2019 (8) TMI 1465 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee is engaged in the business of rendering support services in relation to Computer Aided Designing (CAD). Assessee as an ITeS service provider and not as a KPO companies functionally dissimilar with that of assessee need to be deselected from final list. Computation of ALP - Referring to decision of the Coordinate Bench in the case of Kenexa Technologies (P.) Ltd. 2014 (11) TMI 587 - ITAT HYDERABAD we hold that the provision for bad and doubtful debts is an operating expense and has to be considered while computing the ALP. AO/TPO is accordingly directed to take the same into consideration as operating expenditure. Working capital adjustment - As relying on Kenexa Technologies (P.) Ltd. 2014 (11) TMI 587 - ITAT HYDERABAD we are of the opinion that appropriate working capital adjustment is required to the margins of comparable uncontrolled transactions to generate credible comparable data on transactional net margins since the TNMM is applied. Hence, we set aside this issue to the TPO with a direction to allow requisite adjustments on account of the impugned working capital while determining the margins of comparable - we direct the TPO to allow the working capital adjustment to the assessee and recompute the ALP accordingly.

Issues Involved:
1. Incorrect selection of comparables
2. Incorrect rejection of comparables
3. Incorrect computation of margin of comparable companies
4. Incorrect rejection of Appellant's Transfer Pricing study
5. Incorrect benchmarking analysis by TPO
6. Incorrect computation of Profit Level Indicator (PLI)
7. Depreciation Adjustment
8. Working Capital Adjustment
9. Risk Adjustment
10. Levy of interest under Section 234B of the Act

Detailed Analysis:

1. Incorrect Selection of Comparables:
The assessee contested the inclusion of certain companies as comparables by the TPO. The TPO included companies like Infosys BPO Ltd, eClerx Services Ltd, and MPS Ltd as comparables. The assessee argued that these companies were functionally different, had high turnovers, brand values, and engaged in significant onsite operations. The Tribunal directed the exclusion of Infosys BPO Ltd and eClerx Services Ltd from the list of comparables due to their functional dissimilarity and presence of brand value. However, MPS Ltd was retained as a comparable as it was found to be functionally similar to the assessee.

2. Incorrect Rejection of Comparables:
The assessee argued for the inclusion of certain companies that were excluded by the TPO on the grounds that they did not satisfy the filters adopted by the TPO. The Tribunal directed the TPO to reconsider whether these companies satisfy the filters adopted by the TPO and are comparable to the assessee company.

3. Incorrect Computation of Margin of Comparable Companies:
The assessee submitted that the TPO incorrectly computed the margins of Infosys BPO Ltd and Microland Ltd. Since Infosys BPO Ltd was excluded as a comparable, the Tribunal did not adjudicate on its margin computation. However, the TPO was directed to take the correct margins of Microland Ltd.

4. Incorrect Rejection of Appellant's Transfer Pricing Study:
The assessee contended that the TPO and DRP erred in rejecting the transfer pricing analysis/study prepared by the assessee. The Tribunal did not specifically adjudicate on this issue as no specific arguments were advanced by the assessee.

5. Incorrect Benchmarking Analysis by TPO:
The assessee argued that the TPO conducted a fresh benchmarking which was erroneous and liable to be rejected. The Tribunal did not specifically adjudicate on this issue as no specific arguments were advanced by the assessee.

6. Incorrect Computation of Profit Level Indicator (PLI):
The assessee argued that the TPO incorrectly considered the provision for bad and doubtful debts as a non-operating expenditure while computing the PLI. The Tribunal held that the provision for bad and doubtful debts is an operating expense and has to be considered while computing the ALP.

7. Depreciation Adjustment:
The assessee argued that the TPO did not allow Depreciation Adjustment in accordance with the provisions of Rule 10B of the Income-tax Rules, 1962. The Tribunal did not specifically adjudicate on this issue as the assessee did not press this ground.

8. Working Capital Adjustment:
The assessee argued that the TPO did not allow Working Capital Adjustment in accordance with the provisions of Rule 10B of the Income-tax Rules, 1962. The Tribunal directed the TPO to allow the working capital adjustment to the assessee and recompute the ALP accordingly.

9. Risk Adjustment:
The assessee argued that the TPO did not allow risk adjustment in accordance with the provisions of Rule 10B of the Income-tax Rules, 1962. The Tribunal did not specifically adjudicate on this issue as the assessee did not press this ground.

10. Levy of Interest under Section 234B of the Act:
The assessee argued that the levy of interest under Section 234B of the Act was wholly unjustified. The Tribunal did not specifically adjudicate on this issue as no specific arguments were advanced by the assessee.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the TPO to reconsider the inclusion and exclusion of certain comparables, allow working capital adjustment, and consider the provision for bad and doubtful debts as an operating expense.

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