TaxTMI 
TaxTMI 
2023 (7) TMI 1669
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....peal by the assessee. 2. The assessee has raised the following grounds of appeal: 1. The learned Assessing Officer ("the AO") as well as the Dispute Resolution Penal ("the DRP") erred in fact and in law in making upward adjustment of Rs.88,78,438 in determination of Arm's Length Price ("the ALP") in respect of Export of Services. 1.1 The learned AO as well as the DRP erred in fact and in law in considering TNMM as the most appropriate method rejecting the CUP method. 1.2 The learned AO as well as the DRP erred in fact and in law in altering the comparable set of companies and thereby making upward adjustment to the ALP of international transaction in respect of export of services. 1.3 The learned AO as well as the DRP erred in fact and in law in not allowing the benefit of variation of +/- 5% of international transactions as required by proviso to section 92C(2) of the Act. Adjustments made by AO: 2. The learned AO as well as the DRP erred in fact and in law in making an upward adjustment to the book profits u/s. 115JB of the Act by reducing from the book profits the income computed u/s. 10A of the Act, instead of book pr....
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.... services rendered to its AE charged GBP 5 per hour. As per the assessee, the same is at the arm length price in comparison to the charges being GBP 4.60 to 4.80 per hour recovered from the non-AEs for rendering the same services. As such, the assessee, to justify the charges recovered from the AE has adopted the internal cup method. 5.1 However, the AO was not satisfied with the method adopted by the assessee for working out the ALP on the reasoning that the geographical location of the internal comparable was based in African country. Besides, there was a wide gap between the number of service hours rendered to the AE and non-AE. According to the AO, the most appropriate method to determine the ALP of the international transaction is the TNMM. Thus, the TPO selected certain companies as comparable and worked out the average PLI at 33.10 against the PLI of the assessee at 7.90% considering operating profit to operating cost. The TPO /AO finally made an adjustment in upward direction in the draft order for an amount of Rs.1,48,23,848.00 by observing as under: 8.3 Working of adjustment Working of adjustment is worked out as under: Sales 6,37,29,954 Dire....
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....ble companies: (1) Cosmic Global Ltd. (Selected by assessee) (2) Irevna Research Services Ltd. (Selected by TPO) Maple Esolutions Ltd. (Rejected by the assessee). The average Op/Cost of the above three comparable company is 33.98%". 7.4 However, the assessee was not convinced with the comparable selected by the TPO on the reasoning that the comparables selected by it cannot be rejected merely on the reasoning that those were incurring losses. As such, the assessee has applied all the search criteria for the selection of the comparables as adopted by the TPO. 7.5 It was also submitted by the assessee that one of the comparable, namely M/s Datamatic Financial Services Limited, is not incurring losses as alleged by the AO. As such this company has been making a profit for the last 5 years including the year under consideration. The assessee accordingly worked out the PLI of the comparable selected by it Act at 10.49% as detailed below: Calculation of Comparable Margin Rs. In crores Company Name Operating Cost PBT Net of P & E to OC Cosmic Global Ltd. 2.68 16.42% Datamatics Financial Services Ltd. 9.64 4.56% ....
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....t was required to be taken at 8.81%, in view of the arguments given and calculations made in Para 3.27 of the assessee's reply, the PLI of the tested party is required to be taken at 8.81%. The TPO is directed to make the calculation of adjustment, as directed above without allowing the deduction of 5% as per Proviso to Section 92C. 8. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 9. The learned AR before us filed a chart and contended that the comparable being M/s Maple E-Solutions Ltd. should not be considered as it has been alleged that the company was engaged in some fraudulent activity and the management was tainted. It was also submitted that if such a comparable is excluded then there is no need to include the comparable bearing name Eureka Outsourcing Solutions Private Ltd. As such it was pointed out by the learned AR if the above comparables are excluded then the ALP of the assessee is within the range of the companies selected for comparables. 10. On the other hand, the learned DR before us vehemently supported the order of the authorities below. 11. We have heard the rival contentions of both the parties and perused....
