2011 (11) TMI 476 - AT - Income Tax

Non-satisfaction of arm s length principle in respect of international transaction - Assessee registered under the Software Technology Parks of India ( STPI ) scheme assessee contested against incorrect inclusion of uncomparable company by TPO - Held that - The TPO has arbitrarily applied various filters for rejecting comparables in software development segment as well as in ITES segment. TPO has retained Infosys Technologies Ltd. and Satyam Software Services Ltd. in the comparable set in complete disregard of the fact that there is sufficient evidence available in public domain to demonstrate that the functional data of Satyam Software Services Ltd. was not reliable for F.Y. 2005-06 and has also failed to apply wages/ sales ratio filter in ITES segment, erroneously retained Allsec Technologies Ltd. in the final comparable set, though it was functionally uncomparable, applied turnover filter of Rs. 5 crores, denied the benefit of working capital adjustment and the risk adjustment. Further, assessee has raised vital points before the TPO as well as the DRP and the same have not been dealt with by proper speaking order. Issue remitted back to the file of the AO who inturn will remit the issue to the TPO for his consideration in the light of adjudication as above - Decided in favor of assessee by way of remand.

Issues Involved:

1. Validity of the draft assessment order.
2. Arm's length principle and transfer pricing adjustments.
3. Inclusion of Infosys Technologies Ltd. as a comparable.
4. Application of wages/sales filter.
5. Denial of the +/- 5% range benefit.
6. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Validity of the Draft Assessment Order:
The appellant challenged the draft assessment order passed by the AO, claiming it was bad in law and void-ab-initio. However, the judgment does not provide a detailed analysis or conclusion on this issue, suggesting it was not the primary focus of the tribunal's decision.

2. Arm's Length Principle and Transfer Pricing Adjustments:
The appellant contested the addition of Rs. 7,56,83,173/- to its income, arguing that its international transactions in the IT and ITES segments adhered to the arm's length principle. The appellant maintained that its transfer pricing documentation, prepared per Section 92D of the Act and Rule 10D of the Income Tax Rules, was disregarded by the TPO. The appellant also argued that it was entitled to a tax holiday under Section 10A and thus had no incentive to manipulate transfer prices.

The tribunal noted that the TPO used only current year data (F.Y. 2005-06) for comparability analysis, which the appellant claimed was not available when preparing its TP documentation. The appellant argued that the TPO's interpretation of 'contemporaneous' data was incorrect and that the benefit of the +/- 5% range should have been applied.

3. Inclusion of Infosys Technologies Ltd. as a Comparable:
The appellant argued that Infosys Technologies Ltd. was not a suitable comparable due to significant differences in the Function Asset Risk (FAR) profile. The tribunal acknowledged a recent judgment by the Delhi Bench of the Jurisdictional Tribunal in Agnity India Technologies P. Ltd. v. ITO, which supported the exclusion of Infosys due to FAR dissimilarities. The tribunal also referenced the Spl Bench decision in Dy. CIT v. Quark Systems (P.) Ltd., which allowed taxpayers to point out mistakes in the assessment, even if the taxpayer initially included the comparable.

4. Application of Wages/Sales Filter:
The appellant contended that the TPO arbitrarily applied a wages/sales filter for rejecting comparable companies and violated natural justice principles by not providing the precise basis for selecting the 50-70% range. The tribunal noted that the appellant's wages to sales ratio was 60% in the software development segment, and Infosys's ratio was 47.2%, which should have led to its exclusion based on the TPO's own filter criteria.

5. Denial of the +/- 5% Range Benefit:
The appellant argued that it was entitled to the benefit of the +/- 5% range as per the old proviso to Section 92C(2) of the Act. The tribunal observed that there was no discussion on this aspect in the TPO or DRP's orders.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant also challenged the initiation of penalty proceedings under Section 271(1)(c) read with Section 274 of the Act. However, the judgment does not provide a detailed analysis or conclusion on this issue.

Conclusion:
The tribunal found that the DRP's order was laconic and did not adequately address the appellant's submissions. The tribunal noted that the appellant had raised strong points for the exclusion of Infosys Technologies Ltd. and other grievances that were not properly addressed by the TPO/DRP. Consequently, the tribunal remitted the issues raised in the appeal to the AO, who was directed to refer the matter back to the TPO for reconsideration in light of the tribunal's observations. The appeal was allowed for statistical purposes.

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