SYNAMEDIA INDIA PRIVATE LIMITED ,BENGALURU V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6(1)(1), BENGALURU

SA 35/BANG/2024

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Synamedia India Pvt. Ltd. appealed against the assessment order for the assessment year 2020-21, which involved transfer pricing adjustments made by the TPO. The adjustments were based on the TPO's selection of a new set of comparable companies and the application of different filters, leading to higher profit level indicators (PLIs) compared to those submitted by the assessee. The Tribunal found issues with the transparency and clarity of the TPO's process in selecting comparables and directed a fresh review. Additionally, the Tribunal addressed the TPO's adjustment for outstanding receivables, agreeing that these constituted an international transaction requiring separate benchmarking, but adjusted the interest rate applied to these receivables.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 41338 (ITAT-BANGALORE)
• Appeal Type: Stay Application
• Pronouncement Date: 10-03-2025
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2020-2021
• Other Referred Cases: Bechtel India Pvt Ltd vs. ITA No. 6530/Del/2017, DCIT vs. AMD India Pvt Ltd in ITA No. 274/2018, Technimont Pvt Ltd in ITA No. 487/Mum/2017, AMD India Pvt Ltd vs. DCIT reported in 95 taxmann.com 531, PCIT vs. AMD India Pvt Ltd reported in 98 taxmann.com 512, DCIT Vs. Hewlett Packard India Software Operations Private Limited (2022) 149 taxmann.com 280 (Bang. Trib.), M/s IHS Global Pvt Ltd vs. ACIT bearing IT(TP) No. 1424/Bang/2024
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NANDINI DAS
• Assessee Lawyers: PADAMCHAND KHINCHA; C.A
• Keywords: Set aside; Additional evidence; Transfer pricing; International transaction; Retrospective amendment; Question of law; Arm length price
• Section: 143(3); 13; 234B; 92B; 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH, BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER IT(TP)A No. 1354/Bang/2024 Assessment Year: 2020-21 SP No. 35/Bang/2024 Assessment Year: 2020-21 Synamedia India Pvt. Ltd., Block 9A & 9B, 7th Floor, Pritech Park, SEZ, Survey No.51-64/4, Sarjapur Outer Ring Road, Bellandur Village, Bengaluru – 560 103. PAN – AACCN 1140 K Vs. The DCIT/ACIT, Circle – 6(1)(1), Bengaluru. APPELLANT RESPONDENT Assessee by : Shri Padam Chand Khincha, C.A Revenue by : Smt. Nandini Das, CIT (DR) Date of hearing : 17.12.2024 Date of Pronouncement : 10.03.2025 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: This is an appeal filed by the assessee against the assessment order dated 17/05/2024 in ITA No. ITBA/AST/S/143(3)/2024-25/ 1064958753(1) for the assessment year 2020-21. IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 2 of 14 . 2. The issues raised by the assessee through ground Nos. 1 to 3 are general in nature and do not require any separate adjustment/ adjudication relating to the determination of ALP of the international transactions. Hence, the same are dismissed as infructuous. 3. The next issue raised by assessee through ground Nos. 4 to 16 of its memo of pertains to the rejection of assessee’s TP study, application of certain filters by the TPO and selection of new set of comparable companies and thereby making TP adjustment to Distribution, SWD, ITES/TSS segments of the assessee. 4. The facts in brief are that the assessee in the present case is a private limited company and incorporated in India in 2005, with its headquarters in Bengaluru. It is engaged in providing services such as end-to-end connections for satellite, broadband IPTV, hybrid, OTT, and EPGs etc. The assessee entered into various international transactions with its AEs, which were broadly classified into the following segments: (a) R&D Software development services segment (SWD-segment) (b) Technical Support Services segment. (TSS-segment) (c) Marketing support and distribution services segment (MSD- segment) 5. The assessee benchmarked the international transactions across different segments using the TNMM, considering it the most appropriate method. The PLI for the MSD segment was taken as the operating profit to operating revenue (OP/OR) at 4.43%, whereas the PLI for the SWD and TSS segments was taken as the operating profit to operating cost IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 3 of 14 . (OP/OC) at 14.22% and 3.35%, respectively. Furthermore, the assessee selected 9, 6, and 6 different companies as comparables for the SWD, TSS, and MSD segments, respectively, and, based on a comparability analysis, claimed that the transactions carried out under different segments were at ALP. 6. The TPO rejected the filters applied by the assessee for selecting comparables and, after applying its own filters, selected a fresh set of comparable companies. Accordingly, for the Distribution/MSD segment, the TPO selected 12 companies as comparables, including 10 new companies and 2 from the assessee’s original set, and worked out a weighted average PLI of 9.1% as against the assessee’s PLI i.e. 4.43%. Similarly, for the SWD segment, the TPO selected 6 comparable companies, including only one from the original list chosen by the assessee, and worked out a weighted average PLI of 27.23% as against the assessee’s PLI of 14.22%. 7. For the TSS/ITES segment, the TPO accepted only two comparable companies out of the six selected by the assessee and further included 15 new comparable companies. Consequently, the AO worked out the PLI for the new set of 17 comparable companies at 23.71% as against the assessee’s PLI of 3.35%. 