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....1.3 Besides the above we note that this company is functionally comparable based of FAR analysis with the business activity of the assessee as it is also engaged in the activity of accounts finalization, tax processing, payroll processing, specialized projects. Furthermore, the receipts of the comparable from ITE services is 2.31 crores out of the total receipts of Rs. 8.25 crores, which is more than 38% of the gross receipts. However, the Ld. DRP rejected the same only on the reasoning that there were no segmental accounts available of the company. Thus, the issue arises whether non-availability of segmental accounts of comparable can be a reason for rejection? Admittedly, in the present case, the significant receipt to the assessee is arising from the ITE services as discussed above, therefore we are of the view that this company can be considered as one of the comparable at entity level even in the absence of segmental data. 11.4 As regards Godrej Infotech Solutions Ltd/Tricom Infotech Solutions Ltd, we note that this company has shown related party transactions more than 25% of its total business volume and therefore we are of the view that this company cannot be taken as co....
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....red as an associate enterprise. Similarly in the provisions of section 40A(2)(b) the persons having substantial interest is described as a person carrying not less than 20% of voting power in that company. Thus it is found that 20% or 26% interest is considered as substantial interest. As the provisions of section 92A(2)(a) are from the transfer pricing chapter itself, a limit of 25% is applied as the threshold limit for the related party transactions. If the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. Hence, keeping in view the entirety of the facts, we order that the decision of the ld. CIT(A) on the issue of RPT cannot be upheld. Accordingly, we direct the exclusion of concerns Accel Transmatic Ltd., Geometric Ltd., R. Systems International Ltd. and Ishir Infotech Ltd. in the software development segment of the appellant and Apollo Health Street Ltd., Caliber P....
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....unsafe to take their results for comparison of the profitability of the assessee ..... Accordingly, it is held that none of these cases can be taken to be comparable case." It was submitted by the learned Authorised Representative for the assessee that since the above decision of the Delhi Bench of the Tribunal was delivered subsequent to the impugned order of the DRP, it could not have been relied upon by the assessee before the DRP .. 19. We have considered the submissions of the assessee in relation to these two companies. In view of the aforesaid order of the Delhi Bench of the Tribunal cited above, wherein the comparability of these very same companies was examined, was agree with the contentions of the assessee and hold, that these two companies cannot be accepted as comparables." 36. Also see the decision of Pune Bench of ITAT in the case of Cummins Turbo Technologies Ltd., UK v. DDIT in ITA No. 161 & 269/PN/2013 for AY 2007-08 vide order dated 29-9-2014 (para 11 to 15 of the order) and Cognizant Technology Services Pvt. Ltd. v. ACIT 151 ITD 191 (Hyd) for AY 2007-08 (para 25 to 27) wherein this company was rejected for similar reasons. 37.....
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....fit that will be the amount of profit under section 10A of the Act without considering the provision of section 28 to 44 of the Income Tax Act i.e. Rs. 44,58,003/- only. The assessee also submits that the amount of deduction claimed under section 10A of the Act stands as Rs. 9,93,344/- as evident from form No. 56G in accordance with the normal provisions of the Income Tax Act. i.e. after considering the provisions of section 28 to 44 of the Act. The AO, however, rejected the claim of the assessee by observing that the deduction of profit u/s 10A of the Act for calculating the book profit u/s 115JB of the Act would be after considering the provisions of section 28 to 44 of Income Tax Act i.e. Rs. 9,93,344/- only. The AO, therefore, in the draft order proposed to disallow the excess claim of Rs. 34,64,659/- by adding to the book profit u/s 115JB of the Act. 21.1 The assessee being aggrieved by the draft order filed the objection before the LD. DRP and submits that the AO has reduced the income determined u/s 10A under the normal provisions of the Act whereas to compute the book profit u/s 115JB of the Act, the income eligible for deduction u/s 10A would be reduced. 21.2 However....
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....he principles laid down by the Hon'ble Supreme Court in the case of Bhari Information Tech. Sys. (P.) Ltd (supra) while working out deduction under section 80HHC are equally applicable to the provisions of section 10B while working out deduction under section 115JB, respectfully following the same and decisions of Coordinate Benches above, we uphold assessee's contentions. Accordingly, AO is directed to rework out the computation under section 115JB keeping in view the above principles. Assessee's ground is allowed. 26.1 It is important to note that the judgment of Hon'ble Bombay High Court given in the case of CIT vs. Ajanta Pharma Limited reported in 223 CTR 441 has been referred by the authorities below but the same has been reversed by the Hon'ble Apex Court reported in 194 Taxman 358 SC wherein it was held as under: 10. One of the contentions raised on behalf of the Department was that if clause (iv) of Explanation to section 115JB is read in entirety including the last line thereof (which reads as "subject to the conditions specified in that section"), it becomes clear that the amount of profits eligible for deduction under section 80HHC, compu....
