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2022 (3) TMI 1533 - AT - Income TaxTP Adjustment - Computation of Arm's Length Price - comparable selection - Tribunal directed to be excluded Infosys BPO Ltd., Eclerx Services Ltd., and Crossdomain Solutions Pvt. Ltd., as comparable companies - HELD THAT - As comparing the functional profile of the companies with that of assessee we direct exclusion of the aforesaid 3 companies from the list of comparable companies. TPO while determining the ALP has considered the entire turnover of the assessee and made an adjustment under section 92 of the Act whereas in law, an adjustment should be restricted only to the transactions with AE - The law is well settled that the addition on account of determination of ALP should be restricted only to the transactions with AE and it cannot be made in respect of transactions with non-AE. The Hon'ble Mumbai Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. 2012 (12) TMI 71 - ITAT MUMBAI held that the ALP can only be determined on the value of international transaction alone and not on the entire turnover of the assessee at entity level. Also confirmed by HC 2015 (12) TMI 1076 - BOMBAY HIGH COURT Thus section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE and the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee. TPO/AO is directed to compute the ALP in the light of the directions as given above, after affording assessee opportunity of being heard.
Issues Involved:
1. Validity of the CIT's order under Section 263 of the Income Tax Act. 2. Condonation of delay in filing the appeal. 3. Determination of Arm's Length Price (ALP) for international transactions. 4. Exclusion of certain comparable companies in transfer pricing analysis. 5. Restriction of transfer pricing adjustments to transactions with Associated Enterprises (AE). Detailed Analysis: 1. Validity of the CIT's Order Under Section 263: The CIT exercised powers under Section 263 of the Income Tax Act, 1961, to revise the assessment order passed by the AO. The CIT found the AO's assessment order erroneous and prejudicial to the interests of the Revenue because the AO finalized the assessment without awaiting the Transfer Pricing Officer (TPO)'s order on the ALP determination for international transactions. The CIT directed the AO to make a fresh determination of income considering the TPO’s order. 2. Condonation of Delay in Filing the Appeal: The assessee filed an appeal with a delay of 1348 days, attributing the delay to the advice of their previous CA, who suggested waiting for the outcome of assessment proceedings under Section 263. The Tribunal did not accept this explanation as a reasonable cause for the delay, noting that the subsequent CA was approached well before the appeal was filed, and there was no explanation for the delay after 28.05.2019. The Tribunal refused to condone the delay and dismissed the appeal. 3. Determination of Arm's Length Price (ALP): The TPO determined the ALP for the assessee's international transactions with its AE, suggesting an addition of Rs.10,73,57,230 to the total income. The TPO selected several comparable companies and computed the ALP based on an arithmetic mean margin of 30.29%. The assessee objected to the inclusion of certain comparables, which was partially upheld by the Dispute Resolution Panel (DRP). 4. Exclusion of Certain Comparable Companies: The assessee sought the exclusion of Infosys BPO Ltd., Eclerx Services Ltd., and Crossdomain Solutions Pvt. Ltd. from the list of comparables. The Tribunal, following precedents, directed the exclusion of these companies for being functionally different from the assessee. Infosys BPO Ltd. was excluded due to its diversified services and brand value. Eclerx Services Ltd. was excluded for providing KPO services without segmental information. Crossdomain Solutions Pvt. Ltd. was excluded for providing high-end KPO services, which are not comparable to the assessee's routine ITES. 5. Restriction of Transfer Pricing Adjustments to AE Transactions: The Tribunal held that transfer pricing adjustments should be restricted to transactions with AE and not the entire turnover. The Tribunal cited various judgments, including those of the Hon'ble Bombay High Court and ITAT Bangalore, which supported the view that adjustments under Section 92 should be limited to international transactions with AE. The TPO/AO was directed to compute the ALP accordingly, restricting adjustments to AE-related transactions. Conclusion: The appeal was partly allowed, with directions to exclude certain comparables and restrict transfer pricing adjustments to AE transactions. The Tribunal emphasized that the assessee's appeal was dismissed due to an unreasonable delay in filing, and the CIT's order under Section 263 was upheld.
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