2018 (6) TMI 1707 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee was providing e-learning solutions i.e. IT enabled services like content technology services desktop technology services e-learning and conversion services to its associated enterprises. Accentia Technologies Ltd to be excluded as being not functionally comparable to the activities carried on by the assessee Not considering foreign exchange gain as operating income while calculating the PLI of assessee - The foreign exchange fluctuation is in respect of revenue earned from the associated enterprises vis- -vis provision of ITES services and hence the same forms part of the operating income / cost. The Assessing Officer / TPO is thus directed to verify the claim of assessee in this regard and re- compute the PLI of assessee and the comparables. It may also be pointed out that the assessee had chosen filter of export sales exceeding 75% for comparables. Thus the foreign exchange fluctuations arising with regard to exports cannot be treated as non-operating in nature even in the case of comparables. See B.C. MANAGEMENT SERVICES PVT. LTD. 2017 (12) TMI 255 - DELHI HIGH COURT Risk adjustment - As relying on STARENT NETWORKS (INDIA) PVT. LTD. 2018 (4) TMI 32 - ITAT PUNE we direct the Assessing Officer to verify the above said claim of assessee and re-compute the margins of assessee and also the mean margins of comparables in line with our directions and determine transfer pricing adjustment if any is to be made. The grounds of appeal raised by the assessee are thus partly allowed.

Issues Involved:
1. Transfer Pricing adjustment
2. Rejection of benchmarking analysis carried out by the Appellant
3. Erroneous selection of comparable companies
4. Erroneous consideration of foreign exchange gain as non-operating income while calculating the Profit Level Indicator (PLI)
5. Erroneous rejection of comparable companies
6. Erroneous computation of PLI of companies considered as comparable
7. Benefit of the risk adjustment
8. Benefit of the variation/reduction of 5 percent from the arithmetic mean
9. Initiation of penalty proceedings
10. Levy of interest obligation on account of transfer pricing adjustment

Detailed Analysis:

1. Transfer Pricing Adjustment:
The core issue in the appeal is the transfer pricing adjustment of Rs. 3,69,15,740 made by the Assessing Officer (AO) / Dispute Resolution Panel (DRP) / Transfer Pricing Officer (TPO) to the value of international transactions entered into by the assessee. The assessee provided IT enabled services to its associated enterprises and used the Transactional Net Margin Method (TNMM) with Operating Profit (OP)/Operating Cost (OC) as the Profit Level Indicator (PLI). The TPO rejected the comparables chosen by the assessee and selected new comparables, leading to the adjustment.

2. Rejection of Benchmarking Analysis:
The TPO rejected the benchmarking approach and methodology followed by the assessee for benchmarking the international transaction of provision of ITES. The assessee’s initial benchmarking showed margins at arm’s length, but the TPO’s selection of different comparables led to a significant adjustment.

3. Erroneous Selection of Comparable Companies:
The assessee contested the inclusion of Accentia Technologies Ltd. and Acropetal Technologies Ltd. as comparables. Accentia Technologies Ltd. was argued to be engaged in KPO services in the healthcare sector and had undergone extraordinary events, including the acquisition of Tangent Corporation. The Tribunal noted that similar issues had been raised and decided in favor of the assessee in previous years, leading to the exclusion of Accentia Technologies Ltd. from the final set of comparables.

4. Erroneous Consideration of Foreign Exchange Gain:
The assessee argued that foreign exchange gains should be considered as operating income while calculating the PLI. The Tribunal directed the AO/TPO to verify the claim and re-compute the PLI, considering foreign exchange fluctuations as part of the operating income/cost.

5. Erroneous Rejection of Comparable Companies:
The assessee pointed out the exclusion of C & K Management Ltd. due to the non-availability of its annual report during the transfer pricing assessment proceedings. The Tribunal directed the AO/TPO to verify the financials of C & K Management Ltd. and include it if found functionally comparable.

6. Erroneous Computation of PLI of Companies Considered as Comparable:
The Tribunal directed the AO/TPO to re-compute the PLI of the assessee and the comparables, considering the verified financials and the inclusion of foreign exchange gains as operating income.

7. Benefit of the Risk Adjustment:
The assessee claimed a risk adjustment due to being a captive service provider. The Tribunal referred to previous decisions, including Starent Networks India (P) Ltd. Vs. ACIT, and directed the AO to allow risk adjustment and re-compute the margins of comparables.

8. Benefit of the Variation/Reduction of 5 Percent from the Arithmetic Mean:
The Tribunal acknowledged the benefit of the +/- 5% range as per the proviso to section 92C(2) of the Act and directed the AO to apply this range while determining the arm’s length price.

9. Initiation of Penalty Proceedings:
The grounds related to the initiation of penalty proceedings under section 271(1)(c) were dismissed as general in nature.

10. Levy of Interest Obligation on Account of Transfer Pricing Adjustment:
The assessee argued that the shortfall in advance tax was due to the unanticipated transfer pricing adjustment. The Tribunal’s directions on re-computing the transfer pricing adjustment would consequentially affect the interest levied under section 234B.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to re-compute the margins and transfer pricing adjustment, considering the Tribunal’s directions on the inclusion/exclusion of comparables, foreign exchange gains, and risk adjustment. The appeal was thus, partly allowed.

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