2020 (11) TMI 132 - AT - Income Tax

TP Adjustment made in the segment of business support services - selection of comparables in order to benchmark the international transactions undertaken by the assessee with its AE - applicability of safe harbor rules or not to the year under consideration - HELD THAT - Accentia Technologies Ltd. - In view of the services provided by the assessee which are back office services the concern cannot be held to be comparable to the assessee on the ground of it being not functionally comparable. Another aspect to be kept in mind is the extraordinary event of amalgamation which has occurred during the year and such concern with extraordinary event cannot be held to be comparable in the year of the amalgamation. Accordingly we hold so. Infosys BPO Limited - In the first instance it has large scale of operations totalling 1126 Crores against the total turnover of the assessee as 1.17 Crores. Further the said concern is engaged in wide set of services and the margins of the said concern cannot be compared with the margins of the assessee. We find support from the ratio laid down by the Tribunal in the case of sister concern itself. Similar is the proposition for the TCS E-serve Ltd. and TCS E-serve International Ltd. eClerx Services Limited - Since the assessee is engaged in providing BPO services and eClerx Services Limited is engaged in KPO services we find no merit in the inclusion of said concern in final set of comparables. M/s. R Systems International Limited (segmental) and M/s. Caliber Point Business Solutions Limited - In case from the available data on record the results for the financial year as that of the tested party can be made available by the assessee the AO/TPO may verify the same and include the said concerns i.e. M/s. R Systems International Limited (segmental) and M/s. Caliber Point Business Solutions Limited in the final list of comparables. We direct the Assessing Officer to afford reasonable opportunity of hearing to the assessee in order to decide the same and accordingly re-compute the Arm s length price of ITeS Segment. Safe Harbor Rules - Hon ble Delhi High Court in Pr. CIT vs Fiserv India Pvt. Ltd. 2016 (1) TMI 1276 - DELHI HIGH COURT has held that Safe Harbour Notification dated 18th September 2013 relied upon by the Revenue is prospective. Since Safe Harbour Rules are not operative for the year under consideration; hence the orders of authorities below are reversed on this ground. Interest chargeable on receivables - HELD THAT - The issue arising in the present appeal before us is similar in Pr. CIT vs Kusum Health Care Pvt. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT wherein it was held that if working capital adjustment is allowed to the assessee then no further adjustment is to be made on account of interest on receivables - we find no merit in the adjustment made by the AO/TPO in this regard as working capital adjustment has been allowed in the hands of the assessee. Disallowance of depreciation on such database - HELD THAT - Following the same parity of reasoning as in assessee s own case for earlier assessment year we find no merit in restriction of cost of acquired database and the consequent disallowance of depreciation on such database by the Assessing Officer/TPO. Thus the Assessing Officer is directed to allow depreciation on entire payment of 12 Crores towards acquired Business database. Order of the AO in restricting the cost of goodwill to nil and not allowing depreciation on it - The issue of depreciation on goodwill stands covered in favour of the assessee in line with the order of the Tribunal in assessee s own case in Assessment Year 2002-03 (supra). Following the same parity of reasoning we allow the claim of depreciation on goodwill.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Transfer pricing adjustments.
3. Application of safe harbor rules.
4. Interest on receivables.
5. Restriction of cost and depreciation on acquired database.
6. Restriction of cost and depreciation on goodwill.
7. Withdrawal of interest and penalty proceedings.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order dated 28.01.2015, claiming it was "bad in law and void-ab-initio." The Tribunal did not provide a separate analysis on this ground, indicating it was a general contention.

2. Transfer Pricing Adjustments:
The primary issue was the selection of comparables for benchmarking international transactions. The Tribunal noted that the major business of the assessee was marketing support services, which had been accepted. However, adjustments were made in the IT Enabled Services (ITeS) segment.

- Selection of Comparables: The Tribunal excluded certain companies such as Accentia Technologies Ltd., Infosys BPO Limited, TCS E-serve Limited, TCS E-serve International Ltd., and eClerx Services Limited, citing reasons like functional dissimilarity, high turnover, brand value, and involvement in Knowledge Process Outsourcing (KPO) services.
- Inclusion of Comparables: The Tribunal directed the inclusion of R Systems International Limited (segmental) and Caliber Point Business Solutions Limited, provided their financial data could be reasonably extrapolated to match the assessee's financial year.

3. Application of Safe Harbor Rules:
The Tribunal reversed the application of Safe Harbor Rules for the year under consideration, citing the Delhi High Court's decision in Pr. CIT vs Fiserv India Pvt. Ltd., which held that Safe Harbor Rules are prospective and not applicable for the year in question.

4. Interest on Receivables:
The Tribunal found no merit in the adjustment for interest on receivables, as the working capital adjustment had already been allowed. This decision was based on the Delhi High Court's ruling in Pr. CIT vs Kusum Health Care Pvt. Ltd.

5. Restriction of Cost and Depreciation on Acquired Database:
The Tribunal upheld the assessee's claim for the cost of the acquired database at ?12 Crores, rejecting the restriction to ?3 Crores. The Tribunal also allowed depreciation on the entire payment towards the acquired business database, following its earlier decision in the assessee's own case for AY 2002-03.

6. Restriction of Cost and Depreciation on Goodwill:
The Tribunal allowed the assessee's claim for the cost of goodwill and depreciation on it, following its previous decision in the assessee's own case and the Supreme Court's ruling in CIT vs Smifs Securities Ltd.

7. Withdrawal of Interest and Penalty Proceedings:
The Tribunal did not provide a separate analysis on the withdrawal of interest u/s 244A and the initiation of penalty proceedings u/s 271(1)(c), indicating these were general contentions.

Conclusion:
The Tribunal directed the Assessing Officer to re-compute the transfer pricing adjustments after excluding and including specific comparables as discussed. It also allowed the assessee's claims regarding the cost and depreciation on the acquired database and goodwill. The appeal of the assessee was allowed, and the order was pronounced on 21st October 2020.