2023 (3) TMI 253 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Merely because E-Infochips earns a margin at 72.32% for a particular year, it is not possible to exclude the same because, it is not solely depending upon the margin for a particular year, the ALP adjustment will be made but it would be only one of the several entities the average of which is taken into consideration, and thereby ironing out the difference if any, from entity to entity. The view taken in Intoto Software ( 2013 (10) TMI 599 - ITAT HYDERABAD has no application to the facts of the case. We, therefore, decline to interfere with the findings of the authorities below insofar as E-Infochips, Bangalore Ltd., is concerned. Kals Information Systems - Merely because the Kals Information Systems derives 6% revenue from training, it cannot be said that it is not a good comparable. Persistent Systems Ltd. - When there is a difference between Outsourced Software Product Development and the IT services which means rendering software development service, and the assessee is in software development service, naturally the Persistent Systems Ltd., which is into Outsourced Software Product Development is not a comparable because of functional dissimilarity. Interest on receivables - 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. We accordingly uphold the findings of the learned DRP on this aspect and direct the learned Assessing Officer / learned TPO to adopt the same.

Summary

Issues Involved:
1. Inclusion of E-Infochips, Bangalore Ltd., Kals Information System Ltd., and Persistent Systems Ltd. as comparables.
2. Interest on receivables from associated enterprises.

Detailed Analysis:

1. Inclusion of E-Infochips, Bangalore Ltd., Kals Information System Ltd., and Persistent Systems Ltd. as Comparables:

E-Infochips, Bangalore Ltd.:
The assessee contested the inclusion of E-Infochips, Bangalore Ltd., arguing that the company is engaged in product development services, hardware engineering services, and consultancy, with no segmental information available. The Tribunal, however, noted that the annual report of E-Infochips indicated engagement in software development services, and there was no clear evidence to show consultancy as a separate segment. The Tribunal declined to exclude E-Infochips, stating that high profitability alone is not a valid ground for exclusion and upheld its inclusion as a comparable.

Kals Information System Ltd.:
The assessee argued that Kals Information System Ltd. is involved in software product development and training services, holding significant inventories. The Tribunal observed that the revenue from training constituted only 6% of the total revenue and no income from products was reported for the relevant year. Therefore, it concluded that Kals Information System Ltd. could not be excluded solely based on its minor training revenue and upheld its inclusion as a comparable.

Persistent Systems Ltd.:
The assessee contended that Persistent Systems Ltd. is engaged in outsourced software product development, which is functionally different from the assessee's software development services. The Tribunal found that Persistent Systems Ltd. is indeed involved in outsourced software product development, a different activity from IT services. As this company was excluded in the assessee's own case for the assessment year 2013-14 on similar grounds, the Tribunal directed its exclusion from the list of comparables for the assessment year 2010-11.

2. Interest on Receivables from Associated Enterprises:

Adjustment of Interest on Receivables:
The TPO proposed an adjustment by charging interest at 12% per annum on receivables from associated enterprises, arguing that any independent party would charge interest beyond the credit period. The DRP, considering the retrospective amendment to Section 92B of the Act, directed the application of LIBOR+2% as the notional interest rate instead of 12%.

Tribunal's Decision:
The Tribunal upheld the DRP's direction to apply LIBOR+2% for benchmarking the interest on receivables, referencing judicial precedents that support using LIBOR for similar foreign currency transactions. It cited cases like Tecnimont ICB House vs. DCIT and CIT Vs. Cotton Naturals (I) (P.) Ltd., emphasizing that the interest rate should be based on the currency in which the loan is to be repaid, not the lender's or borrower's country. The Tribunal affirmed that extending the credit period beyond the normal period constitutes a separate international transaction requiring appropriate benchmarking.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of Persistent Systems Ltd. from the list of comparables and upholding the application of LIBOR+2% for interest on receivables. The inclusion of E-Infochips, Bangalore Ltd., and Kals Information System Ltd. as comparables was upheld.