2020 (9) TMI 1 - AT - Income Tax

Tribunal directs Transfer Pricing Officer to recompute arm's length price & consider Section 10A claim

The Tribunal partly allowed the appeal, directing the Transfer Pricing Officer to recompute the arm's length price and consider the alternative claim ... Transfer pricing re-characterisation of business - Comparability of enterprises under TNMM and Rule 10B(2) - Operating income - treatment of foreign exchange fluctuation and sundry balances written back - Comparability adjustment for under utilisation/idle capacity - Deduction under section 10B and alternative claim under section 10A - Interest for deferment of advance tax under section 234C - Consistency of characterization across assessment yearsTransfer pricing re-characterisation of business - Comparability of enterprises under TNMM and Rule 10B(2) - Operating income - treatment of foreign exchange fluctuation and sundry balances written back - Comparability adjustment for under utilisation/idle capacity - Consistency of characterization across assessment years - Whether the TPO/DRP was justified in re characterising the assessee as a KPO, selecting the final set of comparables and excluding certain incomes while computing OP/OC for benchmarking, and whether adjustment on account of idle capacity should be allowed. - HELD THAT: - The Tribunal examined the assessee's factual description of its processes and earlier treatment in adjacent assessment years and concluded that the assessee's activities constituted routine ITES rather than KPO. In view of prior consistent findings by a co ordinate bench of the Tribunal for AY 2010 11 and DRP for AY 2013 14, and absence of material showing any change in facts or adverse higher court ruling, the TPO's re characterisation as KPO was not justified and was set aside (para 43). On the computation of operating margin, the Tribunal held that foreign exchange fluctuation and sundry balances written back are operating items where they arise in the ordinary course of business; accordingly these items must be included in operating income when computing OP/OC (paras 44-45). On selection of comparables, the Tribunal reviewed the functions and available records and directed exclusion of Accentia Technologies Ltd., Eclerx Services Ltd., ICRA Techno Analytics Ltd., Infosys BPO Ltd., and Acropetal Technologies Ltd. (Seg) on grounds of functional dissimilarity, KPO character, significant intangible/brand differences or absence of segmental data; by contrast, TCS E serve Ltd. was retained as a comparable in view of earlier co ordinate bench treatment and lack of material showing that that earlier conclusion had been set aside (paras 46-51). Finally, following earlier co ordinate bench decisions in the assessee's own cases, the Tribunal directed grant of adjustment for idle/under utilised capacity (para 52). The Tribunal accordingly remitted the matter to the AO/TPO to recompute the ALP of international transactions in accordance with these findings and directions (para 53). [Paras 49, 50, 51, 52, 53]TPO's re characterisation to KPO set aside; specified incomes to be treated as operating; listed comparables excluded; TCS E serve retained; adjustment for idle capacity to be allowed; ALP to be recomputed by AO/TPO consistent with these directions.Deduction under section 10B and alternative claim under section 10A - Consistency of characterization across assessment years - Whether deduction claimed under section 10B could be denied and whether the alternate claim under section 10A should be considered by the AO. - HELD THAT: - The Tribunal noted that the identical controversy arose in the assessee's earlier year and that the co ordinate bench had restored the alternate claim under section 10A to the AO for examination, directing that the assessee be afforded an opportunity to justify the claim (para 54 reproduced). Given the identity of issues and following that earlier order, the Tribunal restored the matter to the AO to examine the assessee's claim under section 10A (and to consider any entitlement under law), permitting the assessee to be heard (para 55). The direction is procedural and for fresh consideration by the AO in accordance with law. [Paras 54, 55]Claim under section 10B denied by authorities is set aside for adjudication of the alternate claim under section 10A; matter restored to AO for fresh consideration and opportunity to the assessee.Interest for deferment of advance tax under section 234C - Whether interest under section 234C was to be levied on returned income or assessed income and the correctness of charging such interest. - HELD THAT: - The Tribunal observed that interest under section 234C relates to deferment of advance tax and is to be determined in accordance with law and directions; it directed the AO to charge interest under section 234C in accordance with law (para 56). No detailed re computation was made by the Tribunal; the AO is to apply the correct legal standard when calculating interest after recomputation of income as directed elsewhere in the order. [Paras 56]Interest under section 234C to be charged by the AO in accordance with law.Final Conclusion: Appeal partly allowed. Transfer pricing adjustment vacated in part and remanded to AO/TPO for recomputation consistent with findings (assessee treated as ITES, specified incomes to be treated as operating, certain comparables excluded, TCS E serve retained, idle capacity adjustment to be allowed). The alternate claim under section 10A is restored to the AO for fresh adjudication after affording opportunity to the assessee. Interest under section 234C to be charged in accordance with law. Issues Involved:1. Transfer Pricing Adjustment2. Corporate Tax Addition under Section 10B3. Levying of Interest under Section 234CIssue-wise Detailed Analysis:Transfer Pricing Adjustment:The primary issue in this case revolves around the adjustment of Rs. 5,52,01,139 to the arm's length price (ALP) of international transactions related to Information Technology Enabled Services (ITES) provided by the assessee to its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) re-characterized the assessee's business as Knowledge Processing Outsourcing (KPO) instead of ITES, leading to the selection of different comparable companies and the consequent adjustment.The Tribunal found that the assessee's activities were routine ITES services, involving data processing and communication of vendor details to its AEs. The Tribunal disagreed with the TPO's re-characterization, citing the Delhi High Court's decision in Rampgreen Solutions P. Ltd., which distinguished between KPO and ITES services. The Tribunal also noted consistency in previous assessments where the assessee was characterized as an ITES provider.Regarding the computation of operating margins, the Tribunal directed the TPO to include foreign exchange fluctuation, miscellaneous income, and sundry balances written back as operating income, following precedents such as Fiserv India Pvt. Ltd. and Suessen Asia Pvt. Ltd.The Tribunal excluded certain companies (Accentia Technologies Ltd., Eclerx Services Ltd., ICRA Techno Analytics Ltd., Infosys BPO Ltd., and Acropetal Technologies Ltd.) from the list of comparables due to functional dissimilarity, high brand value, and lack of segmental data. However, it upheld TCS E-Serve Ltd. as a valid comparable, considering the Tribunal's previous decision in the assessee's own case for AY 2010-11.The Tribunal also directed the TPO to grant an adjustment for idle capacity, following its decision in the assessee's case for AY 2009-10.Corporate Tax Addition under Section 10B:The assessee's claim for deduction under Section 10B was denied by the Assessing Officer (AO) on the grounds that the approval was obtained from the Software Technology Park of India (STPI) and not from the Board appointed under Section 14 of the Industrial Development and Regulation Act, 1951. The AO also denied the alternative claim for deduction under Section 10A.The Tribunal restored the matter to the AO for examining the alternative claim under Section 10A, following its decision in the assessee's own case for AY 2010-11. The Tribunal directed the AO to allow the claim after considering the assessee's submissions and in accordance with the law, ensuring adequate opportunity for the assessee to be heard.Levying of Interest under Section 234C:The Tribunal directed the AO to charge interest under Section 234C based on the returned income and not the assessed income, in accordance with the law.Conclusion:The appeal was partly allowed, with directions to the AO/TPO to recompute the ALP and consider the alternative claim under Section 10A, ensuring consistency with previous assessments and judicial precedents. The Tribunal emphasized the importance of uniformity and consistency in tax matters, especially when the facts and circumstances remain identical across different assessment years.