2013 (6) TMI 708 - AT - Income Tax

Partial appeal success, issues restored for fresh review. Stay application dismissed, became irrelevant post-quantum appeal decision.

M/s. HSBC Electronic Data Processing India Ltd. Versus Addl. Commissioner of Income-tax Circle 2 (2), Hyderabad

The appeal was partly allowed for statistical purposes, with several issues restored to the Assessing Officer for fresh consideration. The stay ... Transfer pricing adjustment - selection of comparables - Held that:- Vishal Information Technologies Ltd. - most of the cost incurred by the company taken as comparable is outsourcing cost, as can be seen from the Annual report placed in the paper-book and ITAT, Mumbai in the case of Maersk Global Service Centre [2011 (11) TMI 465 - ITAT MUMBAI] has analysed and rejected this company as comparable, due to the reason that it has outsourced a considerable portion of its business and it is functionally different. This factor was also approved by the DRP in assessee’s own case in the later year, as can be seen from the copy of the order placed on record, for assessment year 2008-09. In view of this, we direct the Assessing Officer to exclude this company from the list of comparables. Goldstone Infratech Ltd company cannot be considered as a comparable for the purpose of determining the ALP as the business model of the above company is different from that of the assessee. In this case, the foreign exchange revenue is less than 1% of the total turnover. Therefore, it fails the filter provided by the Assessing Officer, on the basis of the foreign exchange earnings. Further, the Revenue from BPO is failing over a period of three years. Datamatic Financial Services Ltd. company fails in this filter adopted by the TPO, we direct the TPO to exclude this company from the list of comparables adopted. Maple e-Solutions Ltd. - Since the DRP in assessee’s own case for assessment year 2007-08 also considered and excluded this company, we uphold the assessee’s objection in this regard and direct the Assessing Officer to exclude this company from the comparables adopted. Nucleus Netsoft & GIS(India) Ltd. company cannot be selected as a comparable not only on the reason of failing employee cost filter, but also due to amalgamation during the year, which has changed the business model of the company. Allowance of depreciation - Held that:- Since this issue was already considered and allowed by the CIT(A) in assessment year 2004-05, this can be considered subject to verification of (1) assessee’s contention that it has provided higher depreciation than what is normally required and (2) the working of average percentage of depreciation of various comparables ultimately selected. As seen from the table placed at page 379A, average was worked out at 8.63% . How this was arrived at could not be verified as many of the comparables have provided higher rate of depreciation than the assessee. Since these amounts could not be verified, the Assessing Officer is directed to examine the claim of depreciation adjustment again and then arrive at the average claim of depreciation of the comparables and then decide afresh whether any adjustment is required. Therefore, to that extent, claim of depreciation adjustment is restored to the file of the Assessing Officer for fresh consideration. Risk adjustment - Held that:- It was submitted that since assessee does not have any marketing activities, a 35% adjustment is warranted for the difference in risks. It also submits that risk adjustment can also be computed under the Capital Asset Pricing Model(CAPM)/ Sharpe Model for risk adjustments. Since the application of the above decisions and facts herein are to be examined vis-à-vis the assessee’s business model, we, without giving any direction with reference to the risk adjustment and amount of risk adjustment required, restore the matter to the file of the Assessing Officer to reexamine this adjustment issue afresh, after considering the assessee’s submissions and decide the issue in accordance with the principles on the subject. Inclusion of reimbursement transactions as part of operational cost - Held that:- Reimbursement costs should be excluded as they do not involve any functions to be performed so as to consider it for profitability purposes. See Four Soft Ltd. V/s. DCIT [2011 (9) TMI 634 - ITAT HYDERABAD] Rejection of turnover of the UK branch operations as export turnover for the purpose of computing deduction u/s. 10A - Held that:- The assessee can raise a new claim before the appellate authority, and since it is a legal claim, which requires no examination of facts, the claim can be entertained.For allowing the deduction under S.10A/10B, other conditions are required to be satisfied, including the questions (a) whether the branch is rendering any BPO services; (b) whether the functions are similar; and (c) whether the incomes can be considered as income of STPI eligible for deduction, and for this purpose, we are of the opinion that the issue has to be considered on merits by the Assessing Officer. Therefore, while allowing this ground on the legal principle, for the purpose of verifying and quantifying the deduction, the matter is restored to the file of the Assessing Officer who should examine and consider deduction afresh in accordance with law, after giving due opportunity of hearing to the assessee Re-characterisation of foreign exchange gains as interest income and thereby reducing the same from the profits of the business while computing deduction under S.10A.