2015 (4) TMI 586 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - exclusion of one time ESOP cost - Held that - Do not agree with the action of the authorities below in not excluding the one time ESOP cost and accordingly direct the Assessing Officer to exclude the one time ESOP cost while computing margin in the case of the assessee. The margin after excluding ESOP cost is stated to be 16.6 per cent. which may be verified by the Assessing Officer. Selection of comparable - Held that - New comparables selected at the level of the Dispute Resolution Panel should have been considered. The Dispute Resolution Panel has not considered the new comparables without giving any reason. In our view it would be appropriate to take as many comparables as possible so that the mean margin is closer to the correct margin because no two companies can be said to be exactly identical and small differences if any could be eliminated by increasing number of comparables. These new comparables therefore in our view have to be considered. We however note that one of the comparables i.e. SIP Tech has only revenue of Rs. 3.6 crores. Obviously the company has some problems as it is not able to procure enough orders and cannot be considered as established player in the field. It is in our view has to be excluded outright. The new comparables also include L s length price of international transaction has to be calculated with respect to similar transaction with an unrelated party as per the method prescribed and the Revenue is not required to prove tax avoidance due to transfer of profit to lower tax jurisdiction. The Tribunal therefore held that the argument that parent company was incurring loss or had shown lower margin was not relevant. These arguments had also been earlier considered by the Special Bench in the case of Aztec Software Technology Services Ltd. v. Asst. CIT 2007 (7) TMI 50 - ITAT BANGALORE and not accepted. - Decided partly in favour of assessee.

Issues Involved:
1. Transfer pricing adjustment on account of international transactions.
2. Selection of comparables for benchmarking.
3. Computation of margin for the assessee and comparables.
4. Working capital adjustment.
5. Exclusion of extraordinary ESOP cost.
6. Consideration of new comparables submitted at the Dispute Resolution Panel (DRP) stage.

Detailed Analysis:

1. Transfer Pricing Adjustment on Account of International Transactions:
The dispute revolves around the transfer pricing adjustment made by the Assessing Officer (AO) for international transactions between the assessee and its parent company in the US. The AO referred the determination of the arm's length price (ALP) to the Transfer Pricing Officer (TPO), who used the Transactional Net Margin Method (TNMM) for benchmarking. The TPO selected comparables and computed the ALP, leading to a transfer pricing adjustment of Rs. 1,11,97,50,424.

2. Selection of Comparables for Benchmarking:
The assessee initially selected eleven comparables but later argued that five were not comparable due to various reasons, including restructuring and fraud. The TPO excluded four comparables due to substantial related party transactions and selected four final comparables: Infosys Technologies Ltd., Wipro Ltd., Mindtree Consulting Ltd., and Persistent Systems P. Ltd. The assessee also submitted three new comparables during the TPO proceedings, but only two were accepted. At the DRP stage, the assessee submitted four more comparables, which were not considered by the DRP.

3. Computation of Margin for the Assessee and Comparables:
The TPO computed the margin for the assessee at 6.44% based on the profit and loss account, which included an extraordinary ESOP cost. The assessee argued that this one-time ESOP cost, incurred due to the acquisition by Capgemini Group, should be excluded for a proper comparison of margins. The Tribunal agreed with the assessee, directing the AO to exclude the one-time ESOP cost, resulting in a revised margin of 16.6% for the assessee.

4. Working Capital Adjustment:
The assessee requested a working capital adjustment, arguing that differences in accounts receivable and payable impact profitability. The TPO rejected this claim, but the Tribunal directed the AO to consider working capital adjustments using the average of opening and closing balances, as it would improve comparability.

5. Exclusion of Extraordinary ESOP Cost:
The Tribunal upheld the assessee's claim that the extraordinary ESOP cost should be excluded from the profit and loss account for computing the margin. The Tribunal noted that this one-time cost was due to the acquisition by Capgemini Group and was not a recurring expense. The Tribunal directed the AO to exclude this cost, resulting in a revised margin of 16.6%.

6. Consideration of New Comparables Submitted at the DRP Stage:
The Tribunal found merit in the assessee's submission that the TPO had not given sufficient time for selecting new comparables. The Tribunal directed the AO to consider the new comparables submitted at the DRP stage, except for those with turnover below Rs. 100 crores or those that were subsidiaries of another company.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the AO to exclude the extraordinary ESOP cost, consider working capital adjustments, and include new comparables submitted at the DRP stage, subject to certain conditions. The Tribunal upheld the selection of comparables by the TPO/Assessing Officer but directed verification of margins for Mindtree and Persistent. The Tribunal also rejected the argument that transfer pricing adjustments should not be made if there is no transfer of profit to a low tax jurisdiction.

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