2020 (2) TMI 1642 - AT - Income Tax

ITAT partially allows appeal on transfer pricing, disallowances, deductions, and interest for AY 2014-15

The ITAT partially allowed the appellant's appeal against the Ld. AO/TPO's order concerning transfer pricing analysis, disallowances under sections 14 A ... TP Adjustment - business model of assessee - Comparable selection - functions of assessee was to develop software/providing software services, as was in previous year. Ld.TPO observed that in previous year, assessee chose TNMM as most appropriate method in transfer pricing analysis, whereas for current year, though there is no change in business scenario, and that assessee was providing same kind of services to both AE and non-AE, CUP has been used - HELD THAT:- Admittedly, ongoing through agreements entered into by assessee at page 659 of paper book, it is clear that assessee has 2 segments being AE segment and non-AE segment. Associated enterprises are subsidiaries of assessee, and in order to have the ease of business, associated enterprises enter into contract with 3rd parties for providing services. From these agreements it is clear that assessee bares all risk related to services rendered, whereas subsidiary AE’s only. On the contrary, authorities below assumed that assessee is working on a cost-plus model with associated enterprises and that associated enterprises undertakes all risk related to service provided by assessee. TPO considered assessee to be a contract service provider, assuming minimal risk, which is contrary to the business model of assessee. We agree with contention of Ld.AR that Ld.TPO conducted TP analysis on erroneous understanding of business model of assessee, and comparables selected by Ld.TPO cannot be looked into. Adjustment made by Ld.AO on the proposed adjustment by Ld.TPO should be revisited de novo. Accordingly, we set aside all issues raised by assessee on transfer pricing issues to Ld.AO/TPO. LD.AO/TPO is directed to carry out transfer pricing analysis having regard to the business model of assessee. It is also directed that comparables selected should be functionally similar with assessee, having similar business model like assessee. Assessee is directed to produce all relevant documents to bring out its role in providing services to the parties situated outside India. Ld.TPO is also directed to grand working capital adjustments in comparables in actual where ever necessary, for computing correct margins of comparables. Disallowance u/s 14A - HELD THAT:- As per assessee did not have any exempt income during the year under consideration. Only dividend earned by assessee is from investment in foreign banks, which are subjected to tax. Based upon the submissions by both sides, we direct Ld.AO to call for necessary details for verifying the contentions of assessee, and if found correct to allow the claim as per law. Issues involved:1. Transfer pricing analysis and selection of comparables by the Transfer Pricing Officer (TPO).2. Disallowance under section 14 A and non-granting of deduction under section 10AA of the Act.3. Carry forward and set off of unabsorbed depreciation.4. Interest under sections 234 A/B.Transfer Pricing Analysis:The appellant, a company providing information technology services, challenged the order passed by the Ld. ACIT Circle regarding the transfer pricing analysis for the assessment year 2014-15. The Ld. TPO determined the arm's length price (ALP) of international transactions with associated enterprises using TNMM instead of CUP method. The TPO selected comparables with an average margin of 29.40%, resulting in a proposed adjustment of Rs.41,00,84,082. The appellant argued that the TPO misunderstood its business model and selected inappropriate comparables. The ITAT observed that the TPO's analysis was flawed as it did not consider the actual business model of the appellant. The ITAT directed the TPO to revisit the transfer pricing analysis, considering the appellant's business model and selecting functionally similar comparables.Disallowance under Section 14 A and Section 10AA Deduction:The Ld. AO disallowed Rs.23,90,960 under section 14 A and did not grant a deduction under section 10AA for certain foreign currency expenditures. The DRP upheld the TPO's findings on transfer pricing but excluded ICRA Techno Analytics Ltd. The ITAT directed the Ld. AO to re-verify the submissions of the appellant regarding these issues and to allow the claim if found correct, emphasizing the need for a proper opportunity for the appellant to be heard.Carry Forward of Unabsorbed Depreciation and Interest under Sections 234 A/B:The issues related to the carry forward and set off of unabsorbed depreciation and interest under sections 234 A/B were also raised. The ITAT directed the Ld. AO to verify the submissions of the appellant on these matters and to allow the claim if found valid, ensuring the appellant's right to be heard.In conclusion, the ITAT set aside the appeal to the Ld. AO/TPO partly for statistical purposes, directing a reevaluation of the transfer pricing analysis, verification of disallowances and deductions, and consideration of carry forward and set off of unabsorbed depreciation and interest issues. The order was pronounced on 26th February 2020.