2011 (10) TMI 633 - AT - Income Tax

TPO - ALP determination - AE - selection of comparable - functional dissimilarity - a delay in payment of employees contribution towards provident fund

Issues Involved:
1. Determination of Arm's Length Price (ALP) of the international transaction.
2. Exclusion of certain companies from the list of comparables.
3. Adjustment on account of working capital and risks undertaken.
4. Applicability of the +/-5% variation benefit under the erstwhile proviso to section 92C(2) of the Income-tax Act.
5. Disallowance on account of delay in payment of employees' contribution towards provident fund.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) of the international transaction:
The primary dispute was the determination of the ALP of the appellant's international transaction for software development services. The appellant initially used the Cost Plus Method (CPM) but later tested the transaction using the Transactional Net Margin Method (TNM Method). The Transfer Pricing Officer (TPO) rejected the appellant's method and applied the TNM Method, which resulted in an upward adjustment of Rs. 2,50,91,747/-. The Dispute Resolution Panel (DRP) directed to exclude two companies with extreme margins and concluded a PLI of 20%, leading to an addition of Rs. 1,31,17,207/- to the appellant's income.

2. Exclusion of certain companies from the list of comparables:
The appellant contested the exclusion of Goldstone Technologies Ltd. by the DRP, arguing it was done without a hearing and that its margin was not abnormally low. The appellant also argued that Compucom Software Ltd. should be excluded due to significant related party transactions exceeding 25% of total revenue. The Tribunal found merit in the appellant's argument regarding Compucom Software Ltd. and directed its exclusion from the final set of comparables.

3. Adjustment on account of working capital and risks undertaken:
The appellant sought adjustments for differences in working capital and risks undertaken compared to comparable companies, citing that it was a captive service provider with major risks borne by the parent company. The Tribunal did not explicitly address this issue in the final decision but noted the appellant's detailed submissions and precedents supporting such adjustments.

4. Applicability of the +/-5% variation benefit under the erstwhile proviso to section 92C(2) of the Income-tax Act:
The Tribunal examined whether the benefit of the erstwhile proviso to section 92C(2), allowing a +/-5% variation from the arithmetic mean, was applicable. The Tribunal concluded that the amended proviso, effective from 1.10.2009, was not retrospective and thus not applicable to the assessment year in question. Consequently, the appellant was entitled to the benefit of the +/-5% variation under the erstwhile proviso.

5. Disallowance on account of delay in payment of employees' contribution towards provident fund:
The appellant contested a disallowance of Rs. 71,694/- due to a delay in payment of employees' provident fund contributions, arguing the payments were made before the due date for filing the return of income. The Tribunal, referencing relevant precedents, directed the deletion of the disallowance.

Conclusion:
The Tribunal allowed the appeal of the assessee, granting relief on the primary issue of ALP determination by excluding Compucom Software Ltd. from the comparables and allowing the benefit of the +/-5% variation. The Tribunal also directed the deletion of the disallowance related to the provident fund payment delay.

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