2020 (6) TMI 268 - AT - Income Tax

TP Adjustment - working capital adjustments - HELD THAT - Transfer pricing law is to determine the correct arm s length price of the assessee s transactions with its associated enterprises(AE). For the sake of argument, let say, if these additional evidences were not admitted by us, then it would have not been possible to determine the correct transfer pricing adjustments (ALP-adjustments) and as a result there will not be correct determination of tax liability of the assessee company. Therefore, we have to admit these additional evidences. As explained above, and in the interest of justice and fair play, we admit these additional evidences (relating to working capital adjustments) filed before us and we remit these additional evidences to the file of ld TPO with the direction to examine these additional evidences and adjudicate the issue in accordance with law. For statistical purposes, the ground raised by the assessee is allowed. Comparable selection - eClerx Services Limited (eClerx) is functionally different from the assessee company, it is not a comparable company so far Segment Reporting is concerned. The eClerx Services limited operates under a single primary segment i.e. data analytics and process outsourcing services therefore different from the assessee company. The eClerx Services limited, is engaged in providing KPO services to global clients. Besides, due to high turnover with significant fluctuations in revenues and profits, the eClerx Services limited should not be selected as comparable company. Therefore, we direct the TPO/AO to exclude the eClerx Services limited, as this company is not a comparable company, as explained above, hence it requires to be excluded. TCS eServe International Limited (TCS eServe) had a high brand value and, therefore, was able to command greater profits, besides, it operated on economic upscale. The TCS eServe International is engaged in the business of software testing, verification and validation and thus not comparable, therefore, we direct the ld TPO/AO to exclude the TCS eServe International, as this company is not a comparable company with the assessee, as explained above, hence it requires to be excluded. Denial of claim of exemption of interest under section 10A - HELD THAT - Hon ble High Court of Calcutta in the case of Hindustan Gum Chemicals Ltd 1989 (8) TMI 45 - CALCUTTA HIGH COURT held that in order to compute deduction under section 10B of the Act, the profits of the business of the undertaking would include its entire business income including interest income on fixed deposits. We note that judgment of the Hon ble High Court of Calcutta (supra) is in the context of section 10B of the Act but the ratio of this judgment is squarely applicable to section 10A deduction. Therefore, respectfully following the judgment of the Hon ble High Court of Calcutta in the case of Hindustan Gum Chemicals Ltd (supra), we direct the AO/TPO to allow deduction under section 10A in respect of interest income of fixed deposits.

Summary

Issues Involved:
1. Admission of additional evidence for working capital adjustments.
2. Exclusion of specific comparable companies (eClerx Services Limited and TCS eServe International Limited) in Transfer Pricing analysis.
3. Claim of exemption of interest under section 10A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Admission of Additional Evidence for Working Capital Adjustments:
The assessee argued that the necessary data for working capital adjustments was not available during the Dispute Resolution Panel (DRP) proceedings, resulting in incorrect determination of the arm's length price. The assessee sought to admit additional evidence to rectify this. The Tribunal referenced Rule 29 and Rule 30 of the Income Tax Appellate Tribunal Rules, which allow for the admission of additional evidence if it is necessary for proper adjudication. The Tribunal also cited the Delhi High Court's judgment in Text Hundred India (P) Limited, emphasizing that justice should not be compromised due to procedural errors. Consequently, the Tribunal admitted the additional evidence and remitted the issue back to the Transfer Pricing Officer (TPO) for re-evaluation.

2. Exclusion of Specific Comparable Companies:
a. eClerx Services Limited:
The assessee contended that eClerx is functionally different as it provides high-end data analytics and process outsourcing services, unlike the assessee's IT-enabled services. The Tribunal noted that eClerx operates in a single primary segment and has significant fluctuations in revenue and profits. Various precedents, including decisions from the Delhi High Court and ITAT, supported the exclusion of eClerx due to functional dissimilarity and absence of segmental data. The Tribunal directed the TPO to exclude eClerx from the list of comparables.

b. TCS eServe International Limited:
The assessee argued that TCS eServe is functionally different as it provides services in the banking, financial services, and insurance domains, and benefits from the Tata brand, influencing its pricing and profitability. The Tribunal observed that TCS eServe has high brand value and operates on an economic upscale, making it incomparable to the assessee. Precedents from the Delhi High Court and ITAT supported the exclusion of TCS eServe due to its functional dissimilarity and high brand value. The Tribunal directed the TPO to exclude TCS eServe from the list of comparables.

3. Claim of Exemption of Interest Under Section 10A:
The assessee claimed exemption for interest income from fixed deposits under section 10A, which was denied by the AO/DRP. The Tribunal referenced the Calcutta High Court's judgment in Hindustan Gum & Chemicals Ltd, which held that the entire business income, including interest income, should be considered for deduction under section 10B. The Tribunal found this judgment applicable to section 10A and directed the AO/TPO to allow the deduction for the interest income.

Conclusion:
The Tribunal allowed the appeal to the extent indicated, admitting additional evidence for working capital adjustments, excluding eClerx Services Limited and TCS eServe International Limited from the list of comparables, and directing the AO/TPO to allow the deduction for interest income under section 10A. The decision was pronounced considering the extraordinary situation due to the Covid-19 pandemic.