2018 (5) TMI 239 - AT - Income Tax

TPA - comparable selection criteria - functional similarity - Held that - Assessee is a company engaged in the business of providing back office data creation, content development, software and web development, thus companies companies functionally dissimilar with that of assessee need to be deselected from final list. Negative Working Capital adjustment - Held that - As in the case of Adaptec (India) P. Ltd., Vs. ACIT 2015 (6) TMI 288 - ITAT HYDERABAD Negative working capital should not be made. Therefore, AO is directed not to make any negative working capital adjustment. This ground is considered allowed accordingly. Short credit of tax deducted at source - Held that - Since assessee did not get any opportunity and the working was not provided. Ld. Counsel pleaded for a direction to AO to give the credit as claimed. Since this requires verification of the TDS claims and the record of the department, we direct the AO to examine and give the credit as claimed after due verification. In case of any variation, assessee should be given an opportunity to explain or modify the claims or to furnish further evidence in support of its claims. AO is directed accordingly.

Summary

Issues Involved:
1. Exclusion of comparables in Transfer Pricing.
2. Interest on outstanding receivables.
3. Negative working capital adjustment.
4. Short credit of TDS.

Detailed Analysis:

1. Exclusion of Comparables in Transfer Pricing:

The primary issue in this case was the selection and exclusion of comparables for determining the Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) initially selected 13 comparables, but the Dispute Resolution Panel (DRP) excluded 11 of these based on various grounds such as functional dissimilarity, presence of extraordinary events, and abnormal growth patterns. The DRP's exclusions were upheld by referencing prior decisions, including the jurisdictional ITAT's decision in the assessee's own case for AY 2009-10. Specific companies like Accentia Technologies Ltd., Acropetal Technologies Ltd., eClerx Services Ltd., and Infosys BPO Ltd. were excluded due to their functional differences and extraordinary events impacting their profits. The DRP's decision to exclude these companies was based on established precedents and detailed examination of the companies' annual reports.

2. Interest on Outstanding Receivables:

The issue of charging interest on outstanding receivables was contested by both parties. The TPO had proposed charging interest at 12%, which was reduced to 5% by the DRP. The assessee argued that no interest should be charged, citing the Coordinate Bench's decision in its own case for AY 2010-11, which held that receivables cannot be equated with capital funds and that notional interest cannot be brought to tax under the provisions of Transfer Pricing. The tribunal upheld the assessee's plea, stating that no interest is chargeable for the impugned assessment year, both on facts and on law, thereby dismissing the Revenue's ground contesting the reduction of interest.

3. Negative Working Capital Adjustment:

The assessee contested the negative working capital adjustment proposed by the TPO. The tribunal found that there was no discussion on this issue in the DRP's order and that the TPO and AO had made more adjustments than necessary. Citing the Coordinate Bench's decision in the case of Adaptec (India) P. Ltd., the tribunal held that negative working capital adjustments should not be made. Therefore, the AO was directed not to make any negative working capital adjustment, and this ground was considered in favor of the assessee.

4. Short Credit of TDS:

The last issue was the short credit of tax deducted at source (TDS). The assessee claimed an amount of ?58,03,451 in the return of income filed, whereas the AO gave credit for ?57,56,800. The tribunal directed the AO to verify the TDS claims and give the credit as claimed after due verification. If there were any variations, the assessee should be given an opportunity to explain or modify the claims or furnish further evidence in support of its claims.

Conclusion:

Both the appeals were partly allowed. The tribunal upheld the DRP's exclusion of several comparables, agreed with the assessee that no interest should be charged on outstanding receivables, directed the AO not to make any negative working capital adjustment, and instructed the AO to verify and correct the TDS credit. The order was pronounced in the open Court on 25th April 2018.