2015 (5) TMI 720 - AT - Income Tax

Transfer pricing adjustment - exclusion of three comparables namely Larsen and Tourbo Infotech Ltd. Persistent Systems Ltd. and Mindtree Ltd.- Held that - This issue is no longer res-integra. The Hon ble High Court 2013 (7) TMI 696 - DELHI HIGH COURT upholding the decision of Tribunal in the case of the appellant for A.Y. 2006-07 has held that a giant company in the area of development of software which assumed all risks leading to higher profits is not comparable with the assessee which was a captive unit of the parent company and assumed only a limited risk.Having regard to the factual position and respectfully following the judgment of the Hon ble High Court we partly allow the ground raised by the revenue and uphold the exclusion of persistent system Ltd and direct inclusion of Larsen & Toubro Infotech Ltd and Mind tree Ltd. Inclusion of the comparables namely ICRA Techno Analytic Ltd. and E2E Infotech Ltd. - Held that - we agree in principle with the proposition laid down by the ld CIT(A) in excluding such companies from the list of comparables in which RPT are more than 25%. However we find no discussion in the assessment order about the determination of the percentage of RPT in the case of ICRA Techno Analytic Ltd. Under such circumstances we direct the AO to determine the RPT percentage of this company afresh as per law after giving opportunity to the assessee. In case if the RPT margin is less than 25% the ICRA should be included and if it is more than 25% RPT it should be excluded.Also it is not disputed that turnover of E2E Infotech Ltd. was 5.69 crores which is less than 50 crores and therefore there was no disclosure requirement of RPT under AS-18.Thus in light of the above we find no infirmity in the conclusion of the CIT(A) and reject the ground raised by the revenue. Bodhtree Consulting Ltd. ( Bodhtree ) exclusion - Held that - this company was a comparable in assessee s own case for Assessment Year 2008-09. At that time the assessee did not contest the inclusion of this company and allowed it to remain as a comparable. However this year just because profit margin is higher this company does not cease to become a comparable. Therefore we find no infirmity in the order of the ld CIT(A) and we uphold the same. Disallowance u/s 14A - Held that - in the instant year though Rule 8D is applicable yet since the AO has not recorded any satisfaction in terms of section 14A(3) of the Act therefore disallowance is invalid. Mere general observations without examining the accounts of the appellant does not satisfy the test of section 14A(3) of the Act. The disallowance is thus deleted.

Summary

Issues Involved:
1. Confirmation of addition to income based on Transfer Pricing (TP) adjustments.
2. Disregarding the Arms Length Price (ALP) determined by the appellant.
3. Inclusion and exclusion of certain companies in the list of comparables.
4. Disallowance under section 14A of the Income Tax Act.
5. Charging of interest under section 234B of the Income Tax Act.

Detailed Analysis:

Issue 1: Confirmation of Addition to Income Based on TP Adjustments
The assessee challenged the addition of Rs. 93,58,086/- to its income, arguing that its international transactions did not breach the arm's length principle under the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the addition, partially reducing the original addition of Rs. 1,72,01,288/- made by the Assessing Officer (AO). The Tribunal noted that the assessee is a wholly-owned subsidiary of a US company, providing software development services as a limited risk-bearing captive service provider. The AO's adjustments were based on updated margins of comparables and the application of specific filters, which the CIT(A) partially upheld.

Issue 2: Disregarding the Arms Length Price (ALP) Determined by the Appellant
The appellant argued that the AO disregarded the ALP determined in its TP documentation. The AO used current year data for comparables, which was not available to the appellant when preparing its TP documentation. The CIT(A) upheld the AO's approach but excluded high turnover companies from the comparables list, following judicial precedents.

Issue 3: Inclusion and Exclusion of Certain Companies in the List of Comparables
The Tribunal addressed the inclusion and exclusion of specific companies in the comparables list:
- Exclusion of High Turnover Companies: The CIT(A) excluded Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Mindtree Ltd. based on their high turnover, aligning with the Tribunal's previous decisions.
- Inclusion of ICRA Techno Analytic Ltd. and E2E Infotech Ltd.: The CIT(A) included these companies, noting that they did not breach the Related Party Transactions (RPT) filter of 25%. The Tribunal directed the AO to verify the RPT percentage for ICRA Techno Analytic Ltd. and include it if the RPT margin is less than 25%.
- Bodhtree Consulting Ltd.: The appellant sought the exclusion of Bodhtree Consulting Ltd. due to its high growth rate and abnormal profit margin. The CIT(A) rejected this contention, and the Tribunal upheld this decision, noting that Bodhtree was a comparable in the previous assessment year without objection from the assessee.

Issue 4: Disallowance Under Section 14A of the Income Tax Act
The AO disallowed Rs. 30,946/- under section 14A, applying Rule 8D. The appellant contended that no expenditure was incurred to earn the exempt dividend income. The Tribunal found that the AO did not record any satisfaction as required under section 14A(3) and deleted the disallowance.

Issue 5: Charging of Interest Under Section 234B of the Income Tax Act
The issue of charging interest under section 234B was raised by the assessee but was not specifically addressed in the detailed analysis.

Conclusion:
The Tribunal partly allowed the appeals of both the revenue and the assessee. It upheld the exclusion of Persistent Systems Ltd. and directed the inclusion of Larsen & Toubro Infotech Ltd. and Mindtree Ltd. in the comparables list. The Tribunal also upheld the inclusion of ICRA Techno Analytic Ltd. and E2E Infotech Ltd., subject to verification of the RPT percentage for ICRA. The disallowance under section 14A was deleted due to the AO's failure to record satisfaction.