2017 (2) TMI 1351 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee is engaged in the business of rendering I.T. enabled services to its AEs thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Erroneous assessment by the AO/DRP.
2. Acceptance of Profit margin of 3.09% as per the arms-length principle.
3. Incorrect comparables leading to high arithmetic mean of 18.84%.
4. Adjustment u/s 92CA of ?3,81,82,837/-.
5. Rejection of 12 companies based on functional comparability, super profit, and high turnover.
6. Additional grounds regarding exemption u/s 10A and non-application of mind to the TP study report.

Issue-wise Detailed Analysis:

1. Erroneous Assessment by AO/DRP:
The assessee argued that the AO/DRP's assessment was erroneous in law and on the facts of the case. The Tribunal admitted the additional grounds raised by the assessee, considering them as legal questions that needed adjudication.

2. Acceptance of Profit Margin of 3.09%:
The assessee contended that the AO/DRP should have accepted the profit margin of 3.09% as it complied with the arms-length principle. The Tribunal noted the assessee's reliance on the decision in Tata Consultancy Services Ltd, which emphasized the need for the AO to apply their mind to the TP study before making a reference to the TPO.

3. Incorrect Comparables Leading to High Arithmetic Mean of 18.84%:
The Tribunal examined the comparables used by the TPO, which led to a high arithmetic mean of 18.84% as a ratio of OP/OC. The Tribunal found that the TPO had rejected the TP study of the assessee and conducted an independent analysis under the TNMM, leading to the inclusion of several companies with significantly higher turnover than the assessee.

4. Adjustment u/s 92CA of ?3,81,82,837/-:
The Tribunal addressed the adjustment made by the TPO under section 92CA, which resulted in an addition of ?3,81,82,837/- to the price received by the assessee. The Tribunal found that the TPO had included companies with high turnover, which were not comparable to the assessee, and directed the exclusion of such companies from the final list of comparables.

5. Rejection of 12 Companies Based on Functional Comparability, Super Profit, and High Turnover:
The Tribunal considered the assessee's contention that 12 companies were wrongly included by the TPO. The Tribunal agreed with the assessee that companies with high turnover and super profits were not comparable to the assessee. The Tribunal directed the exclusion of companies like Mindtree Ltd, Sasken, Tata Elxsi, Zylog, and Persistent Systems Ltd, among others, based on high turnover and functional dissimilarity.

6. Additional Grounds Regarding Exemption u/s 10A and Non-application of Mind to the TP Study Report:
The Tribunal addressed the additional grounds raised by the assessee, which argued that the adjustment was unwarranted as the assessee was claiming exemption u/s 10A, and there was no intention to shift profits outside India. The Tribunal referred to the decision in Aztech Software & Technology Services Ltd, which held that the availability of exemption u/s 10A does not bar the applicability of sections 92C and 92CA. The Tribunal dismissed the additional ground of appeal raised by the assessee.

Separate Judgments:
The Tribunal delivered a single judgment, addressing both the assessee's and the Revenue's appeals. The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal against the exclusion of Infosys Technologies Ltd and L&T Infotech Ltd.

Conclusion:
The Tribunal directed the exclusion of certain companies from the final list of comparables based on high turnover and functional dissimilarity. It also remitted the consideration of some companies to the TPO for fresh investigation. The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing a comprehensive analysis of the issues involved.

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