2018 (1) TMI 1370 - AT - Income Tax

TPO - MAM - Comparable selection - Held that - The taxpayer provided software development services competency centre services and IT Support Services to its AE thus companies functionally dissimilar with that of assessee need to be deselected from final list. Determining the ALP foreign exchange loss / gain arising from the transaction of revenue nature are required to be considered as part of operating profit/cost of the assessee as well as that of the comparables. The ld.TPO while computing the OP/OC of the comparables treated the amount of foreign exchange gain/loss as non-operating item whereas in case of the taxpayer foreign exchange gain and loss has been treated as operating item. However both the taxpayer as well as comparable companies is required to be on the same page for treating foreign exchange loss/gain arising from transactions of revenue nature as an operating item. So the TPO is directed to compute the ALP accordingly. So this ground is allowed for statistical purposes. Denial of working capital with adjustment - Held that - It is a settled principle of law that for reasonably accurate adjustments tested party as well as comparables should be on the same page. However so far as issue of working capital adjustment is concerned that the ld. TPO disallowed the same for lack of sufficient data as the audited accounts of the taxpayer do not show that it has received any advance from its AE. So we are of the considered view that in the absence of any reliable data working capital adjustment cannot be granted. So the assessee is directed to provide complete computation to avail of the facility of working capital adjustment and thereafter TPO is directed to decide this issue afresh. Similarly so far as question of denial of risk adjustment to the taxpayer by the ld. TPO/DRP is concerned the same has also been denied on the ground that the taxpayer has failed to provide any back up calculation for claim of risk adjustment. So in the given circumstances we are of the considered view that ld. TPO is to re-examine the issue on providing back up calculation by the taxpayer for the claim of risk adjustment. Addition on account of income from maintenance enhancement and support services (advance billing / deferred revenue) - Held that - Amount treated as deferred revenue is not brought to be taxed in the year under consideration but to be taxed in the year when such services are rendered or recognized a income of the taxpayer. Grounds as determined in favour of the taxpayer.

Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of Transfer Pricing Documentation
3. Use of Multiple Years’ Data
4. Arbitrary Rejection and Introduction of Comparable Companies
5. Segmentation of Services
6. Computation of Operating Profit Margin
7. Adjustments for Working Capital and Risk
8. Advance Billing/Deferred Revenue
9. Penalty Proceedings
10. Interest under Sections 234B and 244A

Comprehensive Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The taxpayer, a subsidiary of Siemens US, contested the addition of Rs. 10,91,38,523 related to international transactions involving software development, competency center, and IT support services. The TPO's economic analysis, which included 14 comparables with an average OP/TC margin of 27.43%, was challenged. Post DRP directions, the comparables' mean OP/TC margin was adjusted to 19.67%, leading to an ALP adjustment of Rs. 10,91,38,523. The Tribunal examined the comparability of six companies (Infosys, 3K Technologies, KALS Information Systems, Persistent Systems, Bodhtree Consulting, and Zylog Systems) and ordered their exclusion due to functional dissimilarities, unreliable financials, and lack of segmental data.

2. Rejection of Transfer Pricing Documentation:
The TPO, AO, and DRP rejected the taxpayer's TP documentation, which used the Transactional Net Margin Method (TNMM) and multiple years' data for benchmarking. The Tribunal upheld the taxpayer's approach to using TNMM but noted the rejection of the segregated approach for benchmarking international transactions.

3. Use of Multiple Years’ Data:
The Tribunal noted that the taxpayer used multiple years' data for benchmarking, which was not disputed by the TPO. However, the TPO's fresh search and economic analysis led to the selection of different comparables.

4. Arbitrary Rejection and Introduction of Comparable Companies:
The Tribunal found that the TPO arbitrarily rejected the taxpayer's selected comparables and introduced new ones. The Tribunal examined the functional profiles and financials of the comparables and ordered the exclusion of six companies due to significant differences from the taxpayer's operations.

5. Segmentation of Services:
The TPO rejected the taxpayer's segmentation of software development, competency center, and IT support services, instead clubbing them together for benchmarking. The taxpayer did not challenge this aggregation.

6. Computation of Operating Profit Margin:
The Tribunal addressed the TPO's computation of the operating profit margin, which treated forex gains/losses as non-operating items. The Tribunal directed the TPO to treat forex gains/losses as operating items for both the taxpayer and comparables, aligning with the decision in Techbooks International (P.) Ltd. vs. DCIT.

7. Adjustments for Working Capital and Risk:
The Tribunal noted the TPO's denial of working capital and risk adjustments due to insufficient data. The Tribunal directed the taxpayer to provide complete computations for working capital adjustments and backup calculations for risk adjustments, instructing the TPO to re-examine these issues.

8. Advance Billing/Deferred Revenue:
The AO made an ad hoc addition of Rs. 4,32,12,968 for advance billing/deferred revenue, relying on the precedent of AY 2007-08. The Tribunal referred to its earlier decision in the taxpayer's case for AYs 2001-02, 2002-03, and 2003-04, where it was held that deferred revenue should be taxed in the year services are rendered. The Tribunal ruled in favor of the taxpayer, stating that deferred revenue should not be taxed in the current year but in the year when services are rendered.

9. Penalty Proceedings:
The Tribunal found the issue of penalty proceedings under Section 271(1)(c) to be premature and did not provide specific findings.

10. Interest under Sections 234B and 244A:
The Tribunal did not provide specific findings on the levy of interest under Sections 234B and 244A, noting that these issues are consequential in nature.

Conclusion:
The Tribunal allowed the taxpayer's appeal for statistical purposes, directing the TPO to re-examine the issues of working capital and risk adjustments and to treat forex gains/losses as operating items. The Tribunal ordered the exclusion of six comparables and ruled in favor of the taxpayer regarding the deferred revenue issue.

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