Motherson Sumi Infotech & Designs Ltd. Vs DCIT (ITAT Delhi)
We find that the next issue raised is against the transfer pricing adjustment made on account of interest due on receivables outstanding. The said issue stands covered in favour of the assessee by the decision of the Tribunal in M/s. Global Logic India Ltd. for Assessment Year 2010-11 in ITA No.1104/Del/2015 and for Assessment Year 2012-13 in ITA No.11 15/Del/2017 vide order dated 12.12.20 17. The Tribunal has relied on the decision of Hon’ble Delhi High Court in Pr. CIT-V vs Kusum Health Care Pvt. Ltd. in ITA No.765/2016, judgement dated 25.04.2017 and held that no adjustment is to be made on account of notional interest on receivables by relying upon Explanation (i), (a) & (c) of section 92B by treating the continued debt balance as an international transaction. Moreover when the taxpayer is debt free company, there is no question of charging any interest on Receivables.
The assessee during the year under consideration had not avail any loan from AEs or unrelated third parties and was not incurring any interest cost. Further, there was similar delay in receipt of receivables from others and the assessee was not charging any interest on delay in receipt of receivables against services rendered to unrelated third parties.
In such facts and circumstances and following the ratio laid down by the Hon’ble Delhi High Court in Kusum Healthcare Ltd. (supra) and also in line with the findings of the Tribunal in M/s. Global Logic India Ltd. (supra), we find no merit in making any adjustment on account of interest due on receivables from its AE. Ground of appeal raised by the assessee in this regard is thus allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeal filed by assessee is against order of DCIT, Circle-17(i), New Delhi dated 28. i0.20i5 relating to assessment year 20i i-i2 against the order passed under section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).
2. The assessee has raised following grounds of appeal:-
“That on the facts and circumstances of the case, and in law:
1. The assessment order passed by the Learned Assessing Officer (‘Ld. AO’) pursuant to the directions of Learned Dispute Resolution Panel (‘Ld. DRP’) is bad in law and void ab-initio.
2. The Ld. AO / Learned Transfer Pricing Officer (Ld. TPO ‘) (following the directions of the Ld. DRP, have erred on facts and in law in enhancing the income of the Appellant by Rs. 3,46,60,211/-.
2.1. The Ld. TPO erred on the facts and in the circumstances of the case and in law in framing the order u/s 92CA of the /ncome Tax Act, 1961 (‘the Act’) on findings which are erroneous in law, contrary to the facts and based on mere conjectures and surmises.
2.2. The Ld. TPO failed to appreciate the submissions made/ contentions raised by the Appellant and further erred in making several allegations, observations, assertions and inferences in the order, which were both factually incorrect as well as legally untenable.
3. The Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition of Rs. 3,17,63,342/- to the income of the Appellant proposed by the Ld. TPO by holding that its international transactions pertaining to’ provision of software development services do not satisfy the arm’s length principle envisaged under the Act and in doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO’s action of:
3.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case;
3.2. disregarding the Arm’s Length Price (,ALP’) as determined by the Appellant in the Transfer Pricing (‘TP’) documentation maintained by it in terms of section 92D of the Act read with Rule 1 OD of the /ncome-tax Rules, 1962 (‘Rules’) as well as fresh search; and in particular modifying/ rejecting the filters applied by the Appellant;
3.3. rejecting comparability analysis undertaken by the Appellant in the TP documentation/updated mark-up computations and conducting a fresh comparability analysis based on application of additional / revised filters, or disregarding Appellant’s filters in determining the ALP for the international transactions;
3.4. disregarding multiple year! prior years’ data as used by the Appellant in the TP documentation and holding that current year 5i.e. Financial Year (‘FY’) 2010-111 data for comparable companies should be used;
3.5. including companies having high mark-ups! volatile operating profit mark-ups in the final comparables’ set for benchmarking a low risk unit such as the Appellant;
3.6. including certain companies in the final set of comparables that are not comparable to the Appellant in terms offunctions performed, assets employed and risks assumed;
3.7. resorting to arbitrary rejection of low-profit! loss making companies and companies with diminished revenues based on erroneous and inconsistent reasons:
3.8. excluding certain companies on arbitrary!frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed;
3.9. by committing a number of factual !computational errors in selection! rejection of proposed comparables and! or in the operating profit mark-ups of the comparables;
3.10. ignoring the business! commercial reality that the Appellant undertakes limited business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact;
3.11. by making the addition to the entire value of transactions entered into by the Appellant in its export segment and not only to the value of international transactions entered into by the Appellant (i.e. proportionate adjustment) and ignoring established jurisprudence in this regard;
3.12. disregarding the analysis and documentation submitted by the Appellant to benchmark the international transaction pertaining to provision of software development services by using internal Comparable Uncontrolled Price as the most appropriate method to determine the arm’s length price;
3.13. disregarding the analysis and documentation submitted by the Appellant to benchmark the international transaction pertaining to provision of software development services by using internal Transactional Net Margin Method as the most appropriate method to determine the arm’s length price;
3.14. disregarding the fact that internal comparable analysis is preferable over external comparable analysis; and
3.15. disregarding judicial pronouncements in /ndia in undertaking the TP adjustment.
