2017 (1) TMI 1574 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee was engaged in the business of rendering software related services such as Research & Development, Marketing and Technical Support Services to the holding company, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:

1. Transfer Pricing Adjustment
2. Erroneous Rejection of Fresh Search Analysis
3. Erroneous Inclusion/Exclusion of Certain Comparables
4. Non-Allowance of Multiple Year Data
5. Tax Holiday Entitlement under Section 10A
6. Disallowance of Interest Income while Computing Deduction under Section 10A
7. Directions to Re-compute Operating Margins
8. Exclusion of Specific Comparables
9. Verification of Related Party Transactions (RPT) Filter

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contested the transfer pricing adjustment of ?84,85,743 made by the Assessing Officer (AO) based on the Dispute Resolution Panel (DRP) directions. The AO rejected the benchmarking approach adopted by the assessee, leading to the adjustment.

2. Erroneous Rejection of Fresh Search Analysis:
The DRP, AO, and Transfer Pricing Officer (TPO) disregarded the fresh search analysis conducted by the assessee using data for Financial Year (FY) 2009-10. The TPO conducted a selective fresh search, applying additional filters to eliminate certain companies, which was contested by the assessee.

3. Erroneous Inclusion/Exclusion of Certain Comparables:
The DRP, AO, and TPO modified the set of comparable companies identified by the assessee. The inclusion of Asian Business Exhibition and Conferences Ltd. was contested due to its non-comparable services and exceptional year. The exclusion of Cyber Media (India) Ltd. and other functionally comparable companies was also disputed.

4. Non-Allowance of Multiple Year Data:
The DRP and AO did not allow the use of multiple year data as prescribed under Rule 10B(4) of the Rules, determining the arm's length price based on financial information for the previous year 2010-11. This ground of appeal was not pressed by the assessee and hence dismissed.

5. Tax Holiday Entitlement under Section 10A:
The assessee's entitlement to a tax holiday under section 10A on profits derived from software development services was not pressed and hence dismissed.

6. Disallowance of Interest Income while Computing Deduction under Section 10A:
The AO excluded interest income from the profits of the business while computing deduction under section 10A, upheld by the DRP. The assessee argued that the interest income had a close nexus with the business activity and should be eligible for deduction under section 10A. The issue was remitted back to the AO to verify if the FDRs were kept for margin money or availing credit facilities.

7. Directions to Re-compute Operating Margins:
The DRP directed the AO to re-compute the operating margins of Mindtree Ltd. The Revenue contested this, but the Tribunal upheld the DRP's directions, dismissing the Revenue's appeal on this ground.

8. Exclusion of Specific Comparables:
The Tribunal directed the exclusion of Asian Business Exhibition and Conferences Ltd. due to functional dissimilarity and profit volatility. Cyber Media (India) Ltd. and Asian Industry & Information Services Pvt. Ltd. were also excluded based on the assessee's admission. The inclusion of Crystal Hues Ltd., Hansa Vision Pvt. Ltd., Denave India Pvt. Ltd., and Sadhna Media Pvt. Ltd. was rejected due to the lack of financial data.

9. Verification of Related Party Transactions (RPT) Filter:
The DRP directed the TPO to verify the RPT filter in respect of Crisil Ltd. and exclude it if the RPT was greater than 25%. The Tribunal found no merit in the Revenue's appeal against this direction and upheld the DRP's instructions.

Conclusion:
The appeal by the assessee was partly allowed, the appeal by the Revenue was dismissed, and the Cross Objections by the assessee were allowed. The Tribunal provided detailed directions on the inclusion/exclusion of comparables, re-computation of margins, and verification of RPT filters, ensuring the correct benchmarking of international transactions.

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