2017 (7) TMI 1438 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee company is engaged in the business of export of information technology enabled services, thus companies functinally dissimilar with that of assessee need to be deselected. DRP excluded comparables, Viz., (a) Informed Technologies Ltd (b) Microgenetics Ltd (c) Cosmic Global Ltd. - The finding of DRP that Cosmic Global Ltd. has sub-contracted the ITES Services to the extent of 41% whereas assessee has not dealt with any of the sub-contract work of its ITES services and hence it cannot be compared with the assessee. With regard to Informed Technologies, DRP has noticed that sales and services income is only Rs. 1.75 crores to that of gross revenue of Rs. 4.08 crores of the company which fails the services revenue filter of 75% applied by the TPO. With regard to Microgenetics, the DRP noticed that total expenses of Rs. 1.08 crores debited to P L A/c. The company has incurred Rs. 24.98 lakhs in outsourcing on medical transcription activity, which is 23% of the total expenditure. Since the assessee has not entered into any sub-contracting business, this company also cannot be compared with the assessee. In our considered view, DRP has excluded all the above three companies as non-comparables with the proper justification that these companies cannot be considered as comparables to that of the assessee. Accordingly, we sustain the finding of the DRP for exclusion of above three companies. As profit margin of the assessee is at arm's length as the same falls within tolerance band of 5% of arm's length margin of 21.46% of the comparable companies, it is observed that when the TPO arrives the ALP, if it falls within the range of /- 5%, he has to give advantage to the assessee. Therefore, we direct the TPO/AO to extend this benefit to the assessee as per TP guidelines. Disallowance of interest on unsecured loan taken from own 100% subsidiary and extending to its step down foreign subsidiary - HELD THAT - It is observed that the assessee has taken loan from one of its subsidiary and invested the same funds in the step down foreign subsidiaries as investment in shares and in application money. As decided the case of SA Builders 2006 (12) TMI 82 - SUPREME COURT where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. This case is squarely applicable to the facts of the case of the assessee, as the assessee has borrowed from the Indian sister concern and invested in foreign sister concern as in share capital and share application money. The money invested in the sister concerns are considered to be for the purpose of business as per the ratio of Hon'ble Supreme Court because the holding company has deep interest in the subsidiary company, and hence, borrowed funds invested by the assessee in the sister concern are to be considered to be for the purpose of business. Therefore, the AO cannot disallow any expenditure on the ground that the same is not related to business of the assessee company. Accordingly, this ground is allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of Interest on Unsecured Loan

Detailed Analysis:

1. Transfer Pricing Adjustment:

Background:
The assessee, engaged in ITES, filed its return for AY 2011-12 declaring a loss. The case was selected for scrutiny due to international transactions exceeding Rs. 15 crores, and referred to the Transfer Pricing Officer (TPO) for Arm's Length Price determination.

Economic Analysis by Assessee:
The assessee used the Transactional Net Margin Method (TNMM) to benchmark its international transactions, selecting seven comparables with an average PLI (OP/TC) of 14.04% against its margin of 15.58%.

TPO's Analysis:
The TPO rejected the assessee's comparables, stating the search process was not in conformity with TP regulations. The TPO selected 13 new comparables with an average PLI of 25.73%, resulting in an adjustment of Rs. 90,24,561.

Dispute Resolution Panel (DRP) Decision:
The DRP directed the exclusion of seven comparables. However, the mean margin of the remaining comparables still resulted in the same adjustment. The assessee appealed against the inclusion of three comparables: Accentia Technologies Ltd., Crossdomain Solutions P. Ltd., and eClerx Services Ltd.

Tribunal's Decision:
- Accentia Technologies Ltd.: Excluded due to functional dissimilarity and high turnover, supported by precedents like S&P Capital IQ (India) Ltd. Vs. DCIT.
- Crossdomain Solutions P. Ltd.: Excluded due to diversified services and lack of segmental data, supported by cases like Symphony Marketing Solutions.
- eClerx Services Ltd.: Excluded as it provides high-end KPO services, supported by cases like S&P Capital IQ (India) Ltd. Vs. DCIT.

The Tribunal directed the TPO to rework the PLI excluding these comparables.

Informed Technologies Ltd., Microgenetics Ltd., and Cosmic Global Ltd.:
The Tribunal upheld the DRP's exclusion of these comparables due to significant subcontracting and failing the service revenue filter.

Tolerance Band:
The Tribunal directed the TPO to extend the benefit of the +/- 5% tolerance band to the assessee as per TP guidelines.

2. Disallowance of Interest on Unsecured Loan:

Background:
The AO disallowed Rs. 62,23,081/- of interest on an unsecured loan taken from a subsidiary, arguing it was not used for the assessee's business but invested in wholly-owned subsidiaries.

Assessee's Argument:
The assessee contended the loan was for business purposes, citing the Delhi High Court decision in EKL Appliances and the Hyderabad Tribunal decision in Hill County Properties Ltd. v. ACIT.

Tribunal's Decision:
The Tribunal distinguished the assessee's case from the cases cited by the DR, noting the funds were invested in foreign subsidiaries, which is a business decision. The Tribunal relied on the Supreme Court decision in SA Builders, allowing the interest deduction as the investment was for business purposes.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the exclusion of certain comparables for transfer pricing and allowing the interest deduction on the unsecured loan.