2019 (7) TMI 1663 - AT - Income Tax

TP Adjustment - comparable selection - selecting good comparables to the assessee on several ground including the functional dissimilarity non availability of segmental data and diversified activities besides high end use brand worth - HELD THAT - Companies unrelated to service of export of data processing and back office support undertaken by the assessee need to be deselected from final list of comparability. Services rendered by the assessee are only back office operations falling in the category of ITES and not KPO. eClerx is not a good comparable at all to the assessee. Apart from that no segmental information is also available. The reasoning given by the ld. DRP in respect of AY 2011-12 equally applies to the facts obtaining in this year also. We therefore find eClerx not a good comparable and have to be deleted from the list of comparables for benchmarking international transaction. Exclusion of M/s Accentia Technologies and Infosys BPO on the ground that in respect of each comparable certain extraordinary events had occurred during the previous periods which distorted the profitability thereby increasing the margin cannot be characterized as unreasonable. Rejection of comparable not on the ground of functional dissimilarity but only because of a different accounting period - As gone through the financials of this CG Vak Software the income from software development product and services is separately mentioned and was also at page 26 the segment revenue and segment results are also provided. In these circumstances we are of the considered opinion that in the absence of any finding that this company is functionally dissimilar ld. TPO should have considered these figures to identify whether CG Vak Software is a suitable comparable with the assessee. We therefore direct ld. TPO to consider this entity for benchmarking the international transaction. M/s Informed Technologies Ltd. and M/s Micro genetics Systems Ltd. Ld. TPO rejected the same on the ground that both the Companies sales are below 5 Crores - As relying on case of Chris Capital 2015 (4) TMI 949 - DELHI HIGH COURT we hold that so long as a company is functionally similar to the assessee merely because it does not match with the turnover it cannot be rejected. We therefore direct ld. TPO to include Informed Technologies Ltd. in the list of comparables. Interest of credit period granted by the company under normal trade practices - HELD THAT - We are of the considered opinion that if working capital adjustment is granted then no separate adjustment or interest receivables is required. We are fortified in our decision by the decision in case of Kusum Healthcare P. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT TPO/AO has erroneously interchanged operating profit/operating cost margin of the companies namely eClerx Services Ltd. and Omega Healthcare Management Services P. Ltd. and it requires rectification - HELD THAT - Since it is not a part of adjudication but only a mistake that had crept in the order we are of the opinion that the same could be rectified by the ld. TPO/AO. We therefore direct the same. Deduction u/s 10A in respect of AEGSC(STP) Unit set up by the assessee during the financial year 2002-03 on the ground that the STP unit was set up after splitting up its existing business of FCE(EOU) Unit - HELD THAT - We direct the learned AO to allow the deduction u/s 10A of the Act for the Asstt. Year 2010-11 in respect of AEGSC(STP) Unit set up by the assessee during the Financial Year 2002-03. Grant of full credit to the assessee as claimed in the return - HELD THAT - We are of the opinion that the ends of justice would be met by directing the ld. AO to verify the credit of TDS and allow the same to the assessee.

Summary

Issues Involved:
1. Transfer pricing adjustment of ?71,35,97,820/-
2. Deduction u/s 10A of ?49,93,98,378/-
3. Inclusion and exclusion of certain comparables
4. Interest on credit period granted by the company
5. Interchanged operating profit/operating cost margins
6. Full credit of TDS

Detailed Analysis:

1. Transfer Pricing Adjustment of ?71,35,97,820/-:
The assessee, engaged in providing travel-related services, filed a return declaring an income of ?2,42,82,74,285/- for AY 2010-11. The TPO suggested an adjustment of ?114,75,06,127/- to the income, later reduced by the AO to ?71,35,97,820/-. The assessee challenged the inclusion of five comparables (eClerx Services Ltd., Infosys BPO Ltd., Accentia Technologies Ltd., TCS e-serve Ltd., and TCS e-serve International Ltd.) and the exclusion of four comparables (R. Systems International Ltd., CG Vak Software Exports Ltd., Informed Technologies Ltd., and Micro Genetics Systems Ltd.).

2. Deduction u/s 10A of ?49,93,98,378/-:
The AO withdrew the deduction u/s 10A for the AEGSC (STP) Unit set up in FY 2002-03, claiming it was established by splitting an existing business. The Tribunal, following its earlier decisions, directed the AO to allow the deduction, emphasizing that the unit was recognized as a new one in previous assessments.

3. Inclusion and Exclusion of Certain Comparables:
- eClerx Services Ltd.: Rejected due to functional dissimilarity, abnormal revenue fluctuations, and lack of segmental data. The Tribunal upheld its exclusion, noting its KPO nature and entrepreneurial risks.
- Infosys BPO Ltd., Accentia Technologies Ltd., TCS e-serve Ltd., TCS e-serve International Ltd.: Excluded due to diversified activities, extraordinary events during the financial year, and lack of segmental data. The Tribunal cited previous cases and jurisdictional High Court decisions supporting the exclusion of these entities.
- R. Systems International Ltd.: Initially rejected due to a different financial year ending. The Tribunal directed the AO to consider quarterly results and work out the proportionate profit margin.
- CG Vak Software Exports Ltd.: Rejected due to low ITeS segment revenue. The Tribunal directed the TPO to reconsider its inclusion based on functional similarity.
- Informed Technologies Ltd. and Micro Genetics Systems Ltd.: Rejected due to sales below ?5 Crores. The Tribunal directed their inclusion, emphasizing functional similarity over turnover.

4. Interest on Credit Period Granted by the Company:
The Tribunal ruled that if working capital adjustment is granted, no separate adjustment for interest receivables is required, citing the Delhi High Court's decision in Kusum Healthcare P. Ltd.

5. Interchanged Operating Profit/Operating Cost Margins:
The Tribunal acknowledged the error in interchanging the operating profit/operating cost margins of eClerx Services Ltd. and Omega Healthcare Management Services P. Ltd. and directed the TPO/AO to rectify the mistake.

6. Full Credit of TDS:
The Tribunal directed the AO to verify the credit of TDS and allow the same to the assessee as claimed in the return.

Conclusion:
The appeal was allowed, with the Tribunal directing necessary adjustments and verifications, ensuring the inclusion/exclusion of appropriate comparables, rectification of errors, and granting of deductions and TDS credits as per the assessee's claims.