2020 (3) TMI 391 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - We find that in assessee s own case in 2019 (5) TMI 290 - ITAT MUMBAI the Tribunal excluded Apitco from the list of comparables for the reasons that the company is Government company and also being functionally non-comparable. TSR Darshaw Limited is engaged in providing Share Registrar and transfer services, depository services, pay roll and Provident fund Management Services, etc. The activities carried out by the said company are in the nature of BPO/KPO. We find that the Tribunal in the case of Star India Pvt. Ltd 2019 (8) TMI 1464 - ITAT MUMBAI a group company of the assessee, having activities similar to that of assessee has held, TSRDL is not comparable to support service provider. TDS u/s 194H - disallowance made under section 40(a)(ia) - Agency commission paid to the agents for procuring business for the assessee - HELD THAT - Revenue did not assail the findings of Tribunal on the issue of deleting the addition made in respect of agency commission under section 40(a)(ia) of the Act. Thus, the Revenue accepted the findings of Tribunal on this issue. See STAR ENTERTAINMENT MEDIA (P.) LTD. 2020 (1) TMI 867 - BOMBAY HIGH COURT WAPCOS company is liable to be rejected as comparable on account of functional disparity as well as, being a Government Company. In view of our above observation, we direct TPO /Assessing Officer to exclude WAPCOS from the list of comparables. Company having related party transactions exceeding 25% of turnover - It is no denying fact that where an entity is having related party transaction in excess of 25% of the total turnover, the same is held to be bad comparables - We find that in the case of DCIT vs. Aruba Network Pvt. Ltd., 2016 (9) TMI 1447 - ITAT BANGALORE has excluded Hindustan Housing Co. Ltd. from the list of comparables as it has failed to qualify RPT filter of 25%. Taking into consideration, well settled principle of rejecting comparable by applying RPT filter, we deem it appropriate to refer this comparables to the TPO for re-examination. In case the related party transactions of the said company exceeds 25% of the total turnover, the TPO is directed to exclude said company from the list of comparables.

Summary

Issues Involved:

1. Transfer Pricing Adjustments
2. Disallowance under Section 40(a)(ia) of the Income Tax Act
3. Charging of Interest under Sections 234B and 234C
4. Initiation of Penalty Proceedings under Section 271(1)(c)
5. Exclusion/Inclusion of Comparables
6. Treatment of Trade Discounts as Agency Commission
7. Short Credit of Tax Deducted at Source (TDS)
8. Deletion of Disallowance on Account of Channel Placement Fee

Detailed Analysis:

1. Transfer Pricing Adjustments:

The primary issue concerns the transfer pricing adjustments made by the Transfer Pricing Officer (TPO) and the subsequent appeals by the assessee. The TPO rejected five out of eight comparables selected by the assessee and introduced two fresh comparables, resulting in an adjustment of ?29,69,557/-. The assessee contested the inclusion of Apitco Ltd. and TSR Darshaw Limited (TSRDL) as comparables, arguing that Apitco is a government undertaking and functionally different, while TSRDL is engaged in BPO/KPO activities, making them incomparable to the assessee's business support services.

The tribunal found merit in the assessee's arguments, noting that Apitco, being a government company, is not driven by profit motives and is functionally different. Similarly, TSRDL, engaged in payroll and provident fund management services, is not comparable to the assessee's support services. Consequently, both Apitco and TSRDL were excluded from the list of comparables.

2. Disallowance under Section 40(a)(ia):

The assessee challenged the disallowance of ?4,70,26,793/- under Section 40(a)(ia) for non-deduction of tax at source under Section 194H on payments labeled as agency commission. The assessee argued that these were trade discounts reflected in invoices, not payments to agents, and thus not subject to TDS. The tribunal upheld the assessee's contention, noting that similar disallowances in previous years had been resolved in the assessee's favor, and there was no change in the facts or law to warrant a different treatment.

3. Charging of Interest under Sections 234B and 234C:

The tribunal noted that the charging of interest under Sections 234B and 234C is mandatory and consequential. Therefore, the grounds challenging the interest charges were dismissed.

4. Initiation of Penalty Proceedings under Section 271(1)(c):

The tribunal found that the challenge to the initiation of penalty proceedings under Section 271(1)(c) was premature and dismissed the ground as such.

5. Exclusion/Inclusion of Comparables:

In addition to Apitco and TSRDL, the assessee sought the exclusion of WAPCOS Limited, a government company engaged in high-end consultancy services, from the list of comparables. The tribunal agreed, citing previous decisions that excluded WAPCOS on similar grounds. The tribunal also addressed the exclusion of Hindustan Housing Company Ltd. based on related party transactions exceeding 25% of turnover, directing the TPO to re-examine and exclude the company if it failed the RPT filter.

6. Treatment of Trade Discounts as Agency Commission:

The tribunal reiterated its findings from previous years, holding that trade discounts reflected in invoices are not agency commissions and thus not subject to TDS under Section 194H. The disallowance under Section 40(a)(ia) was deleted.

7. Short Credit of Tax Deducted at Source (TDS):

The issue of short credit of TDS was restored to the Assessing Officer for verification of supporting documents, with directions to allow the correct credit in accordance with the law.

8. Deletion of Disallowance on Account of Channel Placement Fee:

The tribunal upheld the deletion of disallowance under Section 40(a)(ia) concerning channel placement fees, relying on decisions from higher courts, including the Hon'ble High Court, which had settled the issue in favor of the assessee in similar cases.

Conclusion:

The appeals by the assessee for the assessment years 2009-10, 2010-11, and 2011-12 were partly allowed, with significant relief granted on transfer pricing adjustments and disallowances under Section 40(a)(ia). The appeal by the Revenue for the assessment year 2011-12 was dismissed, and the cross-objections filed by the assessee were deemed infructuous. The tribunal's order emphasized consistency in applying judicial precedents and the importance of functional comparability in transfer pricing cases.