2017 (7) TMI 656 - AT - Income Tax

Characterization of functions/activities undertaken by the assessee while rendering services to its associated enterprises - market research company OR IT enabled services company - Held that - It is quite clear that the ITE services involve a predominant use of technology to achieve the desired output. The illustrative list of activities brought out by CBDT clearly show that ITE services involve routine human tasks which are carried out more and more by use of technology on the part of human resources. In contrast, if we were to compare such like services with the activities of a market research service provider, it would be evident that in market research, output is the product of collecting, collating and analysing of information/data, which may involve use of technology, whereas in the case of ITE services, rendering of services is primarily driven by use of technology on the part of human resources. In our considered opinion, the DRP was quite justified in coming to conclude that market research services undertaken by assessee cannot be compared with ITE services. In fact, in para 9 of the order of DRP, distinction between market research agency and an IT-enabled service provider under the Service Tax Rules has also been tabulated which clearly shows that the two are incomparable. Therefore, under these circumstances, the TPO was clearly in error in benchmarking the international transactions entered by the assessee on account of market research services with the concerns which were engaged in providing ITE services, since the two activities were incomparable. A concern involved in rendering of ITE services cannot be compared with a concern which is rendering market research services, as is the case of the assessee. Therefore, insofar as the issue relating to characterisation of assessee s functions are concerned, we find no error on the part of DRP in upholding the stand of assessee that the TPO erroneously considered it as an ITE service provider. Disallowance of proportionate interest - Held that - As in the past years, namely, Assessment Years 2004-05 and 2005-06, in a consolidated order passed by the Tribunal stand of assessee has been upheld that no addition can be made on account of notional interest in the valuation of closing work-in-progress. Thus, on this Ground, assessee succeeds. Denial of deduction u/s 80G - Held that - It would be in the fitness of things that the Assessing Officer verifies and allows the claim of assessee for deduction u/s 80G of the Act, having regard to the donation receipt, a copy of which has also been placed in the Paper Book at pg. 609. Thus, on this aspect, assessee succeeds for statistical purposes.

Summary

Issues Involved:
1. Characterization of the assessee-company as a market research company vs. IT-enabled services (ITES) company.
2. Transfer Pricing adjustments and benchmarking analysis.
3. Disallowance of proportionate interest on work-in-progress.
4. Denial of deduction under Section 80G of the Income Tax Act, 1961.
5. Adoption of incorrect transaction values.
6. Levy of interest under Sections 234B and 234D.
7. Initiation of penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Characterization of the Assessee-Company:
The primary issue was whether the assessee-company should be characterized as a market research company or an IT-enabled services (ITES) company. The assessee argued that its activities were purely market research services, which included problem definition, research design formulation, data collection, and analysis, among others. The Transfer Pricing Officer (TPO) had classified the activities under ITES, which was contested by the assessee. The Dispute Resolution Panel (DRP) upheld the assessee's stand, distinguishing market research services from ITES, which primarily involve technology-driven processes. The Tribunal agreed with the DRP, noting that market research involves collecting and analyzing data, which may use technology but is not driven by it, unlike ITES.

2. Transfer Pricing Adjustments and Benchmarking Analysis:
The TPO had rejected the assessee's Transfer Pricing Study, which used the internal Transaction Net Margin Method (TNMM) to benchmark international transactions. The DRP found that the TPO erroneously characterized the assessee as an ITES provider and accepted the assessee's benchmarking analysis. The Tribunal upheld the DRP's decision, confirming that the activities of the assessee were market research services and not ITES. Consequently, the Tribunal dismissed the Revenue's appeal for Assessment Year 2009-10 and restored the matter of determining the arm's length price for Assessment Year 2008-09 to the TPO/Assessing Officer for verification in line with the DRP's accepted method.

3. Disallowance of Proportionate Interest on Work-in-Progress:
The Assessing Officer had added notional interest to the value of work-in-progress, based on past assessments. The Tribunal noted that in earlier years (Assessment Years 2004-05 and 2005-06), the Tribunal had ruled in favor of the assessee, disallowing such notional interest. Following this precedent, the Tribunal deleted the addition for the current assessment year.

4. Denial of Deduction under Section 80G:
The assessee's claim for deduction under Section 80G was initially denied by the Assessing Officer because it was not included in the return of income. The DRP directed the Assessing Officer to verify the claim, which was supported by a donation receipt. The Tribunal instructed the Assessing Officer to verify and allow the deduction based on the provided evidence.

5. Adoption of Incorrect Transaction Values:
The assessee contended that the Assessing Officer adopted incorrect transaction values. The Tribunal directed the Assessing Officer to correct the transaction values during the remanded proceedings.

6. Levy of Interest under Sections 234B and 234D:
The Tribunal noted that the issue of interest under Sections 234B and 234D was consequential and did not require specific adjudication.

7. Initiation of Penalty under Section 271(1)(c):
The Tribunal dismissed the ground related to the initiation of penalty under Section 271(1)(c) as premature.

Conclusion:
The Tribunal dismissed the Revenue's appeal for Assessment Year 2009-10 and allowed the assessee's appeal for Assessment Year 2008-09, subject to the directions for verification and correction by the Assessing Officer. The order was pronounced in the open court on 9th November 2016.