2017 (1) TMI 1572 - AT - Income Tax

Tribunal Adjusts ALP & Deductions, Stresses Consistency in Transfer Pricing

The Tribunal partly allowed the appeal, directing re-computation and verification of adjustments. It emphasized consistency in applying methods for ... TPA - identification of comparables - Held that:- Assessee is one of the leading software solution providers, specializing in providing quality and customized IT solutions to several multinational clients in the Banking, Financial Services and Insurance (BFSI) domain, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Exclusion of various companies from the list of comparables by means of turnover filter, functionally different, having extraordinary events like merger/amalgamation as well as earning super profits, 14 companies out of 34 is acceptable for inclusion in the list of comparables for determining the ALP. Based on the above, the TPO is directed to rework the PLI of the above comparables and recomputed the Arms Length Price adjustment if any necessary. Ordered accordingly. Working capital adjustment wrongly worked out - Held that:- Since the assessee’s ground requires to be reconciled at the AO/TPO’s level, the issue is remitted back on the files of the AO/TPO with a direction to verify the veracity of the assessee’s claim and to rectify the same, if it so warrants by the Indian transfer pricing regulations, OECD guidelines, etc. Eligibility for tax holiday - Held that:- TPO/AO has erred by ignoring the fact that the assessee is eligible for tax holiday and there cannot be any plausible intent to shift profits thereby violating the basic intent of introduction of TP provisions. After duly considering the submissions of the assessee, we direct the TPO/AO to give a finding as to whether the assessee is eligible for tax holiday since the order of authorities below is silent on the issue. Accordingly we remit the issue back to the file of the TPO for de novo consideration. Not allowing the 5% benefit under the proviso to section 92C(2) - Held that:- TPO/AO is directed to work out the ALP of the assessee in accordance with the directions given above and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment is required to be made to the reported value of the assessee’s transaction with its AE. Accordingly, we remit the issue for de novo consideration. Deduction u/s 10A - excluded the expenses incurred in foreign exchange only from export turnover and not from the total turnover - Held that:- By relying on the decision in the case of ITO v. Sak Soft [2009 (3) TMI 243 - ITAT MADRAS-D] wherein it was held that parity should be maintained between the numerator and denominator and therefore, expenses excluded from export turnover should also be excluded from total turnover. Just because the Department has preferred an appeal before the Hon’ble High Court, we cannot take a different view against the decision of the Special Bench of the Tribunal in the case of ITO v. Sak Soft Ltd. (supra). Accordingly, we direct the Assessing Officer to reduce the expenses incurred in foreign exchange both from export turnover as well as from total turnover. Failure to exclude the export proceeds not been realized in time, both from export turnover as well as from total turnover - Held that:- As we have reproduced the relevant findings of the Chennai Special Bench decision in the case of ITO v. Sak Soft [2009 (3) TMI 243 - ITAT MADRAS-D] wherein it was held that parity should be maintained between the numerator and denominator and therefore, expenses excluded from export turnover should also be excluded from total turnover. Following the same analogy of the above Special Bench decision, we direct the Assessing Officer to exclude the export proceeds, which have not been realized in time, both from export turnover as well as total turnover. Thus, the ground raised by the assessee is allowed. Disallowance u/s 14A r.w.r. 8D - assessee has argued that Rule 8D is not applicable to the assessment year under consideration - Held that:- Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT), the Hon’ble Mumbai High Court has also held that application of provisions of 14A are 'Constitutionally valid' and provisions of section 14A are still applicable for earlier assessment years and the Assessing Officer is duty bound to determine expenditure by adopting a reasonable basis or method. Therefore, even though the provisions of Rule 8D are not applicable for the assessment year under consideration since they have been introduced w.e.f. 24.03.2008 an estimate of 2% of gross income from investments received may be disallowed towards expenditure for earning such income. Accordingly, we set aside the orders of authorities below on this issue and direct the Assessing Officer to disallow 2% of gross income from investments towards expenditure for earning such income. Issues Involved:1. Adjustment to Arm's Length Price (ALP) for international transactions.2. Re-computation of deductions under section 10A.3. Re-computation of income under the head 'Other Sources'.4. Disallowance under section 14A read with Rule 8D.5. Charging of interest under sections 234B and 234D.6. Initiation of penalty proceedings under section 271(1)(c).7. Exclusion of expenses incurred in foreign exchange from total turnover.8. Exclusion of export proceeds not realized in time from total turnover.Detailed Analysis:1. Adjustment to Arm's Length Price (ALP) for International Transactions:The assessee's transactions with its Associated Enterprises (AEs) were scrutinized, leading to an upward adjustment of Rs. 110,82,70,000/- by the Transfer Pricing Officer (TPO). The TPO rejected the Comparable Uncontrolled Price (CUP) method and adopted the Transactional Net Margin Method (TNMM), arriving at an operating profit margin of 11.47%. The TPO applied various filters to identify comparables, resulting in 28 companies with an average OP margin of 27.96%. The assessee contested the inclusion of certain companies, arguing they were functionally different or had extraordinary events. The Tribunal excluded several companies (e.g., Avani Cimcon Technologies Ltd., Accel Transmatic Ltd., Celestial Labs Ltd., etc.) from the comparables list due to functional dissimilarities or extraordinary financial events like mergers. The Tribunal directed the TPO to rework the Profit Level Indicator (PLI) and recompute the ALP adjustment accordingly.2. Re-computation of Deductions under Section 10A:The Tribunal addressed the issue of excluding expenses incurred in foreign exchange from export turnover but not from total turnover. Citing the ITAT Chennai Special Bench decision in the case of ITO v. Sak Soft Ltd., the Tribunal directed the Assessing Officer to exclude such expenses from both export turnover and total turnover to maintain parity.3. Re-computation of Income under the Head 'Other Sources':This issue was not specifically detailed in the judgment, implying it might have been addressed within the broader context of the ALP adjustments and other computations.4. Disallowance under Section 14A Read with Rule 8D:The Assessing Officer disallowed Rs. 11,09,719/- under section 14A for earning dividend income. The Tribunal noted that Rule 8D is not applicable retrospectively for the assessment year under consideration. Following the decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT, the Tribunal directed the Assessing Officer to disallow 2% of gross income from investments towards expenditure for earning such income.5. Charging of Interest under Sections 234B and 234D:The Tribunal held that the levy of interest under sections 234B and 234D is mandatory and consequential, thus dismissing the grounds challenging these charges.6. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal found the challenge to the initiation of penalty proceedings premature and dismissed this ground.7. Exclusion of Expenses Incurred in Foreign Exchange from Total Turnover:The Tribunal directed the Assessing Officer to exclude expenses incurred in foreign exchange from both export turnover and total turnover, following the ITAT Chennai Special Bench decision in ITO v. Sak Soft Ltd.8. Exclusion of Export Proceeds Not Realized in Time from Total Turnover:The Tribunal directed the Assessing Officer to exclude export proceeds not realized in time from both export turnover and total turnover, maintaining consistency with the principle of parity between numerator and denominator in the computation.Conclusion:The appeal was partly allowed for statistical purposes, with directions for re-computation and verification of various adjustments and exclusions as per the Tribunal's findings. The Tribunal emphasized the need for consistency in applying methods and principles for determining the ALP and other related computations.