months i.e. 7.5% on outstanding receivables as on 31st March 2016 - HELD THAT - We have examined whether the interest on delayed outstanding payments is an international transaction or not. This issue has come up for our consideration in the decisions referred by the ld.DR in the case of M/s Zeta Interactive Systems (India) Pvt. Ltd 2022 (6) TMI 1383 - ITAT HYDERABAD M/s. Satyam Ventures Engineering Services 2022 (6) TMI 1386 - ITAT HYDERABAD and M/s. Apache Footware India Pvt. Ltd. 2023 (4) TMI 521 - ITAT HYDERABAD . We have consistently held that the interest on delayed outstanding trade receivables is an international transaction and after holding so we have benchmarked the international transactions at 6% SBI rate. However while holding the outstanding trade receivables as international transactions we have granted a credit period of 60 days in the case of Apache Footware India Pvt. Ltd. In the present case the assessee could not file any evidence to prove that it has provided more than 60 days credit period to non-AEs. Thus we are of the opinion that the assessee is entitled to get some relief as against the interest computed by the TPO at SBI rate of 7.5% we direct the AO/TPO to compute the interest @6% of the SBI rate. Appeal of the assessee is partly allowed for statistical purposes.
Issues Involved:
1. Adjustment under section 92CA(3) to the price received by the assessee from its Associated Enterprise. 2. Acceptance of the Profit margin of the assessee company as complying with the arm's length principle. 3. Rejection of the Transfer Pricing Study prepared by the assessee company. 4. Consideration of wrong comparables and arriving at a median margin. 5. Exclusion of specific companies on grounds of functional dissimilarity, super profit, and high turnover. 6. Inclusion of specific companies as comparables. 7. Computation errors in margins of included comparables. 8. Application of appropriate filters for comparables. 9. Consideration of outstanding receivables as a separate international transaction. 10. Application of interest rate on receivables from associated enterprises. 11. Adjustment despite the assessee company claiming exemption under section 10AA. Detailed Analysis: 1. Adjustment under section 92CA(3): The Tribunal noted that the TPO made an adjustment of Rs. 2,17,38,030/- to the price received by the assessee from its Associated Enterprise. The assessee argued that the TPO and DRP erred in making this adjustment and should have accepted the Profit margin of the assessee company (OP IOC) of 11.57% as complying with the arm's length principle. The Tribunal found that the TPO had rejected the TP study prepared by the assessee without cogent reasons and had considered wrong comparables, leading to an incorrect median margin of 26.36%. 2. Acceptance of Profit Margin: The assessee contended that the TPO and DRP should have accepted its profit margin of 11.57% as it complied with the arm's length principle. The Tribunal observed that the TPO had rejected the TP study without proper justification and had applied various filters to select 15 comparables, resulting in a median margin of 26.36%. The Tribunal directed the AO/TPO to reconsider the profit margin in light of the correct comparables. 3. Rejection of Transfer Pricing Study: The Tribunal noted that the TPO had rejected the Transfer Pricing Study prepared by the assessee without providing cogent reasons. The assessee argued that the TPO should have accepted its TP study, which showed an arm's length range of 10.84% to 16.97%. The Tribunal found that the TPO's rejection was not justified and directed the AO/TPO to reconsider the TP study. 4. Consideration of Wrong Comparables: The Tribunal found that the TPO had considered wrong comparables, leading to an incorrect median margin. The assessee argued that the TPO should have excluded certain companies based on functional dissimilarity, super profit, and high turnover. The Tribunal directed the AO/TPO to reconsider the selection of comparables and exclude companies with high turnover and functional dissimilarity. 5. Exclusion of Specific Companies: The Tribunal addressed the assessee's contention for the exclusion of specific companies such as Larsen & Toubro Infotech Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., Aspire Systems (India) Pvt. Ltd., and Infosys Ltd. due to high turnover and functional dissimilarity. The Tribunal agreed with the assessee and directed the AO/TPO to exclude these companies from the list of comparables. 6. Inclusion of Specific Companies: The Tribunal noted that the assessee had sought the inclusion of companies like SagarSoft (India) Ltd., Evoke Technologies Pvt. Ltd., Sankhya Infotech Ltd., Harbinger Systems Pvt. Ltd., Maveric Systems Ltd., and Agilisys IT Services India Pvt. Ltd. The TPO had excluded these companies on various grounds. The Tribunal remanded the matter to the AO/TPO for fresh consideration, subject to the assessee providing specific documents to support the inclusion. 7. Computation Errors in Margins: The Tribunal found that the TPO had made errors in computing the margins of the included comparables. The assessee argued that the TPO had considered wrong margins. The Tribunal directed the AO/TPO to correct the computation errors and recalculate the margins. 8. Application of Appropriate Filters: The Tribunal noted that the TPO had applied inappropriate filters while selecting comparables. The assessee argued that the TPO should have applied the correct filters. The Tribunal directed the AO/TPO to apply appropriate filters and reconsider the selection of comparables. 9. Consideration of Outstanding Receivables: The Tribunal addressed the issue of considering outstanding receivables as a separate international transaction. The assessee argued that receivables arise in the normal course of business and should not be treated as loans for the levy of interest. The Tribunal held that interest on delayed outstanding payments is an international transaction and directed the AO/TPO to compute interest at 6% SBI rate. 10. Application of Interest Rate on Receivables: The Tribunal found that the TPO had applied an interest rate of 7.5% on receivables from associated enterprises, proposing an adjustment of Rs. 32,52,061/- as interest on receivables. The assessee argued that the interest rate should be based on LIBOR. The Tribunal directed the AO/TPO to compute the interest at 6% SBI rate, considering a credit period of 60 days. 11. Adjustment Despite Exemption under Section 10AA: The Tribunal noted that the assessee company was claiming exemption under section 10AA and argued that there was no intention to shift profits outside India. The Tribunal did not find any merit in this ground and upheld the adjustment made by the AO. Conclusion: The Tribunal allowed the appeal of the assessee partly for statistical purposes, directing the AO/TPO to reconsider the selection of comparables, correct computation errors, and apply appropriate filters. The Tribunal also directed the AO/TPO to compute interest on outstanding receivables at 6% SBI rate.
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