Income Tax Appellate Tribunal - Bangalore
Verifone India Technology Private ... vs Deputy Commissioner Of Income Tax, ... on 9 February, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER
AND
Ms. PADMAVATHY S, ACCOUNTANT MEMBER
IT(TP)A No.835/Bang/2022
Assessment year : 2018-19
Verifone India Technology Vs. The Assessment Unit,
Private Limited, National Faceless Assessment
A 101, Cyber Park, Centre, Delhi [NFAC], Delhi /
Plot No.76, 77 & 78,
Doddathogur Village Hobli, DCIT, Circle 7(1)(1),
Bengaluru - 560 100. Bangalore.
PAN: AACCV 1683k
ASSESSEE RESPONDENT
Assessee by : Shri Ankur Pai, Advocate
Respondent by : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 06.02.2023
Date of Pronouncement : 09.02.2023
ORDER
Per Padmavathy S., Accountant Member
This appeal is against the order of the AO, Assessment Unit, Income Tax Department, u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 [the Act] dated 22.07.22 for the assessment year 2018-19.
2. The assessee is a subsidiary of Verifone Singapore Pte Limited and provides software development services and technical support services to Verifone Ireland. The assessee filed e-filed its return of IT(TP)A No.835/Bang/2022 Page 2 of 22 income on 22.03.2019 declaring the taxable income of Rs.25,73,38,410/-. The return was processed under section 143(1) of the Act and was subsequently selected for scrutiny assessment. During AY 2018-19, the assessee has the following international transactions with its Associated Enterprise ("AE"):-
Received / Paid /
International transaction Receivable Method
Payable
Provision of software
development services and 1,17,82,2,502 TNMM
Technical support services
Reimbursement of expenses 49,29,001 TNMM
Outstanding receivables 43,60,79,625 TNMM
Outstanding payables 1,17,862 TNMM
3. The assessee had received Rs.1,17,82,23,502/- from its AE in respect of the software development services and Technical support services provided. The assessee had selected Transaction Net Margin Method ("TNMM") as the Most Appropriate Method ("MAM") and had computed its margin at 20.59% on operating cost (page 1081 of paper book). The assessee further carried out the search for uncontrolled comparables using Prowess and Capitaline Database which yielded a set of 17 comparable companies with 35th and 6th percentile range of the weighted average operating profit/total cost of the comparable companies of 8.53% to 15.55% and median of 10.94%. Since the profit margin of the Assessee at 20.59% on operating cost was higher than the arm's length range, the profit margin earned by the Assessee in the software development and technical support services segment was treated at arm's length (page 1000-1001 of paper book).
IT(TP)A No.835/Bang/2022 Page 3 of 22
4. The TPO rejected the TP study and conducted fresh analysis. The TPO agreed that TNMM was to be applied as the MAM. The assessee in its TP Study had considered Software developments services and Technical support services together for benchmarking analysis. The TPO has drawn the segmental by dividing Operating Cost in the ratio of revenue earned in respective segment. The TPO benchmarked both the segments separately i.e., Software Development segment and Technical Support Services segment. The TPO imputed interest on outstanding debtors and treated the same as an international transaction The TP Officer benchmarked the same applying SBI Short term deposit (interest rate of 6.57%). The TPO accordingly passed the order dated 30.07.2021 under section 92CA of the Act making the following TP adjustments:
Particulars Amount Rs
Software development segment 2,63,25,392
Technical support services segment 87,43,481
Interest on outstanding debtors 2,85,04,062
Total 6,35,72,935
5. The AO passed the draft assessment order dated 18.09.2021 including the transfer pricing adjustment of Rs.6,35,72,935/- made by the TP Officer in his order passed under section 92CA of the Act. The Assessee filed its objections before the Hon'ble Dispute Resolution Panel ("DRP"). The DRP vide directions dated 08.06.20,22 provided partial relief to the assessee. The TPO has passed the order dated 11.07.202.2 giving effect to the directions of the DRP proposing adjustment of Rs.3,30,01,484/- as under:-
IT(TP)A No.835/Bang/2022 Page 4 of 22 Particulars As per TP Officer After DRP Amount Rs Amount Rs Software development segment 2,63,25,392 NIL Technical support services 87,43,481 44,97,422 segment Interest on outstanding debtors 2,85,04,062 2,85,04,062 Total 3,30,01,484
6. The AO passed the final assessment order dated 22.07.2022 making the TP adjustment of Rs.3,30,01,484/-. The assessee being aggrieved by the TP addition is in appeal before the Tribunal.
