2021 (5) TMI 864 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Eclerx Services Limited - functions of this company are different than the functions of the assessee company. Besides this significant expenditure on Advertising and marketing expenses were made by this comparable company and there is significant intangible assets owned by this company. There is no segmental details available of this company. All these factors determine that Eclerx Services Limited is not a good comparable. Therefore we direct the TPO to exclude this comparable from the final set of comparables. TCS-e-Serve Limited - Functions of TCS-e-Serve Limited are different than the functions of the assessee company. Besides this TCS e-Serve has a very high turnover. There was acquisition by TCS Limited/Brand Value of TCS in the present assessment year. All these factors determines that TCS E-Serve Ltd. is not a good comparable. Therefore we direct the TPO to exclude this comparable from the final set of comparables. Infosys BPO Ltd. - It is pertinent to note that the functions of Infosys BPO Ltd. are different from the functions of the assessee company. Besides this the brand value of Infosys BPO Ltd. enjoys the benefit of brand value of Infosys one of world s leading companies. It has consistently spent substantial amount of money on brand building. There was an extraordinary financial events during Financial Year 2011-12 as it acquired 100% voting rights in Portland Group Pty. Limited (strategic sourcing category management services provider based in Sydney Australia) and also invested in Mc Camish Systems LLC. All these factors determines that Infosys BPO Ltd. is not a good comparable. Therefore we direct the TPO to exclude this comparable from the final set of comparables. Acropetal Technologies Ltd.- It is functionally different as the Healthcare Segment has been taken into account. The company is engaged in software development. It provides healthcare services which includes innovation patient life cycle management physician and clinical life cycle management hospital administration management drug discovery and disease life cycle management. There is significant AMP expenses. Acropetal acquired two US based companies subsequent to which it will get into IP development by exploring the expertise and design skills available in the Silicon Valley. It has un-allocable expenditure. All these factors determine that Acropetal Technologies Ltd. is not a good comparable. Therefore we direct the TPO to exclude this comparable from the final set of comparables. E4e Healthcare Services Pvt. Ltd is engaged in the healthcare business services which are functionally different. The assessee company is engaged in providing IT enabled services to banks who issued credit cards. Thus E4e Healthcare Services Pvt. is not a good comparable. Therefore we direct the TPO to exclude this comparable from the final set of comparables. Exclusion of R Systems International Ltd. company was rejected as a comparable on the ground that it has different financial year ending - The contention of the Ld. AR that the data for the entire FY can be extrapolated from its quarterly filings made in the stock exchange appears to be plausible when the same is available in the public domain. The reliance of the decision of McKinsey Knowledge Centre 2015 (3) TMI 1226 - DELHI HIGH COURT is relevant wherein it is held that if the data pertaining to a comparable having a financial year ending other than end-March can be reasonably extrapolated and used. Therefore we direct the TPO/AO to verify this comparable and its functions as well as the principle laid down in the decision of the Hon ble Delhi High Court and if found suitable this comparable be included in the final list of the comparables. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Incorrect computation of assessee s margin - HELD THAT - In the financial statement for the relevant year (F.Y. 2011-12) the auditor has made a clear disclosure that no revenue has been recognized on account of services rendered to SBI despite having incurred a cost of Rs. 3.2 crore. These facts were totally ignored by the TPO/AO and therefore in the interest of justice we deem it proper to remand back this issue to the file of the TPO/AO for proper verification and adjudication as per the facts and law. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Incorrect calculation of Proportionate Adjustment by the TPO - HELD THAT - AR s submission during the hearing was that this transaction was reported as an international transaction only out of abundant caution. But the related party transaction or AE transactions amounts to only Rs. 11, 08, 36, 171/-. After perusal of the records these facts have to be verified by the TPO/AO which was not done by the Revenue authorities. It appears that the Computer Sciences Corporation USA and CSC Australia Pty Ltd. both are not associated enterprises of the assessee as set out by the provisions under Section 92A(1) or 92A(2) of the Income Tax Act 1961. But the TPO ignored these facts and while computing the proportionate adjustment has considered the operating expenses for related party transaction as Rs. 24.01 crores thereby calculating the proportionate factor as 13.34%. Therefore we remand back this issue to the file of the TPO/AO and after verifying the transactions between Computer Sciences Corporation USA and CSC Australia Pty Ltd. the same should be taken cognizance as per the facts and provisions of Income Tax Act 1961. Needless to say the assessee be given opportunity of hearing by following principles of natural justice. Disallowance of license fee - HELD THAT - Issue decided in favour of assessee as relying on own case for A.Y. 2007-08 2008-09 2010-11 and 2011-12. Short grant of prepaid taxes and erroneous levy of interest - HELD THAT - From the perusal of record it appears that the TDS credit as claimed by the assessee in revised return of income was not looked into by the Assessing Officer. Therefore we remand back this issue to the file of the Assessing Officer for proper verification of the claim of TDS credit and grant the same as per the provisions of law.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of License Fee and Data Service Management Charges
3. Short Grant of Prepaid Taxes and Erroneous Levy of Interest

