2015 (6) TMI 1164 - AT - Income Tax

Transfer pricing - determination of arm s length price - selection of comparable - The average mean margin of the 20 comparable companies selected by the TPO was 23.65% whereas the average mean margin of the software development services segment of the assessee was computed by the TPO at 14.07% on total cost. After granting working capital adjustment at 0.11% the TPO computed the T.P. Adjustment of 1, 23, 18, 582 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2008-09. CIT(A) held that since the average margin of these four companies at 24.85% is higher than the average margin of comparables adopted by the TPO at 23.55% he upheld the margin of 23.55% adopted by the TPO. Held that - AO directed to exclude Kals Information Systems Ltd. (Seg) from the final set of comparables as it is functionally different from the assessee in the case on hand who is only a software service provider to its AEs. Application of Related Party Transaction ( RPT ) filter - Held that - RPT filter should be considered at 15% of total revenues and companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. In this view of the matter the order of the learned CIT(A) holding that companies are not to be considered as comparables even if they have a single RPT i.e. that the RPT is in excess of 0% is hereby reversed. Power of CIT(A) for enhancement of income - Held that - Though the CIT (Appeals) has co-terminus power with that of Assessing Officer and can enhance the assessment however since he has not issued any show cause notice for enhancement under Section 251(2) of the Act he cannot reject these two companies from the set of comparables. Therefore to the extent of the rejection of these two companies from the set of comparables the order of CIT (Appeals) is set aside and the TPO is directed to recompute the ALP after giving effect to the order of the Tribunal in respect of the comparables which are directed to be excluded from the set of comparables. Decided partly in favor of assessee.

Summary

Issues Involved:
1. Reference to Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP).
2. Motive of tax evasion.
3. Process for issuing notices under Section 133(6).
4. Computation of ALP based on financial data.
5. Inclusion and exclusion of comparables in transfer pricing analysis.
6. Application of filters by the TPO and CIT(A).
7. Levy of interest under Section 234B.

Issue-wise Detailed Analysis:

1. Reference to Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP):
The appellant challenged the reference made by the Assessing Officer to the TPO without demonstrating the necessity and expediency of such a reference. The tribunal dismissed this ground as general and not specifically urged.

2. Motive of tax evasion:
The appellant contended that the authorities erred in passing the order without demonstrating a motive of tax evasion. This ground was dismissed as general and not specifically urged.

3. Process for issuing notices under Section 133(6):
The appellant argued that the authorities adopted a flawed process for issuing notices under Section 133(6) and relied on the same without providing complete information or an opportunity to cross-examine the companies concerned. This ground was dismissed as general and not specifically urged.

4. Computation of ALP based on financial data:
The appellant objected to the computation of ALP based on the financial year 2007-08 data of comparables, which was not available when the appellant undertook transfer pricing documentation and reporting obligations. This ground was dismissed as general and not specifically urged.

5. Inclusion and exclusion of comparables in transfer pricing analysis:
The appellant raised several objections regarding the inclusion and exclusion of certain comparables by the TPO and CIT(A). The tribunal examined the comparability of individual companies and made the following observations:

- e-Zest Solutions Ltd.: Excluded from the list of comparables as it provides KPO services, which are not comparable to pure software development services.
- Kals Information Systems Ltd. (Seg): Excluded as it is into software products, unlike the appellant, who is a software service provider.
- Bodhtree Consulting Ltd. and Lucid Software Ltd.: Inclusion upheld as the appellant had not objected to their inclusion in earlier proceedings.

6. Application of filters by the TPO and CIT(A):
The tribunal addressed the unilateral modification of certain filters by the CIT(A) and the inclusion/exclusion of certain comparables. It was held that the RPT filter should be applied at 15% of total revenues. The tribunal reversed the CIT(A)'s order that companies with even a single RPT should be excluded. The tribunal directed the inclusion of companies with RPT within 15% of total revenues.

7. Levy of interest under Section 234B:
The appellant contested the levy of interest under Section 234B. The tribunal upheld the Assessing Officer's action, noting that the charging of interest is consequential and mandatory as upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1).

Conclusion:
The appeal was partly allowed. The tribunal directed the Assessing Officer/TPO to recompute the ALP after excluding certain comparables and including others as per the tribunal's directions. The interest under Section 234B was upheld but directed to be recomputed in line with the tribunal's order.