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2011 (7) TMI 583 - AT - Income TaxTransfer pricing adjustment - ALP - assessee objected in not allowing the use of multiple years data for the purpose of a determining the ALP - Held that - For the purpose of determining the ALP, the transactions entered into the AE are to be compared with uncontrolled transactions carried on by an entity during the same period as that of the assessee company as provided under rule 10B(4) of the Income-tax Rules. Hence, lower authorities are right in considering the data of only one year - Decided in favor of Revenue. Non-availability of current year data in respect of the comparables at the time of filing the return of income is concerned - Held that - We find force in the finding of the CIT(A) in confirming the action of the TPO in directing the assessee company to conduct fresh search of the comparables during the transfer pricing proceedings as the Rule 10B(4) of the IT Rules require use of current year data for the purpose of comparability analysis. Allowance of 5% deduction before computing the ALP - Held that - Tolerance band provided in the aforesaid provision is not to be taken as a standard deduction. If the arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment. If it exceeds the said tolerance band, then ALP adjustment is not required to be computed after allowing the deduction at 5%. That means, actual working is to be taken for determining the ALP without giving deduction of 5%. Difference in accounting policies followed by the assessee company and the alleged comparable companies selected by TPO - Held that - Assessee company has not raised any ground on this issue before the first appellate authority. Further, no such plea has been made during the transfer pricing proceedings before the TPO. Under these circumstances, the ground raised by the assessee company before us is not entertainable. Selection of comparables - Held that - As the assessee company not adduced any cogent reason as to why it had selected Visualsoft as comparable in its TP study erroneously. Moreover, the assessee company agreed before the TPO that the Visualsoft is an unrelated party and can be comparable with that of the assessee company. Since the TPO included the aforesaid company on agreed basis, the TPO had no occasion to verify the veracity of present claim made by the assessee company contending that the TPO should have excluded the Visualsoft from the list of comparable companies. Hence, the ground raised by the assessee on this issue is rejected. Force in the arguments of assessee that Spanco Tele-system should be excluded from the final list of comparable companies as the percentage of related party transaction in the case of Spanco Tele-system is 28.73% and it fails to satisfy the TPO s own criteria of excluding the companies having related party transaction of more than 25% of the turnover . For VITL it can be conluded that no two comparable companies can be replicas of each other. The application of rule 10B should be carried out and judged not with technical rigor, but on a broader prospective. In this view of the matter, no infirmity in the order of the CIT(A) in confirming the action of the TPO by selecting the VITL as comparable company. Wipro BPO is not at all comparable as the assessee company is pigmy compared to giant Wipro. Wipro Company s turnover is 20 times more than the assessee company. Hence, the assessee company is not comparable with Wipro BPO. As no controlled transaction between the ASL and Apex Data. Thus, no materially significant related party transactions exist. Section 92A(2)(i) clearly deals with manufacturing of goods and articles and not with provision of services. Therefore, the TPO/CIT (A) is not justified in rejecting the ASL as comparable company. No merit in the argument of assessee that the companies rejected by the TPO operate in similar market condition as that of assessee company due to the fact that the aforesaid companies do not have any international transaction. Dis-allowance of adjustment towards valuable intangibles owned by and in respect of entrepreneurial risk borne by the comparables - Held that - It cannot be said that the assessee company was operating in a risk free environment and accordingly the assessee company is not entitled to any adjustment towards risks borne by various comparable companies. Therefore, we confirm their orders on this issue. Hence, the ground raised by the assessee on this issue is rejected. TPO/AO needs to demonstrate the motive of the assessee company to shift profits outside of India by manipulating the prices charges in its international transactions at the time of framing the transfer pricing assessment - Held that - Transfer pricing rules shall apply when one of the parties to the transaction is a non-resident, even if the transaction takes place