2016 (7) TMI 1297 - AT - Income Tax

TPA - selection of comparable of Techprocess Solutions Ltd. - Held that - TPO rejected this company on the ground of non-availability of financial data and annual report. The assessee has pointed out that application dated 20.10.2015 filed before the ld. DRP u/r 13 of IT DRP Rules that the ld. TPO has rejected the comparables selected by the assessee holding that data of the company for the relevant financial year was not available in the public domain, however, the assessee has submitted the annual report of that company for F.Y. 2010-11. On objection before the ld. DRP, the stand of the TPO was upheld without considering the annual report submitted by the assessee. This application is pending adjudication. However, as the annual report of the company is available and the same is also submitted in paper book before us, we set aside this ground of appeal to the file of ld. TPO to consider this company for comparability analysis. In the result, ground No. 6 of the appeal is allowed for statistical purposes. Remit the matter to the ld.TPO for including R. Systems International Ltd. in the list of comparables for working out the PLI of the assessee. We also make it absolutely clear that it would be the duty of the assessee to substantiate the financial information with respect to R Systems International with authentic and reliable data. The ld. TPO or the Assessing Officer are also directed to verify and assure them about the reliability of the information. After this verification, the above company may be treated as proper comparable if found proper on such examination. In the result, ground of the appeal of the assessee is allowed accordingly. Companies functionally dissimilar with that of assessee as engaged in providing ITES such as back office, financial and fund accounting services to its AE need to be deselected from final list of companies. Computation of risk adjustment - Held that - In the present case, the assessee has submitted the claim at page No. 280, risk adjustment computation with respect to set of comparables. We do not find any sound reasoning given by the ld. TPO, who did not state how the data submitted by the assessee is not reliable. Therefore, in the interest of justice, we set aside this matter to the file of the ld. TPO to verify the computation of risk adjustment submitted by the assessee and to allow the same after proper verification and if found in accordance with law. In the result, ground No. 10 of appeal is set aside to the file of the ld. TPO with the above directions and the same is accordingly allowed.

Issues Involved:
1. Validity of the assessment order.
2. Arm’s length principle for international transactions.
3. Use of multiple year/prior years’ data.
4. Doctrine of impossibility of performance.
5. Selection filters and rejection of comparables.
6. Rejection of Techprocess Solutions Ltd. as a comparable.
7. Rejection of R. Systems International Ltd. as a comparable.
8. Selection of non-comparable companies.
9. Incorrect margins of comparable companies.
10. Risk adjustment for low-risk service providers.
11. Treatment of delay in outstanding receivables as an international transaction.
12. Initiation of penalty proceedings.
13. Computational errors in tax demand calculation.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contended that the assessment order passed by the Income Tax Officer pursuant to the directions of the Dispute Resolution Panel (DRP) is bad in law. However, this ground was general in nature and no specific arguments were advanced, leading to its dismissal.

2. Arm’s Length Principle for International Transactions:
The DRP, AO, and TPO confirmed an addition of ?23,348,693 to the income of the appellant, holding that the international transaction for IT enabled services did not satisfy the arm’s length principle. The TPO used different comparables and filters, leading to the proposed adjustment.

3. Use of Multiple Year/Prior Years’ Data:
The appellant argued that the DRP, AO, and TPO erred in disregarding the use of multiple year/prior years’ data, which is in contravention of section 92C of the Act read with Rule 10B and Rule 10D(4) of the Income-tax Rules. This issue was not separately adjudicated and was considered redundant.

4. Doctrine of Impossibility of Performance:
The appellant claimed that the authorities disregarded the doctrine of impossibility of performance by mandating the use of contemporaneous data for determining the ALP of international transactions. This issue was also not separately adjudicated and was considered redundant.

5. Selection Filters and Rejection of Comparables:
The DRP confirmed the action of the AO and TPO in modifying the selection filters and rejecting the comparable companies identified by the appellant. This issue was not separately adjudicated and was considered redundant.

6. Rejection of Techprocess Solutions Ltd. as a Comparable:
The TPO rejected Techprocess Solutions Ltd. due to non-availability of financial data. The appellant submitted the annual report, but the DRP upheld the TPO’s decision. The Tribunal set aside this issue to the TPO for reconsideration based on the submitted annual report.

7. Rejection of R. Systems International Ltd. as a Comparable:
R. Systems International Ltd. was rejected by the TPO due to a different financial year ending. The Tribunal directed the TPO to include this company in the comparability analysis, provided the financial data for the comparable period is reliable and verified.

8. Selection of Non-Comparable Companies:
The appellant contested the inclusion of eClerx Services Pvt. Ltd., Infosys BPO Ltd., and TCS E-Serve Ltd. as comparables. The Tribunal directed the exclusion of these companies from the final set of comparables based on functional differences and previous judicial pronouncements.

9. Incorrect Margins of Comparable Companies:
The appellant pointed out errors in the computation of margins for certain comparables. The Tribunal directed the AO to verify and rectify these computations based on the appellant’s submissions.

10. Risk Adjustment for Low-Risk Service Providers:
The appellant claimed a risk adjustment due to its status as a low-risk service provider. The TPO rejected this claim citing lack of reliable data. The Tribunal directed the TPO to verify the appellant’s computation of risk adjustment and allow it if found reliable.

11. Treatment of Delay in Outstanding Receivables as an International Transaction:
The TPO treated the delay in receivables as a deemed intra-group loan and imputed interest. The Tribunal set aside this issue to the TPO for re-examination in line with previous judicial decisions.

12. Initiation of Penalty Proceedings:
The initiation of penalty proceedings under section 271(1)(c) was considered premature and consequential, and thus, not adjudicated.

13. Computational Errors in Tax Demand Calculation:
The appellant highlighted computational errors in calculating the tax demand along with interest under section 234B. This issue was considered consequential and not separately adjudicated.

Conclusion:
The appeal was partly allowed, with specific directions for reconsideration and verification on several grounds, including the inclusion/exclusion of comparables, risk adjustment, and computational errors.

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