2014 (6) TMI 1076 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT - Deselection of companies as functionally dissimilar with that of assessee as engaged in rendering market research and related Information Technology Enabled Services (ITES) for domestic and international clients. Assessee s Offshore Research Service Centre (ORSC) is registered with Software Technology Park of India and provides ITES to its group companies. Consideration of management fees disallowed in computation of operating margin - We are of the view that when the TPO is disallowing the payment of management fees it cannot be considered for the purpose of computation of operating margin otherwise it will amount to double addition. We therefore remit this issue back to the file of the AO/TPO to look into this aspect and decide the issue after affording reasonable opportunity of being heard to the assessee. Computation of working capital adjustment - We are of the view that if the assessee has maintained separate records and can substantiate allocation of expenditure to the international transactions with AE and non-AE there is no reason why working capital adjustment should not be made accordingly. In that view of the matter we remit the issue back to the file of the AO/TPO for deciding the same afresh after affording reasonable opportunity of being heard to the assessee. TPO must consider the submissions of the assessee in the context of the facts and materials placed before deciding the issue. Accordingly we direct the AO/TPO to compute ALP in conformity with our directions hereinabove and work out adjustment if any to be made u/s 92CA of the Act. Exemption u/s 10A of the Act on the profit relating to offshore research services centre (ORSC) unit of the assessee - AO while framing draft assessment order rejected exemption claimed u/s 10A of the Act in respect of ORSC unit by holding that the aforesaid unit having been set up by splitting up/reconstruction of the existing business exemption claimed cannot be granted - HELD THAT - So far as the first contention of the assessee that ORSC is a new unit we are unable to accept such contention in view of the specific finding of the AO which has not been controverted by the assessee by bringing sufficient material to substantiate its claim. Alternative contention of the assessee for allowing claim of deduction u/s 10A of the Act due to conversion from DTA unit to STPI unit we find force in such contention of the learned AR. It is not in dispute that ORSC unit is recognized as a STPI unit. On perusal of the order passed by the DRP for the AY 2008-09 it is seen that in para 12 of the said order the DRP has held that when ORSC unit is converted from domestic tariff area to STPI unit it is eligible for deduction u/s 10A of the Act for the remaining period out of 10 consecutive assessment years starting from the year in which it was approved as STPI unit. In view of such finding of the DRP for the AY 2008-09 we direct the AO to allow deduction u/s 10A of the Act for the impugned assessment year also. Levy of interest u/s 234B is consequential to the final determination of income.

Summary

Issues Involved:

1. Selection of comparables.
2. Rejection of comparables.
3. Consideration of management fees disallowed in computation of operating margin.
4. Computation of working capital adjustment.
5. Denial of exemption claimed u/s 10A of the Act.
6. Levy of interest u/s 234B of the Act.
7. Initiation of penalty proceedings u/s 271(1)(c) of the Act.

Detailed Analysis:

I. Selection of Comparables:

1. Vishal Information Technologies Ltd.:
- Assessee's Argument: The company fails the employee cost filter with only 1.25% of turnover as employee cost, indicating major outsourcing. It also earns super profits.
- Tribunal Decision: The Tribunal directed the exclusion of this company from the list of comparables, referencing prior ITAT decisions that rejected it due to significant outsourcing and functional dissimilarity.

2. Goldstone Infratech Ltd.:
- Assessee's Argument: The company fails the employee cost filter (9.38%), has less than 1% forex earnings from exports, and includes lease income in BPO services.
- Tribunal Decision: The Tribunal excluded this company, citing its different business model and failure to meet the export revenue filter.

3. Asit C Mehta Financial Services Ltd. (Earlier Nucleus Netsoft & GIS (India) Ltd.):
- Assessee's Argument: The company fails the employee cost filter and underwent amalgamation, changing its business model.
- Tribunal Decision: The Tribunal excluded this company due to its failure of the employee cost filter and the impact of amalgamation.

4. Datamatics Financial Services Ltd.:
- Assessee's Argument: The company fails the related party transactions (RPT) filter, exceeding 25% of sales.
- Tribunal Decision: The Tribunal excluded this company, agreeing with the assessee's argument that it fails the RPT filter.

5. Maple E Solutions Ltd.:
- Assessee's Argument: The financials are unreliable due to fraud involvement by directors.
- Tribunal Decision: The Tribunal excluded this company, following consistent ITAT decisions that rejected it due to unreliable financials.

II. Rejection of Comparables:

1. Genesys International Corp. Ltd. (Seg):
- Assessee's Argument: The company's RPT is only 7.63%, not 26.34% as computed by TPO.
- Tribunal Decision: The Tribunal upheld the rejection, citing functional dissimilarity.

2. Goldstone Technologies Ltd.:
- Assessee's Argument: It derives revenue from ITES segments and satisfies all TPO filters.
- Tribunal Decision: The Tribunal upheld the rejection, referencing prior ITAT decisions finding it functionally dissimilar.

3. Visualsoft Technologies Ltd. (SEG) and Quantum esolutions Pvt. Ltd.:
- Assessee's Argument: Visualsoft's BPO segment is loss-making, not the entire company. Quantum is in its first year of operation.
- Tribunal Decision: The Tribunal upheld the rejection, noting significant losses and the application of the persistent loss-making filter.

III. Consideration of Management Fees Disallowed in Computation of Operating Margin:

- Assessee's Argument: Double addition of management fees of Rs. 2,89,80,138/-.
- Tribunal Decision: The Tribunal remitted the issue back to the AO/TPO to avoid double addition and to decide after affording reasonable opportunity to the assessee.

IV. Computation of Working Capital Adjustment:

- Assessee's Argument: TPO erred in allocating total receivables and payables to AE transactions only, resulting in incorrect negative working capital adjustment.
- Tribunal Decision: The Tribunal remitted the issue back to the AO/TPO to reallocate costs properly and decide afresh after considering the assessee's submissions.

V. Denial of Exemption Claimed u/s 10A of the Act:

- Assessee's Argument: ORSC unit is a new unit or alternatively, should be eligible for deduction as a converted STPI unit.
- Tribunal Decision: The Tribunal upheld the AO's finding that ORSC is not a new unit but directed the AO to allow deduction u/s 10A for the unexpired period due to conversion to STPI unit, consistent with the DRP's decision for AY 2008-09.

VI. Levy of Interest u/s 234B of the Act:

- Assessee's Argument: No interest should be charged due to retrospective amendment to section 92C(2).
- Tribunal Decision: The Tribunal deemed this ground consequential to the final determination of income and did not adjudicate at this stage.

VII. Initiation of Penalty Proceedings u/s 271(1)(c) of the Act:

- Tribunal Decision: The Tribunal found this ground premature and did not adjudicate at this stage.

Conclusion:

The appeal of the assessee is partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for reconsideration in light of the Tribunal's directions.