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2014 (3) TMI 363 - AT - Income TaxTransfer pricing adjustment Selection of comparables Capital Trust comparable - Held that - The TPO has observed that primary business of the company is automobiles sales and service - a company cannot be excluded from the comparables merely for the reason of having low turnover - It is to be appreciated that no turnover filter was applied by either of the parities - The analysis needs to be carried out on the basis of functional profile and not on an arbitrary or adhoc criteria - the functional profile of Capital Trust Limited s consultancy segment is similar to that of Nortel India the same needs to be included in the final comparables for working the ALP thus, the AO is directed to apply this comparable while working out the ALP Decided in favour of Assessee. Comparability and the exclusion of Choksi, Rites and WAPCOS Held that - The decision in Deputy Commissioner of Income-tax, Circle 17(1), New Delhi Versus MCI Com India(P.) Ltd. 2012 (10) TMI 790 - ITAT DELHI followed - Companies like EIL, Rites, Wapsos and TCE are engineering companies which provide end to end solutions thus, they cannot be compared with assessees who provide marketing support services to the parent company - They were held to be functionally not comparable with thee engineering companies these companies are functionally different and cannot be applied as appropriate comparable to the assessee thus, they are to be excluded from TP adjustment while determining the ALP. Exclusion of Saket Projects Ltd Held that - Relying upon Exxon Mobil Company India (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 3(1), Mumbai 2011 (6) TMI 385 - ITAT, MUMBAI - The specific characteristics of services provided, assets employed, risk assumed i.e. the FAR of the comparable is decisive and inclusion or exclusion of comparables - The higher or lower rate of profit is nowhere prescribed as the determinative factor in this behalf - Higher profits achieved due to factors not mentioned in the rule then such case shall be continued to find place in the list of comparables. No comparable can be rejected merely on the basis of high margins if it is functionally comparable to the assessee or there is miner variation in functional similarity - The case of Saket Projects Ltd. has functional dissimilarity as it is organizing events with various kinds of sponsorships - The company in the division is earning revenue from selling event fees and offering space for rent which cannot be comparable with provision of marketing and sales support services - Saket Projects Ltd. has been rightly held as not an appropriate comparable. Working capital Adjustments Held that - Working capital adjustments are required to be made because these do impact the profitability of the company - Rule 10B(2)(d) also provides that the comparability has to be judged with respect to various factors including the market conditions, geographical conditions, cost of labour and capital in the market - Accounts receivable/payable effect the cost of working capital - Working capital adjustment cannot be denied to the assessee only on the ground that it had not made any claim in the TP study if it is possible to make such adjustment - Working capital adjustments are required as they will improve the parameters of comparability - the AO/TPO to make the working capital adjustment after necessary examination. Corporate additions Excess revenue recognized error in recomputation of total estimated revenue Held that - Assessee contended that the matter for AY 2006-07 has not yet been re-adjudicated by the AO as ordered - the relevant details submitted by the assessee have been overlooked by the AO and DRP thus, the matter is again remitted back to the AO foe re-adjudication. Addition on account of expenses claimed in revised return Held that - The DRP directed the AO to merely check the records regarding the figure of revised income, there is no directions of any further enquiry - Thus AO has erred in exceeding her powers by going beyond the directions of the DRP and instead of verifying the figure went ahead to review the draft order - Thus AO s action in making an addition in this behalf i.e. disallowing expenses claimed by the assessee in its revised return of income is justified. Deduction u/s 40(a)(i) of the Act Held that - The decision in COMMISSIONER OF INCOME TAX Versus SMCC CONSTRUCTION INDIA FORMERLY MITSUI KENSETSU INDIA LTD 2010 (1) TMI 10 - HIGH COURT OF DELHI followed - even if there was no claim in the return of the year in which the expenditure was incurred by the assessee, the deduction can be claimed in view of the provisions of Section 40(a)(i) in the year in which the tax has been deducted at source and paid to the government account thus, the expenses are allowable Decided in favour of Assessee. Claim of Warranty Expense Held that - As decided in assessee s case in the earlier assessment years, as a normal rule when the provision for warranty is disallowed in earlier years, deduction then should be allowed in the year when actual expenses are incurred thus, the ,atter remitted back to the AO for re-adjudication Decided in favour of Assessee. Legal and professional fees paid to KPMG/ BSR & Co Deduction u/s 40(a)(ia) of the Act - Held that - Assessee contended that the requisite tax has already been deducted and deposited at the time of booking of actual expenses on receipt of the invoice - there is no default at the assessee s end and no disallowance is warranted in such a case - there cannot be a double levy of taxes on same income. Since the assessee duly deducted and deposited TDS on the basis of invoice received and any disallowance u/s 40(a)(ia) will lead to a double levy of taxes on the same income thus, in accordance with section 40(a)(ia) of the Act, AO is directed to allow deduction for the expense in Assessment Year when tax was deducted and deposited by the assessee qua these expenses Decided in favour of Assessee.
