2019 (6) TMI 1567 - AT - Income Tax

TP Adjustment - comparable selection - assessee had selected TNMM as the most appropriate method for determining ALP - HELD THAT - The assessee renders software development services in the field of telecom and communication segments to its parent AE Uniwiredsoft USA. The conceptual framework technical specifications and basic design for development of software is provided by Uniwiredsoft USA to the assessee and on the said design and specifications assessee designs develops and tests the software. The assessee has entered in to an agreement with the AE for provision of software development service in the nature of providing roaming solutions. The assessee operates as a software development service provider for which it earns remuneration at cost plus 15% markup from its AE. Thus companies functionally dissimilar with that of assessee need to be deselected from final list. E-Infochips Ltd. is not comparable to the assessee which is mainly engaged in providing software development services to its AE hence we direct the AO/TPO to exclude E-Infochips Ltd. from the list of comparables. Wipro Technologies Limited (Wipro) has generated its entire revenue pursuant to the master service agreement having its huge scale of operation as compared to taxpayer and the fact that the taxpayer is a routine captive service provider the ld. CIT (A) has rightly excluded. E Zest solutions Ltd. exclude the same on the ground that it is providing high end technical services and as such is a KPO and not a software development company. C G VAK Software Exports Ltd. ( CG VAK ) - TPO as well as the DRP were erred in excluding CG VAK Software and Exports Ltd. from the list of final set of comparables even though there is no adverse remark about functional similarity between two companies hence we direct the TPO to include CG-VAK Software and Exports Ltd. in the final set of comparables for determination of arithmetic mean margin to benchmark international transactions with its AE. R Systems International Ltd.- TPO has accepted this company as comparable in earlier AY 2010-11 and later AY 201213. Therefore we are of the considered view that when functions carried out by this company are similar to the functions carried out by the assessee and also the TPO accepted this company in earlier years and subsequent years there is no reason for the TPO to exclude this company for the year under consideration without their being any change in facts and circumstances. DRP after considering relevant facts has rightly directed the TPO to include R Systems International Ltd. in the final set of comparables for determination of Arm s Length Price of international transactions with AE. We are inclined to uphold the findings of Ld. DRP and dismissed the appeal filed by the Revenue. Interest receivables from both AE as well as non-AE for delay in receipt of sale proceeds - HELD THAT - In absence of any findings as to the fact that the assessee has allowed undue benefit to the AE by extending credit period for realisation of sundry debtors and such extension of credit period benefits the AE no adjustment could be made under the TP provisions of the Act to benchmark interest receivables on hypothetical or notional basis because late realisation of export receivable /sundry debtors cannot be considered as advancing loans and advance to the subsidiary or AE. This finding is fortified by the decision of in the case of CIT vs Indo American Jewellers Ltd. 2013 (1) TMI 804 - BOMBAY HIGH COURT where it was held that there was complete uniformity in act of assessee in not charging the interest from AE as well as non-AE debtors for delay in realisation of export proceeds then no adjustment could be made towards interest on delayed realisation of sundry debtors in course of TP proceedings. Therefore, we are of the considered view that the AO as well as the DRP were erred in benchmarking interest receivables on delayed recovery of sundry debtors from AE hence we direct the AO to delete adjustment made towards interest receivable on sundry debtors.

Summary

Issues Involved:
1. Addition to Total Income
2. Requisite Conditions under Section 92C(3)
3. Cherry Picking of Comparable Companies
4. Incorrect Selection of Comparable Companies
5. Incorrect Rejection of Comparable Companies
6. Inconsistency in Approach while Selecting/Rejecting Comparable Companies
7. Incorrect Application of Arbitrary Filter
8. Incorrect Margin Calculations
9. Disregarding No Intention of Shifting Profits
10. Use of Multiple Year Data
11. Adjustment as per Rule 10B(1)(e)(iii)
12. Interest on Outstanding Debtors
13. Initiation of Penalty Proceedings under Section 271(1)(c)
14. Computation of Interest under Sections 234B, 234C, and 234D

Detailed Analysis:

1. Addition to Total Income:
The Tribunal addressed the addition of INR 3,64,56,910 to the total income of the assessee, which was confirmed by the Dispute Resolution Panel (DRP) based on the provisions of Chapter X of the Income-tax Act.

2. Requisite Conditions under Section 92C(3):
The Tribunal noted that the Assessing Officer (AO) and Transfer Pricing Officer (TPO) did not state reasons to show that any conditions under clauses (a) to (d) of Section 92C(3) were satisfied before making the addition to the income.

3. Cherry Picking of Comparable Companies:
The Tribunal examined the assessee's claim that the AO and TPO arbitrarily selected certain companies to benchmark the international transaction of payment for software services. The Tribunal found that the TPO's approach of rejecting loss-making companies but accepting high-profit companies like E-infochips Ltd. was inconsistent.

4. Incorrect Selection of Comparable Companies:
The Tribunal scrutinized the selection of certain companies by the TPO and DRP, which ignored the assessee's submissions regarding the rejection of those companies. The Tribunal concluded that companies like E-infochips Ltd., Wipro Technologies Ltd., and E-Zest Solutions Ltd. were not comparable to the assessee due to functional differences and abnormal profits.

5. Incorrect Rejection of Comparable Companies:
The Tribunal found that the TPO and DRP erred in rejecting CG-VAK Software & Exports Ltd. as a comparable, as it was not a persistent loss-making company and had earned profits during FY 2010-11.

6. Inconsistency in Approach while Selecting/Rejecting Comparable Companies:
The Tribunal highlighted the inconsistency in the TPO's approach by rejecting Vama Industries Ltd. for providing engineering services but accepting E-infochips Ltd., which also provided similar services.

7. Incorrect Application of Arbitrary Filter:
The Tribunal found that the DRP applied an arbitrary filter of software development services more than 50% to select companies like E-infochips Ltd. and Wipro Technologies Ltd., which was unwarranted.

8. Incorrect Margin Calculations:
The Tribunal directed the AO and TPO to consider the correct margin of comparable companies after finding errors in the calculations.

9. Disregarding No Intention of Shifting Profits:
The Tribunal noted that the assessee was claiming tax exemption under Section 10A and had no intention to shift profits outside India, which should have been considered before making any adjustment.

10. Use of Multiple Year Data:
The Tribunal addressed the rejection of the plea for using multiple year data as specified in the Proviso to rule 10B(4) of the Income Tax Rules, 1962.

11. Adjustment as per Rule 10B(1)(e)(iii):
The Tribunal found that the AO and TPO did not make appropriate adjustments to the comparable companies as required by Rule 10B(1)(e)(iii), rendering the benchmarking exercise inconsistent with the law.

12. Interest on Outstanding Debtors:
The Tribunal examined the adjustment of INR 8,74,585 using LIBOR plus 2% for benchmarking notional interest cost. The Tribunal concluded that no adjustment could be made on a hypothetical or notional basis, as the assessee did not charge interest from both AE and non-AE for delayed receipts.

13. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal directed the AO to drop the penalty proceedings initiated under Section 271(1)(c) of the Act.

14. Computation of Interest under Sections 234B, 234C, and 234D:
The Tribunal directed the AO to re-compute the interest under Sections 234B, 234C, and 234D of the Act.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee and dismissed the appeal filed by the Revenue. The Tribunal directed the AO/TPO to re-compute the arithmetic mean of comparables and to exclude certain companies while including others based on the detailed analysis provided.