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2019 (4) TMI 2095 - AT - Income TaxTP Adjustment - comparable selection - upper limit on turnover while selecting the comparable companies - HELD THAT - Decision rendered by the Tribunal in the case of Genesis Integrated Systems (I) P. Ltd. 2011 (8) TMI 952 - ITAT BANGALORE lays down the correct law on the application of turnover filter and that decision has to be followed. In the decision rendered in the case of Genesis Integrates Systems (I) Pvt.Ltd., it has been held that companies with turnover of above Rs.200 crores cannot be compared with companies with turnover of less than Rs.200 Crores. In view of the aforesaid decision of the Tribunal, we hold that the CIT(A) erred in not accepting the claim of assessee for excluding of companies, whose turnovers were more than Rs. 200 Crores and those companies remain un-comparable with assessee, because assessee s turnover was only Rs. 27.61 Crores. Two companies which would stand excluded by the application of turnover filter from the set of 10 set of companies chosen by the TPO are (i) M/s. Infosys BPO Limited, whose turnover is Rs.1312 Crores and (ii) TCS E-Serve Limited, whose turnover is Rs.1578.40 Crores. Accordingly, we hold that the aforesaid two companies should be removed from the list of comparable companies. The TPO is directed to compute the average Arithmetic Mean profit of the comparable companies chosen by the TPO, after excluding the aforesaid two companies. Addition u/s 40(a) - Disallowance of provision for professional fees - non-deduction of taxes at source on such payments - assessee contended that the provisions of Section 40(a) cannot be invoked, where the assessee has merely made a provision in the books of account - HELD THAT - We are of the view that in the absence of material to show that the liability-in-question was not contingent and had crystalised, this Tribunal has no other option to uphold the order of the CIT(A). Accordingly, the order of CIT(A) is upheld and Ground No. 15 raised by the assessee is dismissed. Forex loss - Disallowance of forex loss was on account of change in accounting method for accounting of forex gain/loss arising on account of inter-company foreign currency Receivables/Payables - HELD THAT - This claim was rightly rejected by the Assessing Officer on the basis that prior period losses cannot be allowed as a deduction in a case where the assessee follows Mercantile Systems of Accounting. It is only loss which accrues and arises to an assessee for the period relevant to the previous year relevant to the AY. 2012-13 that can be allowed as a deduction. We are of the view that no fault can be found in the order of CIT(A). Consequently, Ground raised by assessee is dismissed.
Issues Involved:
1. Correctness of the determination of Arm's Length Price (ALP) in respect of an international transaction of rendering Information and Technology Enabled Services (ITES). 2. Application of the turnover filter in selecting comparable companies. 3. Disallowance of provision for professional fees due to non-deduction of taxes at source. 4. Disallowance of forex loss as prior period expenditure. Issue-wise Detailed Analysis: 1. Correctness of the determination of Arm's Length Price (ALP): The primary issue was the correctness of the ALP determination for the ITES provided by the assessee to its Associated Enterprise (AE). Both parties agreed on using the Transactional Net Margin Method (TNMM) and the Profit Level Indicator (PLI) of Operating Profit on Operating Cost. The assessee's PLI was 20.53%. The Transfer Pricing Officer (TPO) rejected the assessee's comparables and chose 10 others, resulting in an Arithmetic Mean of 28.11%. After adjustments, the TPO proposed an addition of Rs. 2,48,24,560 to the total income. The CIT(A) upheld the TPO's choice of comparables but disagreed with the negative working capital adjustment, reducing the Arithmetic Mean to 28.11%. 2. Application of the turnover filter in selecting comparable companies: The assessee contended that the TPO should have applied an upper turnover limit while selecting comparables. The TPO and CIT(A) rejected this, citing previous ITAT decisions. However, the Tribunal referenced the case of DCIT Vs. M/s. Northern Operating Services, which emphasized the relevance of turnover in comparability. The Tribunal concluded that companies with turnovers above Rs. 200 Crores should not be compared with the assessee's turnover of Rs. 27.61 Crores. Consequently, Infosys BPO Limited and TCS E-Serve Limited were excluded from the comparables, and the TPO was directed to recompute the Arithmetic Mean profit. 3. Disallowance of provision for professional fees due to non-deduction of taxes at source: The assessee's provision for professional fees amounting to Rs. 8,11,455 was disallowed by the Assessing Officer (AO) for non-deduction of TDS. The CIT(A) upheld this decision, referencing the Bangalore Bench of ITAT's ruling in M/s. Bosch Limited Vs. ITO, which mandated TDS even on provisions. The Tribunal found no material evidence to show that the liability was not contingent and upheld the CIT(A)'s order, dismissing the assessee's ground. 4. Disallowance of forex loss as prior period expenditure: The forex loss of Rs. 43,40,156, related to AY 2011-12, was claimed in AY 2012-13 due to a change in accounting policy by new auditors. The AO disallowed this as it was a prior period loss, and the CIT(A) upheld this decision. The Tribunal agreed, stating that under the Mercantile System of Accounting, only losses accruing in the relevant period could be deducted. The assessee's ground was dismissed. Conclusion: The appeal was partly allowed. The Tribunal directed the exclusion of certain high-turnover companies from the comparables list and upheld the disallowances related to professional fees and forex loss.
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