2019 (7) TMI 1584 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee is a company engaged in providing Information Technology Enabled Services (ITES) to its Associated Enterprises (AEs) such as pay roll processing cashiering document imaging loan accounting Investor reporting and Internet based customer services. In the year under consideration the assessee has classified its international transactions as ITES thus companies functionally dissimilar with that of assessee need to be deselected from final list. Working capital adjustment - Respectfully following the above decision of the Co-ordinate Bench in the case of Huawei Technologies India (P.) Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE we also hold that the working capital adjustment is to be allowed as per actuals after considering the decisions rendered in this order on the exclusion/inclusion of comparable companies out of/into the final set of comparables. The TPO/AO are accordingly directed.

Issues Involved:
1. Transfer Pricing Adjustments
2. Rejection of Transfer Pricing Documentation
3. Comparability Analysis and Filters
4. Financial Data Consideration
5. Service Income Filter
6. Export Earning Filter
7. Use of Non-Public Information
8. Inclusion and Exclusion of Comparable Companies
9. Working Capital Adjustments
10. Corporate Tax Adjustments
11. Levy of Interest under Section 234B

Detailed Analysis:

Transfer Pricing Adjustments:
The learned AO, TPO, and DRP erred in adjusting the transfer price by INR 15,11,87,300/- with respect to the international transaction rendered by the appellant under section 92CA of the Income-tax Act, 1961. The TPO rejected the assessee's TP study and conducted a fresh comparability analysis, leading to a TP adjustment of INR 15,11,87,300/-.

Rejection of Transfer Pricing Documentation:
The AO/TPO/DRP erred in rejecting the TP documentation maintained by the appellant by invoking provisions of sub-section (3) of section 92C of the Act. The TPO conducted a fresh comparability analysis by introducing various filters and used the current year data only.

Comparability Analysis and Filters:
The AO/TPO/DRP erred in rejecting the comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters. The TPO selected five companies for comparability: Infosys Systems Ltd., Microgenetic Systems Ltd., Microland Ltd., BNR Udyog Ltd., and Crossdomain Solutions Pvt. Ltd. The assessee's margin was higher than the comparable companies, but the TPO's analysis led to a TP adjustment.

Financial Data Consideration:
The AO/TPO/DRP erred in not considering the previous two years' financial data of the comparable companies while determining the ALP.

Service Income Filter:
The AO/TPO/DRP erred in applying the service income filter of 75% to sales, leading to a narrower set of comparable companies.

Export Earning Filter:
The AO/TPO/DRP erred in applying the export earning filter of 75% instead of 25% of the total sales, leading to a narrower set of comparable companies.

Use of Non-Public Information:
The AO/TPO/DRP erred in collating information that is not publicly available using powers under section 133(6) of the Act.

Inclusion and Exclusion of Comparable Companies:
The assessee sought the exclusion of Infosys BPO Ltd. and Microland Ltd. from the final set of comparables. The Tribunal held that Infosys BPO Ltd. is functionally different, owns intangible assets, and has significant brand value, making it incomparable to the assessee. Similarly, Microland Ltd. was excluded as it primarily renders Infrastructure Management Services, which are different from ITES.

The assessee sought the inclusion of Informed Technologies Ltd., Crystal Voxx Ltd., and Jindal Intellicom Ltd. The Tribunal included Informed Technologies Ltd. as it satisfies the service income filter. Crystal Voxx Ltd. was included as it predominantly relates to BPO activity with significant foreign exchange earnings. Jindal Intellicom Ltd. was included as it is functionally comparable and passes all the filters applied by the TPO.

Working Capital Adjustments:
The assessee contended that the TPO/DRP erred in not allowing appropriate adjustments towards working capital differential. The Tribunal held that working capital adjustments should be allowed on actual basis, following the decision in Huawei Technologies India (P.) Ltd. v. Jt. CIT.

Corporate Tax Adjustments:
The AO erred in adjusting for the difference in interest income amounting to INR 22,18,240 as per Form 26AS and Income Tax Return. The AO did not appreciate that the interest income from Fixed Deposits amounting to INR 21,51,033 was offered to tax in subsequent assessment years and the interest receivable of INR 67,208 from Tata Power Company Ltd. was adjusted against the electricity bill.

Levy of Interest under Section 234B:
The AO erred in levying interest under section 234B, which is consequential to the additions made in the assessment order.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the AO/TPO to exclude Infosys BPO Ltd. and Microland Ltd. from the final set of comparables and include Informed Technologies Ltd., Crystal Voxx Ltd., and Jindal Intellicom Ltd. The Tribunal also directed the AO/TPO to allow working capital adjustments on actual basis.

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