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TMI Blog2022 (7) TMI 1400X X X X Extracts X X X X X X X X Extracts X X X X ..... re the margin of that year should be exclude while computing the average margin of that company - As relying on BORQS Software Solutions P. Ltd. case. [ 2021 (10) TMI 1351 - ITAT BANGALORE] we direct the AO to exclude the margin for AY 2015-16 of while arriving at the 3 year average profit of Infobeans Technologies Ltd. Working capital adjustment - TPO did not allow any adjustment on the working capital as upheld by DRP - In the view of the ruling in the case of M/s. Huawei Technologies India (P) Ltd.[ 2018 (10) TMI 1796 - ITAT BANGALORE] the basis of rejection of the relief by the DRP is no longer valid -We therefore direct the AO/TPO to consider the working capital adjustment in the light of the aforesaid ruling and allow appropriate adjustment in arriving at an arm s length price. TP adjustment towards interest on outstanding receivables - TPO treated the outstanding receivables from AE as in the nature of loan facility given to the AE and imputed interest @ 6 months LIBOR plus 450 basis points which works out to 4.985% - HELD THAT:- Respectfully following the decision of the coordinate Bench of the Tribunal in the case of Barracuda Networks (I) P. Ltd. [ 2022 (5) TMI 322 - ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length price [ALP] of the international transactions with Associated Enterprises [AE]. The TPO made TP adjustment in SWD segment and interest on receivables for an amount of Rs.11,50,59,080. The AO passed the draft assessment order incorporating the TP adjustment. In addition to TP adjustment, the AO also made a disallowance of depreciation on goodwill claimed by the assessee. The assessee filed objections before the DRP. 4. The DRP confirmed the TP adjustment and the addition towards depreciation on goodwill. The DRP's directions with respect to interest on delayed receivables resulted in an increase of TP adjustment by Rs.34,35,189. Consequently, the AO passed the final assessment order against which the assessee is in appeal before the Tribunal. TP adjustment in SWD segment 5. During the year under consideration, the assessee has entered into the following international transactions with its AE:- International transaction Value(INR) Billing (Revenue) 1,02,94,57,156/- Direct Salary & other Cost 64,09,05,083/- Business SG&A other cost 24,65,57,982/- Total 1,02,94,57,156/- 6. The assessee adopted Transactional Net Margin Method [TNMM] as the Most Appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing the decision of BORQS Software Solutions P. Ltd. (supra) has held as follows:- "13. We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. v. ITO (supra) has considered a host of rulings on this issue including that of Hon'ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that the application of the turnover filter is justified on the basis of the classification of companies as per the report of Dun and Bradstreet. Since the assessee, in the present case, has disclosed an operating income of Rs.39,91,36,436, companies reporting turnover above a threshold are considered not comparable. Accordingly, by following the order of the Tribunal, we direct the AO / TPO to apply the appropriate upper turnover filter and exclude the following 7 companies having turnover in excess of Rs.200 crores:- (i) Larsen and Toubro Infotech Limited (ii) Nihilent Technologies Limited (iii) Persistent Systems Limited (iv) Thirdware Solutions Limited (v) Infosys Limited (vi) Aspire Systems (India) Priva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... average of three years profit margin of this company. We direct accordingly." 16. Respectfully following the above decision of the Tribunal, we direct the AO to exclude the margin for AY 2015-16 of while arriving at the 3 year average profit of Infobeans Technologies Ltd. 17. The next issue contended is with regard to the working capital adjustment. The TPO did not allow any adjustment on the working capital [pg. 51 of TP order] and the same is upheld by the DRP [pg. 58 & 59 of DRP directions]. The ld. AR submitted that it is a settled principle that working capital adjustment is to be granted as per actuals and in this regard placed reliance on the decision of Huawei Technologies India (P) Ltd. v. JCT reported in [2019] 101 taxmann.com 313 (Bang) wherein it was held that the working capital adjustment should be allowed as per actuals. 18. The ld. DR supported the directions of the DRP. 19. We have heard rival submissions and perused the material on record. In the view of the ruling in the case of M/s. Huawei Technologies India (P) Ltd. v. JCIT (supra), the basis of rejection of the relief by the DRP is no longer valid. The relevant findings of the Tribunal in the case of M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 20. We therefore direct the AO/TPO to consider the working capital adjustment in the light of the aforesaid ruling and allow appropriate adjustment in arriving at an arm's length price. 