2018 (2) TMI 1084 - AT - Income Tax

TPA - ALP determination - comparable selection criteria - Held that - Assessee is into IT Enabled Services and IT Software Development thus companies functionally dissimlar with that of assessee need to be deselected from final list. Treating foreign exchange gain/loss as non-operating items in both the segments i.e. ITES services and Software Development services while determining the arm s length price of the international transactions - Held that - Foreign exchange gain/loss cannot be treated as non-operating items while calculating the margin of the taxpayer as well as comparables. So, we direct to treat the foreign exchange gain/loss as non-operating margin as non-operating items while benchmarking the international transactions. Decided in favour of Assessee. Adjustment on account of working capital differences between the taxpayer vis- vis comparable companies - Held that - We are of the considered view that the taxpayer is entitled for working capital adjustment to be on the same page with the comparables. So, the taxpayer is entitled for working capital adjustment, the quantum of which is to be checked by the ld. TPO who has to proceed on the lines of the decision rendered by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2008-09 Deduction u/s 10A of the Act being the interest on FDR and misc. income - Held that - Following the findings returned by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2010-11 based on the decision of Hon ble High Court in Riviera Home Furnishing (2015 (11) TMI 1139 - DELHI HIGH COURT), we are of the considered view that the taxpayer is entitled for deduction u/s 10A on the interest earned on fixed deposit receipts. Pay recoveries from the employees eligible for sec 10A deduction - Held that - Similar view as to allowing the deduction u/s 10A of the Act on excess provision returned back has been expressed by the coordinate Bench of the Tribunal in Birlasoft (India) Ltd. vs. DCIT 2011 (1) TMI 406 - ITAT, DELHI . Following the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that notice pay recoveries from the employees is also part of the business profit of the taxpayer on which the taxpayer is also eligible for deduction u/s 10A. Set off of Minimum Alternate Tax (MAT) credit brought forward during the year under assessment u/s 115JAA - Held that - When it is not in dispute that the taxpayer has claimed the credit being brought forward figure, the taxpayer is entitled for set off of MAT credit of the same. So, the AO is directed to proceed accordingly after due verification.

Issues Involved:
1. Validity of the assessment order.
2. Transfer pricing adjustments.
3. Treatment of foreign exchange gain/loss.
4. Working capital adjustments.
5. Risk adjustments.
6. Jurisdictional error in reference to TPO.
7. Benefit of downward adjustment.
8. Economic analysis for ALP determination.
9. Use of multiple year data.
10. Tax holiday entitlement under section 10A.
11. Deduction under section 10A on interest and miscellaneous income.
12. Credit for Tax deducted at source.
13. Credit for Advance tax.
14. Set off of Minimum Alternate Tax (MAT) credit.
15. Levy of consequential interest under section 234B and 234C.
16. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Validity of the Assessment Order:
The taxpayer argued that the assessment order was vitiated due to violation of principles of natural justice and was arbitrary. The Tribunal did not provide a specific ruling on this issue, focusing instead on the substantive grounds of appeal.

2. Transfer Pricing Adjustments:
The taxpayer contested the inclusion/exclusion of certain comparables for benchmarking international transactions. The Tribunal provided a detailed analysis for each comparable:

- Infosys Technologies Limited: Excluded due to functional dissimilarity, significant R&D expenses, and being a giant company with a fully risk-bearing profile.
- Persistent Systems Ltd.: Remanded to TPO for fresh examination as it was not contested earlier.
- Tata Consultancy Services Ltd.: Excluded due to functional dissimilarity, significant R&D expenses, and lack of segmental data.
- Thirdware Solutions Ltd.: Remanded to TPO for fresh examination due to functional dissimilarity and lack of segmental data.
- Wipro Limited: Excluded due to functional dissimilarity, significant R&D expenses, and being a giant company with a fully risk-bearing profile.

3. Treatment of Foreign Exchange Gain/Loss:
The Tribunal held that foreign exchange gain/loss should be treated as operating items while calculating the margin of the taxpayer and comparables, rejecting the Revenue's reliance on Safe Harbour Rules.

4. Working Capital Adjustments:
The Tribunal directed the TPO to allow working capital adjustments to ensure comparability, following the principle established in the taxpayer's own case for AY 2008-09.

5. Risk Adjustments:
The Tribunal did not specifically address risk adjustments, focusing instead on the comparability and functional profile of the taxpayer and comparables.

6. Jurisdictional Error in Reference to TPO:
The taxpayer argued that the reference to TPO was made without recording reasons. The Tribunal did not provide a specific ruling on this issue.

7. Benefit of Downward Adjustment:
The Tribunal did not specifically address this issue, focusing instead on the substantive grounds of appeal.

8. Economic Analysis for ALP Determination:
The Tribunal upheld the taxpayer's economic analysis and directed the TPO to reconsider the inclusion/exclusion of certain comparables.

9. Use of Multiple Year Data:
The Tribunal did not specifically address the use of multiple year data, focusing on the comparability and functional profile of the taxpayer and comparables.

10. Tax Holiday Entitlement Under Section 10A:
The Tribunal held that the taxpayer is entitled to a tax holiday under section 10A, rejecting the Revenue's argument that the taxpayer had an ulterior motive of shifting profits outside India.

11. Deduction Under Section 10A on Interest and Miscellaneous Income:
The Tribunal allowed the deduction under section 10A on interest income and miscellaneous income, following the decision in the taxpayer's own case for AY 2010-11 and the principle established in Riviera Home Furnishing.

12. Credit for Tax Deducted at Source:
The Tribunal directed the AO to provide credit for tax deducted at source after due verification.

13. Credit for Advance Tax:
The Tribunal directed the AO to provide credit for advance tax deposited by the taxpayer during the year under assessment, subject to verification.

14. Set Off of Minimum Alternate Tax (MAT) Credit:
The Tribunal directed the AO to grant set off of MAT credit brought forward during the year under assessment, subject to verification.

15. Levy of Consequential Interest Under Section 234B and 234C:
The Tribunal held that the levy of interest under sections 234B and 234C is consequential in nature and did not require specific findings.

16. Initiation of Penalty Proceedings Under Section 271(1)(c):
The Tribunal did not specifically address the initiation of penalty proceedings, focusing on the substantive grounds of appeal.

Revenue’s Appeal:
The Revenue's appeal focused on the exclusion of certain comparables by the DRP. The Tribunal upheld the DRP's decision to exclude Aricent Tech, Bodhtree Consulting, and CAT Technologies for benchmarking international transactions in the software development services segment, and Coral Hub in the ITES segment. The Tribunal found these comparables to be functionally dissimilar or having undergone extraordinary events affecting their profitability.

Conclusion:
The taxpayer's appeal was allowed for statistical purposes, and the Revenue's appeal was dismissed. The Tribunal directed the TPO to reconsider certain comparables and adjustments, ensuring a fair benchmarking of the taxpayer's international transactions.

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