2019 (6) TMI 1697 - AT - Income Tax

TP Adjustment - Comparable selection - diminishing revenue filter application - whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category? - HELD THAT - There is no company which was excluded by the CIT(Appeals) by applying diminishing revenue filter and therefore ground by the revenue has no basis and hence dismissed. Excluding the companies on the basis of turnover - The issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India Pvt. Ltd. 2018 (7) TMI 1862 - ITAT BANGALORE . The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores. Excluded 6 companies on the ground that these companies reflected abnormal profits - On a perusal of the order of CIT(A), we find that the discussion on turnover and abnormal profits and losses filter starts at para 156 and till para 164, there a discussion only about turnover filter and no discussion on abnormal profits losses filter. In conclusion CIT(A) has held that abnormally high profits or losses making companies should be excluded. Therefore, the grievance projected by the revenue in ground No.6 needs to be accepted. Functional dissimilarity - 3 companies i.e., Coral Hubs Ltd., Mold-Tek Technologies Ltd. and Eclerx Services Ltd. have to be removed from the final list of comparables chosen by the TPO on functional comparability. Aditya Birla Minacs Worldwide Ltd., Jindal Intellicom Pvt. Ltd. and Allsec Technologies Ltd. - Issue whether abnormal profit or loss should result in exclusion of a company is remitted to the TPO for fresh consideration in the light of law that has evolved since the passing of the order of the TPO. Accentia Technologies Ltd. not to be regarded as comparable company rendering ITeS because of the extra-ordinary events like merger and demerger which had impact on the profit margins of this company. Genesys International Corporation Ltd. - ITAT Bangalore Bench in the case of Flextronics Technologies India Pvt. Ltd. 2015 (10) TMI 2653 - ITAT BANGALORE had excluded this company on the similar ground on which it was excluded by the CIT(A). In view of the aforesaid decision, we find no merits in ground Nos. 8, 9 10 raised by the revenue in its appeal. Deduction allowable u/s 10A - excluding internet charges and expenditure incurred in foreign currency for travel from the export turnover as well as total turnover - HELD THAT - Taking into consideration the decision rendered in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that internet charges and expenditure incurred in foreign currency for travel should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon ble Karnataka High Court has been upheld by the Hon ble Supreme Court in the case of CIT v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT . Therefore, we find no merits in the grounds No.1 to 4 raised by the assessee and the same are dismissed. Setting off the brought forward unabsorbed depreciation before computing the deduction u/s 10A - HELD THAT - Deduction u/s.10A of the Act has to be allowed without setting off the brought forward business losses and unabsorbed depreciation of non- Sec.10A units before allowing the deduction under section 10A of the Act. In view of the aforesaid decision of the Hon ble Supreme Court in the case of Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT the AO is directed not to set off the brought forward unabsorbed depreciation of non 10A units against profits of 10A units before allowing deduction u/s. 10A of the Act. Disallowance made u/s. 40(a)(i) - Alternative ples if any disallowance is made under section 40(a)(i) the same should be considered towards 'profits of the undertaking' in computing the eligible deduction under section 10A - HELD THAT - In the decision of the Hon ble Gujarat High Court Kewal Construction 2013 (7) TMI 291 - GUJARAT HIGH COURT it was held that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit - Thus direct the AO to allow deduction u/s. 10A of the Act on the amount disallowed u/s. 40(a)(i) of the Act. Thus, ground No.5 raised by the assessee is allowed.

Summary

Issues Involved:
1. Determination of Arm’s Length Price (ALP) in respect of international transaction of rendering Information Technology Enabled Services (ITeS).
2. Exclusion of certain companies based on turnover and abnormal profits.
3. Exclusion of internet charges and foreign currency expenditure from export turnover and total turnover.
4. Set off of brought forward unabsorbed depreciation before computing deduction under section 10A.
5. Disallowance under section 40(a)(i) and its impact on deduction under section 10A.

Detailed Analysis:

1. Determination of Arm’s Length Price (ALP):
The primary issue was the determination of ALP for the international transaction of rendering ITeS by the assessee to its Associated Enterprise (AE). The assessee used the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and chose Operating Profit to Operating Cost (OP:OC) as the Profit Level Indicator (PLI). The Transfer Pricing Officer (TPO) selected 20 comparable companies and determined an average profit margin of 24.75%, leading to an addition of Rs.1,59,22,510 to the total income of the assessee. The CIT(A) excluded some comparable companies, resulting in the price charged by the assessee being at arm’s length. The Tribunal upheld the CIT(A)’s decision to exclude certain companies based on turnover and functional comparability.

2. Exclusion of Certain Companies Based on Turnover and Abnormal Profits:
The CIT(A) excluded companies like Infosys BPO Ltd. and Wipro Ltd. on the basis of their high turnover, which was upheld by the Tribunal following the principle that companies with significantly higher turnover are not comparable to the assessee. Additionally, companies like Aditya Birla Minacs Worldwide Ltd., Coral Hubs Ltd., Eclerx Services Ltd., Jindal Intellicom Pvt. Ltd., Mold-Tek Technologies Ltd., and Allsec Technologies Ltd. were excluded by the CIT(A) due to abnormal profits. The Tribunal found that the CIT(A) did not provide adequate reasoning for this exclusion and remitted the issue back to the TPO for fresh consideration. However, the Tribunal upheld the exclusion of Coral Hubs Ltd., Mold-Tek Technologies Ltd., and Eclerx Services Ltd. on grounds of functional non-comparability.

3. Exclusion of Internet Charges and Foreign Currency Expenditure:
The issue was whether internet charges and foreign currency expenditure should be excluded from both export turnover and total turnover while computing deduction under section 10A. The Tribunal, following the decision of the Hon’ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. and upheld by the Hon’ble Supreme Court in CIT v. HCL Technologies Ltd., ruled that these expenses should be excluded from both export turnover and total turnover.

4. Set Off of Brought Forward Unabsorbed Depreciation:
The assessee contested the set off of brought forward unabsorbed depreciation before computing the deduction under section 10A. The Tribunal, following the Hon’ble Supreme Court’s decision in Yokogawa India Ltd., held that deduction under section 10A should be allowed without setting off the brought forward business losses and unabsorbed depreciation of non-10A units.

5. Disallowance under Section 40(a)(i) and its Impact on Deduction under Section 10A:
The assessee argued that any disallowance under section 40(a)(i) should be considered towards the profits of the undertaking while computing the eligible deduction under section 10A. The Tribunal agreed, citing decisions from the Hon’ble Bombay High Court in CIT v. Gem Plus Jewellery India Ltd. and the Hon’ble Gujarat High Court in ITO v. Kewal Construction. The Tribunal directed the AO to allow deduction under section 10A on the amount disallowed under section 40(a)(i).

Conclusion:
The Tribunal partly allowed the appeal by the revenue for statistical purposes and allowed the appeal by the assessee. The Tribunal upheld the exclusion of certain companies based on turnover and functional comparability, directed the exclusion of specific expenses from both export turnover and total turnover, and confirmed that deduction under section 10A should be allowed without setting off brought forward unabsorbed depreciation. Additionally, it ruled that disallowance under section 40(a)(i) should enhance the profits eligible for deduction under section 10A.