2016 (5) TMI 1404 - AT - Income Tax

TPA - selection of comparables - Held that - Assessee is engaged in providing ITES services thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparables.

Issues Involved:
1. Addition to the international transaction based on Chapter X of the Income-tax Act.
2. Rejection of comparable companies by TPO/AO.
3. Identification of new comparable companies by TPO/AO.
4. Erroneous computation of margins for arm's length price adjustment.
5. Non-consideration of specific provisions of Rule 10B(i)(e)(iii) for adjustments.
6. Disregarding contemporaneous multiple year data.
7. Non-satisfaction of conditions under Section 92C(3) before making an adjustment.
8. Non-allowance of 5% variation benefit under Section 92C(2).
9. Initiation of penalty proceedings and levying interest under Sections 234A, 234B, and 234C.

Detailed Analysis:

1. Addition to the International Transaction Based on Chapter X:
The assessee contested a ?3,12,91,568 addition made to its international transaction by the TPO/AO under the directions of the DRP. The Tribunal noted that the assessee was engaged in ITES services to its associate enterprises and had applied the TNMM method for determining the arm's length price. The TPO had selected 10 comparable companies, but the DRP later reduced it to 8. The Tribunal found merit in the assessee's claim and directed the exclusion of certain companies from the final set of comparables, resulting in a reduction of the TP adjustment.

2. Rejection of Comparable Companies by TPO/AO:
The TPO/AO rejected certain comparable companies proposed by the assessee. The Tribunal agreed with the assessee's contention that Cosmic Global Ltd., Informed Technologies India Ltd., and Accentia Technologies Ltd. were not functionally comparable due to different business models, extraordinary events, and low employee cost ratios, respectively. The Tribunal directed their exclusion from the final set of comparables.

3. Identification of New Comparable Companies by TPO/AO:
The TPO/AO included new companies in the final set of comparables without appreciating that they were not comparable to the assessee. The Tribunal found that the inclusion of Accentia Technologies Ltd. was incorrect due to extraordinary events like acquisition and amalgamation. Similarly, Cosmic Global Ltd. and Informed Technologies India Ltd. were excluded due to their different business models and low employee cost ratios.

4. Erroneous Computation of Margins for Arm's Length Price Adjustment:
The assessee argued that the TPO/AO computed erroneous margins for arriving at the arm's length price. The Tribunal directed the correction of margins for Jeevan Softech Ltd., noting that the TPO had failed to consider segmental revenue correctly. The corrected margin was to be 8.04% instead of 39.38%.

5. Non-Consideration of Specific Provisions of Rule 10B(i)(e)(iii) for Adjustments:
The assessee claimed that the TPO/AO did not consider the specific provisions of Rule 10B(i)(e)(iii) for adjustments. The Tribunal did not address this issue separately as the exclusion of certain comparables and correction of margins resolved the main contention.

6. Disregarding Contemporaneous Multiple Year Data:
The assessee contended that the TPO/AO disregarded contemporaneous multiple year data. The Tribunal upheld the use of single year's data as per Rule 10B(4), unless evidence showed that the single year's data was not functionally similar.

7. Non-Satisfaction of Conditions Under Section 92C(3) Before Making an Adjustment:
The assessee argued that the TPO/AO did not satisfy the conditions under Section 92C(3) before making an adjustment. The Tribunal did not address this issue separately as the exclusion of certain comparables and correction of margins resolved the main contention.

8. Non-Allowance of 5% Variation Benefit Under Section 92C(2):
The assessee claimed the benefit of 5% variation under Section 92C(2). The Tribunal noted that with the corrected set of comparables, the assessee's margins were within +/- 5% of the average margins, making this ground infructuous.

9. Initiation of Penalty Proceedings and Levying Interest Under Sections 234A, 234B, and 234C:
The assessee contested the initiation of penalty proceedings and levying of interest. The Tribunal found the initiation of penalty proceedings premature and dismissed this ground as premature.

Revenue's Appeal:
The Revenue contested the exclusion of Eclerx Services Ltd. as a comparable. The Tribunal upheld the exclusion, citing the Hon'ble Delhi High Court's decision in Rampgreen Solutions Pvt. Ltd. Vs. CIT, which held that Eclerx Services Ltd., being a KPO, was not functionally comparable to a BPO.

Conclusion:
The Tribunal partly allowed the assessee's appeal by directing the exclusion of certain comparables and correction of margins, resulting in no addition to the assessee's income on account of arm's length price adjustment. The Revenue's appeal was dismissed.

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