2019 (8) TMI 646 - AT - Income Tax

TP Adjustment - Comparable selection - comparable selection - HELD THAT - Asit C.Mehta Financial Services Ltd. (earlier known as Nucleus Netsoft GIS India Ltd. - This entity was functionally not comparable to the assessee since it was engaged in providing software development services as evident from its Annual Report. Segmental results of the entity are not available and therefore, it could not be treated as a comparable entity - Cases followed TNS INDIA (P.) LTD. 2014 (10) TMI 504 - ITAT HYDERABAD and HSBC ELECTRONIC DATA PROCESSING (I) (P.) LTD. 2013 (9) TMI 444 - ITAT HYDERABAD . Goldstone Infratech Ltd. (earlier Goldstone Teleservices Ltd.) - on similar factual matrix, in HSBC Electronic Data Processing India Ltd. V/s CIT 2013 (9) TMI 444 - ITAT HYDERABAD directed for exclusion of this entity on the ground that foreign exchange revenue were less than 1% of total turnover of the entity and the revenue from BPO was falling over a period of three years. The other decisions as placed on record, also support the exclusion of this entity. Respectfully following the same, we direct for exclusion of this company Maple eSolutions Ltd. - Reliance has been placed on the decision of HSBC Electronic Data Processing India Ltd. V/s CIT supra for the submissions that this entity was engaged in providing call center services for which FAR analysis would be quite different in contrast to the entities engaged in providing BPO services. It has further been submitted that this entity has significant intangible assets of more than 21% of total fixed assets which would make this entity non-comparable. Vishal Information Technologies Ltd. - We find that Hon ble Bombay High Court in the case of Pr.CIT V/s PTC Software India Pvt. Ltd. 2018 (4) TMI 1002 - BOMBAY HIGH COURT has confirmed the stand of the Tribunal in excluding this entity on the ground of non-comparable business model. The other decisions as placed on record also supports the exclusion of this entity. Respectfully following the same, we direct for exclusion of this entity. Adhoc disallowance of 20% of communication expenses - HELD THAT - Assessee debited an amount of ₹ 18.68 Lacs on account of communication expenses reimbursed to its employees. The Ld. AO proposed disallowance of 40% against the same to account for personal element. The Ld. DRP reduced the same to 20%. It has been admitted position before us that the issue stood squarely covered in assessee s favor by the decision of this Tribunal in assessee s own case for AY 2004-05 2013 (4) TMI 935 - ITAT MUMBAI . Factual matrix being similar, respectfully following the earlier decision of this Tribunal in assessee s own case, we delete the adhoc disallowance of 20% as sustained by Ld. DRP and allow this ground of appeal.

Summary

Issues:
1. Transfer Pricing Adjustment
2. Non-Transfer Pricing Adjustment

Transfer Pricing Adjustment:
The appeal by the assessee for Assessment Year 2006-07 challenges the final assessment order passed by the Assistant Commissioner of Income Tax-10(1), Mumbai, regarding Transfer Pricing Adjustment. The assessee contested the additions on account of Transfer Pricing Adjustment and non-Transfer Pricing adjustments. The assessee focused on excluding 4 comparable entities to bring the mean margins within the tolerance range of +5% as per section 92C(2). The assessee provided research support services to its Associated Enterprise and benchmarked the same using TNMM as the Most Appropriate Method. The TPO proposed a TP adjustment of &8377; 43.22 Lacs, which was confirmed by the DRP. The assessee appealed for the exclusion of the 4 entities based on various Tribunal decisions supporting their exclusion due to different business models and functional profiles. The Tribunal directed for the exclusion of these entities, partly allowing the Transfer Pricing Grounds.

Non-Transfer Pricing Adjustment:
The assessee challenged the adhoc disallowance of 20% of communication expenses, which was reimbursed to employees. The AO proposed a 40% disallowance, reduced to 20% by the DRP. The Tribunal, following a previous decision in the assessee's favor for AY 2004-05, deleted the adhoc disallowance of 20% and allowed this ground of appeal. The levy of interest u/s 234 and initiation of penalty proceedings were deemed mandatory and premature respectively, not requiring adjudication. The appeal was partly allowed based on the Tribunal's orders.

This judgment by the ITAT Mumbai addressed the issues of Transfer Pricing Adjustment and Non-Transfer Pricing Adjustment for the Assessment Year 2006-07. The Transfer Pricing Grounds focused on excluding 4 comparable entities to align mean margins within the tolerance range. The Tribunal directed for the exclusion of these entities based on various Tribunal decisions supporting the exclusion due to different business models and functional profiles. Regarding Non-Transfer Pricing Adjustment, the Tribunal deleted the adhoc disallowance of 20% of communication expenses, following a previous decision in the assessee's favor. The levy of interest and initiation of penalty proceedings were considered mandatory and premature respectively, not requiring further adjudication. The appeal was partly allowed based on the Tribunal's orders pronounced on 30th July 2019.