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2023 (4) TMI 520 - AT - Income TaxTP Adjustment - adjustment of arm s length price on the service rendered - main grievance of the assessee is that the TPO considered the assessee as ITeS company whereas the assessee is only a human resource provider - HELD THAT - The segment applicable to the assessee for TP benchmarking is Placement services , recruitment services etc as done by the assessee in the TP documentation. In fact, the assessee requested the TPO to do a search on Recruitment, Placement services segment which is the most appropriate in its case and accept its bench marking analysis. The assessee does not render any services in the nature considered by the TPO as key words. Also, the services rendered by the assessee do not fall under these categories of business as Placement and HR consultancy services is completely different from the business of ITES , BPOs, call centres etc considered by the TPO. The assessee does not provide any back-end support services to its AEs. The TPO has also stated that the assessee has rendered Placement services or recruitment services . Even the definition of ITES as per Rule 10A of the Income Tax Rules, 1962 does not include Placement and recruitments Services . We are therefore of the view that the addition made on account of transfer pricing should be set aside to the AO/TPO for a fresh analysis considering assessee as Placement and HR Consultancy Service provider. The AO/TPO will do a fresh analysis as stated above after due opportunity to the assessee of being heard. Whether TPO has grievously erred in ignoring the margin analysis prepared by the assessee for its AE exports business and non-AE domestic business to unrelated parties? - This is a fundamentally faulty way of assessing the Arms Length Price ( ALP ) of the international transactions undertaken by the assessee with AEs since the Revenue transactions with AE constitute only 0.75% of the total Revenue from Operations earned by the assessee and expenditure transactions with AE constitute only 0.62% of total expenses incurred. Hence, to apply TNMM on an overall basis at the entity level is against the basic canons of transfer pricing law. Assessee had already furnished to the TPO that the net operating margin analysis of the AE and non-AE segment in the TP documentation. As can be seen from therein, the net operating margins of the AE segment is 20.20%. The assessee requested the TPO to consider this instead of looking at the overall margins of the company which includes negligible transactions with AEs. The assessee had furnished the net operating margin analysis of the AE and non-AE segment of the TP documentation. As can be seen from therein, the net operating margins of the AE segment is 20.20%. There was no reason for the TPO to look at the overall margins of the company which includes substantial transactions with non-AEs and to make a transfer pricing adjustment with reference to the total costs incurred / revenue earned by the Company, which includes considerable expenses and sales with non-AEs. This is factually wrong. It may also be noted that the AO has not assigned any reasons for ignoring the margin analysis and allocation of expenses of AE and non-AE segment furnished by the appellant. AO has also not stated as to why he had redone the margin analysis by allocating all expenses on turnover basis rather than accept the basis of allocation followed by the assessee. We allow ground raised by the assessee and direct the AO/TPO to consider the margin analysis as provided by the assessee relating to AE segment alone. Interest on delayed receivables - TPO held that delay in realizing the receivables from the AE is one form of shifting profits from India and was an international transaction and ALP has to be computed for such delay in realization of receivables from the AO - HELD THAT - The computation has to be made on the net amount i.e, excess of receivables over payables. We hold and direct accordingly. We are also of the view that the adoption of SBI short term deposit rates as done by the revenue has not been approved in several decisions of the ITAT and it is only the LIBOR rate that has to be applied. In addition to the LIBOR rate, based on the credit rating appropriate percentage points towards credit risk alone can be added. The TPO should re-compute interest on delayed receivables based on the correct parameters for average collection period and rate of interest as give above. The issue is accordingly set aside to TPO/AO. Disallowance of belated remittance of ESI / PF - AO following the total income computed by CPC determined the total income in the order passed u/s.143(3) of the Act - HELD THAT - As it is not disputed that as per the decision rendered in the case of CHECKMATE SERVICES PVT LTD 2022 (10) TMI 617 - SUPREME COURT decided the issue on allowability/treatment of delayed Employee PF Contribution payment in hands of assessee under provisions of Income Tax Act and held that Section 36(1)(va) and Section 43B(b) operate on totally different equilibriums and have different parameters for due dates, i.e., employee's contribution is linked to payment before the due dates specified in the respective Acts and employer's contribution is linked to the payment before the prescribed due date for filing of return u/s. 139(1) of Income Tax Act, 1961.The result of any failure to pay within the prescribed dates also leads to different results. In the case of employee's contribution, any failure to pay within the prescribed due date under the respective PF Act or Scheme will result in negating employer's claim for deduction permanently forever u/s.36(1)(va). On the other hand, delay in payment of employer's contribution is visited with deferment of deduction on payment basis u/s.43B and is therefore not lost totally. Therefore, as per the above decision, the disallowance made by the Revenue authorities, were fully justified - Decided against assessee.
