2021 (2) TMI 877 - AT - Income Tax

TP Adjustment - Adopting the Transactional Net Margin Method (TNMM) for benchmarking its International transactions and Operating Profit/Total Cost (OP/TC) as the PLI - Comparable selection - HELD THAT - Assessee is into international transactions of provision of business support services to its group entities thus companies functionally dissimilar with that of assessee need to be deselected from final list. As three companies which were included by the TPO/DRP in the final list of comparables for benchmarking the International transactions of the assessee viz. (i). Mold-Tek Technologies Ltd.; (ii). Eclerx Services Ltd.; and (iii). Accentia Technologies Ltd. in terms of our observations recorded hereinabove cannot be held to be comparable to the assessee. Accordingly we herein direct the A.O/TPO to exclude the aforesaid three companies from the final list of comparables for the purpose of benchmarking the International transactions of the assessee for the year under consideration. Before parting we may herein observe that the assessee had furnished before us a Chart wherein it is stated that in case if the aforementioned three companies are excluded from the final list of comparables then its International transactions of provision of support services to its AEs would meet the arms length standard and no adjustment would be warranted. It is stated by the assessee that as the value of its International transactions i.e provision of ITeS services is higher than the tolerance limit of /- 5% as per the erstwhile sec. 92C(2) . As we have excluded the aforementioned three companies from the final list of comparables the A.O is therefore directed to verify the aforesaid claim of the assessee. In case the value of the International transactions of the assessee is found higher than the value of the tolerance band of /- 5% then no adjustment shall be therein be made by the A.O. Disallowing credit for TDS - HELD THAT - As despite the fact that the same was claimed in the return of income. As the aforesaid claim of the assessee would require verification of the facts from the records we therefore direct the A.O to look into the said issue. In case if the claim of the assessee is found to be correct then the A.O shall allow the credit of the amount of the tax deducted at source. The Ground of appeal allowed for statistical purposes.

Issues Involved:
1. Addition to total income based on Chapter X of the Income-tax Act, 1961.
2. Satisfaction of conditions under Section 92C(3) before making an adjustment.
3. Rejection of benchmarking analysis and comparable companies selected by the assessee.
4. Use of non-contemporaneous data for fresh benchmarking analysis.
5. Selection of companies using information gathered under section 133(6).
6. Functional non-comparability of selected comparables.
7. Selection of companies engaged in high-end services as comparables.
8. Consideration of companies earning supernormal profits as comparables.
9. Demonstration of motive to shift profits outside India.
10. Ignoring provisions of Rule 10B(4) regarding multiple year data.
11. Denial of working capital and risk adjustment.
12. Denial of 5% benefit from the arithmetic mean.
13. Non-grant of credit for tax deducted at source.

Issue-wise Detailed Analysis:

1. Addition to Total Income Based on Chapter X:
The Tribunal noted that the TPO suggested an adjustment of ?17,13,58,467/- to the Arm's Length Price (ALP) of the international transactions of the assessee, which was later recomputed to ?12,15,93,156/- by the TPO following directions from the DRP. The AO made an addition of ?12,15,93,156/- to the returned income of the assessee based on this adjustment.

2. Satisfaction of Conditions under Section 92C(3):
The Tribunal observed that the AO and the DRP failed to demonstrate that any of the conditions mentioned in clauses (a) to (d) of Section 92C(3) were satisfied before making the adjustment.

3. Rejection of Benchmarking Analysis and Comparable Companies Selected by the Assessee:
The Tribunal noted that the TPO disregarded the benchmarking analysis and comparable companies selected by the assessee, which were based on contemporaneous data in the transfer pricing study report.

4. Use of Non-contemporaneous Data for Fresh Benchmarking Analysis:
The Tribunal found that the TPO conducted a fresh benchmarking analysis using non-contemporaneous data, which was not in conformity with Rule 10D(4) of the Income-tax Rules.

5. Selection of Companies Using Information Gathered Under Section 133(6):
The Tribunal observed that the TPO selected companies using information gathered under section 133(6), which was contested by the assessee.

6. Functional Non-comparability of Selected Comparables:
The Tribunal agreed with the assessee that the companies Mold-Tek Technologies Ltd., Eclerx Services Ltd., and Accentia Technologies Ltd. were functionally dissimilar and thus should not be included in the final list of comparables for benchmarking the international transactions of the assessee.

7. Selection of Companies Engaged in High-end Services as Comparables:
The Tribunal noted that the selected companies were engaged in high-end services such as knowledge processing services and engineering design services, which were not comparable to the assessee's business support services (ITeS).

8. Consideration of Companies Earning Supernormal Profits as Comparables:
The Tribunal observed that the inclusion of companies earning supernormal profits as comparables was not justified without comparing the functions, assets, and risks undertaken by such comparables.

9. Demonstration of Motive to Shift Profits Outside India:
The Tribunal found that the TPO did not demonstrate that the motive of the assessee was to shift profits outside India by manipulating the prices charged in its international transactions.

10. Ignoring Provisions of Rule 10B(4) Regarding Multiple Year Data:
The Tribunal noted that the TPO ignored the provisions of Rule 10B(4), which authorizes the usage of multiple year data of comparable companies for determining the arm's length price.

11. Denial of Working Capital and Risk Adjustment:
The Tribunal observed that the TPO did not allow working capital and risk adjustment in accordance with Rule 10B(1)(e)(iii) to account for differences in net profit margins realized by the assessee vis-à-vis comparable uncontrolled transactions.

12. Denial of 5% Benefit from the Arithmetic Mean:
The Tribunal noted that the TPO denied the benefit of 5% from the arithmetic mean as provided in the proviso to Section 92C(2) while computing the adjustment to the total income of the assessee.

13. Non-grant of Credit for Tax Deducted at Source:
The Tribunal directed the AO to verify the claim of the assessee regarding the non-grant of credit for the tax deducted at source of ?4,67,629/- and allow the credit if the claim was found to be correct.

Conclusion:
The Tribunal directed the exclusion of Mold-Tek Technologies Ltd., Eclerx Services Ltd., and Accentia Technologies Ltd. from the final list of comparables for benchmarking the international transactions of the assessee. The AO was instructed to verify the assessee's claim that the value of its international transactions was within the tolerance limit of +/- 5% and make no adjustment if found correct. The appeal of the assessee was allowed in terms of these observations, and the issue of non-grant of TDS credit was remanded to the AO for verification.

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