2017 (4) TMI 1331 - AT - Income Tax

TPA - comparability of certain companies selected by the TPO and consequent adjustment made in respect of ALP of international transactions - Held that - Assessee is engaged in providing IT enabled back office services like contract administration, claim administration and technical reinsurance accounting support to its AE, thus companies functionally dissimlar with that of assessee need to de deselected from final list. Foreign exchange fluctuation gain to be treated as operating in nature - Held that - DRP has directed the TPO to consider the foreign exchange fluctuation in respect of the assessee as well as the comparables as operating in nature. Since the assessee has contented that the TPO has not given effect to the said directions of the DRP, accordingly we direct the AO / TPO to give effect to the directions of the DRP on this issue. Incorrect margins computed by the TPO in respect of certain comparable companies - Held that - Since we have directed for exclusion of six companies from the final set of TPO and further the directions of the DRP are to be given effect on certain issues therefore the TPO / AO is directed to recompute the arms length price after giving effect to this order of the Tribunal and also consider the benefit of proviso to section 92C(2) of the Act.

Issues Involved:
1. Adjustment in the arm's length price (ALP) for IT-enabled services (Ites) transactions.
2. Rejection of the economic analysis conducted by the appellant.
3. Use of FY 2011-12 data for determining ALP.
4. Rejection of certain comparable companies based on specific filters.
5. Use of information obtained under section 133(6) for comparability.
6. Acceptance/rejection of companies based on comparability criteria.
7. Computation of operating margins of comparable companies.
8. Consideration of foreign exchange gain/loss as operating in nature.
9. Computation of working capital adjustment.
10. Granting of depreciation adjustments.
11. Allowing capacity adjustments.
12. Adjustments for differences in risk profiles.
13. Levying of interest under sections 234B and 234C.
14. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Adjustment in the ALP for Ites Transactions:
The appellant contested the addition of INR 11,00,63,443 to its total income due to the adjustment in the ALP for Ites transactions with its associated enterprise. The Tribunal noted that the Transfer Pricing Officer (TPO) had rejected three out of six comparable companies selected by the appellant and added six more companies to the set, resulting in an adjusted mean margin of 29.85%. The Dispute Resolution Panel (DRP) excluded one company due to a different business model, leading to a final set of nine comparables.

2. Rejection of Economic Analysis:
The appellant argued that the TPO erred by not accepting its economic analysis and conducting a fresh analysis. The Tribunal did not specifically address this issue but focused on the comparability of selected companies.

3. Use of FY 2011-12 Data:
The appellant contended that the TPO used FY 2011-12 data, which was unavailable during the transfer pricing documentation. The Tribunal did not directly address this issue in the judgment.

4. Rejection of Comparable Companies Based on Filters:
The appellant challenged the rejection of certain comparable companies based on filters such as different accounting years, employee cost criteria, export sales ratio, and turnover thresholds. The Tribunal emphasized the relevance of turnover filters, citing decisions from the Punjab & Haryana High Court and the Bombay High Court, and directed the exclusion of six companies that breached the turnover tolerance range.

5. Use of Information Obtained Under Section 133(6):
The appellant argued against the TPO's use of non-public information obtained under section 133(6) for comparability purposes. The Tribunal did not specifically address this issue.

6. Acceptance/Rejection of Companies Based on Comparability Criteria:
The Tribunal directed the exclusion of six companies from the set of comparables due to their turnover breaching the tolerance range, following precedents from higher courts.

7. Computation of Operating Margins:
The appellant claimed incorrect computation of operating margins for some comparable companies. The Tribunal directed the TPO to recompute the margins by excluding non-operating components as per the DRP's directions.

8. Consideration of Foreign Exchange Gain/Loss:
The appellant argued that foreign exchange fluctuation gain should be treated as operating in nature. The Tribunal noted that the DRP had directed the TPO to consider it as operating in nature and instructed the TPO to give effect to this direction.

9. Computation of Working Capital Adjustment:
The appellant contested the incorrect computation of working capital adjustment. The Tribunal did not specifically address this issue but directed the TPO to recompute the ALP considering the Tribunal's order and DRP's directions.

10. Granting of Depreciation Adjustments:
The appellant sought depreciation adjustments for differences in depreciation rates. The Tribunal did not specifically address this issue.

11. Allowing Capacity Adjustments:
The appellant requested capacity adjustments for differences in capacity utilization. The Tribunal did not specifically address this issue.

12. Adjustments for Differences in Risk Profiles:
The appellant sought adjustments for differences in risk profiles. The Tribunal did not specifically address this issue.

13. Levying of Interest Under Sections 234B and 234C:
The appellant contested the levy of interest under sections 234B and 234C. The Tribunal did not specifically address this issue.

14. Initiation of Penalty Proceedings Under Section 271(1)(c):
The appellant challenged the initiation of penalty proceedings under section 271(1)(c). The Tribunal did not specifically address this issue.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of six companies from the set of comparables, recomputation of ALP, and giving effect to the DRP's directions on foreign exchange fluctuation gain and operating margins. The Tribunal emphasized the relevance of turnover filters and upheld the DRP's directions on certain issues.

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