TPO's transfer pricing order under section 92CA(3) ruled time-barred by one day, education cess deduction denied under section 37(1)

ITAT Mumbai held that TPO's order u/s 92CA(3) dated 01.11.2019 was time-barred by one day as limitation expired on 31.10.2019, making the assessee ineligible u/s 144C(15)(b)(i). Regarding education cess deduction u/s 37(1), the tribunal ruled against the assessee, noting Finance Act 2022's retrospective amendment to Section 40(a)(ii) from 01.04.2005 clarifying education cess is included in "tax." On dividend distribution tax under DTAA, the tribunal dismissed the appeal following Total Oil India precedent, upholding the assessing officer's decision on prescribed rates.

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Issues Involved:
1. Validity of Transfer Pricing Order
2. Separate Segmental Margins for IT and BPO Services
3. Determination of Arm's Length Range for IT Services
4. Acceptance of Economic Analysis for IT Services
5. Accept/Reject Criteria for Comparable Companies
6. Rejection of Comparable Companies
7. Adjustments to Arm's Length Margin
8. Benchmarking of Royalty Payments
9. Non-Transfer Pricing Grounds (Education Cess, Dividend Distribution Tax, Tax Credits, Foreign Tax Credit, Book Profit Computation, Interest Levy, Penalty Proceedings)

Issue-Wise Detailed Analysis:

1. Validity of Transfer Pricing Order:
The assessee contested the validity of the Transfer Pricing Officer's (TPO) order dated 01.11.2019, arguing it was time-barred under Section 92CA(3A) of the Income Tax Act. The court referenced the Hon'ble Madras High Court's decision in Pfizer Healthcare India (P) Ltd. vs. JCIT, which held that the TPO's order must be passed before 60 days prior to the date on which the period of limitation expires. Since the TPO's order was passed on 01.11.2019, it was deemed time-barred by one day. Consequently, the draft assessment order incorporating this invalid adjustment was also invalid.

2. Separate Segmental Margins for IT and BPO Services:
The assessee argued against the separate benchmarking of IT and BPO services under the Delivery Centre Agreement (DCA). However, this ground was not discussed in detail as it was rendered academic following the invalidation of the TPO's order.

3. Determination of Arm's Length Range for IT Services:
The TPO determined the arm's length range for IT services to be 20.61% to 24.07%, with a median of 22.34%. This ground was also not discussed in detail due to the academic nature post the invalidation of the TPO's order.

4. Acceptance of Economic Analysis for IT Services:
The assessee's economic analysis for determining the arm's length price for IT services was not accepted by the TPO. This ground was left open and not discussed in detail.

5. Accept/Reject Criteria for Comparable Companies:
The TPO applied various filters for selecting comparable companies, which the assessee argued were arbitrary and inconsistent. This ground was also left open and not discussed in detail.

6. Rejection of Comparable Companies:
The TPO accepted certain companies like Infosys Limited, Larsen & Toubro Infotech Limited, Mindtree Limited, and Persistent Systems as comparables, which the assessee contested. This ground was left open and not discussed in detail.

7. Adjustments to Arm's Length Margin:
The TPO did not allow working capital and risk adjustments to the arm's length margin. This ground was left open and not discussed in detail.

8. Benchmarking of Royalty Payments:
The TPO rejected the assessee's economic analysis using the CUP method for benchmarking royalty payments and instead determined the arm's length price to be 1% of revenues. This ground was left open and not discussed in detail.

9. Non-Transfer Pricing Grounds:
- Education Cess (Grounds 24-26): The assessee claimed a deduction for education cess paid on income tax liability. The court referenced the Finance Act 2022, which retrospectively amended Section 40(a)(ii) to include education cess as tax, thereby disallowing the deduction. These grounds were dismissed.
- Dividend Distribution Tax (Grounds 27-28): The assessee claimed a refund for excess DDT paid, arguing it should be taxed at the rate prescribed under respective Double Tax Avoidance Agreements. This claim was rejected, referencing the ITAT Mumbai's decision in Total Oil India Pvt. Ltd.
- Tax Credits (Grounds 29-33, 35): These grounds were not pressed and hence dismissed.
- Foreign Tax Credit (Ground 33): Not pressed and dismissed.
- Book Profit Computation (Ground 34): The assessee acknowledged no tax impact, rendering this ground academic and dismissed.
- Interest Levy (Ground 36): Not pressed and dismissed.
- Penalty Proceedings (Ground 37): Consequential in nature and dismissed.

Conclusion:
The appeal was partly allowed, primarily on the ground that the TPO's order was time-barred, rendering subsequent proceedings invalid. Other grounds were either dismissed as academic or not pressed. The order was pronounced in the open court on 13.07.2023.

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