2016 (6) TMI 1358 - AT - Income Tax

TP Adjustment - comparable selection- TPO accepted TNMM adopted by the assessee-company as well as cost margin as a profit level indicator but rejected the transfer pricing study report - HELD THAT - Company functionally dissimilar cannot be compared with a company engaged in rendering of ITeS services. Depending on the skills required to perform ITES the comparability has to be done Co-ordinate bench of Mumbai the case of Symphony Marketing Solutions India Pvt. Ltd. vs. ITO 2014 (2) TMI 83 - ITAT BANGALORE wherein the Tribunal held that since the company has very low salary cost and outsourced most of its work and therefore, was held to be incomparable. Extraordinary event like merger and de-merger will have an effect on the profitability of the company in the financial year in which such event takes place. Allowability of benefit of tolerance margin - Deduction of / 5% under proviso to Sec.92C - HELD THAT - An Explanation was added to section 92C(2) with retrospective effect from 1/10/2009. This Explanation was considered by IHG IT SERVICES (INDIA) (P.) LTD. 2013 (5) TMI 309 - ITAT DELHI wherein it was held that the benefit of 5% tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeds the tolerance margin, then no benefit of tolerance margin would be available to the assessee. Respectfully following the decision of the Special Bench, we direct the AO/TPO to grant the benefit of tolerance limit of 5% if the variation after passing the consequential order to the Tribunal is less than 5% and accordingly, the issue is restored to the file of the AO.

Issues Involved:
1. Appropriateness of CIT(A)'s order regarding law and facts.
2. Criteria for treating companies as comparables based on size and turnover.
3. Rejection of the diminishing revenue filter by CIT(A).
4. Necessity of the different year ending filter applied by the TPO.
5. Exclusion of M/s Accentia Technologies Ltd. as a comparable.
6. Exclusion of M/s Genesys International Corporation Ltd. as a comparable.
7. Rejection of the economic analysis by the assessee.
8. Use of financial year 2007-08 data for determining arm's length margin/price.
9. Use of information obtained under section 133(6) by AO/TPO.
10. Acceptance of certain comparables by AO/TPO.
11. Adjustments for differences in risk profiles.
12. Computation of arm's length price without +/- 5% benefit.
13. Computation of interest under section 234D.

Detailed Analysis:

1. Appropriateness of CIT(A)'s order regarding law and facts:
The revenue contended that the CIT(A)'s order was opposed to the law and facts of the case. The Tribunal examined the CIT(A)'s decisions and found them to be consistent with the legal principles and factual matrix of the case.

2. Criteria for treating companies as comparables based on size and turnover:
The CIT(A) excluded certain companies (e.g., M/s Aditya Birla Minacs Worldwide Ltd., M/s Coral Hubs Ltd., M/s Eclerx Services Ltd., M/s Infosys BPO Ltd., M/s Jindal Intellicom Pvt. Ltd., M/s Mold-tek Technologies Pvt. Ltd., M/s Wipro Ltd. (seg), and M/s Allsec Technologies Pvt. Ltd.) based on size and turnover. The Tribunal upheld this exclusion, referencing decisions in similar cases where functional dissimilarity and significant differences in business models were considered valid grounds for exclusion.

3. Rejection of the diminishing revenue filter by CIT(A):
The CIT(A) rejected the diminishing revenue filter applied by the TPO. The Tribunal did not find any substantial argument from the revenue to overturn this decision, thereby supporting the CIT(A)'s stance.

4. Necessity of the different year ending filter applied by the TPO:
The CIT(A) did not find it necessary to apply the different year ending filter as proposed by the TPO. The Tribunal supported this view, indicating that such a filter was not essential for comparability analysis.

5. Exclusion of M/s Accentia Technologies Ltd. as a comparable:
The CIT(A) excluded M/s Accentia Technologies Ltd. due to extraordinary events like acquisitions and mergers during the relevant year. The Tribunal upheld this exclusion, referencing previous Tribunal decisions that supported the exclusion of companies undergoing significant changes impacting their financials.

6. Exclusion of M/s Genesys International Corporation Ltd. as a comparable:
The CIT(A) excluded M/s Genesys International Corporation Ltd. due to functional dissimilarity and abnormal revenue growth. The Tribunal agreed with this exclusion, citing the need for comparability in terms of functions performed, assets used, and risks undertaken.

7. Rejection of the economic analysis by the assessee:
The assessee contended that the CIT(A) erred in not accepting their economic analysis. The Tribunal found that the CIT(A) had rightly rejected the analysis based on the TPO's detailed examination and selection of appropriate comparables.

8. Use of financial year 2007-08 data for determining arm's length margin/price:
The CIT(A) upheld the TPO's use of financial year 2007-08 data. The Tribunal supported this decision, noting that the data used was relevant and available at the time of the transfer pricing documentation.

9. Use of information obtained under section 133(6) by AO/TPO:
The assessee objected to the use of information obtained under section 133(6). The Tribunal found that the AO/TPO was within their rights to use such information for comparability analysis.

10. Acceptance of certain comparables by AO/TPO:
The CIT(A) upheld the inclusion of certain comparables by the TPO. The Tribunal found no reason to interfere with this decision, indicating that the comparables were selected based on reasonable criteria.

11. Adjustments for differences in risk profiles:
The assessee argued for adjustments to account for differences in risk profiles. The Tribunal did not find sufficient grounds to mandate such adjustments, supporting the CIT(A)'s decision.

12. Computation of arm's length price without +/- 5% benefit:
The CIT(A) denied the benefit of +/- 5% under the proviso to section 92C. The Tribunal, referencing the Special Bench decision in the case of High IT Services (India) Pvt. Ltd., directed the AO/TPO to grant the benefit if the variation after passing the consequential order was within the tolerance limit.

13. Computation of interest under section 234D:
The CIT(A) confirmed the interest computation under section 234D. The Tribunal did not find any error in this computation, thereby upholding the CIT(A)'s decision.

Conclusion:
The Tribunal partly allowed the revenue's appeal and partly allowed the assessee's cross objections for statistical purposes. The AO/TPO was directed to exclude certain companies from the list of comparables and to grant the benefit of the tolerance limit of 5% if applicable.

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