2015 (9) TMI 1554 - HC - Income Tax

TPA - selection of comparable - Held that - The orders of the TPO the DRP as well as the ITAT this Court is not persuaded that the impugned order of the ITAT suffers from any illegality. The view taken by the ITAT that markets in the US and the India were fundamentally different and that the results of the Indian segment of the US operations of Goldstone Technologies constituted an inappropriate a comparable cannot be said to be perverse. The view of the ITAT that basis of allocation of costs and therefore the working of the profits was also not clear is another aspect on which the Court is unable to hold that the impugned order of the ITAT is perverse. The ITAT has passed the impugned order after examining all the relevant materials. No substantial question of law

Summary

Issues:
1. Transfer pricing adjustment based on operating profit by operating cost (OP/OC) as the profit level indicator (PLI) under the Transactional Net Margin Method (TNMM).
2. Inclusion of M/s Goldstone Technologies as a comparable for transfer pricing analysis.
3. Working capital adjustment claimed by the Assessee.

Transfer Pricing Adjustment Issue:
The appellant, a private limited company providing software development services to associated enterprises, contested a transfer pricing adjustment by the Transfer Pricing Officer (TPO) based on the operating profit by operating cost (OP/OC) as the profit level indicator (PLI) under the Transactional Net Margin Method (TNMM). The TPO rejected the comparables provided by the Assessee and included M/s Goldstone Technologies, a USA-based company, with a significantly higher PLI. The Dispute Resolution Panel upheld the TPO's decision, leading to a transfer pricing adjustment of Rs. 4,62,71,394. The Income Tax Appellate Tribunal (ITAT) excluded Goldstone Technologies as a comparable due to fundamental market differences and lack of clarity in cost allocation, remanding the matter for a working capital adjustment review at the assessment stage.

Inclusion of M/s Goldstone Technologies Issue:
The Assessee objected to the inclusion of M/s Goldstone Technologies as a comparable due to segmental reporting for its US operations and unclear cost allocation. The ITAT concurred, noting incomparable profitability levels between US and Indian software service providers and the lack of transparency in cost allocation. The ITAT directed the exclusion of Goldstone Technologies as a comparable, emphasizing the need for clear and transparent profit calculations in transfer pricing analysis.

Working Capital Adjustment Issue:
The ITAT remanded the working capital adjustment issue to the assessment stage, highlighting the importance of a thorough review and clear understanding of cost allocation and profit calculations in transfer pricing analysis. The Court dismissed the appeal, affirming the ITAT's decision to exclude Goldstone Technologies as a comparable and emphasizing the need for clarity and transparency in transfer pricing assessments.