2021 (11) TMI 1148 - AT - Income Tax

TP Adjustment - Exclusion of Comparables - HELD THAT - As the comparable Killick is functionally different from the assessee, hence, we hereby direct the same may be excluded from the list of final comparables. Inclusion of Comparables - With regard to CPRIL, we find that the company engaged in organizing conferences, tours, demonstration of products, seminars, publicity campaign through various media channel, demonstrations of client products, hotel bookings, conference literature etc. Having gone through the functions of the assessee which have been duly mentioned in the above paras of this order, we hold that the comparable CPRIL is functionally dissimilar. With regard to MIL, we find that the comparable Offers Consultancy in the areas asset development, community and experience management, strategic event management and communication marketing. We find that the functions of this comparable are different from that of the assessee. Hence, we decline to interfere with the order of ld. DRP in this comparable. Interest on Receivables - AR argued extensively as to how adjustment with regard to interest on receivables cannot be resorted to - HELD THAT - Primarily, we find that the assessee is a debt free company and has no claim of interest payable. Hence, in the specific financial conditions of the assessee, we hold that no adjustment is required on this ground. Incorrect Computation of Margins - HELD THAT - TPO erred in not giving effect to the directions of ld. DRP who directed to verify and take correct margins of the comparables and adopted an inconsistent approach while computing operating margin of the comparable companies used in the determination of the ALP resulting in incorrect margins of the comparable companies. Detailed computation of margins of comparables provided to TPO pursuant to ld. DRP directions. As perused the same in the paper book at page nos. 1709 to 1747. The AO is directed to re-compute the margins. Claim of education cess as an allowable expenditure - Interpretation of provisions of Section 40(a)(ii) - Deduction u/s 37(1) - HELD THAT - Education Cess is not of the nature described in sections 30 to 36, Education Cess is not in the nature of capital expenditure, Education Cess is not personal expense of the assessee, it is mandatory for it to pay Education Cess and for the purpose of computation of Education Cess, the Income Tax is taken as the criteria for computational purpose. Thus, the expense of Education Cess is mandatory expenses to be paid but does not fall under capital expense and personal expenditure and hence may be allowed as deduction. Also gone through the various judgments of judicial authorities pan India wherein the fresh claim of the assessee is considered and the deduction u/s 37 of Education Cess has been allowed. The Hon ble High Court of Bombay 2020 (3) TMI 347 - BOMBAY HIGH COURT held that the appellate authorities may confirm, reduce, enhance or annul the assessment or remand the case to the AO, because the basic purpose of a tax appeal was to ascertain the correct tax liability in accordance with the law. Keeping in view the provisions of the Act pertaining to Section 40(a)(ii) and Section 115JB, Circular of the CBDT No. 91/58/66- ITJ(19), the orders of Co-ordinate Benches of ITAT and judicial pronouncements of the Hon ble High Court of Bombay and Hon ble High Court of Rajasthan, we hereby hold that the assessee is eligible to claim the deduction of the Education Cess as per the provisions of Section 37 - Appeal of the assessee is allowed.

Issues Involved:
1. Rejection of economic analysis.
2. Selection of functionally different companies as comparable to Business support services.
3. Rejection of companies selected as comparable to Business support services.
4. Interest on outstanding receivables.
5. Incorrect computation of margins.
6. Risk adjustment.
7. Depreciation adjustment.
8. Deduction of education cess.

Issue-wise Detailed Analysis:

1. Rejection of Economic Analysis:
The Dispute Resolution Panel (DRP) upheld the Transfer Pricing Officer’s (TPO) action of not accepting the economic analysis undertaken by the assessee in accordance with the provisions of the Income Tax Act, 1961, and the Income Tax Rules, 1962. The TPO modified the economic analysis for determining the arm’s length price (ALP) and conducted a fresh analysis.

2. Selection of Functionally Different Companies as Comparable to Business Support Services:
The DRP upheld the TPO’s action of selecting Killick Agencies & Marketing Ltd. as a comparable company for software development services, despite its functional differences. The Tribunal found that Killick was engaged in activities such as acting as an agent for foreign principals, exporting various items, and providing after-sales services, which were functionally different from the corporate services and market research & business development activities of the assessee. Therefore, Killick was directed to be excluded from the list of final comparables.

3. Rejection of Companies Selected as Comparable to Business Support Services:
The DRP upheld the TPO’s rejection of India Tourism Development Corporation Ltd., MCI Management (India) Ltd., and Concept Public Relations India Ltd. as comparables. The Tribunal found that Concept Public Relations India Ltd. was engaged in organizing conferences, tours, and publicity campaigns, making it functionally dissimilar to the assessee. Similarly, MCI Management (India) Ltd. offered consultancy services in asset development and strategic event management, which were different from the assessee’s functions. Therefore, the Tribunal declined to interfere with the DRP’s order on these comparables.

4. Interest on Outstanding Receivables:
The TPO made an adjustment by imputing interest on outstanding receivables related to services provided to the associated enterprises (AEs). The assessee argued that the receivables were closely linked to the provision of services and should not be re-characterized as loans. The Tribunal found that the assessee was a debt-free company with no claim of interest payable, and thus, no adjustment was required on this ground.

5. Incorrect Computation of Margins:
The TPO did not give effect to the DRP’s directions to verify and take correct margins of the comparables. The Tribunal directed the Assessing Officer (AO) to re-compute the margins based on the detailed computation provided by the assessee. The assessee was instructed to furnish any required clarifications promptly.

6. Risk Adjustment:
The TPO and DRP erred in not adjusting the net margins of the comparable companies to account for the functional and risk differences between the assessee’s international transactions and the comparable transactions. The Tribunal did not provide a specific ruling on this issue in the summary provided.

7. Depreciation Adjustment:
The DRP did not adjudicate on the adjustment to be made for differences in depreciation policy followed by the assessee and the comparable companies. The Tribunal did not provide a specific ruling on this issue in the summary provided.

8. Deduction of Education Cess:
The assessee raised an additional ground for the deduction of education cess, relying on favorable rulings from the Rajasthan High Court and the Mumbai High Court. The Tribunal admitted the additional ground, citing the judgment of the Hon’ble Apex Court in National Thermal Power Co. Ltd. Vs CIT, which allows for the consideration of new legal grounds if the relevant facts are on record. The Tribunal found that education cess is not included in the definition of "tax" under Section 40(a)(ii) and is therefore an allowable expenditure under Section 37 of the Income Tax Act. The Tribunal cited various judicial pronouncements supporting this view and allowed the deduction.

Conclusion:
The Tribunal ruled in favor of the assessee on several grounds, including the exclusion of functionally different comparables, the non-adjustment of interest on receivables, the re-computation of margins, and the deduction of education cess. The appeal of the assessee was allowed.

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