2024 (3) TMI 1064 - AT - Income Tax

TP adjustment - ALP of Contract Software Development (CSD Segment) - Comparable selection - HELD THAT - Infobeans Technologies Ltd had declared that it was engaged in providing custom development services to offshore and was engaged in software engineering services in different fields. No segmentals were available. In such facts and circumstances we find no merit in inclusion of the said concern in the final list of comparables. We direct its exclusion. Exilant Technologies Pvt. Ltd derived substantial revenue from software development services. Thus in our view the company is functionally similar to the assessee. The impact of amalgamation on profitability needs to be examined. Since both the sides have not brought any material on record to establish the impact or otherwise of amalgamation on profitability we restore the issue to the AO for examining this aspect and thereafter decide whether it can be treated as a comparable. Cybage Software Pvt. Ltd. design and overall guidance relating to the specific software is provided by the AEs. The assessee only has to do the coding and testing as per the design provided by the AE. Thus not only the assessee doesn t bear any risk but the work executed is limited in its scope. Whereas from the annual report of the comparable it is observed that it has incurred sales promotion and marketing expenses and also owns plant equipment and other intangible assets which presupposes that it is a full risk bearing entity unlike the assessee which is more or less a no risk-entity. Therefore in our considered opinion the company cannot be selected as a comparable. Rheal Software Pvt. Ltd. excluded as it is a persistent loss making company - The company has made profit in financial year 2015-16. Thus in our view applying the filter of persistent loss making company of the TPO the company cannot be rejected. Accordingly we direct the Assessing Officer to include this company. DCIS Dot Com Solutions India Pvt. Ltd - As per the annual report of the company it has only one segment of software development and the revenue earned during the year is from software development charges. Therefore in our view the company being functionally similar to the assessee has to be treated as comparable. Adjustment of notional interest on overdue receivables from AEs - HELD THAT - From the facts discussed by the TPO it is observed that the assessee has entered into international transaction only with its AE. It is further observed invoice-wise delay worked out by the TPO varies from 27 days to 365 days. Thus by allowing AEs to retain the money beyond credit period of 30 days and in some instances for a year certainly amounts to extending benefit to the AE in utilizing the money without paying interest to the assessee. The question one needs to ask is whether the assessee would have extended such benefit to an unrelated party? In our view the answer would be in negative. Prima facie it appears that there was delay in receivables in the immediately preceding assessment year as well. However TPO needs to examine the statistics of at least three-four assessment years to discern a pattern which would indicate that the assessee has benefited the AEs through the receivables. We may also observe that in some of the decisions cited by learned Departmental Representative the co-ordinate Benches have held that the invoices raised within the financial year and payment made within the financial year but with delay may not have an impact on the opening and closing balance of outstanding receivables. Therefore it could not have been factored by the assessee in working capital adjustment. Though we are conscious of the fact that in assessment year 2017-18 the co-ordinate Bench has decided the issue in favour of the assessee however we are of the view that in the impugned assessment year the issue has not been examined in the context of principles laid down in case of Kusum Healthcare Pvt. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT . However in all fairness it must be said that there is delay in trade payable to AEs. Therefore some benefit on account of delayed payables must have percolated to the assessee. Thus it needs to be examined whether and to what extent the benefit received by the assessee on account of trade payables can be set off against the purported benefit given to the AEs on account of trade receivables. We are inclined to restore the issue to the Assessing Officer for de novo adjudication keeping in view the observations made by us (supra) and applying the ratio laid down by the Hon ble jurisdictional High Court in case of Kusum Healthcare Pvt. Ltd. The assessee must be provided reasonable opportunity of being heard before deciding the issue. Ground is allowed for statistical purposes. Difference in the income as per the books and as reflected in Form 26AS - HELD THAT - We are of the view that the issue needs re-examination at the end of the AO as facts brought on record by the assessee have not been properly examined. It goes without saying if a particular item of income has already been offered to tax either in the preceding assessment years or in subsequent assessment years the same income cannot be added in the impugned assessment year again as it amounts to double addition of the same income. If the assessee has not been given credit of TDS corresponding to such income due to the fact that income was recognized in a different assessment year but TDS was in the impugned assessment year the credit for such TDS has to be given. With the aforesaid observations issue is restored back to the AO for fresh adjudication after providing due and reasonable opportunity of being heard to the assessee. Short credit of tax collected at source - Assessee has submitted before us that an application for rectification filed u/s 154 of the Act before the Assessing Officer on the issue has been dismissed - HELD THAT - Considering the fact that assessee has already availed a remedy by way of section 154 proceedings it cannot be permitted to continue parallel proceedings on the same issue. The ground is dismissed.

Summary

Issues Involved:

1. General Grounds
2. Transfer Pricing Adjustment to the Arm's Length Price (ALP) of Contract Software Development (CSD) Segment
3. Adjustment of Notional Interest on Overdue Receivables from Associated Enterprises (AEs)
4. Addition of Income Due to TDS Reconciliation Discrepancies
5. Short Credit of Tax Collected at Source
6. Levy of Interest u/s 234C

Summary:

1. General Grounds:

Ground nos. 1 and 2 were dismissed as general in nature. Ground no. 7 was deemed premature, and ground no. 8 was consequential, hence dismissed.

2. Transfer Pricing Adjustment to the ALP of CSD Segment:

The assessee contested the inclusion and exclusion of specific comparables in the transfer pricing analysis. The Tribunal restricted its decision to five comparables.

Infobeans Technologies Ltd.: The Tribunal excluded this company as a comparable, citing functional differences and lack of segmental information, consistent with previous decisions in the assessee's own case.

Exilant Technologies Pvt. Ltd.: The Tribunal restored this issue to the Assessing Officer to examine the impact of amalgamation on profitability.

Cybage Software Pvt. Ltd.: The Tribunal excluded this company due to functional dissimilarities and different revenue recognition models.

Rheal Software Pvt. Ltd.: The Tribunal directed the inclusion of this company, noting it did not meet the persistent loss-making filter applied by the TPO.

DCIS Dot Com Solutions India Pvt. Ltd.: The Tribunal included this company as a comparable, finding it functionally similar to the assessee.

3. Adjustment of Notional Interest on Overdue Receivables from AEs:

The Tribunal restored this issue to the Assessing Officer for de novo adjudication, emphasizing the need to examine the factors responsible for the delay and whether the impact of receivables was factored into the working capital adjustment, in line with the principles laid down by the Hon'ble Delhi High Court in Kusum Healthcare Pvt. Ltd.

4. Addition of Income Due to TDS Reconciliation Discrepancies:

The Tribunal restored this issue to the Assessing Officer for re-examination, noting that the differences giving rise to the disputed addition need proper verification. If income has already been offered to tax in different assessment years, it should not be added again, and appropriate TDS credit must be given.

5. Short Credit of Tax Collected at Source:

The Tribunal dismissed this ground, noting that the assessee had already sought remedy through section 154 proceedings.

6. Levy of Interest u/s 234C:

The Tribunal directed the Assessing Officer to compute interest u/s 234C based on the returned income.

Conclusion:

The appeal was partly allowed, and the stay application was dismissed as infructuous.