8. Thus, the TPO proposed an upward adjustment of Rs. 2,53,80,913, Rs. 30,44,14,548, and Rs. 14,61,47,124 to the Distribution/MSD segment, SWD segment, and TSS segment, respectively. IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 4 of 14 . 9. The aggrieved assessee filed an objection before the learned DRP, which, vide its order dated 18th April 2024, rejected the objections raised by the assessee. The learned DRP confirmed the upward TP adjustment made by the TPO in the Distribution/MSD segment and the SWD segment. However, it increased the adjustment in the TSS segment from Rs. 14,61,47,124 to Rs. 16,96,94,562 only. Accordingly, the AO passed the final assessment order under section 143(3) r.w.s. 144C(13) of the Act in conformity with the learned DRP’s directions. 10. Being aggrieved by the direction/order of the ld. DRP/ AO/TPO, the assessee is in appeal before us. 11. The learned AR before us pointed out mistakes in the order of the TPO while selecting the comparables. According to the ld. AR the TPO has also not furnished the filters for the search process for applying the FAR analysis adopted for the comparable companies. The Ld. AR accordingly requested to set aside the issue to the file of the TPO for fresh adjudication as per the provisions of law. 12. On the other hand, the learned DR before us did not controvert the arguments advanced by the ld. AR of the assessee. As such the learned DR did not raise any serious objection if the matter is set aside to the file of the TPO for fresh adjudication as per the provisions of law. 13. We have heard the rival contentions of both parties and perused the materials available on record. From the preceding discussion, we IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 5 of 14 . note that the assessee entered into several international transactions with its AEs, broadly classified into three segments, as discussed above. The assessee applied the TNMM to benchmark these transactions, which is not disputed. However, the TPO rejected the assessee’s TP study concerning the selection of comparables and the computation of ALP. Consequently, the TPO conducted its own TP study, selected a new set of comparable companies for each segment, and made upward TP adjustments in each segment. 14. Thus, in this case, the dispute primarily revolves around the filters applied, the inclusion or exclusion of comparable companies, the computation of margins, and related adjustments concerning working capital, risk factors, etc. 15. During the hearing, the learned AR for the assessee strongly contested the approach adopted by the TPO for selecting comparable companies for each segment. In this regard, we have perused the TPO's order and made certain observations, which are detailed below: (i) For the selection of comparables in the Distribution/MSD segment, the TPO conducted a search in the Prowess database using keywords such as \"computer software,\" \"sale of computer software,\" and \"trading of software.\" According to the TPO, the database initially provided 117 companies, and after applying various filters, 67 companies remained. Subsequently, the TPO excluded 55 companies based on the FAR analysis. However, the specific FAR analysis conducted by IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 6 of 14 . the TPO to justify the exclusion of these 55 companies has not been provided. (ii) Similarly, for the SWD segment, the TPO conducted a search in both the \"Prowess Database\" and the \"ACE TP Database.\" After applying filters and the FAR analysis, the TPO shortlisted 26 comparable companies—15 from the \"Prowess Database,\" 10 from the \"Ace TP Database,\" and 1 from the assessee’s study. However, without providing any justification, the TPO ultimately selected only 6 companies for benchmarking. There is no clear basis for the exclusion of 20 out of the 26 shortlisted companies, despite the TPO having applied its own filters and FAR analysis. Furthermore, the specific details of the FAR analysis have not been discussed. An identical observation applies to the TSS segment as well. 16. In light of the above observations, we find that the TPO’s approach in selecting comparables for the Distribution/MSD, SWD, and TSS segments lacks transparency and clarity. The exclusion of certain companies without providing a detailed FAR analysis and justification raises concerns about the reliability of the benchmarking process. Given these inconsistencies, we deem it appropriate to set aside the issue to the file of the TPO for fresh adjudication. The TPO is directed to conduct a detailed FAR analysis, provide a reasoned order for the selection and exclusion of comparables, and grant the assessee an opportunity to present its case. The TPO shall also consider any additional evidence or submissions to be made by the assessee before making a fresh determination in accordance with the law. Hence, the grounds of appeal of the assessee are allowed for statistical purposes. IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 7 of 14 . 17. The next issue raised by the assessee through ground Nos. 17 to 24 is that the learned DRP/AO/TPO erred in benchmarking the outstanding receivable and making TP adjustment of Rs. 19,34,93,050.00 only. 18. During the proceedings, the TPO has noticed that the assessee has outstanding receivable from its AEs beyond the agreed credit period of 15 days. The TPO opined that the delay in payment of receivables from the AEs constitutes an International Transaction under section 92B of the Act, which explicitly includes such deferred payments under the ambit of transfer pricing provisions, thereby warranting an Arm’s Length Price (ALP) determination. The TPO in this regard also referred the various case laws which are part of TPO order. 