2016 (6) TMI 1322 - AT - Income Tax

TPA - ALP determination - rejection of Most Appropriate Method ( MAM ) adopted by the assessee as CPM/CUP by the TPO and adopting Transactional Net Margin Method ( TNMM ) - comparable selection - Held that - The assessee provides off shore software development services to its parent company (Associated Enterprise AE) and also execute project to support engineering system or to develop software for internal use or for development of new product for AE. The assessee is compensated by its AE at cost plus mark up of 10% for the services rendered by the assessee. Following the earlier order of this Tribunal in assessee s own case this issue is decided against the assessee and confirmed the order of the TPO in adopting TNMM as MAM. Rejecting the multiyear data and adopting the current year data by the TPO -There is no dispute that as per the Rule 10B(4) as well as Rule 10D (4) so far as possible the current year and contemporaneous data has to be considered for determining comparable price. Only in the case of exceptional circumstances where current year data cannot be relied upon and does not give the true and correct state of affairs of the functional comparability then multiyear data up to 2 earlier years can be used. The assessee has failed to demonstrate that the current year data of the comparables are not reliable. Accordingly, we do not find any substance or merit in this ground of the assessee s appeal and the same is rejected. Rejection of companies functionally dissimilar with that of assessee who provides off shore software development services to its parent company (Associated Enterprise AE) and also execute project to support engineering system or to develop software for internal use or for development of new product for AE Comparable selection - filter applied by the DRP in respect of the Related Party Transaction ( RPT ) at 0% - Held that - RPT filter of 15% is proper in the case of the assessee. Consequently, the impugned order of the CIT (Appeals) whereby applied filter of 0% RPT is set aside. Hence we direct the Assessing Officer/TPO to apply the RPT filter of 15% and then select the comparables. Benefit of working capital adjustment - TPO has worked out the working capital as per Annexure C to the order passed under Section 92CA however the TPO has restricted the working capital adjustment and not granted the actual computation in the case of each comparable - Held that - As following the order of the co-ordinate bench of this Tribunal in the case of Bearing Point Business Consulting Pvt. Ltd. (2014 (4) TMI 997 - ITAT BANGALORE), we direct the A.O/TPO to reconsider the issue and allow the appropriate actual working capital adjustment as per the working in case of each comparable. Benefit of proviso to Section 92C of the Act - Held that - If the comparable price is within the range of or 5% of the assessee s price then the benefit of proviso to section 92C shall be granted to the assessee. Accordingly, we direct the A.O/TPO to consider the same at the time of passing the order to give effect this order of the Tribunal.

Issues Involved:
1. Assessment of total income.
2. Transfer pricing adjustments.
3. Rejection of Cost Plus Method (CPM) and Comparable Uncontrolled Price (CUP) method.
4. Use of Transactional Net Margin Method (TNMM).
5. Use of current year data instead of multiyear data.
6. Selection and rejection of comparable companies.
7. Working capital adjustment.
8. Risk adjustment.
9. Foreign exchange gain/loss as operating in nature.
10. Levying of interest under sections 234B, 234C, and 234D.
11. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Assessment of Total Income:
The assessee contested the assessment order that assessed the total income at ?171,357,245 against the returned income of ?83,805,890. This issue was general and did not require specific adjudication.

2. Transfer Pricing Adjustments:
The AO/TPO made an addition of ?87,551,355 to the total income due to adjustments in the arm’s length price (ALP) of software research and development services. The tribunal upheld the use of TNMM over CPM/CUP methods, citing the absence of reliable data for traditional methods (CUP and CPM) and the appropriateness of TNMM under the given circumstances.

3. Rejection of Cost Plus Method (CPM) and Comparable Uncontrolled Price (CUP) Method:
The tribunal noted that the assessee did not provide sufficient data to support the CPM. The CUP method was also rejected due to the lack of reliable internal or external comparables. The tribunal upheld the TPO’s use of TNMM, referencing past decisions in similar cases.

4. Use of Transactional Net Margin Method (TNMM):
The tribunal confirmed the TPO's use of TNMM as the most appropriate method for determining the ALP, following the precedent set in the assessee’s own case for the assessment year 2008-09.

5. Use of Current Year Data Instead of Multiyear Data:
The tribunal rejected the assessee’s argument for using multiyear data, emphasizing that current year data should be used unless exceptional circumstances are demonstrated.

6. Selection and Rejection of Comparable Companies:
The tribunal addressed various objections regarding the selection of comparable companies:
- KALS Information System: Excluded due to functional dissimilarity, as it was engaged in software product development.
- Persistent Systems Ltd.: Excluded due to exceeding the 15% Related Party Transaction (RPT) threshold.
- Sasken Communication Technology Ltd.: Remanded to the TPO to verify if it meets the export turnover filter.
- Tata Elxsi Ltd.: Excluded due to functional dissimilarity.
- Zylog System Ltd.: Excluded due to significant intangibles and R&D activities.
The tribunal also directed the AO/TPO to recompute the ALP after making these adjustments.

7. Working Capital Adjustment:
The tribunal directed the AO/TPO to reconsider and allow the appropriate actual working capital adjustment, following the precedent set in the case of Bearing Point Business Consulting Pvt. Ltd.

8. Risk Adjustment:
The tribunal upheld the DRP’s direction to grant risk adjustment, referencing past decisions that supported such adjustments.

9. Foreign Exchange Gain/Loss as Operating in Nature:
The tribunal confirmed that foreign exchange gains/losses should be considered as operating in nature, following the precedent set in the assessee’s own case for the assessment year 2008-09.

10. Levying of Interest Under Sections 234B, 234C, and 234D:
The tribunal did not provide specific adjudication on this issue in the summary provided.

11. Initiation of Penalty Proceedings Under Section 271(1)(c):
The tribunal did not provide specific adjudication on this issue in the summary provided.

Conclusion:
The tribunal partly allowed the appeals of both the assessee and the revenue, directing the AO/TPO to recompute the ALP and make necessary adjustments as per the tribunal’s findings. The tribunal emphasized the use of TNMM, proper selection of comparables, and appropriate adjustments for working capital and risk.

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