Order directs AO/TPO to exclude and FAR-reassess comparables, allows OECD working-capital adjustment, deletes section 14A disallowance

ITAT (Bangalore) directed the AO/TPO to exclude several selected comparables relied on by the revenue and remanded other comparables to the AO/TPO for fresh FAR-based consideration and opportunity of hearing. The Tribunal allowed the assessee's claim for working-capital adjustment in line with OECD principles and remitted determination of the correct adjustment to the AO/TPO. Disallowance under section 14A was deleted because the assessee earned no exempt income during the relevant year, so no 14A disallowance could be sustained.

---

---

Issues Involved:
1. Transfer pricing adjustment.
2. Disallowance under section 14A.
3. Computation of interest under section 234B and 234C.

Summary:

Transfer Pricing Adjustment:
1. The AO/DRP/TPO erred in making a transfer pricing adjustment of INR 18,34,63,116 for ITeS, alleging services were not rendered at arm's length as per sections 92C(1) and 92C(2) of the Act, read with Rule 10B of the Income-tax Rules, 1962.
2. The AO/DRP/TPO erred in arbitrarily selecting comparable companies based on incorrect appreciation of functional, asset, and risk profile, and arbitrary filters. The Tribunal excluded Infosys BPM Ltd., SPI Technologies India Pvt. Ltd., Inteq BPO Services Pvt. Ltd., Manipal Digital Systems Pvt. Ltd., CES Ltd., and Datamatics Financial Services Ltd. from the final list of comparables.
3. The AO/TPO erred in rejecting R Systems International Ltd. (seg) and Interglobe Technologies Pvt. Ltd. The Tribunal remanded the inclusion of these comparables back to the AO/TPO for reconsideration based on FAR analysis.
4. The AO/DRP/TPO erred in rejecting the transfer pricing study of the Appellant and using arbitrary filters for benchmarking the international transaction pertaining to ITeS. The Tribunal directed the AO/TPO to determine the correct working capital adjustment.
5. The AO/DRP/TPO erred in not granting economic/risk adjustments and working capital adjustment. The Tribunal remanded the issue to the AO/TPO for determination.

Disallowance Under Section 14A:
6. The AO/DRP erred in disallowing INR 18,24,975 under section 14A read with amended Rule 8D(2)(ii) of the Income-tax Rules, 1962. The Tribunal noted that there was no exempt income earned by the Appellant during the relevant AY, and thus, no disallowance could be made under section 14A.
7. The AO erred in not recording satisfaction, which is sine qua non for making disallowance under section 14A.
8. The AO/DRP erred in making disallowance without appreciating that no exempt income was earned by the Appellant during the relevant AY.
9. The AO/DRP erred in making disallowance under section 14A without appreciating that the Appellant has not incurred any expenditure in earning the exempt income. The Tribunal directed the deletion of the disallowance under section 14A.

Computation of Interest Under Section 234B and 234C:
10. The AO erred in computing interest under sections 234B and 234C. This ground was noted as consequential and did not require adjudication.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific directions for exclusion and inclusion of certain comparables, remand for reconsideration on specific grounds, and deletion of disallowance under section 14A.

---