2019 (10) TMI 1598 - AT - Income Tax

TP Adjustment - exclusion of Infosys BPO Ltd from the comparable list - HELD THAT - Assessee had made out a clear case in its favour and hence, the AO / TPO is directed to exclude M/s. Infosys BPO Limited as comparable company while computing the ALP for the ITeS Services. Segmental margins to be considered for Microland Ltd., we find merit in the assessee s above submission. Therefore, we deem it appropriate to restore this to the AO/TPO for considering the ITEs segmentals alone afresh and rework the adjustments in accordance with law after due opportunity of being heard to the assessee. Inclusion of comparable companies M/s. Informed Technologies India Ltd. - We find merit in the contention of ld. AR that entire export revenue of this company is earned from BPO services alone. Hence, rental income cannot be treated as part of operational income. Further, there is also substance in the submissions of ld. AR that the company satisfies more than 25% revenue earned from export filter applied by TPO. As neither TPO nor DRP have examined the aforesaid aspects while rejecting the aforesaid company as comparable, we think it appropriate to restore the issue of comparability of this company to AO/TPO for considering afresh. Working capital adjustment - We are of the considered opinion that the capital employed on the assessee, including working capital, is one of the relevant factors for the purpose of determining the arm s length price. Therefore, the capital employed by the assessee, including the working capital, and that of comparable companies needs to be taken into consideration. Without comparing the working capital employed by the comparable companies and that of the assessee, this Tribunal is of the considered opinion that there cannot be any transfer pricing adjustment. Therefore, we restore this issue to the AO/TPO for considering it afresh after due opportunity of being heard to assessee. Disallowance of claim U/s. 80JJAA - assessee is engaged in export documentation services, e-commerce and data management services, web-based support services and software services wherein the raw data received are converted into a distinct processed data. Section 80JJAA is applicable to an industrial undertaking engaged in the manufacture or production of article or thing. The term production is a wider than the term manufacture as held by the Supreme Court in the case of CIT v Sesa Goa Ltd 2004 (11) TMI 14 - SUPREME COURT and CIT v N.C. Budharaja Co 1993 (9) TMI 6 - SUPREME COURT AR also submitted that this issue is pending before the ld. CIT (A) for his decision in the earlier year - HELD THAT - Since, this issue is pending before the ld.CIT(A) for his decision in the earlier year, we deem it fit to remit this issue back to the AO to decide the issue in accordance with the decision of the ld.CIT(A).

Summary

Issues Involved:

1. Exclusion of Infosys BPO Ltd. from the comparable list.
2. Consideration of segmental margins for Microland Ltd.
3. Inclusion of Informed Technologies India Ltd. in the comparable set.
4. Working capital adjustment.
5. Disallowance of claim under Section 80JJAA.

Detailed Analysis:

1. Exclusion of Infosys BPO Ltd. from the Comparable List:

The appellant argued for the exclusion of Infosys BPO Ltd. from the comparable list due to significant differences in turnover, brand value, nature of services, and asset base. The turnover of Infosys was INR 2323 Crores compared to the appellant's INR 64.81 Crores, with Infosys having a substantial brand value and a diverse service portfolio. The Tribunal found merit in the appellant's submission, referencing judicial precedents, and directed the exclusion of Infosys BPO Ltd. from the comparable list for computing the arm's length price (ALP) in the ITES segment.

2. Consideration of Segmental Margins for Microland Ltd.:

The appellant contended that Microland Ltd. was engaged in both ITES and infrastructure management services, making it functionally different. They argued that only the ITES segment should be considered comparable. The Tribunal agreed with this view, noting the segmentation in Microland's financial statements, and remanded the issue to the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to consider only the ITES segment and rework the adjustments accordingly.

3. Inclusion of Informed Technologies India Ltd. in the Comparable Set:

The appellant argued for the inclusion of Informed Technologies India Ltd., asserting it was functionally comparable as it operated solely in the BPO segment. The TPO had erroneously excluded it based on a service income filter, considering non-operating income. The Tribunal found merit in the appellant's argument, referencing a decision from the Hyderabad Bench, and remanded the issue to the AO/TPO to reassess the comparability after providing the appellant an opportunity to be heard.

4. Working Capital Adjustment:

The appellant sought a working capital adjustment, citing differences in working capital days between themselves and comparable companies, which impacted profitability and operating margins. The Tribunal, referencing OECD principles and a prior decision, acknowledged the relevance of working capital in determining the arm's length price. The Tribunal remanded this issue to the AO/TPO for fresh consideration, emphasizing the need to compare working capital employed by the appellant and comparable companies.

5. Disallowance of Claim under Section 80JJAA:

The appellant claimed eligibility for deduction under Section 80JJAA, arguing that their activities qualified as "production," a term broader than "manufacture," as per Supreme Court rulings. The Tribunal noted that this issue was pending before the CIT(A) for a decision in an earlier year and remitted the issue back to the AO to decide in accordance with the CIT(A)'s decision.

Conclusion:

The Tribunal partly allowed the appellant's appeal for statistical purposes, directing the AO/TPO to reassess certain issues while dismissing unargued grounds. The order was pronounced on 25th October 2019 in Chennai.