within India and there is no requirement to demonstrate the motive of the assessee company to shift the profits outside India by manipulating the prices. Telecommunication charges incurred by the assessee company, which has been excluded by the Assessing Officer from export turnover, should be excluded from the total turnover also, if such amount stands included therein, while computing the admissible deduction under section 10A of the Act. Inclusion of Northgate Technologies Ltd. as comparable company in the BPO segment - Held that - TPO simply rejected the aforesaid company on the ground that segmental results are neither available in the public data base nor provided by the assessee company. Moreover, no observation of the TPO in his order that NTL has failed to fulfil the RPT filter conditions. Thus no infirmity in the findings of the CIT(A) in holding that the aforesaid company should be considered as comparable.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Selection and rejection of comparable companies. 3. Adjustment for differences in depreciation policy. 4. Adjustment for differences in risk profile. 5. Application of the 5% tolerance band under section 92C(2). 6. Exclusion of communication expenses from total turnover for section 10A deduction. 7. Charging of interest under sections 234B and 234C. 8. Initiation of penalty proceedings under section 271(1)(c). Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for International Transactions: The assessee, a company deriving income from Software Development and IT Enabled Services, entered into international transactions with associated enterprises. The Transfer Pricing Officer (TPO) adopted the Transactional Net Margin Method (TNMM) to determine the ALP, resulting in adjustments of Rs. 4,70,27,658 for IT Enabled Services and Rs. 1,78,75,211 for Software Development Services. The CIT(A) upheld the TPO's approach and directed the assessee to conduct a fresh search of comparables using current financial year data. 2. Selection and Rejection of Comparable Companies: The CIT(A) confirmed the TPO's rejection of certain companies as comparables for the back office segment, while accepting others. The Tribunal upheld the CIT(A)'s decision to exclude companies without foreign exchange revenue, as domestic BPOs are less productive and profitable compared to export BPOs. The Tribunal also excluded Spanco Tele-systems due to high related party transactions and Wipro BPO due to its significantly larger turnover. However, the Tribunal included Northgate Technologies Ltd. and Ace Software Ltd. as comparables, rejecting the TPO's basis for their exclusion. 3. Adjustment for Differences in Depreciation Policy: The assessee's claim for adjustment due to differences in depreciation policy was rejected as it was not raised before the CIT(A) or during transfer pricing proceedings. The Tribunal upheld this rejection, emphasizing the need to raise such issues at the appropriate stages. 4. Adjustment for Differences in Risk Profile: The Tribunal found that the assessee, being an independent contracting entity, carried several risks and thus was not operating in a risk-free environment. Consequently, the Tribunal upheld the CIT(A)'s decision not to allow any adjustment for differences in risk profile between the assessee and the comparables. 5. Application of the 5% Tolerance Band under Section 92C(2): The Tribunal clarified that the 5% tolerance band is not a standard deduction but a margin of error within which no adjustment is required. If the ALP exceeds this band, the entire adjustment is to be made without any deduction. This interpretation aligns with the recent decision of the Delhi Bench in the case of ST Microelectronics (P.) Ltd. 6. Exclusion of Communication Expenses from Total Turnover for Section 10A Deduction: The Tribunal upheld the CIT(A)'s decision to exclude communication expenses from both export turnover and total turnover when computing the deduction under section 10A, in line with the decision of the Chennai Special Bench in the case of ITO v. Sak Soft Ltd. 7. Charging of Interest under Sections 234B and 234C: The Tribunal confirmed that charging interest under sections 234B and 234C is mandatory and consequential to the assessed income, rejecting the assessee's grounds on this issue. 8. Initiation of Penalty Proceedings under Section 271(1)(c): The Tribunal noted that there is no provision for appealing against the initiation of penalty proceedings under section 271(1)(c) and thus rejected the assessee's ground on this issue. Conclusion: The Tribunal allowed the assessee's appeal in part, specifically in relation to the inclusion of certain comparables and exclusion of communication expenses from total turnover. The Revenue's appeal was dismissed, affirming the CIT(A)'s decisions on various issues.
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