2019 (10) TMI 1286 - AT - Income Tax

Tribunal adjusts transfer pricing, allows deductions, and grants correct TDS credit in recent tax appeal decision.

M/s. Arctern Consulting Pvt. Ltd. Versus Deputy Commissioner of Income-tax, Circle – 1 (1) (2), Bengaluru.

The appeal of the assessee was partly allowed. The Tribunal directed the Transfer Pricing Officer to recompute the arm's length price by excluding certain ... TP Adjustment - comparability - HELD THAT:- Companies functionally comparable with ITES only need to be included in final list of comparability. TCS E Service Ltd., should be excluded from the list of comparable companies. Whether foreign exchange fluctuation gain or loss should be considered as part of the operating profit while computing the profit margin of the assessee as well as the comparable companies? - main reason why the DRP considered foreign exchange gain should not be treated as a part of the operating profit was due to the fact that the assessee in the preceding Assessment year did not consider foreign exchange loss as operating in nature - HELD THAT:- We are of the view that the foreign exchange gain has to be treated as part of the operating profit while computing the profit margin of the assessee as well of the comparable companies. The TPO is directed to compute the ALP in the light of the directions given above, after affording opportunity of being heard to the assessee. All other issues arising on account of TP adjustments were not argued and therefore treated as not pressed for adjudication. Deduction u/s.43B - employees’ contribution under the Employees’ State Insurance Act, 1948, on the ground that the same were paid beyond the due date as per the relevant law relating to employees’ state insurance even though the said contributions were remitted on or before the due date for filing return of income under section 139(1) - HELD THAT:- It is not in dispute before us that it has been held in the case of CIT Vs. Spectrum Consultants India (P) Ltd. [2014 (2) TMI 127 - KARNATAKA HIGH COURT] that employees’ contribution if it is paid on or before the due date prescribed under section 139(1) of the Act should be allowed as a deduction. In view of the above, we direct the AO to allow the claim for deduction. Deduction u/s 10A - whether the Revenue authorities were justified in reducing the telecommunication charges from the export turnover without reducing the same from the total turnover while allowing deduction to the assessee? - HELD THAT:- It is not in dispute before us that the Hon’ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd., [2011 (8) TMI 782 - KARNATAKA HIGH COURT] has held that whatever is excluded from the export turnover should also be excluded from the total turnover while computing deduction under section 10AA of the Act. This view of the Hon’ble Karnataka High Court has been upheld in the case of CIT Vs. HCL Technologies Ltd., . [2018 (5) TMI 357 - SUPREME COURT]. We hold that telecommunication charges should be excluded both from the export turnover as well as from the total turnover and deduction under section 10AA computed. Short-grant of credit of taxes deducted at source - HELD THAT:- DRP has in its direction directed the AO to allow credit as per law. In the order giving effect passed by the AO, after the order of the DRP, the AO did not give credit for taxes deducted at source. We are of the view that it would be just appropriate to direct the AO to consider the grievance in this regard and allow credit to TDS in accordance with law. Issues Involved:1. Transfer pricing adjustment (TP adjustment) towards the International transactions of provision of Information Technology Enabled services (ITES).2. Disallowance of deduction claimed under Section 10AA of the Income Tax Act.3. Disallowance of employees' contribution under the Employee State Insurance Act, 1948.4. Short-grant of credit of taxes deducted at source (TDS).Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment:The assessee, a company providing ITES to its Associated Enterprises (AE), received Rs. 13,60,48,189/- for its services. To justify the arm's length price (ALP), the assessee used the Transaction Net Margin Method (TNMM) with an operating profit on total cost (OP/TC) of 14.60%. The Transfer Pricing Officer (TPO) accepted the method but selected additional comparable companies, leading to a TP adjustment of Rs. 1,49,79,297/-, later reduced to Rs. 1,31,74,095/- by the Dispute Resolution Panel (DRP). The Tribunal excluded Infosys BPO Ltd., TCS E-Service Ltd., and BNR Udyog Ltd. from the list of comparables based on functional differences and other factors, directing the TPO to recompute the ALP accordingly.2. Disallowance of Deduction under Section 10AA:The Revenue authorities reduced telecommunication expenses from the export turnover without reducing the same from the total turnover, affecting the deduction under Section 10AA. The Tribunal, referencing the Karnataka High Court's decision in CIT Vs. Tata Elxsi Ltd. and the Supreme Court's ruling in CIT Vs. HCL Technologies Ltd., held that such expenses should be excluded from both export and total turnover. The AO was directed to recompute the deduction accordingly.3. Disallowance of Employees' Contribution:The Revenue disallowed a sum of Rs. 1,19,694/- under Section 43B, being employees' contribution under the Employees' State Insurance Act, 1948, paid beyond the due date. The Tribunal, citing the Karnataka High Court's decision in CIT Vs. Spectrum Consultants India (P) Ltd., directed the AO to allow the deduction as the contributions were remitted before the due date for filing the return under Section 139(1).4. Short-grant of Credit of Taxes Deducted at Source:The assessee raised a grievance regarding the short-grant of TDS credit. The DRP directed the AO to allow credit as per law, but the AO failed to do so in the final order. The Tribunal directed the AO to consider the grievance and allow the TDS credit in accordance with the law.Conclusion:The appeal of the assessee was partly allowed with directions to the AO to recompute the ALP after excluding certain comparables, adjust the deduction under Section 10AA by excluding telecommunication expenses from both export and total turnover, allow the deduction for employees' contribution, and grant the correct TDS credit. The order was pronounced on October 15, 2019.