2018 (3) TMI 2013 - AT - Income Tax

TP Adjustment - comparable selection - Exclusion of Accentia Technologies Limited, TCS Eserve Ltd. and TCS Eserve International Limited - HELD THAT - Accentia is into the field of medical transcription, billing and coding and also developing its own software products; that it has undergone extra ordinary events making huge addition in its assets impacting profitability because of acquisition and its segmental information is not available; it is not a suitable comparable vis- -vis. taxpayer which is a routine ITES service provider. So, we order to exclude Accentia from the final set of comparables. TCS Eserve - As following the decision rendered by the coordinate Bench of the Tribunal in Ameriprise India Pvt. Ltd. 2016 (1) TMI 1117 - ITAT DELHI we are of the considered view that because of functional dissimilarity having high brand value, highly fluctuating margin and huge size of the company and its operation, TCS Eserve is not a valid comparable vis- -vis. the taxpayer which is into providing back office services related to maintenance and database working on minimal risk having meager turnover of Rs. 14.15 crores. TCS Eserve International is a big brand operating as full-fledged risk bearing company and its profitability has increased by 174% and 286% in FY 2008-09 and 2009-10 respectively due to acquisition and the fact that it is functionally dissimilar, it cannot be a valid comparable vis- -vis. taxpayer which is into providing back office services related to maintenance and database working on minimal risk as a captive service provider. So, we order to exclude TCS Eserve International as a comparable from the final list of comparables. Deduction u/s 10A - benefit of inclusion of expenditure incurred by the taxpayer in foreign currency towards communication charges and expenditure incurred by the taxpayer in foreign currency in database fee - HELD THAT - When it is not in dispute that for the purpose of section 10A, the term total turnover is to be interpreted by computing the entire export turnover as well as domestic turnover and in case, expenses are to be excluded from export turnover, the same are to be excluded from the total turnover for the purpose of computing the deduction u/s. 10A - AO has erred in not excluding the communication charges and expenditure incurred by the taxpayer in foreign currency in database fees from the total turnover for the purpose of calculating the deduction u/s. 10A - Decided in favour of the assessee.

Summary

Issues Involved:
1. Jurisdictional error in the reference made by AO to TPO for computation of arm's length price.
2. Determination of arm's length price and transfer pricing adjustments.
3. Exclusion of certain expenditures from export turnover for computing deduction under section 10A.
4. Validity of initiation of penalty proceedings under section 271(1)(c).
5. Charging and computation of interest under sections 234B, 234C, and 234D.

Issue-wise Detailed Analysis:

1. Jurisdictional Error in Reference to TPO:
The taxpayer argued that the AO did not record any reasons in the assessment order to justify the reference to the TPO for computing the arm's length price under section 92CA(1) of the Act. However, this issue was not specifically adjudicated in the judgment.

2. Determination of Arm's Length Price and Transfer Pricing Adjustments:
The taxpayer's international transactions were benchmarked using the Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The taxpayer selected 7 comparables with an average margin of 13.62%, whereas the TPO rejected 6 out of these 7 comparables and introduced 11 new comparables, resulting in an average margin of 30.12%. The TPO made an adjustment of Rs. 20,288,060/- to the taxpayer's income.

The taxpayer contested the inclusion of Accentia Technologies Limited, TCS Eserve Limited, and TCS Eserve International Limited as comparables on the grounds of functional dissimilarity, lack of segmental information, extraordinary events, and brand value impact. The Tribunal agreed with the taxpayer and excluded these companies from the final set of comparables, emphasizing their functional dissimilarity and impact of extraordinary events on profitability.

3. Exclusion of Certain Expenditures from Export Turnover for Computing Deduction under Section 10A:
The AO excluded communication charges of Rs. 1,84,211/- and database fees of Rs. 19,07,772/- incurred in foreign currency from the export turnover for computing the deduction under section 10A. The Tribunal held that these expenses should also be excluded from the total turnover for the purpose of computing the deduction under section 10A, following the settled legal proposition in various judgments.

4. Validity of Initiation of Penalty Proceedings under Section 271(1)(c):
The taxpayer argued that the AO/TPO erred in not examining the validity of initiation of penalty proceedings under section 271(1)(c) of the Act. This issue was not specifically adjudicated in the judgment.

5. Charging and Computation of Interest under Sections 234B, 234C, and 234D:
The taxpayer contested the AO's computation of interest under sections 234B, 234C, and 234D. This issue was not specifically adjudicated in the judgment.

Conclusion:
The Tribunal partly allowed the taxpayer's appeal by excluding the contested comparables (Accentia Technologies Limited, TCS Eserve Limited, and TCS Eserve International Limited) from the final set of comparables and directed the AO to exclude the communication charges and database fees from the total turnover for computing the deduction under section 10A. The appeal was thus partly allowed, providing relief to the taxpayer on significant grounds.