2017 (4) TMI 1484 - AT - Income Tax

Disallowance u/s 10A on the enhanced income - Mandation of recording the satisfaction for the compilation of Rule 8D - HELD THAT - AO has merely mentioned that he is not satisfied with the explanation, therefore, in our view, the AO has recorded the satisfaction for the compilation of Rule 8D. No specific format is provided under the act for recording the satisfaction. Assessee has failed to discharge his primary onus of proving nexus of interest free funds available at the time of making the investment that has yielded the interest free income , in our view, in the absence of discharge of initial onus the burden is not shifted to AO to establish nexus between the interest bearing funds and the investment made by the assessee. As the AO has recorded his dissatisfaction regarding the correctness of the claim of the assessee in respect of expenditure (Nil) which the assessee claimed to have been incurred in relation to the income which does not form part of the total income. After recording dissatisfaction, the AO is left with no other option but to adopt the methodology provided in Rule 8D r.w.s 14A(2) of the Act. In the present case, the AO has only applied 0.5% of the total income as expenditure. AO has rightly applied the Rule 8D and no error has been pointed out by the ld AR on working out of the expenditure by applying the Rule 8D. In our view, the AO has worked out the expenses after due application of the methodology, therefore, the ground raised by the assessee is required to be rejected. Non granting the relief u/s 10A of the Act on the enhanced income - HELD THAT - In Gem Plus Jewellery India Ltd., 2010 (6) TMI 65 - BOMBAY HIGH COURT wherein it was held that the assessee was entitled to exemption u/s 10A with reference to addition or disallowance of various payments as the plain consequence of disallowance and add back made by the AO is increased in the business profit of the assessee. We find force in the submissions of the learned AR of the assessee on this issue because if part of expenses claimed by the assessee against business income is considered as expenses incurred for earning tax free income and is disallowed u/s 14A, the business income stands increased by that amount and only such increased business income should be considered for computing the amount of deduction u/s 10A. A. O. is directed accordingly. TP Adjustment - comparable selection - HELD THAT - Assessee is providing specialized services and is not simply into BPO services provider as projected by the assessee. The work scope and the agreement of the assessee with its AE clearly provides that the assessee is providing high end technical services to its AE and for that purposes has engaged various technical staffs in the form of IT Team Leader, Program Manager, Project Manager, Enterprise Architect/Application Architect/Design Architect, Business Analyst/Project Leader, Product Developer/Senior Product Developer, Product Quality Engineer/Senior Product Quality Engineer, Technical Author/Senior Technical Author, Team Lead (Development), Team Lead (QA) and various functions of these persons are provided in detail in the agreements thus companies functionally dissimilar with that of assessee need to be deselected from final list. Exclusion of telecommunication expenses from the total turnover also while computing the deduction u/s 10A - HELD THAT - Hon ble Karnataka High Court rendered in the case of Tata Elxsi, 2011 (8) TMI 782 - KARNATAKA HIGH COURT supports the case of the assessee because in this case, it was held by Hon ble Karnataka High Court that the total turnover is sum total of export turnover and domestic turnover and, therefore, if an amount is excluded from export turnover, the total turnover is also reduced by the same amount as a consequences of deduction from export turnover. In this view of the matter, we find no infirmity in the order of the learned CIT(A) on this issue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Grant of relief under Section 10A on enhanced income.
3. Exclusion of certain companies as comparables for Transfer Pricing analysis.
4. Re-computation of deduction allowable under Section 10A after reducing communication expenses from total turnover.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act, 1961:
The primary issue raised by the assessee was the disallowance of ?19,40,000 under Section 14A of the Act, which was upheld by the Commissioner of Income-tax (Appeals) [CIT(A)]. The assessee contended that no expenditure was incurred in earning the exempt dividend income. However, the Assessing Officer (AO) applied Section 14A read with Rule 8D of the Income-tax Rules, disallowing ?19,40,000 as expenditure related to exempt income. The Tribunal observed that the AO did not provide detailed reasons for his dissatisfaction with the assessee's claim of nil expenditure. However, it was noted that the AO followed the prescribed method under Rule 8D after recording his dissatisfaction. The Tribunal upheld the AO's application of Rule 8D, finding no error in the calculation of the disallowed amount.

2. Grant of Relief under Section 10A on Enhanced Income:
The assessee argued that if the disallowance under Section 14A is upheld, the disallowed amount should be added back to the business income, and the deduction under Section 10A should be allowed on the enhanced income. The CIT(A) had noted that any adjustment made during the computation of business income increased the profit of the business undertaking eligible for tax holiday benefits. The Tribunal agreed with the assessee's contention, directing the AO to add back the disallowed amount to the business income and allow the deduction under Section 10A on the enhanced income.

3. Exclusion of Certain Companies as Comparables for Transfer Pricing Analysis:
The Revenue challenged the CIT(A)'s exclusion of certain companies from the list of comparables used for Transfer Pricing analysis. The Tribunal examined the functional profiles and circumstances of the excluded companies:

- Aditya Birla Minacs, Jindal Intellicom, and Allsec Technologies Ltd.: The assessee had no objection to including these companies as comparables. The Tribunal directed their inclusion.
- Coral Hubs: The Tribunal upheld the exclusion of Coral Hubs, noting its functional dissimilarity and the direction from a previous year's decision.
- eClerx Services Limited and Mold-Tek Technologies Limited: The Tribunal noted that these companies were functionally different from the assessee, providing high-end services. Following the decision in Tesco Hindustan Service Centre Pvt. Ltd., the Tribunal upheld their exclusion due to abnormal profits and failing the employee cost filter.
- Genesys International Corporation Ltd.: The CIT(A) excluded Genesys for being functionally different and having abnormal results. The Tribunal remanded the issue back to the CIT(A) for a detailed comparison of the functional profiles of Genesys and the assessee.

4. Re-computation of Deduction Allowable under Section 10A after Reducing Communication Expenses from Total Turnover:
The Revenue contended that telecommunication expenses should be excluded from the export turnover but not from the total turnover. The Tribunal referred to the Karnataka High Court's decision in Tata Elxsi, which held that if an amount is excluded from export turnover, it should also be excluded from total turnover. The Tribunal found no infirmity in the CIT(A)'s order directing the AO to re-compute the deduction under Section 10A by reducing the communication expenses from the total turnover.

Conclusion:
The Tribunal partly allowed the appeals of both the Revenue and the assessee for statistical purposes. The AO was directed to re-compute the deduction under Section 10A on the enhanced income and to include/exclude certain companies as comparables based on the Tribunal's findings. The issue regarding Genesys International Corporation Ltd. was remanded to the CIT(A) for further examination.