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2019 (7) TMI 664 - AT - Income TaxTP Adjustment - arm s length price relating to international transaction of back office support services rendered by the assessee - Comparable selection - HELD THAT - TCS E-serve ltd - One of the filters applied by the ld. TPO was to consider the companies whose turnover is more than One Crore. We find that assessee also has considered the same filter in his TP study report with regard to turnover but the assessee had considered the comparables which are reasonable and comparable with the size and scale of operations with that of the assessee whereas the TPO by considering the comparable like TCS E-serve ltd with that of assessee had practically considered the comparable whose turnover is several times more than that of the assessee. We hold that the giant size ITES provider like TCS E-serve ltd cannot be compared with routine ITES / BPO service provider like that of the assessee. ITES company would then get compared with top giants like TCS E-serve ltd and others with the same high turnover which would in turn result in mandatory ALP adjustment in all the cases. That cannot be certainly the intention of the legislature. In order to avoid any absurdity in this regard the test of reasonableness should be applied by the TPO by comparing the cases whose turnover is either 10 times below or 10 times above the turnover with that of the assessee which would be reasonable for the purpose of comparison. Hence the argument advanced by the ld. DR in this regard is not appreciated. Accordingly we hold that this comparable i.e. TCS E-serve ltd deserves to be excluded due to huge turnover. TCS E-serve ltd is excluded the mean margin of the comparables would be 16.21% as against the assessee s margin of 12% and accordingly the assessee would fall within /-5% tolerance limit. We direct the TPO to verify the said workings given by the ld. AR and if the contention of the ld. AR is found to be correct then no adjustment to ALP need to be made in respect of ITES segment of the assessee. Since we directed the TPO to exclude TCS E-serve ltd from the list of comparables the adjudication of other comparables both inclusion / exclusion become academic in nature and no opinion is rendered by us herein. Accordingly the ground No.2 read with ground No.4 raised by the assessee are allowed for statistical purposes. Arm s length adjustment made relating to international transaction of software support services (IT segment) - Comparable selection - HELD THAT - If the argument advanced by the ld. DR is to be accepted for both the comparables (i.e Infosys and Wipro) filters adopted by the assessee as well as by the ld. TPO then in every transfer pricing adjustment of any software company Infosys Limited and Wipro Technologies Ltd would be subject matter of comparability and adjustment to ALP would have to be made mandatorily which is not the intention of the legislature as it would only result in absurdity. In view of the aforesaid observations we direct the TPO to exclude both Infosys Ltd. as well as Wipro Technologies Ltd. from the final list of comparables in IT segment and recompute the margins of the comparables and decide whether at all any adjustment to ALP need to be made in IT segment of the assessee. House property income - shown in revised return - effect of non inclusion of said income in draft assessment order - HELD THAT - We agree with the argument of the AR but both the parties before us were not able to give us the workings specifically as to whether this sum was included in the final computation adopted by the AO both in draft assessment proceedings as well as in the final proceedings. Hence with the consent of both the parties we hereby direct the ld. AO to verify whether this sum of 9, 99, 600/- representing house property income was at all considered by him in the draft assessment order. If it is so considered then the ld. AO is justified in considering the same in final assessment order pursuant to direction of the DRP. If from verification it is proved otherwise then the said addition requires to be deleted. With these observations the ground No.5 raised by the assessee is disposed off. Deduction u/s.10A - TDS not deducted u/s 195 on payments made to foreign parties - disallowance made u/s.40(a)(i) - whether the said disallowance would consequently increase the claim of the deduction u/s.10A? - Circular No.37/2016 dated 02/11/2016 - HELD THAT - It is not in dispute that assessee had made certain payments to foreign parties in the sum of 31, 59, 524/- relating to the unit for which deduction u/s.10A is eligible. It is now well settled that even if disallowance u/s.40(a)(i) is to be made for non-deduction of tax at source still it would only result in enhancement on business income of the eligible unit of the assessee which would inturn consequently increase the claim of deduction u/s.10A for the assessee thereby making it revenue neutral. We find that the ld. AR in this regard had rightly placed reliance on the decision of Hon ble Jurisdictional High Court in the case of PCIT vs. Lionbridge Technologies (P) Ltd. 2017 (9) TMI 1410 - BOMBAY HIGH COURT . We also find that recently the CBDT had also issued a Circular No.37/2016 dated 02/11/2016 wherein it has been categorically stated that disallowances made u/s.32 40(a)(ia) 40A(iii) 43D of the Act etc. and other specific disallowances related to the business activity against which Chapter VIA deduction has been claimed result in enhancement of the profits of the eligible business and that deduction in Chapter VIA is admissible on the profits so enhanced by the disallowance. The same analogy would apply for deduction u/s.10A of the Act also. Respectfully following the aforesaid decision of Hon ble High Court reported in Lionbridge Technologies (P) Ltd. (supra) and the Circular of the CBDT the ground 6 7 raised by the assessee are allowed.
