2017 (4) TMI 1347 - AT - Income Tax

Working capital adjustment restricted by the TPO but allowed by the DRP - Held that - In view of the decision of the coordinate bench of the Tribunal in assessee s own case for the assessment year 2009-10 we do not find any reason to interfere with the directions of DRP of this issue as held when the average margin of the comparable companies are taken it takes care of the differences if any in the comparable companies. Therefore there is no rationale in allowing the risk adjustment. The objection is therefore not found acceptable. Consequently this ground of the revenue s appeal is dismissed. Whether the income enhanced due to disallowance u/s. 40(a)(ia)is eligible for deduction u/s. 10A? - Held that - This issue of disallowance made u/s. 40(a)(ia) eligible for deduction of tax holiday under law is covered by the decision of Keval Construction 2013 (7) TMI 291 - GUJARAT HIGH COURT as held whatever be the ultimate profit of the assessee as computed even after making disallowance under section 40(a)(ia) of the Act would qualify for deduction as provided under the law - Decided in favour of Assessee. Exclusion of communication expenses from the export turnover as well as total turnover while computing the deduction u/s. 10A - Held that - DRP has directed the AO to exclude the communication expenses both from export turnover as well as total turnover while computing the deduction u/s. 10A by following the decision of Hon ble jurisdictional High Court in case of Tata Elxsi Ltd (2011 (8) TMI 782 - KARNATAKA HIGH COURT). No error or illegality in the directions of the DRP qua this issue. Comparability analysis - Held that - As the assessee who is into captive service provider of ITES companies functionally dissimilar with that of assessee need to be deselected from final list. Thus exclude these two companies namely Accentia Technologies Limited and eClerx Services Limited from the set of comparables. Foreign exchange gain / loss was treated as non-operating in nature - Held that - For the purpose of computing the margins for the assessment year under consideration only the gain or loss which pertains to the export made during the year under consideration has to be taken into account as operating revenue or cost. Accordingly we direct the AO / TPO to compute the operating margins of the assessee as well as comparable companies by considering the gain or loss arising from forex fluctuation on account of the exports made during the year. Risk adjustment - Held that - Though the assessee has claimed risk adjustment on the ground that assessee being a captive service provider operates at low risk level in comparison to comparable companies however the assessee has not furnished the relevant details and computation of risk level of the assessee as well as the comparable companies. Therefore in the absence of the relevant details and working it is not possible to work out the adjustment on account of difference in risk level of assessee and comparable Disallowance u/s. 14A r.w. Rule 8D - Held that - Expression does not form part of the total income in Section 14A of the envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. Thus Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. See case of Cheminvest Ltd. v. CIT 2015 (9) TMI 238 - DELHI HIGH COURT

Issues Involved:
1. Working Capital Adjustment
2. Deduction under Section 10A on Enhanced Income due to Disallowance under Section 40(a)(ia)
3. Exclusion of Communication Expenses from Export Turnover and Total Turnover for Deduction under Section 10A
4. Rejection of Transfer Pricing Documentation
5. Inclusion of Accentia Technologies Limited and eClerx Services Limited as Comparables
6. Treatment of Foreign Exchange Gain/Loss
7. Risk Adjustment
8. Disallowance under Section 14A

Detailed Analysis:

1. Working Capital Adjustment:
The issue concerned the restriction of working capital adjustment by the Transfer Pricing Officer (TPO) to 0.91%, while the Dispute Resolution Panel (DRP) allowed the adjustment as per actual figures without a cap. The Tribunal referenced its own decision in the assessee's case for the assessment year 2010-11, where it was held that the average working capital of the industry should not be imposed on the assessee. The Tribunal upheld the DRP's direction to carry out the working capital adjustment as per actual figures, dismissing the revenue's appeal on this ground.

2. Deduction under Section 10A on Enhanced Income due to Disallowance under Section 40(a)(ia):
The DRP directed the Assessing Officer (AO) to verify if the expenditure was purely reimbursement and not liable for disallowance under Section 40(a)(ia). Additionally, the DRP accepted the assessee's alternative claim that enhanced income due to disallowance under Section 40(a)(ia) is eligible for deduction under Section 10A. The Tribunal upheld this direction, referencing the Gujarat High Court's decision in Keval Construction, which supported the inclusion of disallowed amounts in the profit for deduction purposes.

3. Exclusion of Communication Expenses from Export Turnover and Total Turnover for Deduction under Section 10A:
The Tribunal noted that the DRP directed the AO to exclude communication expenses from both export turnover and total turnover while computing deduction under Section 10A, following the jurisdictional High Court's decision in Tata Elxsi Ltd. The Tribunal found no error in the DRP's directions and dismissed the revenue's appeal on this ground.

4. Rejection of Transfer Pricing Documentation:
The assessee did not press the grounds related to the rejection of its Transfer Pricing (TP) documentation. Consequently, these grounds were dismissed as not pressed.

5. Inclusion of Accentia Technologies Limited and eClerx Services Limited as Comparables:
The assessee contended that these companies were not functionally comparable. The Tribunal referred to its earlier decisions and the Delhi High Court's decision in Rampgreen Solutions, which excluded these companies from the set of comparables due to functional differences. The Tribunal directed the AO/TPO to exclude Accentia Technologies Limited and eClerx Services Limited from the comparables.

6. Treatment of Foreign Exchange Gain/Loss:
The Tribunal held that foreign exchange gain/loss arising from export realization should be considered part of operating profit or cost. It directed the AO/TPO to compute operating margins by considering only the gain/loss related to exports made during the year.

7. Risk Adjustment:
The Tribunal dismissed the assessee's claim for risk adjustment due to the lack of relevant details and computation to work out the adjustment for differences in risk levels between the assessee and comparables.

8. Disallowance under Section 14A:
The Tribunal referenced the Delhi High Court's decision in Cheminvest Ltd., which held that Section 14A does not apply if no exempt income is received or receivable during the relevant year. Consequently, the Tribunal deleted the disallowance made by the AO under Section 14A, as the assessee had not earned any exempt income.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's cross-objections, providing detailed issue-wise analysis and directions, while upholding the DRP's decisions on key matters. The judgment emphasized adherence to precedent and proper functional analysis in Transfer Pricing matters.

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