2011 (10) TMI 616 - AT - Income Tax

Transfer pricing adjustments - analysis undertaken by the appellant to determine arm s length price for its international transactions pertaining to provisions of software development services to the AE - applying transfer pricing provisions to the appellant which enjoys tax holiday u/s 10B - selection of comparable.

Issues Involved:
1. Transfer pricing adjustments and arm's length price (ALP) determination.
2. Application of transfer pricing provisions to an entity enjoying tax holiday under section 10B.
3. Rejection of search analysis and documentation maintained by the appellant.
4. Selection of comparable companies for determining the ALP.
5. Initiation of penalty proceedings under sections 271AA and 271(1)(c).
6. Charging of interest under sections 234B and 234C.

Detailed Analysis:

1. Transfer Pricing Adjustments and ALP Determination:
The appellant challenged the transfer pricing adjustments made by the Assessing Officer (AO) by rejecting the analysis undertaken by the appellant to determine the ALP for its international transactions related to software development services. The AO referred the documentation of ALP to the Transfer Pricing Officer (TPO), who required the appellant to furnish information and documents maintained under section 92D(1) of the Act read with IT Rules 10D(1) and (3). The TPO rejected the appellant's analysis, emphasizing the mandatory use of contemporaneous data for analyzing international transactions as per Rule 10B(4). The TPO conducted a fresh search on the Prowess database to ascertain comparables, which revealed 8 companies with a mean cost-plus margin of 25.01%. The appellant's objections to the TPO's fresh search and the selection of comparables were dismissed, as the TPO's actions were deemed in accordance with the provisions of the Act.

2. Application of Transfer Pricing Provisions to an Entity Enjoying Tax Holiday under Section 10B:
The appellant argued that transfer pricing provisions should not apply to it as it enjoys a tax holiday under section 10B of the Act. This ground was not pressed and thus dismissed.

3. Rejection of Search Analysis and Documentation Maintained by the Appellant:
The appellant contended the rejection of its search analysis conducted using databases updated as of January 11, 2006, and August 25, 2006. The TPO rejected this analysis, emphasizing the need for contemporaneous data. The Tribunal upheld the TPO's decision, stating that the appellant failed to undertake a search process for the relevant financial year and did not provide fresh documentation as required.

4. Selection of Comparable Companies for Determining the ALP:
The TPO's selection of 12 comparable companies was contested by the appellant, who argued that some companies were inappropriate comparables due to different functional profiles, significant related party transactions, or insufficient financial information. The Tribunal excluded 5 companies (Avani Cimcon Technologies Ltd., Exensys Software Solutions Ltd., Fortune Infotech Ltd., Maveric Systems Ltd., and Sankhya Infotech Ltd.) from the comparables list, resulting in an arithmetic mean margin of 11.85%. The Tribunal concluded that the appellant's margin of 11.08% was within the acceptable range, thus no adjustment to the ALP was required.

5. Initiation of Penalty Proceedings under Sections 271AA and 271(1)(c):
The grounds of appeal against the initiation of penalty proceedings under sections 271AA and 271(1)(c) were dismissed as no appeal is provided against the initiation of penalty.

6. Charging of Interest under Sections 234B and 234C:
The ground of appeal against charging interest under sections 234B and 234C was addressed by stating that interest is mandatory, and the appellant will receive consequential relief.

Conclusion:
The Tribunal partly allowed the appeal, dismissing the grounds related to the rejection of search analysis, selection of inappropriate comparables, and initiation of penalty proceedings. It allowed the grounds related to the correct margins of comparable companies and the computation of ALP, resulting in no transfer pricing adjustment. The Tribunal emphasized the importance of using contemporaneous data and upheld the TPO's methodology while excluding certain inappropriate comparables. The order was pronounced in the open court on October 31, 2011.

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