2023 (11) TMI 278 - AT - Income Tax

AO directed to correct taxable income computation after transfer pricing adjustment and exclude five incomparable companies from benchmarking

ITAT Mumbai directed AO to correct total taxable income computation from Rs. 218,87,79,755 to Rs. 218,46,93,421 for demand calculation after transfer ... Computation of Income from business or profession - taxable income for computing the total demand payable - overstating the total income of the assessee in the computation sheet forming part of the final assessment order - HELD THAT:- We find that pursuant to the DRP’s direction the total transfer pricing adjustment was reduced to Rs. 12,01,75,576 from the original adjustment of Rs. 12,42,61,908, accordingly the total taxable income as proposed by the AO vide draft assessment order of Rs 218,87,79,753, was reduced to Rs. 218,46,93,421, vide final assessment order. Since while computing the total demand payable by the assessee, the AO has considered the total taxable income of 218,87,79,755, therefore, we direct the AO to consider the correct amount of total taxable income for computing the total demand payable. Accordingly, ground no.2, raised in assessee’s appeal is allowed for statistical purposes. TP adjustment in relation to the provision of IT support and related services (ITeS) segment - Comparable selection - TPO objected to the selection of filter of turnover less than Rs. 1 crore and introduced three new filters - HELD THAT:- Comviva Technologies Ltd company is earning income from various business activities including income from the sale of products/license fees without any operating segment which is functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude Comviva Technologies Ltd while benchmarking the international transaction pertaining to “Provision of IT support and related services”. XS Cad India Private Limited company treats its complete operations as a single segment, i.e. “Information Technology Services”. As noted above, the assessee has made relevant segment reporting in the notes to its financial statements. Since this company is earning revenue from various streams, therefore, in the absence of relevant segmental information, this company cannot be said to be functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude it. Nihilent Ltd. company is engaged in the development of applications across a wide range of hardware and software platforms, develop solutions to integrate various applications across platforms, provide migration, re-engineering, and software maintenance services and as services rendered by the assessee under the ITeS segment are primarily in the nature of database administration and management, operating systems, and network administration, therefore, Nihilent Ltd cannot be said to be functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude it. Infobeans Technologies Ltd. - absence of relevant segmental information, this company cannot be held to be functionally comparable to the assessee. Cygnet Infotech Pvt. Ltd. company has determined its business segment as “Software Development”, which is the only reportable segment and there are no other primary reportable segments. The services rendered by the assessee are in the nature of ITeS and the same cannot be compared with software development. Therefore, we are of the view that in the absence of relevant segmental information, this company cannot be held to be functionally comparable to the assessee. TP adjustment in relation to the provision of facilitation support services (Marketing Support Services) - Comparable selection - HELD THAT:- Axience Consulting Private Ltd. company is in market research and public opinion polling, while the assessee is engaged in providing Marketing Support Services to its associated enterprises. Therefore, we find no infirmity in orders passed by the AO/TPO/learned DRP in treating Axience Consulting Private Ltd to be functionally similar to the assessee. Further, since 100% of the turnover of Axience Consulting Private Ltd is only from one stream, i.e. market research and public opinion polling, therefore we find no merit in the submission of the assessee that no segmental information pertaining to various services rendered by this company is available. Accordingly, we uphold the inclusion of Axience Consulting Private Ltd for benchmarking the international transaction of “Provision of Facilitation Support Services”. MCI Management India Private Ltd. company is also engaged in marketing support services, we are of the view that it is functionally comparable to the assessee. TP Adjustment in relation to the provision of engineering and related services segment - as per TPO aggregation approach followed by the assessee is flawed - SCN asking why the transactions of “Provision of Engineering and related services” be benchmarked separately for FCEC, EEC, and EIC divisions? - HELD THAT:- As it is undisputed that this issue is recurring in nature and the ground raised is similar to that of earlier years. Further, the learned DR could not show us any material to deviate from the conclusion so reached by the coordinate bench in the preceding year. Thus respectfully following the judicial precedent in assessee’s own case ITA No.6098 and 531/Mum./2018 [2019 (6) TMI 1444 - ITAT