2019 (4) TMI 1361 - AT - Income Tax

Tribunal remands issues for further verification & consideration, directs AO to examine interest income eligibility

The Tribunal remanded various issues back to the Assessing Officer for further verification and consideration. The Tribunal directed the AO to examine if ... Transfer pricing comparability - TNMM and OP/TC as PLI - Exclusion and inclusion of comparables - Use of quarterly results to align differing financial years - Rejection of comparables on low-turnover filter as impermissible - Deduction under section 10A - profits of the undertaking including incidental interest - Disallowance under section 40A(2)(b) - related party/employee remuneration and commercial expediency - Provision for bonus - ascertainment for book profits under section 115JB - Remand for limited factual verificationTransfer pricing comparability - TCS E-Serve Ltd. not comparable - TCS E-Serve Ltd. excluded from the final set of comparables for benchmarking the assessee's margin - HELD THAT: - On examination of the annual report and functions, the Tribunal found that TCS E-Serve Ltd. performs both transaction processing (BPO/ITES) and substantial technical services (software testing, verification and validation) which involve high technical expertise akin to software development. Those technical services are functionally distinct from the assessee's predominantly back office finance/actuarial/operations functions. The absence of segmental disclosure prevents apportionment of income between transaction processing and technical services, and prior authorities indicate Tata/TCS brand/intangible advantages affect profitability. For these reasons the company cannot be treated as a comparable and is directed to be excluded. [Paras 13]Excluded from comparablesTransfer pricing comparability - TCS E-Serve International Ltd. not comparable - TCS E-Serve International Ltd. excluded from the final set of comparables - HELD THAT: - The Tribunal reached the same conclusion as for TCS E-Serve Ltd.: the company provides transaction processing as well as technical services (software testing/verification/validation) that require specialised technical expertise and are functionally different from the assessee's back office support services. Lack of segmental disclosure precludes reliable apportionment; accordingly it is not comparable. [Paras 11, 13]Excluded from comparablesTransfer pricing comparability - Omega Healthcare - remand - Whether Omega Healthcare Ltd. is an available and acceptable comparable is remanded to the TPO for verification - HELD THAT: - The TPO had excluded Omega Healthcare on the stated ground that annual information was not in the public domain. The assessee placed the annual report on record before the Tribunal. Given the narrow reason for earlier exclusion, the Tribunal remanded the matter to the TPO to examine the annual report and decide inclusion/exclusion in the comparability set. [Paras 15]Remanded to TPO for examination of annual reportUse of quarterly results to align differing financial years - Caliber Point Business - remand - Caliber Point Business remanded to the TPO to examine quarterly results and compute proportionate margins if available - HELD THAT: - Caliber Point had been excluded only because it followed a different financial year end. The Tribunal followed precedents that where audited quarterly results for the corresponding period are available, profit margins can be proportionately computed and the company need not be rejected merely for a different year end. The matter is remitted to the TPO to examine quarterly results and, if margins can be computed, to consider inclusion. [Paras 18]Remanded to TPO to examine quarterly results and compute proportionate marginUse of quarterly results to align differing financial years - R Systems International Ltd. (segmental) - conditional acceptance - R Systems International Ltd. to be accepted as comparable subject to computation of proportionate margin from available quarterly/audited data - HELD THAT: - The Tribunal followed precedent that a different accounting year does not preclude comparability if data for the corresponding period (via audited quarterly results) is available. The TPO is directed to examine quarterly/audited results and work out a proportionate profit margin for benchmarking the assessee's PLI. [Paras 21]Accepted subject to TPO computing proportionate margin from quarterly/audited dataRejection of comparables on low-turnover filter as impermissible - Small turnover comparables (Microgenetic, CG VAK, Microgenitics) - inclusion - The three small turnover companies cannot be excluded merely because their turnover is below an arbitrary threshold; they cannot be rejected on that filter - HELD THAT: - The TPO had excluded the three companies solely on the ground that their revenues were below Rs. 5 crore (and in one case on an incorrect employee cost filter). The Tribunal held such a filter amounts to impermissible cherry picking and followed authority that low turnover alone is not a valid ground for exclusion; hence these comparables should not be excluded on that basis. [Paras 24]Cannot be rejected solely on low-turnover filter; to be considered for comparabilityTransfer pricing comparability - Accentia Technologies - non comparability due to functional difference and extraordinary event - Accentia Technologies Pvt. Ltd. held non comparable and excluded - HELD THAT: - Accentia was found to provide healthcare receivables cycle management and high level KPO services with income streams (medical coding, transcription, software