2020 (12) TMI 724 - AT - Income Tax

Tribunal Adjusts Transfer Pricing, Grants TDS Credit, Disallows Section 14A, and Addresses Other Tax Issues

The Tribunal partly allowed the appeal, directing the reassessment of the transfer pricing adjustment for technical support services by excluding certain ... TP Adjustment - technical support services rendered by appellant to its overseas associated enterprise (''AE') - comparable selection - HELD THAT:- M/s Acropetal Technologies Limited entity is not purely in the field of rendering ITES services. Its segmental results could not be relied upon which is evident from its financial statements. Therefore, it would not be a good comparable for the assessee. We direct for exclusion of this entity. M/s Coral Hub Limited (earlier known as Vishal Information Technologies Limited) entity has outsourced its services to outside vendors as against the fact that the assessee has rendered the services itself. The business model being different, the two entities could not be compared with each other. M/s Cosmic Global Limited excluded on account of functional dissimilarity in assessee’s own case for AY 2008-09 - We find that similar facts exist during the year. No change in the business model of this comparable entity has been shown before us. Therefore, we direct for exclusion of this entity on the ground of functional dissimilarity. Disallowance u/s 14A - assessee earned exempt dividend income and offered suo-moto disallowance in its computation of income - Non recording of satisfaction by AO - HELD THAT:- AO has not faulted with the suo-moto disallowance made by the assessee. The assessee estimated the same @60% of salary of two employees which were stated to be engaged in investment activity. - AO did not demonstrate as to how the said disallowance was inadequate. We find that it was incumbent for Ld. AO to record a satisfaction as to why the disallowance offered by the assessee was not sufficient and this said satisfaction was to be arrived at having regard to assessee’s books of accounts. The recording of the said satisfaction was sine qua non before proceeding to apply Rule 8D. Although there is no particular format or manner in which the satisfaction was to be recorded but at least the same should have been discernible from the order of Ld. AO. We find that there is no discussion whatsoever as to sufficiency or insufficiency of suomoto disallowance offered by the assessee. No fault has been pointed out in assessee’s methodology of arriving at the said disallowance. The application of Rule 8D was not mechanical. Therefore, the additional disallowance as made by Ld. AO in terms of Rule 8D was to be rejected rather the assessee’s suo-moto disallowance was to be accepted. Addition on account of TDS - Assessee claimed TDS credit - HELD THAT:- we find that petty differences have arisen in the account of various deductor. The unreconciled amount varies from as low as ₹ 20/- to as high as ₹ 6,72,400/-. However, as rightly pleaded by Ld. AR, the unreconciled amount could not be treated as unexplained income, keeping in view the fact that the assessee had reflected receipts far in excess of what was shown by the deductor in TDS data. Therefore, we accept the arguments raised by Ld. AR and delete this difference from the income of the assessee. This ground stand allowed. Short Grant of TDS - HELD THAT:- As assessee claimed TDS credit of ₹ 1621.95 Lacs in the computation of income, however, it has been granted credit of only ₹ 1532.97 Lacs. The same being matter of record & reconciliation, we direct Ld. AO to grant due TDS credit to the assessee as per law. This ground stand allowed for statistical purposes. Issues Involved:1. Transfer Pricing Adjustment for Technical Support Service.2. Disallowance under Section 14A read with Rule 8D.3. Addition on account of TDS (CASS-ITS).4. Short Grant of TDS.5. Incorrect Levy of Interest under Section 234B.6. Interest under Section 244A.7. Penalty Proceedings under Section 271(1)(c).Detailed Analysis:A. Transfer Pricing Grounds:1. Transfer Pricing Adjustment for Technical Support Service:- The assessee, engaged in data communication and network systems, contested the transfer pricing adjustment of Rs. 58.31 Lacs made by the AO for AY 2009-10. The adjustment was based on the services rendered to its overseas associated enterprise (AE) and was remunerated at cost plus a 10% markup, with an additional 5% markup offered in the computation of income.- The assessee used the Transactional Net Margin Method (TNMM) with a profit level indicator (PLI) of operating profit/cost (OP/Cost) and benchmarked its margin against 20 comparable entities, showing a mean margin of 7.62%.- The TPO directed the inclusion of additional filters and comparables, resulting in a mean margin of 31.90%. The inclusion of entities like Acropetal Technologies Limited, Coral Hub Limited, and Cosmic Global Limited was contested.- The Tribunal directed the exclusion of Acropetal Technologies Limited due to low employee cost and involvement in software development, Coral Hub Limited due to its outsourcing business model, and Cosmic Global Limited due to functional dissimilarity. The AO/TPO was directed to re-compute the TP adjustment after excluding these entities.B. Corporate Tax Grounds:2. Disallowance under Section 14A read with Rule 8D:- The assessee offered a suo-moto disallowance of Rs. 7.10 Lacs for exempt dividend income. The AO computed an additional disallowance of Rs. 3.55 Lacs under Rule 8D(2)(iii).- The Tribunal found that the AO did not demonstrate the inadequacy of the assessee's disallowance and failed to record satisfaction as required before applying Rule 8D. Therefore, the additional disallowance was deleted, and the assessee's suo-moto disallowance was accepted.3. Addition on account of TDS (CASS-ITS):- The AO added Rs. 16.38 Lacs to the income due to differences between the income reflected in the TDS statement and the sales register.- The Tribunal accepted the assessee's reconciliation efforts, noting that the reported income exceeded the TDS data. The minor unreconciled differences could not be treated as unexplained income, and the addition was deleted.4. Short Grant of TDS:- The assessee claimed TDS credit of Rs. 1621.95 Lacs but was granted only Rs. 1532.97 Lacs.- The Tribunal directed the AO to grant the due TDS credit as per law, allowing this ground for statistical purposes.Other Grounds:5. Incorrect Levy of Interest under Section 234B:- The interest was deemed consequential and mandatory. The AO was directed to recompute the income and levy interest as per law.6. Interest under Section 244A:- The Tribunal directed the AO to grant interest under Section 244A in accordance with law.7. Penalty Proceedings under Section 271(1)(c):- The initiation of penalty proceedings was considered premature.Conclusion:The appeal was partly allowed, with directions to re-compute the TP adjustment and grant the due TDS credit, while other grounds were resolved as per the Tribunal's directives.