9911796707
TMI Blog2022 (5) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... the international transaction of rendering of SWD services by the Assessee to AE in the light of the directions given above, after affording Assessee opportunity of being heard. Determination of ALP by construing the delayed realization of receivable by the Assessee from its AE as a separate international transaction and determining ALP of such delayed receivables - HELD THAT:- We are of the view that the TPO/AO have erred in not giving effect to the direction of the DRP based on invoice wise delay in receipt of outstanding. Instead the TPO/AO proceeded on estimation basis by considering the average of opening and closing debtors balances and computed interest for the whole year on this average balance receivable after treating it as a loan, after reducing the allowed credit period of 180 days from 365 days and has charged interest on the estimated average balance as explained above for an assumed delay of 185 days - as per contract with the holding company for providing software development services the credit period agreed is 180 days. And thus interest on delay if any, may be charged on invoice wise receipt exceeding the agreed credit period of 180 days. Since there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec. 92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the Assessee, the first dispute is with regard to determination of Arms' Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 3. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLI PLI=OP/OC 15.45% 35th Percentile Margin of comaparable set 20.87% Adjustment Required (if PLI 35 th Percentile) Yes Median Margin of comparable set M 27.28% Arm's Length Price ALP=(1+M)*OC 107,83,20,045 Price Received OR 97,81,14,574 Shortfall being adjustment ALP-OR 10,02,05,471 21.4.2 The above shortfall of Rs. 10,02,05,471/- is treated as Transfer Pricing adjustment u/s. 92CA in respect of software development segment of the Taxpayer's International Transactions. Thus a sum of Rs. 10,02,05,471/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE. 6. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 11. As far as comparability of companies listed as (a) to (g) in Grd. No. 3 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs. 200 Crores and the Assessee's turnover is only Rs. 97,81,14,574/-. The TPO excluded from the list of comparable companies chosen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): 41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No. 1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs. 200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that companies listed in Sl. No. (a) to (g) of Grd. No. 3 raised by the Assessee whose turnover in the current year is more than Rs. 200 Crores should be excluded from the list of comparable companies. 15. The learned DR however submitted that the Assessee in its transfer pricing study had applied the filter of 10 times turnover of the Assessee as a criteria for comparing the Assessee company with a comparable company. He pointed out that the Tribunal in some cases has applied the filter of 10 times the turnover as criteria for choosing comparable companies and therefore not all companies listed in Ground No. 3 will have turnover 10 times more than that of the Assessee. 16. As we have already noticed the first decision on the issue of application of turnover filter w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction and determining ALP of such delayed receivables. These grounds read as follows: 5. The TPO, AO and DRP have erred in law and on facts in computing notional interest on alleged delay in collecting trade receivables amounting to Rs. 1,18,23,644 from its AE. As per the TPO order, the average of opening and closing receivable balances has been treated as unsecured loan for a period of 365 days and after allowing a credit period of 180 days, the AO/TPO has arrived at a delay of 185 days on the deemed loan amount. This is factually incorrect, since the appellant has received all the receivables in respect of invoices raised in FY 2015-16 from its AE within the agreed credit period of 180 days. Thus, as all the receivables are collected within due date, no interest on delay in collection of trade receivable should arise. 6. The TPO/AO erred in law as well on facts by not following the direction of the DRP to recompute the interest on the delayed receivables after obtaining invoice wise details from the assessee. 7. The DRP erred in law while giving direction to the TPO/AO to consider the credit at 60 days as against the 180 days which is as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the TPO. The observations of the DRP in this regard were as follows: 2.9.18 As regards adoption of ALP interest rate, the approach of the TPO in adopting LIBOR rate is incorrect. In the facts of the case, we consider that, it is pertinent to look into the opportunity costs i.e. the income that the assessee would have earned, had the assessee received the amounts in time. This has to be determined taking into account the Indian market conditions, the assessee being taken as the tested party Factoring these aspects, we are of the view, that the SBI short term fixed deposit interest rate may be the appropriate ALP rate to measure the interest compensation in these type of transactions. In this regard, we place reliance on the principle, held by the Honourable Bangalore ITAT in the case of Logix Microsystems Ltd. (ITA No. 423/Bang/2019 dated 07.10.2010).(2010-TI 1-30-ITAT Bang-TP), under similar factual circumstances, wherein it was observed, While adopting the Indian rate, it is not proper to rely on PLR of the State Bank of India. This is because if the funds were brought in time and those funds were properly deployed, the assessee company may earn an income at the maximum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the allowed credit period, computation of notional interest on the outstanding does not arise. 22. The learned counsel also invited our attention to the master service agreement, para 5.2 (in page 5 of the agreement under the heading 'Invoicing and Payments') wherein the credit period allowed to the holding company is 180 days or such other time as may be prescribed by the Reserve Bank of India from time to time. It was argued that since the computation of notional interest did not arise, the TPO was requested to kindly delete the notional interest from the Draft TP order passed on 30.10.2019 and provide a copy of the Order Giving Effect to the direction of the DRP order dated 04.03.2021. It was submitted that the above submission made before the TPO was not considered by the TPO and therefore no relief arising from DRP direction was received. The learned DR relied on the order of the DRP/TPO. 23. After considering the rival submissions, we are of the view that the TPO/AO have erred in not giving effect to the direction of the DRP based on invoice wise delay in receipt of outstanding. Instead the TPO/AO proceeded on estimation basis by considering the average of op ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
