2020 (9) TMI 1052 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee is into software development services and support services for card payment authentication and processing, solutions, and focused on global growth market in prepaid, online and mobile payments to its AE thus companies functionally dissimilar with that of assessee need to be deselected from final list. International transaction - assessee challenges cost allocation by Ld. TPO to determine margin of assessee at 2.95% - HELD THAT - Assessee filed revised statement of cost allocation, however, the same was not considered by Ld.TPO/DRP, for the reason that, basis of such allocation was not submitted/explained by assessee. In the interest of Justice we deem it appropriate to remand the issue to DRP for verifying the same. Assessee is directed to file all necessary documents to substantiate the basis of such allocation in ascertaining margin of assesse in respect of international transaction undertaken by assessee with its associated enterprise. DRP shall then pass a reasoned order by granting proper opportunity of being heard to assessee in accordance with law. Disallowance of employee contribution to PF belatedly - HELD THAT - This issue now stands settled in favour of assessee by decision of Hon ble Karnataka High Court in case of CIT vs Sabari Enterprises 2007 (7) TMI 169 - KARNATAKA HIGH COURT wherein held that, in view of statutory provisions of section 2(24)(x), section 36(1)(va) and section 43B(b), contributions made by assessee to PF and ESI are allowable deductions, even though made beyond stipulated period, as contemplated under mandatory provisions of section 36(1)(va), read with section 2(24)(x), provided such contributions are paid by assessee on or before due date for furnishing return of income as per section 139(1). This ratio has been upheld by Hon ble Supreme Court in CIT vs Alom Extrusion Ltd reported in 2009 (11) TMI 27 - SUPREME COURT . We therefore remand this issue to Ld.AO to verify whether, employee contributions were made by assessee before due date of furnishing of return, as per section 139 (1) of the Act.

Summary

Issues Involved:
1. Reference to Transfer Pricing Officer (TPO) for determining arm's length price.
2. Transfer pricing adjustments and comparables.
3. Disallowance of employee contribution to PF.
4. Non-allowance of set off of brought forward business loss and unabsorbed depreciation.
5. Levy of interest under sections 234B and 234C.
6. Rejection of segmental results and cost allocation.

Detailed Analysis:

1. Reference to Transfer Pricing Officer (TPO) for Determining Arm's Length Price:
The assessee contended that the Assessing Officer (AO) erred in making a reference to the TPO without demonstrating necessity and expediency. The Dispute Resolution Panel (DRP) confirmed the AO's action. The tribunal did not specifically adjudicate this issue, as it was deemed general and not requiring detailed analysis.

2. Transfer Pricing Adjustments and Comparables:
The AO made a transfer pricing adjustment of ?1,65,61,543/-. The TPO rejected the comparables selected by the assessee and conducted a fresh transfer pricing analysis. The TPO adopted inappropriate filters and included companies that were not functionally comparable. The tribunal, referencing the case of CGI Information Systems, directed the exclusion of four comparables: Genesys International Corpn. Ltd., Infosys Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd. The tribunal found these companies to be functionally different and not comparable to the assessee's software development services.

3. Disallowance of Employee Contribution to PF:
The AO disallowed the employee contribution to PF amounting to ?11,25,151/- for being paid late. The tribunal referred to the Karnataka High Court's decision in CIT vs Sabari Enterprises and the Supreme Court's decision in CIT vs Alom Extrusion Ltd, which allow such contributions if paid before the due date of filing the return under section 139(1). The tribunal remanded the issue to the AO for verification of the payment date.

4. Non-Allowance of Set Off of Brought Forward Business Loss and Unabsorbed Depreciation:
The assessee raised the issue of non-allowance of set off of brought forward business loss and unabsorbed depreciation. The tribunal noted that a rectification application was pending before the AO and did not express any view on this issue.

5. Levy of Interest Under Sections 234B and 234C:
The assessee contested the levy of interest under sections 234B and 234C. The tribunal did not specifically adjudicate this issue, as it was deemed consequential and dependent on the outcome of other issues.

6. Rejection of Segmental Results and Cost Allocation:
The assessee challenged the cost allocation made by the TPO, which reworked the segmental cost based on the ratio of income to total turnover. The tribunal remanded the issue to the DRP for verification, directing the assessee to substantiate the basis of cost allocation. The DRP was instructed to pass a reasoned order after granting the assessee an opportunity of being heard.

Conclusion:
The tribunal allowed the appeal partly, directing the exclusion of certain comparables and remanding issues related to cost allocation and PF contributions for further verification. The tribunal's decision emphasized the need for proper functional analysis and adherence to judicial precedents in transfer pricing matters. The appeal was allowed as indicated, with specific directions for further proceedings.