Issues Involved:
1. Adjustment to arm's length price (ALP) for back office support services. 2. Adjustment to ALP for software support services (IT segment). 3. Consideration of house property income. 4. Disallowance under Section 40(a)(i) of the Income Tax Act for non-withholding of tax on payments to foreign parties and its impact on Section 10A deduction. Detailed Analysis: 1. Adjustment to Arm's Length Price (ALP) for Back Office Support Services: The primary issue raised by the assessee was the inclusion/exclusion of comparables in determining the ALP for international transactions related to back office support services. The assessee contested the inclusion of TCS E-serve Ltd., arguing it was functionally dissimilar due to its engagement in business process management services in the banking and financial services vertical, unlike the assessee, which provided routine back office services like data entry and reconciliation. The Tribunal noted significant differences, such as TCS E-serve's possession of intangibles like the 'Tata Brand', its substantially higher turnover, and super normal profits, making it incomparable. The Tribunal directed the exclusion of TCS E-serve Ltd. from the list of comparables, leading to the acceptance of the assessee's margin within the permissible tolerance limit, thus allowing the ground in favor of the assessee. 2. Adjustment to ALP for Software Support Services (IT Segment): The assessee challenged the inclusion of Infosys Ltd. and Wipro Technologies Ltd. as comparables for its software support services. The Tribunal found that the assessee provided routine software development services, while Infosys and Wipro were engaged in diversified activities with significant intangibles and super normal profits. The Tribunal directed their exclusion, emphasizing that their giant size and different pricing models made them incomparable. The Tribunal instructed the Transfer Pricing Officer (TPO) to recompute the margins of the remaining comparables and determine if any adjustment to ALP was necessary, thus allowing the ground in favor of the assessee for statistical purposes. 3. Consideration of House Property Income: The assessee argued that the house property income of ?9,99,600/- was included in the revised return but not in the original return. The Assessing Officer (AO) taxed this amount in the final assessment order without it being part of the draft assessment order. The Tribunal directed the AO to verify if this income was considered in the draft assessment order. If it was, the AO was justified in including it in the final order; otherwise, the addition should be deleted. This ground was disposed of with these directions. 4. Disallowance under Section 40(a)(i) and Impact on Section 10A Deduction: The assessee faced disallowance of ?31,59,524/- for non-withholding of tax on payments to foreign parties. The issue was whether this disallowance would increase the deduction under Section 10A of the Act. The Tribunal noted that even if disallowance was made, it would enhance the business income of the eligible unit, thereby increasing the Section 10A deduction, making it revenue neutral. The Tribunal relied on the decision of the Hon'ble Jurisdictional High Court in PCIT vs. Lionbridge Technologies (P) Ltd. and the CBDT Circular No.37/2016, which supported this view. Consequently, the ground was allowed in favor of the assessee. Other Grounds: Ground No.8 was not pressed by the assessee and was dismissed as not pressed. The appeal was partly allowed for statistical purposes. Conclusion: The Tribunal's order addressed the various grounds raised by the assessee, providing detailed reasoning for the exclusion of certain comparables and the treatment of house property income and disallowance under Section 40(a)(i). The appeal was partly allowed, with specific directions for the AO and TPO to follow.
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