7. Ground No.1 and Ground Nos.2.1 to 2.3 are general not warranting separate adjudication. The assessee raised ground no.2.4 to 2.18 with regard to TP adjustment in the Technical support service segment. During the course of hearing the ld AR submitted that if ground no.2.13 pertaining to TPO not applying the upper turnover filter and Ground No.2.14 pertaining to working capital adjustments are adjudicated in favour of the assessee the rest of the grounds raised in this regard would become academic. Ground No.2.19 is related to notional interest charged on outstanding receivables. Ground No.3 is consequential.
TP adjustment in Technical Support Services segment
8. The assessee in the Technical Support Services Segment provides assistance to Verifone Ireland in the configuration and maintenance of Oracle Applications production environment that are used by Verifone Group for its internal business functions (page 965 of paper book). The functions, asset and risk analysis ("FAR analysis") as IT(TP)A No.835/Bang/2022 Page 5 of 22 per the TP study is available at pages 983 to 991 of paper book. The assessee was characterized as a risk mitigated service provider. For the AY 2018-19, the Assessee had received Rs.1,17,82,23,502/- from its AE in respect of the software development services and Technical support services provided which included Rs.18,28,49,028/- towards Technical support services. The assessee selected TNMM as the MAM and had computed its margin at 20.59% on operating cost (page 1081 of paper book). The assessee in its TP Study had considered Software developments services and Technical support services together for benchmarking analysis.
9. The assessee further carried out the search for uncontrolled comparables using Prowess and Capitaline Database which yielded a set of 17 comparable companies with 35th and 65th percentile range of the weighted average operating profit/total cost of the comparable companies of 8.53% to 15.55% and median of 10.94%. Since the profit margin of the Assessee at 20.59% on operating cost was higher than the arm's length range, the profit margin earned by the assessee in the software development and technical support services segment was treated at arm's length.
10. The TPO rejected the TP documentation of the assessee and conducted fresh benchmarking analysis. The TPO has drawn the segmental by dividing Operating Cost in the ratio of revenue earned in respective segment. The TPO benchmarked both the segments separately.
IT(TP)A No.835/Bang/2022 Page 6 of 22
11. With respect to the Technical support services segment, the TPO applied certain filters and treated the same as ITES segment. The TPO selected 17 comparable companies which included 16 new companies as comparables, while 1 company selected by the assessee was retained. The list of the final set of comparables selected by the TP Officer is as under:-
Average S.No. Company name of 3 years (OP/OC) 1 Jindal Intellicom Ltd. 7.41% 2 Microland Ltd 8.58% 3 Datamatics Business Solutions Ltd 13.41% 4 Fuzen Software Pvt Ltd 15.75% 5 Tech Mahindra Business Services Ltd 18.85% 6 Infosys BPM Services Pvt Ltd 20.95% 7 CES Ltd (seg) 21.77%• 8 Manipal Digital Systems Pvt Ltd 23.54% 9 Domex E Data Pvt Ltd 26.34% Vitae International Accounting 10 Services Pvt Ltd 27.35% 11 AGS Health Pvt Ltd 27.64% 12 Ultramarine & Pigment Ltd (seg) 33.28% 13 Access Healthcar4 Services Pvt Ltd 39.03% 14 Inteq BPO Services Pvt. Ltd. 39.15% 15 Motif India Infotech Pvt Ltd 45.72% 16 Eclerx Services Ltd 46.85% 17 MPS Ltd 61.83% 35th Percentile 20.95% Median 26.34% 65th Percentile 33.28%
12. Accordingly the TPO determined the ALP as follows:-
IT(TP)A No.835/Bang/2022 Page 7 of 22 Particulars - ITES segment As per TP Officer Total Operating Revenue (Rs) 18,28,44,758 Total Operating Expenses (Rs) 15,16,44,957 Operating Profit (Rs) 3,11,99,801 OP/ OC (percent) 20.57% Median (percent) 26.34% Arm's length price 19,15,88,239 TP adjustment (Rs) 87,43,481
13. The assessee filed its objections before the DRP. The DRP rejected the objections of the assessee seeking exclusion of Fuzen Software Pvt Ltd., Tech Mahindra Business Services Ltd., Infosys BPM Services Pvt Ltd., Manipal Digital Systems Pvt Ltd., Vitae International Accounting Services Pvt Ltd., Domex E Data Pvt Ltd., Inteq BPO Services Pvt Ltd., Eclerx Services Ltd and MPS Ltd. The DRP rejected the objections of the assessee seeking inclusion of Athena BPO Pvt Ltd., Allsec Technologies Ltd., Bhilwara Infotechnology Ltd., One Point Solutions Ltd., Cosmic Global Ltd., Cameo Corporate Services Ltd., and Surevin BPO Services Ltd. The DRP accepted the objections of the assessee and directed exclusion AGS Health Pvt Ltd., Ultramarine & Pigment Ltd., and Access Healthcare Services Pvt Ltd. The DRP accepted the objections of the assessee and directed inclusion of Suprawin Technologies Ltd. as comparable if it qualifies all filters.
