2016 (7) TMI 1373 - AT - Income Tax

Tribunal directs exclusion of comparables in transfer pricing appeal, instructs adjustments and correct set-off sequence.

Exevo India Pvt. Ltd., Versus. ITO, Ward 8 (4),

The appeal filed by the assessee was allowed by the Tribunal. The Tribunal directed the Transfer Pricing Officer (TPO) and Assessing Officer (AO) to ... TPA - selection of comparables - Held that:- Assessee is engaged in provision of information technology (IT) enabled services in the nature of survey programming, data collection, data analysis and business research. It is a captive contract service provider rendering IT enabled services to its associated enterprise. The assessee has an approximately 80% of its workforce as graduates for undertaking data collection activities. Further, it also employs MCA’s, BCA’s and diploma holders for undertaking data processing and survey programs. It’s data processing staff comprises only 15% of the personnel of Exevo India. Thus with the above understanding of the nature of services provided by the assessee to its AE’s, companies functionally dissimilar with that of assessee need to be deselected from final lost of comparables. Working capital adjustment - Held that:- While comparing the margins earned by the comparable companies there is always the assessee, the difference on account of working capital employed should also be factored into. In order to improve the reliability of results, the financial data of comparable companies are required to be adjusted. The efforts stated decisions of this tribunal has held that in practice such adjustments usually include adjustments for accounts payable, accounts receivable and inventory. We accordingly allow this ground of appeal raised by the assessee Unabsorbed depreciation adjustment - Held that:- When the assessee has brought forward business losses as well as unabsorbed depreciation, the Act specifies a sequence in which these allowances shall be set off. While computing total income of an assessee, carry forward unabsorbed depreciation can be set off in future years only after setting off the brought forward business losses. Further the provision is clear that carry forward unabsorbed depreciation can be set off not only against income from profits and gains from business and profession, but also against income from any other head including income from other sources. In the present case the assessee has brought forward business losses as well as unobserved depreciation. The act specifies the sequence in which these allowances can be set off. Section 72 (3) implies that, the set off of unobserved depreciation as per section 32 (2) against business income shall be given effect to only after setting off the brought forward business losses. From the calculation made by the Ld.AO, it is observed that the Ld.AO has adjusted the amount of unobserved depreciation from the business income before making adjustment for brought forward business losses. The circular relied upon by the Ld.AR is not applicable to the present case under consideration as it is applicable where the set off each to be made against the profits of a STP/EOU/SEZ unit, before the deduction under section 10 A/10 B of the Income tax Act is allowed. Issues Involved:1. Selection of comparables for determining the Arm's Length Price (ALP).2. Exclusion of certain comparables.3. Inclusion of certain comparables.4. Computation of working capital adjustments.5. Set-off of unabsorbed depreciation and brought forward business losses.6. Initiation of penalty proceedings under section 271(1)(c).7. Charging of interest under section 234B.Detailed Analysis:Selection of Comparables for Determining ALP:The primary issue revolves around the selection of comparables for determining the ALP for the international transactions undertaken by the assessee. The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) had differing views on the comparables to be included.Exclusion of Certain Comparables:1. Accentia Technologies Ltd.:- Assessee's Argument: The company is functionally incompatible as it provides Knowledge Process Outsourcing (KPO) services, which are distinct from the Business Process Outsourcing (BPO) services provided by the assessee.- Tribunal's Decision: The Tribunal found Accentia Technologies Ltd. to be functionally dissimilar due to its involvement in diversified activities and lack of segmental information. Thus, it directed the TPO to exclude this company from the list of comparables.2. Infosys BPO Ltd.:- Assessee's Argument: Infosys BPO provides high-end integrated services with high brand value and goodwill, making it incomparable to the low-end services provided by the assessee.- Tribunal's Decision: The Tribunal, citing functional dissimilarity and following the precedent set by the Delhi High Court in Agnity India Technologies Pvt. Ltd., directed the TPO to exclude Infosys BPO Ltd. from the list of comparables.3. TCS E-Serve Ltd.:- Assessee's Argument: The company provides financial information processing services and has abnormal profits, making it incomparable.- Tribunal's Decision: The Tribunal noted the lack of material change in functionality and financial data from the previous year when this company was excluded. Therefore, it directed the TPO to exclude TCS E-Serve Ltd. from the list of comparables.Inclusion of Certain Comparables:1. CG-VAK Software & Exports Ltd.:- TPO's Reason for Exclusion: The revenue generated under the ITES segment was too low, failing the turnover filter.- Tribunal's Decision: The Tribunal held that turnover is not a decisive factor in the service industry and directed the TPO to include CG-VAK Software & Exports Ltd. as a comparable.2. R Systems International Ltd.:- TPO's Reason for Exclusion: Different financial year ending.- Tribunal's Decision: The Tribunal found that functional comparability should not be disregarded merely due to different financial year endings. It directed the TPO to include R Systems International Ltd. in the final list of comparables.Computation of Working Capital Adjustments:- Assessee's Argument: The DRP's directions for working capital adjustments were not followed by the AO.- Tribunal's Decision: The Tribunal agreed with the assessee, citing various judicial rulings, and directed the AO to make suitable working capital adjustments to improve the reliability of results.Set-off of Unabsorbed Depreciation and Brought Forward Business Losses:- Assessee's Argument: The AO incorrectly adjusted unabsorbed depreciation before brought forward business losses.- Tribunal's Decision: The Tribunal clarified the sequence for set-off as per sections 32(2) and 72(2) of the Act, directing the AO to allow the set-off as per the law.Initiation of Penalty Proceedings under Section 271(1)(c):- Tribunal's Decision: The Tribunal deemed the issue premature and did not provide a ruling on it.Charging of Interest under Section 234B:- Tribunal's Decision: The Tribunal noted this issue as consequential and did not provide a specific ruling.Conclusion:The appeal filed by the assessee was allowed, with the Tribunal directing the TPO/AO to exclude certain comparables, include others, make appropriate working capital adjustments, and correctly apply the set-off sequence for unabsorbed depreciation and brought forward business losses. The issues regarding penalty proceedings and interest under section 234B were deemed premature or consequential.