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2019 (5) TMI 1745 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - Assessee in its transfer pricing study for contract software development (CSD) services provided to the Associated Enterprises (AEs) determine the arm s length price applying Transactional Net Margin Method (TNMM). The Operating Profit to Total Cost (OP/TC) was taken as profit level indicator (PLI) in the TNMM analysis thus companies functionally dissimilar with that of assessee need to be deselected from final list. Disallowance u/s 37(1) on account of prior period expenditure - HELD THAT - Additional evidence was not considered the matter in that respect is remanded back to the Assessing Officer relating to the Corporate Tax issue. Ground are remanded back to the AO/Transfer Pricing Officer for fresh adjudication after taking into account the additional evidence. Disallowance under Rule 8D of Income-tax Rules, 1962 read with section 14A - HELD THAT - Since in the instant case, the assessee has not earned any exempt income during the year under consideration, no disallowance can be made under section 14A of the Act, respectfully following the decision of Hon ble Delhi High Court in the case of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT . The disallowance made by the lower authorities is accordingly deleted. The ground no. 16.2 of the appeal is accordingly allowed. Since the disallowance under section 14A has already been deleted Interest expenses under section 36(1)(iii) - assessee failed to justify that the advance was for any commercial expediency or any business benefit has been accrued to the assessee - HELD THAT - No addition on account imputed interest attributable to allegedly interest free advances is called for and that a nexus is required to exist and be proved between the borrowing and lending of funds. Disallowance on account of contribution to labour welfare fund - HELD THAT - Parties have agreed that identical question of disallowance was involved in immediately preceding assessment year 2012-13, which has been restored to the file of the learned Assessing Officer for deciding a fresh in accordance with law. Thus, respectfully following the finding of the Tribunal in 2017 (11) TMI 1725 - ITAT DELHI while deciding the ground No. 14 and 15 of this appeal), we restore this issue to the file of the Ld. Assessing Officer for deciding afresh in accordance with law. The ground of the appeal is accordingly allowed for statistical purposes. Allowing set off of brought forward business losses of the earlier years - HELD THAT - We find that this is the issue of the examination of the claim of the assessee and verification of the updated position of the same by the Assessing Officer, thus, we feel it appropriate to restore this issue also to the file of the Assessing Officer for examining and verification of the claim of the set off of brought forward business losses and allow the same in accordance with law.
Issues Involved:
1. Determination of taxable income and proposed additions. 2. Transfer Pricing adjustments and comparability analysis. 3. Disallowance of liquidated damages. 4. Disallowance of prior period expenditure. 5. Disallowance under Section 14A of the Income Tax Act. 6. Disallowance of interest expenses under Section 36(1)(iii). 7. Disallowance of contribution to labor welfare fund. 8. Set off of brought forward business losses. 9. Initiation of penalty proceedings under Section 271(1)(c). Issue-wise Detailed Analysis: 1. Determination of Taxable Income and Proposed Additions: The appellant contested the determination of taxable income at ?2,52,89,95,210/- against the returned income of ?1,11,54,93,650/-. The appellant argued that the AO erred in making several additions based on conjectures and surmises, ignoring the factual matrix and the nature of transactions undertaken. 2. Transfer Pricing Adjustments and Comparability Analysis: The appellant raised multiple grounds challenging the transfer pricing adjustments amounting to ?65,65,05,130/-. The key issues included: - Jurisdictional error in the reference made under Section 92CA(1). - Rejection of the appellant’s economic analysis and fresh comparability analysis by the AO/TPO/DRP. - Inclusion of certain companies as comparables despite failing to qualify the filters. - Non-granting of working capital adjustment. - Rejection of multiple-year data for computing ALP. - Application of inappropriate filters and selection of non-comparable companies. - Cherry-picking of companies and selection of companies earning supernormal profits. - Computational errors in computing operating margins. - Inconsistent approach in providing working capital adjustment. - Non-allowance of risk adjustment. The Tribunal directed the AO/TPO to exclude certain companies from the final set of comparables due to functional dissimilarity and lack of segmental data, including Infosys Ltd, Larson and Toubro (Infotech) Ltd, Mindtree Ltd, Persistent Systems Ltd, Allcargo Logistics Ltd, HSCC (India) Ltd, Mitcon Consultancy and Engineering Services Ltd, Holtec Consulting Private Ltd, Certification Engineering International Ltd, and Acropetal Technologies Ltd. The Tribunal also directed the AO/TPO to re-compute the average margin of the final set of comparables and determine the transfer pricing adjustment accordingly. 3. Disallowance of Liquidated Damages: The AO disallowed liquidated damages of ?1,64,00,000/-. The Tribunal remitted the issue back to the AO for fresh consideration, following the approach adopted in the previous assessment year. 4. Disallowance of Prior Period Expenditure: The AO disallowed an amount of ?6,17,20,463/- under Section 37(1) on account of prior period expenditure. The Tribunal remitted the issue back to the AO for fresh consideration, consistent with the approach in the previous assessment year. 5. Disallowance under Section 14A: The AO disallowed ?28,61,300/- under Rule 8D read with Section 14A. The Tribunal deleted the disallowance, following the Delhi High Court’s decision in Cheminvest Ltd., which held that Section 14A does not apply if no exempt income is received or receivable during the relevant year. 6. Disallowance of Interest Expenses under Section 36(1)(iii): The AO disallowed ?44,67,442/- on account of interest expenses. The Tribunal deleted the disallowance, noting that the identical disallowance in the subsequent year was deleted by the DRP, and the loan/advance was only an opening balance during the year. 7. Disallowance of Contribution to Labor Welfare Fund: The AO disallowed ?76,446/- on account of late deposit of contribution to the labor welfare fund. The Tribunal remitted the issue back to the AO for fresh consideration, following the approach in the previous assessment year. 8. Set Off of Brought Forward Business Losses: The Tribunal restored the issue to the AO for examination and verification of the claim of set off of brought forward business losses. 9. Initiation of Penalty Proceedings under Section 271(1)(c): The Tribunal dismissed the issue as premature since the penalty was not levied in the impugned order. Conclusion: The Tribunal allowed the appeal partly for statistical purposes, directing the AO/TPO to re-compute the transfer pricing adjustments and remitting several issues back to the AO for fresh consideration. The Tribunal also deleted the disallowance under Section 14A and the disallowance of interest expenses under Section 36(1)(iii).
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