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.... Ld. AO erred in not considering the direction of the Ld. DRP to allow the deduction of disallowance of Rs. 12,62,697/- u/s 40(a)(ia) of the Act in computing the deduction u/s 10A of the Act. 28. The assessee in the year under consideration has claimed the expenses of Rs. 12,92,697/- under the head accounting charges. The assessee has not deducted the TDS on the said amount on the reasoning that the payment of accounting charges is not covered under the provisions of section 194C of the Act. However, the AO on the other hand opined that the payment of accounting charges is covered under section 194] of the Act being professional services. The AO, therefore, on account of non-deduction of TDS proposed to disallow the sum of Rs. 12,92,697/- u/s 40(a)(ia) of the Act in the draft the assessment order and added to the total income of the assessee. 28.1 The assessee, being aggrieved with the draft order filed the objection before the LD. DRP and submits the list of persons containing S. Nos. 1 to 15 to whom the accounting charges were paid. The assessee contended that out of 15 people, the persons specified at S. Nos. 11, 14 and 15 to whom the payments in aggregate of Rs. 30,000/- ....
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....disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance". 32.1 Further, the Hon'ble Karnataka in the case of CIT Vs M/s M. Pact Technology Services Pvt. Ltd. in ITA No. 228/2013 vide order dated 11.7.2018 had to deal with admissibility of the following substantial question of law in an appeal by the Revenue u/s 260A of the Act: "5. Whether the Tribunal is correct in law in not adjudicating the main issue of applicability of provisions of section 40(a)(ia) in respect of disallowance of sub-contracting chares of RS.16,21,851/- made by assessing authority on the ground that the assessee had failed to deduct tax at source under section 194C of I.T. Act? 6. Whether the Tribunal is justified in law in directing the assessing authority to allow deduction under section 10A in respect of amount disallowed under section 40(a)(ia) without appreciating the fact that....
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....Income-tax Officer-Ward 5[1] vs. Keval Construction, Tax Appeal No.443 of 2012, December 10 2012, Gujarat High Court [b] Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambharnath Tiwari, IT Appeal No.2 of 2011, September 11 2015, Bombay High Court [ii] If deduction under section 40A[3] of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction under section 80-IB of the Act." 32.3 Applying the same analogy, it can be held that if deduction u/s 40[a][ia] of the Act is not allowed, the same would have been to be added to the profits of the undertaking on which the Assessee would be entitled for deduction u/s 10A of the Act. This view is fortified by the decision of Bombay High Court in the case of `Commissioner of Income Tax v. Gem Plus Jewellery India Ltd.,' [2011] 330 ITR 175 [Bom], wherein it is held as under: "13. By reason of the judgment of the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Limited [2009] 319 ITR 306 the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The....
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....l of the assessee is partly allowed. Coming to ITA 1285/Ahd/2012, for A.Y. 2007-08, an appeal by the assessee. 33. The assessee has raised the following grounds of appeal: 1. The learned CIT(A) erred in fact and law in confirming action of Transfer Pricing Officer I, Ahmedabad ("the TPO") and the learned Deputy Commissioner of the Income Tax, Circle 1(1), Baroda("the AO") in making adjustment of Rs. 85.52,242/- in the Arm's Length Price ("ALP") of International transaction in respect of Export of Services. 2. The learned CIT (A) erred in fact and in law in rejecting the search process for selection of comparables and FAR analysis done by the Appellant Company. 3. The learned CIT (A) erred in fact and in law in applying new filters/ modifying filters for selecting comparable companies. 4. The learned CIT (A) erred in fact and in law in stating that the Appellant has not raised any objection against the quantitative filters used for carrying out fresh search. 5. The learned CIT (A) erred in fact and in law in law stating that the Appellant has accepted the comparables selected by TPO in fresh search process. 6 Without pr....
