2025 (3) TMI 640 - AT - Income Tax

TP Adjustment - treating services (tangible and intangible) provided by the AE free of cost as a part operating cost to the assessee - whether the notional cost is to be treated as part of operating cost of the assessee to work out the PLI of the assessee - HELD THAT - As we can safely conclude that the stand of the lower authorities for including the notional cost in calculating the PLI of the assessee in the given facts and circumstances is not sustainable. It is necessary to take a note of the amendment brought under the Income Tax Amendment Rule 2017 where under rule 10TA in the definition of operating expense share based compensation has been included in the definition of operating expenses and such amendment was applicable from 1st April 2017 with prospective effect. Regarding the applicability of rule 10TA we note that such rule is applicable if the assessee opts for safe Harbour rules. But in the present case the assessee has not opted such rule therefore the impugned transaction of share-based compensation cannot be treated as operating expenses in the year under consideration in terms of such rule. Assessee has also incurred similar cost in the earlier assessment years i.e 2015-16 and 2016-17 but there was no such adjustment made by the lower authorities in the PLI of the assessee. Accordingly we are of the view that the principles of consistency in the present case also needs to be applied as there is no change in the facts and circumstances of the case in the year under consideration viz a viz the earlier assessment years. We direct the TPO not include the notional cost discussed above while calculating the PLI of the assessee. Hence the ground of appeal of the assessee is hereby allowed. Comparable selection - Based on the above findings of the ITAT in the case of different companies being comparables we are inclined to set aside the issue to the file of the TPO for fresh adjudication in the light of above discussion and as per the provisions of law. It is pertinent to note that there was no submission filed by the ld. AR for the exclusion of the comparable namely Tech Mahindra Business Services Ltd. Nevertheless in the interest of justice and fair-play we also set-aside the issue to the file of the TPO for fresh adjudication as per the provisions of law. Hence the ground of appeal of the assessee is partly allowed for statistical purposes. Addition on account of notional interest to be charged on overdue receivables from the AE - whether or not the outstanding receivables is an international transaction? - HELD THAT - This issue is no longer res integra. We took a view in the case of CIT v. Patni Computer Systems 2013 (10) TMI 293 - BOMBAY HIGH COURT on the amendment to Section 92B of the Act by way of Finance Act 2012 with retrospective effect from 01/04/2002 that the interest on outstanding receivables is an international transaction and it certainly requires separate benchmarking. Rate of interest - We hold that the PLR rate therefore would not be applicable and should not be applied for determining the interest rate and the PLR rates are not applicable to loans to be re- paid in foreign currency. We are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR 200 points by applying the credit period of thirty days or as per agreement or invoice. Accordingly we direct AO/TPO to re-compute the same. Hence the grounds of appeal of the assessee is hereby allowed for statistical purposes. Disallowing the interest expenses incurred on the CCD on the reasoning that such CCD represents the investment in the equity of the company - At the outset we note that the issue raised on hand stands covered in favour of the assessee by the order of the ITAT cited above in the own case of the assessee as held deduction claimed by the assessee has to be allowed. We may also clarify that the Thin Capitalisation principle was neither invoked by the AO or the CIT(Appeals) in the present case nor were those rules part of the statute for the relevant AY in this appeal. Disallowance of delayed contribution under the PF Act - HELD THAT - The issue on hand stands covered against the assessee by virtue of the judgement of Checkmate Services Private Limited 2022 (10) TMI 617 - SUPREME COURT as held it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted the non- obstante clause under section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee s contribution on or before the due date as a condition for deduction. Decided in favour of revenue. Denial of benefit of TDS in toto - AR before us prayed to issue a direction to the AO to grant the benefit of TDS as per the provisions of law after necessary verification - DR could not submit anything contrary to the arguments advanced by the ld. counsel for the assessee - Thus we direct the AO to verify the claim of the assessee for the credit of the TDS amount and allow the same as per the provisions of law. Hence the ground of appeal of the assessee is hereby allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the notional costs related to ESOPs and other tangible/intangible assets provided by the Associated Enterprises (AEs) should be included in the operating costs of the assessee for calculating the Profit Level Indicator (PLI).
• The appropriateness of the comparables selected by the Transfer Pricing Officer (TPO) for benchmarking the international transactions of the assessee.
• Whether the outstanding receivables from AEs should be treated as an international transaction and benchmarked separately for interest calculation.
• The treatment of interest expenses incurred on Compulsorily Convertible Debentures (CCDs) issued to the AE.
• The disallowance of delayed contributions under the Provident Fund (PF) Act.
• The entitlement of the assessee to the total benefit of Tax Deducted at Source (TDS).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Notional Costs as Operating Expenses

