2015 (7) TMI 214 - AT - Income Tax

Transfer pricing adjustment - whether OP/OC margin is 15.01% and not 13.05%.? - Held that - We admit the above ground of appeal raised by the appellant. Further on consideration of the facts, we direct the Assessing Officer to recompute the OP/OC by adopting the operating profit at ₹ 2,46,79,428/- and operating cost at ₹ 16,43,66,021/-. The additional ground is therefore, allowed for statistical purposes. Computing the net margin by considering foreign exchange gain/loss as non operating item - Held that - Assessing Officer while computing the margin of the tax payer, has adopted the foreign exchange loss of ₹ 13,01,702/- as part of the operating cost; whereas while computing the margin of the comparables, he has treated foreign exchange gain/loss as non operating item which to our mind, is apparently contradictory and otherwise not in conformity with the aforesaid decision of the Tribunal. In light of the above, we direct the AO/TPO to treat the foreign exchange gain/loss as an operating item. As such, the ground raised by the appellant is allowed. Exclusion of M/s. Info Drive Software Limited as comparable taken by the TPO/TRP - Held that - employee cost as per the financial statements of M/s. Info Drive Software Ltd. is ₹ 164.05 lacs whereas the total cost is 927.61 lacs (Page 617 of Paper Book). On the said basis, according to the appellant since the employee cost is 17.69% which is less than the filter of 25% applied by the TPO, therefore the same should be excluded. We therefore, direct the AO/TPO to verify the claim of the appellant as to the computation of percentage at 17.69% and if the said computation is correct then the said comparable of M/s. Info Drive Software Ltd. be excluded from the list of comparables. So far as objection raised by the learned DR as well as the DRP that this company has been taken as comparable at the time of filing TP study is not maintainable in light of the recent judgment of the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. vs. DCIT 2015 (4) TMI 949 - DELHI HIGH COURT - Decided in favour of assessee for statistical purposes. Assessing Officer passed order under section 154 of the Act determining the adjustment at ₹ 2,13,67,552/- in terms of the directions of the DRP - Held that - The contention of the appellant is that upper band margin based on the PLI of the appellant at 15.01% is 20.76% and since margin of the comparables is 19.87% is less than 20.76% therefore, no adjustment is warranted. We have allowed both the above claims of the tax payer subject to arithmetical verification by the TPO/AO. Having accepted the above claims, we therefore do not proceed to deal with the remaining grounds as these grounds have become academic in nature. In view of the above, adjustment made by the TPO/AO pursuant to the directions of DRP of ₹ 2,13,67,552/- is deleted subject to the arithmetical verification as directed above. - Decided in favour of assessee.

Summary

Issues Involved:
1. Determination of adjustment to the value of the international transaction.
2. Consideration of non-comparable companies as comparable.
3. Use of financial information of comparable companies for the financial year 2008-09.
4. Cherry-picking of comparables.
5. Selection of companies as comparables based on various criteria.
6. Treatment of foreign exchange gain/loss as non-operating item.
7. Adjustments to the Arm's Length Price considering the low risks assumed by the assessee.
8. Use of an entirely different set of companies as comparables.
9. Rejection of comparable companies identified by the assessee.
10. Rejection of certain filters used by the assessee for identifying comparable companies.
11. Computation of net profit margin.
12. Reliance on the action taken by the Transfer Pricing Officer without exercising independent judgment.
13. Levying of interest based on enhanced taxable income.

Detailed Analysis:

1. Determination of Adjustment to the Value of the International Transaction:
The Transfer Pricing Officer (TPO) determined an adjustment of Rs. 2,13,67,550/- to the value of the international transaction of the assessee, enhancing the taxable income. The appellant contested this adjustment, arguing errors in the selection of comparables and the computation methodology.

