2011 (2) TMI 1294 - AT - Income Tax

Determining ALP for International Transaction u/s 92C - Filter for rejection of comparable companies - Assessee-company is an Indian company and almost the entire share capital of it is owned by International LLC - An addition was made in the present case on account of variation in income as a consequence of the order of TPO u/s 92C(3) HELD THAT - Applying the filter for rejection of comparable companies having related party transactions as a percentage of sales more than 15 per cent., we uphold the said filter. Another filter of rejecting the comparables whose current year financial data is not available, we find that the said filter has been upheld by the DRP by following the decision in CUSTOMER SERVICES INDIA (P.) LTD. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-17(1), NEW DELHI 2009 (3) TMI 637 - ITAT DELHI ,therefore, the second filter is also upheld. Regarding third filter, ratio adopted to filter the comparables is reasonable. However, regarding calculations made while applying this filter with respect to parties in question, as claimed by the assessee that their ratio also falls between 30 to 60 percent, we, therefore, hold that if the wage/sale ratio of the parties, fall within the range of 30 per cent. to 60 per cent., then those parties should be included in the list of comparables to compute the mean margin. We consider it just and proper to restore this issue to the file of the DRP to verify the claim of the assessee. Selection of Companies as comparables - M/s. Space Computer and Systems Ltd. - As per assessee, TPO has wrongly been excluded simply on the ground that it was the first year of operation of the comparable. DRP will verify such fact and after verifying a specific finding should be recorded in this regard and appropriate relief should be given to the assessee Infosys Technologies Ltd., Kals Information System Ltd., Visualsoft Tech Ltd. and Wipro Ltd., particularly, Infosys Technologies Ltd. and Wipro Ltd., - They cannot be excluded as the assessee itself has taken those parties as comparables and now the assessee cannot plead their exclusion simply for the reason that their results are going against the assessee. Cotton Textiles Export Promotion Council and Export Promotion Council for Handicrafts - As per TPO a business enterprise whose basis of existence is profit making, can't be compared to a non-profit organisation. The assessee has not brought any material on record to controvert such findings of fact recorded by the TPO. Hence, the exclusion of such party from the list of comparable is also upheld. IL FS Academy for Insurance Finance - This company is engaged in providing training in the form of insurance and finance. Therefore, the result of such company are also not comparable with the results of the assessee. The AR has not submitted any material to controvert these factual finding recorded by the TPO. We decline to interfere and TPO's calculation is upheld However, it is held that if such calculation of the assessee falls within /- 5%. margin benefit, the said issue may be considered by the DRP as the matter is being restored to the Dispute Resolution Panel on the software development segment. The learned Dispute Resolution Panel has not given any specific finding on this issue that whether or not the assessee is entitled for /- 5%. benefit to the marketing support service segment.

Issues Involved:
1. Validity of the assessment order passed by the Dispute Resolution Panel (DRP).
2. Addition to income due to Transfer Pricing Officer's (TPO) adjustments in software development services.
3. Addition to income due to TPO's adjustments in marketing support services.
4. Use of current year data versus multiple year data for comparables.
5. Application of +/- 5% range benefit under section 92C(2) of the Act.
6. Exclusion of certain companies as comparables.
7. Inclusion of specific companies as comparables.
8. Working capital adjustment.
9. Risk adjustment.
10. Rejection of low-profit/loss making companies.
11. Denial of benefit under section 10A of the Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the DRP issued a non-speaking order without appropriate application of mind. The tribunal found that the DRP upheld the TPO's adjustments without detailed reasons, which necessitated a remand for proper verification and detailed reasoning.

2. Addition to Income for Software Development Services:
The TPO made an addition of Rs. 4,44,46,736 by modifying the set of comparable companies and applying a wages-to-sales ratio. The tribunal upheld some filters but found errors in the TPO's calculations and inclusion/exclusion of certain companies. The issue was remanded to the DRP for verification and recalculating the mean margin, considering the correct wage/sales ratio.

3. Addition to Income for Marketing Support Services:
The TPO made an addition of Rs. 12,39,564 by rejecting certain comparables. The tribunal upheld the rejection of some companies like Cotton Textiles Export Promotion Council and Export Promotion Council for Handicrafts due to their non-commercial nature. However, it directed the DRP to verify if the assessee's calculations fall within the +/- 5% range benefit.

4. Use of Current Year Data:
The assessee used weighted average margins of three years, while the TPO used current year data. The tribunal upheld the TPO's approach, citing the decision in Customer Services India P. Ltd. v. Asst. CIT, which mandates using the financial year data when international transactions occurred.

5. Application of +/- 5% Range Benefit:
The tribunal noted that if the recalculated mean margin after including correct comparables falls within the +/- 5% range, no addition should be sustained. This issue was remanded to the DRP for verification.

6. Exclusion of Certain Companies as Comparables:
The tribunal upheld the exclusion of Infosys Technologies Ltd. and Wipro Ltd. due to their significantly different turnover and business models compared to the assessee. The exclusion of certain non-commercial entities in the marketing support services segment was also upheld.

7. Inclusion of Specific Companies as Comparables:
The tribunal found that the TPO wrongly excluded some companies based on incorrect wage/sales ratio calculations. It directed the DRP to verify and include these companies if they fall within the correct ratio range. The tribunal also directed verification of Space Computer and Systems Ltd. to determine its inclusion as a comparable.

8. Working Capital Adjustment:
The assessee did not press this ground during the hearing, and it was dismissed by the tribunal.

9. Risk Adjustment:
The tribunal did not provide a specific ruling on this issue but implied that the DRP should consider it during the remand process if relevant.

10. Rejection of Low-Profit/Loss Making Companies:
The tribunal found that the TPO's rejection of low-profit/loss making companies was arbitrary and directed a re-evaluation of the comparables.

11. Denial of Benefit under Section 10A:
The assessee argued that being entitled to a tax holiday under section 10A, it had no motive to manipulate transfer prices. The tribunal did not specifically address this argument but implied that the DRP should consider all relevant factors during the remand process.

Conclusion:
The tribunal partly allowed the appeal for statistical purposes, remanding several issues to the DRP for proper verification and detailed reasoning, particularly concerning the inclusion and exclusion of comparables and the application of the +/- 5% range benefit. The order was pronounced in open court on February 25, 2011.

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