2020 (6) TMI 761 - AT - Income Tax

TP Adjustment - Comparable selection - comparable Caliber Point Business Solutions Ltd. - HELD THAT - No such disclosure is apparent in the annual report of the company and therefore we are of the considered opinion that this company cannot be excluded only on an inference that some extraordinary event might have occurred. We also note that the functional comparability of this company has not been disputed either by the TPO or by the CIT (A). As now settled law that a company cannot be excluded as a comparable solely for the reason that its financial year is different without considering whether the data for the financial year adopted by the assessee can be compiled from the audited statements of such company. The ITAT Delhi Bench in the case of Xchanging Technology Services India Pvt. Ltd. 2015 (10) TMI 1005 - ITAT DELHI directed that this company be included as a comparable wherein it had been rejected only on the ground of having different financial year any. Accordingly this company is directed to be included in the final set of comparables after verifying that the margin can be recomputed to work out the proportionate working margins if the financial data are duly audited and are available in the public domain of course with the rider that during that period there were no other factors affecting the operating margin thus ground No.2 stands allowed for statistical purposes. Rejection of the comparable R-System International Ltd. - As rejection of the comparable by the Ld. CIT (A) is more on some kind of suspicion rather than being supported by any cogent data. As we have already mentioned in the preceding paragraphs a comparable cannot be rejected merely because of a different financial year ending and now there are numerous orders of the Tribunal in this regard. We again refer to order of the ITAT Delhi Bench in the case of Xchanging Technology Services India Private Limited 2015 (10) TMI 1005 - ITAT DELHI wherein this company was directed to be included. Since the Ld. CIT (A) has not indicated any basis for suspecting the reliability of the financial results for this company we direct that this company be included in the final set off comparables subject to the verification that the relevant data can be easily compiled from the audited statements of the company of course with the rider that during that period there are no other factors affecting the operating margin. Accordingly Ground No.4 stands allowed for statistical purposes. Exclusion of Infosys BPO as a comparable - Similarly ITAT Delhi Bench in the case of Cengage Learing India Pvt. Ltd. 2018 (7) TMI 1549 - ITAT DELHI held that Infosys BPO Ltd. had huge turnovers owns IPR and brand value on products and provides services to vast clientele. Under such circumstances this company cannot be accepted to be a fit comparable in case of assessee who is a captive service provider providing services only to its group concerns. The Judicial precedents where Infosys BPO Ltd. has been excluded for the reason of being a giant company having huge turnover brand value ownership of IPRs etc. can be multiplied. Therefore in over all view of the matter considering the size and service being rendered by the assessee company as compared to Infosys BPO Ltd. we hold that this company is not a good comparable. Accordingly we direct the exclusion of this company from the final set of comparables. Thus Ground No.5 stands allowed. Incorrect computation of operating profit margin of e4e Healthcare Business Services Pvt. Ltd. - We note that the Delhi Bench of the ITAT in the case of Sony India Pvt. Ltd. 2008 (9) TMI 420 - ITAT DELHI-H has held that provision for doubtful debts is part of normal operating activity of the business and similarly any write back of provision is also to be treated as operating in nature. Similar views have been taken by the Bengalure Bench of ITAT in the case of Outsource Partners International (P.) Ltd. 2017 (2) TMI 1410 - ITAT BENGALURU and Hyderabad Bench of the Tribunal in the case of Sum Total Systems India Pvt. Ltd. 2016 (9) TMI 1514 - ITAT HYDERABAD Accordingly we direct that the provision for bad and doubtful debts of this company be treated as a part of the operating expenses and the margins of this company be recomputed after giving proper opportunity to the assessee to present its case. Thus Ground No.6 stands allowed for statistical purposes. Operating profit margin of ICRA Techno Analytics Limited has been incorrectly computed at 28.66% instead of the correct operating profit margin of 24.96% - It is the assessee contention that this computational error occurred because the foreign exchange fluctuation loss was deducted twice by the TPO. In this regard a chart has also been submitted. In our considered opinion this claim of the assessee needs to be re-examined by the TPO after giving proper opportunity to the assessee. Accordingly Ground No.7 is restored to the file of TPO for verification of the assessee s claim and pass order in accordance with law after giving due opportunity to the assessee. Ground No.7 thus stands allowed for statistical purposes.

Summary

Issues Involved:
1. Inclusion/Exclusion of Comparables
2. Incorrect Computation of Operating Profit Margins
3. Levy of Interest under Section 234B
4. Initiation of Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Inclusion/Exclusion of Comparables:

Caliber Point Business Solutions Ltd.:
The Tribunal noted that this comparable was rejected by the TPO due to a different accounting year and an alleged extraordinary event causing a fall in profitability. However, the Tribunal found no reference to any extraordinary event in the company's annual report and emphasized that functional comparability was not disputed. Citing the ITAT Delhi Bench's decision in Xchanging Technology Services India Pvt. Ltd. vs. DCIT, the Tribunal directed the inclusion of this company after verifying that the margin can be recomputed from audited financial data, provided no other factors affected the operating margin.

R-System International Ltd.:
This comparable was also rejected due to a different accounting year and concerns about the authenticity of its financial results. The Tribunal found no basis for doubting the financial results and reiterated that a different financial year alone is not a valid ground for rejection. Referring to the ITAT Delhi Bench's decision in Xchanging Technology Services India Pvt. Ltd. vs. DCIT, the Tribunal directed the inclusion of this company, subject to verification of data from audited statements and ensuring no other factors affected the operating margin.

Infosys BPO Ltd.:
Although initially selected by the assessee, the Tribunal allowed the assessee to seek its exclusion on the grounds that Infosys BPO Ltd. is a giant company with significantly higher turnover, assets, and employee strength. Citing multiple judicial precedents, including the Hon’ble Delhi High Court's decision in CIT vs. Sanvih Info Group Pvt. Ltd., the Tribunal directed the exclusion of Infosys BPO Ltd. from the final set of comparables.

Datamatics Financial Services Ltd.:
The assessee did not press this ground, and it was dismissed as academic.

2. Incorrect Computation of Operating Profit Margins:

e4e Healthcare Business Services Pvt. Ltd.:
The Tribunal addressed the incorrect computation of operating profit margin due to the treatment of provision for doubtful debts as non-operating. Citing the Delhi Bench of the ITAT in Sony India Pvt. Ltd. vs. DCIT and other cases, the Tribunal directed that the provision for bad and doubtful debts be treated as part of operating expenses and recomputed the margins accordingly.

ICRA Techno Analytics Ltd.:
The Tribunal noted the computational error where the foreign exchange fluctuation loss was deducted twice, leading to an inflated operating profit margin. The Tribunal directed the TPO to re-examine and verify the assessee’s claim, ensuring proper opportunity for the assessee to present its case.

Cosmic Global Ltd.:
The assessee did not press this ground, and it was dismissed as not pressed.

3. Levy of Interest under Section 234B:
The Tribunal deemed this ground consequential and did not require specific adjudication.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed this ground as premature at this stage.

Final Result:
The appeal of the assessee was partly allowed, with specific directions for inclusion/exclusion of comparables and recomputation of margins as discussed.