2015 (10) TMI 2625 - AT - Income Tax

TPA - selection of comparable - Assessee does not outsource the work rather it receives outsourced work - Abnormal profit in the F.Y. of company is a major constraint to be selected as comparable - Held that - Cepha Imaging Pvt. Ltd. should be considered as a comparable, if the RPT to sales is less than 25%. So far as Allsec Technologies Ltd.- the functions carried out by Allsec Technologies Ltd. are different from that of the functions carried on by the assessee. Further, this company has incurred loss in the current year as well as in the preceding year. Apart from the general argument the Ld. Counsel for the assessee could not rebut the findings/observations given by the AO as well as the DRP as to how Allsec Technologies Ltd. should be included in the list of comparables. The various decisions relied on by Ld. Counsel for the assessee are not applicable to the facts of the present case. We, therefore, reject the arguments of the Ld. Counsel for the asessee on this issue and uphold the action of the AO/DRP in rejecting this company from the list of comparables. R Systems International Ltd. - the company is product development and product seller. Accordingly, the DRP considered the same as not comparable with that of the assessee company. We do not find any infirmity in the order of the AO as well as the DRP on this issue. We find the Ld. Counsel for the assessee while arguing the case for exclusion of Cosmic Global Ltd. has argued that the same company had to be excluded since it had paid translation charges to third parties indicting outsourcing of work. For the above proposition, she also relied on various decisions. Therefore, once it has been found by the DRP from the director s report that R Systems International Ltd. is leading provider of outsource product development services, business process, outsource service and also own product suites in BFSI, manufacturing and logistics verticals etc., therefore, in the own arguments of the Ld. Counsel for the assessee this company is functionally dissimilar and therefore the same cannot be accepted as comparable. In this view of the matter, we uphold the order of the AO/DRP on this issue. Risk adjustment - Held that - The different benches of the Tribunal are taking the view that an assessee who is a captive service provider and does not assume any risk or takes lesser risk as compared to comparable company which undertakes higher risks, then it is entitled to some risk adjustment. However, since the assessee has not produced complete analysis and complete spectrum of risk faced by business entity and in absence of risk analysis of each comparable, we restore this issue to the file of the AO with a direction to give an opportunity to the assessee to work out and justify to the satisfaction of the AO regarding the risk adjustment it is entitled to. We hold and direct accordingly. Ground of appeal by the assessee is accordingly allowed for statistical purposes.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Inclusion/Exclusion of Comparable Companies
3. Risk Adjustment
4. Consideration of Multiple Year Financial Data
5. Interest under Section 234A and Section 234B

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue revolved around the Transfer Pricing (TP) adjustment of Rs. 1,27,15,040/- made by the Assessing Officer (AO). The AO re-computed the arm's length price (ALP) of the assessee's international transaction of providing technical support services to its Associated Enterprises (AEs). The AO selected certain comparable companies and rejected others, leading to the TP adjustment.

2. Inclusion/Exclusion of Comparable Companies:
The assessee contested the inclusion of Cosmic Global Ltd. as a comparable, arguing it had super normal profits and outsourced a significant portion of its work, unlike the assessee. The Tribunal agreed, noting Cosmic Global Ltd.'s abnormal profit margin in the financial year (F.Y.) 2008-09 compared to other years and its high outsourcing costs, making it functionally incomparable. The Tribunal directed the AO to exclude Cosmic Global Ltd. from the list of comparables.

For Cepha Imaging Pvt. Ltd., the AO rejected it due to related party transactions (RPT) exceeding 25% of sales. However, the Tribunal found that debtors and creditors should not be considered in computing RPT to sales and remanded the issue back to the AO to recompute the percentage. If RPT to sales is less than 25%, Cepha Imaging Pvt. Ltd. should be included as a comparable.

Allsec Technologies Ltd. was excluded by the AO due to functional differences and persistent losses. The Tribunal upheld this exclusion, agreeing with the AO and DRP's findings that Allsec Technologies Ltd. was functionally dissimilar and had incurred losses in the current and preceding years.

R Systems International Ltd. was rejected by the AO and DRP due to its different financial year and functional differences as it was involved in product development and selling. The Tribunal upheld this exclusion, agreeing with the DRP's findings.

3. Risk Adjustment:
The assessee sought risk adjustment, arguing its business model was cost-plus with no risk of incurring losses, unlike the comparables. The Tribunal acknowledged the merit in the assessee's argument but noted the lack of complete risk analysis. The issue was remanded back to the AO to allow the assessee to justify the risk adjustment with proper analysis.

4. Consideration of Multiple Year Financial Data:
The assessee argued for the consideration of multiple year financial data for comparables. However, the Tribunal did not provide a specific ruling on this issue within the detailed judgment provided.

5. Interest under Section 234A and Section 234B:
The assessee contested the levying of interest under Section 234A and Section 234B. The Tribunal did not address this issue in detail as the grounds were dismissed as 'not pressed' by the assessee.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions for the AO to re-evaluate certain comparables and the risk adjustment claim. The Tribunal emphasized the need for a detailed and justified approach in determining the comparability and risk adjustments.