2023 (5) TMI 1045 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - We direct the Ld.AO/TPO to apply upper turnover filter and exclude all comparables mentioned hereinabove from the final list. Comparables sought for exclusion / inclusion under the trading segment - AR requested for the trading segment to be remanded to TPO / TPO for denovo consideration - HELD THAT - DR did not object for the request adhered by the Ld.AR. Considering the submissions by the AR, we remand the entire trading segment to the Ld.AO/TPO to carry out denovo search with the direction to include comparables having parity with the trading activities carried on by the assessee. Needless to say that the FAR analysis must be given primary importance for selecting the comparables. Assessee must be granted proper opportunity of being heard for considering this issue. Grievance of the assessee for considering the trading segment at entity level - We direct the Ld.AO/TPO to restrict the adjustment if any only in respect of the value of international transaction between assessee and AE. Respectfully following the ratios laid down in plethora of decisions hereinabove, we remand this issue back to the Ld.AO/TPO to consider the claim in accordance with law. Non-granting of working capital adjustment - HELD THAT - DRP may be correct in denying working adjustment due to unavailability required data, however there is no merit in observations of DRP/TPO as supported by Ld.CIR DR, in denying working capital adjustment due to absence of details for working out adjustments in comparable companies chosen. If we appreciate the argument advanced by Ld.CIT.DR, there would remain no comparables for the purpose of comparability analysis to determine ALP of an international transaction, and this would be fatal to entire exercise of transfer pricing analysis. Endeavor should be made to bring in comparable companies for the purpose of broad comparison and working capital adjustment claimed by Assessee should be analysed, keeping in mind, OECD guidelines. As respectfully following decision of Huawei Technologies India (P.) Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE we direct working capital adjustment to be computed and to allow as per actual, after considering exclusion/inclusion of comparable companies in the final set of comparables as discussed hereinabove. Notional interest computed on the outstanding receivables - HELD THAT - This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. 2016 (7) TMI 760 - ITAT KOLKATA held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. As argued that working capital adjustment subsumes sundry creditors and computing interest on outstanding receivables and loan and advances to international transaction would amount to double taxation - We deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables, no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration, then, the rate of interest to be charged must be LIBOR 300 basis points which is in accordance with the principles laid down in case of CIT vs. Cotton Naturals (I) Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT by considering a credit of 90 days. Short grant of TDS and interest u/s. 234C - interest levied on the assessed income or returned income as required under the provision of the Act - HELD THAT - We direct the Ld.AO to grant credit of TDS in accordance with law after carrying out necessary verifications in respect of the interest u/s. 234C, it is directed that the levy of interest must be on the returned income as mandated u/s. 234C of the act.

Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of TP Study and Comparable Companies
3. Application of Filters
4. Computation Methodology
5. Interest on Delayed Receivables
6. Grant of TDS Credit and Interest Computation

Summary:

1. Transfer Pricing Adjustment:
The AO/DRP/TPO made a transfer pricing adjustment of Rs. 8,52,25,669/- to the return of income, holding that the international transactions of provision of Software Development Segment and Trading Segment were not at Arm's Length. The assessee's margin was noted to be 14.50% in the SWD segment and 5.58% in the trading segment.

2. Rejection of TP Study and Comparable Companies:
The AO/DRP/TPO rejected the TP study conducted by the assessee and conducted a fresh search process with additional and/or modified filters. The TPO shortlisted 26 comparables for the SWD segment with a median of 22.27% and 4 comparables for the trading segment with an average margin of 9.85%.

3. Application of Filters:
The Tribunal directed the AO/TPO to apply an upper turnover filter and exclude comparables not fulfilling the turnover criteria. Companies with turnover less than Rs. 1 crore or more than Rs. 200 crores were excluded. The Tribunal also remanded the trading segment issue to the AO/TPO for a de novo search, emphasizing the need for functional parity in comparables.

4. Computation Methodology:
The Tribunal directed the AO/TPO to restrict the adjustment to the value of international transactions between the assessee and AE, following the principles laid down in various judicial decisions. The Tribunal also directed the AO/TPO to grant working capital adjustment based on actuals, following the OECD guidelines.

5. Interest on Delayed Receivables:
The Tribunal remitted the issue of notional interest on outstanding receivables to the AO/TPO for reconsideration, emphasizing the need for a proper inquiry and analysis of the impact on the working capital. The interest rate was directed to be LIBOR + 300 basis points with a credit period of 90 days.

6. Grant of TDS Credit and Interest Computation:
The Tribunal directed the AO to grant credit of TDS after necessary verification and to compute interest u/s 234C on the returned income as mandated by the Act.

Conclusion:
The appeal was partly allowed, with directions for re-evaluation and necessary corrections by the AO/TPO in accordance with the law and judicial precedents.

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