2024 (8) TMI 809 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT -Unfortunately, the assessee has sought inclusion of few companies in the TP Study Report, however, for the reasons best known to the TPO, it was stated that these companies were not meeting the search matrix and accordingly, they were rejected by the TPO. Since the assessee has shown us that these companies are appearing in search matrix, therefore, it would be in the interests of justice the issue of inclusion of these companies are remanded back to the file of TPO with a direction to examine whether these companies are functionally comparable with the assessee company or not after applying the applicable filters. If these companies were functionally comparable, then the TPO is directed to include these companies for the purpose of computing the ALP. Thus, these grounds are allowed for statistical purposes. Erroneous comparison made by the TPO and DRP, who compared the Appellant companies with companies having high turnover - Tribunal has continuously been following the turnover of the filter of ten times x and 1/10th of the turnover of the assessee on both the sides. We deem it appropriate to remand back this issue to the file of AO / TPO with a direction to apply ten times filter lower and upper on both the sides. The companies which are having turnover of more than 10 times are required to be excluded from the list of comparable and similarly, the companies whose turnover are less than 1/10th of the turnover of the assessee are also required to be excluded from the list of comparable. TPO is directed to exclude the comparable in the light of the above said directions. Thus, this ground is allowed for statistical purposes. Exclusion of Infobeans Technologies Limited - It is clear that this company was into software development services and cannot be said to be a KPO for any purposes. When the TNMM method is applied to benchmark the transaction, then the slight / little variation in the profile of the comparable company are required to be permitted for applying TNMM method, otherwise, the other methods as available are required to apply if the transaction entered by the assessee with its AE matches with the profile of the comparable company. Therefore, we do not find any error in the order passed by the lower authorities. Accordingly, the ground raised by the assessee is rejected. With respect to the other companies, the assessee has not raised any objection and it was submitted that these companies would be taken care being the subject matter of turnover filter. Hence, the ground no.4 of the assessee is dismissed subject to our finding with respect to turnover filter. Adjustments made in the case of delay in receipts of sale proceeds from AE - HELD THAT - Admittedly, this Tribunal in the case of Satyam Ventures Engineering Services Vs. ACIT 2022 (6) TMI 1386 - ITAT HYDERABAD , Zeta Interactive Systems India Private Limited 2022 (6) TMI 1383 - ITAT HYDERABAD M/s. Apache Footware India Private Limited etc 2023 (4) TMI 521 - ITAT HYDERABAD has decided the issue in favour of the Revenue by holding that the SBI bank rate of 6% with a credit period of 60 days is to be applied for determining the interest on delayed trade receivables. In the present case, says the assessee has agreed for application of has very deposited of 6% for benchmarking the interest on trade receivable, therefore we don t want to decide the issue and accordingly direct the AO /TPO to apply the SB rate of 6% to the transaction in dispute for with a credit of 60 days. In the light of the above the issue is decided in favour of the assessee and against the revenue.

Issues Involved:
1. Rejection of Assessee's Comparables in Transfer Pricing Study.
2. Erroneous Comparison with High Turnover Companies.
3. Exclusion of Functionally Different Comparables.
4. Adjustment for Delay in Receipts from Associated Enterprise.

Detailed Analysis:

Issue 1: Rejection of Assessee's Comparables in Transfer Pricing Study

The assessee argued that the TPO wrongly rejected the comparables listed in their Transfer Pricing (TP) Study. The TPO claimed these comparables did not appear in the search matrix of the appellant's TP Study Report. The assessee countered that the data for these comparables was available in the public domain, which the DRP failed to consider.

The Tribunal found that the TPO's rejection was incorrect as the comparables were indeed part of the search matrix. Therefore, the Tribunal remanded the issue back to the TPO to examine the functional comparability of these companies with the assessee. If found functionally comparable, these companies should be included for computing the Arm's Length Price (ALP). This ground was allowed for statistical purposes.

Issue 2: Erroneous Comparison with High Turnover Companies

The assessee contended that the TPO compared them with companies having high turnover, which is not legally acceptable as per various judicial precedents. The assessee argued that high turnover companies benefit from economies of scale, which affects profitability, making them unsuitable comparables.

The Tribunal noted that turnover is a relevant criterion for comparability, as established by the Bombay High Court in CIT vs. Pentair Water India Pvt. Ltd. and other judicial precedents. The Tribunal directed the Assessing Officer/TPO to apply a turnover filter of ten times on both ends of the assessee's turnover. Companies with turnover more than ten times or less than one-tenth of the assessee's turnover should be excluded. This ground was allowed for statistical purposes.

Issue 3: Exclusion of Functionally Different Comparables

The assessee specifically sought the exclusion of Infobeans Technologies Limited, arguing it was functionally different as it was involved in Automation Engine and customized software, unlike the assessee's software development services.

The Tribunal upheld the DRP's decision, noting that the functional profile should be based on the company's annual report, not dynamic website information. The Tribunal found no error in the lower authorities' decision to include Infobeans Technologies Limited as a comparable. The ground was dismissed.

Issue 4: Adjustment for Delay in Receipts from Associated Enterprise

The assessee accepted the lower authorities' decision to apply SBI short-term interest rates for calculating interest on delayed trade receivables. The Tribunal directed the AO/TPO to apply the SBI rate of 6% with a credit period of 60 days, as upheld in several cases like Satyam Ventures Engineering Services Vs. ACIT. This ground was decided in favor of the assessee.

Conclusion:
The Tribunal remanded the issues related to the inclusion of certain comparables and the application of the turnover filter back to the TPO for re-examination. The ground concerning the exclusion of Infobeans Technologies Limited was dismissed, and the adjustment for delayed receipts was decided in favor of the assessee. The appeal was allowed for statistical purposes.

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