2018 (3) TMI 1881 - AT - Income Tax

TP Adjustment - upward adjustment in relation to assessee s international transaction of software services distributed by UK based associated enterprises Mastek UK (MUK) - HELD THAT - As relying on assessee's own case 2012 (5) TMI 206 - ITAT AHMEDABAD it is held that the operations of MUK can be characterized as distributor and accordingly the approach adopted by the TPO is set aside as it was not justified. The upward adjustment made by the TPO is accordingly directed to be deleted. Upward ALP adjustment relating to assessee s international transaction of provisions of Information Technology Enabled Services (ITES) - Comparable selection - HELD THAT - CIT(A) has recomputed assessee s arm s length margin after excluding two entities M/s. Accentia Technologies Limited and M/s. Cross Domain Solutions Limited - these very entities are not to be taken as comparables since the former one underwent extra ordinary merger event whereas the latter entity provided high-end KPO services. We observe in view of all these developments that the CIT(A) has rightly deleted the impugned adjustment after excluding the above two comparable entities from the array of comparables. The Revenue fails in its instant substantive ground as well. Upward adjustment on fee for performance guarantee from 2% to 0.11% as proposed in the transfer pricing officer s order - International transaction u/s 92B - HELD THAT - We find that recent co-ordinate bench in M/s Suzlon Energy Ltd. vs. ACIT 2017 (4) TMI 1406 - ITAT AHMEDABAD holds that such a guarantee does not amount to an international transaction under section 92B. TPO had himself taken financial guarantees given by various institutions as the relevant bench mark for the performance guarantee adjustment in question. assessee extending corporate guarantees to its AEs, particularly on the facts and in the circumstances of this case and when the assessee has done so in the course of its stewardship activities for its subsidiaries, does not constitute an international transaction, and, as such, no ALP adjustment can be made in respect of the same. Accordingly, entire ALP adjustment stands deleted. Upward adjustment to human resource management services - HELD THAT - As decided in own case 2012 (5) TMI 206 - ITAT AHMEDABAD figures have revealed that following the said business strategy the business growth as a whole was much higher than the impugned compensation amount. This allegation is also to be ruled out that those very employees were otherwise regular employees of the assessee-company and they have been absorbed after their return for the period for which they were sent abroad and worked offshore with AEs. It is true that such employees are the regular group of experts but they have been paid by AEs when worked on-site abroad, which means the burden of salary for the offshore period was in fact borne by AEs, otherwise to maintain bunch of trained employees the MIL had to incur the expenditure on salary - secondee-provider is not akin to recruitment service-provider or that secondment is different from recruitment . Finally, we hold that there was no legal basis for the impugned upward adjustment and the same is hereby directed to be deleted. This ground is allowed.

Issues Involved:
1. Upward adjustment related to the international transaction of software services.
2. Upward adjustment related to the international transaction of Information Technology Enabled Services (ITES).
3. Upward adjustment on fee for performance guarantee.
4. Upward adjustment related to human resource management services.
5. Disallowance under section 14A read with rule 8D(2)(iii) for administrative expenses related to exempt income.

Detailed Analysis:

1. Upward Adjustment Related to the International Transaction of Software Services:
The Revenue's appeal challenged the CIT(A)'s deletion of an upward adjustment of ?26,07,06,640/- related to the assessee's international transaction of software services distributed by its UK-based associated enterprise, Mastek UK (MUK). The CIT(A) deleted the adjustment, noting that MUK was characterized as a distributor assuming normal risk and not merely a marketing service provider. This characterization had been upheld by the ITAT in previous years (A.Y. 2006-07 and 2007-08). The tribunal affirmed the CIT(A)'s decision, citing judicial consistency and lack of any distinction in facts or law for the relevant assessment year.

2. Upward Adjustment Related to the International Transaction of ITES:
The Revenue's second substantive ground contested the CIT(A)'s deletion of an upward adjustment of ?29,07,087/- related to the provision of ITES to Carretek LLC. The CIT(A) had recomputed the arm's length margin after excluding two comparables, Accentia Technologies Ltd. and Cross Domain Solutions Ltd., based on the tribunal's co-ordinate bench decision. The tribunal upheld the CIT(A)'s decision, noting that the exclusion of these entities was justified due to extraordinary events and high-end KPO services, respectively.

3. Upward Adjustment on Fee for Performance Guarantee:
The Revenue's third ground challenged the CIT(A)'s reduction of the upward adjustment on the fee for performance guarantee from 2% to 0.11%. The CIT(A) noted that the performance guarantee was provided to ensure quality and timely services, and the TPO's comparison with financial guarantees was not justified. The tribunal referenced the co-ordinate bench decision in M/s Suzlon Energy Ltd. vs. ACIT, which held that such guarantees do not amount to an international transaction under section 92B of the Act. The tribunal agreed with the CIT(A)'s detailed analysis and upheld the decision.

4. Upward Adjustment Related to Human Resource Management Services:
The Revenue's last substantive ground contested the CIT(A)'s deletion of an upward adjustment of ?1,81,79,272/- related to human resource management services. The CIT(A) followed the tribunal's order in the assessee's case for A.Y. 2006-07, which held that HRM functions were an integral part of the software development services and not a separate international transaction. The tribunal affirmed the CIT(A)'s decision, noting that the facts for the relevant year were similar to those in earlier years.

5. Disallowance Under Section 14A Read with Rule 8D(2)(iii):
The assessee's cross appeal contested the disallowance of ?57,56,632/- under section 14A read with rule 8D(2)(iii) for administrative expenses related to exempt income. The CIT(A) upheld the disallowance, noting that the assessee had not maintained proper accounts for such expenditure. The tribunal observed that the disallowance was based on a statutory computation formula applicable from A.Y. 2008-09 and confirmed the disallowance in principle. However, the tribunal directed the Assessing Officer to exclude the average investment made in growth-oriented debt funds and fixed maturity plan funds yielding only taxable income from the computation.

Conclusion:
- The Revenue's appeal was dismissed, and the CIT(A)'s decisions on all upward adjustments were upheld.
- The assessee's cross appeal was partly allowed, with directions to recompute the disallowance under section 14A by excluding investments yielding taxable income.

← Previous Next →