2019 (3) TMI 1633 - AT - Income Tax

Transfer pricing provisions to software development unit which enjoys tax holiday u/s 10A - assessee's contention that when companies are entitled to deduction u/s 10A of the Act, no adjustment on account of transfer pricing may be made - HELD THAT - We find that identical issue arose in assessee's own case in A.Y. 2006-07 wherein the Co-ordinate Bench of the Tribunal decided the issue against the assessee. Since the facts for the year under consideration are identical to that of earlier years, as admitted by both the parties before us, we therefore following the same reasoning as given by the Co-ordinate Bench of the Tribunal while deciding assessee's appeal in A.Y. 2006-07 and for similar reasons dismiss the ground of assessee. Thus, ground No.2 is dismissed. Non-consideration of contemporaneous nature of data and non- consideration of multiple year's data - HELD THAT - We find that the TPO while deciding the issue against the assessee has relied on the various decisions of Tribunal cited under para 10.10 of the DRP of the order. Before us also Ld AR has submitted that the issue is covered against the assessee by various decisions. We find no reason to interfere with the order of DRP and thus these grounds are dismissed. Applying turnover filter of ₹ 25 crores to ₹ 200 crores as against turnover filter of ₹ 25 crores to ₹ 125 crores applied by assessee - HELD THAT - The issue in the present ground is the application of turnover filters for selection of comparable companies for benchmarking the international transactions. We find that for A.Y 2006-07, the turnover of the assessee from software services was ₹ 82 crores and it had applied the turnover filter of ₹ 25 crore to ₹ 100 crores as against which the TPO had applied the turnover filter of ₹ 25 to ₹ 150 crores and the action of the TPO was upheld by the co-ordinate Bench of Tribunal. For the year under consideration, the turnover of the assessee from software services is ₹ 104 crores and assessee has adopted the turnover filter criteria of ₹ 25 crore to ₹ 125 crores as against which the TPO has adopted the turnover filter criteria of ₹ 25 crores to ₹ 200 crores. For the reasoning as followed by the coordinate bench of tribunal in assessee's own case for A.Y 2006-07 and for similar reasons we find no infirmity in the action of TPO in applying the turnover criteria filters. We thus uphold the order of TPO and thus this ground of assessee is dismissed. TP Adjustment - comparable selection - HELD THAT - Informed Technologies - there were wide fluctuations in the margins earned by it over a period of time coupled with the fact that there was also wide fluctuation in the revenue generation during the year under consideration and past three years. It therefore held for its exclusion. In view of the aforesaid facts, we direct the exclusion of Informed Technologies as a comparable We therefore direct TPO for the exclusion of Informed Technologies as a comparable company Maple E Solutions - Annual Accounts has demonstrated that it is engaged in call centre activities, its income is from call centre services whereas Assessee is engaged in providing non voice based services. In such a situation, we hold that Maple E solutions cannot be considered to be a comparable company in view of functional dissimilarity and therefore direct its exclusion. Cyber Media Events Ltd, Educational Consultants India Ltd, NTPC Electric Supply Co Ltd - Cyber Media TPO on the basis of Directors Report has noted that it is primarily engaged in event business and therefore not comparable to Assessee. With respect to Educational Consultants, TPO on the basis of Directors Report has noted that the company is engaged in technical assistance, HRD and institutional development projects and therefore not comparable. With respect NTPC Electric supply Ltd, TPO has noted that it is engaged in implementation of rural electrification projects in India and therefore functionally different from the Assessee. Before us, Ld AR has not controverted the findings of TPO on the functional dissimilarity found with the Assessee Company. In such a situation we do not find force in the argument of the Ld AR that these companies should be considered to be comparable based on broader comparable set. In such a situation, we find no reason to interfere with the order of TPO/DRP of excluding the aforesaid 3 companies as comparable with the Assessee. Exclusion of IOL - the operations for FY 2006-07 to be quite abnormal and therefore did not reflect a normal business trend and therefore was excluded from being a comparable. In view of the aforesaid facts, we direct the exclusion of IOL as a comparable company and thus direct the TPO to exclude it from comparables. Computation of relief for working capital adjustment in relation to provision for software development services, provision for IT enabled services and Sales Support Services - HELD THAT - As it is assessee's contention that pursuant to the directions of DRP, AO/TPO had worked out the working capital adjustment for Software Development Services, IT enabled services and Sales Support Services but AO/TPO has erred in working out the margins and has furnished the working made by AO/TPO and the correct working as per the Assessee. In view of the aforesaid submissions of Ld AR, we direct the AO/TPO to peruse the working furnished by the Assessee and consider the correct working capital adjusted operating margins of identified comparable companies for Software Development Services, IT enabled Services and Sales Support Service C omputation of Sec.10A deduction by reducing telecommunication expenses and foreign currency expenses from export turnover - HELD THAT - We find that AO while computing the deduction u/s 10A of the Act had reduced the telecommunication charges and expenditure in foreign currency from only 'export turnover' but the same was not excluded from 'total turnover' - As per CBDT vide Circular No.4/2018 dated 14.08.2018 which is binding on Revenue authorities, we are of the view that the aforesaid expenses have to be excluded both from 'export turnover' and 'total turnover' while computing deduction u/s 10A of the Act. We thus, direct accordingly. Thus, the ground of the assessee is allowed. Computation of interest u/s 234D - HELD THAT - AR's submission that there is error in the computation of interest u/s 234D and therefore an application u/s 154 of the Act has been made before the AO and the same is yet to be disposed. In view of the aforesaid submission of Ld AR, we direct the AO to compute the interest in accordance with law and pass the necessary orders. Thus, this ground of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Non-applicability of Transfer Pricing Provisions to Software Development Unit
3. Non-consideration of Contemporaneous Data
4. Non-consideration of Multiple Year Data
5. Use of Different Turnover Filter for Identification of Comparable Companies
6. Rejection of Certain Comparable Companies Identified by the Appellant
7. Acceptance of Certain Companies as Comparable
8. Inconsistent Approach for Rejecting/Accepting Companies
9. Computation of Relief for Working Capital Adjustment in Software Development Services
10. Computation of Relief for Working Capital Adjustment in IT Enabled Services
11. Adjustment for Differences on Account of Functional and Risk Profile
12. Applicability of +/-5% Range
13. Computation of Section 10A Deduction
14. Computation of Interest under Section 234D
15. Initiation of Penalty Proceedings under Section 271(1)(c)
16. Erroneous Levy of Interest under Section 234B

