2022 (12) TMI 923 - AT - Income Tax

TP Adjustment - comparable selection - IT enabled services segment - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected from final list. Mismatch of the income shown by the assessee and the entries shown in Form 26AS - HELD THAT - The disagreement between the Assessing Officer and the assessee with respect to the income received by the assessee or vis- -vis the amount shown in 26AS can only be resolved by making necessary enquiries from the persons who had deducted the TDS amount. The details of the persons i.e., Names, PAN numbers and addresses, are all available in form 26AS. Therefore, we deem it appropriate to restore the issue to the file of the Assessing Officer with the direction to verify once again the claim of the assessee by using powers conferred under the Act and find out whether the said income pertains to assessee company or not from the said persons who had allegedly deducted the tax as reflected in 26AS. This ground is allowed for statistical purposes.

Issues Involved:
1. Transfer pricing adjustment for IT enabled services.
2. Separate transfer pricing benchmarking for IT enabled services and business support services.
3. Rejection of transfer pricing study and comparability analysis.
4. Inclusion and exclusion of certain companies in the comparable set.
5. Treatment of provision for doubtful debts and miscellaneous income.
6. Granting of working capital and risk adjustments.
7. Addition of income as per Form 26AS.
8. Initiation of penalty proceedings under Section 271(1)(C) of the Act.

Detailed Analysis:

I. Transfer Pricing Adjustment for IT Enabled Services:
The appeal concerns the transfer pricing adjustment of Rs. 11,81,52,927 made by the AO/TPO for the provision of IT enabled services to the associated enterprise. The TPO rejected the assessee's transfer pricing study, conducted a fresh comparability analysis, and determined the Arm's Length Price (ALP) at Rs. 109,47,51,113, resulting in a shortfall treated as an adjustment under section 92CA.

II. Separate Transfer Pricing Benchmarking:
The assessee maintained separate transfer pricing benchmarking for IT enabled services and business support services. However, the AO/DRP/TPO aggregated these segments for benchmarking the international transaction of IT enabled services, which the assessee contested.

III. Rejection of Transfer Pricing Study and Comparability Analysis:
The TPO rejected the assessee's transfer pricing study, search process, use of multiple-year data, and certain filters applied in the selection of comparable companies. The TPO applied additional/modified filters and conducted a fresh search for appropriate comparable companies.

IV. Inclusion and Exclusion of Certain Companies in Comparable Set:
The assessee contested the inclusion of Infosys BPO Limited, Microland Limited, Eclerx Services Limited, Crossdomain Solutions Private Limited, and MPS Limited in the comparable set, arguing they were not comparable to the assessee's functions, asset base, and risk profile. The assessee also contested the exclusion of Informed Technologies India Limited, Allsec Technologies Limited, Caliber Point Business Solutions Limited, Datamatics Financial Services Limited, Jindal Intellicom Limited, R Systems International Limited, Ace BPO Services Private Limited, and Hartron Communications Limited (Seg).

V. Treatment of Provision for Doubtful Debts and Miscellaneous Income:
The AO/DRP/TPO did not treat the provision for doubtful debts as part of the operating cost while computing the operating mark-up on total cost of the comparable companies, nor did they treat the provision written back as part of the operating income. Miscellaneous income was considered part of the operating income while computing the operating mark-up.

VI. Granting of Working Capital and Risk Adjustments:
The AO/DRP/TPO did not grant working capital and risk adjustments, which the assessee contested.

VII. Addition of Income as per Form 26AS:
The AO added Rs. 10,10,372 to the total income as per Form 26AS, treating it as undisclosed income. The assessee argued that this income did not belong to them and no credit of taxes on such income was claimed.

VIII. Initiation of Penalty Proceedings under Section 271(1)(C) of the Act:
The AO initiated penalty proceedings under Section 271(1)(C) of the Act, which the assessee contested.

Separate Judgments Delivered by Judges:

I. Eclerx Services Limited:
The Tribunal upheld the inclusion of Eclerx Services Limited as a comparable, finding it functionally similar to the assessee. The Tribunal noted that both companies provided similar IT enabled services, and the objections regarding high profitability and inorganic growth were not sufficient to exclude Eclerx.

II. Microland Limited:
The Tribunal upheld the inclusion of Microland Limited, noting that its services, categorized under IT enabled services, were similar to those provided by the assessee. The Tribunal rejected the argument that segmental information was required for comparability.

III. Crossdomain Solutions Private Limited:
The Tribunal remanded the issue of inclusion/exclusion of Crossdomain Solutions Private Limited to the TPO for further verification, noting the need for a detailed examination of financials and functions.

IV. MPS Limited:
The Tribunal upheld the inclusion of MPS Limited as a comparable, finding its services similar to those of the assessee. The Tribunal rejected the argument that MPS was functionally dissimilar due to its involvement in digital publishing and software development.

V. Allsec Technologies Limited:
The Tribunal remanded the issue of inclusion of Allsec Technologies Limited to the TPO for further verification, directing the TPO to examine the functional comparability and financials of the company.

VI. Infosys BPO Limited:
The Tribunal directed the exclusion of Infosys BPO Limited from the list of comparables, citing significant differences in turnover and other aspects, in line with previous judicial decisions.

Corporate Ground:
The Tribunal remanded the issue of addition of Rs. 10,10,372 to the AO for verification, directing the AO to make necessary inquiries to determine whether the income shown in Form 26AS pertained to the assessee.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for further verification and reconsideration on several issues. The Tribunal's detailed analysis and directions aim to ensure a fair and accurate determination of the transfer pricing adjustments and other contested issues.

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