2015 (1) TMI 868 - AT - Income Tax

Transfer pricing adjustment - Disregarding the ALP, as determined by the assessee in the TP documentation - Held that - TPO has given a detailed reasoning for rejecting the assessee s TP document, therefore we decide the issue against the asssessee. Selection of comparables - Held that - No reason to interfere with the orders of TPO and DRP in applying filter of excluding companies with companies with employee cost of less than 25% of total cost. While selecting the comparable ld. TPO / Ld. DRP in principle were agreeable that software Product Company cannot be compared with software service provider. This is evident from the fact that TPO while applying the filters had accepted the assessee s filter of rejecting companies undertaking significantly different functions compared to assessee. Restore this issue of inclusion of above four companies namely, Bodhtree Consul., Cat Tech., Infosys and Tata Elxsi to the TPO for fresh consideration. For Persistent Systems Limited as find from the Annual Report that it has been deriving income from sale of software service and software products and the segmental details were not available. Since this company was included as comparable by the assessee itself and not contested before the TPO/DRP and in the interest of the principles of natural justice and fairness, we direct the TPO to examine as to whether the income derived from sale of products can be excluded while working out the margin of this company. For Thirdware Solutions Ltd we are in agreement with the DRP s observation that Software development, implementation and support services are various sub-segments of software development services only and require employment of software engineers .In view of the above, the TPO is directed to include this company as comparable with a rider to exclude the figure of sale and purchase of license. For TCS it cannot be considered as comparable and, accordingly, the TPO is directed to exclude TCS from the list of comparable as it is dissimilar to that of the assessee. For L & T Infotech & Mindtree TPO was justified in including these companies as comparable as no potentially comparable company can be excluded from the list of comparable simply because of its high turnover. Risk adjustment - Held that - The assessee has not come up with the calculation of quantified risk adjustment as pointed out by the Tribunal for the preceding AY. - Decided against the asssessee. Denying a working capital adjustment to the operating profit margins of the comparable - Held that - Matter restored to the file of TPO for making the working capital adjustment to the profit margins of comparable subject, of course, to assessee demonstrating that there was difference in the levels of working capital employed viz-a-viz the comparable. - Decided in favour of assessee for staistical purposes. Adding FBT paid for computing the book profit u/s 115 JB - Held that - Do not find any reason to interfere with the order of ld. DRP because as per sec. 115 WA Fringe Benefit Tax is an additional incometax and, therefore, it is to be treated at par with income-tax for computing book profit. - Decided against assessee.

Issues Involved:
1. Validity of the assessment order.
2. Transfer Pricing (TP) adjustments and arm's length principle.
3. Rejection of the assessee's TP documentation.
4. Use of current year data versus multiple year data.
5. Application of additional/revised filters for comparability analysis.
6. Inclusion/exclusion of specific companies as comparables.
7. Risk adjustment for the assessee.
8. Consideration of foreign exchange fluctuations.
9. Computational errors in margins.
10. Working capital adjustments.
11. Judicial pronouncements in TP adjustments.
12. Addition of Fringe Benefit Tax (FBT) for computing book profit.
13. Levy of interest under sections 234B and 234D.
14. Initiation of penal proceedings under section 271(1)(c).

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order passed by the AO pursuant to the directions of the DRP as bad in law and void ab-initio. This ground was not pressed during the hearing and was dismissed as 'not pressed'.

2. Transfer Pricing Adjustments and Arm's Length Principle:
The AO confirmed the addition of Rs. 3,18,73,338 to the income of the assessee based on the TPO's assessment that the international transactions did not satisfy the arm's length principle. This ground was also not pressed and dismissed as 'not pressed'.

3. Rejection of the Assessee's TP Documentation:
The TPO rejected the assessee's TP documentation and conducted a fresh economic analysis using additional filters. The Tribunal upheld the TPO's detailed reasoning for rejecting the TP documentation, consistent with the decision in the assessee's case for AY 2008-09.

4. Use of Current Year Data versus Multiple Year Data:
The Tribunal upheld the TPO's use of current year data for comparability analysis, as the assessee failed to demonstrate how earlier year conditions influenced the profit of the relevant financial year. This decision was consistent with the Tribunal's findings for AY 2008-09.

5. Application of Additional/Revised Filters for Comparability Analysis:
The Tribunal addressed the application of various filters by the TPO:
- Turnover Filter: The Tribunal directed the TPO to exclude companies with turnover less than Rs. 1 crore instead of Rs. 5 crores, noting inconsistency in the TPO's approach compared to the previous year.
- Employee Cost Filter: The Tribunal upheld the TPO's application of the filter excluding companies with employee costs less than 25% of total costs.
- Diminishing Revenues/Persistent Losses: The Tribunal upheld the exclusion of companies with diminishing revenues or persistent losses, consistent with the previous year's decision.

6. Inclusion/Exclusion of Specific Companies as Comparables:
The Tribunal addressed the inclusion/exclusion of specific companies:
- Bodhtree Consulting, Cat Technologies, Infosys, and Tata Elxsi: The issue was restored to the TPO for de novo consideration, consistent with the previous year's decision.
- Persistent Systems Limited: The TPO was directed to examine the exclusion of income from the sale of products while working out the margin.
- Thirdware Solutions Ltd: The TPO was directed to include this company as comparable with a rider to exclude the figure of sale and purchase of licenses.
- TCS: The Tribunal directed the TPO to exclude TCS due to its dissimilar functioning and significant R&D activities.
- L&T Infotech and Mindtree: The Tribunal upheld the inclusion of these companies, rejecting the argument that high turnover alone justified exclusion.

7. Risk Adjustment for the Assessee:
The Tribunal dismissed the ground for risk adjustment, noting that the assessee had not quantified the same, consistent with the decision for AY 2008-09.

8. Consideration of Foreign Exchange Fluctuations:
No specific argument was put forth regarding foreign exchange fluctuations, and this ground was not adjudicated.

9. Computational Errors in Margins:
This ground was not pressed during the hearing and was dismissed as 'not pressed'.

10. Working Capital Adjustments:
The Tribunal restored the matter to the TPO for making the working capital adjustment to the profit margins of comparable, consistent with the previous year's decision.

11. Judicial Pronouncements in TP Adjustments:
No specific argument was put forth regarding judicial pronouncements, and this ground was not adjudicated.

12. Addition of Fringe Benefit Tax (FBT) for Computing Book Profit:
The Tribunal upheld the addition of FBT for computing book profit under section 115JB, consistent with the previous year's decision.

13. Levy of Interest under Sections 234B and 234D:
The Tribunal noted that the levy of interest under sections 234B and 234D is mandatory and consequential in nature, and this ground was not maintainable.

14. Initiation of Penal Proceedings under Section 271(1)(c):
The Tribunal dismissed this ground as not maintainable, noting that initiation of penal proceedings cannot be challenged unless the penalty is imposed.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions provided for the TPO to re-examine certain issues and comparables. The Tribunal's decisions were largely consistent with its findings for the previous assessment year (AY 2008-09).

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