2016 (8) TMI 1221 - AT - Income Tax

TPO - comparability - Held that - The assessee company is engaged in providing ITES and therefore it appears to be a BPO company thus companies functionally dissimilar with that of assessee company need to be deselected from final list of comparable.

Issues Involved:
1. Legality of assessment and reference to Transfer Pricing Officer (TPO).
2. Legality of fresh comparable search by TPO.
3. Comparability analysis for determining arm's length price (ALP).
4. Erroneous data used by AO/TPO.
5. Non-allowance of appropriate adjustments by AO/TPO.
6. Variation of 5% from the arithmetic mean.
7. Deduction under section 10A of the Income-tax Act, 1961.
8. Levy of interest under section 234B.
9. Directions issued by the Dispute Resolution Panel (DRP).

Detailed Analysis:

1. Legality of Assessment and Reference to TPO:
The assessee contended that the final assessment order by the Deputy Commissioner of Income-tax (DCIT) was bad in law and violated principles of natural justice due to the absence of a show-cause notice as per section 92C(3) of the Income-tax Act, 1961. Furthermore, the AO erred in making a reference to the TPO without recording an opinion that any conditions in section 92C(3) were satisfied and did not follow section 92CA(1).

2. Legality of Fresh Comparable Search by TPO:
The assessee argued that the TPO conducted a fresh benchmarking analysis using non-contemporaneous data, substituting the assessee's analysis with his own conjectures. The TPO also failed to demonstrate that the motive was to shift profits outside India, a prerequisite for any adjustment under Chapter X of the Act.

3. Comparability Analysis for Determining ALP:
The AO/TPO erred in benchmarking the transactions of the assessee's captive IT-enabled services (ITeS) with companies operating as fully-fledged entrepreneurs. The AO/TPO rejected comparable companies from the Transfer Pricing Study without considering functional and risk analysis. Arbitrary filters were applied, and companies were accepted or rejected without considering turnover, size, and functional comparability. Specific issues included the application of a 25% related party criteria, rejection of companies with different year endings, and exclusion of foreign exchange gains or losses in net margin calculations.

4. Erroneous Data Used by AO/TPO:
The AO/TPO used non-contemporaneous data not available in the public domain at the time of the assessee's transfer pricing study. They also failed to apply multiple-year data, which influenced the pricing policy of the assessee.

5. Non-Allowance of Appropriate Adjustments by AO/TPO:
The AO/TPO did not allow appropriate adjustments under Rule 10B to account for differences in accounting practices, marketing expenditure, research and development expenditure, and risk profiles between the assessee and comparable companies.

6. Variation of 5% from the Arithmetic Mean:
The AO/TPO did not grant the benefits of the proviso to section 92C(2) of the Act, which allows for a variation of 5% from the arithmetic mean.

7. Deduction Under Section 10A of the Income-tax Act, 1961:
The AO erred in computing the deduction under section 10A by reducing expenditure incurred in foreign currency from the 'export turnover' without making a corresponding adjustment to the 'total turnover'. The assessee relied on the Karnataka High Court decision in CIT v. Dell International Service Private Limited.

8. Levy of Interest Under Section 234B:
The AO erred in levying interest under section 234B of the Act amounting to ?7,268,642.

9. Directions Issued by the Dispute Resolution Panel (DRP):
The DRP erred in not taking cognizance of the objections filed by the assessee and in confirming the draft assessment order. They misinterpreted the definition of 'export turnover' for computing the deduction under section 10A. The DRP directed adjustments to 'export turnover' without corresponding adjustments to 'total turnover'.

Conclusion:
The Tribunal modified the CIT(A)'s order by reinstating three comparables (Allsec Technologies Ltd., Transworks Information Services Ltd., and Ace Software Exports Ltd.) and rejecting Vishal Information Technologies Ltd. The Tribunal directed the AO/TPO to re-compute the ALP after excluding eight comparables for AY 2007-08, considering the assessee's profile as an ITES provider. The appeals of the assessee and revenue for AY 2005-06 were partly allowed, and the appeal for AY 2007-08 was partly allowed for statistical purposes.

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