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2022 (7) TMI 1259 - AT - Income TaxTP Adjustment - income earned by the assessee from its associated enterprises for rendering of engineering, tendering and IT support services - selection of Desein Pvt. Ltd as comparability - HELD THAT - Desein Pvt. Ltd. is operating in a completely different segment insofar as its revenue from operation and maintenance is concerned and the aforesaid services, in our considered view, cannot be said to be comparable to the assessee. Desein Pvt. Ltd. also earns income from consultancy fees and same has been declared separately in its financials at Note No. 18 to Accounts. However, in the present case, lower authorities didn t examine whether functions performed, assets employed and risks assumed for earning the income from consultancy fees is comparable to the assessee. Further, the segmental information regarding the income from consultancy fees was also not examined by any of the lower authorities and the company was excluded on one or the other reason as mentioned above. Therefore, we deem to appropriate to remand the issue of comparability of relevant segment of Desein Pvt. Ltd. with assessee to the file of TPO for de novo adjudication after necessary examination of all the data. Further, the assessee is directed to file all the information regarding functions performed, assets employed and risks assumed by Desein Pvt. Ltd. for earning the income from consultancy fees before the TPO for the purpose of examination of comparability of relevant segment of Desein Pvt. Ltd. with the assessee. - Ground of assessee s appeal are allowed for statistical purpose. Adjustment in respect of international transaction of Payment of Corporate IT Support Services - HELD THAT - From the perusal of invoices, it is evident that same also describe the services provided under the head IT services by the third-party. To prove the rendition of service, the assessee has also filed sample extracts of email communication between the employees of the assessee and the associated enterprise as well as screenshots and IT tickets raised mentioning the description of various IT services received. From careful perusal of all the details filed by the assessee, we are of the considered view that lower authorities were not justified in holding that no services were rendered by the associated enterprise in respect of which payments were made by the assessee. We are further of the view that none of the basis for rejecting these details by the learned DRP is arising from the record. As per the provisions of aforesaid Rule, the other method shall be the method which takes into account the price which has been or would have been charged or paid for the same or similar uncontrolled transaction between non-associated enterprises. However, in the present case, the lower authorities without searching for similar uncontrolled transaction between non-associated enterprises, straightaway treated the value of the international transaction to be at NIL. As noted above, in the present case, no search was conducted to find out the independent entity in a comparable transaction and the arm s length price of the international transaction was treated to be NIL. In the present case, no doubts about payments made by the assessee have been raised by the Assessing Officer under section 37 of the Act. Further, accrual of benefit to assessee or the commercial expediency of any expenditure incurred by the assessee cannot be the basis for disallowing the same, as held by Hon ble Delhi High Court in the case of EKL Appliances Ltd 2012 (4) TMI 346 - DELHI HIGH COURT Thus we are of the considered opinion that TPO as well as learned DRP were not justified in treating the value of international transaction of Payment of Corporate IT Support Services to be NIL, in the present case. Accordingly, ground No. 2, including grounds no. 2.1 to 2.3, raised in assessee s appeal are allowed.
Issues Involved:
1. Adjustment of Rs. 6,69,18,234 to the income earned by the assessee from its associated enterprises for rendering engineering, tendering, and IT support services. 2. Adjustment of Rs. 2,52,49,650 to the payment made by the assessee to its associated enterprise for the receipt of IT support services. 3. Deduction of Education Cess and Higher and Secondary Education Cess in computing business income. Issue-wise Detailed Analysis: 1. Adjustment of Rs. 6,69,18,234 for Rendering Services: The assessee challenged the adjustment of Rs. 6,69,18,234 made by the Transfer Pricing Officer (TPO) concerning the international transaction of rendering tendering, design, engineering, and IT services. The TPO excluded Desein Pvt. Ltd. from the set of comparables used by the assessee for benchmarking its international transaction. The TPO reasoned that Desein Pvt. Ltd. had a significantly lower margin due to its involvement with Central Government statutory bodies and competitive bidding. The Dispute Resolution Panel (DRP) upheld the TPO's decision, noting that Desein Pvt. Ltd. had different revenue streams and higher employee costs compared to the assessee, making it functionally incomparable. The Tribunal found that Desein Pvt. Ltd. serves both public and private sector clients, making it incorrect to assume its revenue solely from government entities. The Tribunal also noted that the employee costs of Desein Pvt. Ltd. were not significantly higher than those of the assessee. However, the Tribunal acknowledged that Desein Pvt. Ltd. earned income from both consultancy fees and operation and maintenance, which were declared separately in its financials. The Tribunal remanded the issue to the TPO to examine the segmental information and comparability of Desein Pvt. Ltd.'s consultancy services with the assessee's services. The Tribunal directed the TPO to comply with the DRP's directions and compute the arm's length price accordingly. 2. Adjustment of Rs. 2,52,49,650 for IT Support Services: The assessee challenged the adjustment of Rs. 2,52,49,650 made by the TPO concerning the international transaction of payment for corporate IT support services. The TPO determined the arm's length price of the transaction to be NIL, applying the need-evidence-benefit test, and concluded that the assessee would not have paid for services not availed or beneficial to its business. The DRP upheld the TPO's decision. The Tribunal reviewed the agreement between the assessee and its associated enterprise, which detailed the IT services provided and the remuneration model. The assessee provided evidence of service rendition, including email communications, invoices, and IT tickets. The Tribunal found that the lower authorities were not justified in holding that no services were rendered. The Tribunal noted that the TPO did not search for similar uncontrolled transactions between non-associated enterprises and straightaway treated the transaction value as NIL. The Tribunal referred to the Delhi High Court's decision in Cushman and Wakefield (India) Pvt. Ltd., emphasizing that the TPO's role is to determine the arm's length price, not to disallow expenditure based on benefit accrual. The Tribunal concluded that the TPO and DRP were not justified in treating the transaction value as NIL and allowed the assessee's appeal on this ground. 3. Deduction of Education Cess and Higher and Secondary Education Cess: The issue regarding the deduction of Education Cess and Higher and Secondary Education Cess in computing business income was not pressed by the assessee during the hearing. Consequently, this ground was dismissed as not pressed. Conclusion: The appeal by the assessee was partly allowed for statistical purposes, with the Tribunal remanding the issue of comparability of Desein Pvt. Ltd. to the TPO for further examination and allowing the appeal concerning the adjustment for IT support services. The ground regarding the deduction of Education Cess was dismissed as not pressed.
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