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
- Adjustment on Account of Transfer Pricing Addition: The TPO/AO/DRP enhanced the income of the appellant by Rs. 4,85,54,206 by holding that the international related party transactions relating to payment for data server management charges and other transactions did not satisfy the arm's length principle.
- Comparability Analysis: The TPO rejected the comparability analysis conducted by the appellant, introducing additional/revised filters and rejecting/modifying quantitative filters applied by the appellant.
- Inclusion/Exclusion of Comparables: The TPO included companies like Eclerx Services Ltd., TCS e-Serve Ltd., Infosys BPO Ltd., Acropetal Technologies Ltd., and E4e Healthcare Services Pvt. Ltd., which the appellant argued were not comparable. Conversely, the TPO excluded R Systems International Ltd. due to different financial year ending.
- Judgment on Comparables:
- Eclerx Services Ltd.: Excluded due to functional differences, significant advertising expenses, and ownership of intangibles.
- TCS e-Serve Ltd.: Excluded due to functional differences, high turnover, and brand value from TCS acquisition.
- Infosys BPO Ltd.: Excluded due to functional differences, brand value, and extraordinary financial events.
- Acropetal Technologies Ltd.: Excluded due to functional differences, significant AMP expenses, and extraordinary economic events.
- E4e Healthcare Services Pvt. Ltd.: Excluded due to functional differences in providing healthcare business services.
- R Systems International Ltd.: Directed TPO/AO to verify and include if data can be reasonably extrapolated.
- Incorrect Computation of Assessee's Margin: The TPO incorrectly computed the operating revenue of the assessee, disregarding Rs. 2,87,55,643, which was recognized in the subsequent financial year. The issue was remanded back to the TPO/AO for proper verification.
- Incorrect Calculation of Proportionate Adjustment: The TPO considered the operating expenses for related party transactions as Rs. 24.01 crores, including Rs. 12,92,90,597 paid to CSC Australia Pty Ltd., a third party. The issue was remanded back to the TPO/AO for verification.

2. Disallowance of License Fee and Data Service Management Charges:
- Disallowance of Rs. 10,90,21,322: The AO disallowed the license fee and data service management charges paid to GECC, treating it as capital expenditure.
- Appellant's Argument: The appellant argued that the issue is covered by the Tribunal's decision in their favor for previous assessment years, where the payment was treated as revenue expenditure.
- Judgment: The Tribunal held that the issue is covered by previous orders in favor of the appellant, treating the payment as revenue expenditure. The license fee paid for the use of Vision Plus software does not provide enduring benefits and is deductible under section 37 of the Act.

3. Short Grant of Prepaid Taxes and Erroneous Levy of Interest:
- Short Grant of TDS Credit: The AO did not grant TDS credit to the extent of Rs. 4,40,63,648 as claimed by the appellant in the revised return of income.
- Erroneous Levy of Interest: The AO levied excess interest under section 234C of the Act.
- Judgment: The issue was remanded back to the AO for proper verification of the TDS credit claim and to grant the same as per the provisions of law.

Conclusion:
- The appeal was partly allowed for statistical purposes, with directions to the TPO/AO for proper verification and adjudication on the remanded issues, ensuring the appellant is given an opportunity for a hearing following principles of natural justice.