2023 (7) TMI 1467 - AT - Income Tax

Validity of order passed u/s 92CA(3) - Period of limitation - HELD THAT - As per provision of Sec. 92CA(3A) the TPO is required to pass an order u/s 92CA(3) of the Act at any time before 60 days prior to the date on which the period of limitation referred to in Sec. 153 for making the assessment order of assessment or reassessment or re-computation or fresh assessment as the case may be expires. Undisputed fact that transfer pricing officer has passed order u/s 92CA(3) on 01.11.2019 whereas the limitation for passing the said order u/s 92CA(3) expires on 31.10.2019, therefore,the order u/s 92CA(3) of the Act is time barred by 1 day. As the order of the TPO and draft assessment order are barred by limitation, therefore, resulting in assessee not being a eligible assessee u/s 144C(15)(b)(i) of the Act. Allowability of education cess u/s 37(1) - Assessee claimed education cess paid by the assessee under Finance Act 2004 is not hit by the provisions of Sec. 40(a)(ii) and same is allowable as deduction u/s 37(1) - HELD THAT - We find that Finance Act 2022 introduced explanation to Section 40(a)(ii) of the Act and clarify that education cess is included in the term tax and retrospectively amended the provisions of Sec. 40(a)(ii) w.e.f 01.04.2005. In view of the amendment made by Finance Act 2022 as referred supra we don t find any merit in the ground of appeal of the assessee as it is categorically laid down in the explanation 3 to Section 40(a)(ii) that education cess is included in the term tax as per the provision of Sec. 40(a)(ii) w.e.f 01.04.2005. Decided against assessee. Dividend distribution tax ought to be taxed at the rate prescribed under the respective DTAA - HELD THAT - In view of the decision of Total Oil India Pvt. Ltd. 2023 (4) TMI 988 - ITAT MUMBAI (SB) we don t find any reason to interfere in the decision of assessing officer, therefore, these ground of appeal of the assessee stand dismissed.

Summary

Issues Involved:
1. Validity of Transfer Pricing Order
2. Separate Segmental Margins for IT and BPO Services
3. Determination of Arm's Length Range for IT Services
4. Acceptance of Economic Analysis for IT Services
5. Accept/Reject Criteria for Comparable Companies
6. Rejection of Comparable Companies
7. Adjustments to Arm's Length Margin
8. Benchmarking of Royalty Payments
9. Non-Transfer Pricing Grounds (Education Cess, Dividend Distribution Tax, Tax Credits, Foreign Tax Credit, Book Profit Computation, Interest Levy, Penalty Proceedings)

Issue-Wise Detailed Analysis:

1. Validity of Transfer Pricing Order:
The assessee contested the validity of the Transfer Pricing Officer's (TPO) order dated 01.11.2019, arguing it was time-barred under Section 92CA(3A) of the Income Tax Act. The court referenced the Hon'ble Madras High Court's decision in Pfizer Healthcare India (P) Ltd. vs. JCIT, which held that the TPO's order must be passed before 60 days prior to the date on which the period of limitation expires. Since the TPO's order was passed on 01.11.2019, it was deemed time-barred by one day. Consequently, the draft assessment order incorporating this invalid adjustment was also invalid.

2. Separate Segmental Margins for IT and BPO Services:
The assessee argued against the separate benchmarking of IT and BPO services under the Delivery Centre Agreement (DCA). However, this ground was not discussed in detail as it was rendered academic following the invalidation of the TPO's order.

3. Determination of Arm's Length Range for IT Services:
The TPO determined the arm's length range for IT services to be 20.61% to 24.07%, with a median of 22.34%. This ground was also not discussed in detail due to the academic nature post the invalidation of the TPO's order.

4. Acceptance of Economic Analysis for IT Services:
The assessee's economic analysis for determining the arm's length price for IT services was not accepted by the TPO. This ground was left open and not discussed in detail.

5. Accept/Reject Criteria for Comparable Companies:
The TPO applied various filters for selecting comparable companies, which the assessee argued were arbitrary and inconsistent. This ground was also left open and not discussed in detail.

6. Rejection of Comparable Companies:
The TPO accepted certain companies like Infosys Limited, Larsen & Toubro Infotech Limited, Mindtree Limited, and Persistent Systems as comparables, which the assessee contested. This ground was left open and not discussed in detail.

7. Adjustments to Arm's Length Margin:
The TPO did not allow working capital and risk adjustments to the arm's length margin. This ground was left open and not discussed in detail.

8. Benchmarking of Royalty Payments:
The TPO rejected the assessee's economic analysis using the CUP method for benchmarking royalty payments and instead determined the arm's length price to be 1% of revenues. This ground was left open and not discussed in detail.

9. Non-Transfer Pricing Grounds:
- Education Cess (Grounds 24-26): The assessee claimed a deduction for education cess paid on income tax liability. The court referenced the Finance Act 2022, which retrospectively amended Section 40(a)(ii) to include education cess as tax, thereby disallowing the deduction. These grounds were dismissed.
- Dividend Distribution Tax (Grounds 27-28): The assessee claimed a refund for excess DDT paid, arguing it should be taxed at the rate prescribed under respective Double Tax Avoidance Agreements. This claim was rejected, referencing the ITAT Mumbai's decision in Total Oil India Pvt. Ltd.
- Tax Credits (Grounds 29-33, 35): These grounds were not pressed and hence dismissed.
- Foreign Tax Credit (Ground 33): Not pressed and dismissed.
- Book Profit Computation (Ground 34): The assessee acknowledged no tax impact, rendering this ground academic and dismissed.
- Interest Levy (Ground 36): Not pressed and dismissed.
- Penalty Proceedings (Ground 37): Consequential in nature and dismissed.

Conclusion:
The appeal was partly allowed, primarily on the ground that the TPO's order was time-barred, rendering subsequent proceedings invalid. Other grounds were either dismissed as academic or not pressed. The order was pronounced in the open court on 13.07.2023.