4. The Ld. AO/Ld. TPO erred in facts and in law in enhancing the income of the Appellant by Rs. 28,96,869/- by treating the receivables outstanding beyond 30 days from associated enterprises as deemed loan and charging notional interest;
5. The Ld. DRP erred in disregarding the detailed arguments/ submissions put forth by the Appellant during the course of the DRP 1 assessment proceedings while passing its direction section 144C of the Act;
6. The Ld. AO has grossly erred by proposing to compute interest under section 234A, 234B, 234C and 234D of the Act;
7. The Ld. AO has grossly erred in initiating penalty under section 271(1)(C) of the Act mechanically and without recording any satisfaction for its initiation.”
3. The only issue raised in the present appeal is against the transfer pricing adjustment made on account of international transaction of rendering Software Development Services to the AEs amounting to Rs.3,46,60,21 1/-.
4. Briefly in the facts of the case, the assessee was engaged in providing customized Software Development Services to the customer of its Associated Enterprises (in short AE). The assessee was compensated at cost plus markup of 10% for rendering the said Software Development Services. During the year under consideration, the assessee had undertaken few international transactions with its AE, which were reported in its TP study report. The assessee had selected TNMM method to benchmark its international transactions, with OP/TC as Profit Level Indicator (in short PLI) at 10.0 1%. The assessee selected 16 companies as functionally comparable, whose mean margins worked to 13.08%. The assessee thus in the TP study report pointed out that its international transaction were at Arm’s Length Price. The Assessing Officer made reference under section 92 CA(1) of the Act to the TPO to benchmark Arm’s Length Price of the international transaction of provision of Software Development Services by the assessee to its AE. The TPO noted certain defects in the transfer pricing study report and also the application of average margin of three years by the assessee and proposed that only data for contemporaneous period had to be applied. He also revised the filters to be applied and show caused assessee with a fresh list of comparables of 18 companies, whose mean margin worked out to 22.32%. Admittedly there was no dispute on FAR analysis and the PLI to be adopted. The TPO in the order passed under section 92CA(3) of the Act also proposed an adjustment on account of interest on receivables from AE. The TPO thus proposed an upward adjustment of Rs. 05,01,36,985/-. The Assessing Officer in the draft assessment order show caused the assessee as to the upward adjustment to be made in its hand. The assessee filed objection before the DRP, which in turn directed exclusion of two concerns i.e. Infosys Ltd. and eZest Solutions Ltd. and inclusion of Think Soft Global Services Ltd. The DRP also directed that working capital adjustment is to be allowed. The DRP directed application of LIBOR rates instead of SBI PLR lending rates for the adjustment to be made on account of interest on Receivable. Consequent to the directions of DRP, the AO/TPO drew up final list of comparable totaling 17, whose mean margins worked to 19.04% and made upward adjustment of Rs.3,46,60,21 1/-. The AO/TPO also reworked the adjustment to be made on account of interest on Receivables. The Assessing Officer passed the consequent order making upward adjustment of Rs. 3,46,60,211/- against which the assessee is in appeal before us.
5. The ground of appeal nos. 1 and 2 are general in nature and does not require any adjudication. The issue raised in ground of appeal no. 3 is against the transfer pricing adjustment made on account of provision of Software Development Services by the assessee to its AE totaling Rs. 3,17,63,342/- . By way of ground of appeal no. 4, the assessee is aggrieved by the adjustment of Rs. 28,96,869/- made on account of interest due on receivable from AE. The ground of appeal no. 5 raised by the assessee is general in nature and does not require any adjudication. The ground of appeal no. 6 raised by the assessee against charging of interest under section 234A, 234B and 234D of the Act, as per learned AR for the assessee is consequential. Hence the same is dismissed. The ground of appeal no. 7 raised by the assessee against the initiation of penalty proceedings is premature and the same is dismissed.
6. Now coming to the issue of adjustment of international transaction of provisions of Software Development Services by the assessee to its AE. The learned AR for the assessee brought to our notice that in case out of the total list of comparable finally selected by the AO/TPO, few concerns are excluded then the margins shown by the assessee would be within range and no adjustment on account of transfer pricing issue related to provision of software development services need to be made in the hands of the assessee.
7. We shall deal with the arguments of the learned AR and learned DR for the Revenue in respect of the each of the comparables in the paras dealing with the same.
8. The assessee is engaged in provision of Software Development Services to its AE. For benchmarking aforesaid international transaction, Transactional Net Margin Method (in short TNMM) is applied. The list of finally selected comparables by the AO/DRP/TPO is as under:-
