2021 (9) TMI 440 - AT - Income Tax

TP Adjustment - rate determined under MAP resolution for USA based transactions to other non-USA based transactions transfer pricing assessment made in respect of Software development services ( Information Technology Services ) - rate determined under MAP resolution for USA based transactions to other non-USA based transactions - HELD THAT - AO/TPO to adopt the net margin rate of 16.99% for non-USA based transactions also and compute the Transfer pricing adjustment for SWD segment (IT services segment) accordingly. Non-granting of proper credit for TDS and advance tax - HELD THAT - AO has given credit for the amounts wherein the PAN number of the present assessee is shown. It is the case of the assessee that the payments made under the name and PAN number of merged entities also should be given credit when the corresponding income is assessed in the hands of the present assessee. We find merit in the said contentions. However this issue requires factual verification. Accordingly we restore this issue to the file of the AO for examining the claim of the assessee in accordance with law. Rejection of set off of brought forward business loss claimed in the return - HELD THAT - We notice that the AO has not assigned any reason for not allowing set off of brought forward business loss. Accordingly we restore this issue to the file of the AO for examining the claim of the assessee in accordance with law. Transfer pricing adjustment made in respect of ITES segment - HELD THAT - Major source of income for this company is from Engineering Design Services which is an activity falling under the category of Knowledge Process Outsourcing (KPO) while the activities carried on by the assessee falls under the category of Business process outsourcing (BPO) - DRP has followed the decision rendered by the coordinate bench in the case of Symphony Marketing Solutions India Pvt. Ltd. 2014 (2) TMI 83 - ITAT BANGALORE - Hence we do not find any reason to interfere with the decision of Ld. DRP on this comparable company. Computation of deduction u/s. 10A - HELD THAT - A.O. to exclude certain expenditure both from export turnover and total turnover while computing deduction u/s. 10A of the Act. This issue is now settled by Hon ble Supreme Court in the case of CIT Vs. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT and this decision support the view taken by the Ld. DRP. Accordingly we uphold the decision of DRP on this issue.

Summary

Issues Involved:
1. TP adjustment in software development segment.
2. Short credit of TDS & advance tax.
3. Denial of setting off of brought forward business loss.
4. TP adjustment in ITES segment.
5. Deduction u/s. 10A of the Act.

Detailed Analysis:

1. TP Adjustment in Software Development Segment:
The assessee, engaged in software development services and IT enabled services, contested the transfer pricing (TP) adjustment for the software development segment. The assessee's turnover in this segment was Rs. 1197.60 lakhs, with a declared profit level indicator (PLI) of 15.05%. The Transfer Pricing Officer (TPO) selected 13 comparables with an average margin of 23.55%, resulting in a TP adjustment of Rs. 88.46 crores. The Dispute Resolution Panel (DRP) retained three comparables, reducing the adjustment to Rs. 87.90 crores. The assessee sought the exclusion of these comparables and the inclusion of five others. The Tribunal directed the adoption of a net margin rate of 16.99% for non-USA based transactions, following a precedent from the assessee's own case for AY 2010-11.

2. Short Credit of TDS & Advance Tax:
The assessee claimed a credit for advance tax of Rs. 74.53 crores and TDS of Rs. 7.39 crores, but the Assessing Officer (AO) allowed only Rs. 43.00 crores and Rs. 3.04 crores, respectively. The Tribunal found merit in the assessee's contention that credits should be given for payments made under the PAN of merged entities and remanded the issue to the AO for factual verification.

3. Denial of Setting Off of Brought Forward Business Loss:
The assessee claimed a set-off of brought forward business loss of Rs. 16.60 crores. The AO did not provide reasons for denying this set-off. The Tribunal restored the issue to the AO for examination in accordance with the law.

4. TP Adjustment in ITES Segment:
The assessee declared an operating income of Rs. 1009.28 crores with a PLI of 14.14% in the ITES segment. The TPO selected 10 comparables, resulting in a TP adjustment of Rs. 85.88 crores. The DRP excluded eight comparables, making the adjustment nil. The revenue challenged the exclusion of three comparables: Acropetal Technologies Limited, Jeevan Scientific Technology Limited, and Infosys BPO Limited. The Tribunal upheld the DRP's exclusion based on functional dissimilarities and precedents from coordinate benches and High Courts.

5. Deduction u/s. 10A of the Act:
The revenue contested the DRP's direction to exclude certain expenditures from both export turnover and total turnover while computing the deduction u/s. 10A. The Tribunal upheld the DRP's decision, citing the Supreme Court's ruling in CIT Vs. HCL Technologies Ltd., which supports the exclusion.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal, delivering a comprehensive judgment on the various issues related to transfer pricing adjustments, tax credits, and deductions.