Issues Involved:
1. Transfer Pricing (T.P.) adjustments and selection of comparables. 2. Working capital adjustments. 3. Revenue recognition under the BSNL project. 4. Addition of expenses claimed in the revised return. 5. Deduction for warranty expenses. 6. Disallowance of legal and professional fees. 7. Initiation of penalty under section 271(1)(c). Detailed Analysis: 1. Transfer Pricing Adjustments and Selection of Comparables: The appeals challenged the Transfer Pricing (T.P.) adjustments related to the provision of marketing and after-sales support services. The primary issues included the rejection of the economic analysis undertaken by the assessee, inappropriate selection of comparables, and the use of data from Financial Year 2006-07. For AY 2007-08, the assessee's comparable Capital Trust Limited was excluded by the TPO due to low revenue. The DRP upheld this exclusion, citing the unreliability of financial data from companies with very low sales. The Tribunal disagreed, stating that no turnover filter was applied initially and that functional comparability should be the key criterion. It directed the inclusion of Capital Trust Limited for ALP determination. For AY 2008-09, the TPO included new comparables like Saket Projects Limited, Choksi Laboratories Ltd, Rites Ltd, and WAPCOS (India) Ltd. The Tribunal found that these companies were functionally different, providing high-end consultancy and engineering services, unlike the assessee's administrative support services. Following precedents, the Tribunal excluded these companies from the comparables. 2. Working Capital Adjustments: The assessee argued for working capital adjustments, claiming that differences in working capital levels affect profitability. The TPO and DRP rejected this claim, stating that the assessee did not make such a claim in its TP study and that accurate adjustments were difficult. The Tribunal, however, held that working capital adjustments are necessary for comparability and directed the AO/TPO to make these adjustments after examination. 3. Revenue Recognition under the BSNL Project: The AO enhanced the revenue to be recognized under the BSNL project, which the assessee contested. The Tribunal noted that similar issues were remanded back to the AO for AY 2006-07 and directed a similar remand for AYs 2007-08 and 2008-09, ensuring the assessee is given an opportunity to provide necessary details. 4. Addition of Expenses Claimed in the Revised Return: The AO added back expenses claimed in the revised return, which the assessee argued was beyond the AO's powers. The Tribunal agreed, stating that the AO was only directed to verify the revised income figure and not to conduct further scrutiny. The Tribunal allowed the assessee's claim for the expenses on both jurisdictional and merit grounds. 5. Deduction for Warranty Expenses: The assessee claimed deduction for warranty expenses, which were disallowed in earlier years. The Tribunal remanded the issue back to the AO, directing that if the provision for warranty was disallowed in earlier years, the actual warranty expenses incurred should be allowed in the subject year. 6. Disallowance of Legal and Professional Fees: The AO disallowed legal fees for non-deduction of tax at the time of booking the provision. The Tribunal upheld the disallowance but directed the AO to allow the deduction in the year when TDS was deducted and deposited. The Tribunal instructed the AO to verify the deduction and deposit of TDS and allow the deduction accordingly. 7. Initiation of Penalty under Section 271(1)(c): The assessee challenged the initiation of penalty under section 271(1)(c). The Tribunal dismissed this ground as premature. Conclusion: The Tribunal partly allowed the assessee's appeals for AYs 2007-08 and 2008-09, directing specific adjustments and remands for various issues while upholding some disallowances with directions for future deductions. The decision emphasized the importance of functional comparability, the necessity of working capital adjustments, and the procedural limits of AO's powers post-DRP directions.
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