2015 (12) TMI 517 - AT - Income Tax

Transfer pricing adjustment - adjustment to the arm s length price of the international transaction of provision of software development services provided by the appellant company to its holding company M/s ION Trading UK Ltd. - Held that - Companies that are affected by factors like persistent losses, declining sales, extraordinary Income or expense, mergers and acquisitions or other such factors which affect the operations of the company substantially should not be used as comparables as they will not prove to be good benchmarks. Adjustment of unutilized rent and maintenance expenses as expenses incurred in relation to the international transaction of the provision of Software development services - Held that - We uphold the order of Hon ble DRP, as it has rightly held that as there is no objective basis led by the assessee to support its claim; mere submission that there was underutilization does not discharge the burden upon the assessee. Moreover, the assessee has not given any cogent basis to satisfy the reasons for underutilization. Once the assessee is a software service provider to its AE then there can be no claim on account of under utilization of capacity as it was AE who initiates such expansion. Hence, we reject the ground raised by the assessee. Risk adjustment under Rule 10B(1)(e)(iii) and Rule 10B(3) to account for differences in the risk profile of the comparable companies vis- -vis the Appellant - Held that - Where the assessee succeeds in ably demonstrating that the comparables finally selected bore relatively more risk than it, then there should be no denial of the risk adjustment. If, however, the assessee fails in specifically pointing out the extra risks undertaken by the comparables, then, of course, there cannot be any question of granting risk adjustment. Under the transfer pricing regime, onus is always on the assessee to show the reasons for claiming any separate adjustment by pointing out the differences between it and the comparables. Risk adjustment can be allowed provided the assessee places on record some appropriate material to demonstrate that the risk undertaken by the comparable companies were relatively more than it, warranting downward adjustment in their profit rates. Further, the variation in such risks, if any, should be capable of quantification on some reasonable and logical basis. Since the ld. AR has failed to objectively demonstrate the relatively higher risks undertaken by the comparables on an overall basis, we are disinclined to grant any risk adjustment.In view of the foregoing discussion, we set aside the impugned order and remit the matter of determination of ALP of the international transaction of Provision of IT enabled data conversion services to the file of TPO/AO for a fresh decision AO/Ld. TPO and the Hon ble DRP did not erred in not granting the benefit of reduction/variation of 5 percent from the arithmetic mean while determining the arm s length price to the Appellant as per the proviso to section 92C(2) of the Act.

Issues Involved:
1. Adjustment to the arm's length price (ALP) of international transactions.
2. Jurisdiction of the Transfer Pricing Officer (TPO).
3. Motive of profit shifting.
4. Benchmarking analysis and selection of comparables.
5. Risk adjustment.
6. Levy of interest under sections 234A, 234B, and 234D.
7. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Adjustment to the Arm's Length Price (ALP) of International Transactions:
The appellant company, a wholly-owned subsidiary of M/s ION Trading UK Ltd., provided computer software development services to its AE and declared an income of Rs. 3,53,440/-. The TPO made an adjustment of Rs. 4,46,82,661/- to the ALP, which was later reduced to Rs. 3,03,25,034/- by the DRP. The TPO identified 23 comparables and computed a margin of 23.99%, which was recalculated to 17.22% by the DRP on a set of 22 comparables. The final adjustment was determined at Rs. 3,03,25,034/-.

2. Jurisdiction of the Transfer Pricing Officer (TPO):
The appellant argued that the TPO's order was without jurisdiction as the AO did not record an opinion that any conditions in section 92C(3) were satisfied. The tribunal did not find merit in this argument, supporting the TPO's jurisdiction.

3. Motive of Profit Shifting:
The appellant contended that the TPO did not demonstrate that the motive was to shift profits outside India. The tribunal did not specifically address this issue, implying that the adjustment was based on the comparability analysis rather than the motive.

4. Benchmarking Analysis and Selection of Comparables:
The appellant challenged the inclusion and exclusion of certain comparables. The tribunal upheld the exclusion of CG-VAK Software & Exports Limited due to functional dissimilarity and lack of segmental details. The tribunal also directed the exclusion of E-Infochips Bangalore Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Thirdware Solutions Ltd., and Wipro Technology Services Ltd. due to functional differences, presence of intangibles, and significant transactions with related parties.

5. Risk Adjustment:
The appellant sought risk adjustment under Rule 10B(1)(e)(iii) and Rule 10B(3). The tribunal upheld the TPO's and DRP's rejection of the risk adjustment, stating that the appellant failed to demonstrate the higher risks undertaken by the comparables and how these risks affected their margins.

6. Levy of Interest under Sections 234A, 234B, and 234D:
The tribunal noted that the chargeability of interest under section 234B would depend on the final income determination and deemed it premature to address this issue at this stage. Grounds related to sections 234A and 234D were considered consequential.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The tribunal rejected the ground related to the initiation of penalty proceedings under section 271(1)(c), stating that it was not connected to the merits of the case and would be addressed independently.

Conclusion:
The appeal was disposed of with directions to the TPO/AO for fresh consideration of the ALP determination, excluding certain comparables as directed. The tribunal upheld the rejection of risk adjustment and the levy of interest under sections 234A, 234B, and 234D, while rejecting the ground related to penalty proceedings under section 271(1)(c).

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