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2020 (4) TMI 610 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - Companies showing super normal profits of 96.66% and such profit is not representative of the industry need to be deselected. Assessee-company in the instant case primarily provides foreign exchange services which include purchase and sale of foreign currency to individuals and corporate, in its capacity as a licensed full-fledged money changer thus companies functionally dissimilar with that of assessee need to be deselected from final list.
Issues Involved:
1. Transfer Pricing Adjustment 2. Selection of Comparables 3. Working Capital and Risk Adjustment 4. Benefit of 5% Range under Proviso to Section 92C(2) 5. Credit of Taxes Withheld 6. Set-off of Brought Forward Losses 7. Levy of Interest under Section 234B 8. Initiation of Penalty Proceedings under Section 271(1)(c) Detailed Analysis: 1. Transfer Pricing Adjustment: The primary issue in both assessment years (AY 2008-09 and AY 2009-10) was the transfer pricing adjustment made by the Transfer Pricing Officer (TPO) and upheld by the Assistant Commissioner of Income Tax (AO). The adjustments were ?98,28,555 for IT support services and ?3,54,249 for group audit services in AY 2008-09, and ?62,60,526 for IT-enabled services in AY 2009-10. The appellant challenged the entire transfer pricing adjustment, arguing that if certain comparables were excluded, their operating margin would fall within the acceptable range. 2. Selection of Comparables: The appellant contested the inclusion of certain comparables by the TPO, particularly Coral Hubs Ltd., Accentia Technologies Ltd., eClerx Services Ltd., and Mold-Tek Technologies Ltd., on grounds of functional dissimilarity and extraordinary events affecting profitability. The Tribunal found merit in the appellant's arguments and directed the exclusion of these comparables based on previous judicial precedents and decisions of the Dispute Resolution Panel (DRP). AY 2008-09: - Coral Hubs Ltd.: Excluded due to a different business model involving outsourcing to third-party vendors. - Accentia Technologies Ltd.: Excluded due to extraordinary events like mergers affecting profitability. - eClerx Services Ltd. and Mold-Tek Technologies Ltd.: Excluded due to supernormal profits, making them unrepresentative of the industry. AY 2009-10: - Coral Hubs Ltd.: Excluded for similar reasons as in AY 2008-09, supported by multiple judicial precedents. 3. Working Capital and Risk Adjustment: The appellant sought adjustments for differences in working capital and risk profiles between the comparables and themselves. However, this issue became academic after the exclusion of certain comparables. 4. Benefit of 5% Range under Proviso to Section 92C(2): The appellant requested the benefit of the 5% range as envisaged under the proviso to Section 92C(2). This issue also became academic following the exclusion of specific comparables. 5. Credit of Taxes Withheld: In AY 2009-10, the appellant claimed a short grant of credit for taxes withheld amounting to ?58,103. The Tribunal directed the AO to verify and grant the tax credit as per the provisions of the Act. 6. Set-off of Brought Forward Losses: The appellant sought the set-off of brought forward losses, including depreciation, as per their return of income. The Tribunal directed the AO to verify and allow the set-off as per the provisions of the Act. 7. Levy of Interest under Section 234B: The appellant contested the levy of interest under Section 234B, which was deemed consequential by the Tribunal. 8. Initiation of Penalty Proceedings under Section 271(1)(c): The initiation of penalty proceedings under Section 271(1)(c) was considered premature by the Tribunal. Conclusion: The appeal for AY 2008-09 was allowed, with the Tribunal directing the exclusion of certain comparables and rendering other issues academic. For AY 2009-10, the appeal was partly allowed, with directions to the AO to verify and grant tax credit and set-off of brought forward losses, while other issues were considered academic or consequential.
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