2015 (5) TMI 780 - AT - Income Tax

Transfer pricing adjustment - wrong selection of comparable - Held that - Since we have excluded Excel Infoways Ltd from the final list of comparables as having low employees ratio to sales, the average of the comparables of the remaining companies as per TPO being at 20.97% as compared to that of the assessee at 17.11% is within 5% range as per the provisions of law. The international transactions made by the assessee is directed to be treated as at ALP. As we have decided this issue only by excluding Excel Infoways Ltd from the final list of comparables, we do not find it necessary to decide the other issues in this regard raised by the assessee - Decided in favour of assessee. Non-grant of exemption u/s 10(35) - Held that - DRP has given clear direction that a deduction of ₹ 5,98,957/- must be allowed while determining the taxable income of the assessee. We find that the AO has not followed the direction given by the DRP. We direct the AO to follow the direction of the DRP. - Decided in favour of assessee. Disallowance u/s 14A r.w. Rule 8D - Held that - A perusal of the assessment order shows that the AO grossly erred by wrongly taking the quantity of units purchased and sold as the value of mutual funds. We find that there is no opening and closing balance. What the AO has taken is the quantity of units purchased and units sold for the purpose of making disallowance u/s 14A of the Act. Since, the disallowance is based on factual errors, we direct the AO to delete the addition of ₹ 19,326/- - Decided in favour of assessee. Levy of interest u/s 234B and 234C - Held that - The levy of interest is mandatory though consequential. We accordingly direct the AO to charge interest u/s 243C and 234B of the Act. - Decided against assessee.

Summary

Issues:
1. Transfer pricing adjustment
2. Disallowance under section 14A r.w. Rule 8D
3. Levy of interest u/s 234B and 234C

Transfer Pricing Adjustment:
The assessee, engaged in Information Technology support operations, filed its income tax return declaring total income. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) for international transactions. The TPO conducted a search and determined a new set of comparables, making an adjustment of Rs. 2,92,13,537. The Dispute Resolution Panel (DRP) upheld the TPO's decision. The assessee contended that excluding a specific company from the comparables list would bring the average within the acceptable range. The Tribunal, considering judicial precedents, excluded the company due to abnormal profit margins and low employee cost to sales ratio, resulting in the ALP being accepted. Grounds 1 to 6 of the appeal were allowed.

Disallowance under section 14A r.w. Rule 8D:
The AO incorrectly calculated the disallowance under section 14A based on the quantity of units purchased and sold instead of the value of mutual funds, leading to factual errors. The Tribunal directed the AO to delete the addition of Rs. 19,326 as the disallowance was erroneous. Grounds 8 to 10 of the appeal were allowed.

Levy of Interest u/s 234B and 234C:
The Tribunal found the levy of interest under sections 234B and 234C to be mandatory, directing the AO to charge interest as per the provisions of the Act. Grounds 12 and 13 of the appeal were upheld.

The Tribunal's decision, pronounced on 6th Feb, 2015, partially allowed the assessee's appeal for statistical purposes.