2024 (2) TMI 522 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Mold-Tek has provided derivative losses during the year and this is foreign currency exposure, which has to be considered while comparing the results before it can be selected. It is also pertinent to note that while working out the operating margin of the said company, provision for derivative loss of ₹. 6.43 crores made by Mold-Tek technologies Ltd. was excluded by the Assessing Officer treating the same as non-operating expenses whereas in the case of Rushabh Diamonds 2013 (11) TMI 520 - ITAT MUMBAI , it was held by the Division Bench of this Tribunal that the gain or loss arising from the forward contract entered into for the purpose of foreign currency exposure on the export and import has to be taken into consideration while computing the operating profit. Therefore, respectfully following the above decision, we are inclined to direct the TPO/AO to remove the above company from the final list of comparables. M/s Eclerx and Accentia Technologies Ltd. be eliminated as functionally different. Restricting working capital adjustment - We observe that TPO has adopted the adhoc 2% for finalizing the WCA without assigning any reasons for adopting the above said percentage. We are inclined to remit this issue back to the file of TPO to adopt the reasonable percentage on actual basis based on the data available on record. Accordingly, this ground of appeal is allowed for statistical purpose. Non-grant of TDS Credit - As considering the overall merits on the submissions made by the assessee we are inclined to remit this issue back to the file of AO with a direction to verify the records submitted by the assessee on merit as per law. It is needless to say that assessee may be given a proper opportunity of being heard. In the result, the issue under consideration is remitted back to the file of AO for statistical purpose. Computation of deduction u/s 10A - HELD THAT - As relying on HCLTechnologies Ltd. 2018 (5) TMI 357 - SUPREME COURT we hold that the expenses excluded from the export turnover have to be excluded from the total turnover as well while computing deduction under section 10A of the Act. Accordingly, ground raised by the revenue is dismissed. Disallowance u/s 14A r.w.r.8D - HELD THAT - We observe that the assessee has earned dividend income from domestic and foreign companies and the 14A disallowance applicable only on the dividend earned by the assessee from domestic companies. Further, the assessee has made submissions that the Assessing Officer has not recorded satisfaction before invoking rule 8D. It is fact on record that the AO has invoked rule 8D considering the fact that the rule 8D is applicable for this year and instead of going into this aspect, we are inclined to direct the Assessing Officer to make disallowances based on the settled position of law, in the following cases, the Hon ble High Courts and coordinate benches has given clear findings that the disallowance u/s 14A is restricted only to the extent of exempt income earned and the investments to be considered for making disallowances are only on those investments which has actually earned the dividend. Assessing Officer is directed to re-work disallowance u/s.14A under rule 8D(2)(iii) by adopting only those investments which has yielded exempt income. The assessee gets the relief accordingly. This ground of appeal is partly allowed. TP Adjustment in relation to financial data analysis services - comparabaility analysis - HELD THAT - Comparable TCS e-serve is distinguishable on the basis of high turnover and brand value not on the basis of functionality test. In our view, whether the turnover makes the difference. We observe that the Turnover of TCS is ₹.1578 crores in this segment, whereas the Turnover of the assessee is ₹. 114 Crores, there is significant difference and it is about 14 times - we direct the Transfer Pricing Officer to exclude the comparable TCS e-serve from the final list of comparables.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Characterization of services provided as Knowledge Process Outsourcing (KPO) vs. Business Process Outsourcing (BPO).
3. Comparability analysis and selection of comparables.
4. Working capital and risk adjustments.
5. Computation of deduction under section 10A and 10AA of the Income Tax Act.
6. Grant of credit for Tax Deducted at Source (TDS).
7. Levy of interest under sections 234B and 234C of the Income Tax Act.
8. Disallowance under section 14A of the Income Tax Act.

Summary:

1. Determination of Arm's Length Price (ALP):
The assessee challenged the Transfer Pricing Officer's (TPO) determination of the ALP for the provision of back-end support for data analysis services. The TPO characterized the services as high-end KPO services, leading to a higher ALP. The Tribunal directed the exclusion of certain comparables, such as Mold-Tek Technologies Ltd. and Eclerx Services Ltd., due to functional dissimilarity and extraordinary events affecting their financials.

2. Characterization of Services:
The Tribunal evaluated whether the services provided by the assessee should be characterized as KPO or BPO. It was determined that the services were process-driven and did not involve significant human intelligence or technical skills, thus aligning more with BPO services.

3. Comparability Analysis and Selection of Comparables:
The Tribunal excluded certain comparables, including Mold-Tek Technologies Ltd., Eclerx Services Ltd., and TCS E-Serve Ltd., due to functional dissimilarities, extraordinary events, and high turnover/brand value. The decisions were based on precedents and detailed analysis of the comparables' business activities.

4. Working Capital and Risk Adjustments:
The Tribunal remitted the issue of working capital adjustment back to the TPO, directing the adjustment to be made on an actual basis rather than an ad-hoc percentage.

5. Computation of Deduction under Section 10A and 10AA:
The Tribunal held that expenses excluded from export turnover should also be excluded from total turnover while computing deductions under sections 10A and 10AA, following the Supreme Court's decision in HCL Technologies Ltd.

6. Grant of Credit for TDS:
The Tribunal remitted the issue of non-grant of full TDS credit back to the Assessing Officer for verification and appropriate action based on the records submitted by the assessee.

7. Levy of Interest under Sections 234B and 234C:
The Tribunal noted that the levy of interest under sections 234B and 234C is consequential and directed the Assessing Officer to re-compute the interest based on the final tax liability.

8. Disallowance under Section 14A:
The Tribunal directed the Assessing Officer to re-compute the disallowance under section 14A by considering only those investments that yielded exempt income during the year, following the decision in Vireet Investments Pvt. Ltd.

Conclusion:
The appeals were partly allowed, with directions for re-computation and verification on several issues, ensuring that the adjustments and deductions are made in accordance with the law and judicial precedents. The Tribunal provided detailed reasoning for the exclusion of certain comparables and the characterization of services, emphasizing the importance of functional similarity and the impact of extraordinary events on financials.