Tribunal adjusts comparables, recompute deductions, upholds interest charge

Dy. Commissioner of Income Tax, Circle 11 (3), Bangalore Versus M/s. E4E Business Solutions Pvt. Ltd.,

Dy. Commissioner of Income Tax, Circle 11 (3), Bangalore Versus M/s. E4E Business Solutions Pvt. Ltd., - TMI Issues Involved:
1. Rejection of Transfer Pricing documentation and adjustment to the transfer price.
2. Exclusion of certain companies from the list of comparables.
3. Deduction under Section 10A of the Income Tax Act.
4. Charging of interest under Section 234B of the Income Tax Act.

Detailed Analysis:

1. Rejection of Transfer Pricing Documentation and Adjustment to the Transfer Price:
The assessee filed its return declaring a total income of Rs. 1,42,99,895 for the Assessment Year 2008-09. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of the international transactions. The TPO rejected the assessee's Transfer Pricing (TP) study, which used the Transactional Net Margin Method (TNMM) and selected 13 comparables with an average profit margin of 13.65%. The TPO conducted a fresh search and selected 20 comparables, resulting in an average profit margin of 24.75%. After adjustments, the TPO proposed an adjustment of Rs. 6,40,54,571 to the ALP. The AO completed the assessment, adding the TP adjustment and disallowing excess claims under Section 10A, resulting in a total assessed income of Rs. 8,23,14,946.

2. Exclusion of Certain Companies from the List of Comparables:
The assessee contested the inclusion of certain companies in the TPO's list of comparables, arguing functional dissimilarity. The Tribunal reviewed the comparability of eight companies:

- Accentia Technologies Ltd.: Excluded due to extraordinary events like acquisitions during the relevant year.
- Acropetal Technologies Ltd.: Excluded as it provides high-end engineering design services, not comparable to low-end ITES services.
- Coral Hubs Ltd.: Excluded as it outsources most of its work, unlike the assessee which performs work in-house.
- Crossdomain Solutions Ltd.: Excluded for providing high-end KPO services and development of information systems.
- Eclerx Services Ltd.: Excluded for providing high-end KPO services, data analytics, and operations management.
- Infosys BPO Ltd.: Excluded due to brand value, market leadership, and significant selling and marketing expenses.
- Mold-Tek Technologies Ltd.: Excluded as it provides KPO and engineering services, not comparable to ITES services.
- Wipro BPO Ltd.: Excluded due to brand value, market leadership, and owning substantial intellectual property.

3. Deduction under Section 10A of the Income Tax Act:
The assessee challenged the reduction of telecommunication expenses and travel expenditure from the export turnover while computing the deduction under Section 10A. The Tribunal directed the AO to exclude these expenses from both export turnover and total turnover, following the decision of the Karnataka High Court in Tata Elxsi Ltd. (349 ITR 98).

4. Charging of Interest under Section 234B of the Income Tax Act:
The assessee contested the levy of interest under Section 234B. The Tribunal upheld the AO's action, stating that the charging of interest is consequential and mandatory as per the Supreme Court's decision in Anjum H Ghaswala (252 ITR 1).

Conclusion:
Both the assessee's appeal and the Revenue's cross-appeal were partly allowed. The Tribunal directed the exclusion of certain companies from the list of comparables and ordered the AO to recompute the deduction under Section 10A by excluding specific expenses from both export turnover and total turnover. The charging of interest under Section 234B was upheld.