2020 (9) TMI 819 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected which provides IT services such as maintenance of software, management of servers, provision of technical support, documentation of software code and ITES service and Back Office services such as quality assurance, vendor management and investor relationship, etc. Disallowance of employee contribution of PF and ESI - HELD THAT - We notice that in favour of assessee in Hindustan Organics Chemical Ltd. 2014 (7) TMI 477 - BOMBAY HIGH COURT AND CIT vrs. Ghatge Patil Transports Ltd. 2014 (10) TMI 402 - BOMBAY HIGH COURT Following the Vegetable product 1973 (1) TMI 1 - SUPREME COURT we are inclined to follow the jurisdictional High Court decision. Accordingly, the grounds raised by the assessee are allowed. Application u/s 154 before AO as substantial carry forward losses and unabsorbed depreciation, which the AO has not disposed off yet - Following the decision of the coordinate bench in the AY 2012-13, the bench gave the direction to AO to dispose off the application as per law. Similarly, we are directing the AO to consider the submissions of the assessee and remitting this issue to his file to pass the rectification application as per law. Accordingly ground raised by the assessee is allowed for statistical purpose.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Inclusion of Excel Infoways Ltd. as a Comparable Company
3. Disallowance of Employee's Contribution to PF and ESIC
4. Set-off of Brought Forward Losses and Unabsorbed Depreciation

Detailed Analysis:

1. Transfer Pricing Adjustment:

The assessee challenged the transfer pricing adjustment of ?1,44,69,701/- made by the AO and TPO under the directions of the DRP. The primary contention was the rejection of the assessee's transfer pricing documentation and the selection of inappropriate comparable companies. The TPO had initially rejected 15 out of 17 comparables selected by the assessee and included two additional companies, resulting in an average margin of 28.14%. The DRP later adjusted the margin of Jindal Intellicom Ltd. and included two more companies, leading to a final average margin of 19.92%. The assessee argued against the selection of comparable companies and the computation of margins.

2. Inclusion of Excel Infoways Ltd. as a Comparable Company:

The assessee specifically contested the inclusion of Excel Infoways Ltd. as a comparable company, citing significant differences in functional profile, asset profile, risk profile, and employee cost ratio. The assessee highlighted that Excel Infoways Ltd. had fluctuating margins and diminishing revenue trends, which made it incomparable. The DRP had previously upheld the inclusion of Excel Infoways Ltd. based on its functional comparability. However, the ITAT, following precedents from earlier years and other cases, concluded that Excel Infoways Ltd. should be excluded from the list of comparables due to its fluctuating margins and differing business activities. The ITAT directed the AO/TPO to exclude Excel Infoways Ltd. from the final set of comparables and recompute the ALP.

3. Disallowance of Employee's Contribution to PF and ESIC:

The AO had disallowed ?73,45,335/- under Section 36(1)(va) for delayed deposit of employee contributions to PF and ESIC. The assessee argued that these contributions were deposited before the due date of filing the return of income under Section 139, and thus should not be disallowed. The ITAT referred to decisions from the Bombay High Court in CIT vs. Hindustan Organics Chemical Ltd. and CIT vs. Ghatge Patil Transports Ltd., which supported the assessee's position. The ITAT, following the jurisdictional High Court's decisions, allowed the assessee's grounds and directed the deletion of the disallowance.

4. Set-off of Brought Forward Losses and Unabsorbed Depreciation:

The assessee claimed that the AO did not allow the set-off of brought forward losses and unabsorbed depreciation amounting to ?16,51,19,294/-. The AO had noted that the total loss available for set-off was NIL based on earlier assessment orders. The assessee had filed an application under Section 154, which was pending disposal. The ITAT directed the AO to consider the application and dispose of it as per law, following the precedent set in the assessee's own case for AY 2012-13. The ITAT remitted the issue back to the AO for reconsideration.

Conclusion:

The ITAT partly allowed the appeal, directing the exclusion of Excel Infoways Ltd. from the comparables, deleting the disallowance of employee contributions to PF and ESIC, and remitting the issue of set-off of brought forward losses and unabsorbed depreciation back to the AO for reconsideration. The ITAT's decision was pronounced in the open court on 15.09.2020.