2016 (9) TMI 1279 - AT - Income Tax

TPA adjustment - selection of comparable - Held that - Acropetal Technologies Ltd. is not functionally similar to the assessee. Therefore, on over all consideration of facts and materials on record, we are of the view that Acropetal Technologies Ltd. cannot be treated as a comparable to the assessee. Bodhtree Consulting Ltd. - looking at the activities carried on by this company, it is evident, though, it has reported only one segment, namely, software development but it is involved in various activities including product development. However, it has not done segmental accounting for each of the activities. We have further noted that for the reason that the aforesaid company is involved in product development the Tribunal in the decisions relied upon by the learned Authorised Representative has excluded this company as a comparable. As these decisions of the Tribunal are for the very same assessment year, respectfully following the consistent view of the Tribunal in case of other assessees, we exclude this company as a comparable. Kals Information Systems Ltd. - in absence of segmental details of the revenue earned, the company cannot be treated as comparable to the assessee Soft Sol Ltd. - prima-facie assessee s claim appears to be correct as the RPT as a percentage of total sales works out to 60.93%. That being the case, the company under no circumstances can be treated as a comparable to the assessee. Therefore, we direct the Assessing Officer to verify this aspect and exclude this company from the list of comparables. Disallowance of provisions of expenditure - Held that - Assessing Officer has disallowed assessee s claim of deduction of professional fees, on the ground that it is in the nature of provision and secondly, the assessee has not deducted tax at source. However, it is the contention of the assessee before us that the amount in question has been offered as income in the subsequent assessment year i.e., A.Y. 2010-11. If the assessee has already offered the amount in dispute as income in assessment year 2010-11, it cannot be taxed twice. Therefore, we direct the Assessing Officer to verify assessee s claim and if it is found that the amount of ₹ 2,53,936 has been offered as income by the assessee in assessment year 2010-11 no disallowance of the said amount should be made in the impugned assessment year. This ground is allowed for statistical purposes.

Issues Involved:

1. Arm's Length Price of International Transactions
2. Rejection of Transfer Pricing Documentation
3. Comparable Companies Selection and Rejection
4. Adjustment for Differences between Assessee and Comparables
5. Use of Multiple Year Data for Comparables
6. Information Gathering under Section 133(6)
7. Interpretation of Law and Judicial Pronouncements
8. Benefit of 5% Range under Proviso to Section 92C(2)
9. Disallowance of Provision of Expenses
10. Levy of Interest under Sections 234B and 234D

Issue-wise Detailed Analysis:

1. Arm's Length Price of International Transactions:
The assessee challenged the decision of the CIT(A) who upheld and enhanced the Transfer Pricing adjustments made by the AO, resulting in an addition of INR 30,767,570 to the income of the assessee. The Tribunal noted that the AO selected 20 companies as comparables, rejecting the assessee's selection, and applied an arithmetic mean of 25.62% to determine the arm's length price, leading to a transfer pricing adjustment of INR 2,66,82,392.

2. Rejection of Transfer Pricing Documentation:
The CIT(A) rejected the Transfer Pricing documentation prepared by the assessee. The Tribunal did not specifically adjudicate on this issue as it was considered general in nature.

3. Comparable Companies Selection and Rejection:
The Tribunal dealt extensively with the selection and rejection of comparable companies. The CIT(A) excluded certain companies like Celestial Biolabs Ltd., Infosys Technologies Ltd., and Wipro Ltd., and also excluded three more companies suo-motu due to consistent losses. The Tribunal upheld the exclusion of Acropetal Technologies Ltd., Bodhtree Consulting Ltd., and Kals Information Systems Ltd. based on functional dissimilarity and lack of segmental accounting. The Tribunal directed the AO to verify the related party transactions of Soft Sol Ltd. and exclude it if the transactions exceeded 25% of total sales.

4. Adjustment for Differences between Assessee and Comparables:
The Tribunal noted that the CIT(A) did not provide appropriate adjustments for differences between the assessee and comparables. The Tribunal directed the AO to recompute the arm's length price after excluding certain comparables.

5. Use of Multiple Year Data for Comparables:
The issue of using multiple year data was not pressed by the assessee and was dismissed as "not pressed."

6. Information Gathering under Section 133(6):
The issue regarding the AO's use of information gathered under Section 133(6) was also not pressed by the assessee and dismissed as "not pressed."

7. Interpretation of Law and Judicial Pronouncements:
The Tribunal noted that the CIT(A) made several observations based on incorrect interpretation of law. However, specific details were not adjudicated as the issue was dismissed as "not pressed."

8. Benefit of 5% Range under Proviso to Section 92C(2):
The Tribunal directed the AO to compute the arm's length price afresh, which made the issue of the 5% range benefit infructuous.

9. Disallowance of Provision of Expenses:
The AO disallowed a provision of expenses of INR 253,936 on the grounds of non-payment and non-deduction of tax at source. The Tribunal directed the AO to verify if the amount was offered as income in the subsequent assessment year (2010-11) and, if so, not to disallow the amount in the impugned assessment year.

10. Levy of Interest under Sections 234B and 234D:
The issue of interest levy under Sections 234B and 234D was not specifically adjudicated as it was considered general in nature.

Conclusion:
The Tribunal provided a detailed analysis of the selection and rejection of comparable companies, directed the AO to recompute the arm's length price, and provided specific directions regarding the disallowance of provision of expenses. The assessee's appeal was partly allowed, and the order was pronounced on 30.09.2016.

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