2019 (12) TMI 678 - AT - Income Tax

TP Adjustment - AO found that the assessee has international transaction with its Associated Enterprises (AE) exceeding limit and hence, with prior approval of the Principal CIT, the matter was referred to the Deputy Commissioner of Income-tax(TP) - Comparable selection - HELD THAT - Companies as different with software development services (SDS) as that of assessee need to be deselected from final list. The companies who have more than 25% RPT of sales were excluded. AR submitted that the assessee has made a claim of TDS and out of total TDS the AO has not granted the total credit and prayed for direction for granting for credit of TDS. We found that the assessee has raised this ground of appeal and we direct the AO to grant TDS credit as per Form 26AS and further interest u/s 234B has to be levied as per law.

Summary

Issues Involved:
1. Assessment and reference to Transfer Pricing Officer (TPO)
2. Determination of arm's length price and erroneous data used by the TPO
3. Determination of arm's length price relating to IT Enabled Services
4. Non-allowance of appropriate adjustment to the comparable companies
5. Variation of 3% from the arithmetic mean
6. Short grant of TDS credit
7. Directions issued by the Dispute Resolution Panel (DRP)
8. Levy of interest under section 234B of the Act
9. Initiation of penalty proceedings
10. Relief

Detailed Analysis:

1. Assessment and Reference to Transfer Pricing Officer (TPO):
The assessee challenged the final assessment order, asserting it was "bad in law" and violated principles of natural justice. The assessee argued that the TPO reference was made without issuing a show cause notice as per Section 92C(3) of the Income Tax Act, 1961, and without providing an opportunity to be heard. Additionally, it was claimed that the TPO reference was made without recording an opinion that any conditions in Section 92C(3) were satisfied. The final assessment order was also contested as being without jurisdiction.

2. Determination of Arm's Length Price and Erroneous Data Used by the TPO:
The assessee contended that the TPO erred in rejecting the value of the international transaction related to Telephonic Support Services and did not accept the assessee's economic analysis. The TPO conducted fresh benchmarking analysis and used data not available in the public domain. The TPO also applied arbitrary filters, deviated from the uncontrolled party transaction definition, and did not apply the turnover filter at the upper limit.

3. Determination of Arm's Length Price Relating to IT Enabled Services:
The TPO excluded certain companies from the list of comparables and included others that were not functionally comparable. The assessee argued that companies like Capgemini Business Services (India) Pvt. Ltd., Infosys BPO Ltd., and Hartron Communications Ltd. were not comparable due to their different functions, assets, risks, and significant related party transactions.

4. Non-Allowance of Appropriate Adjustment to the Comparable Companies:
The TPO did not allow appropriate adjustments under Rule 10B to account for differences in accounting practices, marketing expenditure, research and development expenditure, working capital, risk profile, and depreciation between the assessee and the comparable companies.

5. Variation of 3% from the Arithmetic Mean:
The TPO did not grant the benefit of the proviso to Section 92C(2) of the Act, which the assessee claimed entitlement to.

6. Short Grant of TDS Credit:
The AO granted credit for TDS only to the extent of INR 14,962,665 against the claimed amount of INR 15,518,356. The Tribunal directed the AO to grant TDS credit as per Form 26AS.

7. Directions Issued by the Dispute Resolution Panel (DRP):
The DRP confirmed the draft assessment order of the AO, which the assessee claimed was erroneous and liable to be set aside.

8. Levy of Interest Under Section 234B of the Act:
The AO levied interest under Section 234B of the Act, which the assessee contested.

9. Initiation of Penalty Proceedings:
The AO initiated penalty proceedings under section 271(1)(c) of the Act, which the assessee challenged.

10. Relief:
The assessee prayed for directions to grant all reliefs arising from the grounds and consequential reliefs. The Tribunal partly allowed the appeal, directing the exclusion of certain comparables and granting TDS credit.

Tribunal's Decision:
- Exclusion of Comparables: The Tribunal directed the TPO to exclude M/s. Capgemini Business Services (India) Ltd., M/s. Infosys BPO Ltd., M/s. Microland Ltd., and M/s. Harton Communications Ltd. from the final list of comparables based on turnover criteria and functional dissimilarity.
- TDS Credit: The Tribunal directed the AO to grant TDS credit as per Form 26AS.
- Interest and Penalty: Interest under Section 234B to be levied as per law, and the initiation of penalty proceedings was noted.

Conclusion:
The Tribunal provided a detailed analysis and directions on each issue raised by the assessee, resulting in partial relief by excluding certain comparables and directing the AO to grant the correct TDS credit. The appeal was partly allowed.