2023 (4) TMI 31 - AT - Income Tax

TP Adjustment - comparable selection - Informed Technologies India Ltd. excluded on the ground of low turnover - HELD THAT - Service income filter which was set by the assessee failed because as per the annual report the other income is more than the service income and not on account of low turnover. Thus the decisions relied on by the ld. Counsel for the assessee has no application to the facts of the case. In view of the above we uphold the directions of the DRP and TPO in excluding Informed Technologies India Ltd. from final set of comparables. R. Systems International - BPO services rejected as this company follows calendar year as against financial year - TPO excluded R. Systems International Ltd. on the ground that this company has different Financial Year ending. The TPO did not reject this company on functional comparability analysis. Thus following the decisions MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD. 2015 (3) TMI 1226 - DELHI HIGH COURT and M/S MERCER CONSULTING (INDIA) PVT. LTD. GURGAON 2016 (8) TMI 1163 - PUNJAB AND HARYANA HIGH COURT we direct the AO/TPO to include R Systems International Ltd. - BPO services as comparable company in the final set of comparables. ICRA Techno Analytics Ltd.on the ground that as functionally not comparable to the assessee company - The Bangalore Bench of the Tribunal in the case of Cerner Healthcare Solutions (P.) Ltd. 2017 (1) TMI 1491 - ITAT BANGALORE held that when ICRA Techno Analytics Ltd. is engaged in diversified activities of software development and consultancy, engineering services, web development and hosting and substantially diversified itself into domain of business analysis and business process outsourcing then the same cannot be regarded as functionally comparable with that of the assessee, who is rendering software development services to its AE. Thus, following the decision of the Bangalore Bench of the Tribunal we direct the TPO/AO to exclude ICRA Techno Analytics Ltd. from the final list of comparables. Infosys B.P.O. Ltd. - As in the case of Cadence Design Systems (I) (P.) Ltd. 2018 (4) TMI 1574 - ITAT NEW DELHI Tribunal excluded Infosys B.P.O. Ltd. for the assessment year 2011- 12 holding that it is not as good comparable accepting the submissions of the assessee that Infosys B.P.O. Ltd. is having significantly large operations and is providing high-end integrated services for business platforms, customer service, outsourcing service, functions and accounting on account of resources outsourcing medical process, outsourcing sales and fulfillment, sourcing and procurement outsourcing etc. and also having goodwill of Rs.2.27 crores. We observe that all these factors have not been examined by the TPO while including this company as comparable. Therefore, we restore this comparable to the file of the AO/TPO to re-examine in detail. TCS e-Serve Ltd. - We feel it appropriate to restore this comparable to the file of the AO/TPO and decide in the light of the observations of the Tribunal in assessee s own case for assessment year 2010-11 and also keeping in view various decisions and contentions raised by the assessee on functionality, brand value, intangible assets, extraordinary economic events pointed out in the assessment year under consideration as stated above and decide for the purpose of exclusion/ inclusion from the final set of comparables. Acropetal Technologies Ltd. (Seg) - This company has been considered as a high-end software development company and a KPO services provider and cannot be a comparable to that of a company providing ITES services by the Bangalore Bench Tribunal in the case of S P Capital IQ (India) (P.) Ltd. 2016 (7) TMI 1265 - ITAT HYDERABAD - Acropetal Technologies Ltd. is having engineering design service segment, which was compared to that of the assessee. The type of services that was being provided by Acropetal Technologies Ltd. was not comparable with the type of services that the assessee is providing. Acropetal Technologies Ltd. was providing high-end services in the engineering design services and whereas the assessee is providing ITES services to its AE. In view of the above, we direct the AO/ TPO to exclude Acropetal Technologies Ltd. from the final set of comparables. Not granting risk adjustment - DR submits that risk adjustment is not allowed automatically and It has to be looked into each and every comparable - HELD THAT - We are of the view that this issue has to go back to the file of the ld. AO/TPO to decide afresh keeping in view the judgements of various benches after providing adequate opportunity of being heard to the assessee. The TPO shall decide the issue in accordance with law. Working capital adjustment - HELD THAT - We direct the TPO/AO to re-compute the working capital adjustment keeping in view the directions of the Tribunal and the High Court in assessee s own case. However, in so far as including the income of Philippines PE branch for determining the working capital adjustment, we restore this issue to the file of the AO/TPO to examine afresh in the light of the submissions of the assessee that Philippines PE branch had closed down on 31.03.2010 and no transactions were carried out during the year and, therefore, could not be included to determine the working capital adjustment as there were no transactions and has no relationship with business of the assessee during the year. Disallowance u/s 14A read with Rule 8D - AO applying Rule 8D(2)(iii) made disallowance and while doing so considered even the mutual funds where the dividend is not exempt - HELD THAT - As contention of the assessee has been dealt with by the DRP by directing the Assessing Officer to exclude those investments which do not yield exempt income to exclude for the purpose of computing disallowance under Rule 8D(2)(iii) and restrict the disallowance only to the dividend income earned. We do not see any infirmity in the order passed by the DRP. Therefore, the grounds raised by the assessee as well as the Revenue on this issue are rejected. DRP considering the forex gain/loss operating in nature for determination of ALP - HELD THAT - We find that an identical issue has been decided in assessee s own case for the assessment year 2010-11 2015 (11) TMI 1651 - ITAT DELHI as affirmed by HC 2016 (5) TMI 1434 - DELHI HIGH COURT issue stands covered against the Revenue and in favour of the Assessee as held that forex gain/loss in the revenue account is a trading receipt, or, as the case may be, business expenditure, allowable u/s 37(1) of the Act. We, accordingly, direct that the forex gain/ loss be treated as operating income/ loss both in the case of tested party as well as comparable and the PLI should be determined accordingly.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Addition under Section 14A of the Income Tax Act
3. Levy of Interest under Sections 234A, 234B, and 234C
4. Initiation of Penalty Proceedings under Section 271(1)(c)

