2016 (3) TMI 1201 - AT - Income Tax

TPA - selection of comparable - Held that - As the assessee had declared income from software development, training and product both in the domestic and export market and is off-site developer,companies dissimilar with that of assessee need to be deselected from final list of compatibles. Also where the R&D filter is more than 3% not to be taken in the final list of comparables. Working of profit before depreciation and the allowability of its adjustment - Held that - In view of our deciding other aspects of transfer pricing adjustment, we are of the view that final adjustments, if any, would fall within / - 5% range and no adjustment is to be made to international transaction entered into by the assessee. Accordingly, we do not address the issue of exclusion of depreciation from operating cost while benchmarking international transaction of the assessee at present. TP adjustment made under sections 10A and 10B - Held that - The provisions of the Act are clear in not allowing any deduction on any TP adjustment made under sections 10A and 10B of the Act. Where the section itself provides that no deduction under section 10A of the Act is to be allowed on any transfer pricing adjustment, then corollary to the same is that transfer pricing adjustment can be made in the case of concerns which are claiming deduction under sections 10A and 10B of the Act

Issues Involved:
1. Transfer pricing adjustment and comparability analysis.
2. Applicability of transfer pricing provisions to a tax holiday unit under section 10A.
3. Use of contemporaneous data for arm's length analysis.
4. Use of multiple-year data.
5. Turnover filter for identification of comparable companies.
6. Rejection of loss-making companies.
7. Rejection of certain comparable companies identified by the appellant.
8. Rejection of Goldstone Technologies Limited based on foreign exchange earnings.
9. Acceptance of certain companies as comparable.
10. Rejection of 3 years weighted average margin approach.
11. Non-acceptance of OPBDIT as PLI.
12. Adjustment for differences in functional and risk profiles.
13. Applicability of +/-5% range.
14. Initiation of penalty proceedings under section 271(1)(c).
15. Erroneous levy of interest under section 234B.

Detailed Analysis:

1. Transfer Pricing Adjustment and Comparability Analysis:
The Tribunal addressed various aspects of transfer pricing adjustments related to the international transactions conducted by the assessee. The assessee contended that the results would fall within the +/- 5% range if certain companies were included or excluded from the comparables. The Tribunal reviewed the selection and rejection of comparable companies by the TPO and DRP.

2. Applicability of Transfer Pricing Provisions to a Tax Holiday Unit under Section 10A:
The Tribunal upheld the applicability of transfer pricing provisions to the software development unit enjoying a tax holiday under section 10A. The Tribunal found no merit in the claim that transfer pricing adjustments should not be made for units claiming deductions under section 10A, following the ratio laid down by the Pune Bench in ACIT Vs. MSS India Pvt. Ltd.

3. Use of Contemporaneous Data for Arm's Length Analysis:
The Tribunal did not specifically address this issue in detail, implying that the use of contemporaneous data by the TPO was accepted as part of the standard procedure for arm's length analysis.

4. Use of Multiple-Year Data:
The Tribunal did not find merit in the assessee's contention for using multiple-year data. The TPO's approach of using single-year data for the financial year under consideration was upheld.

5. Turnover Filter for Identification of Comparable Companies:
The Tribunal upheld the TPO's application of a broader turnover filter range of INR 25 crores to INR 150 crores. The Tribunal found that the turnover filter adopted by the TPO was appropriate and consistent with the legal position settled by various Tribunal decisions.

6. Rejection of Loss-Making Companies:
The Tribunal found that the TPO had consistently rejected loss-making companies while benchmarking international transactions. The Tribunal upheld the TPO's approach, noting that loss-making companies were excluded from the final set of comparables.

7. Rejection of Certain Comparable Companies Identified by the Appellant:
The Tribunal reviewed the rejection of specific companies by the TPO, such as Orient Information Technologies Limited and Goldstone Technologies Limited, and directed the inclusion of Goldstone Technologies Limited in the final set of comparables, finding no merit in the TPO's rejection based on foreign exchange earnings.

8. Rejection of Goldstone Technologies Limited Based on Foreign Exchange Earnings:
The Tribunal found that Goldstone Technologies Limited had earned 100% of its total sales from exports, contrary to the TPO's observation. The Tribunal directed the inclusion of Goldstone Technologies Limited in the final set of comparables.

9. Acceptance of Certain Companies as Comparable:
The Tribunal reviewed the acceptance of companies like Aztecsoft Ltd. and Helios and Matheson Information Technology Ltd. as comparables. The Tribunal directed the inclusion of Aztecsoft Ltd. and Orient Information Technologies Limited in the final set of comparables, while excluding Helios and Matheson Information Technology Ltd. due to functional dissimilarity.

10. Rejection of 3 Years Weighted Average Margin Approach:
The Tribunal did not specifically address the issue of the 3 years weighted average margin approach, implying that the TPO's use of single-year data was accepted.

11. Non-Acceptance of OPBDIT as PLI:
The Tribunal did not address the issue of using OPBDIT as PLI in detail. The Tribunal's decision focused on other aspects of transfer pricing adjustments, suggesting that the standard PLI approach was upheld.

12. Adjustment for Differences in Functional and Risk Profiles:
The Tribunal restored the issue of risk adjustment to the file of the Assessing Officer/TPO for computation, allowing the assessee to justify the risk adjustment it would be entitled to. The Tribunal acknowledged that captive service providers do not assume significant risks compared to normal risk-bearing entities.

13. Applicability of +/-5% Range:
The Tribunal found that the final adjustments, if any, would fall within the +/- 5% range, and no adjustment was to be made to the international transactions entered into by the assessee.

14. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c), implying that the issue was not a primary focus of the judgment.

15. Erroneous Levy of Interest under Section 234B:
The Tribunal did not specifically address the issue of the erroneous levy of interest under section 234B, implying that the issue was not a primary focus of the judgment.

Conclusion:
The Tribunal's judgment provided a detailed analysis of various aspects of transfer pricing adjustments, comparability analysis, and the applicability of transfer pricing provisions to units enjoying tax holidays. The Tribunal directed the inclusion and exclusion of specific comparable companies and restored the issue of risk adjustment to the Assessing Officer/TPO. The appeal of the assessee was partly allowed, with specific directions for benchmarking international transactions.

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