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2023 (11) TMI 1190 - AT - Income TaxTP Adjustment - Allocation of Common Cost - Assessee while working out the allocation has considered the number of manhours spent on Direct cost as the basis for allocation - assessee had applied Technical Manpower-Ratio for allocation of G A expenses - HELD THAT - G A expenses are general in nature like Legal, Audit, HR, Corporate Planning, Finance, Communications cost, Cost of Laptop computers used, etc., therefore the application of Technical Manpower ratio by the assessee in its working submitted to TPO is, conceptually wrong and the formula applied by the assessee may not be able to arrive at an appropriate profit level indicator. Therefore, for all the reasons discussed, the working submitted by the assessee is rejected. These services have been provided by 415 employees of the assessee from India. However, nowhere the Assessee has submitted Actual Number of Employees working in various branches situated outside India. The Actual Number of employees working in various branches situated outside India, are important because the man-hour spent by HR team, manhour Spend by Account Team to prepare the monthly payment sheet, etc depend on the actual number of employees working in these branches. The communication expenses which is part of G A depends on the number of employees of the Branches who availed these services. Also, the actual number of employees in the Branches are required to understand the utilisation of Communication Cost. We have already made it clear that all these details have nowhere been placed on records on behalf of the assessee. We have already mentioned that the Assessee has not categorically mentioned the basis of Common Cost Allocation in the Transfer Pricing Study Report, to that extent the Transfer Pricing report is unclear. Therefore, we agree with the TPO s calculation of allocation based on the direct cost as it is the best suitable basis for allocation of Common Cost of G A. Because the direct cost is easily available and verifiable. The onus is always on the assessee to file all necessary details before the TPO to prove the allocation. In this case the assessee failed to file all the essential details even before us. Therefore, the allocation made by the TPO is sustained. Accordingly, the Ground Number 5 of the assessee is dismissed. Entity Level PLI - It is an accepted fact that there are independent different Segments. The assessee during Transfer Pricing Proceedings had submitted Segmental PLI working. This explains that there are different segments. In this case the transactions with the Non-AE are 89.59%, it means the transactions with the Non-AE independent entities are almost 90%. It means the entity level profit is mainly influenced by the 90% transactions which are with the Non-AE. Therefore, considering the Entity Level PLI will give distorted results as it is affected by 90% transactions which are with the Non-AE. Therefore, in these facts and circumstances of the case we reject the Assessee s plea that Entity Level PLI shall be considered for bench marking transactions with the AE. Comparable selection - Exilant Technologies Pvt. Ltd's Annual Report is only for the period 01.04.2017 to 14.02.2018. It is also observed that during the year 99% of its shares have been acquired by Quest Global Engineering. There are also another extraordinary events like sale of subsidiaries during the year. It is also observed neither TPO, nor DRP has discussed these events in the orders, though they are very much obvious from the Annual Report. In these facts and circumstances of the case, since Annual Report is not available for the entire year and presence of extraordinary events, we hold that Exilant Technologies Pvt. Ltd., cannot be included in the comparables for the present year. Accordingly, the TPO is directed to exclude Exilant Technologies Pvt. Ltd., from the list of comparables. E-Infochips Pvt. Ltd - There is Revenue from Sale of Products. It is also having the activity of ITES as mentioned in the Annual Report filed by the assessee. However, the assessee is not into any trading activity. Therefore, assessee s segment of software development cannot be compared with E-Infochips Pvt. Ltd., as it also has trading activity and ITES, in the absence of segmental accounts. TPO and DRP has not discussed these issues. However, on the facts and circumstances of the case, we hold that E-Infochips Pvt. Ltd., is not comparable to Software Development Segment of the assessee. Accordingly, TPO is directed to delete the E-Infochips Pvt. Ltd., from the list of comparable. Nihilent Ltd. as seen from the description of the services provided in the Annual Report that these services are functionally dis-similar to the services provided by assessee, hence, it is not functionally comparable. Hence, the TPO is directed to delete it. Cybage Software Pvt. Ltd is also into ITES, BPO Services. It is also mentioned that Cybage Software (P) Ltd., is also involved in branding creative production, content marketing, campaign management.Therefore, we are convinced that Cybage Software (P) Ltd., is functionally dis-similar and hence cannot be accepted as comparable. Accordingly, TPO is directed to delete Cybage Software (P) Ltd., from list of comparables. Ninestars Information Technologies Ltd. - We could not specifically observe that Ninestar Information Technologies Private Ltd., is in the business of Software Development Services. Therefore, based on the cryptic information available in the Audit Report, it is not possible to understand actual functions performed by Ninestar Information Technologies Pvt. Ltd. Hence, Ninestar Information Technologies Pvt. Ltd., is held to be functionally not comparable with the assessee. Accordingly, the TPO is directed to delete the comparable. Disallowance u/s 14A - mandation of recording of satisfaction by AO - HELD THAT - As respectfully following Hon ble Jurisdictional High Court in Godrej Boyce Mfg. Co. Ltd 2023 (2) TMI 868 - BOMBAY HIGH COURT ITAT Pune s decision in assessee s own case 2020 (3) TMI 222 - ITAT PUNE since no satisfaction has been recorded by the AO the disallowance u/s14A is not sustainable. Accordingly, the AO is directed to delete the addition made u/s 14A of the Act. Additional claim of deduction u/s 90 by filing a letter before AO which was not claimed in the Return of Income - AO rejected the said claim as it was not claimed in the Return of Income - HELD THAT - We set-aside the issue to the Assessing Officer for de-novo verification. Accordingly, Ground No.10 is allowed for statistical purpose.
