2019 (4) TMI 2134 - AT - Income Tax

TP Adjustment - comparable selection - Exclusion of Alphageo (India) Ltd. - HELD THAT - As there is a stark difference between employee cost to total cost ratio in the case of Alphageo of 7.55% as against 60.35% in case of the taxpayer. Further when we examine the show cause notice issued by the TPO he has himself applied the export filter that the company having export turnover less than 25% is not to be taken as comparable. So when Alphageo fails the export filter which is less than 25% as against 100% export of the taxpayer company the same cannot be a valid comparable. So we are of the considered view that Alphageo is not a suitable comparable vis- -vis the taxpayer and as such has been rightly excluded by the ld. CIT (A). Allowable deduction u/s 10B - exclusion of misc. income from the net profit of the business of the undertaking on the ground that the taxpayer has not fulfilled three conditions laid down u/s 10B - HELD THAT - Undisputedly the taxpayer has duly shown the misc. income in profit loss account under the head other income which represents amount recovered from its employees towards the notice pay in relation to the period of notice not served. It is also not in dispute that the salary of the employees is claimed as expenses of the undertaking of the taxpayer and that subsequent recovery on termination of the employee should also be credited to the respective undertaking. Thus by applying the decision rendered in Birla Soft (India) Ltd. vs. DCIPT 2011 (12) TMI 385 - ITAT DELHI CIT (A) has rightly allowed the notice period pay received as income while computing the deduction u/s 10B of the Act because amount received towards notice period pay was to be treated as income derived from the eligible undertaking. The decision rendered by the Hon ble Supreme Court in Liberty India 2009 (8) TMI 63 - SUPREME COURT applies to DEPP/Duty Drawback benefits which do not form part of net profit for the purpose of computation of profits and do not fall within the expression profits derived from industrial undertaking for the purpose of section 80IB. So ld. CIT (A) has rightly held that Liberty India (supra) is not applicable to the facts and circumstances of the case. - Decided against the Revenue. Suitability of Stup Consultants Pvt. Ltd. as a comparable for benchmarking the international transactions undertaken by the taxpayer with its AE - Coordinate Bench of the Tribunal in case cited as Emerson Process Management Power Water Solutions India (P.) Ltd. vs. ACIT 2016 (4) TMI 1176 - ITAT DELHI examined the suitability of Stup vis- -vis Emerson Process Management Power Water Solutions India (P.) Ltd. which is engaged in providing Application Engineering software development and related services to its group company and found the same as not a suitable comparable for AY 2008-09 as having different functional profile compared to the assessee company. Thus Stup is not a suitable comparable vis- -vis taxpayer on ground of functional dissimilarity non-availability of segmental information and on ground of failing the export filter hence we order to exclude it from the final set of comparables.

Summary

Issues Involved:

1. Exclusion of Alphageo (India) Ltd. as a comparable.
2. Treatment of miscellaneous income from notice period pay for deduction eligibility under section 10B of the IT Act, 1961.
3. Inclusion of Stup Consultants Pvt. Ltd. as a comparable.

Issue-wise Detailed Analysis:

1. Exclusion of Alphageo (India) Ltd. as a Comparable:

The Revenue argued that the CIT(A) erred in excluding Alphageo (India) Ltd. as a comparable for benchmarking international transactions. The TPO had included Alphageo based on the TNMM method, considering it broadly comparable to the taxpayer's engineering design services. However, the CIT(A) excluded Alphageo, noting its functional dissimilarity and failure to meet the export turnover filter of less than 25%. Alphageo was involved in seismic services and had an employee cost to total cost ratio significantly different from the taxpayer. The Tribunal upheld the CIT(A)'s decision, affirming that Alphageo was not a suitable comparable due to these disparities.

2. Treatment of Miscellaneous Income from Notice Period Pay for Deduction Eligibility under Section 10B of the IT Act, 1961:

The AO excluded miscellaneous income of Rs.17,90,395 from the net profit for deduction under section 10B, arguing it lacked a direct nexus with the industrial undertaking's activities. The CIT(A) included this income, distinguishing it from the Liberty India case, which dealt with DEPB/Duty Drawback benefits. The Tribunal agreed with the CIT(A), noting that the notice period pay was income derived from the eligible undertaking, as the salary expenses were claimed by the undertaking. Thus, the inclusion of this income for section 10B deduction was upheld.

3. Inclusion of Stup Consultants Pvt. Ltd. as a Comparable:

The taxpayer contested the inclusion of Stup Consultants Pvt. Ltd., arguing its functional dissimilarity and failure to meet the export filter. The TPO had retained Stup as a comparable, but the CIT(A) did not address this issue. The Tribunal examined the taxpayer's submissions and found that Stup, being a consultancy firm providing diverse services, was not functionally comparable to the taxpayer's engineering design services. Additionally, Stup failed the export filter applied by the TPO. The Tribunal, referencing a similar case, concluded that Stup was not a suitable comparable and ordered its exclusion from the final set of comparables.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the taxpayer's appeal, affirming the exclusion of Alphageo (India) Ltd. and Stup Consultants Pvt. Ltd. as comparables and the inclusion of notice period pay in the net profit for section 10B deduction. The decisions were based on functional dissimilarity, failure to meet specified filters, and relevant legal precedents.