2016 (5) TMI 1541 - AT - Income Tax

TP Adjustment - selection of certain comparables - functionality dissimilarity - HELD THAT - Assessee is engaged in global financial services in the investment advisory activities broker dealer activities and computer based quantitative management. The assessee provides software development services to its AE. Therefore the assessee is purely a captive service provider. The assessee has been recognised as 100% EOU registered under the Software Technology Park of India (STPI) Scheme thus companies functionally dissimilar with that of assessee need to be deselected.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Recourse to Information Obtained under Section 133(6) of the Act
3. Use of Filters
4. Use of Multiple Year Data
5. Disregard of Rule 10B(2) and Rule 10B(3) of the Income Tax Rules, 1962
6. Selection of Comparables
7. Arm's Length Range of ±5%
8. Disallowance of Expenditure
9. Consequential Interest under Section 234B and 234D

Detailed Analysis:

Transfer Pricing Adjustments:
The assessee contested the assessment order passed under section 143(3) read with section 144C of the Income-tax Act, which included a transfer pricing adjustment. The primary contention was that the Transfer Pricing Officer (TPO) disregarded the economic analysis and search process methodology undertaken by the assessee, and conducted a fresh economic analysis for determining the Arm's Length Price (ALP). The TPO selected 19 comparables with an average margin of 26.20% and made an adjustment of ?11,65,27,986/-. The Dispute Resolution Panel (DRP) directed the deletion of one comparable, resulting in a revised adjustment of ?10,80,49,941/-.

Recourse to Information Obtained under Section 133(6) of the Act:
The assessee argued that the TPO violated the principles of natural justice by not providing the manner of obtaining and disclosing information called for under section 133(6) of the Income Tax Act, 1961. The TPO did not provide the assessee an opportunity to cross-examine the comparable companies that furnished information under this section.

Use of Filters:
The assessee objected to the use of filters adopted by the TPO, which were claimed to be inconsistent and selectively applied. The TPO's rejection of key filters applied by the assessee was also contested.

Use of Multiple Year Data:
The assessee argued that the TPO erred in rejecting the multiple year analysis for computing the operating margins of the comparable companies.

Disregard of Rule 10B(2) and Rule 10B(3) of the Income Tax Rules, 1962:
The assessee contended that the TPO and DRP disregarded the comparability factors specified under Rule 10B(2) and the provisions contained in Rule 10B(3) that specify adjustments to account for differences that materially affect the price. The assessee's claim for risk adjustment was also rejected.

Selection of Comparables:
The assessee objected to the selection of certain comparables by the TPO, which were upheld by the DRP. The ITAT examined the objections to eight specific comparables and found merit in the assessee's arguments. The comparables in question were Avani Cimcon Technologies Ltd., E-Zest Solutions Ltd., Infosys Technologies Ltd., Kals Information Systems Ltd., Wipro Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., and Quintegra Solutions Ltd. The ITAT directed the exclusion of these companies from the list of comparables, citing reasons such as functional dissimilarity, engagement in product development, lack of segmental information, and ownership of intangibles. The ITAT relied on previous decisions, including those in the cases of M/s Intoto Software India (P) Ltd., NTT Data India Enterprise Application Services Ltd., and 3DPLM Software Solutions Pvt. Ltd.

Arm's Length Range of ±5%:
The assessee argued that the AO/DRP erred in not granting the benefit of the variation/reduction of 5 percent from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act.

Disallowance of Expenditure:
The AO/DRP disallowed ?40,000 paid to GPR Charities as a final settlement amount on account of rent, which was wrongly narrated in the books as a donation.

Consequential Interest under Section 234B and 234D:
The AO/DRP imposed interest under sections 234B and 234D, which was contested by the assessee.

Conclusion:
The ITAT allowed the assessee's appeal, directing the exclusion of the disputed comparables and the redetermination of the ALP. If the price charged by the assessee for its international transaction is found to be within the arm's length after such redetermination, no adjustment is required. The other grounds raised by the assessee were dismissed as not pressed. The judgment was pronounced on 20th May 2016.