2014 (10) TMI 739 - AT - Income Tax

Transfer pricing adjustment Selection of comparables Accentia Technologies Limited Eclerx Services Limited Mold-Tek Technologies Limited - Extraordinarily high profit of 117% - High profits because of ex-ordinary events Functionally dissimilar unit - Held that - Two companies viz., Iridium Technologies and Geosoft Technologies amalgamated with M/s. Accentia Technologies Limited which resulted in a higher profit for the company during the year following the decision in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) 2014 (3) TMI 626 - ITAT HYDERABAD - The company was excluded since ex-ordinary events like merger and demerger had taken during the relevant financial year which must have impacted the financial results of the company - That besides the high volume of on-site operation of Accentia Technologies Limited also makes it functionally dissimilar to the assessee - These facts are not considered either by the TPO or by the DRP thus, the matter is to be remitted back to the AO for verification. Accurate Data Convertors Private Ltd. Asit C Mehta financial services Ltd. (Seg). Employee cost filter - Held that - The assessee was not given any opportunity/ information to examine the comparability of the company - Though the TPO is empowered under the provisions of the Act to obtain information with regard to selection of comparables, however before utilising the information obtained, he has to give fair opportunity to the assessee to have its say in the matter - since the TPO has not given any opportunity to the assessee to raise its objections with regard to the company, the matter is to be remitted back to the AO for considering the objections. Vishal Information Technologies Ltd. Employee cost filter Held that - Following the decision in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) 2014 (3) TMI 626 - ITAT HYDERABAD - The company unlike the assessee has outsourced considerable portion of its business to third party vendor - Hence, it cannot be considered as a comparable. HCL Comnet Systems & Services Limited, Infosys BPO Limited and Wipro Limited Functionally dissimilar unit - Held that - Following the decision in M/s. Capital IQ Information Systems (India) Pvt. Ltd. Versus Addl. Commissioner of Income-tax 2014 (9) TMI 125 - ITAT HYDERABAD - These three companies are having huge turnovers like that of assessee during the year - Therefore turnover filter as considered in other cases does not apply here but, the functional profile of companies as such is different - But, if the BPO division is similar to assessee the same can be considered after proper FAR analysis thus, the matter is remitted back to the TPO/AO for re-consideration of the comparables after giving due opportunity to assess and fairly analyzing its objections. Inclusion of reimbursement transactions as part of operational cost Held that - Reimbursement costs should be excluded as they do not involve any functions to be performed so as to consider it for profitability purposes relying upon M/s. Four Soft Ltd. Hyderabad Versus The Dy. Commissioner of Income-tax, Circle 1(3), Hyderabad 2011 (9) TMI 634 - ITAT, Mumbai - for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee s enterprise in respect of software development services - Since the AO had no occasion to verify the veracity of the segmental financials prepared by the assessee company, the matter is remitted back to the AO for determination of ALP Decided in favour of assessee. Computation of deduction u/s 10A - Re-characterisation of foreign exchange gain Held that - Following the decision in ITO vs Banyan Chemicals P. Ltd. 2008 (12) TMI 296 - ITAT AHMEDABAD - that foreign exchange gain on account of fluctuation qua exports business is eligible for exemption u/s 10B - since foreign exchange gain is on account of fluctuations of the foreign exchange received for the services rendered by the assessee, has to be treated as business income and it has to be considered as profits of the business for computing the deduction u/s 10A of the Act Decided in favour of assessee. Reduction of communication charges from the export turnover Held that - Following the decision in CIT vs. Gem Plus Jewellery Ltd 2010 (6) TMI 65 - BOMBAY HIGH COURT - the AO is directed to reduce communication charges both from the export turnover as well as the total turnover for computing exemption u/s 10A of the Act Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Re-characterisation of Foreign Exchange Gain
3. Reduction of Communication Charges from Export Turnover
4. Levy of Interest under Section 234B and 234C
5. Initiation of Penalty Proceedings under Section 271(1)(c)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:

The assessee, HSBC Electronic Data Processing India Private Limited, contested the TP adjustments made by the AO and TPO. The TPO had selected 27 comparables and made adjustments based on additional filters. The Tribunal examined objections regarding specific comparables:

- Accentia Technologies Limited: The Tribunal noted that extraordinary events like mergers and acquisitions during the year impacted profitability. The AO was directed to verify these facts and exclude the company if the merger affected financial results.

- Accurate Data Convertors Private Ltd.: The Tribunal found that the assessee was not given an opportunity to examine this comparable and remitted the issue to the AO for reconsideration after allowing the assessee to raise objections.

- Asit C Mehta Financial Services Ltd. (Seg.): The Tribunal directed the exclusion of this company due to significant differences in employee costs compared to the assessee and its exclusion in similar cases.

- Bodhtree Consulting Limited: The Tribunal remitted the issue to the AO to reconsider the functional differences and objections raised by the assessee.

- Eclerx Services Limited: The Tribunal held that this company, engaged in KPO services, showed extraordinarily high profits and should not be treated as comparable.

- Informed Technologies India Limited and Iservices India Private Ltd.: The Tribunal remitted the issue to the AO for re-examination due to exceptional profits and lack of prior objections by the assessee.

- Mold-Tek Technologies Limited: The Tribunal directed the exclusion of this company due to extraordinarily high profits and functional differences.

- Vishal Information Technologies Ltd.: The Tribunal excluded this company as it outsourced significant portions of its business and was functionally different from the assessee.

- HCL Comnet Systems & Services Limited, Infosys BPO Limited, and Wipro Limited: The Tribunal remitted the issue to the AO for reconsideration, emphasizing the need for a proper FAR analysis.

The Tribunal also addressed the risk adjustment and reimbursement transactions, directing the AO to re-examine these issues and exclude reimbursement costs from operating costs.

2. Re-characterisation of Foreign Exchange Gain:

The Tribunal directed the AO to treat foreign exchange gain as business income and allow the deduction under Section 10A. This decision was based on the Special Bench ruling in ITO vs. Banyan Chemicals P. Ltd. and the Tribunal's own decision in the assessee's case for AY 2006-07.

3. Reduction of Communication Charges from Export Turnover:

The Tribunal directed the AO to reduce communication charges from both the export turnover and total turnover for computing exemption under Section 10A. This decision was based on the Bombay High Court ruling in CIT vs. Gem Plus Jewellery Ltd. and the Tribunal's Special Bench decision in ITO vs. Sak Soft Limited.

4. Levy of Interest under Section 234B and 234C:

The Tribunal dismissed the grounds related to the levy of interest under Sections 234B and 234C as they were consequential to the final determination of income.

5. Initiation of Penalty Proceedings under Section 271(1)(c):

The Tribunal dismissed the ground related to the initiation of penalty proceedings under Section 271(1)(c) as it was consequential to the final determination of income.

Conclusion:

The appeal was partly allowed for statistical purposes, with directions for the AO to re-examine specific issues and provide a reasonable opportunity for the assessee to present its case. The Tribunal emphasized the need for proper verification and consideration of functional differences in the selection of comparables.