2020 (11) TMI 1057 - AT - Income Tax

Taxability of Education cess - As submitted that, education cess is not tax and hence is not disallowable - HELD THAT - As rely on the judgment of Hon'ble Rajasthan High Court in the case of Chambal Fertilizers and Chemicals Ltd. v. Jt. CIT 2018 (10) TMI 589 - RAJASTHAN HIGH COURT , which after taking into account aforementioned CBDT circular held that section 40(a)(ii) applies only to taxes and not to education cess - we allow the additional ground raised by assessee TP Adjustment - comparables alleged for inclusion/exclusion by assessee as well as revenue under engineering design services segment- HELD THAT - Assessee has been categorised to be rendering engineering design services with the help of software developed by its AE as a captive service provider, thus companies functionally dissimilar with that of assessee need to be deselected.

Summary

Issues Involved:
1. Rejection of comparable cases under TNMM.
2. Adjustment to transfer price of international transactions.
3. Partial rejection of TP documentation.
4. Determination of arm's length price and comparability analysis.
5. Risk differential adjustments.
6. Deduction under section 37(1) for education cess.
7. Charging of interest under section 234D.

Detailed Analysis:

1. Rejection of Comparable Cases under TNMM:
The Dispute Resolution Panel (DRP) rejected comparable cases by insisting on strict comparability under the Transactional Net Margin Method (TNMM), which the appellant argued defeats the purpose of determining the Arm's Length Price (ALP) under the Income Tax Act. The appellant contended that the DRP's insistence on exact comparability overlooked the possibility of making reasonably accurate adjustments to eliminate material differences.

2. Adjustment to Transfer Price of International Transactions:
The Learned Deputy Commissioner of Income-tax (Ld. AO) made an adjustment of INR 1,83,23,932 to the transfer price of the international transactions relating to the Services segment. The appellant argued that the Ld. AO/DRP erred in upholding this adjustment, particularly by not following the use of multiple-year data as prescribed under Rule 10B(4) of the Income-tax Rules, 1962, and by considering additional comparables during the assessment proceedings.

3. Partial Rejection of TP Documentation:
The Ld. AO/DRP partially rejected the TP documentation maintained by the appellant, invoking the provisions of section 92C(3) of the Act. The appellant contended that the information or data used in the computation of the ALP was reliable and correct, and the rejection was erroneous.

4. Determination of Arm's Length Price and Comparability Analysis:
The Ld. AO/DRP held that the international transactions in the Services segment did not satisfy the arm's length principle. The appellant argued against the application of only the current year (FY 2010-11) data, the non-acceptance of the economic analysis undertaken, and the disregard for the functional comparability of identified comparables. The appellant also challenged the acceptance of companies that failed the parameters/tests of comparability analysis and the arbitrary adoption of certain filters for determining comparables.

5. Risk Differential Adjustments:
The Ld. AO/DRP ignored the limited risk nature of the services provided by the appellant and upheld the conclusion that no adjustment on account of risk differential was required while determining the ALP of the international transactions in the Services segment.

6. Deduction under Section 37(1) for Education Cess:
The appellant raised an additional ground for deduction under section 37(1) of the Income Tax Act for education cess. The Tribunal admitted this ground, noting that the issue is covered by the decision of the Hon'ble Rajasthan High Court in Chambal Fertilizers and Chemicals Ltd. v. Jt. CIT, which held that education cess is not a tax and hence is not disallowable under section 40(a)(ii).

7. Charging of Interest under Section 234D:
The appellant challenged the charging of interest under section 234D of the Act. However, this ground was not pressed during the hearing and was dismissed.

Conclusion:
The Tribunal allowed the additional ground regarding the deduction for education cess, following the precedent set by the Hon'ble Rajasthan High Court. It also directed the inclusion of certain comparables (Cosmic Global Ltd, e4e Healthcare Business Services Pvt. Ltd, and Mindtree Ltd) in the final list, as both sides did not object to their inclusion. The Tribunal upheld the exclusion of comparables like Jeevan Scientific Technology Ltd and iGate Global Solutions Ltd, finding no reason to interfere with the DRP's decision. The Tribunal remanded the comparability analysis of Cades Digitech Pvt. Ltd and Microland Ltd back to the Ld. AO/TPO for re-examination. The appeal filed by the revenue was partly allowed, while the appeal filed by the assessee was allowed to the extent indicated.