• Legal Framework and Precedents: The Tribunal referred to the Delhi High Court judgment in M/s Li and Fung India Private Limited, which held that notional adjustments based on costs incurred by third parties should not be included in the assessee's operating costs when applying the Transactional Net Margin Method (TNMM).
• Court's Interpretation and Reasoning: The Tribunal concluded that the notional costs should not be included in the operating expenses based on the precedent that only the costs incurred by the assessee should be considered.
• Conclusion: The Tribunal directed the TPO not to include the notional costs in calculating the PLI of the assessee.

Issue 2: Selection of Comparables

• Legal Framework and Precedents: The Tribunal considered various precedents where certain companies were excluded as comparables due to functional dissimilarity.
• Court's Interpretation and Reasoning: The Tribunal noted that the comparables selected by the TPO were functionally dissimilar to the assessee's operations and should be excluded.
• Conclusion: The Tribunal set aside the issue to the TPO for fresh adjudication, directing the exclusion of certain companies from the list of comparables.

Issue 3: Interest on Outstanding Receivables

• Legal Framework and Precedents: The Tribunal referred to the Bombay High Court's judgment in CIT v. Patni Computer Systems, which held that interest on outstanding receivables is an international transaction requiring separate benchmarking.
• Court's Interpretation and Reasoning: The Tribunal agreed that the interest should be calculated at LIBOR rates rather than the SBI PLR, as the transaction was in foreign currency.
• Conclusion: The Tribunal directed the TPO to recompute the interest using LIBOR rates.

Issue 4: Interest on CCDs

• Legal Framework and Precedents: The Tribunal referred to its own decision in the assessee's case for the earlier assessment year, which allowed the deduction of interest on CCDs.
• Court's Interpretation and Reasoning: The Tribunal upheld the deduction of interest on CCDs, citing that CCDs are considered debt until conversion.
• Conclusion: The Tribunal allowed the deduction of interest expenses on CCDs.

Issue 5: Delayed Contributions under PF Act

• Legal Framework and Precedents: The Tribunal referred to the Supreme Court's judgment in Checkmate Services Private Limited, which held that delayed contributions to the PF cannot be allowed as deductions.
• Court's Interpretation and Reasoning: The Tribunal followed the Supreme Court's ruling, denying the deduction for delayed PF contributions.
• Conclusion: The Tribunal upheld the disallowance of delayed contributions under the PF Act.

Issue 6: Entitlement to TDS Benefit

• Legal Framework and Precedents: The Tribunal considered the provisions of the Income Tax Act regarding TDS credit.
• Court's Interpretation and Reasoning: The Tribunal directed the AO to verify the TDS claim and allow the benefit as per law.
• Conclusion: The Tribunal allowed the ground for statistical purposes, directing verification of the TDS claim.

3. SIGNIFICANT HOLDINGS

• Notional Costs: The Tribunal emphasized that notional costs should not be included in operating expenses for PLI calculation, aligning with the Delhi High Court's ruling.
• Comparables: The Tribunal highlighted the importance of functional similarity in selecting comparables, directing the exclusion of dissimilar companies.
• Interest on Receivables: The Tribunal mandated the use of LIBOR rates for interest calculation on foreign currency receivables.
• Interest on CCDs: The Tribunal reaffirmed that interest on CCDs is deductible until conversion, consistent with prior decisions.
• PF Contributions: The Tribunal adhered to the Supreme Court's ruling, disallowing deductions for delayed PF contributions.
• TDS Credit: The Tribunal directed verification and allowance of TDS credit as per the Income Tax Act.