2016 (12) TMI 1720 - AT - Income Tax

TPA - TPO has considered other Finance charges as operating cost - DRP has directed the AO to verify from the computation of total income as to whether the above expenses have been disallowed treating the same as capital in nature - Held that - There is no need to interfere with the directions of the DRP on the issue. Whether the up-front fees paid is part of the operating cost or not is a factual matter to be verified and therefore, the ground does not deserve any merit at this end. Accordingly, the same is rejected. Selection of comparables - Held that - Assessee is involved in providing support services in connection with CAE/CAD modeling and iterative simulation. It receives the basic design from its group company with respect to CAD modeling and makes a 3D CAD modeling data of vehicle components using CAD software tools. Assessee is a routing support service provider and it assumes less than normal risk associated with carrying out such business. Companies functionally dissimilar with that of assessee need to be deselected from final list. Functional comparability need to be decided on the basis of the information available in the annual report and not based on the website information which may vary and may not be reliable. Treating the provision for bad and doubtful debts and bad debts written off as nonoperating expenses for the purpose of margin computation of comparable companies as selected by TPO - Held that - DRP has not erred in confirming the TPO s stand of treating the provision for bad and doubtful debts and bad debts written off as nonoperating expenses for the purpose of margin computation of comparable companies as selected by TPO. Deselection of companies who fails export earning filter as the export turnover was 91.41 Lakhs as against domestic turnover of ₹ 13.33 Crores. ALP adjustment - Held that - ALP adjustment should only be restricted to international transactions and not to the entire turnover of assessee. However, this requires verification by the AO/TPO. Therefore, we direct the AO/TPO to verify and restrict the adjustment only to the international transactions. Ground is considered allowed for statistical purposes. Working capital adjustment - Held that - There is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this, we direct the TPO not to make negative working capital adjustment . Non-setting off of unabsorbed depreciation - Held that - We direct the AO/TPO to follow the directions of the DRP and allow the unabsorbed depreciation as per the provisions of the Act. Ground is accordingly considered allowed. Comparable selection - reasons given by the DRP in excluding the company, not only on the basis of the high turnover but also with reference to the brand value etc. is acceptable.

Summary

Issues Involved:
1. Inclusion of upfront fee as part of operating cost.
2. Selection and rejection of comparable companies for Transfer Pricing (TP) analysis.
3. Treatment of provision for bad and doubtful debts.
4. Exclusion of certain companies by the Dispute Resolution Panel (DRP).
5. Adjustment restricted to international transactions.
6. Negative working capital adjustment.
7. Non-setting off of unabsorbed depreciation.
8. Levy of interest under sections 234A, 234B, and 234D.

Issue-wise Detailed Analysis:

1. Inclusion of Upfront Fee as Part of Operating Cost:
The Tribunal addressed whether the upfront fee paid for obtaining a loan for capital purposes should be considered as part of the operating cost. The DRP directed the AO to verify if the expense was disallowed as capital in nature or allowed as revenue expenditure. The Tribunal upheld the DRP's directions, indicating that the issue is factual and requires verification, thus rejecting the assessee's ground.

2. Selection and Rejection of Comparable Companies for TP Analysis:
- Accentia Technologies Limited: The Tribunal found this company functionally dissimilar due to its diversified activities and extraordinary events, directing its exclusion.
- Eclerx Services Limited: The Tribunal upheld the DRP's inclusion of this company, noting its functional similarity to the assessee despite the assessee's objections.
- Crossdomain Solutions Private Limited: The Tribunal retained this company as a comparable but directed the AO/TPO to verify the margin computation.
- Microland Limited: Rejected by the Tribunal due to its small turnover in IT Enabled Services and functional dissimilarity.
- R Systems International Limited: The Tribunal directed the AO/TPO to re-examine this company for inclusion if it satisfies other filters.
- Accuspeed Engineering Limited: Rejected due to functional dissimilarity and failing the employee cost filter.
- CSS Technology Limited: Excluded due to failing the export earning filter.

3. Treatment of Provision for Bad and Doubtful Debts:
The Tribunal agreed with the DRP that such provisions should be excluded from operating expenses for comparability analysis, directing the AO/TPO to rework the margins accordingly.

4. Exclusion of Certain Companies by the DRP:
The Tribunal found that the DRP wrongly excluded e4e Healthcare Business Services Private Limited and Mastiff Tech Private Limited without valid reasons, directing their inclusion as comparables.

5. Adjustment Restricted to International Transactions:
The Tribunal agreed that the TP adjustment should be restricted to international transactions and directed the AO/TPO to verify and apply this principle.

6. Negative Working Capital Adjustment:
The Tribunal ruled that negative working capital adjustment should not be made for a captive service provider like the assessee, following the precedent set in Adaptec (India) P. Ltd. vs. ACIT.

7. Non-setting off of Unabsorbed Depreciation:
The Tribunal noted that the AO did not follow the DRP's directions to verify and allow the set-off of unabsorbed depreciation. It directed the AO/TPO to comply with the DRP's instructions.

8. Levy of Interest under Sections 234A, 234B, and 234D:
The Tribunal directed the AO to follow the provisions of the Act and compute interest based on the total income after giving effect to the Tribunal's order.

Revenue’s Appeal:
- Ground No. 1: Rejected as it lacked specific objections and the DRP's functional analysis was found to be justified.
- Ground No. 2: Rejected as the exclusion of Infosys BPO Ltd. was justified based on high turnover, brand value, and functional dissimilarity.
- Ground No. 3: Allowed as it pertained to the inclusion of e4e Healthcare and Mastiff Tech, aligning with the Tribunal’s decision on the assessee’s appeal.

Conclusion:
The Tribunal's judgment provided a detailed analysis of each issue, directing necessary verifications and adjustments to ensure compliance with the principles of TP and the provisions of the Income Tax Act. The assessee’s appeal was partly allowed for statistical purposes, and the Revenue’s appeal was partly allowed.