2023 (5) TMI 952 - AT - Income Tax

TP Adjustment - determination of ALP in respect of software development services - comparable selection - HELD THAT - In the case on hand, it could be seen from the order of the learned TPO that the learned TPO accepted the turnover filter selected by the assessee with companies, whose net sales are more than Rs. 1 crore, but failed to notice that without fixing the upper limit of such filter, it would lead to the insertion of certain entities, who operate on different scales and economies and render themselves as unsuitable for comparison. Though we agree with the counsel that certain comparables have to be deleted for their operation in relation with the assessee s operation is huge in scale and economies We direct the learned Assessing Officer/learned TPO to take the range of turnover filter at ten times on both the ends and conduct search afresh to take a plausible view. These grounds are accordingly treated as allowed for statistical purposes. ALP adjustment in respect of the interest on trade 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 direct the learned Assessing Officer/learned TPO to adopt the same. Grounds are partly allowed accordingly.

Summary

Issues Involved:

1. Determination of Arm's Length Price (ALP) for software development services.
2. ALP adjustment in respect of interest on trade receivables.

Summary:

1. Determination of Arm's Length Price (ALP) for software development services:

The assessee, engaged in medical transcription and software development services, challenged the final assessment order for the assessment year 2015-16, specifically the ALP adjustments made by the Transfer Pricing Officer (TPO). The TPO initially suggested adjustments based on a set of comparables, which were later modified by the Dispute Resolution Panel (DRP). The assessee contested the inclusion of certain comparables with significantly higher turnovers, arguing they were unsuitable for comparison. The Tribunal referenced multiple judicial precedents and the ICAI TP guidance note, emphasizing the importance of a turnover filter in comparability analysis. The Tribunal concluded that a turnover range of ten times on both ends should be applied, and directed the Assessing Officer/TPO to reassess the comparables within this range.

2. ALP adjustment in respect of interest on trade receivables:

The assessee argued that outstanding receivables should not be treated as a separate international transaction requiring separate benchmarking. The Tribunal, referencing the retrospective amendment to Section 92B of the Income Tax Act, upheld that interest on outstanding receivables constitutes an international transaction. However, the Tribunal agreed with the assessee's alternative argument that the interest rate should be benchmarked using LIBOR+200 basis points, aligning with judicial precedents. The Assessing Officer/TPO was directed to adopt this rate for computing the ALP adjustment for interest on trade receivables.

Conclusion:

The appeal was partly allowed for statistical purposes, with directions for reassessment based on the specified turnover filter for software development services and the application of LIBOR+200 basis points for interest on trade receivables.