2. Consideration of Non-Comparable Companies as Comparable:
The appellant argued that the TPO and the Dispute Resolution Panel (DRP) erred in considering certain non-comparable companies as comparable. These companies did not meet the criteria for comparability, such as functional and product profile, related party transactions (RPT), and employee cost filters.

3. Use of Financial Information for FY 2008-09:
The appellant contended that the TPO used financial information of comparable companies for the financial year 2008-09, which was not available when the appellant maintained documentation as per the Act's requirements.

4. Cherry-Picking of Comparables:
The appellant argued that the TPO cherry-picked comparables without providing information regarding the date of search and the database used, leading to an unjustified selection of comparables.

5. Selection of Companies as Comparables:
The appellant raised multiple issues regarding the selection of companies as comparables:
- Related Party Transactions (RPT) Filter: Companies like Tech Mahindra Ltd. and Infodrive Software Limited had high RPT percentages.
- Employee Cost Filter: Infodrive Software Limited's employee cost was significantly lower than the 25% filter applied by the TPO.
- Functional and Product Profile: Companies like Aricent Technologies, Tech Mahindra Ltd., and Infodrive Software Limited operated in different segments.
- Super-Normal Profits: Some comparables had super-normal profits.
- Insufficient Data: Data for companies like CAT Technologies Limited and Thirdware Solutions Limited was not ample for comparability.
- Non-Compliance with Accounting Standards: Companies like CAT Technologies Limited did not comply with mandatory accounting standards.
- Inappropriate Assumptions: The TPO used inappropriate assumptions for companies with RPT transactions.
- Brand Value/Recognition: Companies like Aricent Technologies and Tech Mahindra Ltd. had higher brand value affecting their rates.
- Assets Employed and Risks Assumed: Companies like Aricent Technologies and Infodrive Software Limited had different asset profiles and risk assumptions.

6. Treatment of Foreign Exchange Gain/Loss as Non-Operating Item:
The appellant argued that the DRP and TPO erred in treating foreign exchange gain/loss as a non-operating item. The Tribunal referred to the decision in Westfalia Separator India Pvt. Ltd., where it was held that forex gain/loss is an operating item as it is a direct outcome of the transaction.

7. Adjustments Considering Low Risks Assumed by the Assessee:
The appellant claimed that the TPO did not make necessary adjustments to the Arm's Length Price to account for the low risks assumed by the assessee in its international transactions.

8. Use of Different Set of Comparables:
The appellant argued that the TPO used an entirely different set of comparables than those identified in the transfer pricing study conducted by the assessee, despite ample comparables being available.

9. Rejection of Comparable Companies Identified by the Assessee:
The appellant contended that the TPO rejected the comparable companies identified by the assessee without valid reasons.

10. Rejection of Certain Filters Used by the Assessee:
The appellant argued that the TPO erred in applying filters such as a 25% RPT filter instead of 15%, a lower turnover limit of Rs. 5 crores instead of Rs. 1 crore, and non-application of a high turnover filter.

11. Computation of Net Profit Margin:
The appellant claimed that the DRP erred in sustaining the TPO's computation of net profit margin at 28% instead of 15%, leading to an adjustment to the Arm's Length Price.

12. Reliance on TPO's Action Without Independent Judgment:
The appellant argued that the DRP erred by relying on the TPO's actions without exercising their own judgment and skill.

13. Levying of Interest Based on Enhanced Taxable Income:
The appellant contended that the Assessing Officer erred in levying interest based on the enhanced taxable income.

Conclusion:
The Tribunal allowed the appellant's additional ground regarding the correct computation of the OP/OC margin, directing the Assessing Officer to recompute it. The Tribunal also directed the AO/TPO to treat foreign exchange gain/loss as an operating item and to verify the exclusion of Info Drive Software Ltd. based on the employee cost filter. Consequently, the adjustment made by the TPO/AO was deleted subject to arithmetical verification. Other grounds were not addressed as they became academic in nature due to the allowed claims. The appeal was allowed for statistical purposes.