2018 (1) TMI 1383 - AT - Income Tax

Transfer pricing adjustment - non reference to TPO - grievance of assessee is that in cases where the value of international transactions exceeded ₹ 5 crores, Instruction No.3 of 2003 issued by the CBDT mandates reference by AO to the Transfer Pricing Officer but in the present case AO had transgressed his jurisdiction by undertaking transfer pricing adjustment himself - Held that - In view of the revised limits prescribed under the Action Plan for financial year 2006-07, which is drawn by CBDT itself and in view of the approach of Assessing Officer in assessment year 2009-10, we find no merit in the plea of assessee in this regard. AO under the revised Instruction of CBDT had exercised his jurisdiction in computing arm s length price of international transactions and we find no merit in the stand of assessee in this regard. No doubt, as per Instruction No.3 of 2003, dated 20.05.2003, the limit for making reference to the TPO was where aggregate value of international transactions exceeded ₹ 5 crores. In view of revised Action Plan, the action of AO in the present case, where the value of international transactions was to the tune of ₹ 10.42 crores, in not making any reference to the TPO is correct and no fault can be found with the exercise of jurisdiction by AO, under the said facts and circumstances. It may also be put on record that revised Instructions were later issued dated 16.10.2015 being Instruction No.15 of 2015. Thus, the additional ground of appeal raised by the assessee is dismissed. Selection of comparable - functinal profile - deselection of loss making company - Held that - The accepted principle for benchmarking international transactions is to select the companies which are functionally comparable to the assessee and benchmark the international transactions undertaken by the assessee by comparing the margins shown by the assessee with the margins of selected external comparables. The concern CG-VAK Software and Exports Ltd. no change in the functionality of said concern, hence the said concern passes the first threshold limit of being functionally comparable. The second aspect which had weighed with the Assessing Officer in rejecting the said concern is losses shown by the said concern. The margin shown by the said concern in the preceding year was 3.84% and during the year is 0.29% i.e. it has shown positive margin and had not shown any losses. However, while allowing economic adjustment by way of working capital adjustment, the margins of said concern became negative but the said adjustment which has been allowed, does not determine the profitability of the said concern in the open market. Accordingly, we find no merit in the approach of Assessing Officer in this regard and hold that CG-VAK Software and Exports Ltd., is not persistent loss maker and is to be included in the final list of comparables. Coral Hub Ltd. not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, its expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. Cosmic Global Ltd. is to be excluded from the final list of comparables on the ground of its outsourcing model as in different business model than the assessee in the year under consideration. Assessee is only engaged in providing technical support services to its associated enterprises and hence, the concern Accentia Technologies Ltd. is not functionally comparable to the assessee. Exclusion is E4e Healthcare Business Services Pvt. Ltd. on the ground that the same is not functionally comparable being engaged in providing healthcare outsourcing services.

Issues Involved:
1. Jurisdiction of the Assessing Officer in making transfer pricing adjustments without referring to the Transfer Pricing Officer (TPO).
2. Rejection and selection of comparable companies for transfer pricing analysis.
3. Inclusion of specific companies in the final set of comparables.
4. Economic adjustments and computation of Profit Level Indicator (PLI).

Detailed Analysis:

1. Jurisdiction of the Assessing Officer:
The primary issue raised by the assessee was the jurisdiction of the Assessing Officer (AO) to make transfer pricing adjustments without referring to the Transfer Pricing Officer (TPO) as mandated by Instruction No.3 of 2003 issued by the Central Board of Direct Taxes (CBDT). The assessee argued that the AO transgressed his jurisdiction by undertaking the transfer pricing assessment himself for transactions exceeding ?5 crores. However, the Tribunal noted that the threshold limit for mandatory referral to the TPO had been revised to ?15 crores. The Tribunal found that since the transactions in question were below ?15 crores, the AO was within his rights to conduct the transfer pricing assessment without referring to the TPO. Consequently, the additional ground of appeal challenging the AO's jurisdiction was dismissed.

2. Rejection and Selection of Comparable Companies:
The Tribunal examined the AO’s rejection of the comparables selected by the assessee and the inclusion of new comparables. The AO had rejected the assessee's comparables and selected a new set, leading to an upward adjustment of ?1,90,45,982/-. The Tribunal scrutinized the functional comparability and financial year alignment of the selected comparables.

3. Inclusion of Specific Companies in the Final Set of Comparables:
- CG-VAK Software and Exports Ltd.: The Tribunal held that CG-VAK Software and Exports Ltd. should be included in the final set of comparables as it was functionally comparable and not a persistent loss-maker. The Tribunal emphasized the principle of consistency, noting that the company was considered comparable in the previous assessment year.

- Jindal Intellicom Pvt. Ltd.: This company was excluded from the final set of comparables because it had a different financial year (15 months) than the assessee, which did not align with the Tribunal’s and the Hon’ble Bombay High Court's precedents requiring comparable data to pertain to the same financial year.

- Coral Hub Ltd.: The Tribunal excluded Coral Hub Ltd. due to its different financial year and its outsourcing model, which was not comparable to the assessee's business model. This decision was supported by the jurisdictional High Court’s ruling in a similar case.

- Cosmic Global Ltd.: This company was excluded because it operated on a different business model (outsourcing), making it not comparable to the assessee. The Tribunal referenced previous decisions rejecting Cosmic Global Ltd. on similar grounds.

- Accentia Technologies Ltd.: The Tribunal excluded this company due to its extraordinary financial event (merger) and its functional dissimilarity to the assessee. The Tribunal cited similar exclusions in previous cases.

- E4e Healthcare Business Services Pvt. Ltd.: This company was excluded as it was engaged in healthcare outsourcing services, which were not functionally comparable to the assessee’s ITES. The Tribunal referred to a previous decision that rejected this company on similar grounds.

4. Economic Adjustments and PLI Computation:
The Tribunal directed the AO to recompute the arm's length price (ALP) of international transactions by excluding the non-comparable companies and including CG-VAK Software and Exports Ltd. The Tribunal noted that if the revised set of comparables resulted in the PLI falling within the +/-5% range of the mean PLI of the comparables, the assessee's declared PLI would be acceptable. Consequently, the other grounds of appeal regarding economic adjustments were deemed academic and were not adjudicated.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the AO to re-determine the ALP based on the revised set of comparables and make suitable adjustments if necessary. The Tribunal upheld the AO's jurisdiction in conducting the transfer pricing assessment without referring to the TPO, given the revised threshold limit.

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