2017 (10) TMI 1434 - AT - Income Tax

Transfer pricing adjustment - international transactions pertaining to provision of Information Technology enabled services ( ITeS ) - exclusion of comparables - HELD THAT - Turnover filter cannot be held to be a good filter unless it affects the profitability of the comparables R System International Ltd. excluded on account of different financial year - AR contended that the data for the relevant financial year i.e. April to March can be derived from the quarterly data available on the website of the company therefore this comparable should be included in the list of comparables - HELD THAT - In the instant case assessee has tried to demonstrate that data for the relevant financial year (April to March) can be derived from the data available on website. Therefore we are of the opinion that this comparable should be included in the list of comparables and before doing so the AO/TPO will examine the details and if the data for the relevant financial year can be derived from the data available on the website and it stands on other filters the same can be included in the list of comparables. Credit of risk adjustment - HELD THAT - Since the Tribunal has repeatedly held that in such circumstances risk adjustment should be given after making necessary verification we are of the view that in the instant case we should restore the matter to the TPO to consider the contentions of the assessee and after taking into account all relevant facts make the risk adjustment while determining the ALP for international transactions. Excluding provision for doubtful debt from the cost base in the computation of mark up of certain comparable companies - HELD THAT - Same treatment should be given while excluding/including the provisions for bad and doubtful debts in the case of the assesse company and the comparables. If the provisions of the doubtful debts have been excluded in the case of assessee company the same be excluded in the case of comparables. Two different types of treatment cannot be given in the case of assessee company and the comparables. Therefore we also restore the issue to the AO/TPO to examine the facts relating to provision for doubtful debts in the assessee company as well as in the case of comparables. Rejecting claim of adjustment on account of accelerated depreciation - HELD THAT - Wherever rates of depreciation are different in the case of assessee and the comparables the depreciation adjustment should be allowed. The Tribunal has repeatedly held that adjustment for difference in depreciation rate should be allowed in order to determine the ALP. See EXL SERVICE. COM (INDIA) PVT. LTD. VERSUS ASSTT. CIT CIRCLE-11(1) NEW DELHI. 2014 (12) TMI 894 - ITAT DELHI Tribunal has taken a consistent view that wherever different rates of depreciation are charged in the case of assessee as well as the comparables the depreciation adjustment should be allowed. In the instant case the learned counsel for the assessee has tried to demonstrate that the rate of depreciation charged in the case of assessee and the comparables are different. Therefore we are of the view that let this matter be re-examined by the TPO/AO and if they notice that the rates of depreciation are different in the case of assessee and the comparable companies the reasonable depreciation adjustment be made in order to determine the ALP for the international transactions. Working capital adjustment should be allowed while determining the ALP without putting any cap thereon. Therefore we restore this issue to the file of the AO/TPO to allow the working capital adjustment while computing the ALP for international transactions. Deduction u/s 10A - HELD THAT - This ground is covered by judgment of jurisdictional High Court in the case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT in which it has been held that whenever any expenditures are to be excluded from the export turnover the same should also be excluded from the total turnover. We accordingly following the same direct the AO/TPO to exclude the telecommunication charges from the turnover also as it was excluded from the export turnover. Addition u/s 14A r.w.r. 8D - HELD THAT - Assessee has earned the exempted income and the AO has invoked the provisions of section 14A and applied Rule 8D for determining the disallowances. Since rule 8D takes care of all aspects of interest bearing funds and interest free funds and expenditure incurred in management of portfolios etc. we are of the view that once it is decided that provisions of section 14A is to be invoked disallowances are to made as per Rule 8D of the Rules. Accordingly we find no infirmity in the order of the AO.

Issues Involved:
1. Legality of the AO's order.
2. Enhancement of income by the AO/TPO based on the arm's length principle.
3. Rejection of the TP documentation by the AO/TPO.
4. Ignoring tax holiday entitlement under sections 10A and 10AA.
5. Disregarding the ALP determined by the appellant.
6. Use of current year data for comparables.
7. Exclusion/inclusion of certain comparables.
8. Risk adjustment.
9. Working capital adjustment.
10. Penalty proceedings under section 271(1)(c).
11. Interest computation under section 234B.
12. Jurisdictional error in referring the matter to the TPO.