MUMBAI] we direct the TPO/AO to benchmark the international transaction pertaining to “Provision of Engineering and related services” by adopting an aggregate approach for all three divisions. As a result, ground no. 5 raised in assessee’s appeal is allowed. Disallowance of expenditure u/s 14A r.w.r. 8D - HELD THAT:- As decided in Cheminvest Ltd. v. CIT [2015 (9) TMI 238 - DELHI HIGH COURT] held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Thus disallowance of expenditure under section 14A read with Rule 8D is not sustainable. Also decided in M/s Era infrastructure (India) Ltd, [2022 (7) TMI 1093 - DELHI HIGH COURT] held that the amendment by Finance Act, 2022 in section 14A is prospective and will apply in relation to the assessment year 2022–23 and subsequent assessment years. Thus, even in view of the aforesaid amendment also, the disallowance under section 14A read with Rule 8D is not permissible in the present case. Decided in favour of assessee. Delay in payment of Provident Fund (P.F) u/s 36(1)(va) r/w section 2(24) - HELD THAT:- This issue is covered against the assessee by the decision of Checkmate Services Pvt. Ltd. [2022 (10) TMI 617 - SUPREME COURT] as held that payment towards employee’s contribution to P.F. / E.S.I.C. after the due date prescribed under the relevant statute is not allowable as a deduction under section 36(1)(va) - Accordingly, ground raised in assessee’s appeal is dismissed. Incorrect computation of interest u/s 234C - interest u/s 234C should be computed on the “returned income” or “assessed income”? - HELD THAT:- As per provisions of section 234C interest is levied either on failure to pay the advance tax by the assessee or on shortfall in payment of advance tax as compared to tax due on returned income. Thus, it is pertinent to note that section 234C refers to the term “returned income” in comparison to section 234B which refers to the term “assessed tax” for imposing interest. Accordingly, we direct the AO to compute the interest under section 234C of the Act on the “returned income” of the assessee. Issues Involved:1. General ground.2. Overstating total income in the computation sheet.3. Transfer pricing adjustment for IT support and related services (ITeS) segment.4. Transfer pricing adjustment for facilitation support services (Marketing Support Services).5. Transfer pricing adjustment for engineering and related services segment.6. Disallowance of expenses under Section 14A.7. Disallowance under Section 36(1)(va) for delayed Provident Fund payments.8. Incorrect computation of interest under Section 234B.9. Incorrect computation of interest under Section 234C.10. Initiation of penalty proceedings under Section 270A.Summary:General Ground:Ground no. 1 was deemed general and required no separate adjudication.Overstating Total Income:The AO overstated the total income by Rs. 40,86,334 in the computation sheet, despite relief granted by the DRP. The Tribunal directed the AO to consider the correct total taxable income for computing the total demand payable. Ground no. 2 was allowed for statistical purposes.Transfer Pricing Adjustment - IT Support and Related Services (ITeS):The TPO's inclusion of five comparables (Comviva Technologies Ltd, XS Cad India Private Limited, Nihilent Ltd, Infobeans Technologies Ltd, and Cygnet Infotech Pvt. Ltd) was challenged. The Tribunal found these companies functionally dissimilar due to diversified activities and lack of segmental data. The Tribunal directed their exclusion for benchmarking the international transaction. Ground no. 3 was decided accordingly.Transfer Pricing Adjustment - Facilitation Support Services (Marketing Support Services):The TPO included Axience Consulting Private Ltd and excluded MCI Management India Private Ltd. The Tribunal upheld the inclusion of Axience Consulting but directed the inclusion of MCI Management, noting its functional comparability and previous acceptance as a comparable. Ground no. 4 was decided accordingly.Transfer Pricing Adjustment - Engineering and Related Services:The Tribunal followed the precedent set in earlier years, directing the AO/TPO to benchmark the international transaction by adopting an aggregate approach for all three divisions (FCEC, EEC, and EIC). Ground no. 5 was allowed.Disallowance of Expenses under Section 14A:The Tribunal noted that the assessee did not earn any exempt income during the year. Following judicial precedents, it held that disallowance under Section 14A read with Rule 8D was not sustainable. Ground no. 6 was allowed.Disallowance under Section 36(1)(va):The Tribunal followed the Supreme Court's decision in Checkmate Services Pvt. Ltd. v/s CIT, holding that payments towards employee's contributions to P.F. after the due date are not deductible. Ground no. 7 was dismissed.Incorrect Computation of Interest under Section 234B:The issue was deemed consequential. Ground no. 8 was allowed for statistical purposes.Incorrect Computation of Interest under Section 234C:The Tribunal directed the AO to compute interest under Section 234C based on the 'returned income' of the assessee. Ground no. 9 was allowed for statistical purposes.Initiation of Penalty Proceedings:The Tribunal found the issue premature and dismissed ground no. 10.Conclusion:The appeal was partly allowed for statistical purposes.