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2015 (7) TMI 561 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Coral Hub Limited - Held that - In the case of Mercer Consulting (India) Pvt. Ltd. (2014 (7) TMI 715 - ITAT DELHI) also the company was engaged in rendering IT and IT enabled services to its AEs. This company was providing service in the nature of application development, quality assurance, application maintenance, implementation services, helpdesk services, administrative processing, contribution processing, health and benefits processing and pension plan valuation services to the clients of its AEs for and on their behalf for which it is compensated on cost plus basis. Therefore, we do not find any reason to take a different view in the case of present assessee which is also rendering almost similar services. It is well settled law that in TP cases identical replica of the tested party cannot be found and one has to consider the broad similarities between the tested party and the comparables. The business model of assessee is not comparable to coral hub particularly on account of different models adopted by two companies for carrying out its functions. We, accordingly, direct the AO to exclude this comparable. Eclerk Services Ltd. - primarily assessee was engaged in providing primary data for various field of activities but not complete business solutions. Therefore, this company could not be treated as comparable for the purpose of determining ALP of the transactions between the assessee company with its AEs. We, accordingly, direct that this company be excluded from the list of comparables finally taken by the AO/ TPO as per the direction of the DRP. Aditya Birla Minacs Worldwide Limited; and Microgenetic Systems Ltd. - Admittedly the AO while giving effect to the direction of DRP has adopted the PLI of Aditya Birla Minacs Worldwide Limited and of Microgenetic Systems Ltd., on the basis of safe harbor rule and substituted the margin that was calculated by TPO in his order. This could not be done by AO unless there was direction by ld. DRP. The AO could not vary the margins as computed by TPO in his order, because once reference has been made by AO under section 92CA(1), then in view of the provisions of section 92CA(4), the AO is required to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the ALP as determined by the TPO. Therefore, unless DRP has given any specific direction altering the ALP as determined by TPO, the AO does not have power to alter the same. We, accordingly, direct the AO to take the margins in regard to Aditya Birla Minacs Worldwide Limited and Microgenetic Systems Ltd., as determined by TPO.
Issues Involved:
1. Adjustment to the income of the appellant by holding that the international transactions do not satisfy the arm's length principle. 2. Imputation of interest on receivables from the Associated Enterprise (AE). 3. Erroneous computation of operating margins of comparables. 4. Proposal to initiate penalty under section 271(1)(C) of the Act. 5. Confirmation of addition made by the AO/ TPO without proper consideration of appellant's contentions. Issue-wise Detailed Analysis: 1. Adjustment to the Income of the Appellant: The appellant, engaged in IT-enabled back office support services, contested the adjustment of Rs. 62,233,832 made by the AO/ TPO, asserting that the international transactions were at arm's length. The TPO disregarded the appellant's economic analysis and used updated current year data for comparables, leading to an adjustment of Rs. 5,07,62,260. The appellant objected, citing functional dissimilarity and the inclusion of high-profit comparables like Coral Hub Limited and Eclerk Services Ltd. The Tribunal agreed with the appellant, directing the exclusion of Coral Hub Limited due to its significant outsourcing and different business model. Similarly, Eclerk Services Ltd. was excluded as it provided high-end services involving specialized knowledge, unlike the appellant's low-end services. 2. Imputation of Interest on Receivables: The TPO issued a show cause notice proposing to charge interest at 16% on delayed payments from AE, treating them as unsecured loans. The appellant objected, arguing that receivables were not international transactions warranting benchmarking and that the interest rate was excessive. The TPO imputed interest at 15.77%, resulting in an adjustment of Rs. 18,53,019. The Tribunal found merit in the appellant's objection, noting that the terms of payment were 180 days, accepted by the TPO for the subsequent AY 2010-11. Thus, the imputation of interest was not justified. 3. Erroneous Computation of Operating Margins: The appellant contended errors in the computation of margins for Aditya Birla Minacs Worldwide Limited and Microgenetic Systems Ltd. The TPO initially computed the margins at 0.50% and 10%, respectively, but later revised them to 23.88% and 21.47% based on safe harbor rules without providing the appellant an opportunity to respond. The Tribunal held that the AO could not alter the margins determined by the TPO unless directed by the DRP. Therefore, the AO was directed to adopt the margins as originally computed by the TPO. 4. Proposal to Initiate Penalty under Section 271(1)(C): The appellant objected to the DRP's confirmation of the TPO/AO's proposal to initiate penalty under section 271(1)(C) of the Act. However, this ground was not pressed during the hearing, and thus, it was dismissed. 5. Confirmation of Addition without Proper Consideration: The appellant argued that the DRP did not properly consider its contentions and submissions, leading to the confirmation of the addition by the AO/ TPO. The Tribunal found that the DRP failed to address the appellant's objections adequately, particularly regarding the inclusion of certain comparables and the imputation of interest on receivables. Consequently, the Tribunal directed the AO to exclude the inappropriate comparables and reconsider the imputation of interest. Conclusion: The Tribunal partly allowed the appellant's appeal, directing the exclusion of Coral Hub Limited and Eclerk Services Ltd. from the list of comparables, and instructed the AO to adopt the original margins computed by the TPO for Aditya Birla Minacs Worldwide Limited and Microgenetic Systems Ltd. The imputation of interest on receivables was also to be reconsidered in light of the appellant's submissions. The proposal to initiate penalty under section 271(1)(C) was dismissed as not pressed.
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