2020 (11) TMI 958 - AT - Income Tax

Tribunal Partially Allows Appeal, Remands for Verification, Upholds Turnover Filter, Considers Education Cess as Business Expenditure

The appeal was partly allowed. The Tribunal remanded certain issues for further verification and upheld the application of the turnover filter for ... TP Adjustment - comparable selection - HELD THAT:- Assessee is engaged in the business of development and technical maintenance work in certain intellectual property and knowhow related to certain products and systems thus companies functionally dissimilar with that of assessee need to be deselected . Secondary and higher education cess is deductible as business expenditure under section 37 (1) -Additional ground raised by assessee - HELD THAT:- Nothing is discernible from the record to establish that assessee has raised the claim by way of revised return before Ld.AO. However we are of considered opinion that this is an allowable expenditure and has of assessee’s. Accordingly we remand this issue back to Ld.AO to consider the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly this ground raised by assessee stands allowed for statistical purposes. Issues Involved:1. Validity of the final assessment order.2. Acceptance of the Transfer Pricing (TP) Study.3. Use of data for determining Arm's Length Price (ALP).4. Use of information under section 133(6) of the Act.5. Adjustments for differences in risk profiles.6. Rejection of comparability analysis.7. Inclusion and exclusion of specific comparables in Software Development Services (SWD) and Information Technology Enabled Services (ITeS) segments.8. Application of turnover filter for selection of comparable companies.9. Deduction under section 37(1) for Education Cess and Secondary and Higher Education Cess.Detailed Analysis:1. Validity of the Final Assessment Order:The assessee challenged the final assessment order dated 10/10/2017, asserting it was prejudicial and should be quashed. The Tribunal did not specifically address this issue, implying it was not the primary focus of the appeal.2. Acceptance of the Transfer Pricing (TP) Study:The assessee contended that the Hon'ble DRP erred in upholding the TPO's rejection of the TP study conducted by the assessee. The Tribunal noted that the TPO conducted a fresh economic analysis, rejecting the assessee's TP study and the filters applied.3. Use of Data for Determining Arm's Length Price (ALP):The assessee argued that the DRP erred in upholding the TPO's use of data available at the time of assessment proceedings instead of the data available at the time of preparing the TP documentation. The Tribunal did not provide a specific ruling on this issue.4. Use of Information under Section 133(6) of the Act:The assessee claimed that using information under section 133(6) amounted to choosing secret comparables. The Tribunal did not specifically address this issue.5. Adjustments for Differences in Risk Profiles:The assessee argued that the DRP erred in not making suitable adjustments for differences in risk profiles. The Tribunal did not specifically address this issue.6. Rejection of Comparability Analysis:The assessee contended that the DRP erred in upholding the TPO's rejection of the comparability analysis. The Tribunal did not provide a specific ruling on this issue.7. Inclusion and Exclusion of Specific Comparables:- Inclusion of Akshay Software Technologies Ltd. and Evoke Technologies Pvt. Ltd.: The Tribunal remanded these comparables to the AO/TPO for further analysis to verify functional similarity and availability of segmental details.- Exclusion of CG-VAK Software and Exports Ltd.: The Tribunal directed the exclusion of this comparable, citing functional dissimilarity and lack of segmental data, following precedents.- Exclusion of Larsen and Toubro Infotech Pvt Ltd. and Persistent Systems Ltd.: The Tribunal upheld the exclusion based on the turnover filter.- Exclusion of Capgemini Business Services (India) Ltd., Infosys BPO Ltd., and Harton Communications Ltd.: The Tribunal upheld the exclusion based on the turnover filter.8. Application of Turnover Filter:The Tribunal admitted the additional ground raised by the assessee regarding the application of the turnover filter. It upheld the turnover filter as a relevant criterion for selecting comparables, following precedents and the principle that companies with turnover more than 200 crores cannot be compared with companies having turnover less than 200 crores.9. Deduction under Section 37(1) for Education Cess and Secondary and Higher Education Cess:The Tribunal admitted the additional ground raised by the assessee and remanded the issue back to the AO for consideration. It cited precedents supporting the deduction of 'cess' as a business expenditure under section 37(1).Conclusion:The appeal was partly allowed. The Tribunal remanded certain issues for further verification and upheld the application of the turnover filter for selecting comparables. It also directed the AO to consider the deduction of education cess and secondary and higher education cess as a business expenditure.