Issues Involved:
1. Adjustment to the arm's length price of the international transactions. 2. Interest on delayed receivables. 3. Disallowance of belated remittance of ESI/PF dues. Detailed Analysis: 1. Adjustment to the Arm's Length Price of the International Transactions: The primary issue relates to the adjustment of Rs. 6,55,13,030/- to the arm's length price of the international transactions made by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP). The adjustments include Rs. 5,96,82,063/- for services rendered and Rs. 58,30,967/- for interest on delayed receivables. The TPO rejected the Transfer Pricing (TP) documentation provided by the assessee, which included the profile of the assessee and the group, nature of transactions, FAR analysis, and detailed economic data analysis. The TPO's rejection was based on general comments and a search process inappropriate for the assessee's business segment. The DRP upheld the TPO's order based on incorrect facts, such as the non-application of certain filters and the use of outdated data. The Tribunal found that the TPO incorrectly considered the assessee as an ITES company instead of a human resource provider. The TPO's search for keywords like "ITES," "BPO," and "Call Centre" was inappropriate as the assessee's business was "Placement & HR Consultancy Service." The Tribunal directed the AO/TPO to conduct a fresh analysis considering the assessee as a Placement and HR Consultancy Service provider. The Tribunal also addressed the TPO's error in ignoring the margin analysis prepared by the assessee for AE and non-AE transactions. The TPO applied the Transactional Net Margin Method (TNMM) on an overall basis at the entity level, which was incorrect given that AE transactions constituted only a small fraction of the total revenue. The Tribunal directed the AO/TPO to consider the segmental margin analysis provided by the assessee. 2. Interest on Delayed Receivables: The assessee contested the TPO's computation of interest on delayed trade receivables, which was initially Rs. 9,18,58,103/- and later reduced to Rs. 31,90,006/-. The TPO subsequently increased this to Rs. 58,30,967/- without netting off payables to AE, which was done in the earlier order. The TPO considered a credit period of 30 days instead of the generally accepted 90 days, and applied an incorrect interest rate. The Tribunal found that the TPO's computation was incorrect as it did not consider the net receivables (receivables from AE less payables to AE). The Tribunal directed the TPO to recompute the interest on delayed receivables based on the correct parameters, including the average collection period and the appropriate interest rate (LIBOR plus credit risk percentage). 3. Disallowance of Belated Remittance of ESI/PF Dues: The assessee challenged the disallowance of Rs. 17,90,490/- for belated remittance of ESI/PF dues. The Tribunal upheld the disallowance based on the Supreme Court's decision in the case of Checkmate Services Pvt. Ltd. vs. CIT-1, which held that employee's contribution to PF must be paid within the due dates specified in the respective Acts. Failure to do so results in a permanent disallowance under Section 36(1)(va) of the Income Tax Act. Conclusion: The appeal was partly allowed. The Tribunal directed a fresh analysis for the adjustment to the arm's length price and the interest on delayed receivables, while upholding the disallowance of belated remittance of ESI/PF dues. The decision emphasized the need for accurate segmental analysis and adherence to appropriate benchmarks and interest rates in TP adjustments.
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