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2023 (4) TMI 843 - AT - Income TaxTP Adjustment - comparable selection - SWD Services Segment - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected from final list. ITeS Segment - We notice that in the order giving effect to the DRP directions, the TPO had considered 14 comparables, the 35th percentile of the average margin of which is 10.43% and the 65th percentile is 19.54%. We also notice that the operating margin of the assessee as has been considered by the TPO works out to 15.16% (rectification petition filed u/s. 154). Therefore, we see merit in the submission of the ld. AR that the assessee s margin is within the arm s length even as per the TPO s order. We also notice that the TPO in spite of the fact that the assessee s margin is within the range, has proceeded to make a TP adjustment which, in our view, is not warranted. We therefore direct the TPO to consider the submissions made by the assessee in the rectification petition dated 22.8.2022 and pass the order accordingly. Working capital and Risk adjustment - TPO did not give working capital adjustment for the reason that the assessee has demonstrated that there is a difference in the level of working capital employed by the assessee vis- -vis the comparables - HELD THAT - Working capital adjustment should be allowed and direct the AO/TPO to examine the issue afresh after affording the Assessee opportunity of being heard. Interest on outstanding receivables - TPO considered the interest on receivable as a separate international transaction and accordingly which is upheld by the DRP - HELD THAT - As relying on Tivo-Tech Pvt. Ltd. 2023 (2) TMI 837 - ITAT BANGALORE we hold that the interest on delayed receivable be calculated at LIBOR 2%. It is ordered accordingly.
Issues Involved:
1. General Grounds. 2. Comparability analysis and determination of ALP. 3. TP adjustment with regard to software development segment (SWD). 4. TP Adjustment with ITeS segment. 5. Not providing working capital adjustment and risk adjustment. 6. Notional interest on outstanding receivables. Detailed Analysis: General Grounds: Ground No.1 and 2 are general and do not warrant separate adjudication. Comparability Analysis and Determination of ALP: Ground No.3 pertains to the selection of comparables and the determination of the Arm's Length Price (ALP). The Tribunal reviewed the comparables selected by the assessee and the Transfer Pricing Officer (TPO). The TPO rejected some comparables and included others, leading to a TP adjustment. The Dispute Resolution Panel (DRP) upheld most of the TPO's selections but directed the exclusion of two companies. The Tribunal remitted the issue back to the TPO for fresh consideration of certain comparables, emphasizing the need to follow the DRP's directions from the previous assessment year. TP Adjustment with Regard to Software Development Segment (SWD): Ground No.4 addresses the TP adjustment in the SWD segment. The assessee adopted the Transactional Net Margin Method (TNMM) and declared a margin of 14.89%. The TPO made adjustments based on a different set of comparables, leading to a higher margin requirement. The DRP upheld most comparables but excluded two companies. The Tribunal reviewed specific comparables such as Wipro Ltd., Infosys Ltd., Tally Solutions P. Ltd., Eclerx Services Ltd., Cybage Software P. Ltd., and Consilient Technologies P. Ltd., and provided detailed directions for their inclusion or exclusion based on functional dissimilarity and lack of segmental data. TP Adjustment with ITeS Segment: Ground No.5 pertains to the TP adjustment in the ITeS segment. The Tribunal noted that the assessee's margin was within the arm's length range as per the TPO's final list of comparables. The Tribunal directed the TPO to consider the assessee's rectification petition and pass the order accordingly, making further contentions academic. Not Providing Working Capital Adjustment and Risk Adjustment: Ground No.6 addresses the non-provision of working capital and risk adjustments. The Tribunal held that working capital adjustment should be allowed and directed the TPO to re-examine the issue in light of relevant judicial precedents. The risk adjustment ground was dismissed as not pressed by the assessee. Notional Interest on Outstanding Receivables: Ground No.7 concerns the adjustment for interest on delayed receivables. The TPO treated interest on receivables as a separate international transaction and calculated notional interest. The Tribunal, following judicial precedents, held that interest on delayed receivables should be calculated at LIBOR + 2% and directed the TPO to re-calculate accordingly. Conclusion: The appeal was partly allowed, with directions for the TPO to re-examine certain issues and make adjustments as per the Tribunal's findings. The Tribunal emphasized the need for functional comparability and proper consideration of working capital adjustments. The decision reflects a detailed analysis of comparables and adherence to judicial precedents in transfer pricing matters.
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