2016 (5) TMI 1412 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee company characterized itself as a provider of software and development services to its Associated Enterprises (AEs) and selected TNMM as the most appropriate method, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Apportioning certain expenses that are specifically incurred in respect of the non-STP units to the STP units of the assessee and thereby reducing the deduction available to the said STP units - Held that - We are of the considered view that the AO has correctly made the apportionment between STP and STP units and as such, there is no scope in interfering the findings returned by the AO/DRP. Hence, ground determined against assessee.

Issues Involved:
1. Validity of the assessment order.
2. Addition on account of adjustment in the arm's length price (ALP).
3. Entitlement to tax holiday under section 10A.
4. Rejection of comparables selected by the appellant.
5. Use of data available at the time of TP audit.
6. Rejection of certain comparable companies.
7. Use of information obtained under section 133(6).
8. Selection of companies earning supernormal profits.
9. Adjustment for differences in risk profile.
10. Benefit of arm's length range under proviso to Section 92C.
11. Taxation of waiver of deferred sales tax loan.
12. Apportionment of expenses to the STP unit.
13. Deduction for provisions utilized/released back.
14. Levy of interest under section 234D.
15. Withdrawal of interest under section 244A.
16. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contended that the assessment order was vitiated due to violation of principles of natural justice and was arbitrary. The Tribunal did not specifically address this issue but focused on the substantive grounds of appeal.

2. Addition on Account of Adjustment in ALP:
The Tribunal examined the comparables selected by the Transfer Pricing Officer (TPO) and the appellant. It directed the exclusion of certain comparables like Celestial Labs Ltd., Flextronics Software Systems Ltd., Infosys Technologies Ltd., KALS Information Systems Ltd., Lucid Software Ltd., Megasoft Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Wipro Ltd. due to functional dissimilarities, supernormal profits, and other reasons. The Tribunal also directed the inclusion of Goldstone Technologies Ltd. and Maars Software International Ltd. after verifying segmental data.

3. Entitlement to Tax Holiday under Section 10A:
The appellant argued that it was entitled to a tax holiday and did not have an ulterior motive of shifting profits. The Tribunal did not specifically address this issue but focused on the comparability analysis for determining the ALP.

4. Rejection of Comparables Selected by the Appellant:
The Tribunal found that the TPO had rejected the comparables selected by the appellant without adequate justification. It directed the inclusion of certain comparables after verifying segmental data.

5. Use of Data Available at the Time of TP Audit:
The appellant contended that the TPO erred in using data available only at the time of the TP audit. The Tribunal did not specifically address this issue but focused on the appropriateness of the comparables selected.

6. Rejection of Certain Comparable Companies:
The Tribunal examined the grounds for rejecting certain comparables and found that some rejections were justified while others were not. It directed the exclusion of certain comparables and the inclusion of others after verifying their functional profiles and segmental data.

7. Use of Information Obtained Under Section 133(6):
The appellant argued that the TPO erred in using information obtained under section 133(6). The Tribunal did not specifically address this issue but focused on the appropriateness of the comparables selected.

8. Selection of Companies Earning Supernormal Profits:
The Tribunal directed the exclusion of companies like Celestial Labs Ltd. and Infosys Technologies Ltd. due to their supernormal profits, which made them incomparable to the appellant.

9. Adjustment for Differences in Risk Profile:
The appellant contended that the TPO did not make suitable adjustments for differences in risk profiles. The Tribunal did not specifically address this issue but focused on the comparability analysis.

10. Benefit of Arm's Length Range Under Proviso to Section 92C:
The appellant argued that the TPO did not provide the benefit of the arm's length range. The Tribunal did not specifically address this issue but focused on the appropriateness of the comparables selected.

11. Taxation of Waiver of Deferred Sales Tax Loan:
The appellant contended that the waiver of deferred sales tax loan should not be taxed under section 41(1)(a). The Tribunal did not specifically address this issue in detail.

12. Apportionment of Expenses to the STP Unit:
The Tribunal upheld the apportionment of expenses to the STP unit, finding that the AO had correctly made the apportionment based on the material relied upon by the appellant.

13. Deduction for Provisions Utilized/Released Back:
The appellant argued that the AO did not allow the deduction for provisions utilized/released back. The Tribunal did not specifically address this issue in detail.

14. Levy of Interest Under Section 234D:
The appellant contended that the AO erred in levying interest under section 234D. The Tribunal did not specifically address this issue in detail.

15. Withdrawal of Interest Under Section 244A:
The appellant argued that the AO erred in withdrawing interest under section 244A. The Tribunal did not specifically address this issue in detail.

16. Initiation of Penalty Proceedings Under Section 271(1)(c):
The appellant contended that the AO erred in initiating penalty proceedings under section 271(1)(c). The Tribunal did not specifically address this issue in detail.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the TPO/AO to redetermine the ALP of the international transactions undertaken by the appellant during the year under assessment in light of the directions given. The Tribunal focused primarily on the appropriateness of the comparables selected for benchmarking the international transactions.

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