14. The TPO has passed the order dated 11.07.2022 giving effect to the directions of the DRP and has excluded Ultramarine & Pigment Ltd and Access Healthcare Services Pvt Ltd from the final list, but he has IT(TP)A No.835/Bang/2022 Page 8 of 22 not included Suprawin Technologies Ltd as comparable since it does not pass the net-worth filter. The TPO however has not followed the direction of the DRP which had specifically directed to exclude the comparable 'AGS Health Pvt Ltd'. The TPO in the consequential order determined the 35th to 65th percentile at 20.95% to 27.35% with median at 23.54% based on the weighted average operating profit/total cost of the 15 comparable companies in ITES segment. The TP Officer computed the adjustment as under:
Particulars - ITES segment Total As per TP Officer -
Consequential to DRP
Operating Revenue (Rs) 18,28,44,758
Total Operating Expenses (Rs) 15,16,44,95,7
Operating Profit (Rs) 3,11,99,801
OP/ OC (percent) 20.57%
Median (percent) 23.54%
Arm's length price 18,73,42,180
TP adjustment (Rs) 44,97,422
15. Ground No.2.13 pertaining to TPO not applying the upper turnover filter reads as follows -
"2.13 The learned AO/learned TPO/Hon'ble DRP grossly erred in not applying the upper limit for the turnover filter. The learned AO/learned TPO/Hon'ble DRP erred in not considering the underlying factor that the companies having high turnover has the benefit of economies of scale."
16. The ld AR submitted that the TPO while applying the turnover filter has excluded the companies whose turnover is more than Rs.1 crore but failed to apply the upper turnover filter of Rs.200 crores for IT(TP)A No.835/Bang/2022 Page 9 of 22 the purpose of exclusion. The ld AR submitted that the turnover of the assessee in this segment is Rs.18.28 crores and accordingly the companies with more than Rs.200 crores turnover should be excluded. In this regard the ld AR relied on the decision of the coordinate bench of the Tribunal in the case of Sapa Extrusions India Pvt Ltd (IT(TP)A No.791/Bang/2022 dated 16.11.22).
17. The ld DR relied on the order of the lower authorities.
18. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in the case of Sapa Extrusions India Pvt Ltd(supra) has considered a similar issue and held that -
20. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:
17.7. We have considered the rival submissions. The 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.
IT(TP)A No.835/Bang/2022 Page 10 of 22 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 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 as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital IT(TP)A No.835/Bang/2022 Page 11 of 22 Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not 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).
21. In view of the aforesaid decision, we hold that 7 companies listed in the earlier paragraph 7 of this order whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies................"
