2021 (8) TMI 1349 - AT - Income Tax

TP adjustment - comparable selection in the ITeS segment - HELD THAT - As far as exclusion of Infosys Ltd., is concerned, the decision of the ITAT Hyderabad Bench 2018 (6) TMI 505 - ITAT HYDERABAD cited by the learned Counsel for assessee supports the pela for exclusion. Hence, we direct exclusion of Infosys Ltd., as a comparable company. As far as exclusion of Cross Domain Solutions Pvt. Ltd., we notice that this company renders diversified Knowledge Process Outsourcing (KPO) providing services in insurance, health care, HR and accounting domains. In the decision cited by the learned DR, the assessee was also in KPO services of providing engineering design services. The assessee in this appeal is a Business Processing Outsourcing Services which are routine in nature and not in the nature of a knowledge process outsourcing. Therefore we prefer to follow the decision cited by the assessee and direct exclusion of Cross Domain Solutions Pvt. Ltd. Non-grant of working capital adjustment while arriving at the average arithmetic profit margin of comparable companies - In the case of the Assessee in this appeal, neither the TPO nor the DRP have gone into the quantum of adjustment that is to be given towards working of working capital adjustment, we are of the view that it would be just and appropriate to remand the issue of granting of working capital adjustment to the TPO/AO for fresh consideration in accordance with law after due opportunity of being afforded to the Assessee. We hold and direct accordingly. Claim towards payment of leave encashment - HELD THAT - In the light of the decision of the Hon ble Supreme Court in the case of Exide Industries 2020 (4) TMI 792 - SUPREME COURT the assessee will not be entitled to claim deduction on leave encashment on the basis of the provision. Taking into consideration the circumstances under which the assessee did not claim a sum being leave encashment actually being paid during the previous year relevant to Assessment Year 2014-15 we are of the view that the assessee should be allowed leave encashment actually paid as per provisions of section 43B(f) of the Act. We remit the issue to the AO to verify the claim of the assessee and allow deduction to the assessee as per law after affording assessee opportunity of being heard. Deduction in respect of Education Cess and Secondary and High Education Cess on Income Tax - HELD THAT - We have considered the submissions and we find that in the case of Sesagoa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT held the expression 'cess' used in section 40(a)(ii) of the Act ought not to be read or included in expression 'any rate or tax levied' as appearing in section 40(a)(ii) and consequently, 'cess' whenever paid in relation to business, is allowable as deductible expenditure. Following the aforesaid decision, we uphold the claim of the assessee for deduction of the aforesaid sum.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for IT-enabled Services (ITeS).
2. Exclusion of certain comparable companies from the list used for ALP determination.
3. Non-grant of working capital adjustment.
4. Deduction for payment towards leave encashment.
5. Deduction in respect of education cess and secondary and higher education cess.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for IT-enabled Services (ITeS):
The assessee, engaged in providing back office operations and customs support services, used the Transaction Net Margin Method (TNMM) with the Profit Level Indicator (PLI) of Operating Profit/Operating Cost (OP/OC) to determine the ALP. The assessee’s OP/OC was 17.73%, compared to an average of 6.81% for seven comparable companies. The Transfer Pricing Officer (TPO) rejected this and selected five comparable companies with an average profit margin of 22.34%, resulting in a transfer pricing adjustment of Rs. 60,65,94,155.

2. Exclusion of Certain Comparable Companies:
The assessee sought the exclusion of Infosys BPO Ltd. and Cross Domain Solutions Pvt. Ltd. from the list of comparables. The Tribunal excluded Infosys BPO Ltd. based on its large scale and brand value, citing previous cases where it was excluded for similar reasons. Cross Domain Solutions Pvt. Ltd. was excluded due to its diversified Knowledge Process Outsourcing (KPO) services, which are not comparable to the routine Business Processing Outsourcing (BPO) services provided by the assessee.

3. Non-grant of Working Capital Adjustment:
The Dispute Resolution Panel (DRP) refused the working capital adjustment, stating that the assessee failed to demonstrate the material impact of differences in working capital on price, cost, or profits. The Tribunal, however, referred to the OECD Transfer Pricing Guidelines and previous ITAT decisions, emphasizing the need for working capital adjustments to account for differences in the time value of money. The issue was remanded to the TPO/AO for fresh consideration.

4. Deduction for Payment Towards Leave Encashment:
The assessee claimed a deduction for leave encashment payments made during the financial year, which was not claimed in the return of income due to ongoing litigation based on the Calcutta High Court decision in Exide Industries Ltd. The Supreme Court later upheld the constitutional validity of section 43B(f), allowing deductions only on an actual payment basis. The Tribunal remanded the issue to the AO to verify and allow the deduction as per law.

5. Deduction in Respect of Education Cess and Secondary and Higher Education Cess:
The assessee claimed a deduction for education cess and secondary and higher education cess, which was not initially claimed in the return of income. The Tribunal upheld the claim based on the Bombay High Court decision in Sesagoa Ltd., which held that 'cess' is not included in 'any rate or tax levied' under section 40(a)(ii) and is thus deductible.

Conclusion:
The appeal by the assessee was partly allowed, with directions for the exclusion of certain comparables, remand for reconsideration of working capital adjustments, and verification of the leave encashment deduction. The claim for education cess deduction was upheld.