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2019 (7) TMI 664 - AT - Income TaxTP Adjustment - arm’s length price relating to international transaction of back office support services rendered by the assessee - Comparable selection - HELD THAT:- TCS E-serve ltd - One of the filters applied by the ld. TPO was to consider the companies whose turnover is more than One Crore. We find that assessee also has considered the same filter in his TP study report with regard to turnover, but the assessee had considered the comparables which are reasonable and comparable with the size and scale of operations with that of the assessee, whereas the TPO by considering the comparable like TCS E-serve ltd with that of assessee had practically considered the comparable whose turnover is several times more than that of the assessee. We hold that the giant size ITES provider like TCS E-serve ltd cannot be compared with routine ITES / BPO service provider like that of the assessee. ITES company would then get compared with top giants like TCS E-serve ltd and others with the same high turnover, which would in turn result in mandatory ALP adjustment in all the cases. That cannot be certainly the intention of the legislature. In order to avoid any absurdity in this regard, the test of reasonableness should be applied by the TPO by comparing the cases whose turnover is either 10 times below or 10 times above the turnover with that of the assessee which would be reasonable for the purpose of comparison. Hence, the argument advanced by the ld. DR in this regard is not appreciated. Accordingly, we hold that this comparable i.e. TCS E-serve ltd deserves to be excluded due to huge turnover. TCS E-serve ltd is excluded the mean margin of the comparables would be 16.21% as against the assessee’s margin of 12% and accordingly, the assessee would fall within +/-5% tolerance limit. We direct the TPO to verify the said workings given by the ld. AR and if the contention of the ld. AR is found to be correct, then no adjustment to ALP need to be made in respect of ITES segment of the assessee. Since, we directed the TPO to exclude TCS E-serve ltd from the list of comparables, the adjudication of other comparables, both inclusion / exclusion become academic in nature and no opinion is rendered by us herein. Accordingly, the ground No.2 read with ground No.4 raised by the assessee are allowed for statistical purposes. Arm’s length adjustment made relating to international transaction of software support services (IT segment) - Comparable selection - HELD THAT:- If the argument advanced by the ld. DR is to be accepted for both the comparables (i.e Infosys and Wipro) , filters adopted by the assessee as well as by the ld. TPO, then in every transfer pricing adjustment of any software company, Infosys Limited and Wipro Technologies Ltd, would be subject matter of comparability and adjustment to ALP would have to be made mandatorily, which is not the intention of the legislature as it would only result in absurdity. In view of the aforesaid observations we direct the TPO to exclude both Infosys Ltd., as well as Wipro Technologies Ltd., from the final list of comparables in IT segment and recompute the margins of the comparables and decide whether at all any adjustment to ALP need to be made in IT segment of the assessee. House property income - shown in revised return - effect of non inclusion of said income in draft assessment order - HELD THAT:- We agree with the argument of the AR, but both the parties before us were not able to give us the workings specifically as to whether this sum was included in the final computation adopted by the AO both in draft assessment proceedings as well as in the final proceedings. Hence, with the consent of both the parties, we hereby direct the ld. AO to verify whether this sum of ₹ 9,99,600/- representing house property income was at all considered by him in the draft assessment order. If it is so considered, then, the ld. AO is justified in considering the same in final assessment order pursuant to direction of the DRP. If from verification, it is proved otherwise, then the said addition requires to be deleted. With these observations, the ground No.5 raised by the assessee is disposed off. Deduction u/s.10A - TDS not deducted u/s 195 on payments made to foreign parties - disallowance made u/s.40(a)(i) - whether the said disallowance would consequently increase the claim of the deduction u/s.10A? - Circular No.37/2016 dated 02/11/2016 - HELD THAT:- It is not in dispute that assessee had made certain payments to foreign parties in the sum of ₹ 31,59,524/- relating to the unit for which deduction u/s.10A is eligible. It is now well settled that even if disallowance u/s.40(a)(i) is to be made for non-deduction of tax at source, still it would only result in enhancement on business income of the eligible unit of the assessee which would inturn consequently increase the claim of deduction u/s.10A for the assessee, thereby making it revenue neutral. We find that the ld. AR in this regard had rightly placed reliance on the decision of Hon’ble Jurisdictional High Court in the case of PCIT vs. Lionbridge Technologies (P) Ltd., [2017 (9) TMI 1410 - BOMBAY HIGH COURT] . We also find that recently, the CBDT had also issued a Circular No.37/2016 dated 02/11/2016 wherein it has been categorically stated that disallowances made u/s.32, 40(a)(ia), 40A(iii), 43D of the Act etc., and other specific disallowances related to the business activity against which Chapter VIA deduction has been claimed result in enhancement of the profits of the eligible business and that deduction in Chapter VIA is admissible on the profits so enhanced by the disallowance. The same analogy would apply for deduction u/s.10A of the Act also. Respectfully following the aforesaid decision of Hon’ble High Court reported in Lionbridge Technologies (P) Ltd. (supra) and the Circular of the CBDT, the ground 6 & 7 raised by the assessee are allowed.
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