2023 (3) TMI 82 - AT - Income Tax

TP Adjustment - Comparable selection - exclude the foregoing comparable companies in its ITES segment - HELD THAT - Entities included by the learned lower authorities i.e., Vitae International Accounting Services Private Limited, Access Healthcare Services Private Limited and Integra Software Services Private Limited are also found to be not engaged in the assessee s segment since they have been carrying-out their business activities and deriving revenues from accounting, healthcare services and e-publishing services, respectively and, therefore, do not have even broader comparability in the segment in issue before us. This is indeed coupled with the fact that M/s. Integra Software Services Private Limited had undergone a merger scheme with M/s. Integra Infotech Private Limited as per the NCLT order to this effect in the relevant previous year. Faced with the situation, we direct the TPO to exclude all the instant six comparables and compute the assessee s arm s length price ALP adjustment accordingly. Include M/s. Cheers Interactive (India) Private Limited, I Services Private Limited and Sundaram Business Services Limited which stand excluded in the learned lower authorities respective orders. The first and foremost comparable herein M/s. Cheers Interactive (India) Private Limited had not derived any revenue in ITES segment. We thus reject the assessee s arguments seeking its inclusion in the array of comparables. M/s. I Services Private Limited it prima facie emerges in the assessee s paper book that this entity carried out its business activities in BPO sector. The assessee s case before us is that the said segment is very much identical to its ITES segment. Faced with the situation, we remit the instant issue back to the learned TPO for his fresh adjudication on merits without commenting anything further at this stage. Third comparable Sundaram Business Services Limited could hardly dispute that it s revenue from operation nowhere specified any ITES activity. We thus decline the assessee s arguments seeking to include this comparable in ALP computation. Ordered accordingly. Negative working capital adjustment when it had not carried any such working capital risk. Learned counsel quotes Inductis India (P.) Ltd. 2018 (8) TMI 1205 - ITAT DELHI reiterating the very proposition. Revenue s case on the other hand is that the instant issue indeed requires the TPO s afresh factual verification. Faced with the situation, we restore the assessee s instant additional ground back to TPO in very terms.

Summary

Issues Involved:
1. Assessment of total income against the returned income.
2. Transfer pricing adjustments and arm's length principle.
3. Disallowance under section 36(1)(va) of the Act.
4. Charging of interest under sections 234B and 234C of the Act.
5. Penalty proceedings under section 270A of the Act.

Detailed Analysis:

1. Assessment of Total Income:
The appeal arose against the assessment by ACIT, Circle-5, Pune for the Assessment Year 2018-19. The appellant contested the assessment of total income at INR 26,06,89,393 as opposed to the returned income of INR 18,72,68,180, citing adjustments made by the Dispute Resolution Panel (DRP). The appellant challenged the assessment on factual and legal grounds, seeking a revision of the total income determination.

2. Transfer Pricing Adjustments:
The appellant raised objections regarding the Transfer Pricing Officer (TPO), DRP, and AO's adjustments of INR 7,29,33,497 to the appellant's income, alleging non-compliance with the arm's length principle (ALP). The appellant argued against the selection and rejection of comparable companies for benchmarking, emphasizing the applicability of Safe Harbour provisions and historical margins. The tribunal examined the comparability analysis and directed the exclusion of certain comparables for a fair ALP computation.

3. Disallowance under Section 36(1)(va) of the Act:
The appellant contested a disallowance of INR 4,87,716 under section 36(1)(va) despite timely contributions to Provident Fund (PF) and Employee State Insurance (ESI). The appellant argued for the allowance of these contributions based on the due date of filing the income tax return. However, the tribunal referred to relevant legal precedents and ruled against the appellant on this issue.

4. Charging of Interest and Penalty Proceedings:
The appellant challenged the charging of interest under sections 234B and 234C of the Act, as well as the initiation of penalty proceedings under section 270A. The tribunal noted the appellant's objections but did not find merit in these challenges, considering them consequential or premature at the current stage of proceedings.

5. Additional Grounds and Working Capital Adjustment:
During the hearing, the appellant raised additional grounds related to working capital adjustments and negative working capital risk. Citing legal precedents, the appellant argued against the negative working capital adjustment made by the authorities. The tribunal acknowledged the need for factual verification and directed the issue back to the Transfer Pricing Officer for further examination.

In conclusion, the tribunal partially allowed the appellant's appeal, addressing various substantive grounds and directing adjustments in the Transfer Pricing analysis while dismissing some grounds based on legal precedents and lack of merit. The judgment was pronounced on 5th January 2023 by the Appellate Tribunal ITAT Pune.