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TMI Blog2023 (2) TMI 837X X X X Extracts X X X X X X X X Extracts X X X X ..... 2022 (1) TMI 1275 - ITAT BANGALORE ] and the judgment of AMD (India) Pvt. Ltd [ 2018 (8) TMI 2094 - KARNATAKA HIGH COURT ], we hold that the treatment of interest on deferred receivables is rightly considered as an independent international transaction and benchmarked separately by the revenue authorities. With regard to calculation of interest, respectfully following the above decision we hold that it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd. [ 2017 (6) TMI 1087 - BOMBAY HIGH COURT ] Disallowance of trade payable and certain other expenses u/s. 37 - AO made an adhoc disallowance of 30% of the actual expenses on trade payables, rent expenses, legal and professional expenses and forex losses - disallowances were made on the ground that the Assessee failed to furnish details with respect to the aforesaid expenditures - details were furnished before the AO under the rectification application - HELD THAT:- DRP has given a direction to consider the confirmations produced by the assessee and that the details listed above as submitted by the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s passed by the AO incorporating the aforesaid TP adjustment. The AO also made the below additions while passing the draft assessment order (i) 30% of trade payables amounting to Rs. 85,20,015/- (ii) 30% of Rent, Legal and professional expenses, and repairs maintenance totalling to Rs.9,40,47,886 /- (iii) 30% of Forex losses of Rs. 14,13,683/-. (iv) Recruitment expenses and reimbursement of expenses incurred in foreign currency of Rs. 30,11,460/- 4. On objections by the assessee, the DRP its directions dated 19.03.2021 rejected most of the objections. The AO passed the final assessment order dated 09.04.2021 pursuant to the DRP directions, whereby the TP adjustment was reworked to Rs. 4,52,45,728/- and the disallowance towards Rent, Legal and professional expenses, and repairs maintenance was reduced to Rs.2,85,14,365. 5. Aggrieved by the final assessment order, the Assessee has preferred the above appeal to this Tribunal. TP adjustment SWD segment 6. The assessee raised 7 grounds and several sub grounds pertaining to the TP adjustment. The assessee also raised one additional ground with regard to the TP adjustment. During the course o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The financials of the of the assessee as per the TP study is as given below - Operating Income Rs. 57,93,47,456/- Operating Cost Rs. 49,69,96,104/- Operating Profit (Op. Income Op. Cost) Rs. 8,23,51,352/- Operating/Net mark-up (OP/OC) 16.57% 10. The weighted average of the comparable companies is in the range of 6.35 percentile to 19.89 percentile and therefore the assessee concluded that the international transactions are within arm s length. 11. TPO rejected 6 of the above comparable companies selected by the assessee. The TPO applied new filters and selected 17 comparables against 8 selected by the assessee and the median of the weighted average of PLI of the companies as follows:- Sl. No. Name of the Company Mark-up on Total Costs (WC unadj) (in %) 1. Kals Information Systems Ltd. 8.60 2. E-Zest Solutions Ltd. 10.87 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shortfall being adjustment u/s. 92CA 4,49,24,168/- 13. The DRP upheld the TPO s order with respect to inclusion and exclusions of comparables. Aggrieved, the assessee is in appeal before the Tribunal. 14. The ld. AR submitted that the TPO erred in not applying a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the Assessee. In this regard, it is submitted that application of turnover filter is a relevant criteria in choosing comparable companies. It is submitted that the difference in the scale of operations have a direct impact on the profitability. The concept of economies of scale wherein, an increase in the size and scale of the operations lead to a decrease in the long run average cost of each unit or each service project delivered. Therefore, the per unit fixed cost of a small scale company would be much higher than of a medium/large size organisation. Further, it is submitted that medium/large size organisation operating in a particular industry also enjoys benefits of certain other market drivers and cost arbitrages. It is submitted that the turnover of the Assessee from rendering SWD services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... *figures in crores FY 2015-16 FY 2014-15 FY 2013-14 Operating revenue 171.41 345.50 351.89 Operating cost 175.07 260.26 283.47 Operating profit -3.66 85.24 68.42 OP/OC -2.09% 32.75% 24.14% 18. It is submitted that the wide fluctuations in profit suggest the existence of a peculiar economic circumstance, for which no appropriate adjustment could be made to mitigate the impact on the margin of the company. In view of the wide fluctuation in the margin of the company, the company cannot be selected as a comparable. Also, segmental details bifurcating revenue generated from SWD services vis- -vis revenue generated from KPO services are not available. The Company has also incurred significant outsourcing charges in the nature of subcontracting expenses. 