2015 (2) TMI 1103 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Pentamedia Graphics Ltd - the points brought out by the Ld. Representative clearly establish that the said concern has been wrongly excluded from the list of comparables. We therefore direct the Assessing Officer to consider the said concern as a comparable. Ace Software Exports Ltd. - there is no justifiable reason to consider the Ace Software Exports Ltd. as a comparable concern in order to benchmark assessee s international transaction of Provision of ITES to its associated enterprise. The order of the TPO is hereby affirmed and assessee fails on this aspect. Accentia Technologies Ltd. - during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable. Coral Hubs Ltd. (formerly Vishal Information Technologies Ltd.) fit to be excluded from the final set of comparables as not comparable to assessee as ITES provider. Cosmic Global Ltd. is not a good comparable to be included for the purposes of comparability analysis as it operates under a different business model which impacts operating margins. As a 14 consequence we direct the Assessing Officer to exclude the said concern from the final set of comparables. Crossdomain Solutions Ltd. liable to be excluded from the list of comparables as there was no bifurcation available for various diversified activities being carried out by the said concern and therefore on an entity level the said concern could not be compared to a normal ITES provider.

Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of Benchmarking Done by the Appellant
3. Erroneous Selection of Comparable Companies
4. Erroneous Rejection of Comparable Companies
5. Benefit of the Risk Adjustment
6. Benefit of the Variation/Reduction of 5 Percent from the Arithmetic Mean
7. Initiation of Penalty Proceedings
8. Levy of Interest Obligation on Account of Transfer Pricing Adjustment

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue revolves around an adjustment of Rs. 3,78,91,404 made to the value of international transactions entered by the assessee with its associated enterprises in respect of the provision of Information Technology Enabled Services (ITES). The assessee is a service provider of e-learning solutions for its associated enterprise, Aptara Inc. abroad. The dispute concerns the determination of the arm's length price of these transactions using the Transactional Net Margin (TNM) Method. The Transfer Pricing Officer (TPO) initially determined the arm's length price at a higher amount than the stated value, leading to an adjustment which was later re-worked by the Assessing Officer following the Dispute Resolution Panel's (DRP) directions.

2. Rejection of Benchmarking Done by the Appellant:
The ACIT, following the DRP's directions, rejected the benchmarking approach and methodology followed by the appellant for benchmarking the international transaction of provision of ITES. The TPO's selection of comparables and the rejection of the appellant's comparables were central to this issue.

3. Erroneous Selection of Comparable Companies:
The TPO included the following companies in the final set of comparables:
- Accentia Technologies Ltd.
- Coral Hub Ltd.
- Cosmic Global Ltd.
- Crossdomain Solutions Ltd.

The appellant argued that these companies were not functionally comparable due to differences in business models and activities. For instance, Accentia Technologies Ltd. was engaged in medical transcription and other activities, which were not comparable to the appellant's e-learning services. Similarly, Coral Hub Ltd. outsourced most of its work, which differed significantly from the appellant's business model.

4. Erroneous Rejection of Comparable Companies:
The appellant contended that the TPO unjustly excluded the following companies:
- Ace Software Exports Limited
- Pentamedia Graphics Ltd.

The TPO excluded Ace Software Exports Limited due to its operating loss and lack of segment-wise performance data. Pentamedia Graphics Ltd. was excluded on the grounds of functional dissimilarity and significant expenditure on multimedia development and webcasting.

5. Benefit of the Risk Adjustment:
The appellant argued that the ACIT, following the DRP's directions, erred in not granting the benefit of risk adjustment. The Tribunal did not provide a specific ruling on this issue in the judgment.

6. Benefit of the Variation/Reduction of 5 Percent from the Arithmetic Mean:
The appellant contended that the ACIT did not grant the benefit of +/- 5 percent as per the proviso to section 92C(2) of the Act. This issue was not specifically addressed in the Tribunal's ruling.

7. Initiation of Penalty Proceedings:
The ACIT initiated penalty proceedings under section 271(1)(c) of the Act. The Tribunal did not provide a specific ruling on this issue in the judgment.

8. Levy of Interest Obligation on Account of Transfer Pricing Adjustment:
The appellant argued that the ACIT erred in levying interest under section 234B of the Act due to unanticipated adjustments made by the TPO. The Tribunal did not provide a specific ruling on this issue in the judgment.

Judgment Summary:
The Tribunal directed the Assessing Officer to consider Pentamedia Graphics Ltd. as a comparable but upheld the exclusion of Ace Software Exports Ltd. The Tribunal also ruled that Accentia Technologies Ltd., Coral Hub Ltd., Cosmic Global Ltd., and Crossdomain Solutions Ltd. should be excluded from the final set of comparables due to functional dissimilarities and differences in business models. Consequently, the appeal of the assessee was partly allowed. The Tribunal did not provide specific rulings on the issues of risk adjustment, the benefit of the variation/reduction of 5 percent, initiation of penalty proceedings, and levy of interest obligation.

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