2020 (12) TMI 235 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee-company is engaged in the business of sale of user license of enterprise application software, software development and rendering software related services to the group companies and external parties thus companies functionally dissimilar with that of assessee need to be deselected. Exclusion of Comparable with turnover huge and uncomparable - TPO has excluded the loss companies and also the companies which are with lowest margins - Companies rejected as persistent loss company. Charging of interest on receivables - A.R argued that credit period of 150 days need to be allowed in assessee s case, since, the industry average is 150 days as against the average period allowed by the AO for 30 days - HELD THAT - After the amendment of law inserting Explanation to section 92B of the Act, the interest on trade receivables also became an international transaction and therefore, the ALP adjustment is required to be made in respect of trade receivables also. Accordingly ITAT has decided the issue against the assessee in the earlier years in assessee s own case for the A.Y.2013-14 and 2014-15 - Accordingly, we direct the TPO (AO) to allow credit period of 90 days or the industry average and only in respect of the deviation, the interest to be considered for ALP adjustment. Interest to be charged as per Libor or SBI interest rate - HELD THAT - The issue has already been considered by the Tribunal in the earlier year and held that interest to be charged as per SBI short term deposit rates. Since there are no changes in the facts, respectfully following the view taken by this tribunal in assessee s own case, we hold that interest is to be charged at the rates of short term deposits of SBI as decided by the ITAT in it s earlier year orders. Accordingly, this issue is remitted back to the file of TPO (AO) to recompute the interest. Appeal of the assessee on this ground is treated as allowed for statistical purposes.

Issues Involved:
1. Addition to the appellant's total income.
2. Inclusion of functionally dissimilar companies as comparables.
3. Rejection of certain companies as comparables.
4. Incorrect computation of margins for specific companies.
5. Rejection of appellant's transfer pricing study.
6. Risk adjustment denial.
7. Classification of bad debts and provisions as non-operating expenditure.
8. Denial of working capital adjustment.
9. Treatment of receivables from associated enterprises as separate international transactions.
10. Interest on delayed trade receivables.
11. Inconsistency with previous assessment orders.
12. Use of SBI short-term deposit rates instead of LIBOR.
13. Breach of principles of natural justice.

Detailed Analysis:

1. Addition to the Appellant's Total Income:
The appellant challenged the addition of INR 4,60,53,538 to their total income. The Tribunal dismissed the general grounds of appeal (Ground Nos. 1, 5, and 13) as they were considered general in nature.

2. Inclusion of Functionally Dissimilar Companies as Comparables:
The appellant argued that certain companies were incorrectly included as comparables by the TPO. These companies included Infosys Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Tata Elxsi Ltd. (Seg), Persistent Systems Ltd., Thirdware Solution Ltd., Cybage Software Pvt. Ltd., and others. The Tribunal agreed with the appellant regarding Infosys Ltd., Larsen & Toubro Infotech Ltd., and Mindtree Ltd., stating these companies are giant companies in software development and not comparable to the appellant. Similarly, Tata Elxsi Ltd., Thirdware Solutions Ltd., and Persistent Systems Ltd. were excluded due to the non-availability of segmental details. Cybage Software Pvt. Ltd. was excluded due to abnormally high margins.

3. Rejection of Certain Companies as Comparables:
The appellant requested the inclusion of companies like Evoke Technologies Pvt. Ltd., InfoMile Technologies Ltd., I2T2 India Ltd., Kireeti Soft Technologies Ltd., SagarSoft India Ltd., Akshay Software Technologies Ltd., and Harbinger Systems Pvt. Ltd. The Tribunal dismissed the request for Akshay Software Technologies Ltd. and Harbinger Systems Pvt. Ltd. as not pressed. For SagarSoft India Ltd., the Tribunal upheld its exclusion due to persistent losses.

4. Incorrect Computation of Margins for Specific Companies:
The appellant argued that the margins for Nihilent Technologies Ltd., Thirdware Solution Ltd., and Sasken Communication Technologies Ltd. were incorrectly computed. The Tribunal directed the TPO to recompute the margins for Nihilent Technologies Ltd. and Sasken Communication Technologies Ltd. after providing the appellant an opportunity to present their case.

5. Rejection of Appellant's Transfer Pricing Study:
The TPO rejected the appellant's transfer pricing study due to defects in filters and conducted a fresh benchmarking. The Tribunal upheld the TPO's decision to reject the appellant's transfer pricing study.

6. Risk Adjustment Denial:
Ground No. 6 was not pressed by the appellant during the appeal hearing and was dismissed as not pressed.

7. Classification of Bad Debts and Provisions as Non-Operating Expenditure:
Ground No. 7 was not pressed by the appellant during the appeal hearing and was dismissed as not pressed.

8. Denial of Working Capital Adjustment:
Ground No. 8 was not pressed by the appellant during the appeal hearing and was dismissed as not pressed.

9. Treatment of Receivables from Associated Enterprises as Separate International Transactions:
The Tribunal upheld the AO/TPO/DRP's adjustment of INR 1,05,81,517 on account of interest on receivables, stating that the interest on trade receivables became an international transaction after the amendment to section 92B of the Act.

10. Interest on Delayed Trade Receivables:
The Tribunal directed the TPO to allow a credit period of 90 days or the industry average and to compute the interest on the deviation. The interest should be charged at the rates of short-term deposits of SBI, as decided by the ITAT in the earlier year's orders.

11. Inconsistency with Previous Assessment Orders:
The Tribunal did not provide a separate adjudication for this ground as it was considered general in nature.

12. Use of SBI Short-Term Deposit Rates Instead of LIBOR:
The Tribunal upheld the use of SBI short-term deposit rates for computing interest on receivables, following the decision in the earlier year's orders.

13. Breach of Principles of Natural Justice:
The Tribunal did not provide a separate adjudication for this ground as it was considered general in nature.

Conclusion:
The appeal filed by the assessee was partly allowed, and the stay application was dismissed. The Tribunal provided specific directions for the exclusion of certain comparables, recomputation of margins, and adjustment of interest on receivables. The order was pronounced in open court on October 19, 2020.

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