2017 (2) TMI 1455 - AT - Income Tax

TP Adjustment - adjustment to the transfer price of the Appellant in respect of its IT enabled support services in the nature of back office and customer support services - rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis performed by the learned TPO in the TP Order - Disregarding application of multiple year/prior year data - HELD THAT - Order on TP issue is very cryptic and not a speaking and reasoned order. Therefore We feel it proper to restore the matter regarding TP issue to his file for a fresh decision. We order accordingly. The TP issue is restored back to his file with a direction that he should pass a speaking and reasoned order after affording adequate opportunity of being heard to both sides. Interest income earned from debts - CIT(A) not considering the income from services in the nature of interest on the delayed payments made by associated enterprises for the provision of IT enabled services as an operating income and hence erred in computing the effective mark-up on total cost earned by the Appellant - HELD THAT - Delhi Bench rendered in the case of EFunds International (P.)Ltd. v. Dy. CIT 2008 (4) TMI 354 - ITAT DELHI-F wherein it was held by the Tribunal that the assessee was not eligible to claim deduction u/s 10A of the IT Act 1961 on the interest income earned by the assessee from the housing loans advanced to its employees because it did not form part of the business of the assessee. CIT(A) as noted by him in his order we find no infirmity in the order of the ld. CIT(A) on this issue and since the working capital adjustment has already been allowed by the TPO we are of the considered opinion that non interference is called for in the order of the ld. CIT(A) on this issue. Accordingly ground no.5 of the assessee is rejected. Working capital adjustment - HELD THAT - Working of risk adjustment claimed by the assessee is not available in the TP study and is not made available before the TPO or before the ld. CIT(A) or before us. This is also true that apart from various risk faced by uncontrollable comparables the assessee providing services to AE is also having risk of single customer and therefore in the absence of any scientific working in respect of the claim for risk adjustment the same cannot be considered and allowed and therefore we are of the considered opinion that the ld. CIT(A) was not justified in holding that the assessee is entitled to risk adjustment as per prevailing- norms which shall be worked out by the TPO and granted to the assessee. If such adjustment was possible to be worked out in the facts of the present case the ld CIT(A) should have worked out himself instead of asking the TPO to work it out. Such working is not made available before us also by the ld. AR of the assessee and therefore we reverse the order of the ld. CIT(A) on. this issue and restore the order of the AO. Accordingly ground no.2 of the revenue is allowed. Deduction u/s 10A - computation of deduction - HELD THAT - This issue is fully covered in favour of the assessee by the judgment of the Hon ble Karnataka High Court rendered in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein it was held that Total Turnover is sum total of Export Turnover and Domestic Turnover and therefore if an amount is reduced from export turnover then total turnover also goes down by the same amount automatically. - Decided against revenue

Issues Involved:
1. Rejection of Transfer Pricing (TP) documentation.
2. Adjustment to the transfer price of IT-enabled support services.
3. Comparability analysis and the use of current year data.
4. Inclusion and exclusion of comparable companies.
5. Consideration of interest income on delayed payments as operating income.
6. Risk adjustment entitlement.
7. Computation of deduction under Section 10A.

Issue-wise Detailed Analysis:

1. Rejection of Transfer Pricing (TP) Documentation:
The assessee contested the rejection of its TP documentation by the Transfer Pricing Officer (TPO) and the Assessing Officer (AO). The CIT(A) upheld this rejection, which led to an adjustment to the transfer price of the assessee's IT-enabled support services. The Tribunal found the CIT(A)'s order on this issue to be "very cryptic and not a speaking and reasoned order." Consequently, the matter was restored to the CIT(A) for a fresh decision with a directive to pass a speaking and reasoned order after affording both parties adequate opportunity to be heard.

2. Adjustment to the Transfer Price of IT-enabled Support Services:
The CIT(A) upheld the TPO's approach of using data available at the time of assessment proceedings rather than at the time of preparing the TP documentation. The Tribunal found this approach reasonable and did not interfere with the CIT(A)'s decision on this matter.

3. Comparability Analysis and Use of Current Year Data:
The CIT(A) upheld the TPO's approach of using current year data (Financial Year 2008-09) for comparable companies, rejecting the multiple year/prior year data used by the assessee. The Tribunal did not find any infirmity in this approach and upheld the CIT(A)'s decision.

4. Inclusion and Exclusion of Comparable Companies:
The assessee argued that the CIT(A) arbitrarily arrived at a set of comparable companies by rejecting functionally comparable companies and including those that failed the test of comparability. The Tribunal noted that the CIT(A) examined the functionality of all comparables and found no reason to exclude any further comparables on the ground of functional dissimilarity. However, the Tribunal found the CIT(A)'s order on this issue to be cryptic and restored the matter to the CIT(A) for a fresh decision.

5. Consideration of Interest Income on Delayed Payments as Operating Income:
The assessee contended that interest received from associated enterprises (AEs) on account of delayed payments should be considered as operating profit. The CIT(A) decided this issue by referring to various judicial authorities, including a judgment from the Hon'ble jurisdictional High Court. The Tribunal agreed with the CIT(A) that the interest income earned from debts had no nexus with the business activity of the assessee and upheld the decision that such receipts should be considered non-operational income.

6. Risk Adjustment Entitlement:
The CIT(A) held that the assessee was entitled to risk adjustment as per prevailing norms, which the TPO should work out. The Tribunal found that the assessee did not provide a scientific working of the claimed risk adjustment and reversed the CIT(A)'s order on this issue, restoring the AO's order. The Tribunal noted that in the absence of any scientific working, the claim for risk adjustment could not be considered and allowed.

7. Computation of Deduction under Section 10A:
The CIT(A) directed the AO to follow the ratio laid down by the Hon'ble High Court in the case of Tata Elxsi Ltd. while computing the deduction under Section 10A by excluding certain expenses from the total turnover. The Tribunal found this issue to be fully covered in favor of the assessee by the judgment of the Hon'ble Karnataka High Court and upheld the CIT(A)'s decision on this matter.

Conclusion:
The Tribunal partly allowed the appeal of the assessee for statistical purposes and partly allowed the appeal of the revenue. The matters regarding TP issues were restored to the file of the CIT(A) for fresh decisions, while the Tribunal upheld the CIT(A)'s decisions on other issues, including the computation of deduction under Section 10A and the non-consideration of interest income as operating income.

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