2018 (4) TMI 1850 - AT - Income Tax

TP Adjustment - comparable selection - Assessee is engaged in the business of providing IT Enabled Services to its parent company - HELD THAT - CG VAK Software Exports Ltd.rejected by the TPO on the ground that its turnover is less than ₹ 1 crore in ITeS segment - It is evident that when the company is functionally similar, the company cannot be rejected on the ground that the company s turnover is less than ₹ 1 crore especially when the companies with high turnover have not been rejected. To the same effect is the Hon ble Delhi High Court decision in the case of CIT v Mckinsey Knowledge Centre India Pvt Ltd 2015 (3) TMI 1226 - DELHI HIGH COURT - From perusal of the orders of the lower authorities, it is not clear whether the company passes through the filters applied by the TPO. Therefore, we deem it fit to remit this issue back to the file of the TPO with a direction to examine whether this company had passed through other filters applied by the TPO. R Systems International Ltd. rejected on the ground that it follows different accounting year - Hon ble Delhi High Court has held in Mckinsey Knowledge Centre India Pvt Ltd. 2015 (3) TMI 1226 - DELHI HIGH COURT that the company cannot be rejected simply because it follows different accounting year and results of adjusted period can be adopted - in the present case, the assessee-company had not discharged the onus of filing the results for adjusted period of the company. In absence of this segmental information, inclusion of this company is not possible. Further, no such plea was made before TPO. Hence, the ground of appeal filed in this regard is rejected. Accentia Technologies Ltd. rejected as functionly dissimilar with that of assessee Accentia Technologies Ltd.not comparable with that of assessee as relying on M/S. TESCO HINDUSTAN SERVICE CENTRE PVT. LTD., 2017 (1) TMI 1673 - ITAT BANGALORE E-clerx Services Ltd., is functionally different as it provides high end data analytics and customized process solutions and is a leading Indian provider of KPO services Infosys BPO Ltd.is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. 2016 (6) TMI 1293 - ITAT BANGALORE for Assessment Year 2007-08 is applicable to this year also. Deduction u/s 10A - direction of the Hon'ble DRP to include earning of foreign exchange, miscellaneous income as part of business income for the purpose of calculating benefit u/s 10A - HELD THAT - This issue is no longer res integra as it is resolved by the Hon'ble jurisdictional High Court in the case of CIT vs. Hewlett Packard Global Soft Ltd 2017 (11) TMI 205 - KARNATAKA HIGH COURT as held incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under sections 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section10-A or section 10-B of the Act and cannot be taxed separately under section 56 - Decided against revenue.

Issues Involved:

1. Transfer Pricing Adjustment
2. Rejection and Selection of Comparables
3. Inclusion of Foreign Exchange and Miscellaneous Income for Section 10A Deduction
4. Risk Adjustment
5. Penalty Proceedings

Detailed Analysis:

1. Transfer Pricing Adjustment:
The core issue pertains to the transfer pricing adjustment of ?8,01,61,253/- made by the TPO. The TPO accepted the Transactional Net Margin Method (TNMM) but rejected the assessee's transfer pricing study report for not using current financial year data and for selecting companies that did not pass the applied filters. The TPO identified a new set of comparables, leading to the adjustment. The AO incorporated these adjustments in the draft assessment order, which was confirmed by the Hon'ble DRP.

2. Rejection and Selection of Comparables:
The assessee challenged the rejection of two comparables (CG-VAK Software & Exports Ltd. and R Systems International Ltd.) and the inclusion of five comparables (Accentia Technologies Ltd., Acropetal Technologies Ltd., Eclerx Services Pvt. Ltd., ICRA Online Ltd., and Infosys BPO Ltd.).

2.1 CG-VAK Software & Exports Ltd.:
Rejected by the TPO due to turnover being less than ?1 crore. The Tribunal noted that functional similarity should prevail over turnover criteria. The issue was remitted back to the TPO for re-examination.

2.2 R Systems International Ltd.:
Rejected for following a different financial year. The Tribunal upheld the rejection as the assessee did not provide adjusted period results.

2.3 Accentia Technologies Ltd.:
Included by the TPO but objected by the assessee for being functionally different and lacking segmental information. The Tribunal directed the exclusion of this company based on previous Tribunal decisions highlighting functional dissimilarity.

2.4 Acropetal Technologies Ltd.:
Included by the TPO but objected by the assessee for being functionally different. The Tribunal directed the exclusion of this company, citing functional differences and previous Tribunal decisions.

2.5 Eclerx Services Pvt. Ltd.:
Included by the TPO but objected by the assessee for providing high-end KPO services. The Tribunal directed the exclusion of this company, aligning with previous Tribunal decisions on functional dissimilarity.

2.6 Infosys BPO Ltd.:
Included by the TPO but objected by the assessee for being functionally different and benefiting from brand value. The Tribunal directed the exclusion of this company, citing functional dissimilarity and brand value considerations.

3. Inclusion of Foreign Exchange and Miscellaneous Income for Section 10A Deduction:
The Hon'ble DRP directed the AO to include foreign exchange and miscellaneous income as part of business income for Section 10A benefits. This was contested by the revenue. The Tribunal upheld the DRP's direction, referencing the jurisdictional High Court's decision in CIT vs. Hewlett Packard Global Soft Ltd., which allowed such inclusion as integral to export business activity.

4. Risk Adjustment:
The assessee's claim for risk adjustment was dismissed due to the lack of substantiating information.

5. Penalty Proceedings:
The initiation of penalty proceedings under Section 271(1)(c) was noted but not elaborated upon in the judgment.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the exclusion of certain comparables and remitting the issue of CG-VAK Software & Exports Ltd. back to the TPO. The revenue's appeal was dismissed, affirming the inclusion of foreign exchange and miscellaneous income for Section 10A benefits. The judgment highlights the importance of functional similarity in selecting comparables and reaffirms the inclusion of incidental incomes for tax benefits under Section 10A.

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