2020 (8) TMI 478 - HC - Income Tax

Revenue's Appeal Dismissed, Tribunal Decisions Affirmed. Substantial Questions of Law answered against Revenue.

The Commissioner of Income Tax, Corporate Circle-3 Chennai Versus Visual Graphics Computing Services India Private Limited

The Commissioner of Income Tax, Corporate Circle-3 Chennai Versus Visual Graphics Computing Services India Private Limited - TMI Issues Involved:1. Inclusion of companies with different financial years as comparables.2. Granting risk adjustments on an ad hoc basis.3. Granting working capital adjustment based on previous orders.4. Removal of comparable companies based on higher turnover.5. Applicability of Section 14A read with Rule 8D when no exempt income is earned.Issue-Wise Detailed Analysis:1. Inclusion of Companies with Different Financial Years as Comparables:The Tribunal remanded the matter back to the Assessing Officer, directing to furnish data for the financial year 2009-10 to the TPO, who after verification shall consider the same as comparable to the assessee's case to determine the ALP. This decision was supported by the High Court of Delhi in PCIT Vs. Baxter India Pvt. Ltd., which held that if data from the available financial year can reasonably be extrapolated, the comparable cannot be excluded. The Tribunal's reference to R R Donnelley India Outsource Private Limited Vs. DCIT was deemed sufficient reasoning.2. Granting Risk Adjustments on an Ad Hoc Basis:The Tribunal directed the Assessing Officer to grant a 2% risk adjustment on an ad hoc basis, referencing the decision in M/s.KOB Medical Textiles Pvt. Ltd. The Tribunal noted that the assessee functions under limited risk as a wholly owned subsidiary and captive service provider, unlike the comparable companies which are independent entities. The Tribunal's factual findings were upheld, and no substantial question of law was found to arise from this issue.3. Granting Working Capital Adjustment Based on Previous Orders:The Tribunal remitted the matter back to the Assessing Officer to rework the working capital adjustment, considering the value of advances and deposits recoverable. The Tribunal's approach was based on the assessee's own case for the assessment year 2008-09. The court affirmed this decision, noting that it is a factual issue and no substantial question of law arises.4. Removal of Comparable Companies Based on Higher Turnover:The Tribunal directed the exclusion of Infosys BPO Limited from the list of comparables, referencing the assessee's own case for the assessment year 2008-09 and decisions from various High Courts, including the Karnataka High Court in PCIT Vs. Swiss Re Global Business Solutions India P. Ltd. and the Bombay High Court in CIT vs. M/s.Pentair Water India Pvt. Ltd. The court confirmed the Tribunal's finding, noting that Infosys BPO's turnover was significantly higher than the assessee's, making it an unsuitable comparable.5. Applicability of Section 14A Read with Rule 8D When No Exempt Income is Earned:The Tribunal held that Section 14A cannot be invoked if no exempt income was earned during the relevant assessment year, referencing the decision in CIT Vs. Chettinad Logistics (P) Ltd. The court upheld this finding, noting that the Special Leave Petition filed by the Revenue against this decision was dismissed by the Supreme Court.Conclusion:The appeal filed by the Revenue was dismissed, with Substantial Questions of Law (i), (iii), (iv), and (v) answered against the Revenue. The question regarding risk adjustments (ii) was found to be fully factual, and no substantial question of law arose from it. The court affirmed the Tribunal's decisions on all issues, finding no errors or grounds for interference.