2019 (5) TMI 1745 - AT - Income Tax

Tribunal revises transfer pricing, excludes comparables, deletes disallowances, and remits issues for fresh review.

M/s. Alcatel-Lucent India Ltd. Versus Addl. CIT, Special Range-1, New Delhi

M/s. Alcatel-Lucent India Ltd. Versus Addl. CIT, Special Range-1, New Delhi - TMI Issues Involved:1. Determination of taxable income and proposed additions.2. Transfer Pricing adjustments and comparability analysis.3. Disallowance of liquidated damages.4. Disallowance of prior period expenditure.5. Disallowance under Section 14A of the Income Tax Act.6. Disallowance of interest expenses under Section 36(1)(iii).7. Disallowance of contribution to labor welfare fund.8. Set off of brought forward business losses.9. Initiation of penalty proceedings under Section 271(1)(c).Issue-wise Detailed Analysis:1. Determination of Taxable Income and Proposed Additions:The appellant contested the determination of taxable income at Rs. 2,52,89,95,210/- against the returned income of Rs. 1,11,54,93,650/-. The appellant argued that the AO erred in making several additions based on conjectures and surmises, ignoring the factual matrix and the nature of transactions undertaken.2. Transfer Pricing Adjustments and Comparability Analysis:The appellant raised multiple grounds challenging the transfer pricing adjustments amounting to Rs. 65,65,05,130/-. The key issues included:- Jurisdictional error in the reference made under Section 92CA(1).- Rejection of the appellant’s economic analysis and fresh comparability analysis by the AO/TPO/DRP.- Inclusion of certain companies as comparables despite failing to qualify the filters.- Non-granting of working capital adjustment.- Rejection of multiple-year data for computing ALP.- Application of inappropriate filters and selection of non-comparable companies.- Cherry-picking of companies and selection of companies earning supernormal profits.- Computational errors in computing operating margins.- Inconsistent approach in providing working capital adjustment.- Non-allowance of risk adjustment.The Tribunal directed the AO/TPO to exclude certain companies from the final set of comparables due to functional dissimilarity and lack of segmental data, including Infosys Ltd, Larson and Toubro (Infotech) Ltd, Mindtree Ltd, Persistent Systems Ltd, Allcargo Logistics Ltd, HSCC (India) Ltd, Mitcon Consultancy and Engineering Services Ltd, Holtec Consulting Private Ltd, Certification Engineering International Ltd, and Acropetal Technologies Ltd. The Tribunal also directed the AO/TPO to re-compute the average margin of the final set of comparables and determine the transfer pricing adjustment accordingly.3. Disallowance of Liquidated Damages:The AO disallowed liquidated damages of Rs. 1,64,00,000/-. The Tribunal remitted the issue back to the AO for fresh consideration, following the approach adopted in the previous assessment year.4. Disallowance of Prior Period Expenditure:The AO disallowed an amount of Rs. 6,17,20,463/- under Section 37(1) on account of prior period expenditure. The Tribunal remitted the issue back to the AO for fresh consideration, consistent with the approach in the previous assessment year.5. Disallowance under Section 14A:The AO disallowed Rs. 28,61,300/- under Rule 8D read with Section 14A. The Tribunal deleted the disallowance, following the Delhi High Court’s decision in Cheminvest Ltd., which held that Section 14A does not apply if no exempt income is received or receivable during the relevant year.6. Disallowance of Interest Expenses under Section 36(1)(iii):The AO disallowed Rs. 44,67,442/- on account of interest expenses. The Tribunal deleted the disallowance, noting that the identical disallowance in the subsequent year was deleted by the DRP, and the loan/advance was only an opening balance during the year.7. Disallowance of Contribution to Labor Welfare Fund:The AO disallowed Rs. 76,446/- on account of late deposit of contribution to the labor welfare fund. The Tribunal remitted the issue back to the AO for fresh consideration, following the approach in the previous assessment year.8. Set Off of Brought Forward Business Losses:The Tribunal restored the issue to the AO for examination and verification of the claim of set off of brought forward business losses.9. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal dismissed the issue as premature since the penalty was not levied in the impugned order.Conclusion:The Tribunal allowed the appeal partly for statistical purposes, directing the AO/TPO to re-compute the transfer pricing adjustments and remitting several issues back to the AO for fresh consideration. The Tribunal also deleted the disallowance under Section 14A and the disallowance of interest expenses under Section 36(1)(iii).