2016 (8) TMI 1195 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee is engaged in the business of distribution and sale of Digital Switching Equipment, Cellular Exchange Equipment and Other Telecommunication Equipment and also provides related services. The assessee also provides Contract Software Development (CSD) Services and Technical Support Services (TSS), thus companies dissimilar with that of assessee need to deselected from final list of comparable. Working capital adjustment and risk adjustment - Held that - Hon ble DRP has allowed the assessee s claim for working capital adjustment in assessee s own case in AY 2010-11. The Ld. CIT DR also agreed to the preposition that the issue may be restored to the file of the TPO for re-examination. On the issue of risk adjustment it was the Ld. AR submission that the issue may be restored for obtaining expert assistance. The Ld. AR also referred to the Capital Asset Pricing Method (CAPM) Computation submitted before the Hon ble DRP and submitted that the Hon ble DRP has not considered the computation at all. On overall factual matrix of the issue, it is our considered opinion that both these issues required restoration to the file of the TPO for reconsideration and reexamination and it is ordered accordingly.

Issues Involved:
1. Validity of the order passed by the AO.
2. Jurisdictional error in AO's reference to TPO.
3. TP adjustments for CSD services and TSS segments.
4. Rejection of comparables by TPO.
5. Exclusion of certain comparables by DRP.
6. Claim for working capital and risk adjustment.
7. Proportionate TP adjustment for TSS segment.
8. Disallowance of liquidated damages.
9. Initiation of penalty proceedings u/s 271(1)(c).

Detailed Analysis:

1. Validity of AO's Order:
The assessee contended that the AO's order is "bad in law and void ab-initio" due to jurisdictional errors and lack of proper reasons for referring the matter to the TPO under section 92CA(1) of the Act.

2. Jurisdictional Error in AO's Reference to TPO:
The assessee argued that the AO did not record any reasons in the assessment order to justify the reference to the TPO for computation of the Arm's Length Price (ALP).

3. TP Adjustments for CSD Services and TSS Segments:
The TPO rejected the economic analysis for the CSD and TSS segments, applied new quantitative filters, and included/excluded certain companies. The DRP directed the TPO to exclude Acropetal Technologies Ltd. and Wipro Technologies Ltd. but included Octant Industries Ltd. The TPO made a revised TP adjustment of ?111,47,85,326/- for the CSD segment.

4. Rejection of Comparables by TPO:
The assessee contested the rejection of certain comparables in the CSD Services Segment, including Allied Digital Services Ltd. and Helios and Matheson Information Technologies Ltd., arguing that functional comparability is essential rather than geographical location or financial year ending.

5. Exclusion of Certain Comparables by DRP:
The DRP directed the TPO to exclude Wipro Technologies Ltd., but the TPO failed to give effect to this direction. The ITAT directed the TPO to exclude Wipro Technologies Ltd., E-Infochips Ltd., Infosys Limited, Larsen and Toubro Infotech Ltd., Persistent Systems and Solutions Limited, Persistent Systems Limited, Sankhya Infotech Limited, and Zylog Systems Limited from the final list of comparables.

6. Claim for Working Capital and Risk Adjustment:
The assessee claimed working capital and risk adjustments, which were rejected by the TPO and DRP. The ITAT restored these issues to the TPO for reconsideration and reexamination, noting that the DRP had allowed working capital adjustment in the previous year.

7. Proportionate TP Adjustment for TSS Segment:
The assessee argued for proportionate TP adjustment under the TSS segment. The ITAT restored the issue to the TPO for fresh adjudication, considering the assessee's claim that the adjustment should be calculated only on international transactions and not on the entire turnover.

8. Disallowance of Liquidated Damages:
The AO disallowed liquidated damages of ?2,34,58,106/- as being penal in nature. The DRP directed the AO to verify the correctness of the claim. The ITAT remitted the issue to the AO for verification of the assessee's claim that the liquidated damages had crystallized in the relevant year.

9. Initiation of Penalty Proceedings u/s 271(1)(c):
The assessee contended that the penalty proceedings were initiated mechanically and without adequate satisfaction. The ITAT did not specifically address this issue in the order.

Conclusion:
The ITAT allowed the appeal of the assessee, directing the TPO to reexamine certain comparables, reconsider working capital and risk adjustments, and verify the claim for liquidated damages. The ITAT emphasized the need for functional comparability and adherence to judicial precedents in determining the ALP. The appeal was allowed for statistical purposes, with specific directions for the TPO and AO to follow.

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