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2013 (6) TMI 113 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Revenue determined ALP of the appellant s international transaction of provision of software development services to its AE at R 26,93,99,396/- as against Rs 24,48,47,439/- declared by the assessee - benefit of /-5% denied - Held that - The amended Proviso denying the benefit has been brought on the statute by the Finance (No. 2) Act, 2009 with effect from 1.10.2009 which would be applicable prospectively and would not apply in respect of the stated assessment year, which is prior to the insertion of the amended Proviso with effect from 1.10.2009 & the proviso inserted by the Finance (No 2) Act, 2009 would not apply to an assessment year prior to its insertion.Thus no justification to deny the benefit of /-5% to the assessee in terms of the erstwhile Proviso for the purposes of computing the ALP. TPO in computing the transfer pricing adjustment using the financial information of the comparable companies available at the time of assessment - Held that - No credible or cogent reasoning has been brought out to justify the use of multiple data of prior two years and the manner in which it would influence the determination of transfer pricing in relation to the impugned international transaction. Therefore, unable to accept such objection of the assessee against the action of TPO having used the data of the financial year 2005-06 of the comparable companies in order to benchmark the impugned international transaction. Thus, on this aspect, the assessee has to fail. Selection of Comparable - Compucon Software Ltd - Held that - As company has a high percentage of Related Party Transactions (RPT) exceeding 25% therefore,even on the basis of the threshold adopted by TPO the said company merits exclusion from the list of comparable companies. Secondly, even adopting the threshold of RPT at 25%, the said company is liable to be excluded. In favour of assessee. Inclusion of ICSA (India) Ltd. as comparable - Held that - No reasons have been advanced by the TPO to do away with the filter adopted by the assessee wherein assessee has excluded comparables wherein the sales are less than Rs One crore and also where the sale are in excess of Rs 50 crores on the basis of the turnover of the comparables TPO is not justified, on a selective basis, to ignore such filter and adopt a comparable company such as ICSA (India) Ltd. for the purposes of comparing international transaction in question which falls outside the search matrix. Even with regard to the filter applied by the assessee on the basis of the level of R & D expenses the situation remains the same. Therefore, once the TPO has accepted such filters in principle, clearly its application is unjustly ignored by him while including ICSA (India) Ltd. as a comparable company. Therefore, direct the TPO to exclude ICSA (India) Ltd. from the final set of comparables. In favour of assessee. Inclusion of Kals Information System Ltd. as comparable - Held that - The said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. All these aspects have not been factually rebutted thus the said concern is liable to be excluded from the final set of comparables. In favour of assessee.
Issues Involved:
1. Computation of arm's length price (ALP) of international transactions. 2. Use of financial information of comparable companies. 3. Selection and rejection of comparable companies. 4. Application of Related Party Transaction (RPT) criteria. 5. Adjustment for differences in functions, assets, and risks. 6. Application of Proviso to section 92C(2) of the Income-tax Act. 7. Levy of interest under section 234B of the Act. Detailed Analysis: 1. Computation of Arm's Length Price (ALP) of International Transactions: The core issue in the appeal was the upward adjustment of Rs 2,45,51,957/- made by the Assessing Officer (AO) in computing the ALP of international transactions. The appellant company benchmarked its international transactions using the Transactional Net Margin Method (TNMM) and identified comparables based on a FAR analysis. The TPO, however, used financial data available at the time of assessment and selected additional comparables, resulting in the disputed adjustment. 2. Use of Financial Information of Comparable Companies: The appellant argued that the TPO erred in using the financial data of comparable companies for the year ending March 31, 2006, which was not available when the appellant complied with the Indian TP regulations. The Tribunal upheld the TPO's use of data for the financial year 2005-06, as per Rule 10B(4) of the Income-tax Rules, 1962, stating that the appellant did not justify the use of multiple year data. 3. Selection and Rejection of Comparable Companies: The appellant contended that the TPO unjustly rejected nine out of eleven comparables selected by the appellant and included five new comparables without a sound search strategy. The Tribunal found merit in the appellant's objections regarding certain comparables: - Compucon Software Ltd.: Excluded due to high RPT exceeding 25%. - ICSA (India) Ltd.: Excluded due to turnover exceeding Rs 50 crores and high R&D expenses. - Kals Information System Ltd.: Excluded for being functionally dissimilar, engaged in software product development. 4. Application of Related Party Transaction (RPT) Criteria: The appellant argued against the TPO's RPT threshold of 25% compared to the appellant's 10%. The Tribunal agreed with the appellant's exclusion of Compucon Software Ltd. due to RPT exceeding 25%, aligning with the TPO's threshold. 5. Adjustment for Differences in Functions, Assets, and Risks: The appellant claimed that the TPO failed to make adjustments for differences in functions, assets, and risks between the appellant and the comparables. The Tribunal noted that the TPO allowed only a working capital adjustment and did not adequately address the differences in risk profiles. 6. Application of Proviso to Section 92C(2) of the Income-tax Act: The appellant sought the benefit of the erstwhile Proviso to section 92C(2) for a +/-5% adjustment. The Tribunal allowed this benefit, citing precedents and emphasizing that the amended Proviso effective from 1.10.2009 should not apply retrospectively to the assessment year in question. 7. Levy of Interest under Section 234B of the Act: The appellant argued against the levy of interest under section 234B for additions based on updated financial data. The Tribunal did not specifically address this issue, as the relief on the main adjustment rendered it moot. Conclusion: The Tribunal allowed the appeal, providing relief to the appellant by excluding certain comparables and granting the benefit of the +/-5% adjustment under the erstwhile Proviso to section 92C(2). This resulted in the appellant's margin being at arm's length, thus nullifying the disputed adjustment.
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