2016 (5) TMI 1364 - AT - Income Tax

TPA - ALP determination - selection of comparable - Held that - Assessee is engaged in providing IT and IT enabled services thus companies functinally dissimilar with that of assessee need to deselected from final list of comparables.

Issues Involved:
1. Jurisdictional error in reference to TPO.
2. Incorrect determination of Arm's Length Price (ALP) by AO/TPO/DRP.
3. Rejection of comparables in Transfer Pricing (TP) analysis.
4. Inclusion of functionally dissimilar companies in comparables.
5. Incorrect computation of operating profit margins and working capital adjustments.
6. Entitlement to tax holiday under section 10A.
7. Initiation of penalty under section 271(1)(C).
8. Charging of interest under section 234B and 234D.

Detailed Analysis:

1. Jurisdictional Error in Reference to TPO:
The assessee argued that the reference made by the AO to the TPO suffered from a jurisdictional error as the AO did not record any reasons in the draft assessment order to conclude that it was "necessary or expedient" to refer the matter to the TPO for computation of the ALP, as required under section 92CA(1) of the Act. The Tribunal did not specifically address this issue in detail, focusing more on the substantive issues related to the ALP determination.

2. Incorrect Determination of ALP by AO/TPO/DRP:
The AO made a reference to the TPO for determination of the ALP for international transactions. The TPO, after detailed analysis, directed adjustments for software development services and IT-enabled services, which were partially upheld by the DRP. The assessee contested the ALP adjustments, arguing that the TPO and DRP erred in their approach and methodology, including the use of incorrect comparables and failure to consider multiple year/prior years' data.

3. Rejection of Comparables in TP Analysis:
The assessee disputed the inclusion of certain comparables by the TPO. Specifically, the comparables Infosys Technologies Ltd., Wipro Technology Services Ltd., and Persistent Systems Ltd. were contested due to functional dissimilarities, brand ownership, and extraordinary events affecting profitability. The Tribunal agreed with the assessee, noting that these companies had significantly different functional profiles, brand ownership, and other distinguishing factors that made them unsuitable as comparables.

4. Inclusion of Functionally Dissimilar Companies in Comparables:
The Tribunal examined the inclusion of Infosys Technologies Ltd., Wipro Technology Services Ltd., and Persistent Systems Ltd. and found them functionally dissimilar to the assessee. Infosys Technologies Ltd. was excluded due to its diversified functions, brand ownership, and significant R&D expenses. Wipro Technology Services Ltd. was excluded due to its business restructuring and high/volatile profit margins. Persistent Systems Ltd. was excluded due to its involvement in product development and lack of segmental information.

5. Incorrect Computation of Operating Profit Margins and Working Capital Adjustments:
The assessee argued that the TPO erred in computing the operating profit margins and working capital adjustments of the comparables. The Tribunal found merit in the assessee's arguments and directed the exclusion of certain comparables, which affected the computation of the operating profit margins.

6. Entitlement to Tax Holiday Under Section 10A:
The assessee contended that it was entitled to a tax holiday under section 10A of the Act on its profits and, therefore, had no motive to manipulate transfer prices. The Tribunal did not specifically address this issue in detail, focusing more on the substantive issues related to the ALP determination.

7. Initiation of Penalty Under Section 271(1)(C):
The assessee argued that the initiation of penalty under section 271(1)(C) was erroneous. The Tribunal did not specifically address this issue in detail, focusing more on the substantive issues related to the ALP determination.

8. Charging of Interest Under Section 234B and 234D:
The assessee contended that the charging of interest under section 234B and 234D was erroneous. The Tribunal did not specifically address this issue in detail, focusing more on the substantive issues related to the ALP determination.

Conclusion:
The Tribunal directed the exclusion of Infosys Technologies Ltd., Wipro Technology Services Ltd., Persistent Systems Ltd., TCS E-Serve Ltd., TCS E-Serve International Ltd., Accentia Technology Ltd., and Infosys BPO Ltd. from the list of comparables, citing functional dissimilarities, brand ownership, extraordinary events, and other distinguishing factors. The Tribunal's decision emphasized the importance of functional similarity and other relevant factors in determining appropriate comparables for TP analysis.

← Previous Next →