19. Without prejudice, if the company were to be retained in the final list of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing methods, being the most appropriate method, in the following manner, namely :- (a) to (d) .. (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: A reading of Rule 10B(3) shows that comparison of an uncontrolled transaction to an international transaction can be done only if differences, if any, between the transactions that are compared or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effects of such differences. A reading of Proviso to Rule 10B(4) would show that use of data relating to a period of two years prior to the current year may also be considered but with a rider that if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared . If by application of any filter an enterprise undertaking uncontrolled transaction similar to an international transaction is regarded as n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the principal transaction. The ld AR also contended the outstanding receivables could not be made subject matter of a TP adjustment as the same is not covered under the provisions of Section 92B of the Act. Also, it is submitted that the Assessee is a debt free company and does not bear any working capital risk since it is fully funded by its AEs. The Assessee has not incurred any interest expenses for its working capital requirement. Hence, the ld AR submitted that the Assessee does not have any interest cost in the funds blocked on deferred receivables from AEs as it is entirely funded by its AEs for its working capital requirements. Reliance in this regard is placed on the following decisions:- (i) Avnet India (P.) Ltd. v. DCIT (reported in [2016] 65 taxmann.com 187 (Bangalore-Trib) (ii) The appeal against the above order came to be dismissed by the Hon ble High Court of Karnataka in PCIT and Anr. V. Avnet India (P.) Ltd. (Order dated 01.08.2018 passed by the Hon ble High Court of Karnataka in ITA No. 358/2016). (iii) Goldstar Jewellery Ltd. v. JCIT (reported in [2015] 53 taxmann.com 353 (Mumbai-Trib) where the Tribunal held as follows:- 25. Without prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standing receivables under weighted average method using LIBOR + 300 basis points applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: (c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? 23.6. Ld.CIT.DR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Avenue Asia Advisors Pvt. Ltd v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions. 23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law. 36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon ble Karnataka High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposed in the draft assessment order and the direction issued by the DRP are as under: Expenses Amount of disallowance DRP directions Addition of Trade Payables Rs. 85,20,015 (being 30% of the total trade payables amounting to Rs. 28,00,052/-) If the Assessee submits the confirmation of trade payables, the AO was directed to not disallow 30% of the trade payables. Rent expenses Rs. 11,77,73,967/- (being 30% of the rent expenses amounting to Rs.3,92,57,989) Assessing Officer was directed not to make any disallowance. Legal and professional charges Rs. 1,51,47,298/- (being 30% of the expenses amounting to Rs. 5,04,90,993/-) If the Assessee submits proof of TDS payments, the AO was directed to not disallow 30% of the trade payables. Repair and maintenance Rs. 1289671/- (being 30% of Rs. 42,98,904/-) The DRP has failed to adjudicate on the said issue. Recruitment expenses Rs. 3,27,448/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished details of TDS deducted (page 957 of the paperbook), Form 16 issued to LinkedIn Ireland (page 958-961 of the paperbook) and challans evidencing appropriate deduction of TDS under Section 195 of the Act (page 962-964 of the paperbook). (vi) As regards the disallowance Rs. 19,19,969/-made towards reimbursement of expenses, it is submitted that Rovi Corporation, USA rolled out a plan to reward the employees which is termed as Bravo Rewards . The cost incurred by Rovi Corporation, USA for such rewards is allocated based on number of awards issued by each group entities and the cost is cross-charged to the group entities on a cost to cost basis without any mark-up. It is submitted that the Bravo Rewards points are taxed in the hands of the employees as perquisites and accordingly, the Assessee has deducted taxes under Section 192 of the Act. Since the payments had already suffered TDS under Section 192 of the Act, it is submitted that no TDS is required on the reimbursements made. (vii) With respect to forex loss, it is submitted that accrual wise / invoice wise details of foreign exchange loss amounting to Rs. 47,12,278/- was furnished before the AO (pages 970-97 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yables being a balance sheet entry, no disallowance can be made while computing the assessed income. Without prejudice, ld AR also submitted that out of the total trade payables amounting to Rs. 2,84,00,052/-, an amount of Rs. 1,86,91,371/- is disclosed as Sundry creditors as at 31 March 2016 and the balance amount of Rs. 97,08,681/- is towards provision of expenses disclosed under the head other liabilities-expenses. It is submitted that the above details were furnished before the AO under the rectification application dated 05.05.2021. 34. We heard the rival submissions and perused the material on record. We notice that the assessee has furnished the following details before the lower authorities: (i) The details of the trade payables amounting to Rs. 2,84,00,052/- along with PAN and address of the parties are furnished at pages 965-966 of the paperbook (ii) With respect to the trade payables amounting to Rs. 1,86,91,371/-, the Assessee has obtained confirmation from Rovi Corporation which is at page 967 of the paperbook. (iii) The balance amount of Rs. 3,61,606/- pertaining to Bharati Airtel Ltd., the Assessee has furnished copies of invoices at pages 968-969 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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