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.... was pleased to partly allow the ground of appeal of the assessee. 37. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 38. The learned AR before us submitted a chart raising the arguments that certain comparables should be excluded while calculating the ALP of the assessee. In the case of BNR Udhyog Ltd., it has significant transactions with the related parties and therefore the same should not be considered as comparable. Likewise, the comparables namely Coral Hub Ltd., Informed Technogies India Ltd. and ASIT C. Mehta financial services Ltd are engaging in different activity and therefore the same should not be considered as comparables. It was also submitted that Maple E-Solutions is the one which is involved in fraudulent activity and the management is tainted. Therefore, for these reasons, the above comparables cannot be considered as comparable to the assessee. 39. On the other hand, the learned DR before us vehemently supported the order of the authorities below. 40. We have heard the rival contentions of both the parties and perused the materials available on record. In the present case the issue primarily revolves around the....
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.... of 25% RPT in the case of comparables was essential. We take into account, the RPT and find it correct to exclude certain comparables by applying a broad ballpark threshold of taken into account, the functioning and profits of comparable entities who is unrelated transactions were in excess of 75% of the business. Nil percentage criteria would result in selection of very few companies which may not give sufficient base for comparable. If the related party transactions do not have material effect on the overall profit margins then still that company can be considered as a comparable. The Act does not provide directly as to what percentage of related party transactions can have material effect on the overall margins. But however guidance can be taken from definition of the Associated Enterprise from section 92A(2) (e) where in it is prescribed that one enterprise holding 26% shares in the other enterprise can be considered as an associate enterprise. Similarly in the provisions of section 40A(2)(b) the persons having substantial interest is described as a person carrying not less than 20% of voting power in that company. Thus it is found that 20% or 26% interest is considered as sub....
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....tative in a tabular form submitted the vendor payment charges as a percentage of sales and also the personal cost as a percentage of sales for the preceding three years to demonstrate the aforesaid fact. It was submitted that the company should be rejected as comparable as it has incurred 2.3 per cent. of the revenue during financial year 2006-07 towards employee expenditure and about 43 per cent. of revenue is expended towards payment to vendor, whereas, in case of the assessee payment to employees were 36 per cent. of the revenue. The learned authorised representative in support of such contention relied upon the decision of the co-ordinate Bench of the Tribunal in the case of Capital IQ Information Systems (India) P. Ltd. (supra) and Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.). The learned authorised representative further submitted that the Dispute Resolution Panel in the assessee's own case for the assessment year 2008-09 has directed for excluding the aforesaid company from the set of comparables as there are major differences in functionality and business model. 18. The learned Departmental representat....
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....ollow the order of the co-ordinate Bench in the case of Capital IQ Information Systems (India) (P.) Ltd. (supra) and hold that the aforesaid company, i.e., Vishal Information Technology cannot be taken as a comparable and direct for excluding the same for determining the arm's length price. 40.4 In view of the above, we hold that the impugned company is functionally different and therefore the same cannot be taken as comparable for deciding the working of the ALP of the assessee. 40.5 As regards Informed Technology India Ltd, we note that this company is also functionally different which can be verified from page 7 of the Annual Report of the company where the business description of the company is specified as under: As per page 7 of the Annual Report (page 329 of Index -2) the company is engaged in the following business: "Business Review & Development The Company is operating as IT enabled, knowledge based Back Office Processing Centre. The Company currently serves the needs of the financial content sector in the USA. The Company collects and analyses data on Financial fundamentals, Corporate Governance, Director/Executive Compensation and ca....
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....nd of appeal of the assessee is partly allowed. 41. The second issue raised by the assessee in ground No. 8 is that the Ld. DRP erred in making an upward adjustment to the book profit of Rs. 80,69,271/- under section 115JB of the Act by wrong interpreting the provision of section 10A of the Act. 42. At the outset we note that the issue raised by the assessee in its ground of appeal for the AY 2007-08 is identical to the issue raised by the assessee in ITA No. 1352/Ahd/2011 for the assessment year 2006-07. Therefore, the findings given in ITA No. 1352/Ahd/2011 shall also be applicable for the year under consideration i.e. AY 2007-08. The ground appeal of the assessee for the assessment 2006-07 has been decided by us vide paragraph No. 26 of this order in favour of the assessee. The learned AR and the DR also agreed that whatever will be, the findings for the assessment year 2006-07 shall also be applied for the year under consideration i.e. AY 2007-08. Hence, the ground of appeal of the assessee is allowed. In the result, the appeal of the assessee is partly allowed. Coming to ITA No. 1822/AHD/2014, an appeal by the assessee for the AY 2008-09 43. The assessee has rai....
