2017 (3) TMI 1689 - AT - Income Tax

TPA - comparable selection - Held that - The assessee company was engaged in providing data collection web services information research and related support services to its associated enterprises (AE) thus companies functionally dissimilar with that of assessee need to deselected from final list. Working capital adjustment - Held that - In the case of the assessee company the working capital adjustment has been allowed in assessment year 2008-09 and 2012-13 and there has been no change in the functionality risk and profile of the assessee company from assessment year 2008-09 to 2012- 13. We do not find any reason why the working capital adjustment should not be allowed to the assessee when it has been allowed in immediately preceding year. The Object of the entire comparability process is to reduce the difference between the comparables and the assessee company. The Tribunal in various judgments allowed working capital adjustment to companies of ITES industries. Respectfully following the decision of the Tribunal in the case of Demag Cranes and Component (India) Private Limited (2012 (1) TMI 60 - ITAT PUNE) we direct the TPO/AO to allow the working capital adjustments to the assessee. The ground of the appeal is accordingly allowed.

Issues Involved:

1. Jurisdictional error in referring the matter to the Transfer Pricing Officer (TPO) without recording reasons.
2. Incorrect computation of arm's length price (ALP) and transfer pricing adjustments.
3. Selection and rejection of comparable companies for determining ALP.
4. Application of transfer pricing methodology and filters.
5. Consideration of tax holiday benefits under the STPI Scheme.
6. Denial of working capital and risk profile adjustments.
7. Initiation of penalty proceedings under Section 271(1)(c).
8. Charging of interest under Sections 234B and 234D.

Detailed Analysis:

1. Jurisdictional Error in Referring to TPO:
The assessee contended that the Assessing Officer (AO) did not record any reasons in the draft assessment order to justify the reference to the TPO, as required under Section 92CA(1) of the Income Tax Act, 1961. This procedural lapse was argued to be a jurisdictional error.

2. Incorrect Computation of ALP and Transfer Pricing Adjustments:
The AO made an addition of Rs. 1,34,72,719 to the returned income by re-computing the ALP of the international transactions. The TPO used current year's data and selected 20 comparables, computing an average margin of 29.16%. After working capital adjustments, the ALP margin was computed at 27.39%, leading to a significant adjustment.

3. Selection and Rejection of Comparable Companies:
The assessee disputed the inclusion of certain comparables, specifically Accentia Technologies Ltd., Coral Hub (previously Vishal Information Technologies Ltd.), and Eclerx Services Ltd., on various grounds such as functional dissimilarity, extraordinary events like mergers and acquisitions, and lack of segmental data.

Accentia Technologies Ltd.:
The Tribunal noted that Accentia had acquired several companies during the relevant year, leading to extraordinary financial results. The Tribunal cited previous decisions where such extraordinary events warranted exclusion of the company as a comparable.

Coral Hub:
The Tribunal observed that Coral Hub outsourced a significant portion of its work to third-party vendors and had different business models and functional profiles compared to the assessee. The Tribunal cited previous rulings excluding Coral Hub as a comparable due to these factors.

Eclerx Services Ltd.:
The Tribunal found that Eclerx provided specialized KPO services, which were functionally different from the ITES services provided by the assessee. Previous decisions were cited to support the exclusion of Eclerx as a comparable.

4. Application of Transfer Pricing Methodology and Filters:
The AO/TPO applied different transfer pricing methodologies and filters, which were contested by the assessee. The Tribunal directed the AO/TPO to reconsider the selection of comparables and apply appropriate filters.

5. Consideration of Tax Holiday Benefits:
The assessee argued that it enjoyed tax holiday benefits under the STPI Scheme, implying no motive to shift profits. The Tribunal acknowledged this but focused on the functional comparability and proper application of transfer pricing rules.

6. Denial of Working Capital and Risk Profile Adjustments:
The Tribunal directed the AO/TPO to allow working capital adjustments, citing previous decisions where such adjustments were deemed necessary to ensure comparability.

7. Initiation of Penalty Proceedings:
The Tribunal did not specifically address the initiation of penalty proceedings under Section 271(1)(c) but focused on the primary issues of transfer pricing adjustments and comparability analysis.

8. Charging of Interest:
The Tribunal did not specifically address the charging of interest under Sections 234B and 234D, as these were consequential to the main issues of transfer pricing adjustments.

Conclusion:
The Tribunal directed the AO/TPO to exclude Accentia Technologies Ltd., Coral Hub, and Eclerx Services Ltd. from the set of comparables, allow working capital adjustments, and recompute the ALP accordingly. The appeals were partly allowed, with directions for a revised assessment considering the Tribunal's findings.

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