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2016 (1) TMI 1406 - AT - Income TaxTP adjustment - exclusion of certain companies and against inclusion of certain companies by the TPO and as confirmed by the DRP and exclusion of certain companies as directed by DRP - HELD THAT - As regards Accentia Technologies Ltd., is concerned, assessee had contended that the company operates in a different environment from that of the tax- payer and further that it has intangibles of Brand/IPRs. It was also stated that Accentia Technologies Ltd., used its own software on which it owns IP rights and offers different services to its customers as is evidenced from the annual report. Assessee had also objected that the company operates in knowledge process outsourcing and provides data analytics, data management and process improvement solutions to global enterprise clients. As regards Infosys BPO Ltd., is concerned, it was submitted that the company has huge turnover with global brand value and operates on large scale with lakhs of employees. It was submitted that the talent pool available with such companies is significantly different and high value and such companies having different functions, assets and risk profile is to be excluded. As regards TCS E-Serve International Ltd., is concerned, the assessee had contended that the assessee is a subsidiary of TCS e-Serve Limited and being part of the group of a large conglomerate, this company has large client base. As regards TCS E-Serve Limited, though TCS E-Serve International Ltd., has not been considered in any of the above decisions, we find that the rationale on which these companies have been excluded is also applicable to TCS E-Serve International Ltd. - we direct the TPO/A.O. to exclude TCS E-Serve International Ltd., also from the final list of comparables. Accordingly, Ground No.3 of the assessee is allowed International transactions - Disallowance of expenditure of copyright infringement settlement expenses paid to the A.E. as non-operating and extraordinary expenditure while calculation of arms length margin - HELD THAT - Unless it is found to be not relating to the normal business operations of the assessee company, it cannot be directed to be excluded from the operating expenditure of the assessee. Further, assessee s contention that it does not relate to the relevant financial year is also to be verified by the A.O. In view of the same, we deem it fit and proper to remit this issue to the file of the TPO for re-determination as to whether it forms part of the operating expenditure of the assessee. Seeking inclusion of two companies ICRA Online and Territory Services Ltd., as comparables to that of the assessee company, the Ld. Counsel for the assessee, has drawn our attention to the submissions of the assessee before the TPO and as to why the TPO has rejected these companies. He has also drawn our attention to the factual inconsistencies in the findings of the TPO against these two companies. Considering the same, we remit the issue to the file of TPO for reconsideration as to whether these factual inconsistencies do exist and after verification of the said details, the TPO may take a decision in accordance with law. Ground No.4 of the assessee is treated as allowed for statistical purposes Addition u/s 36(1)(ii) loyalty rewards - HELD THAT - We find that the loyalty rewards do not fall in the same category as bonus and commission as envisaged under section 36(1)(ii) of the Act. Therefore, respectfully following the judgment in the case of Sri Ram Ltd.. vs. CIT (2008 (4) TMI 273 - DELHI HIGH COURT), we direct the A.O. the allow this expenditure. Deduction u/s 10A - Reduce the telecommunication charges from both the export turnover as well as total turnover for the purpose of computation of deduction under section 10A - This issue is covered in favour of the assessee by the decision in the case of CIT & another vs. Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT
Issues Involved:
1. Exclusion and inclusion of comparable companies for Transfer Pricing adjustments. 2. Consideration of copyright infringement settlement expenses as non-operating and extraordinary expenditure. 3. Inclusion of specific companies as comparables. 4. Disallowance of 'Loyalty Rewards' expenditure. 5. Consideration of 'Advertisement Board penalty charges' as allowable expenditure. 6. Application of Arm's Length Price (ALP) to reimbursement of expenses. 7. Reduction of telecommunication charges from both export turnover and total turnover for section 10A computation. Issue-wise Detailed Analysis: 1. Exclusion and Inclusion of Comparable Companies for Transfer Pricing Adjustments: The common ground for both parties was the inclusion and exclusion of certain companies in the Transfer Pricing (TP) study. The Tribunal noted that the TPO had selected 11 comparable companies, but the assessee objected to five of them: Accentia Technologies Ltd., Eclerx Services Ltd., Infosys BPO Ltd., TCS e-Serve Limited, and TCS e-Serve International Ltd. The DRP directed the exclusion of four companies based on factors like high turnover, brand value, and extraordinary events like mergers. The Tribunal upheld the DRP's decision and also directed the exclusion of TCS e-Serve International Ltd., citing similar reasons. 2. Consideration of Copyright Infringement Settlement Expenses as Non-operating and Extraordinary Expenditure: The assessee argued that the copyright infringement settlement expenses paid to its AE should be treated as non-operating and extraordinary. The Tribunal found that the facts needed verification to determine if these expenses were part of the operating expenditure. The issue was remitted to the TPO for re-determination with directions to provide a fair hearing to the assessee. 3. Inclusion of Specific Companies as Comparables: The assessee sought the inclusion of ICRA Online Ltd. and Vishwa Vikas Services Ltd. as comparables. The Tribunal noted inconsistencies in the TPO's findings and remitted the issue for reconsideration, directing the TPO to verify the details and take a decision in accordance with the law. 4. Disallowance of 'Loyalty Rewards' Expenditure: The assessee contended that 'Loyalty Rewards' paid to employees should not be equated with bonus or commission under section 36(1)(ii). The Tribunal agreed, citing the Delhi High Court's judgment in Shri Ram Pistons & Rings Ltd. vs. CIT, and directed the AO to allow this expenditure. 5. Consideration of 'Advertisement Board Penalty Charges' as Allowable Expenditure: The assessee did not pursue this ground during the hearing, and it was dismissed as not pressed. 6. Application of Arm's Length Price (ALP) to Reimbursement of Expenses: The Tribunal noted that the TPO had applied an ALP of 29.25% to the reimbursement of expenses, where the adjusted ALP arrived at was 29.11%. The Tribunal did not provide a specific ruling on this issue, implying that the TPO's application was accepted. 7. Reduction of Telecommunication Charges from Both Export Turnover and Total Turnover for Section 10A Computation: The Tribunal upheld the DRP's direction to reduce telecommunication charges from both export turnover and total turnover, citing the Karnataka High Court's decision in CIT & another vs. Tata Elxsi. The Tribunal found no reason to interfere with the final assessment order on this issue. Conclusion: The Tribunal allowed the assessee's appeal partly for statistical purposes and dismissed the Revenue's appeal. The order was pronounced in the open court on 20.01.2016.
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