2020 (10) TMI 1354 - AT - Income Tax

Tribunal rules in favor of assessee, dismisses Department's appeal, and Cross Objection as infructuous.

The Tribunal allowed the assessee's appeal for statistical purposes, dismissed the Department's appeal, and dismissed the assessee's Cross Objection as ... TP Adjustment - comparable selection - two comparables viz. R System International and Helios & Matheson Information Technology Limited. have been excluded by the TPO on the ground that these two companies had a different financial year ending - HELD THAT:- It is now a consistent view of the various Hon’ble High Courts as well as of this Tribunal that if a company is otherwise functionally similar, then, it cannot be excluded only on the ground of having a different financial year ending. For this, we agree with the reliance placed by the Ld. Authorized Representative on the order of the Hon’ble Delhi High Court in the case of CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd [2015 (3) TMI 1226 - DELHI HIGH COURT] It is settled law that if the data is available in the public domain which can be compiled and collated so as to arrive at financial results corresponding to the financial year ending of the tested party and where there are no other factors which would otherwise distort the results, then such companies would have to be included in the final set of comparables. From the order of the TPO and the observations of the Ld. DRP no such factors are evident. Therefore, we restore these two comparables to the file of Assessing Officer/TPO for the purpose of including these two comparables after due verification as per law and after giving proper opportunity to the assessee to present its case. Company Sonata Software Limited on the ground that although the TPO had himself applied the related parties transactions filter of 25%, in case of this company, the related party transactions as a percentage of sales was 53.83% - We have gone through the annual accounts of this company and we agree with the contention of the Ld. Authorized Representative that the related party transactions in this company case are more than 50% of sales. Accordingly, this company does not pass the related party filter as applied by the TPO. Accordingly, we direct the TPO to exclude this company from the final set of comparables. Granting of working capital adjustment - Respectfully following the decision of the Coordinate Bench in the case of Goldman Sachs Services Pvt. Ltd. [2020 (2) TMI 347 - ITAT BANGALORE] and after duly noting that working capital adjustment had been allowed to the assessee in assessment year 2007-08, we direct the working capital adjustment to be computed and to be allowed as per actuals after considering exclusions/inclusions of comparables companies in the final set of comparables as discussed herein above Disallowance of expenses of running and maintenance of Motor Cars - HELD THAT:- As in assesee’s own case, for Assessment Year 2008-09 [2016 (2) TMI 1171 - ITAT DELHI] had directed the deletion of this disallowance. Deduction being claimed towards accounting error - HELD THAT:- Accordingly, in view of the order of the ITAT in AY 2008-09 on identical issue [2016 (2) TMI 1171 - ITAT DELHI] we restore this issue to the file of the Assessing Officer with the direction to allow the assessee’s claim if on verification it is found to be correct. Addition as a service tax u/s 43B - submission of the assessee that this amount was actually paid and the Ld. DRP has allowed it on payment basis u/s 43B - HELD THAT:- We agree with the contention of the Ld. Authorized Representative in this regard that the amount was deductible on actually payment basis irrespective of whether the same has been deposited under protest or voluntarily. The Department could not show a cogent reason before us as to why the directions of the Ld. DRP were incorrect in this regard. We not are not agreeable with the contention of the Department that this amount represents contingent liability. Therefore, we find no reason to interfere with the directions of the Ld. DRP in this regard and we uphold the same. Thus, grounds raised by the Department on the issue are dismissed. Issues Involved:1. Transfer Pricing Adjustment2. Inclusion/Exclusion of Comparables3. Working Capital Adjustment4. Disallowance of Motor Car Expenditure5. Deduction for Accounting Error6. Deduction under Section 43B for Service Tax7. Cross Objection by AssesseeIssue-wise Detailed Analysis:1. Transfer Pricing Adjustment:The assessee challenged the Transfer Pricing Adjustment of INR 3,77,75,992/- made by the TPO/AO/DRP. The TPO had proposed an adjustment due to differences in Arm's Length Price (ALP) for Marketing Support Services and Management Consulting Services. The assessee argued that the adjustment was made without following the principle of consistency and disregarded the economic analysis undertaken by the assessee.2. Inclusion/Exclusion of Comparables:The assessee sought the inclusion of R Systems International Limited and Helios & Matheson Information Technology Ltd. as comparables, which were excluded by the TPO on the ground of different financial year endings. The Tribunal agreed with the assessee, citing the Delhi High Court's decision in CIT vs. Mckinsey Knowledge Centre India Pvt. Ltd., and restored these comparables to the TPO for inclusion after verification.The assessee also sought the exclusion of Sonata Software Limited due to high related party transactions (53.83%). The Tribunal directed the TPO to exclude Sonata Software Limited from the final set of comparables, as it did not pass the related party filter applied by the TPO.3. Working Capital Adjustment:The assessee argued for the granting of working capital adjustment, which was denied by the lower authorities. The Tribunal, following the decision in Goldman Sachs Services Pvt. Ltd., directed that working capital adjustment be computed and allowed as per actuals, noting that it had been allowed to the assessee in a previous assessment year.4. Disallowance of Motor Car Expenditure:The assessee contested the ad hoc disallowance of INR 2,24,50,124/- for Motor Car running and maintenance expenses. The Tribunal, following its earlier decisions in the assessee's own case, directed the deletion of this disallowance.5. Deduction for Accounting Error:The assessee claimed a deduction of INR 2,54,53,475/- due to an accounting error. The Tribunal restored this issue to the AO for verification and allowing relief if the claim was found correct, following its earlier decision in the assessee's own case.6. Deduction under Section 43B for Service Tax:The Department's appeal contested the DRP's allowance of a deduction of INR 70 Crores paid as service tax under protest. The Tribunal upheld the DRP's decision, agreeing that the deduction was allowable on a payment basis under Section 43B, and noted that the amount was offered to tax when refunded in AY 2016-17.7. Cross Objection by Assessee:The assessee's Cross Objection, which became academic following the dismissal of the Department's appeal, was dismissed as infructuous.Conclusion:In the final result, the assessee's appeal was allowed for statistical purposes, the Department's appeal was dismissed, and the assessee's Cross Objection was dismissed as infructuous. The Tribunal's order was pronounced on 12/10/2020.