21. The assessee in ground Nos.3.1 to 3.7 contended that the TP adjustment towards interest on outstanding receivables. The TPO treated the outstanding receivables from AE as in the nature of loan facility given to the AE and imputed interest @ 6 months LIBOR plus 450 basis points ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We have carefully considered the rival submissions. On the question whether delayed realization of trade receivables from the AE constitutes an international transaction or not, there are conflicting decisions of various benches of the Tribunal, which we shall point out. section 92B of the Act defining what is an international transaction was amended by Finance Act, 2012, way of insertion of an Explanation to section 92B with retrospective effect from 1-4-2002 and the same reads thus:- "Explanation- For the removed of doubts, it is hereby clarified then-(i) the expression "international transaction" shall include-- (a) to (b). ** ** ** (c) capital financing, including any type of long-term or short- term borrowing. lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment of receivable or any other debt arising during the course of business: …………" The amendment is to the effect that "international transaction" would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business' and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement does not specify the term of the payment, even then assessee must be given benefit of credit period which is accepted business practice in the trade. The ITAT confirmed 30 days as the normal credit period adopted by the TPO. 42. The foregoing discussion discloses that non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. 43. Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his extent cannot give rise to a separate international transaction of interest uncharged. Rather interest for the period in excess of normally realizable period in an uncontrolled situation upto 150 days needs to be considered in the determining the ALP of the international transaction of the 'Provision of IT Enabled data conversion services'. This can be done by increasing the revenue charged by the comparable companies with the amount of interest for the period between that allowed by them in realization of invoices and 150 days as allowed by the assessee, so as to bring such comparables at par with the assessee's international transaction of provision of the ITES. To illustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B stipulates that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. We hold and direct accordingly. All issues on determination of ALP of the transaction are kept open." 24. Respectfully following the decision of the coordinate Bench of the Tribunal in the case of Barracuda Networks (I) P. Ltd. (supra), we hold that interest on receivables is a separate international transaction and separate benchmarking is required to be done. We therefore remit the issue to the TPO for fresh examination and take into consideration the guidelines laid down in the aforesaid decision of the Tribunal. The TPO is also directed to verify and consider the fact that the payables from AE is more than the receivable from AE as submitted by the assessee. Needless to say that the assessee be given opportunity of being heard. It is ordered accordingly. Disallowance of Depreciation on Goodwill -- Ground Nos. 4.1 to 4.8 -- INR 4,56,52,308/- 25. The Assessing Officer in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case in hand in their true perspective. It has to be understood that there was no goodwill in the books of amalgamating companies and only after the scheme of amalgamation, when the amalgamating companies amalgamated, goodwill came into existence being the difference between the consideration paid by amalgamated company over and above the net asset value of the amalgamating companies. The reliance placed on the judgment of coordinate bench is misplaced in as much as in that case the value of the goodwill in the books of amalgamating company was only Rs. 7.45 crores which has been shown by the assessee at Rs. 62.30 crores and on this it was held by the appellate authority that the assessee has failed to justify the valuation of goodwill at Rs. 62.30 crores. The facts of the case in hand clearly show the valuation of goodwill as per the valuation report and there is no quarrel in so far as the net asset value of the amalgamating companies is concerned. The same has the sanction of the Hon'ble High Court. 61. Another argument of the DR is that the assessee has not paid anything for the goodwill acquired in business reconstruction. No consideration can be ascrib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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