2021 (7) TMI 831 - AT - Income Tax

Transfer Pricing Adjustment - selection of one comparable namely, Interactive Man Power Solution Pvt. Ltd. (IMSPL) - HELD THAT - The comparable in dispute is engaged in the business of recruitment service provider and staffing solutions. The ld. DRP accepted to the fact that it is clear from the annual report that the comparable in question is engaged in the business of recruitment process outsourcing services but at the same time upheld the action of the TPO holding that the comparable is providing support services to their clients. We have seen that there are no segmental financials for marketing and the functions of the assessee are different from that of the comparable thus defaulting the FAR analysis. Hence, we hereby direct that IMSPL be deleted from the list of comparables. Adjustment on account of notional interest on the receivables - HELD THAT - In all these years, the assessee is found to be a debt free company and there is no dispute on these facts. We have considered the judgment of Pr. CIT Vs BECHTEL India Pvt. Ltd. for the assessment year 2010-11 2016 (9) TMI 196 - DELHI HIGH COURT after examining the order in the assessee's own case affirmed that when the assessee is a debt free company, the question of charging any interest on receivables do not arise. The SLP filed by the revenue has been summarily dismissed by the Hon'ble Supreme Court 2017 (7) TMI 1058 - SC ORDER Even on general fundamentals, when the assessee is having their own funds and not paying interest on any loans, then there is no obligation on the assessee to charge interest from the interest free loan given nor any provision of the Act mandate the Assessing Officer to add notional interest received to the total income - the assessee being a debt free company, the action of the revenue making adjustment on account of notional interest on the receivables cannot be held to be legally valid. Reconciliation of income credited to P L account and in the amount reflected in AS-26 - HELD THAT - DRP held that the reconciliation is primary correct and directed the AO to verify and give effect which the AO failed to carry out. The AO is hereby directed to follow the directions given by the ld. DRP without fail while passing the order giving effect to the ITAT order. Deduction of Education Cess under the head income from business and profession - HELD THAT - The similar issue has been adjudicated by the Co-ordinate Bench of ITAT in a number of cases wherein the Education Cess is held to be an allowable deduction. See Bharat Rasayan Ltd. 2021 (3) TMI 710 - ITAT DELHI - Decided in favour of assessee.

Issues Involved:
1. Validity of the final assessment order.
2. TP adjustment in relation to notional interest on overdue receivables.
3. TP adjustment in relation to marketing support services.
4. Addition on account of difference in income offered to tax vis-a-vis Form 26AS statement.
5. Incorrect computation of interest under section 234B.
6. Deduction of Education cess and Secondary Higher Education cess.
7. TP adjustment in relation to software services.
8. TP adjustment in relation to IT enabled services.
9. Selection of companies earning supernormal profits as comparables.
10. Treatment of foreign exchange gain/loss as non-operating items.
11. Treatment of provision for doubtful debts and provision written back as non-operating items.
12. Risk adjustment for the appellant as a captive service provider.
13. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Validity of the Final Assessment Order:
The assessee argued that the final assessment order was vitiated as it was passed in violation of principles of natural justice and was arbitrary. However, the tribunal did not provide a specific ruling on this issue in the judgment.

2. TP Adjustment in Relation to Notional Interest on Overdue Receivables:
The tribunal examined the TPO's decision to treat delayed payments as unsecured loans and charge notional interest. The tribunal noted that the assessee was a debt-free company and referenced the judgment in Pr. CIT Vs BECHTEL India Pvt. Ltd., affirming that no interest on receivables should be charged for a debt-free company. The tribunal ruled that the adjustment on account of notional interest on receivables was not legally valid.

3. TP Adjustment in Relation to Marketing Support Services:
The dispute involved the selection of Interactive Man Power Solution Pvt. Ltd. (IMSPL) as a comparable. The tribunal found that IMSPL was engaged in recruitment and staffing services, which were not comparable to the assessee's marketing support services. The tribunal directed that IMSPL be deleted from the list of comparables.

4. Addition on Account of Difference in Income Offered to Tax vis-a-vis Form 26AS Statement:
The tribunal noted that the DRP had directed the AO to verify the details and delete the addition. However, the AO failed to follow these directions. The tribunal directed the AO to comply with the DRP's instructions.

5. Incorrect Computation of Interest Under Section 234B:
The tribunal did not provide a detailed analysis on this issue in the judgment.

6. Deduction of Education Cess and Secondary Higher Education Cess:
The tribunal noted that the DRP had rejected the deduction of education cess. However, the tribunal referenced several judgments, including those from the ITAT and High Courts, which held that education cess is an allowable deduction under Section 37 of the Income Tax Act. The tribunal allowed the deduction of education cess.

7. TP Adjustment in Relation to Software Services:
The tribunal did not provide a detailed analysis on this issue as the TP adjustment in relation to software services was deleted by the AO/TPO while giving effect to the DRP directions.

8. TP Adjustment in Relation to IT Enabled Services:
Similar to software services, the tribunal did not provide a detailed analysis as the TP adjustment in relation to IT enabled services was deleted by the AO/TPO while giving effect to the DRP directions.

9. Selection of Companies Earning Supernormal Profits as Comparables:
The tribunal did not provide a specific ruling on this issue in the judgment.

10. Treatment of Foreign Exchange Gain/Loss as Non-operating Items:
The tribunal did not provide a specific ruling on this issue in the judgment.

11. Treatment of Provision for Doubtful Debts and Provision Written Back as Non-operating Items:
The tribunal did not provide a specific ruling on this issue in the judgment.

12. Risk Adjustment for the Appellant as a Captive Service Provider:
The tribunal did not provide a specific ruling on this issue in the judgment.

13. Initiation of Penalty Proceedings Under Section 271(1)(c):
The tribunal did not provide a specific ruling on this issue in the judgment.

Conclusion:
The tribunal allowed the appeal of the assessee on the grounds of TP adjustment in relation to notional interest on overdue receivables and deduction of education cess. The tribunal directed the AO to follow the DRP's instructions regarding the reconciliation of income credited to the P&L account and the amount reflected in AS-26. The tribunal also ordered the deletion of IMSPL from the list of comparables for marketing support services. The appeal was allowed, and the order was pronounced in the open court.

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