2022 (8) TMI 1449 - AT - Income Tax

TP Adjustment - Interest on receivables - adoption of the LIBOR rate - TPO held hat CUP is being applied and therefore interest that would be charged by an unrelated party for lending a loan in open market is being applied - submissions was limited to the adoption of the LIBOR rate against Indian interest rates (14.47% being return on BBB rate Bonds) as trade receivables where USD-denominated - HELD THAT - Adoption of LIBOR plus appropriate markup is considered appropriate benchmark for international transaction of USD-denominated trade receivables as against the use of the rate of interest prevalent in India. With respect to the mark-up that has been charged over and above LIBOR it is well accepted that such arbitrary numbers cannot be adopted without it being backed by a benchmarking exercise which is a mandate of the law. Ruling in the case of M/s. Bioplus Life Sciences Private Limited 2022 (2) TMI 1402 - ITAT BANGALORE pertains to the different financial year. Moreover during the course of the TP assessment the assessee has pressed for mark up of 300 to 400 basis points over and above the LIBOR rate and the same cannot be brought down to 200 basis points merely on the basis of the strength of ruling given in different case considering the facts of that case. Given the variability of interest rate on a time-to-time basis we direct the TPO to determine the appropriate mark up to be charged over and above the LIBOR rate. Interest has been imputed for the entire year on the receivables instead of the remaining delayed beyond six months - We find merit in the submission of the learned DR that the period mentioned in the agreement between the assessee and AE should not be considered for the purpose of benchmarking and even to determine whether trade receivable constitutes an international transaction. The very purpose of undertaking benchmarking exercise is to compare the tainted transaction i.e. the transaction between two related parties/AEs with that of transactions that are carried on by independent parties on arm s length basis. If we consider the period allowed in the agreement to benchmark the transaction which is also the subject matter of the same agreement it would lead to absurd results. We accordingly direct the AO / TPO to determine the credit period allowed by the comparable companies and treat only such trade receivables that are outstanding beyond the arm s length credit period as international transactions. Once the above exercise has been done we direct computation of interest for the delayed realization of trade receivable over and above the arm s length credit period till the date of its realization or the financial year end whichever is later. Transfer pricing adjustment relating to ITES segment - Comparable selection - HELD THAT - TCS E-Serve Limited is to be de-selected on the basis of application of high turnover filter. Companies with turnover of above Rs. 200 crores cannot be compared with companies with turnover of less than Rs. 200 Crores. Infosys BPO Limited - company with a turnover of Rs. 1290 crore cannot be comparable to the assessee company which has a turnover of Rs. 79 crore. Respectfully following the ruling of the coordinate Bench of the Tribunal in the case of M/s. Fulcrum Fund Services (India) Private Limited 2019 (4) TMI 2095 - ITAT BANGALORE we direct the AO/TPO to exclude this company from the list of comparables. Universal Print Systems Limited - TPO has selected the pre-press BPO segment - We note that the AO / TPO has selected the BPO segment. ITAT in the case of M/s. XL Health Corporation India Private Limited 2018 (4) TMI 82 - ITAT BANGALORE has not considered / adjudicated the availability of segment information. In the interest of natural justice we deem it appropriate to remand the matter back to the file of AO /TPO to examine the applicability of the ruling as referred above in the view of the availability of segment information. If the segment information is not reliable or if the company fails employee / any filter at a segment level we direct the TPO to exclude this as comparable. It is ordered accordingly. Excel Infoways Limited (Segment) - As submission of the learned AR that the company Excel Infoways Limited fails the employees filter and has unreliable data. This contention of the assessee which is elaborated at para 21 (supra) was not raised before any of the authorities. Therefore for necessary verification of the matter the issue of exclusion of Excel Infoways Limited is restored to the files of the TPO. The TPO is directed to examine the contentions raised which mentioned supra and shall verify whether Excel Infoways Limited satisfies the employees cost filter. Negative Working Capital Adjustment - assessee is a captive service provider which is entirely funded by the AE and it does not have any borrowings - HELD THAT - The nature of the assessee its arrangement with its AE and financial particulars to allow the relief on the basis of which the above rulings have been rendered are not forthcoming from the documents available on records. There is no whisper in the orders of the lower authorities with respect to these factual aspects. As the issue requires examination of various facts we direct the AO/TPO to consider the same in the light of the jurisdictional rulings on negative working capital adjustment in the case of captive service providers and allow the relief to the assessee. Accordingly ground 9.5 is allowed for statistical purposes.

Summary

Issues Involved:
1. Interest on receivables
2. Transfer pricing adjustment relating to Information Technology Enabled Services (ITES) segment
3. Negative working capital adjustment

Detailed Analysis:

1. Interest on Receivables:
Facts and Arguments:
The Transfer Pricing Officer (TPO) re-characterized the closing balance of receivables as an international transaction of loan, applying a 14.47% interest rate based on government bonds rated BBB by CRISIL. The assessee contended that the LIBOR rate should be applied instead, with an additional markup of 2%, as the trade receivables were USD-denominated.

Tribunal's Findings:
The Tribunal agreed with the assessee, referencing the case of M/s. Bioplus Life Sciences Private Limited v. DCIT, which supported using LIBOR + 2% for such international transactions. The Tribunal directed the TPO to determine the appropriate markup over the LIBOR rate.

Period of Interest Computation:
The Tribunal found merit in the Departmental Representative's argument that the credit period should be benchmarked against comparable companies' practices, not the agreement between the assessee and its AE. The TPO was directed to determine the arm's length credit period and compute interest only for receivables outstanding beyond this period.

2. Transfer Pricing Adjustment Relating to ITES Segment:
Facts and Arguments:
The TPO made adjustments to the ITES segment, rejecting certain comparables and selecting others. The assessee sought the exclusion of four companies (TCS E-serve Limited, Infosys BPO Limited, Universal Print Systems Limited, and Excel Infoways Limited) based on turnover and functional incompatibility.

Tribunal's Findings:
- TCS E-serve Limited and Infosys BPO Limited: The Tribunal directed their exclusion, referencing the case of M/s. Fulcrum Fund Services (India) Private Limited v. ITO, which held that companies with a turnover above Rs. 200 crores are not comparable to those with significantly lower turnover.
- Universal Print Systems Limited: The Tribunal remanded the issue back to the TPO to verify the reliability of segment information and applicability of the ruling in the case of XLHealth Corporation India Private Limited v. ACIT.
- Excel Infoways Limited: The Tribunal remanded the issue to the TPO to verify whether the company satisfies the employee cost filter, as the assessee raised new contentions regarding the reliability of data.

3. Negative Working Capital Adjustment:
Facts and Arguments:
The assessee, a captive service provider funded entirely by its AE, argued against the negative working capital adjustment made by the TPO, which artificially enhanced the ALP.

Tribunal's Findings:
The Tribunal noted that the nature of the assessee and its financial particulars were not adequately examined by the lower authorities. The issue was remanded to the AO/TPO for consideration in light of jurisdictional rulings on negative working capital adjustment for captive service providers.

Conclusion:
The appeal was partly allowed. The Tribunal directed the TPO to:
- Apply LIBOR + appropriate markup for interest on receivables.
- Exclude TCS E-serve Limited and Infosys BPO Limited from the list of comparables.
- Re-examine the comparability of Universal Print Systems Limited and Excel Infoways Limited.
- Reconsider the negative working capital adjustment in light of relevant jurisdictional rulings.