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2015 (1) TMI 554 - AT - Income TaxTransfer pricing adjustment - determination of Arm s Length Price - selection of comparable - Held that - Assessee is entitled to object to certain comparables selected by TPO which were also initially selected as comparables by assessee itself. If actually the RPT of Caliberpoint Business Solutions Ltd. is more than 25%, it cannot be treated as a comparable to assessee. Accordingly, we direct AO/TPO to verify this aspect and if it is found that RPT as a percentage of sales is more than 25%, then, this company cannot be treated as comparable to assessee. For Cosmic Global Ltd. company it cannot be treated as comparable to assessee as it outsources its activities. For Infosys BPO Ltd.it cannot at all be considered as a comparable to assessee not only because of its size but also due its brand value, diversified activities, and other functional dissimilarities. For CG Vak Software cannot be treated as comparable to assessee on ground of functional dissimilarity as it is predominantly a computer software development company. For CEPHA Imaging P. Ltd there is nothing in the annual report to suggest that it is into software development. Further from the annual report as well as working submitted by assessee it appears that the RPT as a percentage of sale is 16.59%. Thus direct AO/TPO to verify this aspect and if it is found that RPT of this company is less than 25%, then, this company cannot be rejected as a comparable. For Celestial Biolabs Ltd. is concerned, we are of the view that this company cannot be treated as comparable to assessee as it is engaged in various activities. As far as TCG Life Science Ltd. is concerned can be seen from facts on record, substantial revenue earned by the company is from R D activities. Therefore, only because revenue from manufacturing activities exceed the cut off mark by 0.16%, the company cannot be treated as un-comparable to assessee. Thus direct the AO/TPO to compute the ALP of the international transactions under both the segments keeping in view our directions herein above. - Decided partly in favour of assessee for statistical purpose. Allowance of risk/working capital adjustment - Held that - in the TP study assessee has not worked out any adjustment on account of risk or working capital. However, since we have directed the AO/TPO to compute ALP in accordance with directions given by us on comparables, while doing so, he shall also consider assessee s claim towards adjustments to be made on account of risk/working capital etc. after allowing opportunity of being heard to assessee. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Selection/Rejection of Comparables in Corporate Support Services Segment. 2. Selection/Rejection of Comparables in Research & Development Services Segment. 3. Allowance of Risk/Working Capital Adjustment. 4. Levy of Interest under Section 234B. Issue-wise Detailed Analysis: 1. Selection/Rejection of Comparables in Corporate Support Services Segment: The assessee selected seven companies as comparables in its TP study report, out of which the TPO retained five and rejected two. The assessee objected to three of the retained companies: Caliberpoint Business Solutions Ltd., Cosmic Global Ltd., and Infosys BPO Ltd. - Caliberpoint Business Solutions Ltd.: The assessee argued that this company should not be treated as comparable as it fails the 25% RPT filter applied by the TPO. The TPO is directed to verify if the RPT as a percentage of sales is more than 25%, in which case it cannot be treated as comparable. - Cosmic Global Ltd.: The assessee contended that this company outsources its activities, evident from its low employee cost. The Tribunal directed the AO/TPO to exclude this company from the list of comparables, relying on previous ITAT decisions. - Infosys BPO Ltd.: The Tribunal held that this company cannot be considered comparable due to its significant brand value, diversified activities, and functional dissimilarities. The AO/TPO is directed to exclude this company as comparable. The assessee also objected to the rejection of CG Vak Software and Exports Ltd. and CEPHA Imaging P. Ltd. by the TPO. - CG Vak Software and Exports Ltd.: The Tribunal found that this company is predominantly a software development company with insufficient segmental details of expenditure, thus upholding its rejection as comparable. - CEPHA Imaging P. Ltd.: The Tribunal directed the AO/TPO to verify if the RPT is less than 25%, in which case it should not be rejected as comparable. 2. Selection/Rejection of Comparables in Research & Development Services Segment: The assessee objected to the selection of Celestial Biolabs Ltd. and TCG Life Science Ltd. as comparables. - Celestial Biolabs Ltd.: The Tribunal directed the AO/TPO to exclude this company as it is engaged in diversified activities, following the decision of the ITAT Bangalore Bench. - TCG Life Science Ltd.: The Tribunal upheld the selection of this company as comparable, noting that substantial revenue is earned from R&D activities, and the slight exceedance of the 75% revenue filter does not disqualify it as comparable. 3. Allowance of Risk/Working Capital Adjustment: The assessee argued for necessary risk and working capital adjustments, claiming it operates under a limited risk environment. The Tribunal directed the AO/TPO to consider the assessee's claim for adjustments on account of risk/working capital while computing the ALP, after allowing the opportunity of being heard to the assessee. 4. Levy of Interest under Section 234B: The Tribunal noted that the chargeability of interest under Section 234B depends on the income determined in accordance with the Tribunal's directions. The issue is deemed premature at this stage, and the assessee can raise it at the appropriate time. Conclusion: The appeal is partly allowed, with specific directions to the AO/TPO to recompute the ALP of the international transactions under both segments, considering the Tribunal's findings and directions on the selection/rejection of comparables and the allowance of risk/working capital adjustments. The issue of interest under Section 234B is left open for future determination based on the final assessed income.
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