2024 (9) TMI 1802 - AT - Income Tax

Exclude comparables above Rs.200 crore, fix interest 5%, delete 14A, Explanation (f) to 115JB(2), remit MAT/LTCG, recalc 234C

ITAT directed the AO/TPO to exclude comparables with turnover exceeding Rs. 200 crore from the benchmarking set after verification, and to remove specific ... TP Adjustment - DRP/TPO/AO rejecting the TP study of the assessee by conducting fresh benchmarking and selecting fresh comparable - whether the companies having turnover exceeding ₹ 200 crores should be excluded while calculating the ALP of the assessee? - HELD THAT:- We direct the TPO/AO to exclude the companies stated above from the list of comparable while calculating the ALP with respect to the international transaction carried out by the assessee if they are having turnover exceeding Rs. 200 crores after necessary verification. Exclusion of the margins with respect to comparable company namely RS Software India Ltd., we find that this Tribunal in the case of In App Information Technologies India Private Limited [2022 (6) TMI 1541 - ITAT COCHIN] has decided the issue in favour of the assessee. M/s Inteq Software Pvt Ltd and M/s Infobeans Technologies Ltd. are functionally different with the assessee company which engaged in software development services. Therefore, the same cannot be included in comparability analysis. M/s Evoke Technologies Pvt Ltd - Set aside the issue to the file of the AO/TPO to reconsider the comparability of the company namely M/s Evoke Technologies Pvt Ltd by taking the data of Indian branch. Computing interest at the rate of 17.45% per annum being SBI PLR on the advances given to the associated enterprises - We note that this Tribunal in the own case of the assessee in the earlier assessment years 2011-12, 2012-13 and 2013-14 has taken the interest at the rate of 5% as benchmark on the loans given to the associated enterprises while calculating the ALP. Thus, we direct the TPO to adopt the interest at the rate of 5% per annum on the amount of loan advanced to the associated parties. Hence, the ground of appeal of the assessee is hereby partly allowed. MAT computation - upward adjustment representing the deferred tax, provision for wealth tax and interest on TDS while calculating the book profit under the provisions of section 115JB - HELD THAT:- We are inclined to hold that the issue on hand needs to be verified at the level of the AO and therefore in the interest of justice and fair play we are restoring the issue to the file of the AO for fresh adjudication as per the provisions of law. Calculation of interest under the provisions of section 234C of the Act on the assessed income instead of return income - DR raised no objection if the direction is given to the AO for the calculation of the interest under section 234C of the Act on the return income. After hearing both the sides and perusal of the materials available on record, we direct the AO to recalculate the interest under section 234C of the Act at the return income as per the law. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes. Exclusion of comparables on account of turnover filter exceeding Rs. 200 crores confirmed. Disallowance u/s 14A - HELD THAT:- Admittedly, the assessee has not claimed any exempted income in the year under consideration. The question arises whether disallowance u/s 14A of the Act can be made in the absence of exempted income earned/claimed by the assessee. This question has been settled by the various Hon’ble High Court including Hon’ble Delhi High Court in the case of Cheminvest Ltd [2015 (9) TMI 238 - DELHI HIGH COURT] that the provision of section 14A of the Act will not apply in the absence of exempted income. Thus, we hold that no disallowance under section 14A of the Act is required to be made in the facts of the present case and accordingly, we direct the AO to delete the addition made by him. Addition made to the book profit in pursuance to explanation (f) to section 115JB(2) - The provision of explanation (f) to section 115JB(2) of the Act mandate to increase the amount of book profit by the amount of expenditure relatable to income which was exempted under section 10, 11 and 12 of the Act. In the present case, it undisputed that the assessee has not earned/claimed income exempted under section 10, 11 and 12 of the Act. Therefore, in our considered opinion, no addition to the book profit is required to be made. Thus, we direct the AO to delete the addition made to the book profit. Hence, the ground of appeal raised by the assessee is hereby allowed. Non grant of long-term capital loss - as argued there was no consideration received by the assessee on the transfer of shares of the subsidiary company due to the liquidation of subsidiary company - HELD THAT:- AR submitted that the matter can be restored to the file of the AO for fresh adjudication as per the provisions of law. DR did not raise any objection if the matter is set aside to the file of the AO for fresh adjudication as per law. After hearing both the sides and perusal of the materials available on record, we are inclined, in the interest of justice and fair play, to give one more opportunity to the assessee to represent its case before the AO. Interest under the provisions of section 234C - Recalculate the interest under section 234C of the Act at the return income as per the law. ISSUES PRESENTED AND CONSIDERED 1. Whether companies with turnover exceeding Rs. 200 crore should be excluded as comparables in benchmarking for determination of arm's length price under Chapter X (transfer pricing) when the assessee is a comparatively smaller entity. 