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2023 (8) TMI 667 - AT - Income TaxTP Adjustment - Comparable selection - HED THAT - Larsen Toubro Infotech Ltd.and Infosys Ltd. - As present assessee is found to be a captive service provider who carries out software development services in accordance with the direction of its associated enterprises and is compensated on a cost mark-up basis. Therefore in our considered opinion, both the comparables cannot be considered to be fit for being included. R Systems International Ltd. - This Tribunal in ACI Worldwide Solutions Pvt. Ltd. 2022 (5) TMI 1491 - ITAT BANGALORE has restored R Systems International Ltd. with the direction to verify if the said company has prepared the financials for financial year ending on March 31 or if it could be reasonably extrapolated. We accordingly remand this comparable to the Ld.AO/TPO for reverification based on similar direction. Persistent Systems Ltd. - As this company is mostly into product development and owns huge intellectual properties. It is also noted that there is no segmental details available in respect of the various systems of revenue earned by this company. Under such circumstances, we do not find it appropriate to be included in the final list. Accordingly we direct the Ld.AO/TPO to exclude this company. Tata Elxsi Ltd. - Admittedly this company is into research and development activities and has developed various product design, industrial design etc. It is also noted that though this company is into software development services, in the process has developed various products that has been sold and revenue has been generated from sale of products. The segmental details in respect of software services rendered and product sale is not available in the financials of this company. It is noted that in case of Infor (India) Pvt. Ltd. 2023 (3) TMI 597 - ITAT HYDERABAD for similar reason has excluded this company from the final list. We therefore direct this comparable to be excluded from the final list as it is not comparable with a captive service provider like that of assessee. Infobeans Technologies Ltd. - As relying on case of case of Airlinq 2022 (8) TMI 1283 - ITAT BANGALORE we direct the Ld.AO/TPO to exclude this company from the final list. Sasken Communication Technologies Ltd. - As submitted this comparable has been excluded by the Ld.TPO as it is involved in R D activities and owns huge patents. We have hereinabove excluded Infosys Ltd., L T Infotech Ltd. for the reason that they are into research and development activities and owns huge intangibles which is not akin to a captive service provider. Applying the same principle, we do not find any infirmity in exclusion of Sasken Communication Technologies Ltd. by the Ld.TPO. TP Adjustment with respect to outstanding receivables - AR has objected by submitting that no interest is attributable as the same was not charged by the AEs on any delayed payment by the assessee - HELD THAT - This Bench referred to decision of 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. 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. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
Issues Involved:
1. Exclusion of certain comparables from the final list. 2. Inclusion of certain comparables in the final list. 3. Correction in the margins of the comparable companies. 4. Transfer pricing adjustment with respect to outstanding receivables. Summary: Issue 1: Exclusion of Certain Comparables (Ground No. 1.5) The Tribunal addressed the exclusion of Larsen & Toubro Infotech Ltd., Infosys Ltd., R Systems International Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Infobeans Technologies Ltd. from the final list of comparables. The Tribunal found that these companies were functionally dissimilar to the assessee due to their diversified activities, significant research and development, ownership of intangible assets, and lack of segmental details. Consequently, the Tribunal directed the exclusion of these companies from the final list. Issue 2: Inclusion of Certain Comparables (Ground No. 1.6) The Tribunal considered the inclusion of Maveric Systems Ltd., Evoke Technologies Pvt. Ltd., and Sasken Communication Technologies Ltd. The Tribunal remanded the cases of Maveric Systems Ltd. and Evoke Technologies Pvt. Ltd. to the TPO for re-evaluation based on their annual reports and FAR analysis. However, the Tribunal upheld the exclusion of Sasken Communication Technologies Ltd. due to its involvement in R&D activities and ownership of significant patents. Issue 3: Correction in Margins of Comparable Companies (Ground No. 1.7) The Tribunal directed the TPO/AO to recompute the margins of the comparable companies in accordance with the law, as the assessee had provided all relevant details for verification. Issue 4: Transfer Pricing Adjustment for Outstanding Receivables (Ground No. 2) The Tribunal addressed the transfer pricing adjustment for outstanding receivables. The Tribunal noted that attributing interest to delayed payments is an international transaction. It directed the TPO to re-evaluate the adjustment, considering the principles laid down by the Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd. The Tribunal emphasized that if working capital adjustment subsumes the outstanding receivables, no separate characterization is required. For receivables falling outside the working capital adjustment, the interest rate should be LIBOR + 300 basis points, considering a credit period of 90 days. General Grounds (Ground Nos. 1 to 1.4) These grounds were general in nature and did not require adjudication. Conclusion: The appeal filed by the assessee was partly allowed. The Tribunal provided specific directions for the inclusion/exclusion of comparables, correction of margins, and re-evaluation of transfer pricing adjustments for outstanding receivables. The order was pronounced in the open court on 23rd March 2023.
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