2020 (5) TMI 512 - AT - Income Tax

TP Adjustment - not accepting weighted average margin considered by assessee in transfer pricing study for computing arm s length margin in case of comparables - HELD THAT - Proviso to Rule 10 B (4) would apply only in a situation where, data relating to relevant financial year reveals facts which could influence determining transfer price. Further rule 10 B (5) gives an option of using either of the method with the proviso that at the time of determination of arm s length price of international transaction during the course of assessment proceedings for relevant assessment year in the even data for relevant financial year is available, then such data should be used irrespective of the fact that the data was not available at the time of furnishing return of income for relevant year. As we analyse transfer pricing assessment proceedings, it is noted that at the time of assessment, data for relevant assessment year was available, which was used by Ld.TPO, as against average of multiple year data used by assessee transfer pricing document. This in our view is in accordance with the rules specified. We, therefore, do not find any infirmity in analysis carried out by Ld.TPO by using relevant year data. Valid filter for assessing comparability - Assessee before us has turnover of ₹ 98.25 crores so, turnover filter of ₹ 9 crores on lower side to ₹ 980 crores on upper side, should be considered provided the functional similarities stands satisfied. We note that companies that have been pointed out by assessee is very large company that has turnover more than ₹ 1000 crores. Assessee has been categorised to be a captive service provider having turnover of 98.25 crores. Further it is noted that assessee do not own any intangibles whereas, the company alleged for exclusion by assessee by applying turnover filter owns huge brand, holding invaluable intangibles and are engaged in diversified activities. We therefore are of opinion that turnover is a valid filter for assessing comparability. Functionality - Companies functionally not comparable with a BPO service provider like that of assessee need to be deselected. Adjustment of notional interest on outstanding receivables - HELD THAT - This Bench referred to decision of Special Bench of this Tribunal in case of Special Bench of ITAT 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. Alternatively, argued that in TNMM, working capital adjustment subsumes sundry creditors - computing interest on outstanding receivables and lones and advances to associated enterprise would amount to double taxation. Hon ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT 2018 (2) TMI 1151 - ITAT DELHI as directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions - we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment.

Issues Involved:

1. Assessment of total income.
2. Addition to total income based on arm's length price.
3. Validity of the final assessment order.
4. Economic analysis for determining arm's length price.
5. Use of financial year data.
6. Application of quantitative and qualitative filters.
7. Use of information not available in the public domain.
8. Nature of services provided.
9. Acceptance/rejection of comparable companies.
10. Exclusion of specific companies from comparison.
11. Computation of operating margins.
12. Adjustment for working capital differences.
13. Adjustment for risk profile differences.
14. Transfer pricing adjustment for interest on outstanding receivables.
15. Testing of receivables as part of the main transaction.
16. Re-characterization of receivables as a loan transaction.
17. Basis for arm's length interest rate.
18. Levy of interest under section 234B.
19. Computation of interest under section 234B.
20. Initiation of penalty proceedings.

Detailed Analysis:

1. Assessment of Total Income:
The Tribunal addressed the issue of the total income assessed by the AO at INR 32,60,34,282 against the returned income of INR 15,70,57,200. The Tribunal found no infirmity in the AO's assessment, as it was based on the directions of the DRP.

2. Addition to Total Income Based on Arm's Length Price:
The Tribunal examined the addition of INR 16,89,77,082 made by the AO, DRP, and TPO on the ground that the price charged was lower than the arm's length price for IT-enabled services rendered by the assessee to its AEs. The Tribunal upheld the use of relevant year data for comparability analysis, dismissing the assessee's argument for using multiple-year data.

3. Validity of the Final Assessment Order:
The Tribunal did not find the final assessment order invalid under section 144C(13) of the Act, as it was in conformity with the directions of the DRP.

4. Economic Analysis for Determining Arm's Length Price:
The Tribunal upheld the fresh economic analysis conducted by the TPO, rejecting the economic analysis undertaken by the assessee. The TPO's use of current year data was deemed appropriate.

5. Use of Financial Year Data:
The Tribunal confirmed the TPO's use of financial year 2013-14 data for determining the arm's length price, as per Rule 10B(4).

6. Application of Quantitative and Qualitative Filters:
The Tribunal addressed various filters applied by the TPO, such as turnover filters and employee cost filters. It allowed the assessee's ground regarding the application of a lower turnover filter without an upper limit, directing the TPO to apply a turnover filter of 1/10th to 10 times the assessee's turnover.

7. Use of Information Not Available in the Public Domain:
The Tribunal found no error in the TPO exercising powers under section 133(6) to obtain information not available in the public domain for comparability purposes.

8. Nature of Services Provided:
The Tribunal upheld the TPO's characterization of the services provided by the assessee as back office support and technical services, rejecting the assessee's contention that they were purely back office support services.

9. Acceptance/Rejection of Comparable Companies:
The Tribunal addressed the inclusion/exclusion of various comparable companies. It directed the TPO to reconsider certain comparables based on segmental details and functional similarities.

10. Exclusion of Specific Companies from Comparison:
The Tribunal directed the exclusion of Infosys BPO Ltd., Eclerx Services Ltd., and Crossdomain Solutions Pvt. Ltd. from the final list of comparables due to functional dissimilarities.

11. Computation of Operating Margins:
The Tribunal found errors in the computation of operating margins of some comparable companies and directed the TPO to rectify these errors.

12. Adjustment for Working Capital Differences:
The Tribunal directed the TPO to recompute working capital adjustments in actuals to the selected comparables to make them comparable with the assessee.

13. Adjustment for Risk Profile Differences:
The Tribunal did not specifically address this issue, as it was not pressed by the assessee.

14. Transfer Pricing Adjustment for Interest on Outstanding Receivables:
The Tribunal set aside the issue of notional interest on outstanding receivables to the TPO for reconsideration, directing the TPO to study the impact of receivables on the working capital of the assessee.

15. Testing of Receivables as Part of the Main Transaction:
The Tribunal agreed with the assessee that outstanding receivables are closely linked to the main transaction and should not be considered as a separate international transaction.

16. Re-characterization of Receivables as a Loan Transaction:
The Tribunal did not find merit in the TPO's re-characterization of outstanding receivables as a loan transaction.

17. Basis for Arm's Length Interest Rate:
The Tribunal directed the TPO to provide the basis for arriving at the arm's length interest rate of LIBOR plus 300 basis points for computing notional interest on delayed receivables.

18. Levy of Interest Under Section 234B:
The Tribunal upheld the levy of interest under section 234B but directed the AO to recompute the interest amount correctly.

19. Computation of Interest Under Section 234B:
The Tribunal found errors in the computation of interest under section 234B and directed the AO to rectify these errors.

20. Initiation of Penalty Proceedings:
The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c) of the Act.

Conclusion:
The appeal filed by the assessee was partly allowed, with several issues being set aside to the AO/TPO for reconsideration and proper verification. The Tribunal directed the AO/TPO to provide a reasonable opportunity of being heard to the assessee in accordance with the law.

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