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2020 (8) TMI 10 - AT - Income TaxTP Adjustment - comparable selection - functional similarity - HELD THAT - Assessee is engaged in providing IT services and solution that helps clients plan, build, support and manage their IT infrastructures, thus companies functionally dissimilar with that of assessee need to be deselected. Extraordinary event such as merger/amalgamation would have an impact/effect on the profitability. Since Accentia Technologies Ltd., Cosmic Global Ltd., Mold Tek Technologies Ltd., Acropetal Technologies Ltd. and M/s Datamatics Financial Services P. Ltd. are excluded by us, we direct the AO to compute the arithmetic mean margin of the remaining comparables and pass consequential order. Disallowance u/s 14A r.w.r. 8D - HELD THAT - In the instant case the AO has failed to record even elementary satisfaction that having record to the contentions of the appellant, suo motu disallowance of ₹ 6,00,000/- u/s 14A was not correct. Therefore, following the above decision of Maxopp Investment Ltd . 2018 (3) TMI 805 - SUPREME COURT we delete the disallowance made by the AO.
Issues Involved:
1. Transfer pricing adjustment for technical support services. 2. Disallowance under section 14A of the Income Tax Act. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment for Technical Support Services: The appellant challenged the transfer pricing adjustment of ?0.66 crores made by the AO in respect of technical support services rendered to its overseas associated enterprises. The grounds of appeal included: 1.1 The rejection of the appellant's search procedure for comparable companies by the DRP/TPO/AO without specific and cogent reasons, and the ad-hoc, selective, and arbitrary search conducted by the TPO. 1.2 Non-consideration of the appellant's analysis regarding the comparability of certain companies selected by the TPO, which were functionally different, had high profit margins, or involved related party transactions. 1.3 Erroneous treatment of 'provision of derivative loss' as a non-recurring expense in computing the operating margins of Mold Tek Technologies Ltd. 1.4 Application of an arbitrary turnover filter of ?1 crore to ?60 crore and denial of the opportunity for the appellant to be heard after modifying the set of comparable companies. 1.5 Failure to adjust the margins of comparable companies for differences in functions performed, risk assumed, and accounting policies. 1.6 Ignoring that technical support services revenue accounted for less than 2% of the appellant's total revenue, implying minimal impact on the overall profits from international transactions with associated enterprises. The TPO determined the ALP margin at 29.92% based on the arithmetic mean of 14 comparables, leading to an adjustment of ?83,98,618/-. The DRP reduced this adjustment to ?66,21,701/- by considering 12 comparables. The appellant contended the inclusion of certain comparables based on various tribunal and high court decisions. The Tribunal excluded Accentia Technologies Ltd., Cosmic Global Ltd., Mold Tek Technologies Ltd., Acropetal Technologies Ltd., and Datamatics Financial Services Ltd. from the list of comparables. The AO was directed to compute the arithmetic mean margin of the remaining comparables and pass a consequential order, ensuring reasonable opportunity for the appellant to be heard. 2. Disallowance under Section 14A of the Income Tax Act: The AO made a further disallowance of ?17,48,571/- under section 14A, applying Rule 8D, without pointing out any defect in the appellant's disallowance. The appellant argued that the AO failed to record satisfaction regarding the correctness of the suo motu disallowance of ?6,00,000/- made by the appellant. The Tribunal referred to the Supreme Court's decision in Maxopp Investment Ltd. v. CIT, which mandates that the AO must record satisfaction that the assessee's disallowance was not correct before applying Rule 8D. Since the AO did not record such satisfaction, the Tribunal deleted the disallowance of ?17,48,571/-. Procedural Issue: The Tribunal acknowledged the delay in pronouncement of the order due to the COVID-19 lockdown and subsequent extensions, referencing the Supreme Court and Bombay High Court orders that extended the limitation period. The exception to the 90-day time limit for pronouncement of orders was deemed applicable. Conclusion: The appeal filed by the assessee was allowed, with the AO directed to recompute the arithmetic mean margin of the remaining comparables and delete the disallowance under section 14A. The order was pronounced under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1962.
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