- Held that:- Since this issue is no longer res integra and since foreign exchange gain is on account of fluctuations of the foreign exchange received for the services rendered by the assessee, this has to be treated as business income and it has to be considered as profits of the business for computing the deduction under S.10A of the Act. The Assessing Officer is directed to treat accordingly Exclusion of communication charges incurred by the assessee as attributable to the delivery of computer software outside India from the total turnover for the purposes of computing deduction under S.10A - Held that:- We agree in principle with alternate contention that data link charges considered as attributable to delivery of computer software outside India should be excluded from export turnover as well as total turnover while computing the deduction under S.10A. However, out of the data link charges spent by the assessee, how much is for intra and inter office services and how much is for delivery of services outside India has not been examined by the Assessing Officer. Therefore, in the interests of justice, we restore the issue for quantification of determining the communication charges to be excluded to the file of the Assessing Officer, to decide it on factual basis, and accordingly decide whether the communication charges should be excluded or not. In case any amount is to be excluded as attributable to delivery of services outside India, the same should be excluded both from both export and total turnover, while computing deduction under S.10A. Interest under S.234B - Held that:- Levy of interest under S.234B is consequential in nature and the Assessing Officer is bound to follow the provisions of S.234B. Therefore, there is no need to adjudicate on this issue at present. We direct the Assessing Officer to consider the submissions of the assessee before levying interest under S.234B, if warranted. With these observations, this ground is considered rejected. Issues Involved:1. Transfer Pricing Issues (Grounds No.1 to 13)2. Corporate Tax Matters (Grounds No.14 to 18)Transfer Pricing Issues (Grounds No.1 to 13):1. Selection of Comparables:- Vishal Information Technologies Ltd.: The assessee objected to this comparable due to functional differences and low employee cost. The Tribunal agreed, noting that most of the work was outsourced, making it functionally different. The company was excluded from the list of comparables.- Goldstone Infratech Ltd.: The objection was based on foreign exchange earnings and diminishing revenue. The Tribunal found the business model different and excluded the company as it did not meet the foreign exchange revenue filter.- Datamatic Financial Services Ltd.: The assessee argued that related party transactions exceeded 25% of sales. The Tribunal agreed, citing a previous decision that such transactions should be excluded, and directed to exclude this company.- Maple e-Solutions Ltd.: The objection was on the reliability of financial data. The Tribunal upheld the assessee's objection, referencing previous decisions excluding this company, and directed its exclusion.- Nucleus Netsoft & GIS (India) Ltd.: The objection was based on functional differences and employee cost filter. The Tribunal agreed, noting changes due to amalgamation and directed to exclude this company.2. Inclusion of a Comparable:- Gold Stone Technologies Ltd.: The assessee's request to include this company was rejected as it was not originally selected by the assessee in the TP report and lacked sufficient data for verification.3. Depreciation Adjustment:- The assessee sought adjustment for higher depreciation provided in India compared to comparables. The Tribunal directed the Assessing Officer to verify and consider the claim for depreciation adjustment afresh.4. Risk Adjustment:- The assessee argued for risk adjustment due to operating in a limited risk environment. The Tribunal agreed in principle but restored the matter to the Assessing Officer for fresh consideration and quantification.5. Reimbursement Transactions:- The assessee contended that reimbursement transactions should be excluded from operational costs. The Tribunal agreed, directing the exclusion of such costs while working out operating costs.Corporate Tax Matters (Grounds No.14 to 18):1. Claim of Deduction under S.10A for UK Branch Operations:- The assessee claimed deduction for the UK branch's income under S.10A. The Tribunal allowed the legal claim but restored the matter to the Assessing Officer to verify and quantify the deduction afresh.2. Re-characterisation of Foreign Exchange Gains:- The assessee argued that foreign exchange gains should be treated as business income for computing deduction under S.10A. The Tribunal agreed and directed the Assessing Officer to treat the gains as business income.3. Exclusion of Communication Charges:- The assessee contended that communication charges should be excluded from total turnover for computing deduction under S.10A. The Tribunal agreed in principle but restored the issue to the Assessing Officer for quantification.4. Interest under S.234B:- The assessee argued against the levy of interest under S.234B. The Tribunal noted that this issue is consequential and directed the Assessing Officer to consider the assessee's submissions before levying interest.5. Initiation of Penalty Proceedings under S.271(1)(c):- The Tribunal found this issue premature as the proceedings were not yet finalized and treated the ground as academic, rejecting it.Conclusion:The appeal was partly allowed for statistical purposes, with several issues restored to the Assessing Officer for fresh consideration. The stay application was dismissed as it became infructuous following the decision on the quantum appeal.