Issues Involved:
1. Validity of the Assessment Order. 2. Transfer Pricing Adjustments. 3. Entity Level Profit Level Indicator (PLI). 4. Allocation of Common Costs. 5. Selection of Comparable Companies. 6. Disallowance under Section 14A. 7. Additional Relief under Section 90. 8. Initiation of Penalty Proceedings. Summary of Judgment: Issue 1: Validity of the Assessment Order The assessee argued that the assessment order was invalid as the Assessment Unit did not provide an opportunity for a personal hearing via video conference and did not allow the assessee to file a written submission in response to the Show-cause notice, violating Section 144B of the Income Tax Act, 1961. The Dispute Resolution Panel (DRP) upheld the assessment order, contending no denial of opportunity. The Tribunal did not press this ground, and it was dismissed as not pressed. Issue 2: Transfer Pricing Adjustments The assessee contested the Transfer Pricing (TP) adjustment of INR 27,05,17,208 made by the AU, arguing that the international transaction pertaining to the Provision of Software Development Services was at arm's length. The Tribunal upheld the TP adjustment, rejecting the assessee's economic analysis documented in the TP study report. Issue 3: Entity Level Profit Level Indicator (PLI) The assessee argued for the acceptance of entity-level PLI instead of segmental PLI. The Tribunal rejected this, noting that considering the entity-level PLI would give distorted results due to the significant transactions with non-AE (89.59%). Issue 4: Allocation of Common Costs The Tribunal examined the basis for allocating common costs. The TPO had allocated common costs based on direct costs, rejecting the assessee's method of allocation based on person months (headcount). The Tribunal upheld the TPO's method, agreeing that direct cost was a more appropriate basis for allocation of common costs. Issue 5: Selection of Comparable Companies The assessee challenged the inclusion of certain companies as comparables. The Tribunal directed the TPO to exclude Exilant Technologies Pvt. Ltd., E-Infochips Pvt. Ltd., Nihilent Ltd., Cybage Software Pvt. Ltd., and Ninestar Information Technologies Ltd. from the list of comparables, finding them functionally dissimilar to the assessee's software development services. Issue 6: Disallowance under Section 14A The AO made a disallowance under Section 14A of INR 4,50,70,798. The Tribunal found that the AO did not record satisfaction about the correctness of the assessee's claim regarding expenditure in relation to exempt income. Following the jurisdictional High Court's decision, the Tribunal directed the AO to delete the disallowance under Section 14A. Issue 7: Additional Relief under Section 90 The assessee sought additional relief under Section 90 of INR 48,97,620, which was not claimed in the return of income. The Tribunal set aside the issue to the AO for de-novo verification. Issue 8: Initiation of Penalty Proceedings The assessee contested the initiation of penalty proceedings under Section 274 r.w.s 270A of the Act. The Tribunal did not adjudicate this ground as it was consequential in nature. Conclusion: The appeal was partly allowed. The Tribunal upheld the TP adjustments and the method of allocation of common costs but directed the exclusion of certain comparables and deletion of disallowance under Section 14A. The issue of additional relief under Section 90 was remanded to the AO for verification.
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