19. In assessee's case the turnover of the assessee is Rs.18.28 crores and therefore respectfully following the above decision of the coordinate bench we hold that the below listed companies whose turnover is more than Rs.200 crores be excluded:-
S No Comparable Turnover
(Rs / crore)
1 Microland Ltd 618.11
2 Infosys BPM Services Pvt Ltd 3,071.00
3 Motif India Infotech Pvt Ltd 207.08
4 Eclerx Services Ltd 1,150.69
5 MPS Ltd 220.90
6 Tech Mahindra Business Services Ltd 709.30
7 AGS Health Pvt Ltd 319.97
20. Ground No.2.14 pertaining to TPO not providing working capital adjustment reads as follows -
IT(TP)A No.835/Bang/2022 Page 12 of 22 "2.14 The learned AO/learned TPO/Hon'ble DRP grossly erred in not providing an adjustment for difference in working capital between the Assessee and the comparable companies."
21. The ld AR submitted that the TPO did not provide for working capital adjustment which is confirmed by the DRP. The ld AR prayed for working capital adjustment being provided on actual basis and in this regard relied on the decision of the coordinate bench in the case of Huawei Technologies India (P) Ltd., (2019) 101 taxmann.com 313 (Bang).
22. The ld DR supported order of the lower authorities
23. We heard the rival submissions and perused the material on record. We notice that similar issue of working capital adjustment came up for consideration before the coordinate Bench of the Tribunal in the case of Huawei Technologies India Pvt. Ltd. (supra) wherein it was held as under:-
"15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons:
(i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year.
(ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made.
IT(TP)A No.835/Bang/2022 Page 13 of 22
(iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and IT(TP)A No.477/Bang/2021 Page 8 of 20 therefore working capital adjustment done without such break up would result in computation being skewed.
(iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results.
16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. 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 IT(TP)A No.835/Bang/2022 Page 14 of 22 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 on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable.
17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows:
IT(TP)A No.835/Bang/2022 Page 15 of 22 "(3) An uncontrolled transaction shall be comparable to an international transaction if--
(i) none of the differences, if any, between the transactions being compared, or between 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."
24. 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.
25. Ground 2.19 pertaining to notional interest charged on receivable reads as follows -
"Grounds related to interest on outstanding receivables 2.19 The learned AO/ learned TPO/ Hon'ble DRP grossly erred in law and facts by charging notional interest on delayed trade receivables and thereby erred in making an addition of INR 2,85,04,062/- hereby:
i. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in considering delayed trade receipts as "unsecured loans"
advanced to the Associated Enterprises ('AEs') for the period of delay, and thereby erred in imputing an interest on the same during the year.
IT(TP)A No.835/Bang/2022 Page 16 of 22 ii. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in treating a delay in receivables or deferred receivables as a separate international transaction, whereas, it is only the realization of the service proceeds, incidental to the primary transaction of provision of services. Further, learned AO/ learned TPO/Hon'ble DRP grossly erred in not considering that the delay in receivables or deferred receivables does not fall within the purview of capital financing as stated under Sec. 92B of the Act.
iii. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in not appreciating the fact that the Act provides for taxing only real income whether received or accrued under the regular provisions and does not provide for taxing notional income.
iv. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in not appreciating the fact that transfer pricing adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income.
v. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in charging notional interest on delayed receivables without appreciating the fact that the Assessee does not have any cost of debt and not following the Supreme Court decision in the case of Bechtel India Private Limited. [TS-591-SC-2017 TP] vi. The learned AO/ learned TPO/Hon'ble DRP have erred in not appreciating that the Assessee did not charge interest on delayed receivables from non-AE's vii. The learned AO/ learned TPO/ Hon'ble DRP grossly erred in imputing interest on delayed receivables once the primary transaction has been tested by the TPO and has been accepted to be at arm's length while selecting the Transactional Net Margin Method ("TNMM").
viii. Without prejudice to the above, Hon'ble DRP has erred in upholding the SBI short term deposit rate of 6.57 percent for one year to compute the adjustment for interest on delayed receivables.
IT(TP)A No.835/Bang/2022 Page 17 of 22 ix. The Hon'ble DRP while upholding the order of the learned AO/ learned TPO erred in not appreciating that the learned AO/ learned TPO had not adopted any of the methods prescribed under the Income-tax Rules, 1962 ("Rules").
x. The learned AO/ learned TPO/Hon'ble DRP have erred in concluding the interest on delayed receivables as an international transaction without analyzing the impact of the receivables on the working capital of the Assessee and the benefit if any, received by the AE.
xi. The learned AO/ learned TPO/Hon'ble DRP have erred in computing the adjustment on the average of the receivables on 31 March 2017 and 31 March 2018 without computing the adjustment on actual period of delay beyond the grace period."
