2017 (4) TMI 1462 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Infosys Technologies cannot be compared with any other company like that of the assessee-company engaged in the business of provision of marketing data management services to customers of SMS USA. This ground of the revenue is dismissed. Direction of the DRP that DRP to give IT risk adjustment to assessee-company - HELD THAT - DRP only as a means of guidance has sought IT risk adjustment but the matter was restored to the file of the TPO to calculate risk adjustment in accordance with well accepted method. By this direction the revenue could not be aggrieved. Benefit u/s 10A - reducing telecommunication expenditure and insurance incurred in foreign currency from export turnover - HELD THAT - The issue sought to be raised in the above grounds is covered in favour of the assessee by the decision of the Hon ble Karnataka High Court in the case of Tata Elxsi Ltd. ( 2011 (8) TMI 782 - KARNATAKA HIGH COURT ) as directed the AO to reduce this expenditure from export turnover as well as total turnover for the purpose of calculating benefit u/s 10A . Since the DRP has only followed the decision of the jurisdictional High Court in the cased of Tata Elxsi Ltd. (supra) we do not find any merit in the appeal raised by the revenue hence dismissed.

Summary

Issues:
1. Transfer pricing adjustment on international transactions.
2. Rejection of transfer pricing study report by TPO.
3. Selection of comparable entities for transfer pricing analysis.
4. Application of filters by TPO in determining ALP.
5. DRP directions on turnover filter and risk adjustment.
6. Exclusion of Infosys Technologies Ltd. as a comparable.
7. IT risk adjustment direction by DRP.
8. Benefit u/s 10A restriction by reducing certain expenses.

Transfer Pricing Adjustment on International Transactions:
The appeal was filed against the final assessment order for the assessment year 2010-11. The assessee, engaged in marketing data management services, justified the consideration for international transactions with its AE as at arm's length. The assessee applied the Transactional Net Margin Method (TNMM) for transfer pricing study, claiming its profit margin was comparable with other companies. The TPO computed a transfer pricing adjustment, rejecting some comparables and introducing new ones, resulting in a significant adjustment.

Rejection of Transfer Pricing Study Report:
The TPO rejected the transfer pricing study report, deeming the information unreliable. Different comparable entities were identified by the TPO, applying various filters like current year data, turnover limits, related party transactions, and persistent losses. The TPO's adjustments led to a substantial transfer pricing adjustment, impacting the final assessment order.

Selection of Comparable Entities:
The TPO rejected some entities chosen by the assessee in the transfer pricing study, introducing new comparables based on specific filters. The final selection of comparables resulted in a higher average profit margin, leading to significant adjustments in the transfer pricing analysis.

Application of Filters by TPO:
The TPO applied multiple filters to select comparables, including turnover limits, related party transactions, losses, financial year ending, functional differences, and economic circumstances. These filters influenced the selection of comparables and the subsequent transfer pricing adjustments.

DRP Directions on Turnover Filter and Risk Adjustment:
The DRP upheld the rejection of the transfer pricing study report and directed the TPO to consider turnover and employee cost filters. The DRP also instructed the TPO to determine the risk adjustment percentage using an accepted method, impacting the final assessment order and transfer pricing adjustments.

Exclusion of Infosys Technologies Ltd. as a Comparable:
The appeal challenged the DRP's direction to exclude Infosys Technologies Ltd. as a comparable entity based on size, turnover, and brand name. The Tribunal dismissed the appeal, citing precedents that established Infosys as incomparable due to its unique position in software development and higher risks compared to the assessee.

IT Risk Adjustment Direction by DRP:
The DRP directed the consideration of an IT risk adjustment but left the calculation to the TPO, following an accepted method. The Tribunal found no grounds for the revenue to be aggrieved by this direction, leading to the dismissal of the appeal on this ground.

Benefit u/s 10A Restriction by Reducing Certain Expenses:
The issue related to the restriction of benefits under section 10A by reducing specific expenses from export turnover was addressed following a petition by the assessee. The DRP directed the reduction of these expenses in line with a High Court decision, leading to modifications in the assessment order and the subsequent appeal by the revenue being dismissed.

This detailed analysis covers the various issues involved in the legal judgment, addressing the transfer pricing adjustments, selection of comparables, rejection of the transfer pricing study report, and the impact of DRP directions on the final assessment order.