2016 (3) TMI 1182 - AT - Income Tax

TPA - selection of comparable - Held that - Since the assessee before us is engaged in providing ITES services to its parent office companies, thus companies functionally dissimilar to the assessee need to be excluded. Commpanies need to excluded from the final set of comparables having extra-ordinary circumstances of amalgamation.

Issues Involved:
1. Transfer pricing adjustments amounting to ?2,11,83,084.
2. Use of financial information of comparable companies only for financial year 2007-08 and non-consideration of contemporaneous data.
3. Modification of quantitative and qualitative filters adopted by the Appellant in the TP documentation.
4. Rejection of comparable companies.
5. Inclusion of non-comparable companies.
6. Adjustment for risk differences.
7. Acceptance/cherry-picking of high profit margin companies from the Accept/reject matrix.
8. Transfer pricing adjustment without giving the benefit of +/- 5 per cent as available under proviso to section 92C(2) of the Act.
9. Non-applicability of transfer pricing provisions to Appellant enjoying tax holiday regime under section 10A of the Act.
10. Penalty proceedings.
11. Levy of interest under sections 234A, 234B, and 234C of the Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred in making transfer pricing adjustments to the value of international transactions of rendering Information Technology Enabled Services (ITES) and marketing support services entered into by the Appellant. The comparability analysis documented in the transfer pricing study report for AY 2009-10 provided by the Appellant was not considered.

2. Use of Financial Information of Comparable Companies:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred in not considering multiple-year data and contemporaneous data available at the time of undertaking the transfer pricing study for determining the arm's length price of international transactions pertaining to IT-enabled and marketing support services.

3. Modification of Quantitative and Qualitative Filters:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred in modifying the quantitative and qualitative filters adopted by the Appellant in its TP documentation for AY 2009-10.

4. Rejection of Comparable Companies:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred by rejecting certain comparable companies selected by the Appellant in its transfer pricing study report.

5. Inclusion of Non-Comparable Companies:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred by selecting/including certain non-comparable companies in the final set of comparable companies. The Tribunal directed the exclusion of the following companies from the final set of comparables due to functional dissimilarity or extraordinary circumstances:
- Accentia Technologies Ltd.
- Crossdomain Solutions Ltd.
- Cosmic Global Ltd.
- Eclerx Services Ltd.
- Genesys International Corporation Ltd.

6. Adjustment for Risk Differences:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred in comparing full-fledged risk-bearing entities with the Appellant's captive operations without making any risk adjustment for differences between the functional and risk profile of comparable companies considered as comparable vis-à-vis the risk profile of the Appellant.

7. Acceptance/Cherry-Picking of High Profit Margin Companies:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred in cherry-picking high-margin companies from the Accept-reject matrix of the TP report of the Appellant and disregarding other comparable companies for which data is now available in the public domain.

8. Transfer Pricing Adjustment Without Benefit of +/- 5%:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred in computing the arm's length price of the international transactions without taking into account the benefit of +/- 5% variation from the mean, which is permitted and opted for by the Appellant under the provisions of section 92C(2) of the Act.

9. Non-Applicability of Transfer Pricing Provisions:
The learned Assessing Officer, based on directions of the Hon'ble DRP, erred in concluding that the transfer pricing provisions are applicable to the Appellant despite the fact that the Appellant is enjoying the tax holiday regime under section 10A of the Act.

10. Penalty Proceedings:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred in initiating penalty proceedings.

11. Levy of Interest:
The learned Assessing Officer, based on the directions of the Hon'ble DRP, erred in levying interest under sections 234A, 234B, and 234C of the Act, as applicable, on account of unanticipated transfer pricing adjustments made to the total income of the Appellant.

Conclusion:
The appeal of the assessee was allowed, and the Assessing Officer/TPO was directed to compute the arm's length price of international transactions of the assessee accordingly, excluding the aforementioned non-comparable companies from the final set of comparables.

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