2016 (4) TMI 1338 - AT - Income Tax

TPA - comparable selection - Held that - The business model of the Assessee is highly employee intensive thus companies functionally dissimilar with that of assessee need to be deselected from final list. Employees cost to sales ratio also to match to be selected as comparable.

Issues Involved:
1. Computation of arm's length price (ALP) of international transactions.
2. Rejection of the most appropriate method (MAM) selected by the assessee.
3. Inclusion and exclusion of comparable companies.
4. Profit Level Indicator (PLI) calculations.
5. Application of filters for selecting comparables.
6. Adjustments for differences in risks and assets.
7. Proviso to Section 92C(2) of the Income-tax Act, 1961.
8. Levy of interest under Section 234B.
9. Initiation of penalty proceedings under Section 274 read with Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Computation of Arm's Length Price (ALP) of International Transactions:
The assessee, engaged in IT-enabled services, had undertaken international transactions with its associate enterprise (AE) amounting to ?7,84,92,342/-. The Transfer Pricing Officer (TPO) made an upward adjustment of ?91,27,129/- to the ALP, which was later reduced to ?64,70,396/- by the Dispute Resolution Panel (DRP). The assessee contended that the ALP was computed incorrectly by including non-comparable companies and misapplying filters.

2. Rejection of the Most Appropriate Method (MAM) Selected by the Assessee:
The assessee used the Transactional Net Margin Method (TNMM) as the most appropriate method (MAM) for determining the ALP. The TPO rejected the internal TNMM method and adopted the external TNMM method, which led to disputes over the comparables selected.

3. Inclusion and Exclusion of Comparable Companies:
The primary contention was the inclusion of three companies: Accentia Technologies Limited, Coral Hubs Limited, and Maple e-Solutions Limited. The Tribunal found that these companies were not comparable due to differences in business models, functional profiles, and extraordinary events like mergers and acquisitions. The Tribunal directed the exclusion of these companies from the final set of comparables.

4. Profit Level Indicator (PLI) Calculations:
The TPO used the ratio of operating cost to operating profit (OP/OC) to determine the PLI. The arithmetic mean of the PLI from the final set of comparables was 16.34%. The assessee argued that the PLI was incorrectly computed by including non-comparable companies, which skewed the results.

5. Application of Filters for Selecting Comparables:
The TPO applied additional filters and rejected the assessee's filters for selecting comparables. The Tribunal found that the TPO's approach was flawed and directed the exclusion of certain companies that did not meet the appropriate criteria.

6. Adjustments for Differences in Risks and Assets:
The assessee argued that no adjustments were made for differences in risks and assets between the assessee and the comparables. The Tribunal did not specifically address this issue but implied that the correct selection of comparables would inherently account for such differences.

7. Proviso to Section 92C(2) of the Income-tax Act, 1961:
The assessee claimed that the TPO failed to apply the proviso to Section 92C(2), which allows for a downward adjustment of 5% from the arithmetic mean. The Tribunal's decision to exclude certain comparables effectively brought the PLI within the permissible range, rendering this issue moot.

8. Levy of Interest under Section 234B:
The assessee contested the erroneous levy of interest under Section 234B. The Tribunal did not specifically address this issue, as the primary contention was resolved in favor of the assessee.

9. Initiation of Penalty Proceedings under Section 274 read with Section 271(1)(c):
The assessee also contested the initiation of penalty proceedings. The Tribunal did not address this issue separately, as the primary issue of transfer pricing adjustment was resolved.

Conclusion:
The Tribunal allowed the appeal, directing the exclusion of Accentia Technologies Limited, Coral Hubs Limited, and Maple e-Solutions Limited from the list of comparables. This exclusion brought the PLI within the permissible range, negating the need for any transfer pricing adjustment. Other grounds raised by the assessee were rendered infructuous.

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