Etisalat Software Solutions Pvt. Ltd. Vs DCIT (ITAT Bangalore)
The appeal arose from the final assessment order for Assessment Year 2018-19 making transfer pricing adjustments in respect of software development services rendered by the assessee, a subsidiary of Emirates Telecommunications Group Company PJSC engaged in software development and telecom support services for its associated enterprise. The Transfer Pricing Officer (TPO) rejected the assessee’s set of comparables, selected a new set of comparables with a higher average margin, proposed a transfer pricing adjustment on software development services, and also made a separate adjustment towards notional interest on outstanding receivables by applying the SBI short-term deposit rate. The Dispute Resolution Panel partly accepted and partly rejected the assessee’s objections, following which the final assessment order was passed.
Before the Tribunal, the assessee primarily challenged the adjustment relating to notional interest on outstanding receivables and the inclusion and exclusion of various comparable companies. Regarding outstanding receivables, the assessee contended that the receivables were part of the principal international transaction, stood subsumed in the arm’s length price of software development services, and that it was a debt-free company funded by its associated enterprise, thereby incurring no working capital cost. The Tribunal referred to judicial precedents dealing with outstanding receivables and working capital adjustments and held that the issue required fresh examination. It directed the Assessing Officer/TPO to verify whether the working capital adjustment already subsumed the outstanding receivables. If so, no separate transfer pricing adjustment should be made. For receivables not covered by the working capital adjustment, the Tribunal directed that interest, if chargeable, should be computed at LIBOR plus 300 basis points after allowing a credit period of 90 days. The issue was accordingly remanded for fresh adjudication.