Detailed Analysis:

1. Legality of the AO's Order:
The assessee contended that the AO's order was "bad in law." The Tribunal did not provide a specific ruling on this issue, indicating that it was general in nature.

2. Enhancement of Income by the AO/TPO:
The AO/TPO enhanced the income by Rs. 15,39,24,517, holding that the international transactions did not satisfy the arm's length principle. The Tribunal found that the TPO's approach was flawed in several respects, including the rejection of the TP documentation and the use of inappropriate filters.

3. Rejection of the TP Documentation:
The AO/TPO rejected the TP documentation maintained by the appellant under section 92D of the Act and Rule 10D of the Income-tax Rules, 1962. The Tribunal found that the TPO did not appreciate that none of the conditions set out in section 92C(3) of the Act were satisfied in the present case.

4. Ignoring Tax Holiday Entitlement:
The appellant argued that it was entitled to a tax holiday under sections 10A and 10AA and would not have any motive to derive a tax advantage by manipulating transfer prices. The Tribunal did not specifically address this issue, indicating that it was part of the broader context of TP adjustments.

5. Disregarding the ALP Determined by the Appellant:
The AO/TPO disregarded the ALP as determined by the appellant and modified/rejected the filters applied by the appellant. The Tribunal found that the TPO's revised comparability analysis was flawed and directed the AO/TPO to re-examine the comparables.

6. Use of Current Year Data for Comparables:
The AO/TPO used current year data for comparable companies, which was not necessarily available to the appellant at the time of preparing its TP documentation. The Tribunal found this approach to be inappropriate and directed the AO/TPO to use relevant financial year data if available.

7. Exclusion/Inclusion of Certain Comparables:
The Tribunal examined the exclusion/inclusion of various comparables in detail:
- Accentia Technologies Ltd., Acropetal Technologies Ltd., and Jeevan Scientific Technology Ltd.: The Tribunal excluded these comparables, finding them functionally different.
- R Systems International Ltd.: The Tribunal directed the AO/TPO to include this comparable if relevant financial year data was available.
- Infosys BPO Ltd., TCS E-serve Ltd., BNR Udyog Ltd., and Excel Infoways Ltd.: The Tribunal set aside the DRP's order and directed the AO/TPO to re-examine these comparables.

8. Risk Adjustment:
The Tribunal found that the lower authorities did not consider the factor of risk adjustment while computing the ALP for international transactions. It directed the AO/TPO to make a risk adjustment after making necessary verification.

9. Working Capital Adjustment:
The Tribunal held that working capital adjustment should be allowed while determining the ALP without putting any cap thereon. It restored the issue to the AO/TPO for re-examination.

10. Penalty Proceedings under Section 271(1)(c):
The appellant argued that the AO initiated penalty proceedings mechanically without recording any adequate satisfaction. The Tribunal did not specifically address this issue, indicating that it was part of the broader context of the AO's order.

11. Interest Computation under Section 234B:
The appellant contended that the AO erred in charging and computing interest under section 234B. The Tribunal did not specifically address this issue, indicating that it was part of the broader context of the AO's order.

12. Jurisdictional Error in Referring the Matter to the TPO:
The appellant argued that the reference made by the AO suffered from a jurisdictional error as the AO did not record any reasons in the draft assessment order. The Tribunal did not specifically address this issue, indicating that it was part of the broader context of the AO's order.

Conclusion:
The Tribunal found several flaws in the AO/TPO's approach, particularly in the rejection of the TP documentation, the use of inappropriate filters, and the failure to consider risk and working capital adjustments. It directed the AO/TPO to re-examine the comparables and make necessary adjustments while determining the ALP for international transactions. The appeals were partly allowed for statistical purposes.

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