COMMISSIONER OF INCOME TAX FARIDABAD vs. M/S MERCER CONSULTING INDIA PVT LTD

ITA/101/2015HC Punjab & HaryanaPHHC01109722201524 August 2016Author: MR. JUSTICE M.M. AGGARWAL,MR. JUSTICE AVNEESH JHINGAN19 pages
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What were the facts?

This appeal by the Commissioner of Income Tax, Faridabad, concerns the assessment year 2009-10. The dispute revolves around the determination of the Arm's Length Price (ALP) of international transactions between the assessee, M/s Mercer Consulting (India) Pvt. Ltd., and its associated enterprises. The assessee, a wholly owned subsidiary, provides IT and IT-enabled services on a cost-plus basis. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO), who proposed an adjustment of approximately ₹6.16 crores. The Disputes Resolution Panel (DRP) issued directions, and the Income Tax Appellate Tribunal (ITAT) partly allowed the assessee's appeal against the DRP's order. The High Court is hearing the appeal against the ITAT's decision.

What did the High Court hold?

The High Court held that the ITAT's decision on the comparables was justified. Regarding comparables at Sr. No. 2 (Allsec Technologies Limited), the court agreed with the ITAT that rejecting the company solely for a 0.55% deviation from the 75% export revenue threshold was unreasonable. For comparable Sr. No. 8 (R Systems International Limited), the court found that the ITAT had correctly noted that reliable financial data for a 12-month period would not be available due to a different year-end, making it unsuitable. The court also upheld the ITAT's decision regarding comparables Sr. Nos. 5, 6, and 9. On the second issue concerning Section 10AA, the court held that communication charges incurred in foreign currency attributable to the delivery of computer software outside India should not be excluded from the total turnover. The court reasoned that the definition of 'export turnover' under Section 10AA(1) Explanation 1 explicitly excludes such charges, but the 'total turnover' definition does not provide for such an exclusion. Therefore, to maintain consistency and avoid absurdity, these charges should be part of the total turnover. The court relied on the Bombay High Court's judgment in a similar matter under Section 10A.

What were the issues?

The High Court had to decide two questions of law: 1. Whether the ITAT rightly held certain companies (Sr. Nos. 2 and 8) as suitable comparables and others (Sr. Nos. 5, 6, and 9) as unsuitable for determining the Arm's Length Price (ALP) under Section 92(3) of the Income Tax Act, 1961. 2. Whether the ITAT erred in law by excluding an amount of ₹57,02,875/- on account of communication charges incurred in foreign currency attributable to the delivery of computer software outside India from the total turnover for computing deduction under Section 10AA of the Income Tax Act, 1961. The revenue argued that the ITAT's decision on comparables was incorrect, specifically regarding the exclusion of companies based on export revenue thresholds and year-end differences. The revenue also contended that communication charges should not be excluded from total turnover when calculating the deduction under Section 10AA. The assessee argued that the ITAT's decision on comparables was justified, particularly concerning minor deviations from filters and the inclusion of companies. For the second issue, the assessee argued that communication charges attributable to delivery outside India should be excluded from total turnover as per the definition of 'export turnover' under Section 10AA.

Which sections of the Income-tax Act were involved?

Section 92(3),Section 10AA,Section 10A

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH

Income Tax Appeal No. 101 of 2015 (O&M)

Date of Decision: 24th August, 2016

The Commissioner of Income Tax, Faridabad

..Appellant

versus

M/s Mercer Consulting (India) Pvt. Ltd. Gurgaon ..Respondent

CORAM: HON'BLE MR. JUSTICE S.J.VAZIFDAR, CHIEF JUSTICE HON'BLE MR. JUSTICE DEEPAK SIBAL, JUDGE

Present : Mr. Tejender K.Joshi, Advocate, for the appellant.

Mr. Deepak Chopra, Advocate,

Mr. Deepak Aggarwal, Advocate,

Ms. Manasvini Bajpai, Advocate,

Mr. Piyush, Advocate and

Mr. Rohit Gupta, Advocate, for the respondent.

****

S.J.VAZIFDAR, CHIEF JUSTICE

This is an appeal against the order of the Income Tax Appellate Tribunal allowing partly the respondent’s appeal against the order of the Disputes Resolution Panel. The dispute pertains to the assessment year 2009-10. 2. This appeal is only in respect of the determination of the ‘Arm’s Length Price’ (ALP) of certain international transactions between the assessee and its associated enterprises.

3.

The appeal is admitted on the following questions of law:- i) Whether the

The order continues below.

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