2020 (11) TMI 651 - AT - Income Tax

TP Adjustment - comparable selection - Comparability analysis - HELD THAT - Accentia technologies Ltd - Several judgments relied upon wherein this comparable is rejected on functionally being different and absence of any segmental data as well as occurring of any extraordinary events as discussed above did not happen in the case of this comparable for this year. In view of this, the decisions relied upon by the assessee does not help the case for exclusion of the above comparable. In view of this we confirm the order of the learned TPO/DRP in including the above comparable company for the comparability analysis of the profit margin of the assessee. ICRA Techno analytics Ltd - This company is engaged in software development and consultancy as well as engineering services, Web development hosting and subsequently diversified into the domain of business analytics and business process outsourcing. Further though it is mentioned that company is engaged in consultancy business as also in software development, therefore this company cannot be compared with the assessee appellant which does not carry on such activity. Naturally the activity of software development and consultancy are altogether different from the functional profile of the assessee. Therefore we direct the learned transfer pricing officer to exclude the above comparable. Eclrex services Ltd - In view of this fact that assessee is not a KPO, the above comparable is required to be excluded. Ld TPO is directed accordingly to exclude this comparable. TCS E serve Ltd - We accept the argument of the assessee that such a large comparable cannot be used to determine ALP of an international transaction of the assessee. Therefore we direct the learned transfer pricing officer to exclude TCS E Serve Limited. Infosys BPO Ltd , which is having the turnover more than 27 times, than the revenue of the assessee. Therefore, for the reasons given by us for exclusion of TCS E Serve Limited we also direct the learned transfer-pricing officer to exclude Infosys BPO Ltd from the comparability analysis. R systems international Ltd with different accounting period compared to the assessee - Though R Systems International Ltd follows calendar year as its accounting year, its financial for the financial year can be recast by considering its quarterly financial results. Several coordinate benches have taken this view therefore, we also direct the assessee to reconstruct the financial results of this comparable by producing credible information with respect to eliminating and includible quarter before the learned transfer-pricing officer.Ld TPO is directed to examine the same and if found in order, include this comparable in the comparability analysis. Interest on overdue receivable from associated enterprise - Overdue receivable from associated enterprise as an international transactions - HELD THAT - As working capital adjusted margin were considered with respect to all the comparables, therefore, we do not find any reason to further sustain any adjustment on account of interest on outstanding receivables from its associated enterprise. As the outstanding of associated enterprise is shown as debtors and is covered in the working capital adjustment itself, it amounts to double addition. Had the working capital adjusted margin were not taken in case of comparable company, this addition/adjustment would have been worth considering. We direct the learned transfer pricing officer to delete the addition on account of interest on overdue receivable from associated enterprise. Accordingly ground of the appeal is allowed.

Issues Involved:
1. Recomputing the arm's length price (ALP) of international transactions.
2. Jurisdictional error in the reference made by the AO to the TPO.
3. Non-satisfaction of conditions set out in Section 92C(3) of the Act.
4. Recharacterization of the assessee as a Knowledge Process Outsourcing (KPO) unit.
5. Rejection of the Internal Transactional Net Margin Method (TNMM) by the AO/TPO/DRP.
6. Modifications in the economic analysis conducted by the appellant.
7. Treatment of overdue receivables from AEs as an international transaction.
8. Initiation of penalty proceedings under Section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Recomputing the ALP of International Transactions:
The assessee contested the addition of ?1,95,70,892 by recomputing the ALP of international transactions under Section 92 of the Income-tax Act, 1961. The TPO initially proposed an adjustment of ?21,113,342, which was later revised to ?1,95,70,892 after considering the directions of the DRP. The Tribunal examined the inclusion and exclusion of various comparables used by the TPO and DRP, ultimately deciding to exclude certain comparables like TCS E Serve Limited and Infosys BPO Ltd due to their significantly higher turnover compared to the assessee.

2. Jurisdictional Error in Reference to TPO:
The assessee argued that the AO did not record any reasons in the assessment order to justify the reference to the TPO for computation of ALP, as required under Section 92CA(1) of the Act. However, this ground was not pressed by the assessee during the proceedings and was subsequently dismissed by the Tribunal.

3. Non-Satisfaction of Conditions under Section 92C(3):
The assessee contended that none of the conditions set out in Section 92C(3) of the Act were satisfied in their case. This ground was also not pressed by the assessee during the proceedings and was dismissed by the Tribunal.

4. Recharacterization as a KPO:
The assessee challenged the recharacterization of its operations as a KPO instead of a low-end IT-enabled service provider (ITES). The Tribunal found that the TPO had incorrectly classified the assessee as a KPO and directed the exclusion of certain comparables that were functionally different, such as Eclrex Services Ltd and Accentia Technologies Ltd.

5. Rejection of Internal TNMM:
The assessee's application of the Internal TNMM was rejected by the AO/TPO/DRP on the grounds that services rendered to associated enterprises (AEs) and non-AEs were not similar, and the basis of cost allocation was not furnished. The Tribunal upheld the rejection of the Internal TNMM but directed the TPO to reconsider the inclusion of R Systems International Ltd as a comparable, provided credible and reliable financial data was submitted.

6. Modifications in Economic Analysis:
The Tribunal addressed the modifications made by the AO/TPO/DRP in the economic analysis, including the application of quantitative filters and the selection of functionally comparable companies. The Tribunal directed the exclusion of comparables like TCS E Serve Limited and Infosys BPO Ltd due to their significantly higher turnover and functional dissimilarities.

7. Treatment of Overdue Receivables:
The assessee contested the treatment of overdue receivables from AEs as an international transaction and the computation methodology used by the AO/TPO/DRP. The Tribunal found that the working capital-adjusted margin already accounted for the outstanding receivables and directed the deletion of the adjustment of ?59,953 on account of interest on overdue receivables.

8. Initiation of Penalty Proceedings:
The assessee argued against the initiation of penalty proceedings under Section 271(1)(c) of the Act. The Tribunal deemed this issue premature and dismissed it.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the exclusion of certain comparables, reconsideration of others, and deletion of the adjustment on overdue receivables. The grounds related to jurisdictional error, non-satisfaction of conditions under Section 92C(3), and initiation of penalty proceedings were dismissed.

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