2019 (7) TMI 981 - AT - Income Tax

TP Adjustment - comparable selection - determination of ALP under TNMM - HELD THAT - E Clerx Ltd to be a KPO company and not comparable to a BPO Co. The Special Bench of the Tribunal in the case of Maersk Global Centers (India) Pvt Ltd 2014 (3) TMI 891 - ITAT MUMBAI has also brought out the distinction between the KPO and the BPO particularly in accordance with the term knowledge process outsourcing services as defined in Cl.(g) of Rule 10TA of the I.T. Rules. Respectfully following the same, we direct the AO to exclude EClerx Services Ltd from the final list of comparables. Hartron Communications Ltd - DRP has directed the TPO to consider only the operating margin of office back up operation segment of Hartron Communications to the assessee to determine the ALP, but the TPO has not followed the directions of DRP and have retained Hartron Communications at the entity level in the final assessment order. We find that the DRP directions are binding on the AO and therefore, we direct the AO to follow and implement the directions of the DRP on this issue. Inclusion of ACE BPO Services and APE Technologies (P) Ltd - The learned DR was also heard and on consideration of the relevant material, we deem it fit and proper to remand this issue to the file of the AO/TPO to reconsider the same and only if it is found that these companies do not fail the relevant filters adopted by the TPO, then these companies should be included in the final list of comparables Risk adjustment - Provision for bad and doubtful debts and provision for loans and advances as operating in nature and allowing risk adjustment, since the assessee has sought exclusion of only Eclerx and we have held it to be not comparable to the assessee, the adjudication of these grounds would only result in an academic exercise at this stage. Therefore, we are not inclined to adjudicate the same at this stage. Similarly, adjudication of Ground No.1 also is not required as by exclusion of E Clerx Services Ltd from the final list of comparables, the margin of the assessee falls with the or 3% of the margin of the comparables and the adjudication of this issue also is academic in nature. TP adjustment regarding interest on outstanding receivables as on 31st March, 2014 - Agreement between the assessee and its AE wherein 35 days period is fixed for realization of the consideration - HELD THAT - We find that interest on receivables is an international transaction during the relevant financial year. The decisions relied upon by the learned Counsel for the assessee are in relation to the A.Ys prior to the amendment to section 92B of the Act and therefore, are not applicable ipso facto to the case of the assessee. When the credit period is clearly mentioned in the Agreement between the parties, then the same only should be allowed and interest on trade receivables after such credit period should be computed. Therefore, the computation of interest on trade receivables is remitted to the file of the AO with these directions. Ground of appeal treated as allowed for statistical purposes. Disallowance of expenses on ESOP and ESPP - HELD THAT - We find that this issue is covered in favour of the assessee and therefore, we direct the AO to grant relief to the assessee by following the directions of the Special Bench in the case of Biocon Ltd. 2014 (12) TMI 838 - ITAT BANGALORE This ground is accordingly allowed. Disallowance of forex loss on forward contracts - allowable revenue expenses - HELD THAT - Hon'ble Supreme Court in the case of Woodwand Governor India (P) Ltd 2009 (4) TMI 4 - SUPREME COURT has held that the loss suffered by an assessee on account of foreign exchange difference as on date of Balance Sheet is an item of expenditure u/s 37(1) of the Act. Respectfully following the same, this ground of the assessee is allowed.

Summary

Issues Involved:
1. Non-application of APA terms
2. Rejection of TP documents
3. Rejection of use of multiple year data in applying TNMM
4. Use of additional filters
5. Information obtained u/s 133(6)
6. Selection of uncomparable companies
7. Not following the directions of the Hon'ble DRP
8. Rejection of comparable companies
9. Computation of operating margin of the comparables
10. Non-provision of adjustment for risk differences
11. Imputing interest on outstanding receivables
12. Disallowance of expenditure on ESOP and ESPP
13. Disallowance of unrealized hedging loss
14. Imposition of interest u/s 234B
15. Imposing penalty u/s 271(1)(c)

Detailed Analysis:

1. Non-application of APA terms:
The assessee argued that the terms of the Advance Pricing Agreement (APA) with the CBDT should be applied for the A.Y 2014-15, as the business circumstances remained unchanged. The APA agreed on an 18% operating margin, whereas the assessee's margin was 20.76%. The Tribunal found that since the APA period did not cover the relevant A.Y, the TPO and DRP's independent assessment was valid.

2. Rejection of TP documents:
The TPO rejected the assessee's transfer pricing documentation and conducted a fresh economic analysis, resulting in an adjustment of INR 305,33,05,656. The Tribunal upheld the TPO's decision to reject the documentation due to the use of outdated financial data and other defects in the TP analysis.

3. Rejection of use of multiple year data in applying TNMM:
The Tribunal noted that the assessee's use of multiple year data was not justified under Rule 10B(4), which mandates the use of current year financial data unless specific reasons are provided.

4. Use of additional filters:
The TPO's use of additional filters such as diminishing revenue/persistent loss and different financial year end was upheld. These filters were deemed appropriate for a more accurate comparative analysis.

5. Information obtained u/s 133(6):
The Tribunal found that the TPO's selective use of information obtained under Section 133(6) was valid, as it was necessary for a comprehensive assessment.

6. Selection of uncomparable companies:
The Tribunal agreed with the assessee that E Clerx Services Ltd should be excluded from the list of comparables due to functional dissimilarity. E Clerx was engaged in high-end KPO services, whereas the assessee provided low-end ITeS services.

7. Not following the directions of the Hon'ble DRP:
The Tribunal directed the AO to follow the DRP's instructions to consider only the operating margin of the office backup operations segment of Hartron Communications Ltd, not the entity level results.

8. Rejection of comparable companies:
The Tribunal remanded the issue of including ACE BPO Services and APE Technologies (P) Ltd to the AO/TPO for reconsideration, provided these companies meet the relevant filters.

9. Computation of operating margin of the comparables:
Since E Clerx Services Ltd was excluded, the Tribunal found no need to adjudicate on the computation of operating margins and risk adjustments, as the assessee's margin fell within the acceptable range.

10. Non-provision of adjustment for risk differences:
The Tribunal did not find it necessary to adjudicate this issue separately due to the exclusion of E Clerx Services Ltd.

11. Imputing interest on outstanding receivables:
The Tribunal directed the AO to compute interest on trade receivables after the agreed credit period of 35 days, as specified in the agreement between the assessee and its AE.

12. Disallowance of expenditure on ESOP and ESPP:
The Tribunal directed the AO to allow the expenditure on ESOP and ESPP, following the Special Bench decision in Biocon Ltd., which held such expenses to be revenue in nature.

13. Disallowance of unrealized hedging loss:
The Tribunal allowed the assessee's claim for unrealized hedging loss, following the Supreme Court's decision in Woodward Governor, which recognized such losses as deductible under Section 37(1).

14. Imposition of interest u/s 234B:
The Tribunal directed the AO to allow consequential relief for interest imposed under Section 234B.

15. Imposing penalty u/s 271(1)(c):
The Tribunal rejected the ground on penalty under Section 271(1)(c) as premature, as it was not yet imposed.

Conclusion:
The appeal was partly allowed, with significant relief granted on the exclusion of E Clerx Services Ltd from the list of comparables and the allowance of ESOP and ESPP expenses, among other issues.