2015 (6) TMI 677 - AT - Income Tax

Transfer pricing adjustment - ALP - selection of comparables - Held that - We are in agreement with the submissions made by the assessee that the aforesaid comparables i.e. Maple Esolutions Ltd. cannot be selected for the purpose of benchmarking in the case of the assessee while applying TNMM method.. The TPO failed to appreciate that the aforesaid comparable company and the assessee are engaged in different businesses altogether. As the business model of voice based companies is of totally different nature than that of non voice based companies, we have no option but to exclude the comparable Maple E-solutions Ltd. for the purpose of benchmarking.. It is pertinent to mention here that the aforesaid comparable company was also involved in fraud and the business reputation came under serious indictment. As regards Indusind Information Technological Limited, it is the case of the assessee that the business model of the comparable chosen by the TPO is that of software development unlike that of the assessee company which is engaged in the business of BPO services. The aforesaid comparable may be excluded for the purpose of benchmarking the arm s length price of the international transactions entered into by the assessee. The software development company has a completely different functional profile as compared to a company engaged in BPO services. The risk undertaken and the assets employed by a software development company cannot be compared to a BPO company. The approach of the TPO by selecting the band of PLI between 10% and 50% is completely arbitrary and has no basis for reasons stated above. The selection of comparables by the TPO has led to arbitrariness wherein the loss making companies are excluded and comparables only in the range of 10% to 50% are selected. The benchmarking made by the TPO is not as per the principles governing Indian Transfer Pricing guidelines regulations or even the OECD guidelines.In view thereof the matter is restored to the file of the AO for making fresh search of comparables in view of the position of law enunciated in the present decision. - Decided in favour of assessee statistical purposes.

Issues Involved:
1. Adjustment to international transactions with Associated Enterprise (AE).
2. Importance of functional comparability in selecting comparables.
3. Faulty approach in rejecting high profit-making companies and applying a band of Profit Level Indicator (PLI).
4. Fresh search for comparability analysis beyond the date of compliance.
5. Application of turnover filter.
6. Rejection of transfer pricing analysis for using multiple year data.
7. Determination of arm's length mark-up based on data for financial year 2006-2007.
8. Applicability of proviso to section 92C(2) and benefit of 5% tolerance.
9. Adherence to principles of natural justice.
10. Deduction of expenses from export turnover.
11. Deduction of overseas insurance expenses.
12. Disallowance of exemption under sections 10A and 10B.
13. Deduction of relevant expenses from export turnover only.
14. Disregard of principles of erstwhile section 80HHC.

Detailed Analysis:

1. Adjustment to International Transactions with AE:
The assessee challenged the adjustment of Rs. 13,157,697 made by the Transfer Pricing Officer (TPO) to its international transactions with its AE. The TPO had made an upward adjustment, which was upheld by the Dispute Resolution Panel (DRP).

2. Importance of Functional Comparability:
The assessee argued that the TPO and DRP erred by not considering the importance of functional comparability while selecting comparables. The Tribunal agreed with the assessee, noting that Maple Esolutions Ltd. and Indusind Information Technology Ltd. were not functionally comparable due to different business models and should be excluded from the list of comparables.

3. Faulty Approach in Rejecting High Profit-Making Companies:
The assessee contended that the TPO adopted a faulty approach by rejecting high profit-making companies and applying a PLI range of 10% to 50%. The Tribunal found the TPO's approach arbitrary and not in line with Indian Transfer Pricing regulations, which do not prohibit considering companies with high profits or losses as comparables.

4. Fresh Search for Comparability Analysis:
The assessee argued that the TPO erred in undertaking a fresh search for comparability analysis beyond the compliance date, resulting in the use of additional information penalizing the assessee. The Tribunal remanded the issue to the AO for fresh search of comparables.

5. Application of Turnover Filter:
The TPO applied a turnover filter with a small range, rendering the comparative study defective. The Tribunal did not specifically address this issue, but it remanded the matter for fresh search of comparables.

6. Rejection of Transfer Pricing Analysis for Using Multiple Year Data:
The TPO rejected the assessee's transfer pricing analysis for using multiple year data. The Tribunal remanded the issue to the AO for fresh consideration.

7. Determination of Arm's Length Mark-Up Based on Data for FY 2006-2007:
The TPO determined the arm's length mark-up based on data for FY 2006-2007. The Tribunal remanded the issue to the AO for fresh consideration.

8. Applicability of Proviso to Section 92C(2) and Benefit of 5% Tolerance:
The TPO held that the proviso to section 92C(2) (as per Finance Act 2009) was applicable and did not provide the benefit of 5% tolerance. The Tribunal did not specifically address this issue but remanded the matter for fresh consideration.

9. Adherence to Principles of Natural Justice:
The assessee argued that the TPO and DRP failed to adhere to principles of natural justice. The Tribunal did not specifically address this issue but remanded the matter for fresh consideration.

10. Deduction of Expenses from Export Turnover:
The AO deducted Rs. 39,451 from the export turnover as expenses in foreign currency. The Tribunal remanded the issue to the AO for fresh adjudication.

11. Deduction of Overseas Insurance Expenses:
The AO deducted Rs. 14,839 as overseas insurance expenses. The Tribunal remanded the issue to the AO for fresh adjudication.

12. Disallowance of Exemption Under Sections 10A and 10B:
The AO disallowed exemption totaling Rs. 4,54,183 by deducting expenses incurred in foreign currency and connectivity charges from the export turnover. The Tribunal remanded the issue to the AO for fresh adjudication.

13. Deduction of Relevant Expenses from Export Turnover Only:
The AO deducted relevant expenses from the export turnover only, not from the total turnover. The Tribunal remanded the issue to the AO for fresh adjudication.

14. Disregard of Principles of Erstwhile Section 80HHC:
The assessee argued that the AO disregarded the principles of erstwhile section 80HHC in sections 10A and 10B cases. The Tribunal remanded the issue to the AO for fresh adjudication.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, with several issues remanded to the AO for fresh adjudication. The Tribunal emphasized the importance of functional comparability and proper benchmarking in transfer pricing analysis.

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