2019 (4) TMI 1361 - AT - Income Tax

TP Adjustment - upward adjustment of provision for IT Enabled Services - comparable selection - HELD THAT - TCS E Serve Ltd. - The income reported by the TCS E serve is under the one head transaction process and other services . From such a description, it is very difficult to deduce as to how much is for rendering technical services for software testing, verification and validation and how much is for transaction services. Apart from that, various courts including that of Hon'ble Delhi High Courts have held that the association of higher brand value of Tata and TCS have impacted its revenue and the profitability in a positive manner, because associated with such a big brand, has a direct impact on price negotiation which ultimately affects the profitability also. Thus, on functional level and looking to technical services rendered by the TCS E Serve Ltd., we are of the opinion that it cannot be held to be comparable with the assessee whose functions are purely back end office support services. Thus, this comparable is directed to be excluded. TCS E Serve International Ltd. - software testing, verification and validation of software are highly technical and require high level of technical expertise for carrying out such type of software relating testing, and therefore, such a function cannot be compared with that of the assessee. Again, in the profit and loss account, the income has been shown as transaction processing and other services which does not give any segmental information with regard to the technical services rendered by this company, therefore, we hold that at the functional level this company cannot be held to be comparable. Omega Healthcare Ltd. - Since the only reason assigned to reject this company is that its financial data is not available in public domain, accordingly, we remand this comparable to the file of the TPO who shall examine the annual report and decide accordingly. Caliber Point Business - if the quarterly results of the relevant financial year of this company are available and margins can be computed proportionately, then same can be adopted; and simply because this company follows different financial years ending, the same cannot be excluded if functionally it is found to be comparable. Accordingly, we remand this comparable back to the file of the TPO to examine the quarterly results and see the proportionate profit margin. R Systems International Ltd. (Segmental) - We direct the TPO to examine the quarterly result and work out the proportionate profit margin of bench mark with the PLI of the assessee. Accordingly, this comparable is accepted subject to aforesaid condition. Microgenetic System Ltd., CG-VAK Software Export Ltd. and Microgenitics Systems Ltd - these comparables have been rejected by the TPO on the ground that the revenue of these companies are less than ₹ 5 crore and in case of CG-VAK another point of rejection has been taken by the ld. CIT(A) is that employee cost is less than 25% - HELD THAT - Only reason for rejecting the three comparables is that their turnover is less than ₹ 5 crores, and therefore, same cannot be included for the comparability analysis. Such a filter applied by the TPO in the search matrix of assessee to reject the comparables cannot be upheld as it amounts to cherry picking. We find that now this issue of rejection on low turnover stands settled by the judgment of Hon'ble Delhi High Court in the case of Chryscapital Investment India Pvt. Ltd vs. Dy.CIT, 2015 (4) TMI 949 - DELHI HIGH COURT . Thus, we hold that these comparables cannot be rejected on low turnover filter. Accentia Technologies Pvt. Ltd - HELD THAT - we find that this company is engaged in providing healthcare receivables cycle management services. It is not in dispute that in pursuance of scheme amalgamation of erstwhile company, Ascent Info Serve Pvt. Ltd. with the assessee company, this company was amalgamated with the assessee company during the relevant financial year and hence there is an extraordinary event during the year. Apart from the functions and services provided by this company has been held to be high level KPO services providing company which now has been held to be functionally different from the company providing BPO Services. I-Gate Global Services Ltd. - no segmental information with regard to the information technical services, i.e., development of software products and also there is an extraordinary event of amalgamation, therefore, this company has rightly been excluded by the ld. CIT(A). Infosys BPO Ltd. company has a high brand value and incurred brand building expenditure of about ₹ 78 crores, whereas assessee does not hold any significant intangibles. Apart from that, it is a substantial selling and marketing expenses which is 6.93% of sales, whereas in case of the assessee, it has not incurred any expenses for business promotion/marketing etc. being a captive service provider. Such a huge brand value and marketing expense has a direct effect in negotiation of prices and impacts profit margins . Thus this company cannot be held to be comparable. Disallowance of deduction u/s.10A on interest income earned from short term deposits - AO considering the same as income from other sources - HELD THAT - The words derived by undertaking in Section 10A are derived from the words enshrined in Chapter VI A, and therefore, Profits Gains of undertaking including incidental income by way of bank deposits is also entitled for 100% deduction u/s.10A. Keeping in view this principle of law, we remand the issue for a limited purpose to the file of the Assessing Officer to examine the contention of the assessee that, whether the fixed deposits made by the assessee was made for over margin money obtaining bank guarantee; or for making prepayment of ECB for which funds were parked on temporary basis pending approval from the requisite authorities; or is in any manner inextricably linked with the assessee s business. If the contention of the assessee is found to be correct on facts then deduction of such an interest has to be allowed while computing the profits u/s.10A. Reconciliation of interest with TDS certificates - as per AO assessee has declared interest income of ₹ 63,67,249/- - in TDS certificates interest income credit at ₹ 64,69,690/-. - HELD THAT - No infirmity in the order of the ld. CIT(A), because if the difference of interest amount has already been offered to tax in the year of accrual then there is no point for taxing the same in this year. In any case, we have already held while deciding ground no.4 to 4.2 subject to certain verification by the Assessing Officer if the interest income is subject to deduction, then ostensibly no addition can be made. Accordingly, in view of the direction given in ground no.4 and also in line with the direction of the ld. CIT(A), we hold that the Assessing Officer shall verify and delete the addition accordingly. Unbilled revenue realized within the stipulated period for the purpose of computing the export turnover - AO has reduced the export turnover of assessee alleging that assessee has failed to realize unbilled revenue of and amount receivable within six months, i.e., time stipulated for deduction u/s.10A. - HELD THAT - The matter should have been examined by the ld. CIT(A) and allowed. Since, he has simply given the direction for verification, therefore, we hold that Assessing Officer should verify the same and allow the exemption of unbilled revenue u/s.10A if it has been realized within six months of the end of the relevant financial year. The Assessing Officer shall also verify, whether the amount of ₹ 2,59,241/- forms part of the export turnover of the assessee or not. Disallowance made u/s.40A(2)(b) - HELD THAT - The assessee is reimbursed with mark up on the cost incurred. If the cost is reduced then at the same time, mark up on such cost also gets reduced. Therefore, in such a business model there could not be any disallowance on the salary expenses. In any case assessee is a 100% export oriented unit eligible for deduction u/s.10A and if while computing the profits of the undertaking Assessing Officer has allowed the deduction u/s.10A, then such a disallowance ostensibly will only go to enhance the income of the assessee which again would be subject to deduction u/s.10A. Therefore, such a disallowance in the case of the assessee becomes purely academic. In any case, when this issue has been decided in favour of the assessee in the Assessment Year 2009-10, then on this ground also, we do not find any reason to deviate from such a precedence and accordingly, disallowance made u/s.40A(2)(b) is directed to be deleted. Adjustment u/s 115JB - MAT - provisions for bonus by considering it as unascertained liabilities - HELD THAT - No detail or working has been given before us in this regard, therefore, we deem it fit to restore this issue to the file of the Assessing Officer who shall examine, whether the provision has been made on the basis of rational or scientific basis or not and assessee shall demonstrate that such a reasonable degree of estimation has been considered while making the provision. If it is found that provision has been made on rational and reasonable basis, then such a provision needs to be allowed and cannot held to be contingent or unascertained. With this direction, this matter is restored back to the file of the Assessing Officer who shall decide this issue after giving due opportunity to the assessee. - Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of deduction claimed under Section 10A on interest income.
2. Reconciliation of interest income with TDS certificates.
3. Reduction in deduction claimed under Section 10A due to unbilled revenue and sundry debtors.
4. Disallowance under Section 40A(2)(b) for alleged excess payment.
5. Disallowance of provision for bonus for computing book profits under Section 115JB.
6. Transfer pricing adjustments and inclusion/exclusion of comparables.