products) and significant intangibles; segmental data was lacking. Additionally, an amalgamation/acquisition during the year was an extraordinary event likely to distort margins. On both grounds (functional difference and extraordinary event) the Tribunal upheld its exclusion. [Paras 30]Excluded from comparablesTransfer pricing comparability - I Gate Global Services - non comparability due to software products and extraordinary event - I Gate Global Services Ltd. excluded as non comparable - HELD THAT: - I Gate carried on software product development in addition to ITES and no segmental disclosure existed; an amalgamation during the relevant year was also noted. Given the functional dissimilarity (software development) and the extraordinary event, the Tribunal affirmed exclusion. [Paras 32]Excluded from comparablesTransfer pricing comparability - Infosys BPO - non comparability due to scale and intangibles - Infosys BPO Ltd. excluded from comparability set - HELD THAT: - Infosys BPO operates at a vastly larger scale, services diverse industries, and possesses substantial brand/intangible value and marketing/selling costs that materially affect price negotiation and margins. These differences make it non comparable with the captive assessee; the Tribunal affirmed its exclusion. [Paras 39]Excluded from comparablesDeduction under section 10A - profits of the undertaking including incidental interest - Remand for limited factual verification - Claim that interest on short term fixed deposits is part of profits of the undertaking for deduction under section 10A is remanded to the Assessing Officer for limited verification of facts - HELD THAT: - The Tribunal examined precedents holding that for 100% EOUs/STPI units the computation under subsection (4) of section 10A contemplates inclusion of business profits including incidental interest on temporarily parked funds. Given competing factual findings in earlier years and the assessee's explanation (funds parked pending ECB prepayment, margin money for bank requirements, working capital management), the Tribunal remitted the issue to the AO to verify whether the FDRs were inextricably linked to business (e.g., for bank margins, pending prepayment of ECB) and, if so, allow the deduction under section 10A. The direction is limited to factual verification; if verified, interest must be allowed in computing relief under section 10A. [Paras 42]Remanded to Assessing Officer for verification; partly allowed for statistical purposesReconciliation of interest with TDS certificates - Accrual accounting and deletion of double addition - Addition of difference in interest (Rs. 1,02,261) deleted if already taxed in the year of accrual; AO to verify and delete accordingly - HELD THAT: - The assessee followed accrual accounting and reconciled FDR wise figures, showing the shortfall had been offered to tax in earlier year(s). The Tribunal endorsed the CIT(A)'s direction that if the difference was already offered to tax in the year of accrual, the addition should be deleted. The AO is directed to verify and delete the addition consistent with the earlier remand on section 10A. [Paras 48]Addition to be verified and deleted by AO if already offered to taxDeduction under section 10A - realization of unbilled revenue - Export turnover - six months realization rule - Unbilled revenue and sundry debtors issue remanded to the AO for verification and allowance if realized within six months - HELD THAT: - AO reduced export turnover alleging unbilled revenue and sundry debtors were not realized within six months. The assessee produced FIRC evidencing realization within the stipulated period and claimed the sundry debt did not form part of export turnover. The Tribunal held the CIT(A) should have allowed the exemption; accordingly it remitted the matter to the AO to verify the FIRCs and whether the sundry debt forms part of export turnover and to allow deduction under section 10A if realization within six months is established. [Paras 52]Remanded to AO for verification; grounds treated partly allowedDisallowance under section 40A(2)(b) - related party remuneration - Cost plus reimbursement model and effect on operating profit - Disallowance under section 40A(2)(b) in respect of specified employees deleted - HELD THAT: - The AO disallowed portions of remuneration to three employees on related party grounds. The Tribunal accepted the assessee's position that it operates on a cost plus reimbursement model where employee costs form operating expenditure and any disallowance would reduce the cost base and correspondingly the mark up, producing an illogical distortion; earlier year precedence in favour of the assessee was also noted. On these grounds the Tribunal deleted the disallowance. [Paras 56]Disallowance deletedProvision for bonus - ascertainment for book profits under section 115JB - Remand for factual and evidentiary verification - Addition of provision for bonus to book profits under section 115JB remanded to the Assessing Officer for verification whether the provision was made on a rational/scientific basis - HELD THAT: - AO treated the provision for bonus as an unascertained/contingent liability and added it for book profit computation. The assessee maintained books on mercantile basis and claimed the provision was computed on a reasonable/scientific estimate. The Tribunal recalled settled law that a liability arising in the accounting year and capable of reasonable estimation is deductible; absent detailed workings on record, the Tribunal directed remand to the AO to examine whether the provision was made on a