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2018 (7) TMI 1757 - AT - Income TaxTPA - comparable selection - functional similarity - Held that - Assessee is only providing ordinary technical support which is categorized as ITeS BPO services provider in earlier years. We are of the firm opinion that there is no change in assessee s profile and so it has to be treated as a BPO providing ordinary support services to its AE, whose services may be high end at their end but not by assessee. Accordingly, the analysis of the company s functional profile and objections on the comparables is considered treating assessee as only BPO. Thus comparing functional profile of comparable company with that of assessee companies dissimlar with that of assessee need to be deselected. Addition on account of the interest on receivables - Held that - Putting a limit of one month of credit itself by the DRP is arbitrary. Further, as seen from the calculation, AO also calculated the interest wrongly particularly from Sr. No. 34 onwards. Upto Serial No. 1 to 33 in the table given in assessment order, AO has correctly gave thirty days credit period, whereas subsequently, the credit period varied and it has arbitrarily determined, the rationale of which is not forthcoming from the order. Moreover, as relied upon by the Ld. Counsel, the impact of receivables is already been factored in the working capital adjustment by the TPO and as there are no borrowed funds or actual interest liability charging of interest does not arise. We are of the opinion that the six months period granted by assessee is reasonable and so no interest can be levied just because the amounts are shown as outstanding in the balance sheet at the end of the year. The various case law stated above will support assessee contentions. Consequently, we cancel the interest levied and allow assessee s contentions. Grounds are considered allowed.
Issues Involved:
1. Transfer Pricing adjustments and selection of comparables. 2. Addition on account of interest on receivables. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustments and Selection of Comparables: The assessee, engaged in IT enabled Services (ITES), filed its return of income and had international transactions with its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) proposed an adjustment of ?3,68,61,675/-, which was later revised to ?2,30,56,229/- by the Assessing Officer (AO) after directions from the Dispute Resolution Panel (DRP). The assessee contested the inclusion of certain comparables for determining the Arm's Length Price (ALP) and the levy of interest on receivables. The assessee argued that it should be treated as an ordinary Business Process Outsourcing (BPO) service provider, not a Knowledge Process Outsourcing (KPO) provider. The DRP had misinterpreted the activities of the AE, leading to an incorrect classification. The Tribunal agreed, stating that the assessee's profile had not changed and should be treated as a BPO providing ordinary support services. The TPO had selected ten comparables, but the assessee objected to four: TCS E-Serve Ltd., Infosys BPO Ltd., Eclerx Services Ltd., and Accentia Technologies Ltd. - TCS E-Serve Ltd.: The Tribunal excluded this company due to functional dissimilarity, as it provided IT consulting, KPO services, and had a significant brand value contributing to its business. This exclusion was consistent with previous years' decisions and supported by various case laws. - Infosys BPO Ltd.: The Tribunal excluded this company due to its diversified services, including high-end KPO and LPO, and its extraordinary scale of operations. This exclusion was consistent with previous years' decisions and supported by various case laws. - Eclerx Services Ltd.: The Tribunal excluded this company as it was a high-end KPO, whereas the assessee was a captive service provider offering routine ITES services. This exclusion was consistent with previous years' decisions and supported by various case laws. - Accentia Technologies Ltd.: The Tribunal excluded this company due to functional dissimilarity, consistent with previous years' decisions. The Tribunal directed the TPO to re-work the ALP by excluding the four contested comparables and making necessary adjustments as per the Act. 2. Addition on Account of Interest on Receivables: The assessee contested the levy of interest on receivables amounting to ?57,20,073/-, arguing that receivables were not a separate 'international transaction' and that the credit period allowed was 180 days as per work orders with the AE. The DRP had allowed a 30-day credit period, which the assessee argued was arbitrary. The Tribunal agreed with the assessee, noting that the credit period of 180 days was consistent with RBI guidelines on foreign exchange receivables. The Tribunal found the DRP's 30-day credit period arbitrary and noted errors in the AO's interest calculation. The Tribunal also noted that the impact of receivables was already factored into the working capital adjustment and that the assessee had no borrowed funds or actual interest liability. The Tribunal cancelled the interest levied on receivables, supporting the assessee's contentions with various case laws. Conclusion: The appeal was allowed, with the Tribunal directing the TPO to exclude the contested comparables and re-work the ALP, and cancelling the interest levied on receivables. The judgment was pronounced on 25th July, 2018.
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