19. The TPO, further rejected the assessee’s contention that the receivables transaction should not be separately benchmarked as it was part of an overall business arrangement with the AE. As such the TPO noted that aggregation of transactions is permissible only when the underlying transactions are continuous, closely interlinked, and have a direct bearing on pricing. The burden of proving such linkage rests with the assessee, which, in this case, failed to provide substantial evidence to justify aggregation. Hence, the TPO proceeded with a transaction-by- transaction approach for benchmarking the delayed receivables. As a result, the TPO, worked out the interest on delayed period in excess to 15 days of agreed credit period for each and every invoice applying the IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 8 of 14 . interest rate as 6-month LIBOR + 450 basis point. Accordingly, the TPO proposed the final TP adjustment of ₹ 19,34,93,050/- only. 20. The aggrieved assessee preferred to file objection before the learned DRP. 21. The learned DRP after considering the facts in totality rejected the objection raised by the assessee. The learned DRP found that by explanation inserted to section 92B of the Act through the Finance Act 2012, the transaction of deferred payment or receivable or any other debt arising during the course of business was included to the definition of international transaction. Accordingly, the assessee required to charges interest on the extended period of credit as per ALP. 22. The learned DRP to support their view referred the decision of Delhi ITAT in case of Bechtel India Pvt Ltd in ITA No. 6530/Del/2017 wherein the Tribunal after considering the amended provision of section 92B of the Act and judicial pronouncement held that non-charging or under charging of interest on extended credit period allowed to the AE on trade receivable is international transaction on which ALP is required to be determined. 23. The learned DRP also referred the decision of Hon’ble Karnataka High Court in case of DCIT vs. AMD India Pvt Ltd in ITA No. 274/2018 and Hon’ble Bombay High Court in case of Technimont Pvt Ltd. in ITA No. 487/Mum/2017 where it was held that allowing the extend credit IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 9 of 14 . period beyond the agreed/normal time would constitute independent international transaction. 24. Being aggrieved by the order of the learned DRP/AO/TPO the assessee is in appeal before us. 25. The learned AR before us submitted that there cannot be any separate adjustment on account of interest on the outstanding receivables as the same is arising out of sales transaction which has already been considered for determining the arm length price. Without prejudice to the above, if at all there has to be determination of arm length price with respect to the outstanding receivables, the same should be limited to the extent of LIBOR+200 basis point. 26. On the other hand, the learned DR vehemently supported the order of the authorities below. 27. We have heard the rival contentions of both the parties and perused the materials available on record. The first question before us arises as to whether or not the outstanding receivables from AEs are an international transaction. This issue is no longer res integra. As per the amendment to section 92B of the Act by way of Finance Act, 2012 with retrospective effect from 01/04/2002 that, the interest on outstanding receivables is an international transaction, and it certainly requires separate benchmarking. Accordingly, the extended credit period or credit allowed over and above the agreed period shall be considered as separate international transaction required to be benchmarked. In IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 10 of 14 . holding so, we refer the decision of this Tribunal in case of AMD India Pvt Ltd vs. DCIT reported in 95 taxmann.com 531 wherein it was held as under: \"10. In our considered opinion, to the extent of agreed credit period, the sale price to AE or non AE is inclusive of possible interest on such agreed debt and therefore, for such credit allowed to AE, it cannot be said that this is an independent international transaction. But when extra credit is allowed beyond the agreed credit period, the same is a subsequent independent event and. interest for such extra credit period cannot be factored in the price agreed. Only because the agreed price without considering extra credit period is in excess of the ALP, it cannot be said and held that for such independent subsequent event of allowing extra credit also, the agreed prices takes care and this is not an independent international transaction requiring separate benchmarking. In transfer pricing analysis, the purpose is not to compare profit of the tested party with that of the comparables but the purpose is to compare the prices charged by the tested, party with the prices charged by the comparables although when TNMM is adopted as MA.M, the process of such price comparison is by comparing profits of tested party with that of the comparables and therefore, if the profit of the tested party is equal or above the profit of comparables, even after taking into account the effect of working capital adjustment and the ALP is less that the price charged by the tested party, it cannot be said that the extra credit allowed is not an independent international