Detailed Analysis:

1. Disallowance of Deduction Claimed Under Section 10A on Interest Income:
The assessee challenged the disallowance of ?63,67,249/- under Section 10A on interest income earned from short-term fixed deposits, which was considered by the Assessing Officer (AO) as 'income from other sources'. The AO argued that the interest income was not derived from the business activity of the assessee. However, the assessee contended that the funds were temporarily parked in fixed deposits to mitigate interest costs on external commercial borrowings (ECB) and manage working capital. The Tribunal remanded the issue back to the AO to verify if the fixed deposits were linked to the business activities and if so, allow the deduction under Section 10A.

2. Reconciliation of Interest Income with TDS Certificates:
The AO noted a discrepancy between the interest income declared by the assessee (?63,67,249/-) and the amount reflected in TDS certificates (?64,69,690/-). The assessee explained that the difference arose due to the accrual system of accounting and that the interest income had already been offered to tax in various years. The Tribunal directed the AO to verify the records and delete the addition if the interest income had indeed been offered to tax in the year of accrual.

3. Reduction in Deduction Claimed Under Section 10A Due to Unbilled Revenue and Sundry Debtors:
The AO reduced the export turnover by ?52,18,911/- alleging that unbilled revenue and sundry debtors were not realized within the stipulated period. The assessee provided Foreign Inward Remittance Certificates (FIRC) evidencing realization within six months. The Tribunal directed the AO to verify these documents and allow the exemption under Section 10A if the amounts were realized within the stipulated period.

4. Disallowance Under Section 40A(2)(b) for Alleged Excess Payment:
The AO disallowed ?80,72,451/- under Section 40A(2)(b) for alleged excessive payments to related parties. The assessee argued that the payments were for commercial expediency and were part of the operating expenditure under the cost-plus mark-up model. The Tribunal found merit in the assessee's contention and noted that any disallowance would reduce the operating profit, which is contrary to the cost-plus mark-up model. The Tribunal directed the deletion of the disallowance.

5. Disallowance of Provision for Bonus for Computing Book Profits Under Section 115JB:
The AO added ?3,08,21,090/- to the book profits under Section 115JB, treating the provision for bonus as an unascertained liability. The assessee contended that the provision was made on a scientific basis and was a definite liability. The Tribunal remanded the issue back to the AO to verify if the provision was made on a rational and reasonable basis and to allow it if found to be so.

6. Transfer Pricing Adjustments and Inclusion/Exclusion of Comparables:
The Tribunal addressed various transfer pricing issues related to the inclusion/exclusion of comparables. The Tribunal excluded TCS E-Serve Ltd. and TCS E-Serve International Ltd. due to functional dissimilarities and the impact of the Tata brand. Omega Healthcare Ltd. was remanded to the AO for verification of its financial data. Caliber Point Business and R Systems International Ltd. were remanded to the AO to examine quarterly results and proportionate profit margins. The Tribunal also directed the inclusion of three comparables (Microgenetic System Ltd., CG-VAK Software & Export Ltd., and Microgenitics Systems Ltd.) that were excluded due to low turnover. The Tribunal upheld the exclusion of Accentia Technology Pvt. Ltd., I-Gate Global Solution Ltd., and Infosys BPO Ltd. due to functional differences and extraordinary events.

Conclusion:
The Tribunal provided detailed directions on each issue, ensuring that the AO verifies the necessary details and allows deductions and adjustments as per the legal provisions. The decision emphasizes the importance of functional comparability and the need for accurate verification of financial data in transfer pricing cases.