2016 (2) TMI 1163 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The business of the assessee is engaged in providing software development and Information Technology Enabled Services (ITES) to its Associate Enterprise on a cost plus basis. Thus the assessee is providing services in two segments i.e. software development services and ITES thus companies functionally dissimilar with that of assessee need to be deselected from final list. Since we have directed the TPO to exclude some of the companies from the list of comparables as well as restored some of the companies to the list of comparables which were excluded by the CIT (Appeals) therefore the TPO/A.O. is directed to recompute the ALP after exclusion and inclusion of the comparable companies as directed above. Needless to say the benefit of tolerance range of /- 5% as per the proviso to section 92C be considered.

Issues Involved:

1. Validity of the CIT (Appeals) order.
2. Rejection of Transfer Pricing (TP) documentation.
3. Comparability analysis and selection of comparable companies.
4. Application of multiple year/prior year data.
5. Use of data available at the time of assessment.
6. Collection of selective information by TPO.
7. Adjustment towards the difference in risk profile.
8. Levy of interest under section 234B of the Act.

Detailed Analysis:

1. Validity of the CIT (Appeals) Order:
The assessee argued that the CIT (Appeals) order was prejudicial and should be quashed. The Tribunal did not find the order entirely prejudicial but noted specific areas requiring reconsideration, particularly the application of the Related Party Transactions (RPT) filter.

2. Rejection of Transfer Pricing (TP) Documentation:
The CIT (Appeals) upheld the TPO's rejection of the TP documentation and the adjustments made. The Tribunal noted that the TPO had conducted a fresh search and selected 26 comparables, which led to an upward adjustment. The Tribunal directed the TPO to reapply the RPT filter at 15% instead of 0%.

3. Comparability Analysis and Selection of Comparable Companies:
The Tribunal examined the functional comparability of several companies:

- Accel Transmatic Ltd. (Seg.): The Tribunal restored this company to the list of comparables, noting no objections from the assessee and an RPT of 6.40%.

- Avani Cincom Technologies Ltd.: The Tribunal found this company functionally similar and restored it to the list of comparables.

- Celestial Labs Limited: The Tribunal excluded this company, noting it was primarily engaged in R&D activities.

- Datamatics Ltd.: Restored to the list of comparables with an RPT of 13.1%.

- Flextronics Software Ltd. (Seg.): Excluded due to involvement in product development.

- Infosys Technologies Ltd.: Excluded due to significant intangibles and diversified operations.

- KALS Information Systems Ltd. (Seg.): Excluded due to functional dissimilarity and absence of segmental data.

- Lucid Software Ltd.: Excluded as it was engaged in software product development.

- Wipro Ltd.: Excluded due to significant investments in business acquisition and R&D activities.

4. Application of Multiple Year/Prior Year Data:
The Tribunal upheld the CIT (Appeals) decision to use current year data (FY 2006-07) for comparability, rejecting the assessee's use of multiple year data.

5. Use of Data Available at the Time of Assessment:
The Tribunal upheld the TPO's approach of using data available at the time of assessment proceedings, emphasizing that the data should be contemporaneous.

6. Collection of Selective Information by TPO:
The Tribunal noted that the TPO's use of selective information under section 133(6) was permissible as long as it was not available to the assessee in the public domain.

7. Adjustment Towards the Difference in Risk Profile:
The Tribunal did not find any merit in the assessee's argument for adjustments towards the difference in the risk profile between the assessee and entrepreneurial companies.

8. Levy of Interest Under Section 234B:
The Tribunal directed the AO to recompute the ALP and consider the benefit of the tolerance range of +/- 5% as per the proviso to section 92C, which would impact the levy of interest under section 234B.

Conclusion:
The Tribunal partly allowed both the revenue's and the assessee's appeals, directing the TPO/AO to recompute the ALP after including and excluding certain comparables as directed. The Tribunal emphasized the application of a 15% RPT filter and the need for functional comparability in selecting comparable companies.

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