26. The TPO issued a detailed show cause notice on 17.07.2021 requiring the assessee to submit its reply before 20.07.2021. The assessee filed an adjournment letter for which the TPO granted 3 days time i.e., until 23.07.2021. However, according to the assessee, due to Covid-19 pandemic, the assessee and its Consultant's offices were not fully functional and therefore, sufficient time was required to collate the necessary details / evidences to prepare detailed response. The assessee filed a detailed response on 23.07.2021 which has not been considered by the TPO as the order under section 92CA was passed on 30.07.2021 ex-parte.
27. The TPO imputed notional interest on delayed receivables treating the same as international transaction. The TPO computed the interest on delayed receivables by taking the average trade receivables / payables as on 31.03.2017 and 31.03.2018 and adopted notional interest rate of 6.57% for one year being SBI Short Team Deposit IT(TP)A No.835/Bang/2022 Page 18 of 22 Interest Rate, without providing the method of computation of such rate to the assessee. The TPO therefore made adjustment of Rs.2,85,04,062. The DRP upheld the addition made by the TPO. Aggrieved, the assessee is in appeal before the Tribunal.
28. The ld. AR submitted that the TPO has not provided the workings of the adjustment determined in respect of interest on outstanding receivables and the basis for considering SBI short term deposit rate for benchmarking. It was submitted that the assessee is debt-free and invited our attention to Pages 941-942 of paper book. Therefore, the assessee does not bear any working capital risk as there are no working capital contingencies. Accordingly, no borrowed funds are used to pass on any presumed benefit to AE. The assessee also does not pay any interest to its creditors or suppliers on delayed payments. Since, it is debt free company, it was submitted that no adjustment can be made towards notional interest on receivables.
29. Reliance is placed on the decision of the Delhi Bench of this Hon'ble ITAT in the case of Bechtel India Pvt. Ltd. v. DCIT ITA No.:1478/Del/2015. It is further submitted that the decision of the ITAT has been approved by the Hon'ble Delhi High Court in PCIT v. Bechtel India Pvt. Ltd. I74 No.379/2016 and the SLP' before the Hon'ble Supreme Court in this regard has been dismissed.
30. Without prejudice to the above, the ld AR submitted that the TPO adopted SBI Short Team Interest Rate of 6.57% while computing the delay in receiving the receivables which has been upheld by the IT(TP)A No.835/Bang/2022 Page 19 of 22 DRP. This Tribunal has been directing to apply LIBOR rates for computing interest on receivables.
31. The ld. AR further submitted that the agreement with the AE specifies that the assessee has to furnish a report within 1 month from the end of each quarter and the payment would be made no later than end of the month immediately following the month in which the report is received by the AE (page 1095 of paper book). The assessee therefore submits that there is no fixed credit period for each invoice. Reliance is placed on the decision of this Tribunal in the case of Subex Limited [IT(TP)A No.2579/Bang/2019] wherein the Tribunal has granted 90-days credit period. The assessee therefore prays that 90- day credit period may be allowed in the present case.
32. The ld. AR further submitted that the action of the TPO is wrong on facts and principles. The TPO ought to have given an opportunity to the assessee to explain the issue. Failure to give an opportunity before enhancement has resulted in violation of principles of natural justice. Reliance is placed on the decision of this Tribunal in the case of the assessee for AY 2016-17 [IT(TP)A No.290/Bang/2021] wherein, the Tribunal under similar circumstances has remitted the issue to the TPO for determining the ALP, i.e., interest on delayed receivables by following the Rules. Reliance is also placed on the recent decision of this Tribunal in the case of Safran Engineering Services Private Limited IT(TP)A No.907/Bang/2022 (AY 2018-19).
