2013 (6) TMI 746 - AT - Income Tax

ALP in respect of transactions of software development segment entered into by the assessee with its associate enterprise - comparability - Denial of set off of loss in eligible unit against the profits of non eligible unit. We thus while setting aside the orders of the authorities below in this regard direct the AO to allow the claimed set off

Issues Involved:
1. Adjustment in Arm's Length Price (ALP) of international transactions.
2. Economic analysis for establishing ALP.
3. Use of single year data vs. multiple year data.
4. Application of filters in selecting comparable companies.
5. Addition of comparables based on previous year's assessment.
6. Adjustments for differences in working capital.
7. Adjustments for differences in risk profile.
8. Benefit of arm's length range under Section 92C(2).
9. Set off of losses of STPI unit with profits of non-STPI unit.
10. Short credit for taxes paid and tax deducted at source.
11. Levying of interest under Section 234B.
12. Initiation of penalty proceedings under Section 271(1)(C).

Detailed Analysis:

1. Adjustment in Arm's Length Price (ALP) of International Transactions:
The assessee questioned the addition of Rs. 13,19,23,213/- to its total income due to adjustments in the ALP of international transactions with its Associated Enterprises (AEs) for the assessment year 2006-07. The Tribunal considered the facts and the TP study conducted by the assessee, which used the Transaction Net Margin Method (TNMM) and selected 36 comparables. The TPO rejected some comparables and added new ones, leading to the disputed adjustment.

2. Economic Analysis for Establishing ALP:
The Tribunal found that the assessee's economic analysis was based on accepted TP principles. The primary onus is on the taxpayer to determine ALP with reliable data. The Tribunal emphasized that the TPO should have accepted the assessee's analysis unless there were reasons to believe the transactions were not at arm's length.

3. Use of Single Year Data vs. Multiple Year Data:
The Tribunal upheld the TPO's use of single year data for the financial year 2005-06, as per Rule 10B(4). The assessee's contention for using multiple year data was rejected, emphasizing that the data should be contemporaneous and pertain to the same financial year in which the international transaction occurred.

4. Application of Filters in Selecting Comparable Companies:
The Tribunal examined the filters applied by the TPO, such as related party transactions greater than 15%, functional dissimilarity, consistent loss-making companies, and diminishing revenues. It directed the TPO to re-evaluate certain comparables, like Melstar Information Technology Ltd., Akshay Software Ltd., Aztec Software Pvt. Ltd., and others, based on detailed submissions and functional similarities.

5. Addition of Comparables Based on Previous Year's Assessment:
The Tribunal directed the TPO to reconsider the comparability of Aftek Infosis Ltd. and Asian CERC Information Technology Ltd. after verifying the functional differences and hearing the assessee.

6. Adjustments for Differences in Working Capital:
The Tribunal acknowledged the need for adjustments to account for differences in working capital employed by the assessee vis-`a-vis comparable companies. It directed the TPO to consider these adjustments while reworking the ALP.

7. Adjustments for Differences in Risk Profile:
The Tribunal agreed that adjustments should be made for differences in the risk profile of the assessee compared to comparable companies. It directed the TPO to consider these adjustments based on detailed analysis and submissions from the assessee.

8. Benefit of Arm's Length Range Under Section 92C(2):
The Tribunal rejected the assessee's claim for the benefit of the +/- 5% range under the proviso to Section 92C(2), citing the Special Bench decision in IHG IT Services (India) Pvt. Ltd. vs. ITO, which clarified that the benefit is available only if the variation between ALP and the transaction price does not exceed 5%.

9. Set Off of Losses of STPI Unit with Profits of Non-STPI Unit:
The Tribunal allowed the set off of losses of the Bangalore STPI unit against the profits of the Mumbai non-STPI unit, following the decision in Navin Bharat Industries Ltd. vs. DCIT and other similar cases. It held that losses from eligible units can be set off against profits from non-eligible units.

10. Short Credit for Taxes Paid and Tax Deducted at Source:
The Tribunal rejected this ground as no arguments were advanced by the assessee during the hearing.

11. Levying of Interest Under Section 234B:
The Tribunal noted that this issue is consequential and does not require independent adjudication.

12. Initiation of Penalty Proceedings Under Section 271(1)(C):
The Tribunal considered this ground premature as penalty proceedings are independent and do not require separate adjudication at this stage.

Conclusion:
The appeal was partly allowed, with directions for reworking the ALP considering the Tribunal's findings and providing the assessee an opportunity to present its case. The Tribunal emphasized the need for detailed analysis and appropriate adjustments in determining the ALP and set-offs.

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