2. Whether certain identified companies (Inteq Software Pvt. Ltd.; Infobeans Technologies Ltd.; Aspire Systems; Nihilent) are functionally comparable to the taxpayer for inclusion as comparables. 3. Whether Evoke Technologies Pvt. Ltd. is a valid comparable where consolidated financials include branch revenue from outside India and branch-level audited figures are available or can be isolated. 4. Whether interest on inter-company/branch advances should be benchmarked at SBI PLR (+ spread) or at an internal comparable rate previously accepted by the Tribunal in the assessee's own earlier years (5% per annum). 5. Whether disallowance under section 14A and consequential adjustment to book profit under Explanation (f) to section 115JB(2) is permissible in the absence of exempt income. 6. Whether the AO's computation of interest under section 234C should be on returned income or assessed income. 7. Whether certain issues (MAT book-profit adjustments, long-term capital loss, non-consideration of submissions under s.143(1)(a), interest under s.234B etc.) require remand to the AO for fresh adjudication. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Exclusion of high-turnover companies as comparables (turnover filter) Legal framework: Selection of comparables governed by Rule 10B(2) and arm's length determination under Chapter X; comparability factors include nature of business, functions, assets, risks and size (turnover) as a relevant criterion. Precedent Treatment: The Tribunal followed decisions favouring application of turnover filter (including a binding coordinate-bench approach and the view in Pentair) and treated contrary precedents as per incuriam or obiter; where two views exist the view favourable to the taxpayer is adopted. Interpretation and reasoning: The Tribunal observed that turnover is a relevant comparability criterion, and earlier Tribunal precedent (Autodesk analysis and follow-up in coordinate-bench authorities) supports rejecting comparables whose turnover is substantially higher (exceeding Rs. 200 crore) than that of the tested party. The Tribunal applied that approach after verification of turnover figures for the relevant years of the comparables. Ratio vs. Obiter: Ratio - turnover can be a valid filter to exclude high-turnover comparables; application of this filter to exclude specific listed companies is part of the operative decision. Obiter - commentary on relative weight of non-jurisdictional High Court obiter dicta. Conclusions: The Tribunal directed exclusion of specified comparables whose turnover exceeded Rs. 200 crore (subject to verification) and ordered recomputation of ALP without those comparables. Issue 2 - Functional dissimilarity of certain comparables (Inteq, Infobeans, Aspire, Nihilent) Legal framework: Rule 10B(2) requires comparability in specific characteristics-functions performed, assets employed, and risks assumed; segmental financials and related party transaction (RPT) intensity affect reliability. Precedent Treatment: Tribunal relied on coordinate-bench decisions (including recent orders excluding Infobeans/Inteq on functional divergence and lack of segmental data) and applied them to find non-comparability. Interpretation and reasoning: The Tribunal examined the business lines of the comparables (diversified activities, absence of segmental data, high RPT percentages, fluctuating margins) and concluded these functional and financial differences render them unsuitable for comparability with a pure software development service provider. Ratio vs. Obiter: Ratio - companies lacking segmental financials or having materially different business models/functions are not comparable. Obiter - references to other Tribunals' findings supportive of exclusion. Conclusions: The Tribunal held that Inteq and Infobeans (and Aspire/Nihilent where facts support non-comparability or high RPT) are functionally dissimilar and directed their exclusion from the comparability set. Issue 3 - Evoke Technologies: treatment of branch audit/consolidation in comparability Legal framework: Comparable selection must use reliable, contemporaneous financials; where consolidated figures include unaudited branch revenue, the Indian branch figures may be isolable and usable. Precedent Treatment: The Tribunal relied on coordinate-bench holdings (ADP and assessee's own earlier years) that directed reconsideration by taking Indian branch revenue only where branch figures are separately reported. Interpretation and reasoning: Where Evoke's annual report separately shows Indian branch revenue, the Tribunal found no justification to reject the