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2018 (3) TMI 1563 - AT - Income TaxTPA - Comparability analysis criteria - Held that - Companies non comparable with captive services provider and providing simply IT enabled services need to be deleted from final list of comparability. Working capital adjustment - Held that - We direct the TPO/AO that no separate adjustment on account of receivables are required after considering the working capital adjustment. Accordingly, the appeal for the Assessment Year 2012-13 is treated as allowed.
Issues Involved:
1. Transfer Pricing Adjustment for IT-enabled services (ITeS) and IT services. 2. Inclusion/Exclusion of Comparable Companies. 3. Working Capital Adjustment. 4. Adjustment on Account of Receivables. 5. Corporate Tax Disallowance under Section 10A. 6. Computation of Book Profits under Section 115JB. Detailed Analysis: 1. Transfer Pricing Adjustment for IT-enabled services (ITeS) and IT services: The assessee challenged the transfer pricing adjustment of international transactions made by the Transfer Pricing Officer (TPO) on account of IT-enabled services (ITeS) and Information Technology (IT) services. The adjustments were: - ITeS segment: ?16,67,89,267/- - IT segment: ?2,62,12,557/- - Receivables: ?48,33,838/- The assessee used the Transactional Net Margin Method (TNMM) and selected 23 comparables for software development and 11 for ITeS. The TPO rejected the assessee’s benchmarking and selected his own comparables, resulting in higher average margins and significant adjustments. 2. Inclusion/Exclusion of Comparable Companies: ITeS Segment: - TCS E-Serve Ltd.: Excluded due to incomparable scale of operations, payment for brand equity, presence of intangibles, and services that differ from low-end ITeS. Supported by multiple Tribunal decisions. - Accentia Technology Pvt. Ltd.: Excluded due to an extraordinary event of amalgamation during the financial year, distorting profits. Supported by Tribunal decisions in similar cases. IT Segment: - E-Info Chip Bangalore Ltd.: Excluded as it provides both IT and IT-enabled services without segmental accounts, making it incomparable. Supported by Tribunal decisions. - Wipro Technology Services Ltd.: Excluded due to an extraordinary event of acquisition by Wipro Ltd. and related party transactions, impacting comparability. - Infosys Ltd.: Excluded due to its large scale, significant R&D expenditure, and brand value, making it incomparable with smaller captive service providers. Supported by High Court and Tribunal decisions. 3. Working Capital Adjustment: The Tribunal directed that working capital adjustments should be allowed even for service industries, as they impact profitability. This decision aligns with multiple Tribunal rulings, which emphasize the need to neutralize differences in working capital positions to ensure fair comparability. 4. Adjustment on Account of Receivables: The Tribunal held that if the impact of receivables is factored into the working capital adjustment, no separate adjustment for receivables is warranted. This principle was supported by the Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. 5. Corporate Tax Disallowance under Section 10A: The assessee contested the restriction of deduction under Section 10A. The Tribunal directed the Assessing Officer to follow the jurisdictional High Court’s principle in CIT vs. Genpact India, ensuring that expenses excluded from export turnover should also be excluded from total turnover. 6. Computation of Book Profits under Section 115JB: The assessee claimed a reduction in book profits for compensation paid to a landlord for early vacation of premises, which was initially added back in a prior year. The Tribunal agreed with the assessee, holding that the actual payment from the provision created earlier should be allowed to avoid double taxation. Conclusion: The appeals were partly allowed, with directions to exclude certain comparables and allow working capital adjustments. The Tribunal emphasized the need for fair comparability and adherence to established principles in transfer pricing and corporate tax computations.
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