2016 (2) TMI 1162 - AT - Income Tax

Transfer pricing adjustment - comparable selection criteria - functional similarity - Held that - Assessee being into the business of software / I T enabled services,thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:

1. Deletion of addition made by the Assessing Officer on account of Transfer Pricing Adjustment (TPA).
2. Exclusion and inclusion of certain companies as comparables for Transfer Pricing purposes.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Transfer Pricing Adjustment (TPA):

The primary issue in the appeal by the Revenue was the deletion of an addition of Rs. 18,77,813/- made by the Assessing Officer due to Transfer Pricing Adjustment in the computation of the Arm's Length Price (ALP) for the international transaction. The Transfer Pricing Officer (TPO) had determined the ALP by comparing the assessee's Operating Profit to Total Cost (OP/TC) ratio of 15.50% with the average OP/TC ratio of 23.29% of selected comparables. The TPO made an adjustment due to a variation exceeding 5% between the prices charged by the assessee and the ALP.

2. Exclusion and Inclusion of Comparables:

A. BNR Udyog Ltd.:

The Revenue challenged the exclusion of BNR Udyog Ltd. by the CIT(A) on the grounds of high Related Party Transactions (RPT). The CIT(A) excluded this comparable without examining the RPT percentage, which was claimed to be 75% by the assessee. The Tribunal restored the matter to the TPO to verify the RPT percentage and decide afresh.

B. Datamatix Financial Ltd.:

The CIT(A) excluded Datamatix Financial Ltd. due to functional dissimilarity and lack of segmental information. The Tribunal noted that the TPO included this comparable based on assumptions without verifying segmental information. The matter was restored to the TPO to verify if the figures relied upon were of the BPO division.

C. Genesys International Corporation Ltd.:

The CIT(A) excluded Genesys International Corporation Ltd. due to functional dissimilarity, as it was engaged in specialized services requiring a highly skilled workforce, unlike the assessee. The Tribunal affirmed the CIT(A)'s decision.

D. Maple E Solutions Ltd.:

The CIT(A) excluded Maple E Solutions Ltd. due to its involvement in non-comparable services and serious indictments against its owners. The Tribunal affirmed the CIT(A)'s decision, citing functional dissimilarity and low credibility.

E. Mold-Tek Technologies Ltd.:

The CIT(A) excluded Mold-Tek Technologies Ltd. due to its extraordinary profits and functional dissimilarity. The Tribunal affirmed the CIT(A)'s decision, noting the company's involvement in engineering design services, which were different from the assessee's services.

F. Triton Corp. Ltd.:

The CIT(A) excluded Triton Corp. Ltd. due to its involvement in fraud and functional dissimilarity. The Tribunal affirmed the CIT(A)'s decision, referencing a previous ITAT ruling that declared the company as fraud.

Cross Objections by the Assessee:

i. eClerx Services Ltd.:

The assessee sought exclusion of eClerx Services Ltd. due to its high profit margins and involvement in a merger. The Tribunal, following previous ITAT rulings, excluded eClerx Services Ltd. from the list of comparables due to its exceptional financial results and functional dissimilarity.

ii. Cosmic Global Ltd.:

The assessee sought inclusion of Cosmic Global Ltd. The Tribunal restored the matter to the TPO to decide the comparability of this company afresh.

iii. CG Vok Software:

The assessee sought inclusion of CG Vok Software, which was rejected by the TPO due to low turnover. The Tribunal noted that the company met the turnover filter and had been included in the assessee's comparables in a previous case. The Tribunal ordered its inclusion in the list of comparables.

Conclusion:

The Tribunal set aside the CIT(A)'s order and restored the issue of ALP computation to the Assessing Officer/TPO for fresh consideration, providing an opportunity for both parties to be heard. The appeal by the Revenue was partly allowed for statistical purposes, and the cross objections by the assessee were allowed.

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