Summary:

Issue 1: Transfer Pricing Adjustments

The assessee challenged the addition of Rs. 4,09,29,957/- made by the TPO under section 92CA of the Act. The DRP sustained the filters applied by the TPO/AO and the inclusion of inappropriate comparables. The Tribunal observed that the DRP excluded Accentia Technologies Ltd. and Eclerx Services Ltd. based on previous Tribunal and High Court decisions. The Tribunal directed the inclusion of CG VAk Software Limited and R Systems International - BPO services, and upheld the exclusion of Informed Technologies India Ltd. and ICRA Techno Analytics Ltd. Infosys B.P.O. Ltd. and TCS E-Serve Ltd. were remanded to the AO/TPO for re-examination. Acropetal Technologies Ltd. was excluded due to functional dissimilarity.

Issue 2: Addition under Section 14A

The AO disallowed Rs. 14,94,534/- under Rule 8D(2)(iii) for earning exempt income. The DRP directed the AO to exclude investments not yielding exempt income and restrict disallowance to the dividend income earned. The Tribunal upheld the DRP's directions, rejecting both the assessee's and Revenue's appeals on this issue.

Issue 3: Levy of Interest under Sections 234A, 234B, and 234C

The Tribunal did not provide specific details on this issue in the judgment, implying that the levy of interest under these sections was not a contentious point in the appeals.

Issue 4: Initiation of Penalty Proceedings under Section 271(1)(c)

The Tribunal did not address this issue explicitly, suggesting that it was not a significant point of contention in the appeals.

Forex Gain/Loss as Operating in Nature

The Tribunal upheld the DRP's decision to consider forex gain/loss as operating in nature for determining ALP, following the assessee's own case for the previous assessment year and the Supreme Court's decision in Commissioner of Income-tax v. Woodward Governor India (P) Ltd.

Risk Adjustment

The Tribunal remanded the issue of risk adjustment to the AO/TPO for fresh consideration, directing them to follow various judgments and provide adequate opportunity to the assessee.

Working Capital Adjustment

The Tribunal directed the AO/TPO to re-compute the working capital adjustment based on the interest rate applicable to US currency, following the Tribunal and High Court's decisions in the assessee's own case. The inclusion of the Philippines PE branch for determining working capital adjustment was remanded for re-examination.

Conclusion

The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal provided specific directions for re-examination and re-computation on several issues, ensuring adherence to previous judicial decisions and providing adequate opportunities for the assessee.