2025 (7) TMI 1489 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Cybage Software P. Ltdcompany has declared income from Software Services with segmental bifurcation of Export Turnover and Domestic Turnover. But there is no segmental data of income from Services and Products. Since no segmental data of Revenue is available Cybage cannot be treated as comparable. Hence the TPO/AO is directed to exclude said company for the list of comparables. Sagarsoft (India) Ltd. - As per the Financials there is no product development by the company. From perusal 24th Annual Report relating to Financial Year 2019-20 of the company it is not emanating that there is any product development or closing stock of any product. Hence the contention of the assessee that the company is engaged in product development is unsustainable hence rejected. The assessee has further pointed that overseas travel expenditure of Sagarsoft (India) Ltd. is as high as 21.16% of the total expenditure. To contend that the said company is providing on-site services apart from the inference drawn from the travel expenditure there is no other document to show that the said company is providing on-site services. In light of above findings we are not in agreement with the assessee that Sagarsoft (India) Ltd. is is not a good comparable. Nihilent Ltd. - A perusal of the financial statements reveals that the company is engaged in providing consultancy and IT Solutions. The assessee is also engaged in providing product engineering DevOps and Scaled Agile Framework TM besides conventional IT programs. However no segmental information is available with respect to diversified services offered by the said company. There is an extra ordinary event of acquisition of business by the said company during the FY 2019-20. Therefore in our considered view the said company is not an idle comparable to be selected in the final list of comparables. Therefore TPO/AO is directed to exclude the company from the list of comparables. R Systems Ltd. - If from the available data on record the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings. Similar view has been expressed in various decision by the Tribunal from different Benches viz. American Express Services India (P) Ltd 2020 (11) TMI 132 - ITAT DELHI and Rampgreen Solutions (P) Ltd. 2023 (4) TMI 31 - ITAT DELHI The TPO/AO is thus directed to include R. Systems Ltd. in the list of comparables. Infomile Technologies Ltd company is engaged in providing software consultancy services which includes software services such as Data Services Outsource Solutions Mobile Applications Application Management Custom Designed Web Enabled Database and Application Solutions. We are not in agreement with the findings of the TPO and the DRP that the company are functionally different. The assessee and Infomile Technologies Ltd. both are rendering software development services the area of operation may differ. Therefore in our considered view the said company is a suitable comparable. The TPO is directed to include the company in the final list of comparables. Adjustment qua outstanding receivables - TPO charged interest on delayed receivables beyond 30 days by applying 6 months LIBOR plus 400 Basis point on invoice by invoice basis - As argued that working capital adjustment subsumes the effect of credit period hence separate adjustment is not required - We direct the AO/TPO to examine that if while making working capital adjustment outstanding receivable have been factored no separate adjustment is warranted for outstanding receivables as separate international transaction.

Summary

ISSUES:

Whether certain companies included or excluded as comparables in Transfer Pricing analysis are functionally comparable to the assessee for benchmarking international transactions under TNMM.Whether a company can be excluded as comparable solely on the ground of having a different financial year ending.Whether separate adjustment for interest on outstanding receivables beyond agreed credit period is warranted when working capital adjustment has been made.Whether outstanding receivables can be characterized as loans or advances to Associated Enterprises for imputing interest.Whether charging of interest under sections 234B and 234C of the Income Tax Act, 1961 is contestable in the appeal.Whether initiation of penalty proceedings under section 270A of the Income Tax Act, 1961 can be challenged at this stage.

RULINGS / HOLDINGS:

The companies Cybage Software P. Ltd. and Nihilent Ltd. are functionally dissimilar and lack segmental data to justify their inclusion; hence, they are to be excluded from the list of comparables. Cybage is a product company while the assessee is a captive service provider, and Nihilent is engaged in diversified activities including non-software services.Sagarsoft (India) Ltd. is functionally comparable as it is engaged solely in software development and consultancy without product development; the high overseas travel expenses do not conclusively establish on-site services, thus its inclusion as comparable is upheld.A company cannot be rejected as comparable merely for having a different financial year ending if it is functionally comparable and quarterly audited results are available; such financial data can be calendarized to align with the tested party's fiscal year. Accordingly, R Systems International Ltd. is to be included as comparable.Infomile Technologies Ltd., engaged in software consultancy services similar to the assessee, is functionally comparable and must be included in the list of comparables.Separate adjustment for interest on outstanding receivables is not warranted where working capital adjustment has been made that already accounts for the impact of receivables on profitability; imputing additional interest would distort the pricing and re-characterize the transaction impermissibly.Outstanding receivables cannot be characterized as loans or advances to Associated Enterprises for the purpose of imputing interest without proper benchmarking analysis.Charging of interest under sections 234B and 234C of the Act is consequential and mandatory; thus, the appeal against such interest is dismissed.Challenge to initiation of penalty proceedings under section 270A at this stage is premature and dismissed.

RATIONALE:

The Transfer Pricing analysis is governed by the Income Tax Act, 1961, and the application of the Transactional Net Margin Method (TNMM) requires selection of functionally comparable companies to benchmark international transactions.Functional comparability is assessed based on the nature of business activities, availability of segmental data, and similarity in services rendered; absence of segmental data and diversified activities justify exclusion of certain companies.Precedents establish that different financial year endings do not preclude inclusion as comparables if financial data can be reasonably aligned (calendarized) with the tested party's fiscal year; reliance is placed on authoritative decisions affirming this principle.Working capital adjustments incorporate the cost of capital tied up in accounts receivable, inventories, and payables, thereby subsuming the effect of credit periods; additional interest imputation on receivables beyond the agreed credit period is thus legally impermissible as it results in double counting and distortion.Judicial precedents, including decisions affirmed by the High Court, emphasize that outstanding receivables should not be treated as separate international transactions if working capital adjustments are properly made.Interest under sections 234B and 234C is statutory and consequential upon tax defaults, leaving no scope for contestation in the transfer pricing appeal.Penalty proceedings under section 270A are distinct and their challenge is premature at the assessment appeal stage.