2016 (6) TMI 1321 - AT - Income Tax

Addition on account of Arm s Length Price adjustment - comparable selection criteria - Held that - As gone through the material available on the record. In the present case, it is an admitted fact that complete data relating to the comparable selected by the assessee was not available at the time of making the transfer price study. However, the same are now available at the public domain. We, therefore, think it appropriate to restore this issue back to the file of the TPO/AO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. MAM selection - TPO applied the residuary profit split method as most appropriate method instead of TNMM method choosen by the assessee as most appropriate method - Held that - As noticed that the TPO for the assessment year 2010-11 had considered the TNMM method as most appropriate method by keeping in view the Circular No. 6/2013 dated 29.06.2013 but it is an admitted fact that the said Circular was not in existence when the TPO passed the impugned orders for the respective assessment years i.e. assessment years 2007-08 to 2009-10, under consideration. However, he admitted while passing the orders u/s 92CA of the Act for the assessment year 2010-11 that TNMM is most appropriate method for determining the Arm s Length Price. We, therefore, deem it appropriate to set aside this issue relating to the assessment years 2007-08 to 2009-10 to the file of the TPO/AO to decide as to what is the most appropriate method by considering the facts and the guidelines available in the form of circular. As regards to the issue relating to the comparables for which the information u/s 133(6) of the Act were obtained by the TPO and which were not confronted to the assessee, we are of the view that this issue also deserves to be set aside to the file of the TPO/AO for fresh adjudication in accordance with law. Additional ground relating to deduction u/s 10A of the Act was not before the TPO/AO. The said grounds are purely legal grounds and raised first time before the Tribunal, so this issue raised in the additional grounds is remanded to the file of the TPO/AO to be decided along with another assessment years under consideration.

Issues Involved:

1. Validity of the order passed by the Deputy Commissioner of Income Tax under section 143(3) read with section 144C of the Income Tax Act, 1961.
2. Adjustment in the arm's length price of international transactions.
3. Applicability of Section 92C(3) clauses (a) to (d) of the Income Tax Act.
4. Classification of software development services and risk-bearing by the assessee.
5. Creation and ownership of significant intangibles.
6. Identification and selection of comparable companies.
7. Use of multiple year data for computing arm's length price.
8. Adjustments for working capital and risk profile differences.
9. Application of the Proviso to section 92C.
10. Levy of interest under section 234B of the Act.
11. Admission of additional grounds of appeal.

Detailed Analysis:

1. Validity of the Order Passed by the Deputy Commissioner of Income Tax:
The assessee challenged the order passed by the Deputy Commissioner of Income Tax, Circle-6(1), New Delhi, under section 143(3) read with section 144C of the Income Tax Act, 1961. The order was contested on the grounds that it failed to appreciate the facts involved and the applicable law.

2. Adjustment in the Arm's Length Price:
The Hon'ble DRP confirmed the variations proposed by the AO, resulting in an addition of ?1,505,082,752 to the total income of the appellant. The adjustment was made on account of the arm's length price of the international transaction entered by the appellant with its associated enterprises. The TPO rejected 35 out of 36 comparables selected by the assessee and considered only Infosys Technologies Ltd. The TPO proposed an adjustment of ?1,50,50,82,752/- for software development services, which was determined not to be at arm's length.

3. Applicability of Section 92C(3) Clauses (a) to (d):
The DRP concluded that the provisions of Section 92C(3) clauses (a) to (d) were not applicable when the arm's length price was determined by the TPO. The assessee argued that the TPO did not establish that the case was covered under any of the clauses of Section 92C(3).

4. Classification of Software Development Services and Risk-Bearing:
The DRP and TPO classified the software development services rendered by the appellant as end-to-end product development, misinterpreting the phrase to mean all stages of the software development life cycle. They also classified the appellant as a risk-bearing entity, ignoring the fact that the appellant received a substantial cost-plus mark-up remuneration from its AE, regardless of the success or failure of the products developed.

5. Creation and Ownership of Significant Intangibles:
The DRP and TPO concluded that the appellant created significant intangibles and was the economic owner of such intangibles.

6. Identification and Selection of Comparable Companies:
The DRP and TPO failed to adopt a step-by-step scientific approach for identifying comparable companies based on a reliable Functional and Risk Analysis. The selection of only one comparable company was seen as cherry-picking, causing undue hardship to the appellant. The TPO did not consider the annual reports of comparables, which were now available in the public domain.

7. Use of Multiple Year Data:
The DRP and TPO rejected the appellant's claim to use multiple year data for computing the arm's length price and adhered to the use of single year updated data.

8. Adjustments for Working Capital and Risk Profile Differences:
The DRP and TPO failed to make appropriate adjustments for differences in working capital and risk profiles between the appellant and the comparables, ignoring Indian transfer pricing regulations and judicial precedence.

9. Application of the Proviso to Section 92C:
The DRP and TPO failed to apply the Proviso to section 92C, which allows for fixing the arm's length price at a variance of 5 percent from the arithmetic mean. They erroneously adjusted the income of the appellant to the mean of comparable margins.

10. Levy of Interest under Section 234B of the Act:
The DRP confirmed the conclusions drawn by the AO in levying interest under section 234B, disregarding the provisions of the Act and judicial precedents.

11. Admission of Additional Grounds of Appeal:
The assessee raised additional grounds, stating that the transfer pricing adjustment was bad in law for reasons including an invalid reference by the AO and the appellant's income being eligible for deduction under Section 10A. The Tribunal admitted these additional grounds as they were purely legal and did not require verification of facts.

Conclusion:
The Tribunal set aside the issues raised by the assessee in the additional grounds to the file of the TPO/AO for fresh adjudication. The Tribunal also restored the issues relating to the application of the most appropriate method and the selection of comparables to the TPO/AO. For assessment years 2007-08 to 2009-10, the Tribunal directed the TPO/AO to consider the guidelines issued by the CBDT in Circular No. 6/2013. The Tribunal also remanded the issue of deduction under Section 10A and corporate matters to the TPO/AO for fresh consideration. The appeals of the assessee were allowed for statistical purposes.

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