Tribunal grants partial relief in transfer pricing case, allows education cess deduction

The Tribunal partially allowed the assessee's appeal by excluding certain comparables in a transfer pricing adjustment case, resulting in partial relief. Additionally, the Tribunal directed the assessing officer to allow the deduction of education cess. The revenue's appeal challenging the benefit of +/- 5% relief and the amended proviso to Section 92(2) for AY 2007-08 was dismissed. The order was pronounced on 11/08/2021.

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Issues Involved:
1. Transfer Pricing Adjustment - Selection/Rejection of Comparables
2. Deduction on Account of Education Cess
3. Applicability of the Amended Proviso to Section 92(2) for AY 2007-08

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment - Selection/Rejection of Comparables
The primary issue in the assessee's appeal was the addition made on account of transfer pricing adjustment, specifically concerning the selection/rejection of comparables. The assessee, a wholly-owned subsidiary of Deutsche Asia Pacific Holdings Pte Ltd, Singapore, engaged in providing data processing and back office support services, had reported revenue of Rs. 112,84,66,814/- from international transactions with its associated enterprises (AE). The assessee used the Transactional Net Margin Method (TNMM) and shortlisted twelve comparables with an arithmetic mean of 14.91%. Since the margin shown by the assessee at 11.20% was within the +/- 5% range, the transaction was considered at arm's length. However, the Transfer Pricing Officer (TPO) rejected seven of the twelve comparables and selected twenty-seven new comparables with an arithmetic mean of 30.67%, leading to an adjustment of Rs. 19,98,46,156/-.

The Tribunal reviewed the comparables and excluded several companies based on various grounds:
- Asit C Mehta: Excluded due to low employee cost and non-availability of segmental data.
- Infosys BPO Ltd: Excluded due to functional dissimilarity and high turnover.
- Apex Knowledge Solutions Pvt Ltd: Excluded for engaging in software development and related technical activities.
- Vishal Information Technologies Ltd: Excluded due to outsourcing activities and low employee cost.
- Wipro Limited (Seg): Excluded due to exceptionally high turnover and brand value.
- eClerx Services Ltd: Excluded for being a KPO service provider with significant outsourcing.
- Moldtek Technologies Ltd: Excluded for functional dissimilarity, abnormal profit margin, and low employee cost.
- Informed Technologies India Ltd: Excluded due to functional dissimilarity and low employee cost.
- Caliber Point Business Solutions Ltd & HCL Comnet Systems Pvt Ltd (Seg): Excluded due to high related party transactions (RPT).
- I Services India Pvt Ltd: Excluded for functional dissimilarity, super normal profit, and non-availability of contemporaneous data.

With the exclusion of these eleven companies, the assessee's margin was within the acceptable range of the arithmetic mean of the remaining comparables. Thus, the Tribunal granted partial relief to the assessee.

2. Deduction on Account of Education Cess
The assessee raised an additional ground seeking deduction on account of Education Cess paid for the assessment year 2007-08. The Tribunal admitted the additional ground, stating it was a purely legal issue that could be decided based on the facts available on record. The Tribunal directed the assessing officer to verify the facts and allow the deduction of education cess, following the decision of the Hon'ble jurisdictional High Court in the case of Sesa Goa Ltd vs ACIT.

3. Applicability of the Amended Proviso to Section 92(2) for AY 2007-08
The revenue's appeal raised grounds challenging the benefit of +/- 5% relief granted to the assessee and the applicability of the amended proviso to Section 92(2) for AY 2007-08. The Tribunal noted that in light of its decision on the assessee's appeal, these grounds had become infructuous. The Tribunal reiterated that the benefit of +/- 5% under section 92C(2) could not be allowed as a standard deduction and dismissed the revenue's appeal.

Conclusion:
The Tribunal partly allowed the assessee's appeal by excluding certain comparables and directed the assessing officer to allow the deduction of education cess. The revenue's appeal was dismissed. The order was pronounced on 11/08/2021.

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