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged the transfer pricing adjustment of ?141,304,001 due to non-acceptance of comparability analysis documented in the transfer pricing study report. The Tribunal upheld the TPO's adjustments, rejecting the comparables selected by the assessee and including additional companies identified by the TPO.

2. Non-applicability of Transfer Pricing Provisions to Software Development Unit:
The assessee argued that transfer pricing provisions should not apply to its software development unit enjoying tax holiday under Section 10A. The Tribunal referred to its earlier decision in the assessee's own case for A.Y. 2006-07, where it was held that transfer pricing adjustments could be made even for units claiming Section 10A deductions. Thus, this ground was dismissed.

3. Non-consideration of Contemporaneous Data:
The assessee contended that the TPO erred by not using contemporaneous data available at the time of compliance with transfer pricing regulations. The Tribunal noted that the issue was covered against the assessee by various Tribunal decisions and upheld the TPO's approach of using data of the comparables for F.Y. 2006-07 only.

4. Non-consideration of Multiple Year Data:
The assessee argued for the use of multiple year data to capture market cycles and reduce distortions. The Tribunal upheld the TPO's decision to use single-year data, citing consistency with established Tribunal rulings.

5. Use of Different Turnover Filter for Identification of Comparable Companies:
The TPO applied a turnover filter of ?25 crores to ?200 crores, while the assessee had used ?25 crores to ?125 crores. The Tribunal upheld the TPO's filter, referencing the assessee's own case for A.Y. 2006-07, where a similar approach was accepted.

6. Rejection of Certain Comparable Companies Identified by the Appellant:
The Tribunal reviewed the TPO's exclusion of certain companies from the comparable set and upheld the exclusions based on functional dissimilarities and other criteria.

7. Acceptance of Certain Companies as Comparable:
The Tribunal directed the inclusion of Lanco Global Systems Ltd, Maars Software International Ltd, and Quintegra Solutions Ltd as comparables and the exclusion of Helios and Matheson Information Technology Ltd, based on functional similarities and past decisions.

8. Inconsistent Approach for Rejecting/Accepting Companies:
The Tribunal found no merit in the assessee's claim of inconsistency in the TPO's approach and upheld the TPO's selection of comparables.

9. Computation of Relief for Working Capital Adjustment in Software Development Services:
The Tribunal directed the AO/TPO to re-compute the working capital adjustment for software development services, considering the correct margins as per the assessee's submissions.

10. Computation of Relief for Working Capital Adjustment in IT Enabled Services:
Similar to software development services, the Tribunal directed the AO/TPO to re-compute the working capital adjustment for IT enabled services.

11. Adjustment for Differences on Account of Functional and Risk Profile:
The Tribunal restored the issue of risk adjustment to the AO/TPO for re-computation, following the methodology prescribed by various Tribunal decisions and considering the assessee's risk-mitigated business model.

12. Applicability of +/-5% Range:
The Tribunal did not specifically address this ground, as the adjustments were upheld or remanded for re-computation.

13. Computation of Section 10A Deduction:
The Tribunal directed the AO to exclude telecommunication expenses and foreign currency expenses from both 'export turnover' and 'total turnover' while computing the deduction under Section 10A, in line with CBDT Circular No. 4/2018.

14. Computation of Interest under Section 234D:
The Tribunal directed the AO to re-compute the interest under Section 234D at the correct rate of 0.5%, as per the assessee's application under Section 154.

15. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed this ground as premature, noting that penalty proceedings were not yet concluded.

16. Erroneous Levy of Interest under Section 234B:
The Tribunal did not specifically address this ground, as it was contingent on the outcome of the primary adjustments.

Conclusion:
The appeal was partly allowed, with directions for re-computation of certain adjustments and deductions, and dismissal of other grounds based on established Tribunal rulings and precedents.