company outright; instead, the AO/TPO should consider Indian branch data only or exclude non-audited branch numbers from the benchmark computation. Ratio vs. Obiter: Ratio - a functionally comparable company should not be excluded merely because consolidated accounts include foreign branch figures if the Indian branch data can be isolated and relied upon. Conclusions: The matter was remitted to AO/TPO to reconsider Evoke as a comparable using Indian branch data; inclusion allowed for statistical purposes pending such verification. Issue 4 - Benchmarking interest on advances to AEs/branches (choice of rate) Legal framework: ALP for international loans advances determined by comparables/internal comparables and consistent application of transfer-pricing principles; prior Tribunal decisions in the assessee's own case are binding for similar factual matrix unless distinguished. Precedent Treatment: Tribunal followed its earlier decisions in the taxpayer's own case for AYs 2011-12 to 2013-14 where an internal comparable interest rate of 5% was accepted. Interpretation and reasoning: Given identical factual circumstances and absence of distinguishing features, the Tribunal applied stare decisis (coordinate-bench precedent) and directed adoption of 5% p.a. as the benchmark rate rather than SBI PLR (+ spread). The Revenue did not controvert reliance on the prior acceptances materially distinguishing the years in issue. Ratio vs. Obiter: Ratio - in consistent factual scenarios, earlier Tribunal acceptance of an internal comparable rate is to be followed; application of SBI PLR +3% was set aside for the years under appeal. Conclusions: The TPO/AO was directed to adopt 5% p.a. for interest on advances to associated enterprises/branches (partial allowance of appeal). Issue 5 - Applicability of section 14A and Explanation (f) to section 115JB(2) where no exempt income is earned Legal framework: Section 14A disallows expenditure incurred to earn exempt income; Explanation (f) to s.115JB(2) requires addition to book profit for expenditure relatable to exempt income under sections 10, 11, 12. Precedent Treatment: Tribunal relied on High Court rulings (e.g., Cheminvest) holding that section 14A does not apply where no exempt income was received or receivable in the relevant year. Interpretation and reasoning: As the assessee did not earn or claim any exempt income in the relevant years, the statutory precondition for s.14A disallowance and the Explanation (f) addition to book profit did not arise. The Tribunal held that both the disallowance and the MAT book-profit addition were incorrectly made. Ratio vs. Obiter: Ratio - no s.14A disallowance or Explanation (f) addition to MAT book profit in the absence of exempt income. Conclusions: Deletion of s.14A addition and corresponding deletion of the addition to book profit under s.115JB(2) was directed (ground allowed). Issue 6 - Computation of interest under section 234C on returned income vs assessed income Legal framework: Section 234C penal interest relates to installment defaults on advance tax basis; calculation conventionally applies on returned income when returns and payments are based thereon. Interpretation and reasoning: The Tribunal accepted the assessee's contention that interest under s.234C should be computed on returned income (not assessed income) and found no objection from Revenue. Ratio vs. Obiter: Ratio - AO to recompute s.234C interest on returned income. Conclusions: Directed AO to recalculate s.234C interest on returned income as per law (ground allowed for statistical purposes). Issue 7 - Remandable and statutory-adjacent matters (MAT computation, long-term capital loss, non-consideration of s.143(1)(a) submissions, s.234B consequential interest) Legal framework: Matters requiring factual verification and application of law in first instance (e.g., correctness of MAT computation entries, entitlement to capital loss where no consideration received, consideration of earlier submissions) are fit for remand to AO for fresh adjudication. Interpretation and reasoning: Where factual records or additional adjudicatory steps were necessary, and where Revenue did not oppose remand, the Tribunal set aside those issues to the AO for fresh adjudication to secure fair play and correct determination. Ratio vs. Obiter: Ratio - remand appropriate where factual verification or further opportunity to represent before AO is required; consequential interest under s.234B to be redetermined post outcome. Conclusions: Directed restoration of specified issues to AO for fresh adjudication; consequential interest charges to be revisited in light of outcomes (grounds allowed for statistical purposes/remanded). Overall Disposition The appeals were partly allowed for statistical purposes: comparability adjustments (exclusions/inclusions) directed as above; interest on inter-company loans to be benchmarked at 5% p.a.; s.14A and Explanation (f) additions deleted where no exempt income; s.234C to be recalculated on returned income; several issues remanded to AO for fresh adjudication. Certain grounds were dismissed as not pressed.