2012 (10) TMI 1025 - AT - Income Tax

Deduction u/s 10A - TPA - Comparability analysis - functional dissimilarity - analysis of functions performed - assessee engaged in providing Information Technology (IT) enabled back office services and contract software development services to COLT Group of companies.

Summary

Issues Involved:
1. Deletion of addition on account of difference in arm's length price.
2. General grounds for amending, modifying, altering, adding, or foregoing any grounds of appeal.

Issue-wise Detailed Analysis:

Ground No. 1:
The primary issue concerns the deletion of an addition of Rs. 4,181,738 by the CIT(A) regarding the difference in arm's length price (ALP) for international transactions. The revenue argued that the CIT(A) ignored the detailed Functions, Assets, and Risks (FAR) analysis conducted by the Transfer Pricing Officer (TPO). The TPO had determined the ALP based on comparables identified through a fresh search in the Prowess and Capitoline databases. The assessee, however, contended that its international transactions were at arm's length, as evidenced by its Transfer Pricing Study, which used the Transactional Net Margin Method (TNMM) and OP/TC as the profit level indicator. The CIT(A) agreed with the assessee, finding that the four comparables selected by the TPO (Exensys Software Solutions Ltd., Sankhya Infotech Ltd., Thirdware Solutions Ltd., and Visual Soft Technologies Ltd.) were not appropriate due to differences in functional profiles, ownership of proprietary software, and high R&D expenditure. The Tribunal upheld the CIT(A)'s decision, concluding that the assessee's international transactions were at arm's length with a mean OP/TC margin of 14.04%, within the permissible +/-5% range.

General Grounds (Ground No. 2):
This ground was general in nature, allowing the appellant to amend, modify, alter, add, or forego any grounds of appeal at any time before or during the hearing. The Tribunal noted that this ground did not require adjudication.

Cross Objections by the Assessee:
The assessee raised several objections against the first appellate order, including:
1. The rejection of the arm's length analysis conducted by the respondent without basis.
2. Ignoring the fact that the respondent is entitled to deduction u/s 10A of the Income Tax Act, 1961.
3. Determining the ALP based only on data for the financial year 2004-05, ignoring data for two prior financial years.
4. Rejecting all loss-making companies while undertaking a fresh search of comparables.
5. Not allowing an adjustment on account of the differential risk profile of the respondent vis-`a-vis comparable companies.
6. Not adjudicating the benefit of +/-5% mentioned in the proviso to section 92C(2) of the Act.

The Tribunal found that the CIT(A) had already accepted that the assessee's international transactions were at arm's length, making the issues raised in the cross objections academic. Consequently, the cross objections were dismissed.

Conclusion:
Both the appeal and the cross objection were dismissed. The Tribunal upheld the CIT(A)'s decision that the assessee's international transactions were at arm's length, rejecting the revenue's contention that the CIT(A) ignored the detailed FAR analysis conducted by the TPO. The Tribunal also dismissed the cross objections raised by the assessee, finding them academic in light of the CIT(A)'s acceptance of the arm's length nature of the transactions.