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....on of the Deputy Commissioner of Income Tax (TPO- II), Ahmedabad [*the TPO'] and the learned Additional Commissioner of Income Tax, Range 1, Baroda [the AO'] in applying the provisions of 92 of the Income Tax Act, 1962 ["the Act'] despite the Appellant is a STPI unit and eligible for exemption u/s. 10A of the Act." 45. At the outset, the learned Counsel for the assessee before us submitted that he has been instructed by the assessee not to press additional ground of appeal raised in the memo of appeal. Accordingly, we dismiss the same as not pressed. 46. The 1st interconnected issue raised by the assessee in ground numbers 1 to 7 of the appeal is that the learned CIT-A erred in making the upward adjustment of Rs. 1,68,04,304.00 to the total income as well as not allowing the benefit of the variation provided in the proviso to section 92C(2) of the Act. 47. The TPO in the present case rejected the companies selected by the assessee as comparables and further found out fresh/ new comparables after applying new/modifying the filters and made an upward adjustment of Rs. 2,12,47,821.00 which was subsequently added to the total income of the assessee. On appeal, the ....
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....t rejected Accentia as a comparable company by holding in Paragraph 13 Page 3 of its order as under: - "The assessee was aggrieved by the inclusion of Accentia a Software Development Company. The Revenue is aggrieved by the exclusion of Accentia from the TP analysis. The DRP had directed its deletion. We observe that the ITAT has noticed the unavailability of the segmental data so far as these comparables are concerned. Furthermore, the functionality of this entity was concerned, it is different from that of the assessee; Accentia was engaged in KPO services in the healthcare sector." 51.3 Therefore, considering the above facts and precedents, we are not inclined to take M/s Accentia Technologies Ltd as one of the comparable in the working of the ALP of the assessee. 51.4 As regards Acropetal Technologies Ltd, we note that this company is functionally different from the activity of the assessee. The assessee is involved in the activity of BPO services in the field of book-keeping, accounting, and taxation whereas the impugned company is providing the services of Engineering design services, ITES Segment, IT Infrastructure Management Services, IT Security Solutions. I....
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....sessee during the course of proceedings. In so far as the "correctness" of the data is concerned, it is important to note that the data. was submitted by the entity in response to the statutory notice issued by an Income Tax Authority u/s 133(6). The apprehension on part of the assessee regarding the correctness of the data is unfounded since the data was not bifurcated by the TPO but the data provided by the entity was only used. Even though the information was shared with the assessee, a copy of the information submitted by the entity is attached with this letter your good self's perusal. 51.8 The assessee in its rejoinder to the remand report before the learned CIT-A further submitted that TPO during the remand proceedings has not called for any further information from the company being comparable. The assessee, besides reiterating its contention, further submitted filed the entire financial statements of the comparable for the year ending 31-3-2008 to demonstrate that there is no mention of the reporting of the BPO segment. 51.9 However, the learned CIT-A rejected the contention of the assessee by observing as under: The appellant's main objection in thi....
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....LP of the assessee in the given facts and circumstances. 51.13 Regarding the comparable, namely Spance Ltd, we note that this company is engaged in providing services of complex networking, data center services, managed services, application services. Likewise, there are substantial related party transactions and the turnover of the comparable is much higher than the comparable of the assessee. Furthermore, the employee cost of the comparable is merely 10.75% as against the assessee's employee cost Act 46.16%. Accordingly, we find this company is functionally different from the activity of the assessee. The assessee is involved in the activity of BPO services in the field of book- keeping, accounting, and taxation. In view of the above, we hold that the impugned company is functionally different and therefore the same cannot be taken as comparable for deciding the working of the ALP of the assessee. 51.14 In view of the above we hold that the above companies should not be considered as comparable while determining the ALP of the assessee with respect to the transactions carried out with the AE. Furthermore, removal of the above comparables, the PLI of the remaining compar....