2022 (7) TMI 1372 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - As relying on ZYNGA GAME NETWORK INDIA PVT. LTD 2021 (4) TMI 208 - ITAT BANGALORE we direct Ld. AO/TPO to exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. for having high turnover as compared to a captive service provider like assessee. Accordingly, we direct the Ld.AO to exclude the above comparables from the final list. Batchmaster Software Pvt. Ltd. and DCIS DOT COM Solutions India Pvt. Ltd. - As submitted by the Ld.AR that in respect of the above three comparables, the Ld.TPO has not considered the functions performed and has cherry picked the comparables without going through the actual functions and annual reports. We are therefore directing these comparables to be reconsidered by the Ld.AO/TPO based on the annual reports. TPO shall consider these comparables after verifying the FAR of these comparables with that of assessee. Accordingly, Batchmaster Software Pvt. Ltd., DCIS DOT COM Solutions India Pvt. Ltd. and Evoke Technologies Ltd. for denovo consideration to Ld.AO/TPO. Sagarsoft (India) Ltd and Akshay Software Technologies Ltd - We note that above two comparables has not been verified by the Ld.AO/TPO in detail. We are therefore remanding these comparables also to the Ld.AO/TPO for a denovo verification. Working Capital Adjustment - This Bench referred to decision of Special Bench of this Tribunal in case of 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. Alternatively, it also argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables as loans and advances to associated enterprise would amount to double taxation. As relying on ORANGE BUSINESS SERVICES INDIA SOLUTIONS PVT. LTD. 2018 (2) TMI 1151 - ITAT DELHI e deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law. Foreign exchange loss treated by the Ld.TPO as operating in nature both in the hands of the assessee as well as comparables - HELD THAT - As submitted by the Ld.AR that the foreign exchange losses did not arise out of the revenue transactions and the assessee who were due to the yearend restatement advance received from the AE. As we are remanding the issue of notional interest computed by the Ld.TPO for denovo verification, this ground also deserves to be reverified along with Ground nos. 7 9. Both these issues are inter related to each other.

Summary

Issues Involved:
1. Exclusion of comparables based on turnover filter.
2. Inclusion of specific comparables.
3. Treatment of foreign exchange fluctuation.
4. Working Capital Adjustment for deferred receivables.

Issue-wise Detailed Analysis:

1. Exclusion of Comparables Based on Turnover Filter:
The assessee sought the exclusion of seven comparables on the grounds that their turnover far exceeded Rs. 200 crores, while the assessee's turnover was only Rs. 13 crores. The Tribunal referenced several precedents, including the case of Barracuda Networks India (P.) Ltd. vs. DCIT, where companies with high turnovers were excluded for not being comparable with captive service providers. The Tribunal upheld the exclusion of the following companies: L&T Infotech Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., Infosys Ltd., R Systems International Ltd., Nihilent Technologies Ltd., and Cybage Software Pvt. Ltd., based on their high turnover, aligning with the principle that companies with significantly higher turnovers are not comparable to smaller captive service providers.

2. Inclusion of Specific Comparables:
The assessee sought the inclusion of Batchmaster Software Pvt. Ltd., DCIS DOT COM Solutions India Pvt. Ltd., Evoke Technologies Ltd., Sagarsoft (India) Ltd., and Akshay Software Technologies Ltd. The Tribunal directed the AO/TPO to reconsider Batchmaster Software Pvt. Ltd., DCIS DOT COM Solutions India Pvt. Ltd., and Evoke Technologies Ltd. after verifying their functional analysis and annual reports. For Sagarsoft (India) Ltd., the Tribunal noted that the company was engaged in software development services along with system administration, which the TPO had not considered. Akshay Software Technologies Ltd. was rejected by the TPO for being a persistent loss-making company, but the Tribunal noted that the company had incurred losses only in two out of three years and directed a denovo verification.

3. Treatment of Foreign Exchange Fluctuation:
The assessee argued that foreign exchange losses should not be treated as operating in nature as they did not arise from revenue transactions but from year-end restatement of advances received from the AE. The Tribunal decided to remand the issue for denovo verification, considering it interrelated with the issue of notional interest computed by the TPO.

4. Working Capital Adjustment for Deferred Receivables:
The TPO computed interest on outstanding receivables at 5.975% for receivables exceeding 90 days, treating it as an independent international transaction. The assessee argued that outstanding receivables are closely linked to the main transaction and should not be considered separately. The Tribunal referenced several judgments, including Kusum Healthcare Pvt. Ltd. vs. ACIT, where it was held that no interest could be charged on outstanding receivables as it was not considered an international transaction. The Tribunal set aside the issue for the AO/TPO to decide in conformity with these judgments, emphasizing the need for a proper inquiry into the impact of receivables on the assessee's working capital.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal directed the exclusion of certain high-turnover comparables, reconsideration of specific comparables, and remanded issues related to foreign exchange fluctuation and working capital adjustment for further verification.