2016 (1) TMI 1259 - AT - Income Tax

Tribunal directs exclusion of companies from comparables list, emphasizes proper justification in transfer pricing adjustments

The Tribunal partially allowed the appeal, directing the exclusion of certain companies from the final list of comparables and remitting various issues ... TPA - deduction u/s 10A computation - Held that:- Any expenditure or the income is to be excluded from the export turnover, then the same has to be reduced from the total turnover as well. Quantum taken by the A.O. towards travel and conveyance expenses is incorrect. A.O. has erred in taking the correct figure from the P & L A/c. As it is an apparent mistake, we deem it fit and proper to remit this issue to the file of the A.O. with a direction to take the correct figure from the P & L A/c of the assessee and consider the same for computation of deduction under section 10A of the I.T. Act. Selection of comparable - Held that:- As assessee is ITES concern so comparable selected should not be functionally different as that of assessee or into different business model. Accentia Technologies Limited, TCS E-Serve International Limited and Cosmic Global Limited need to be excluded. Issues Involved:1. Adjustment of Rs. 23,97,01,758 pertaining to provision of IT-enabled back office services provided to AE in pre and post-acquisition period.2. Errors in transfer pricing adjustments, including aggregation of transactions, rejection of segmented financials, and selection of comparables.3. Exclusion of travel and conveyance expenses from Export Turnover while computing deduction under Section 10A.4. Levy of interest under sections 234A, 234B, and 234D of the Act.Detailed Analysis:1. Adjustment of Rs. 23,97,01,758 Pertaining to Provision of IT-enabled Back Office Services:The Deputy Commissioner of Income Tax, Dispute Resolution Panel (DRP), and Additional Commissioner of Income Tax (Transfer Pricing) (TPO) made an adjustment of Rs. 23,97,01,758 for IT-enabled back office services provided to Associated Enterprises (AE) in both pre and post-acquisition periods. The Tribunal examined whether the aggregation of transactions for pre and post-acquisition periods was justified and if the segmented financials adopted by the appellant were correctly disregarded. The Tribunal also reviewed the economic analysis conducted by the appellant for these periods.2. Errors in Transfer Pricing Adjustments:The Tribunal addressed multiple sub-issues under transfer pricing adjustments:- Aggregation of Transactions: The TPO aggregated international transactions of pre and post-acquisition periods, treating the activities as similar ITES.- Rejection of Segmented Financials: The Tribunal found that the segmented financials adopted by the appellant for pre and post-acquisition periods were disregarded without proper justification.- Selection of Comparables: The Tribunal reviewed the inclusion and exclusion of certain companies as comparables. The appellant challenged the inclusion of Accentia Technologies Ltd., TCS E-Serve International Ltd., Eclerx Services Ltd., and Cosmic Global Ltd. The Tribunal agreed with the appellant's contentions, citing extraordinary events and functional dissimilarities, and directed the exclusion of these companies from the final list of comparables.- Economic Analysis and Tested Party: The Tribunal noted that the appellant's selection of the Associated Enterprises as the 'tested party' was rejected without proper reasoning.- Multiple Year Data and Search Process: The Tribunal found that the rejection of multiple year data and the search process followed by the appellant was not adequately justified.- Depreciation Adjustment and Operating Costs: The Tribunal addressed the issues of not granting depreciation adjustment and considering foreign exchange loss/gain, miscellaneous income, and provision for doubtful debts as operating in nature.3. Exclusion of Travel and Conveyance Expenses from Export Turnover:The Tribunal found that the exclusion of travel and conveyance expenses amounting to Rs. 3,06,20,196 from Export Turnover was incorrect. The Tribunal referred to the decision of the Hon'ble Karnataka High Court in the case of CIT & Another vs. Tata Elxsi Ltd., which held that if any expenditure is excluded from Export Turnover, it must also be reduced from Total Turnover. Consequently, Ground No.4 was allowed, and Ground No.3 was rejected as not pressed.4. Levy of Interest Under Sections 234A, 234B, and 234D:- Section 234A: The appellant contended that the due date for filing the corporate tax return was extended to October 15, 2010, and the return was filed on that date. The Tribunal remitted the issue to the Assessing Officer (A.O.) for verification.- Sections 234B and 234D: The Tribunal found that the relief sought was consequential and remitted the issue to the A.O. for providing consequential relief while giving effect to the Tribunal's order.Conclusion:The Tribunal allowed the appeal partly for statistical purposes, directing the exclusion of certain companies from the final list of comparables and remitting several issues back to the A.O. for verification and re-consideration in accordance with the law. The Tribunal emphasized the need for proper justification and verification of facts in transfer pricing adjustments and the computation of deductions under Section 10A.