2019 (4) TMI 2156 - AT - Income Tax

TP Adjustment - comparable selection - assessee was engaged in providing ITES services in the nature of analysis and research of price movement and recommendations of trends in future price movement of securities listed on New York Stock Exchange and Nasdaq, both situated in USA - HELD THAT - Accentia Technologies Ltd. - The said issue now stands covered by the order in Pr.CIT Vs. BNY Mellon International Operations (India) (P) Ltd. 2018 (4) TMI 1536 - BOMBAY HIGH COURT wherein while deciding the transfer pricing adjustment in the hands of assessee engaged in the Business Process Outsourcing i.e. BPO services, it has held that Accentia Technologies Ltd. is to be excluded being KPO company. Also in Aptara Technologies Pvt. Ltd. 2018 (6) TMI 1707 - ITAT PUNE also directed its exclusion. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from final set of comparables while benchmarking the international transactions of assessee. The ground of appeal No.8 raised by assessee is thus, allowed. Computation of PLI in the hands of assessee - grievance of assessee is that TPO/AO/DRP have included items of revenue relating to DTA activity which were excluded while allowing 10A deduction AND including service tax refund as part of revenue item, despite same being operating income and also despite directions of DRP - HELD THAT - From the PLI working of TPO/AO, it transpires that the TPO had recognized the sales and service and payout income as revenue items, against which it had debited expense items of personnel expenses, payout cost, administrative expenses, expenses relating to DTA, Forex loss, asset written off and depreciation. One of the grievances of assessee is inclusion of payout income but from the perusal of working of TPO, it transpires that he had debited payout cost of the same value as included on account of payout income and hence, it has no effect on the PLI income. Thus, we find no merit in the plea of assessee in this regard. Item of expenses relating to DTA unit which have been included by the TPO as part of expenses item - We find merit in the plea of assessee that in case expenses are so included as operating cost, then the income arising from the same head should be included in operating revenue. Accordingly, we direct the TPO/Assessing Officer to include income of DTA unit as part of revenue item. Inclusion of service tax refund as operating revenue - DRP in this regard has directed the TPO/AO to include service tax refund. Accordingly, we direct the TPO/AO to give effect to the order of DRP and include the same as part of operating revenue. Accordingly, the TPO is directed to re-compute the PLI of assessee, which as per the calculation of assessee works out to 5.20% and compare the same with mean margins of comparable companies after giving effect to our directions in respect of comparables and determine the arm's length price of international transactions, if any, in the hands of assessee. Re-computation of PLI of Informed Technologies Ltd. and Jindal Intellicom Ltd. - DRP has already directed the AO / TPO to carry out re-working which has not been carried out by the AO/TPO. Hence, direction is issued to re-compute the PLI of Informed Technologies Ltd. and Jindal Intellicom Ltd. as per directions of DRP. Allowance of working capital adjustment - assessee claims that it was in better financial position as it had received advances from associated enterprises and had no debtors - HELD THAT - We find merit in the plea of assessee in this regard and accordingly, direct the AO / TPO to allow working capital adjustment and rework the margins of comparables. AO is thus, directed to work out arm's length price of international transactions, after affording reasonable opportunity of hearing to the assessee. The grounds of appeal raised by assessee are thus, partly allowed.

Summary

Issues Involved: Transfer pricing adjustments, computation of Profit Level Indicator (PLI), inclusion/exclusion of comparable companies, and working capital adjustment.

1. Transfer Pricing Adjustments:

The assessee contested the enhancement of the price of the international transaction of ITES services by Rs.1,81,42,166/-. The Tribunal noted that the assessee had initially adopted the TNMM method but later relied on the CUP method for benchmarking. The TPO selected 6 comparable companies, resulting in an arithmetic mean margin of 13.65%, leading to an upward adjustment of Rs.1,81,42,166/-.

2. Inclusion/Exclusion of Comparable Companies:

The assessee opposed the inclusion of Accentia Technologies Ltd., arguing it was not functionally comparable as it was engaged in KPO services. The Tribunal referenced the Hon'ble Bombay High Court's decision in Pr.CIT Vs. BNY Mellon International Operations (India) (P) Ltd., which excluded Accentia Technologies Ltd. for similar reasons. Thus, the Tribunal directed its exclusion from the final set of comparables.

3. Computation of Profit Level Indicator (PLI):

The assessee raised issues regarding the inclusion of expenses related to the DTA unit and the exclusion of service tax refunds in the PLI computation. The Tribunal directed the TPO/Assessing Officer to include the income of the DTA unit and the service tax refund as part of the operating revenue, and to re-compute the PLI accordingly.

4. Re-computation of PLI for Specific Comparables:

The Tribunal noted that the DRP had directed the re-computation of PLI for Informed Technologies Ltd. and Jindal Intellicom Ltd., which had not been carried out. The Tribunal issued a direction to re-compute the PLI as per the DRP's instructions.

5. Working Capital Adjustment:

The assessee claimed a working capital adjustment due to receiving advances from associated enterprises and having no debtors. The Tribunal found merit in this claim and directed the Assessing Officer/TPO to allow the working capital adjustment and rework the margins of comparables.

Conclusion:

The Tribunal partly allowed the appeal, directing the re-computation of the PLI, exclusion of Accentia Technologies Ltd. from comparables, and granting of working capital adjustment, among other directions.

Order pronounced on this 5th day of April, 2019.