transaction and not required to be separately benchmarked. In our considered opinion, the first requirement is this that it has to be first decided that whether it is an independent international transaction or not and if it is found that it is not so, then obviously, no separate benchmarking is required but if it is found that it is an independent international transaction then separate bench making has to be done and TP adjustment is to be made as per law irrespective of whether any TP adjustment is required to be made in respect of main transaction of sale. 11. Hence, we first decide this aspect as to whether this is an independent international transaction or not. In our considered opinion, in respect of agreed credit period which is 30 days in the present case, there is no independent international transaction because the effect of the credit to that extent is factored in the agreed prices. But for extra credit, the effect of the credit to that extent cannot be factored in the agreed prices because it is not even known at the stage as to how extra credit will be allowed and therefore, that is an independent international transaction and hence, separate bench making has to be done and TP IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 11 of 14 . adjustment is to be made as per law. This is worth noting that by allowing extra credit in excess of agreed period of 30 days, profit shifting is there because if credit period is more, prices go up which is not done in the present case since, the prices are determined on the basis of 30 days credit period. 28. The above finding of the Tribunal was challenged by the revenue before the Hon’ble Jurisdictional High Court in case of PCIT vs. AMD India Pvt Ltd reported in 98 taxmann.com 512 wherein the revenue appeal was dismissed by observing as under: 5. Having heard the learned counsel for the appellants-Revenue, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs. 29. Now, coming to the issue in respect of the rate of interest, the TPO has taken 6-months LIBOR + 450 basis point whereas the assessee on the strength of case law argued that the rate of interest should be LIBOR + 200 basis point. In this regard, we find pertinent to refer the order of this Tribunal in the case of DCIT Vs. Hewlett Packard India Software Operations Private Limited (2022) 149 taxmann.com 280 (Bang. Trib.) wherein it was held as under: 37. Once we have held that the transaction between the assessee and AE was in foreign currency with regard to receivables and transaction was international transaction, then transaction would have to be looked upon by applying the commercial principles with regard to international transactions and accordingly proceeded to take into account interest rate in terms of London Inter Bank Offer Rate [LIBOR] and it would be appropriate to take the LIBOR rate + 2%. For this purpose, we place reliance on the judgment of the Bombay High Court in the case of CIT v. Aurionpro Solutions Ltd., 99 CCH 0070 (Mum HC). It is ordered accordingly.\" IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 12 of 14 . 30. The above finding was further followed by the coordinate bench of this Tribunal in case of M/s IHS Global Pvt Ltd vs. ACIT bearing IT(TP) No. 1424/Bang/2024, thereby respectfully following the view taken by this Tribunal in aforementioned cases, we hold that the appropriate rate of interest shall be LIBOR + 200 Basis point. Therefore, we in view of the above detailed discussion direct the AO/TPO to compute the interest on delayed receivable taking the interest at LIBOR + 200 basis point. Hence the grounds of appeal raised by the assessee is allowed for statistical purposes. 31. The next issue raised by the assessee vide ground Nos. 25 & 26 of its appeal is that the learned AO/TPO/DRP did not provide the appropriate adjustment on account of difference in working capital and risk between assessee and comparable companies. 32. At the outset, we note the issue of selection of companies has been set aside by us to file of the TPO for fresh adjudication. Therefore, we find it necessary to set aside this issue of adjustment on account of working capital and its risk involved in calculating the ALP to the TPO. The TPO is directed to provide the necessary adjustment if any as per law. Hence ground of appeal of the assessee is allowed for statistical purposes. 33. The next issue raised by the assessee through ground Nos. 27 & 28 of its appeal is that the AO erred in initiating penalty proceeding u/s 270A and levying interest u/s 234B and 234C of the Act. IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 13 of 14 . 34. At the outset, we note that the issue raised by the assessee is either premature or consequential, which do not require any separate adjustment/ adjudication. Hence the grounds of appeal of the assessee are hereby dismissed as infructuous. S.P. No. 25/Bang/2024 35. Coming to stay petition bearing No. 35/Bang/2024, at the outset we note that, since the main appeal of the assessee has been disposed off, we don’t find any reason to adjudicate the stay petition filed by the assessee. Accordingly, the same is dismissed as infructuous. 36. In the result, the appeal of the assessee is partly allowed for statistical purposes whereas the stay petition is dismissed as infructuous. Order pronounced in court on 10th day of March, 2025 Sd/- (KESHAV DUBEY) Sd/- (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 10th March, 2025 / vms / IT(TP)A No.1354/Bang/2024 S.P No.35/Bang/2024 Page 14 of 14 . Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore "