2023 (4) TMI 794 - AT - Income Tax

TP Adjustment - Interest on outstanding receivables - assessee submits that the TPO had not provided the working of the adjustment determined in respect of interest on outstanding receivables - As stated since, it is debt free company; no adjustment can be made towards notional interest on receivables - HELD THAT - TPO during the study had not considered this issue in light that the assessee is a debt free company. So the adjustment of interest cannot be warranted in respect of the assessee. The assessee-company is not in other hard paying any interest to the creditor. Normally the assessee allowed credit to debtors for 60 days on the other hand they are enjoying the credit on same days against creditors. We find the issue was not properly adjudicated by the AO/TPO in the order. The DR had not made any strong objection on this issue. We remand back this issue to the TPO for further adjudication in light of our observations above. Grant of working capital adjustment - Trade terms of payment of debtor is 60 days. So, the price of goods should equate to the price for immediate payment plus 60 days of interest on immediate payment price. For making working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparable for which is the work out the adjustment on account of working capital adjustment. As the issue is first time agitated before the ITAT, we remit back the issue to the AO/TPO for further adjudication and to grant actual working capital adjustment after duly examining it. Accordingly, this ground is remitted back to the file of AO/TPO for reconsideration. Selection of comparables - Exclusion of companies as functionally dissimilar with that of assessee characterised as the contract service provider .

Summary

Issues:
1. Interest on outstanding receivables
2. Grant of working capital adjustment
3. Exclusion of comparables

Interest on Outstanding Receivables:
The appeal was against the order of the Ld.DCIT, challenging various grounds, with focus on grounds 1.17, 1.18, and 1.19. The assessee, a subsidiary of a holding company, provided software development services to its Associated Enterprises (AE). The issue of interest on outstanding receivables was raised, with the AR arguing that as a debt-free company, no adjustment for interest was warranted. The DRP suggested upholding the TPO's order, citing the need to benchmark international transactions at arm's length. The AR relied on precedents to support the claim that interest should not be imputed on outstanding receivables for a debt-free company. The Tribunal remanded the issue back to the TPO for further adjudication due to inadequate consideration by the AO/TPO.

Grant of Working Capital Adjustment:
The AR raised the issue of working capital adjustment for the first time before the ITAT, citing a trade term of 60 days for debtor payments. The Tribunal emphasized the need to adjust for the time value of money and remitted the issue back to the AO/TPO for proper examination and actual adjustment. This ground was remitted for reconsideration.

Exclusion of Comparables:
The assessee sought exclusion of several comparables based on functional dissimilarity, RPT filter failure, presence of intangibles, and brand promotion expenses. The AR relied on precedents and directed the exclusion of Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., Nihilent Ltd., Infosys Ltd., and Cybage Software Pvt. Ltd. from the TP study. The Tribunal, following the orders of the Coordinate Bench, directed the AO/TPO to exclude these companies from the list of comparables. Grounds 1.17 and 1.18 were allowed for statistical purposes, while ground 1.19 was allowed in favor of the assessee.

In conclusion, the appeal was partly allowed for statistical purposes, with the Tribunal directing specific issues back to the AO/TPO for further examination and adjustment. The judgment highlighted the importance of considering the unique circumstances of the assessee, such as being a debt-free company, in determining adjustments related to interest on receivables and working capital. The exclusion of comparables based on functional dissimilarity and other factors was also a crucial aspect of the decision.