IT(TP)A No.835/Bang/2022 Page 20 of 22
33. We heard the ld DR. We notice that the coordinate bench in the case of Safran Engineering Services India Pvt Ltd (supra) has considered a similar issue and held that -
"10. We have heard rival submissions and perused the material on record. On identical facts, the Tribunal in assessee's own case for assessment year 2017-2018 (supra) had restored the matter to the AO / TPO with specific directions to determine the ALP with regard to interest on delayed receivable by following the rules with a proper benchmarking study. The contentions raised by the learned AR and the findings of the Tribunal, in assessee's own case for assessment year 2017-2018, reads as follows:-
"5. The ld. AR submitted that the assessee is not disputing the view taken by the AO/TPO that the delayed receivable is an international transaction. He submitted that once it is considered to be international transaction, then it is imperative for the TPO to determine the ALP under one of the prescribed methods. The ld. AR further submitted that the TPO has not carried out any benchmarking analysis as per rules, but simply adopted 6 months LIBOR + 400 basis points which is against the TP provision. He also highlighted that the AO has committed computational errors where he has taken the payable figure taken as receivable for computing interest on delayed receivable and has wrongly considered the weighted average period of receipt of payments as 256 whereas the actual is 51 days. The ld AR further submitted that the assessee has filed a petition u/s. 154 [pg. 496 & 497 of PB] for rectification these mistakes apparent on record but the AO has not still passed any order in this regard. The ld. AR submitted that the TPO ignored the fact that the assessee did not charge interest on delayed receivables from non- AEs. The assessee has receivables as on 31st March for an amount of Rs.24.35 crores whereas the receivable is Rs.14.96 crores and if the same are netted off, it would result in a negative receivables position, thereby not warranting levy of any interest on delayed receivables. The ld AR also brought to our attention that the assessee is a debt-free company and it is a settled principle that no adjustment for interest on delayed receivables is warranted for debt free companies since such companies IT(TP)A No.835/Bang/2022 Page 21 of 22 are not required to pay any interest on borrowings. The ld AR relied on the decision of the Delhi Tribunal in the case of Bechtel India Pvt Ltd (ITA No.1478/Del/2015) and this order of the Tribunal is accepted by the Hon'ble Delhi High Court and the SLP filed in this regard before the Supreme Court is dismissed. It is therefore the prayer of the ld AR that the issue requires fresh examination at the end of AO/TPO.
6. Having heard the rival submissions of the parties, we are of the considered view that there is merit in the contentions raised by the ld. AR. As rightly submitted by the ld. AR, the ALP of the international transactions have to be determined by following one of the prescribed methods under the I.T. Rules. Admittedly, the TPO/DRP in the instant case has not followed the same. Accordingly, we deem it proper to remit the issue to the file of AO/TPO for determining the ALP with regard to interest on delayed receivables by following the Rules with a proper benchmarking study. The AO/TPO is also directed to rectify the mistakes done in computation of interest raised by the assessee. Needless to say that the assessee may be given a reasonable opportunity of being heard. The assessee is free to raise all the contentions before the AO/TPO."
11. Since the facts are identical for the relevant assessment year with that of the assessment year considered by the Tribunal for assessment year 2017-2018 (supra), by following the co-ordinate Bench order of the Tribunal in assessee's own case, we restore the grounds 7 and 8 with regard to the TP adjustment on interest on outstanding receivables to the files of the AO / TPO. The AO / TPO is directed to follow the directions of the ITAT in assessee's own case for assessment year 2017-2018. It is ordered accordingly."
34. In assessee's case the facts being similar respectfully following the above decision we remit the issue back to the AO/TPO for a denovo consideration after giving a reasonable opportunity of being heard to the assessee. It is ordered accordingly.
IT(TP)A No.835/Bang/2022 Page 22 of 22
35. The AO/TPO is directed to compute the ALP of the international transaction in question as per the directions contained in this order after giving a reasonable opportunity of being heard to the assessee.
36. The rest of the grounds pertaining to the TP adjustment in Technical support service segment have become academic in the light of our decision given above and therefore they are left open.
37. In result the appeal of the assessee is partly allowed.
Pronounced in the open court on this 9th day of February, 2023.
Sd/- Sd/-
( GEORGE GEORGE K. ) ( PADMAVATHY S. )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Bangalore,
Dated, the 9th February, 2023.
/Desai S Murthy /
Copy to:
1. Assessee 2. Respondent 3. CIT 4. CIT(A)
5. DR, ITAT, Bangalore.
By order
Assistant Registrar
ITAT, Bangalore.