2024 (1) TMI 26 - AT - Income Tax

TP Adjustment - Addition of provision of warranty services - HELD THAT - TPO has committed an error that while he has considered the cost of services provided during the financial year 2016-17, the TPO has not considered the revenue recognized during the year. This has resulted into a situation where the cost of services provided is considered but the revenue pertaining to these services have been ignored. Obviously, this will give absurd results. We, therefore, concur with the arguments advanced by assessee and find no mistake in the accounting policy adopted by the assessee. We have also considered the other arguments of the Ld. AR that the entire revenue recognized during the year amounting to INR 19,16,24,516 has been offered for taxation. Since we have accepted the accounting methodology adopted by the assessee, we do not wish to comment on this argument of Ld. AR. Thus we hold that the margin of the assessee under this segment should be computed by considering the entire revenue of INR 19,16,24,516. This computation is available in the order of the TPO and the margin works out to 35.71%. The median margin of the comparables which has been accepted by the TPO works out to 6.55% as available on page number 6 of the order of the TPO. Since the margin of the assessee is higher, the entire transfer pricing addition of INR 13,99,71,558 made by the TPO on account of provision of warranty services, is deleted. Provision of software development services - Comparable selection - assessee is providing software development services including identifying the bugs and debugging the software while the AEs are responsible for all other functions - HELD THAT - Exclusion of companies as functionally dissimilar with that of assessee.- Deselect E-Infochip Limited, Dun Bradstreet Technologies Data Services Pvt. Ltd., Interglobe Technology Quotient Pvt. Ltd., Cybage Software Private Limited,Acewin Agriteck Ltd., Cadsys (India) Ltd., Cygnet Infotech Pvt. Ltd., InfoBeans Technologies Limited, Nihilent Analytics Ltd. and Nihilent Ltd. Arguments of the Ld. AR regarding the inclusion of 8 companies - A company which is comparable in AY 2016-17 and/or AY 2018-19 cannot be rejected by the TPO just on the basis of a general and common comment. TPO has not pointed out any specific reason for rejection of these companies while the same companies were good comparable either in the immediately preceding year or succeeding year. Thus, we direct the TPO to include the following companies in the comparable set, i.e.,C G-V A K Software Exports Ltd., Harbinger Systems Pvt Ltd., Sagarsoft (India) Ltd., Evoke Technologies Pvt Ltd., Kireeti Soft Technologies Ltd., Maveric Systems Limited and Akshay Software Technologies Limited. Sasken Technologies Ltd. which the Ld. AR has argued for inclusion on the ground that it passes all the quantitative filters adopted by the TPO - submitted that Sasken Technologies Limited (Software Service Segment) is engaged in Software development services; The Company has reported Segment reporting between 'Software service' and ' Software Product' and the relevant Segment 'Software Service' Selected by the Assessee. Since the Ld. AR has argued that there are segmental results available, we direct the TPO to verify the same from the annual report and if segmental results are available use the segmental results for this company. We direct accordingly. Notional interest on overdue receivables - TPO considered amount of receivables from AE as indirect advance which benefitted the AE. The TPO in his order has observed that the Assessee has not submitted the required details in relation with the outstanding receivables - whats the amount and days on which the interest should be charged, the grace period and the rate of interest applicable? - HELD THAT - As far as the amount and days on which the interest should be charged there is no doubt that the interest can be charged only on the actual amount outstanding for each and every invoice beyond the grace period. Charging of interest by the TPO on the closing balance without looking into delay of each and every invoice is incorrect. Therefore, we direct the TPO to compute the amount and number of days outstanding beyond the grace period for each and every invoice. The assessee shall provide complete information in this regard to the TPO. Number of days of grace period, there is no thumb rule that grace period of 30 days, 60 days or 90 days should be allowed. It should be dependent upon (i) the terms and conditions of agreement with the AE and/or (ii) the terms and conditions of comparable business transactions with the Non-AEs. On being asked, the Ld. AR submitted that the assessee is a captive service provider and there are no comparable transactions with the Non-AEs. Thus, we are left with no choice but to remand this issue to the file of the TPO to examine if there are any agreements with the AE and what is the grace period in those agreements. If there are no agreements with the AEs, the TPO should consider the market practice in the relevant sector and then grant the grace period. We, however, clarify that in business world there is always a grace period and therefore non-granting of grace period is ignoring the business realities. Rate of interest we have considered the arguments of both the sides. Following various judicial precedents, we hold that the rate of interest of Libor 200 bps should be applied.

Summary

Issues Involved:

1. Provision of warranty services.
2. Provision of software development services.
3. Notional interest on outstanding receivables.

Summary:

Provision of Warranty Services:

The assessee, engaged in providing after-sales warranty services for medical equipment, faced a transfer pricing adjustment by the TPO, who recomputed the margin of the warranty segment by excluding significant revenue recognized in the P&L account. The Tribunal held that warranty services span multiple financial years, and the revenue must be recognized accordingly. The Tribunal found the assessee's accounting policy consistent and scientific, recognizing revenue from both current and previous financial years. The Tribunal concluded that the margin should be computed by considering the entire revenue of INR 19,16,24,516, resulting in the deletion of the transfer pricing addition of INR 13,99,71,558.

Provision of Software Development Services:

The assessee, providing software development and related support services, faced adjustments due to the TPO's rejection of several comparables and inclusion of others. The Tribunal analyzed the functional profiles and found that 10 companies selected by the TPO were not functionally comparable to the assessee. These companies included E-Infochips Ltd., Dun & Bradstreet Technologies & Data Services Pvt. Ltd., and others. The Tribunal directed the exclusion of these companies and the inclusion of 7 companies previously accepted by the TPO in other assessment years, such as C G-V A K Software & Exports Ltd. and Harbinger Systems Pvt Ltd. The Tribunal also directed the TPO to verify segmental results for Sasken Technologies Ltd. and include it if segmental results are available.

Notional Interest on Outstanding Receivables:

The TPO imputed interest on the entire outstanding receivables, treating them as indirect advances. The Tribunal directed that interest should be computed only on the actual amount outstanding beyond a grace period, which should be determined based on agreements with AEs or market practice. The Tribunal also held that the rate of interest should be Libor + 200 bps, following judicial precedents.

Conclusion:

The appeal was partly allowed, with specific directions on the computation of margins and interest, and adjustments were made based on functional comparability and accounting policies. The Tribunal emphasized the importance of accurate revenue recognition and comparability analysis in transfer pricing assessments.