2021 (8) TMI 3 - AT - Income Tax

Transfer pricing adjustment - comparable selection - functional dissimilarity - HELD THAT - Assessee provides IT enabled services to its AE through the use of IT infrastructure which includes use of online software, live information services, research on international data base, thus companies functinally dissimilar with that of assessee need to be deselected from final list of comparables. Disallowance u/s. 40a(ia) - no TDS exemption certificate was submitted in respect of rental payments made to Annapurn Builders - short deduction of TDS - HELD THAT - CIT(A) has given direction to the Assessing Officer to verify whether the copies of non deduction of tax/deduction tax at lower rate was filed before the Assessing Officer before passing of the assessment order and if that be so then no disallowance can be made. It has been informed by the ld. counsel that ld. Assessing Officer will give effect to the order of the ld. CIT(A) vide order dated 27.09.2018 has accepted this fact that in case of payment to M/s Annapurna Builders, assessee has produced TDS exemption certificate and himself has deleted the disallowance. Accordingly, this ground is treated as infructuous. In so far as short deduction of TDS, rather TDS deducted at lower rate in the case of M/s Hind Hosiery Mills Pvt. Ltd, again no disallowance can be made in view of the judgment of Hon ble Calcutta High Court in the case of CIT vs. S.K. Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT . Accordingly, this issue is decided against the revenue. Disallowance u/s.40A(2) - HELD THAT - On perusal of the relevant finding given in the impugned order, we find that first of all Assessing Officer without any reason or material facts on record had simply disallowed 50% on the ground that there is no justification for giving such huge amount of remuneration. Such an ad hoc reasoning cannot be accepted as AO has to justify that such a remuneration paid is not commensurate with the services rendered by the Managing Director having regard to the services rendered and market value of its services. The profile of Managing Director and the services rendered by him as incorporated in the impugned appellate order and also looking to the fact that the subsequent assessment year the increase remuneration has been accepted, and therefore, the disallowance made u/s.40A(2)(b) cannot be sustained. Thus, the Revenue s appeal is dismissed.

Summary

Issues Involved:

1. Exclusion of three comparables: M/s Acropetal Technologies Ltd., eClerx Services Ltd., and Infosys BPO Ltd.
2. Deletion of disallowance under Section 40a(ia) for rent payments.
3. Deletion of addition under Section 40A(2)(b) for remuneration paid to the director.

Issue 1: Exclusion of Three Comparables

The main issue in the Revenue's appeal is the exclusion of three comparables: M/s Acropetal Technologies Ltd., eClerx Services Ltd., and Infosys BPO Ltd. The assessee, a subsidiary of GHF Holdings Ltd., Mauritius, provides IT-enabled services to its AE. During the year, the assessee entered into two international transactions: Provision of IT Enabled Services and Recovery of Expenses, using TNMM as the method. The TPO proposed an adjustment of ?3,42,98,762/- based on nine comparables. The CIT(A) excluded the three comparables based on the following reasons:

- M/s Acropetal Technologies Ltd.: The CIT(A) noted that this company is engaged in software development and has significant on-site development expenses, making it unfit as a comparable for ITES segment. The Tribunal confirmed this exclusion, highlighting that the TPO did not analyze how engineering design services compared with the IT-enabled services of the assessee.

- eClerx Services Ltd.: The CIT(A) excluded this company as it is engaged in high-end KPO services, which are not comparable to the IT-enabled services of the assessee. The Tribunal upheld this exclusion, noting that eClerx Services is a leading KPO service provider with substantial business on an outsourcing model, which is absent in the assessee's case.

- Infosys BPO Ltd.: The CIT(A) excluded this company due to its giant size, substantial intangible assets, and different scale of operations. The Tribunal confirmed this exclusion, citing various judicial precedents where Infosys BPO Ltd. was excluded for being a giant company with significant brand value and operating on a huge economic scale.

Issue 2: Deletion of Disallowance Under Section 40a(ia)

The CIT(A) directed the Assessing Officer to verify whether the copies of non-deduction of tax or deduction at a lower rate were filed before the Assessing Officer. The Tribunal noted that the Assessing Officer, in the order giving effect to the CIT(A)'s order, accepted that the assessee had produced the TDS exemption certificate and deleted the disallowance. The Tribunal also referred to the judgment of the Hon'ble Calcutta High Court in the case of CIT vs. S.K. Tekriwal, which held that no disallowance can be made for short deduction of TDS. Accordingly, this issue was decided against the Revenue.

Issue 3: Deletion of Addition Under Section 40A(2)(b)

The Assessing Officer disallowed 50% of the remuneration paid to the director, Mr. Sunil Baijal, on the ground that the assessee failed to justify the services rendered. The CIT(A) deleted the disallowance, noting that the Assessing Officer did not bring any evidence to support the disallowance and that higher remuneration paid in the subsequent assessment year was accepted in the order passed under Section 143(3). The Tribunal upheld the CIT(A)'s decision, stating that the Assessing Officer's ad hoc reasoning could not be accepted and that the remuneration was commensurate with the services rendered by the Managing Director.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, confirming the exclusion of the three comparables, deletion of disallowance under Section 40a(ia), and deletion of addition under Section 40A(2)(b). The order was pronounced in the open Court on 10th May 2021.