Home Case Index All Cases Income Tax Income Tax + AT Income Tax - 2020 (12) TMI AT This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2020 (12) TMI 458 - AT - Income TaxTP Adjustment - software development services undertaken by the Appellant - Rejection of transfer pricing documentation maintained - comparable selection - HELD THAT:- Referring to software development and related support services in the field of unified data storage solutions of assessee L & T Infotech Ltd. generates revenue from three clusters namely service cluster, industrials cluster and telecom cluster and also develops products like Unitrax, AccuRASI. From the perusal of the annual report of the said comparable, we also find that the said company has got high risk profile, intangibles and huge brand value unlike the assessee company.. We also find that the said comparable is having huge turnover of ₹ 3613 Crores. Even on this aspect, the said comparable cannot be held to a valid comparable with that of the assessee engaged in software development having turnover of ₹ 29.84 crores. Exclusion of Persistent Systems Ltd. - The said comparable is functionally not comparable with the assessee engaged in software development services. We also find that the turnover of the assessee company is ₹ 29.84 Crores which is very low when compared to that of Persistent Systems. We find that the turnover of Persistent Systems is more than 10 times higher than the turnover of the assessee company, so even on the aspect of huge turnover, this comparable cannot be held as valid comparable and hence not comparable with the assessee. Exclusion of CG-VAK Software and Exports Ltd.- Said comparable is to be excluded due to non-availability of segmental information and hence, not comparable to the assessee engaged in software development. Computation Error in Segmental Margin in the case of Mind Tree Ltd. - TPO erroneously applied the incorrect margin computation in the case of Mind Tree Ltd., while passing the order pursuant to the directions of the ld. DRP. The ld. AR before us furnished the workings of the correct net margins to be adopted for Mind Tree Ltd., after allocating unallocated expenses and pleaded that the said working be restored to the file of the ld. TPO for his verification. The ld. DR also fairly agreed for restoration of the same. Hence, we deem it fit and appropriate to remand inclusion of Mind Tree Ltd., in the list of comparable for the limited purpose of verification of the margins. The workings furnished by the assessee before us should be placed before the ld. TPO for his verification and the ld. TPO is hereby directed to examine the same and arrive at the correct margins thereon. After exclusion of the aforesaid three comparables i.e. Persistent Systems Ltd., to L & T Infotech Ltd., and CG-VAK Software and Exports Ltd., from the final list of comparables and after considering the correct margins of Mind Tree Ltd.,rithmetic mean of comparables would work out to 15.19% as against assessee’s margin at 15.21% and therefore, the entire transactions would be at arm’s length. We direct the ld. TPO to delete the adjustment made in the software distribution segment. Adjustment made by imputing interest on outstanding receivables - DRP rejected the plea of the assessee that working capital adjustment would take into account the impact of outstanding receivables - HELD THAT:- It is not in dispute that assessee in the instant case had realized invoices on its AEs beyond the agreed credit period as per the service agreement. The realization of invoices were made with abnormal delay. This, in our considered opinion, tantamount to indirect funding made by the assessee to its AEs by allowing the AE to utilize funds of the assessee as per its whims and fancies. Merely because the assessee is a debt free company, it cannot allow its funds to be utilized by its AE for an indefinite period of time beyond the agreed credit period. Manifestly, in the instant case, the deferred receivables falls squarely within the ambit of debt arising during the course of business which is included in the category of expression “capital financing” under clause C of Explanation of Section 92B of the Act. Hence, we hold that the outstanding receivables from AE constitute a separate international transaction and on which interest is to be imputed thereon and consequently ALP adjustment to be made. Hence, the primary argument made by the ld. AR that the adjustment made on account of outstanding receivables cannot be construed as an international transactions is hereby rejected and dismissed. Rate of interest to be applied for the purpose of imputation and calculation of arm’s length price adjustment account - Since, the assessee had to receive its outstanding receivables from its AE in foreign currency, it would be just and fair to adopt LIBOR rate + 200 basis points for the purpose of imputation of interest beyond the agreed credit period as per the agreement till the date of realization or till the end of the Financial year, whichever is earlier. Any understanding or arrangement between the assessee and its AE which is detrimental to revenue or against the principles of scheme of Chapter X of the Income Tax Act, 1961, cannot come to the rescue of the assessee. Hence, merely because, there is no provision for chargeability of interest in the agreement entered with AEs for delayed realization and merely because assessee does not pay any interest to its AEs on the payables, the revenue cannot be deprived of its legitimate share in accordance with the scheme of Chapter X of the Act and the purpose behind the provisions of Chapter X. Outstanding receivables from AEs would constitute a separate international transaction on which imputation of interest is to be made by applying LIBOR + 200 basis points
|