2018 (8) TMI 1205 - AT - Income Tax

ITAT Appeal Allowed: Adjustments, Exclusions Ordered for Consistency with Precedents

The ITAT allowed the appeal of the assessee, directing adjustments and exclusions as per the detailed analysis, emphasizing consistency with previous ... Transfer pricing - assessee applied Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and OP/OC ratio was taken as the Profit Level Indicator (PLI) in the TNMM analysis. The assessee had taken itself as the tested party and the PLI was computed at 19.41%. The assessee chose a set of nine comparables with a PLI of 22.41%. Thus, the assessee considered its international transaction to be at arm’s length. - The TPO drew a final set of nine comparables with an average PLI of 26.24% and proposed an adjustment of ₹ 13,20,31,648/- with respect to Arms’ Length Price (ALP) of the international transactions. Held that:- keeping in view the principle of consistency and also respectfully following the ratio laid down by the Coordinate Bench, we direct the TPO to examine the facts and allow the depreciation adjustment to the assessee In view of the facts being undisputed regarding the assessee not having raised any objection before the Ld. DRP regarding working capital adjustment to be granted to it as well as in view of the settled judicial precedent, we direct the TPO to re-compute the margins without making any negative working capital adjustment. Accordingly, this ground stands allowed. Issue of reimbursements - While agreeing with the contention of the assessee that reimbursements should be excluded from both the assessee’s margins as well as the margins of the comparables, we deem it fit to restore the issue to the TPO/Assessing Officer for examining the claim of the assessee in light of the evidences filed by the assessee along with its application dated 21.1.2016 and submitted to the office of DCIT – TP- 2(3)(1) New Delhi. Thus, this ground stands allowed for statistical purposes. Notional interest being charged on receivables - the adjustment made by the TPO/Ld. DRP on account of interest on receivables is not sustainable in the eyes of law in the case of the assessee as, undisputedly, the taxpayer is a debt free company. Consequently, this ground is also allowed in favour of the assessee. Other issues - Selection of comparable and disallowance u/s 14A r/w Rule 8D. The appeal of the assessee stands allowed Issues Involved:1. Adjustment on account of difference in the rate of depreciation charged by comparables.2. Negative working capital adjustment.3. Inclusion of reimbursements in operating revenue and costs.4. Adjustment for notional interest on receivables.5. Inclusion and exclusion of specific comparables.6. Disallowance under Section 14A of the Income Tax Act.Detailed Analysis:1. Adjustment on Account of Difference in the Rate of Depreciation Charged by Comparables:The assessee argued that depreciation should be adjusted as it charges depreciation at a higher rate compared to its comparables. The ITAT directed the TPO to allow the depreciation adjustment, citing consistency and previous ITAT rulings in similar cases. The ITAT referenced the case of EXLservice.com vs. ACIT, where it was held that if the assessee and comparables use the same depreciation method but different rates, suitable adjustments should be made to the comparables' profits.2. Negative Working Capital Adjustment:The assessee contended that the Ld. DRP granted a working capital adjustment without the assessee raising this issue, leading to a negative adjustment. The ITAT found this issue in favor of the assessee, noting that the Ld. DRP exceeded its jurisdiction by addressing an unraised issue. The ITAT cited the ITAT Hyderabad Bench in Adaptec (India) (P.) Ltd. vs. ACIT, which opined against negative working capital adjustments when the assessee does not carry any working capital risk.3. Inclusion of Reimbursements in Operating Revenue and Costs:The assessee argued that reimbursements from AEs should be excluded from operating revenue and costs as they are pass-through costs. The ITAT agreed, directing the TPO to examine the claim and exclude reimbursements from both the assessee’s and comparables' margins, citing the need for consistency in treatment.4. Adjustment for Notional Interest on Receivables:The assessee challenged the adjustment for notional interest on receivables, arguing it was a debt-free company. The ITAT upheld the assessee's position, referencing its own previous ruling in the assessee’s case for AY 2010-11, where it was held that such adjustments are unsustainable for debt-free companies.5. Inclusion and Exclusion of Specific Comparables:- Eclerx Services Ltd: The ITAT directed its exclusion, noting it was functionally different as it provided KPO services, unlike the assessee's IT enabled services.- Accentia Technologies Limited: Excluded due to its different business profile and lack of segmental data, supported by previous ITAT and Delhi High Court rulings.- TCS E-Serve Ltd: Excluded due to its high scale of operations, brand value, and functional dissimilarity, consistent with previous ITAT decisions.- Acropetal Technologies Ltd: Excluded due to its involvement in high-end healthcare services and lack of segmental data, following previous ITAT rulings.- R Systems International Ltd: Directed to be included despite a different financial year ending, as long as data for the financial year can be reasonably compiled, referencing the Punjab & Haryana High Court in CIT vs. Mercer Consulting (India) (P) Ltd.6. Disallowance under Section 14A of the Income Tax Act:The assessee argued that no expenditure was incurred to earn exempt income and that the AO did not record satisfaction before invoking Section 14A r/w Rule 8D. The ITAT found that the assessee had no borrowings and investments were made in mutual funds with automatic reinvestment of dividends. The ITAT held that the disallowance was unwarranted and directed its deletion, emphasizing the lack of borrowed funds and the absence of effort in earning the dividend income.Conclusion:The ITAT allowed the appeal of the assessee, directing adjustments and exclusions as per the detailed analysis, and emphasizing consistency with previous rulings and judicial precedents. The order was pronounced on 20th August 2018.