2016 (4) TMI 1250 - AT - Income Tax

TPA - selection of comparable - Held that - As assessee company engaged in the business of software development. The company provides software development and allied services in the area of Mail Plant, Web Mail platform and internet related software. This company in Hyderabad is registered as a 100% EoU under STPI Scheme of Govt. of India. This company is one of the group companies of United Online, US, thus companies functionally different with that of assessee need to de-selected from final list of comparability. We therefore direct the Assessing Officer/TPO to determine the ALP keeping in view our directions given hereinabove and if on such determination the price charged by the assessee for its international transaction is found to be within the arms length then no adjustment is required to be made.

Issues Involved:
1. Rejection of transfer pricing documentation.
2. Rejection of use of contemporaneous data.
3. Eligibility under section 10A.
4. Rejection of use of multiple year data.
5. Use of information obtained under section 133(6).
6. Use of additional filters in comparative analysis.
7. Selection of companies earning abnormal high margins.
8. Selection of uncomparables.
9. Adjustment for risk differences.
10. Applicability of proviso to Section 92C(2).
11. Levy of interest under section 234B.
12. Reduction of communication charges from export turnover.
13. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Rejection of Transfer Pricing Documentation:
The assessee's transfer pricing documentation was rejected by the TPO, leading to an adjustment of ?2,61,59,851. The TPO conducted a fresh transfer pricing study using data for FY 2007-08 and selected 19 comparables. The assessee's objections were partially upheld by the Dispute Resolution Panel (DRP), which excluded Celestial Biolabs Ltd. from the list of comparables, reducing the adjustment to ?2,61,59,851.

2. Rejection of Use of Contemporaneous Data:
The TPO rejected the contemporaneous data used by the assessee and instead used information that was not available to the assessee at the time of documentation. This issue was part of the grounds raised by the assessee.

3. Eligibility under Section 10A:
The assessee argued that it was eligible for tax holiday benefits under section 10A of the Act and that there was no incentive for shifting profits. This issue was raised as part of the grounds of appeal.

4. Rejection of Use of Multiple Year Data:
The TPO rejected the use of multiple year data and used only the data for FY 2007-08. The assessee had selected multiple year data to select comparables, which was not accepted by the TPO.

5. Use of Information Obtained under Section 133(6):
The TPO used information/documents obtained under section 133(6) of the Act, which were not available in the public domain. The assessee was not provided an opportunity to cross-examine this information.

6. Use of Additional Filters in Comparative Analysis:
The TPO applied additional filters such as onsite revenue exceeding 75%, diminishing revenue/loss-making companies, and different financial year-end, which led to the rejection of certain comparables.

7. Selection of Companies Earning Abnormal High Margins:
The TPO selected companies with abnormal high margins as comparables to the assessee. The assessee objected to this selection, arguing that these companies were not comparable.

8. Selection of Uncomparables:
The assessee objected to the inclusion of certain companies (Infosys Technologies Ltd., Kals Information Systems Ltd., Tata Elxsi Ltd., Wipro Ltd.) as comparables, arguing that they were functionally different. The Tribunal directed the AO/TPO to exclude these companies from the list of comparables based on previous decisions and functional dissimilarities.

9. Adjustment for Risk Differences:
The assessee argued that the net margins of comparable companies should be adjusted to account for functional and risk differences between the international transactions of the assessee and the comparable companies.

10. Applicability of Proviso to Section 92C(2):
The assessee argued that the adjustment should be limited to a variation of 5% to the arm's length price as per the proviso to section 92C(2).

11. Levy of Interest under Section 234B:
The assessee objected to the imposition of interest under section 234B of the Act on the transfer pricing adjustments.

12. Reduction of Communication Charges from Export Turnover:
The AO reduced communication charges of ?251,725 from the export turnover, considering it attributable to the delivery of computer software outside India. The assessee argued that this amount should also be reduced from the total turnover for computing the deduction under section 10A.

13. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c) of the Act. The assessee raised this issue as part of the grounds of appeal.

Additional Grounds:
The assessee filed a petition for the admission of additional grounds, objecting to the inclusion of certain companies (Avani Cincom Technologies, Bodhtree Consulting Ltd. (Seg.), E-Zest Solutions Ltd., LGS Global Ltd., Persistent Systems Ltd., Qunitegra Solutions Ltd., Softsol India Ltd.) as comparables. The Tribunal admitted these additional grounds and directed the AO/TPO to exclude these companies from the list of comparables based on functional dissimilarities and previous decisions.

Conclusion:
The Tribunal directed the AO/TPO to re-determine the arm's length price (ALP) by excluding the aforementioned companies from the list of comparables. The appeal was allowed for statistical purposes.

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