2020 (9) TMI 575 - AT - Income Tax

Assessee's Appeal Partly Allowed, Adjustments Ordered for Transfer Pricing

The Tribunal partly allowed the assessee's appeal, dismissing the revenue's appeal. It directed the AO to make adjustments, including exclusion and ... TP Adjustment - Comparable selection - HELD THAT:- Companies functionally with that of assessee need to be deselected from final list. R System International was rejected on the ground that it has different accounting year - If the audit results are available, then the TPO can extrapolate qua the figure to fit into financial year ending in March. Since R Systems is functionally similar to the assessee, we direct the TPO to adjust the audited quarterly figures by extrapolating them in the FY of the assessee and include this company in the final set of compatibles. CG VAK - As assessee stated that this company passes turnover figure as the entity wide turnover of ₹ 594 crores and segments are reported to comply with requirements of AS-17. The learned counsel further pointed out that this company was accepted by the TPO in A.Y 2009–10. We are of the considered view that the TPO should look into the financials of this company once again and decide whether it passes the turnover filter and decide afresh the inclusion or otherwise of this company in the final set of compatibles. Grounds relating to TP adjustments are decided accordingly. Denial of deduction u/s 10A on additional receipts claimed by filing the revised return of income - HELD THAT:- Since the assessee has been allowed deduction under section 10A of the Act by the first appellate authority [against which revenue is in appeal] the assessee is entitled for claim of deduction under section 10A of the Act on additional receipts claimed by filing revised Return of income. We, accordingly, direct the Assessing Officer to allow deduction under section 10A of the Act on additional receipts. Interest income on fixed deposits and miscellaneous income - denied for deduction under section on the ground that such income does not constitute ‘business income’ as envisaged under section 10A - As decided in M/S. HEWLETT PACKARD GLOBAL SOFT LTD. [2017 (11) TMI 205 - KARNATAKA HIGH COURT] we direct the Assessing Officer to allow claim of deduction under section 10A of the Act on interest income. No details of miscellaneous income has been given and, therefore, we are not in a position to examine the nexus with the business income of the assessee. Exclusion of Accentia Technology Pvt Ltd and Infosys BPO Ltd by the ld. CIT(A) - Accentia Technology is concerned, we find that there is an extraordinary event of merger with Accentia Info Serve Pvt. Ltd. Pursuant to this event, effect on overall profit from profitability and turnover cannot be ruled out. This single factor alone is sufficient for exclusion of this company from the final set of comparables and no interference is called for. Infosys BPO we are of the opinion that this company is a giant company in the area of development of software and it assumes all risks leading to higher profit. This company also has substantial intangibles. Claim of deduction under section 10A - TPO completed the TP proceedings treating the assessee under the ITES segment. The Assessing Officer himself has assessed the assessee under the ITES segment and when it came to the claim of deduction under section 10A of the Act the Assessing Officer says that the assessee is merely running a call centre. In Notification No. SO 890E dated 26.09.2000, it has been mentioned that ITES include call centres and, therefore, we do not find any reason why the assessee was denied deduction under section 10A of the Act by the Assessing Officer. However the ld CIT(A) has rightly considered the facts of the case in true perspective and allowed the claim and, therefore, we do not any reason to interfere with the findings of the ld. CIT(A). This ground is accordingly dismissed. Deduction of cess on the ground that the same is not covered under section 40(a)(ii) - HELD THAT:- As relying on SESA GOA LIMITED [2020 (3) TMI 347 - BOMBAY HIGH COURT] we direct for allowing deduction for cess. Accordingly, additional ground is allowed. Issues Involved:1. Transfer Pricing Adjustments2. Deduction under Section 10A of the Income Tax Act3. Inclusion and Exclusion of Comparable Companies4. Interest Income and Miscellaneous Income for Deduction under Section 10A5. Deduction of CessIssue-Wise Detailed Analysis:1. Transfer Pricing Adjustments:The assessee reported international transactions using TNMM with OP/TC as the PLI, arriving at a margin of 21.87%. The Assessing Officer (AO) rejected several comparables used by the assessee and included others, determining an ALP adjustment of Rs. 7,54,39,774/-. The CIT(A) directed the exclusion of Accentia Technology Pvt Ltd and rejected the inclusion of R Systems International Ltd and CG VAK Software Technologies Ltd but accepted Micro Land Ltd. The Tribunal upheld the exclusion of TCS E-Serve Ltd and TCS E-Serve International Ltd due to functional dissimilarity and significant brand value associated with the Tata brand.2. Deduction under Section 10A of the Income Tax Act:The AO denied the assessee's claim under Section 10A, arguing that the business was not eligible. The CIT(A) allowed the claim, and the Tribunal upheld this decision, noting that the AO had inconsistently classified the business under ITES for TP purposes but denied the Section 10A claim on different grounds. The Tribunal directed the AO to allow the deduction on additional receipts claimed by filing a revised return.3. Inclusion and Exclusion of Comparable Companies:The Tribunal directed the exclusion of TCS E-Serve Ltd and TCS E-Serve International Ltd due to their functional dissimilarity and high brand value. It also directed the inclusion of R Systems International Ltd, provided the TPO adjusts the audited quarterly figures to fit the financial year ending in March. For CG VAK Software, the Tribunal directed the TPO to re-examine its financials to determine if it passes the turnover filter.4. Interest Income and Miscellaneous Income for Deduction under Section 10A:The AO denied the deduction of interest income on fixed deposits and miscellaneous income, arguing they did not constitute business income. The Tribunal, referencing decisions from the Delhi High Court and Karnataka High Court, directed the AO to allow the deduction for interest income but denied the deduction for miscellaneous income due to lack of details.5. Deduction of Cess:The Tribunal admitted an additional ground regarding the deduction of cess, referencing a decision from the Bombay High Court, which held that cess is not covered under Section 40(a)(ii) of the Act. The Tribunal directed for the allowance of the deduction for cess.Conclusion:The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The Tribunal directed the AO to make adjustments as per the directions given, including the exclusion and inclusion of certain comparables, allowing deductions under Section 10A for additional receipts and interest income, and allowing the deduction for cess.