Tribunal limits transfer pricing adjustment, reduces disallowance, excludes companies.

The Tribunal partly allowed the appeal, directing the exclusion of three contested comparable companies for transfer pricing adjustment and limiting the disallowance under section 14A to Rs. 30,000.

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Issues Involved:
1. Transfer pricing adjustment of Rs. 2.44 crores.
2. Disallowance made under section 14A of the I.T. Act.

Detailed Analysis:

Transfer Pricing Adjustment of Rs. 2.44 Crores:

The assessee, engaged in rendering back-end processing services to Standard Chartered Bank, UK, followed the Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP) of its international transactions, using Operating profit by Operating cost (OP/OC) as the Profit Level Indicator. The assessee received revenue at cost plus a margin of 14% from its Associated Enterprise (AE).

The Transfer Pricing Officer (TPO) selected 13 comparable companies with an average margin of 24%, resulting in a transfer pricing adjustment of Rs. 3.57 crores. The Dispute Resolution Panel (DRP) excluded 2 comparable companies, affirming the remaining 11, reducing the adjustment to Rs. 2.45 crores. The assessee sought the exclusion of three comparable companies: Maple e-Solutions Ltd., Datamatics Financial Services Ltd. (Seg.), and Goldstone Infratech Ltd. (Seg.), citing a previous Tribunal decision in M/s. Deutsche Networking Services Private Limited Vs. DCIT (ITA No. 8972/Mum/2010).

The Tribunal found that the three companies were not good comparables for companies providing back-end processing services. Specifically:

1. Goldstone Infratech Ltd.:

The Tribunal noted that the company's export turnover was substantially less than 25% of its total sales, contradicting the export filter applied by the TPO. Therefore, it should not be considered a comparable.

2. Maple e-Solutions Ltd.:

The Tribunal excluded this company due to the absence of separate segmental data for ITeS and the involvement of its directors in fraudulent activities, rendering its financial results unreliable.

3. Datamatics Financial Services Ltd.:

The Tribunal excluded this company due to significant Related Party Transactions (RPT) exceeding 25%, consistent with the Tribunal's decision in the case of Stream International Services Pvt. Ltd. Vs. ADIT (International Taxation)-7(2), Mumbai [ITA 8997/Mum/2010; dated 11.01.2013].

Following the above observations, the Tribunal directed the exclusion of these three companies from the final list of comparables.

Disallowance Made Under Section 14A of the I.T. Act:

During the year under consideration, the assessee earned exempt dividend income of Rs. 9.88 lakhs but did not make any disallowance under section 14A of the Act. The Assessing Officer applied Rule 8D of the I.T. Rules, disallowing Rs. 4.03 lakhs, which the DRP confirmed.

The Tribunal noted that Rule 8D applies prospectively from A.Y. 2008-09 onwards, as held by the Hon'ble Bombay High Court in Godrej and Boyce Manufacturing Co. Ltd. Vs. DCIT (2017) 394 ITR 449 and upheld by the Hon'ble Supreme Court in CIT Vs. Essar Teleholdings Ltd. (2018) 401 ITR 445. Therefore, applying Rule 8D for A.Y. 2006-07 was incorrect.

However, the Tribunal agreed that some disallowance was necessary since the assessee would have incurred some expenditure to earn the exempt income. Considering the assessee's investment activities, the Tribunal deemed an ad-hoc disallowance of Rs. 30,000/- under section 14A appropriate and directed the Assessing Officer to restrict the disallowance to this amount.

Conclusion:

The appeal filed by the assessee was partly allowed, with the Tribunal directing the exclusion of the three contested comparable companies for transfer pricing adjustment and limiting the disallowance under section 14A to Rs. 30,000/-.

Pronounced in the open court on 25.1.2023.

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