2018 (5) TMI 1784 - AT - Income Tax

TPA - transfer pricing adjustment on account of management fees and communication cost - Held that - We find that in assessment year 2008-09 similar ground relating to payments for meeting expenditure, travel cost, stock cost, etc. were disallowed by the TPO. Tribunal in appeal filed by assessee 2017 (4) TMI 866 - ITAT PUNE remitted the issue back to the file of Assessing Officer/TPO to decide the issue afresh. One of the contentions of the assessee is that these costs have been recovered as arrangement for remuneration is cost plus mark-up. TPO as well as DRP has failed to take note of this fact. Thus, this issue needs revisit to the file of TPO/Assessing Officer for reconsideration. TPO/Assessing Officer shall grant reasonable opportunity of hearing to the assessee before deciding this issue afresh, in accordance with law. Comparable selection - functinal similarity - rejection of Goldstone Technologies Limited being a loss making entity - Held that - It is a well settled proposition that only persistent loss making companies have to be excluded from the list of comparables. Nowhere it has been urged by the Revenue that the aforesaid company is functionally dissimilar or does not qualify the filters adopted by the TPO for selection of the comparables. We further observe that Goldstone Technologies Limited was selected as one of the comparables by the assessee in immediately preceding assessment years i.e. assessment year 2008-09. TPO has not raised any objection to the inclusion of such company in the assessment year 2008-09. Thus, in view of the facts discussed above, we are of considered view that the Goldstone Technologies Limited deserves to be included in the list of comparables. Companies functinlly dissimilar with that of assessee need to be deselected from final list. Errors in computation of working capital adjustment in relation to international transactions - Held that - The assessee has purportedly filed application u/s. 154 for rectification of the mistake in computation of working capital adjustment. The Assessing Officer is directed to expeditiously dispose of the application of the assessee filed u/s. 154 of the Act. We direct the Assessing Officer to grant risk adjustment to the assessee to iron out difference on this account with the comparables. Re-computation of voluntary transfer pricing adjustment in respect of sales support services - Held that - We find that the DRP is silent on the objections raised by the assessee qua provision of sales support services. Therefore, we deem it appropriate to remit this issue back to the file of DRP for deciding the objections raised by the assessee in respect of sales support services. Charging of interest u/s. 234A for late furnishing of return of income - Held that - As the assessee has pointed that the last date for filing return of income was extended to 31-10-2009 and the assessee filed return of income on 30-10-2009. Thus, there was no delay in filing of return of income. This fact requires verification. Accordingly, we remit this issue back to the file of Assessing Officer for ascertaining the last date for filing return of income. If the assessee has filed return of income within the extended period, the interest u/s. 234A is not to be charged.

Summary

Issues Involved:
1. Transfer pricing adjustment related to management fees and communication costs.
2. Rejection of certain comparable companies in transfer pricing analysis.
3. Inclusion of certain companies as comparables by the TPO.
4. Errors in computation of Profit Level Indicator (PLI) and working capital adjustment.
5. Non-granting of risk adjustment.
6. Applicability of ±5% range benefit.
7. Re-computation of voluntary transfer pricing adjustment for sales support services.
8. Levy of interest under sections 234A and 234B.
9. Initiation of penalty proceedings under sections 271(1)(c) and 271BA.

Detailed Analysis:

1. Transfer Pricing Adjustment Related to Management Fees and Communication Costs:
The assessee challenged the transfer pricing adjustment of ?2,76,53,487 related to management fees and communication costs. The TPO had rejected the assessee's method of cost allocation, treating the Arm’s Length Price (ALP) of these expenses as Nil, arguing that the assessee failed to prove the receipt of services and the benefits derived. The Tribunal remitted the issue back to the TPO/Assessing Officer for reconsideration, noting that the assessee operates on a cost-plus arrangement and had provided documentary evidence, which was not adequately considered by the TPO.

2. Rejection of Certain Comparable Companies in Transfer Pricing Analysis:
The assessee contested the rejection of Goldstone Technologies Limited as a comparable company. The Tribunal found that the company was wrongly excluded by the TPO on the grounds of being a loss-making entity. It was noted that only persistent loss-making companies should be excluded and that Goldstone Technologies Limited did not have persistent losses. Thus, the Tribunal directed its inclusion in the list of comparables.

3. Inclusion of Certain Companies as Comparables by the TPO:
The assessee objected to the inclusion of Thirdware Solution Ltd., Kals Information Technology System Ltd., and Bodhtree Consulting Ltd. as comparables. The Tribunal found that these companies were functionally different from the assessee. Thirdware Solution Ltd. was involved in high-end ERP solutions, Kals Information Technology System Ltd. was engaged in software product development, and Bodhtree Consulting Ltd. was involved in both software development and ITES without segmental details. Following precedents, the Tribunal directed the exclusion of these companies from the final list of comparables.

4. Errors in Computation of Profit Level Indicator (PLI) and Working Capital Adjustment:
The Tribunal noted errors in the computation of PLI for certain companies and the working capital adjustment. The assessee had filed applications under section 154 for rectification of these mistakes, which were pending. The Tribunal directed the TPO/Assessing Officer to dispose of these applications expeditiously and rectify the errors.

5. Non-Granting of Risk Adjustment:
The Tribunal observed that the assessee, being a captive service provider, was entitled to risk adjustment. Citing a previous decision in the assessee's own case for the assessment year 2008-09, the Tribunal directed the Assessing Officer to grant risk adjustment to the assessee to account for differences in risk profiles between the assessee and the comparables.

6. Applicability of ±5% Range Benefit:
The Tribunal directed the Assessing Officer to grant the benefit of the ±5% range, in accordance with the law.

7. Re-Calculation of Voluntary Transfer Pricing Adjustment for Sales Support Services:
The assessee argued for a re-computation of the voluntary transfer pricing adjustment for sales support services, noting that the TPO had not correctly computed the operating margin using single-year data. The Tribunal found that the DRP had not addressed this objection and remitted the issue back to the DRP for proper adjudication.

8. Levy of Interest Under Sections 234A and 234B:
The assessee contended that interest under section 234A was wrongly charged as the return was filed within the extended due date. The Tribunal remitted this issue back to the Assessing Officer for verification. The interest under section 234B was deemed mandatory and consequential, and the ground was dismissed.

9. Initiation of Penalty Proceedings Under Sections 271(1)(c) and 271BA:
The Tribunal found the challenge to the initiation of penalty proceedings under sections 271(1)(c) and 271BA to be premature and dismissed these grounds.

Conclusion:
The appeal was partly allowed, with several issues remitted back to the TPO/Assessing Officer or DRP for reconsideration and proper adjudication. The Tribunal emphasized the need for accurate computation and proper consideration of functional differences in transfer pricing analysis.