Techbooks International Pvt. Ltd. Vs DCIT (ITAT Delhi)
The Income Tax Appellate Tribunal (ITAT) adjudicated cross appeals filed by the assessee and the Revenue against the assessment order passed under Sections 144C read with 143(3) of the Income-tax Act, 1961 for Assessment Year 2011-12. The assessee challenged various transfer pricing adjustments relating to IT enabled data conversion services rendered to its Associated Enterprise (AE), while the Revenue challenged directions of the Dispute Resolution Panel (DRP) concerning certain comparables.
The assessee, a wholly owned subsidiary of Aptara Inc., USA, was engaged in providing IT enabled data conversion services to its AE. It benchmarked the international transaction under the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) accepted TNMM but modified the set of comparables, resulting in a transfer pricing adjustment of ₹21,38,93,273. The DRP granted partial relief by excluding certain comparables, leading both parties to file appeals.
One of the principal issues before the Tribunal concerned the treatment of foreign exchange fluctuation gains. The assessee contended that foreign exchange gains arising from revenue transactions with its AE should be treated as operating revenue while computing operating margins. The Tribunal accepted the contention, observing that such gains directly arose from consideration received for rendering IT enabled services and therefore formed part of operating revenue. It remitted the matter to the Assessing Officer (AO)/TPO for recomputation of the operating margins of both the assessee and the comparables after including foreign exchange gains relating to revenue transactions while excluding gains attributable to capital transactions.
The assessee also sought risk adjustment on the ground that it functioned as a captive service provider. The Tribunal referred to its decision in the assessee’s own case for Assessment Year 2010-11 and observed that risk adjustment could not be granted merely because the assessee was a captive entity. It held that the assessee had failed to objectively demonstrate the comparatively higher risks undertaken by the comparable companies and therefore declined to grant the adjustment.
The Tribunal then considered objections regarding comparable companies. The assessee challenged the inclusion of Eclerx Services Limited, ICRA Techno Analytics Limited and Acropetal Technologies Limited on the ground that they were functionally different. The Tribunal observed that these companies broadly provided IT enabled services and held that they could not be excluded merely because of differences in business models or customer profiles.
Regarding inclusion of CG Vak Software and Exports Ltd. and Calibre Business Point Business Solutions Ltd., the Tribunal followed its earlier decision in the assessee’s own case. It held that a comparable should not be rejected solely because of low turnover if it was otherwise functionally comparable. In the case of companies having different financial year endings, it directed the AO/TPO to verify whether relevant financial year data could be reliably derived from annual reports and, if so, include them accordingly.
On the Revenue’s appeal concerning Infosys BPO Ltd., TCS e-Serve Ltd., Accentia Technologies Ltd., Cosmic Global Ltd. and Informed Technologies India Ltd., the Tribunal again followed its earlier decision. It directed exclusion of Infosys BPO Ltd. and Accentia Technologies Ltd. because of extraordinary corporate events affecting comparability. It upheld inclusion of TCS e-Serve Ltd. as functionally comparable and retained Cosmic Global Ltd. in the final set of comparables. In respect of Informed Technologies India Ltd., it upheld the DRP’s direction requiring verification of turnover before deciding inclusion or exclusion. The Tribunal ultimately remitted the determination of the arm’s length price of the international transaction relating to IT enabled data conversion services to the AO/TPO for fresh adjudication in accordance with its directions.
The Tribunal also examined the transfer pricing adjustment relating to delayed realization of receivables from the AE. The TPO had treated outstanding receivables beyond 60 days as a separate international transaction and computed notional interest. The assessee argued that the inter-company agreement permitted a credit period of 150 days and did not provide for charging interest. The Tribunal held that, in view of the retrospective amendment to Section 92B by the Finance Act, 2012, excess credit period constituted an international transaction requiring arm’s length determination. However, it observed that the agreed credit period of 150 days had already been factored into the pricing of services and therefore interest should be computed only for delays exceeding 150 days, rather than 60 days.
As regards the applicable interest rate, the Tribunal followed the Delhi High Court decision in Cotton Natural [I] Pvt. Ltd. and held that the currency of repayment determined the appropriate benchmark interest rate. The matter was remitted to the AO/TPO for fresh computation of the transfer pricing adjustment on delayed receivables in accordance with these directions.
Accordingly, both the assessee’s appeal and the Revenue’s appeal were partly allowed for statistical purposes.
Cases Discussed
• Cotton Natural [I] Pvt Ltd (Delhi High Court), order dated 27.3.2015
• Ciena India Pvt. Ltd. Vs. DCIT (Delhi ITAT), ITA No.3324/Del/2013
• CIT Vs. Agnity India Technologies (P.) Ltd. (Delhi High Court), (2013) 219 Taxman 26 (Del)
• Petro Araldite (P) Ltd. Vs. DCIT (Mumbai ITAT), (2013) 154 TTJ (Mum) 176
• National Thermal Power Corporation vs. C.I.T., (229 ITR 383)
• Jute Corporation of India vs. C.I.T., (187 ITR 688)
• Ahmadabad Electricity Co. Ltd., (199 ITR 351)
FULL TEXT OF THE ORDER OF ITAT DELHI