rational basis and if so, to allow it. Decision thus restored to AO for fact finding. [Paras 61]Remanded to Assessing Officer for verification of rational/scientific basis; to be allowed if satisfactorily establishedFinal Conclusion: The assessee's appeal is partly allowed. On transfer pricing, the Tribunal excluded TCS E Serve Ltd. and TCS E Serve International Ltd., excluded Accentia, I Gate and Infosys BPO as non comparables, directed inclusion or further verification in respect of several other comparables (Omega Healthcare; Caliber Point; R Systems; and the small turnover companies) with specific directions to the TPO to examine records/quarterly data. On corporate tax issues, the matter is partly remitted to the Assessing Officer: interest on parked FDRs (section 10A) and unbilled revenue/sundry debtors to be verified for allowance, and the provision for bonus is remitted for verification of its ascertainment; the addition for reconciliation difference shall be deleted if already taxed in the year of accrual; the disallowance under section 40A(2)(b) is deleted. Issues Involved:1. Disallowance of deduction claimed under Section 10A on interest income.2. Reconciliation of interest income with TDS certificates.3. Reduction in deduction claimed under Section 10A due to unbilled revenue and sundry debtors.4. Disallowance under Section 40A(2)(b) for alleged excess payment.5. Disallowance of provision for bonus for computing book profits under Section 115JB.6. Transfer pricing adjustments and inclusion/exclusion of comparables.Detailed Analysis:1. Disallowance of Deduction Claimed Under Section 10A on Interest Income:The assessee challenged the disallowance of Rs. 63,67,249/- under Section 10A on interest income earned from short-term fixed deposits, which was considered by the Assessing Officer (AO) as 'income from other sources'. The AO argued that the interest income was not derived from the business activity of the assessee. However, the assessee contended that the funds were temporarily parked in fixed deposits to mitigate interest costs on external commercial borrowings (ECB) and manage working capital. The Tribunal remanded the issue back to the AO to verify if the fixed deposits were linked to the business activities and if so, allow the deduction under Section 10A.2. Reconciliation of Interest Income with TDS Certificates:The AO noted a discrepancy between the interest income declared by the assessee (Rs. 63,67,249/-) and the amount reflected in TDS certificates (Rs. 64,69,690/-). The assessee explained that the difference arose due to the accrual system of accounting and that the interest income had already been offered to tax in various years. The Tribunal directed the AO to verify the records and delete the addition if the interest income had indeed been offered to tax in the year of accrual.3. Reduction in Deduction Claimed Under Section 10A Due to Unbilled Revenue and Sundry Debtors:The AO reduced the export turnover by Rs. 52,18,911/- alleging that unbilled revenue and sundry debtors were not realized within the stipulated period. The assessee provided Foreign Inward Remittance Certificates (FIRC) evidencing realization within six months. The Tribunal directed the AO to verify these documents and allow the exemption under Section 10A if the amounts were realized within the stipulated period.4. Disallowance Under Section 40A(2)(b) for Alleged Excess Payment:The AO disallowed Rs. 80,72,451/- under Section 40A(2)(b) for alleged excessive payments to related parties. The assessee argued that the payments were for commercial expediency and were part of the operating expenditure under the cost-plus mark-up model. The Tribunal found merit in the assessee's contention and noted that any disallowance would reduce the operating profit, which is contrary to the cost-plus mark-up model. The Tribunal directed the deletion of the disallowance.5. Disallowance of Provision for Bonus for Computing Book Profits Under Section 115JB:The AO added Rs. 3,08,21,090/- to the book profits under Section 115JB, treating the provision for bonus as an unascertained liability. The assessee contended that the provision was made on a scientific basis and was a definite liability. The Tribunal remanded the issue back to the AO to verify if the provision was made on a rational and reasonable basis and to allow it if found to be so.6. Transfer Pricing Adjustments and Inclusion/Exclusion of Comparables:The Tribunal addressed various transfer pricing issues related to the inclusion/exclusion of comparables. The Tribunal excluded TCS E-Serve Ltd. and TCS E-Serve International Ltd. due to functional dissimilarities and the impact of the Tata brand. Omega Healthcare Ltd. was remanded to the AO for verification of its financial data. Caliber Point Business and R Systems International Ltd. were remanded to the AO to examine quarterly results and proportionate profit margins. The Tribunal also directed the inclusion of three comparables (Microgenetic System Ltd., CG-VAK Software & Export Ltd., and Microgenitics Systems Ltd.) that were excluded due to low turnover. The Tribunal upheld the exclusion of Accentia Technology Pvt. Ltd., I-Gate Global Solution Ltd., and Infosys BPO Ltd. due to functional differences and extraordinary events.Conclusion:The Tribunal provided detailed directions on each issue, ensuring that the AO verifies the necessary details and allows deductions and adjustments as per the legal provisions. The decision emphasizes the importance of functional comparability and the need for accurate verification of financial data in transfer pricing cases.