2017 (4) TMI 1541 - AT - Income Tax

Computation of deduction u/s 10B - HELD THAT - This issue is covered by the decision of coordinate bench of the tribunal in the assessee s own case 2011 (7) TMI 1259 - ITAT BANGALORE for the assessment year 2002-03, 2003-04 and 2004-05, wherein it was held that if freight expenses are not included in export turnover and total turnover, then they cannot be reduced while computing the deduction u/s 10B of the Act. In our view this issue is no more res integra and it is covered by the decision of Hon ble Jurisdictional High Court 2011 (8) TMI 782 - KARNATAKA HIGH COURT in 349 ITR 98. Therefore, the grounds raised are required to be allowed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - The Bombay High in the case of Godrej and Boyce Mfg. Co. Ltd., Vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT has held that Rule 8D is prospective in nature and is not retrospective in nature and is only applicable from asst. year 2008-09 onwards. Therefore, in our view, Rule 8D cannot be invoked by the AO for calculating disallowance u/s 14A. Thus we set aside this issue to the file of the AO for computing reasonable expenditure incurred in relation to income which does not form part of the total income. TP adjustment - Comparable selection - HELD THAT - Exclusion of Mold-Tek and Eclerx Services as they are into KPO services and the assessee is providing specialized services and is not simply into BPO services provider as projected by the assessee. The work scope and the agreement of the assessee with its AE clearly provides that the assessee is providing high end technical services to its AE and for that purposes has engaged various technical staffs. Vishal Information Technologies Ltd. And Infosys BPO was into outsourcing, therefore, it cannot be comparable with that of the assessee. Moreover, the business model of the comparable company viz., Vishal Information Technologies Ltd. is different from the assessee as it is getting its work done through outsourcing. Similarly, Tribunal has excluded the Infosys BPO Ltd. from the list of comparables after examining the comparability and size of the Infosys BPO in the judgment refereed herein above.

Summary

Issues Involved:

1. Reduction in deduction under Sections 10A and 10B.
2. Disallowance under Section 14A.
3. Transfer Pricing (TP) issues.

Issue-wise Detailed Analysis:

1. Reduction in Deduction under Sections 10A and 10B:

The assessee contested the reduction in deductions claimed under Sections 10A and 10B of the Income Tax Act. The Dispute Resolution Panel (DRP) had upheld the reduction, which was based on the exclusion of freight expenses from the export turnover and total turnover. The tribunal referenced a previous decision in the assessee’s own case for earlier assessment years (2002-03, 2003-04, and 2004-05) and a jurisdictional High Court decision (349 ITR 98), which established that if freight expenses are not included in the export turnover and total turnover, they cannot be reduced while computing the deduction under Section 10B. Consequently, the tribunal allowed the grounds raised by the assessee, reversing the DRP's decision.

2. Disallowance under Section 14A:

The assessee challenged the disallowance of INR 9,70,000 under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The assessee argued that no expenditure was incurred to earn the dividend income, which was substantiated by the tax audit report. The tribunal noted that Rule 8D was applicable prospectively from AY 2008-09 onwards, as held by the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. vs. DCIT [2010] 194 Taxman 203. Therefore, Rule 8D could not be applied for AY 2007-08. The tribunal set aside this issue to the file of the Assessing Officer (AO) for computing reasonable expenditure incurred in relation to income that does not form part of the total income.

3. Transfer Pricing (TP) Issues:

The assessee contested the adjustments made by the Transfer Pricing Officer (TPO) and upheld by the DRP regarding the Arm’s Length Price (ALP) of international transactions. The TPO had selected several companies as comparables, which the assessee argued were not functionally comparable.

a. Mold-Tek Technologies Limited:

The assessee argued that Mold-Tek was engaged in engineering services, which are distinct from the ITES segment of the assessee. The tribunal noted that Mold-Tek provided high-end technical services involving significant expertise, making it functionally different from the assessee’s activities. Thus, Mold-Tek was deemed not comparable.

b. eClerx Services Limited:

The assessee contended that eClerx provided data analytics and process solutions, which are KPO services, unlike the assessee’s ITES services. The tribunal found that eClerx’s high-end services involving specialized knowledge made it non-comparable to the assessee’s low-end services.

c. Vishal Information Technologies Limited:

The assessee argued that Vishal outsourced a majority of its ITES work, making its business model different. The tribunal agreed, noting that Vishal's outsourcing model and intermediary services were not comparable to the assessee’s operations.

d. Infosys BPO Limited:

The assessee claimed that Infosys BPO, being an established player with significant brand value and different risk profiles, was not comparable. The tribunal concurred, citing the significant differences in scale, brand value, and functional profile.

The tribunal directed the AO/TPO to exclude Mold-Tek, eClerx, Vishal Information Technologies, and Infosys BPO from the list of comparables, following precedents set by other tribunal decisions.

Conclusion:

The tribunal allowed the appeal in part, providing relief to the assessee on the issues of deduction under Sections 10A and 10B, disallowance under Section 14A, and the exclusion of certain comparables in the TP analysis. The order was pronounced in the open court on 24th April 2017.