2018 (3) TMI 1640 - AT - Income Tax

TPA - comparable selection criteria - Held that - Assessee is involved in carrying out the patent assessments, intellectual property research and analysis, patents consulting and preparing draft of patent application to be filed overseas. This research is delivered to its AE s which have an arrangement with the team of lawyers for filing patent applications in the appropriate jurisdictions. Assessee also offers intellectual property, asset management and helps in analysing portfolio of patents. Investment research and financial analytic These services include financial analysis and research focussed on global funds and equities. Essentially it involves tracking performance of specific stocks and mutual funds and analysing it, thus companies functionally dissimlar with that of assessee need to be deselected from final list.

Issues Involved:
1. Legality and jurisdiction of the assessment order.
2. Validity of additional disallowances.
3. Jurisdictional error in referring to the Transfer Pricing Officer (TPO).
4. Adjustment to the total income regarding international transactions.
5. Misappreciation of the appellant's business model.
6. Rejection and application of certain filters for comparable companies.
7. Wrongful rejection and acceptance of comparable companies.
8. Computational errors in calculating OP/OC.
9. Denial of working capital adjustment.
10. Classification of the appellant's services as KPO.
11. Inconsistent acceptance/rejection of comparable companies.
12. Non-compliance with Chapter X of the Act and related rules.
13. Initiation of penalty proceedings and interest charges.

Detailed Analysis:

1. Legality and Jurisdiction of the Assessment Order:
The appellant contested the legality and jurisdiction of the assessment order passed under section 143(3) read with sections 92CA(3) and 144C(13) of the Income Tax Act, 1961. The Tribunal did not find merit in this general contention and did not provide a separate adjudication for these grounds.

2. Validity of Additional Disallowances:
The appellant argued that the additional disallowances made by the AO/TPO were unsustainable and excessive. The Tribunal did not provide a separate ruling on this general contention, as it was intertwined with the specific issues regarding the selection of comparables and the computation of the arm's length price (ALP).

3. Jurisdictional Error in Referring to the TPO:
The appellant claimed a jurisdictional error in the reference made by the AO to the TPO without recording reasons in the draft assessment order. The Tribunal did not specifically address this contention, focusing instead on the substantive issues related to the transfer pricing adjustments.

4. Adjustment to the Total Income Regarding International Transactions:
The Tribunal examined the adjustment of ?6,59,17,396/- made by the TPO to the total income of the appellant concerning international transactions. The Tribunal scrutinized the selection and rejection of comparables and found that the TPO had erred in including certain comparables and excluding others, which led to an incorrect adjustment.

5. Misappreciation of the Appellant's Business Model:
The appellant argued that the TPO/AO/CIT(A) failed to appreciate its business model and functional profile. The Tribunal analyzed the appellant's functions, assets, and risks (FAR) and found that the appellant was engaged in Knowledge Process Outsourcing (KPO) services, providing specialized research-based reports to its clients.

6. Rejection and Application of Certain Filters for Comparable Companies:
The Tribunal found that the TPO/AO/CIT(A) had erred in rejecting certain comparables selected by the appellant and applying new filters. The Tribunal directed the TPO to reconsider the inclusion of certain comparables, such as R Systems and Omega Healthcare, based on publicly available authenticated information and segmental data.

7. Wrongful Rejection and Acceptance of Comparable Companies:
The Tribunal upheld the exclusion of certain comparables like Accentia Technologies Ltd., Infosys BPO Ltd., TCS E-Serve Ltd., and eClerx Services Ltd., citing functional dissimilarities, high brand value, and lack of segmental data. The Tribunal directed the TPO to exclude these comparables from the final list.

8. Computational Errors in Calculating OP/OC:
The appellant contended that there were computational errors in calculating the Operating Profit/Operating Cost (OP/OC) of both the appellant and the comparable companies. The Tribunal did not specifically address this issue, as it was consequential to the selection of comparables.

9. Denial of Working Capital Adjustment:
The Tribunal noted that the issue of working capital adjustment was consequential to the comparables selected and directed the TPO to grant the necessary adjustments based on the final list of comparables.

10. Classification of the Appellant's Services as KPO:
The appellant argued against the classification of its services as KPO. The Tribunal, however, upheld the classification, noting the specialized nature of the appellant's services in intellectual property, market research, business research, financial and investment research, and data analytics.

11. Inconsistent Acceptance/Rejection of Comparable Companies:
The Tribunal observed that the CIT(A) had inconsistently accepted and rejected comparable companies. The Tribunal directed a consistent approach in the selection of comparables, based on functional similarities and segmental data.

12. Non-compliance with Chapter X of the Act and Related Rules:
The appellant contended that the AO/TPO/CIT(A) did not follow the detailed procedure laid down in Chapter X of the Act and related rules. The Tribunal did not specifically address this issue, focusing instead on the substantive issues related to transfer pricing adjustments.

13. Initiation of Penalty Proceedings and Interest Charges:
The appellant argued against the initiation of penalty proceedings under section 271(1)(c) and the charging of interest under sections 234B, 234C, 234D, and 244A. The Tribunal found these grounds to be premature and dismissed them at this stage.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO to reconsider the inclusion/exclusion of certain comparables based on publicly available authenticated information and segmental data, and to grant working capital adjustments accordingly. The Tribunal upheld the exclusion of certain comparables and dismissed the grounds related to penalty proceedings and interest charges as premature. The Tribunal's decision emphasized the need for a consistent and accurate approach in the selection of comparables and the computation of the arm's length price.

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