2016 (8) TMI 1466 - AT - Income Tax

TP Adjustment - inclusion or exclusion of certain comparable companies while determining the ALP - HELD THAT - The assessee s service portfolio enables to provide integrated solution for the management of clinical research data right from inception to completion. The assessee s world-class team of highly-qualified and experienced scientists clinicians and multidisciplinary staff are committed to providing quality solutions across a wide range of therapeutic areas. The assessee s commitment to quality and customer-focused approach bundled with outstanding expertise distinguishes us from others. The assessee manages the projects based on the clients requirements and provide customized solutions. The assessee is having immense talent pool to reliably meet the needs of clients and deliver well within timelines. The services at Jeevan Scientific Technologies Ltd. include Medical Writing Clinical Data Management Biostatistics and other services including copy editing proofreading formatting quality assurance literature search graphic design and submissions to journals and congresses. AR submitted that as the assessee is an IT company Jeevan Scientific Technologies Ltd. cannot be considered as comparable to the assessee s case. There is force in the argument of the ld. AR. There is no dispute that Jeevan Scientific Technologies Ltd. is being ITES it cannot be compared to the medical prescription company. Accordingly we are inclined to direct the TPO to exclude Jeevan as comparable to the assessee s case. The assessee pleaded before us that Microgenetics Systems Ltd. to be considered as comparable to the assessee s case and should be included as comparable. We considered the argument of the ld. AR. The turnover of Microgenetics Systems Ltd. is very low i.e. 62.5 crores whereas the assessee s turnover is 600 crores and not proper to compare. On this basis we are inclined to hold that Microgenetics Systems Ltd. is not comparable to the assessee s case. This argument is rejected. Disallowance u/s.14A - HELD THAT - Admittedly the assessee filed documents before the DRP regarding the computation of disallowance u/s.14A r.w.r 8D However there is no discussion by the DRP in their order. He observed that there is no segregation of expenses attributable to investment which will exempt income. In our opinion the documents furnished by the assessee to be looked into and thereafter the DRP has to give direction to the TPO. We direct the assessee to furnish the same documents what is furnished before the DRP on earlier occasion for their consideration and the DRP shall decide the issue in accordance with law after considering the same. Assessee s appeal is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Incorrect TP Adjustment
2. Erroneous Comparability Analysis
3. Application of Invalid Filters
4. Adoption of Functionally Dissimilar Comparables
5. Non-inclusion of Valid Comparables
6. Use of Single Year Data
7. Disallowance under Section 14A

Detailed Analysis:

1. Incorrect TP Adjustment:
The assessee challenged the adjustment of INR 2,82,84,751 made to the Arm's Length Price (ALP) of its international transactions related to the provision of Information Technology Enabled Services (ITeS) with its Associated Enterprise (AE). The adjustment was confirmed by the Dispute Resolution Panel (DRP).

2. Erroneous Comparability Analysis:
The assessee argued that the Transfer Pricing Officer (TPO) and the Assessing Officer (AO) did not accept the economic analysis conducted by the assessee, which was in accordance with the provisions of the Income Tax Act, 1961, and Income Tax Rules, 1962. The TPO conducted a fresh economic analysis without providing cogent reasons for the same.

3. Application of Invalid Filters:
The TPO/AO and the DRP were alleged to have applied arbitrary quantitative and qualitative filters for the selection of comparables in the ITeS segment.

4. Adoption of Functionally Dissimilar Comparables:
The TPO/AO and the DRP included functionally dissimilar companies for determining the ALP under section 92C of the Act. The assessee specifically challenged the inclusion of certain comparables such as Coral Hub Ltd. and Jeevan Scientific Technologies Ltd., arguing that these companies were functionally different from the assessee's business.

5. Non-inclusion of Valid Comparables:
The assessee contended that the TPO/AO and the DRP did not include appropriate comparable companies selected by the assessee without providing valid reasons.

6. Use of Single Year Data:
The TPO/AO and the DRP used only the financial year (FY) 2009-10 data to determine the arm's length margin/price, whereas the assessee used multiple year data covering the subject year and two prior years for its analysis.

7. Disallowance under Section 14A:
The assessee raised an issue regarding the disallowance under section 14A, arguing that the DRP did not consider the documents submitted by the assessee regarding the computation of disallowance under section 14A read with Rule 8D.

Judgment Analysis:

Inclusion/Exclusion of Comparables (Ground Nos. 5 & 6):
The Tribunal focused on grounds 5 and 6, which pertained to the inclusion or exclusion of certain comparable companies while determining the ALP. The TPO initially selected 19 comparables for the Software Development Services (SDS) segment and 7 comparables for the ITeS segment. The assessee challenged the inclusion of several companies, arguing that they were functionally dissimilar.

The Tribunal found merit in the assessee's argument regarding Coral Hub Ltd. and Jeevan Scientific Technologies Ltd., stating that these companies were functionally different from the assessee. Coral Hub Ltd. was involved in data conversion and ePublishing services, while Jeevan Scientific Technologies Ltd. provided clinical research services. The Tribunal directed the TPO to exclude these companies from the comparables.

Non-inclusion of Microgenetics Systems Ltd.:
The assessee argued for the inclusion of Microgenetics Systems Ltd. as a comparable. However, the Tribunal rejected this argument, noting that the turnover of Microgenetics Systems Ltd. was significantly lower than that of the assessee, making it an inappropriate comparable.

Disallowance under Section 14A:
The assessee contended that the DRP did not consider the documents submitted regarding the disallowance under section 14A. The Tribunal directed the DRP to re-examine the documents and provide appropriate directions to the TPO.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the exclusion of certain comparables and remanding the issue of disallowance under section 14A to the DRP for reconsideration. The order was pronounced on August 24, 2016, in Chennai.