2019 (10) TMI 1241 - AT - Income Tax

Allocating the head office expenses while computing the profit eligible for deduction u/s.10A/10B - HELD THAT - As decided in own case 2017 (10) TMI 233 - ITAT MUMBAI this issue has been remanded back to the file of the ld. AO for fresh adjudication TP Adjustment - comparable selection - HELD THAT - Emerson India is a wholly owned subsidiary of Emerson Electric Mauritius limited which is a wholly owned subsidiary of Emerson USA (ultimate parent company). Emerson India has 5 primary segments namely process management (value and measurement devices) appliance and tools (hand tools fans electrostatic air cleaners and electric waste disposal ) climate technologies (compressors thermostat and related equipment) industrial automation (motors and drives) and network Power (Power convergent and distribute equipment and networking products). Emerson India conducts his business through its head office located in Mumbai and different business divisions in Bangalore Pune etc. thus companies functionally dissimilar with that of assessee need to be deselected from final list. Working capital adjustment - Entire workings of working capital adjustment had been furnished before the ld. TPO by the assessee which are enclosed in page 300 of the paper book. Hence the ld. TPO ought to have considered the same on the list of comparables chosen by him while determining the ALP of the international transactions. Hence we hold that the ld. CIT(A) had rightly directed the ld. TPO to grant working capital adjustment on the final set of comparables pursuant to the order of the ld CIT(A). Service tax refund for the eligible unit for the purpose of claiming deduction u/s.10A - HELD THAT - It is not in dispute that service tax was paid by the assessee in earlier years for these eligible units and claimed as deduction pursuant to which the claim of deduction u/s.10A of the Act had indeed been reduced to that extent. When the said service tax had been refunded to the assessee during the year under consideration and also in view of the fact that the said eligible unit still continues for claim of deduction u/s.10A of the Act during the year under consideration there is no reason to disturb the claim of deduction u/s.10A of the Act for the same. Moreover we find from the provisions of Section 10A (4) of the Act that the entire profits of the eligible undertaking are entitled for deduction u/s.10A of the Act and there is no scope for exclusion of the service tax refund as not eligible for deduction u/s 10A(4) of the Act. We also find that the reliance placed on the Special Bench of Indore Tribunal in the case of Maral Overseas Ltd. vs. Additional CIT 2012 (4) TMI 345 - ITAT INDORE also supports the case of the assessee in this regard. Accordingly we find no infirmity in the order of the ld. CIT(A) in granting relief to the assessee - Decided against revenue

Summary

Issues Involved:
1. Allocation of head office expenses for deduction under Section 10A/10B of the Income Tax Act.
2. Exclusion of certain companies from the set of comparables for Transfer Pricing purposes.
3. Grant of working capital adjustment.
4. Functional comparability of certain companies.
5. Inclusion of service tax refund for deduction under Section 10A.

Issue-wise Detailed Analysis:

1. Allocation of Head Office Expenses:
The primary issue in the assessee's appeal was whether the CIT(A) was justified in upholding the AO's action of proportionately allocating head office expenses while computing the profit eligible for deduction under Section 10A/10B of the Income Tax Act. The Tribunal noted that this issue had been remanded back to the AO for fresh adjudication for the previous assessment year (A.Y. 2009-10). The Tribunal decided to remand this issue back to the AO for de novo adjudication, ensuring the assessee is given a reasonable opportunity to be heard.

2. Exclusion of Certain Companies from Comparables:
The Revenue's appeal included several grounds challenging the CIT(A)'s decision to exclude certain companies from the final set of comparables. Specifically, the Tribunal addressed the exclusion of Infosys Ltd., Larsen and Toubro Infotech Ltd., and Wipro Ltd. due to their large scale of operations. The CIT(A) had observed that these companies had significantly higher turnovers and engaged in substantial R&D activities, making them functionally incomparable to the assessee, a captive service provider with minimal risk. The Tribunal upheld the CIT(A)'s decision, noting that the exclusion was not solely based on turnover but also on other functional dissimilarities.

3. Grant of Working Capital Adjustment:
The CIT(A) directed the TPO to grant working capital adjustment to the assessee. The Tribunal upheld this direction, noting that the assessee had furnished the necessary workings for the adjustment, and the TPO should have considered these while determining the Arm's Length Price (ALP) of the international transactions.

4. Functional Comparability of Certain Companies:
The CIT(A) had excluded Thirdware Solutions Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Kals Information Systems Ltd. from the set of comparables due to functional dissimilarities and the absence of segmental data. The Tribunal agreed with the CIT(A)'s observations, noting that these companies were engaged in activities such as software product development and R&D, which were not comparable to the assessee's software development services. The Tribunal also referenced decisions from the jurisdictional High Court and other Tribunals supporting the exclusion of these companies.

5. Inclusion of Service Tax Refund for Deduction under Section 10A:
The CIT(A) allowed the assessee's claim for service tax refund for eligible units under Section 10A. The Tribunal upheld this decision, noting that the service tax was paid in earlier years and claimed as a deduction, reducing the claim of deduction under Section 10A. When the service tax was refunded, it was appropriate to include it in the deduction under Section 10A, as the eligible unit continued to claim the deduction. The Tribunal referenced Section 10A(4) of the Act, which supports the inclusion of the entire profits of the eligible undertaking for deduction.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, remanding the issue of head office expenses back to the AO for fresh adjudication. The Tribunal upheld the CIT(A)'s decisions on excluding certain companies from comparables, granting working capital adjustment, and including service tax refund for deduction under Section 10A.