2019 (6) TMI 1634 - AT - Income Tax

TP Adjustment - comparable selection - application of turnover filter - HELD THAT - As in this case, the Tribunal has approved the applicability of turnover filter of 1/10th or 10 times of the turnover of the tested party. In holding so, the Tribunal has followed the binding judgment of Hon'ble Karnataka High Court rendered in the case of Acusis Software India P. Ltd. 2018 (8) TMI 1885 - KARNATAKA HIGH COURT - thus we hold that the two comparables CG-VAK Software Exports Limited and Larsen Toubro Infotech Limited should be excluded by applying the turnover filter because the turnover of CG-VAK Software Exports Limited is less than 1/10th of the assessee company s turnover and the turnover of Larsen Toubro Infotech Limited is more than 10 times of assessee company s turnover. The turnover of Larsen Toubro Infotech Limited is said to be ₹ 3,609.32 Crores and hence, it is more than 10 times of the turnover of assessee company of ₹ 234.38 Crores. By applying the turnover filter, we direct the TPO/AO to exclude these two comparables from the final list. In view of this, we feel that other arguments in respect of exclusion of these two comparables are not required to be discussed and decided. As assessee is engaged in the provision of software development services to its AEs, thus companies functinally disimilar with that of assessee need to deselected from final list.

Summary

Issues Involved:
1. Transfer pricing adjustment.
2. Rejection of transfer pricing documentation.
3. Use of multiple year data.
4. Computation of operating profit margins of comparable companies.
5. Selection and rejection of comparable companies.
6. Information gathered under Section 133(6) of the Act.
7. Comparability adjustments.
8. Other transfer pricing related grounds.
9. Admission of additional grounds.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged the transfer pricing adjustment of INR 99,984,156 made by the AO/TPO, arguing that the international transactions with its associated enterprises (AEs) were at arm's length. The tribunal found that the AO/TPO erred in law and facts in making this adjustment.

2. Rejection of Transfer Pricing Documentation:
The tribunal noted that the AO/TPO rejected the TP documentation prepared by the assessee, which was in accordance with the relevant provisions of the Act and Rules. The AO/TPO's finding that the information or data used in computation of arm's length price was "unreliable or incorrect" under Section 92C(3) of the Act was also challenged.

3. Use of Multiple Year Data:
The assessee argued that the AO/TPO erred in rejecting the use of multiple year data, which had an influence on the determination of arm's length price. The tribunal found that the AO/TPO ignored provisions of Rule 108(4) and other international commentaries and judicial pronouncements advocating the use of multiple year data.

4. Computation of Operating Profit Margins of Comparable Companies:
The tribunal noted that the AO/TPO erred in considering the provision for doubtful debts as non-operating while computing the operating profit margins of comparable companies, overlooking that it resulted from the company's normal business operations.

5. Selection and Rejection of Comparable Companies:
The tribunal addressed multiple issues regarding comparable companies:
- The AO/TPO conducted a fresh search for comparable companies and rejected the search process carried out by the assessee without justifiable reasons.
- The tribunal found errors in selecting companies like Larsen & Toubro Infotech Limited and CG-VAK Software Exports Limited due to functional dissimilarity and other reasons.
- The tribunal directed the exclusion of these companies by applying the turnover filter, as their turnover was either less than 1/10th or more than 10 times the assessee's turnover.
- The tribunal also restored the matter to the TPO for fresh decision regarding the inclusion of comparables like Evoke Technologies Ltd., Helios & Matheson Information Technology Limited, R Systems International Limited, and Akshay Software Technologies Limited.

6. Information Gathered Under Section 133(6) of the Act:
The tribunal noted that the AO/TPO erred in gathering information from various companies under Section 133(6) which was not available to the assessee at the time of preparing its TP documentation. The reliance on information not available in the public domain was also found to be erroneous.

7. Comparability Adjustments:
The tribunal found that the AO/TPO failed to make risk adjustments reducing the arm's length margin determined by the assessee. The AO/TPO did not appreciate that the assessee, being a captive service provider, operated at lower risk levels compared to comparable companies.

8. Other Transfer Pricing Related Grounds:
The tribunal addressed several other grounds:
- The AO/TPO failed to appreciate the assessee's commercial judgment about the application of the arm's length principle.
- Several observations and findings by the AO/TPO were based on incorrect interpretations of law and contrary to the facts of the case.
- The AO/TPO did not follow the process specified under Section 92C(3) for rejection of TP analysis and independent determination of arm's length price.
- The initiation of penalty proceedings under Section 271(1)(c) and computation of interest under Section 234B on the assessed income were also challenged.

9. Admission of Additional Grounds:
The tribunal admitted additional grounds raised by the assessee regarding the application of the turnover filter, citing the judgment of Hon'ble Karnataka High Court in the case of Acusis Software India P. Ltd. and other Tribunal orders. The tribunal restored the matter to the TPO for fresh decision based on the turnover filter range of 1/10th and 10X times of the turnover.

Conclusion:
The tribunal partly allowed the appeal filed by the assessee, directing the exclusion and inclusion of certain comparables based on turnover filters and restoring several issues to the TPO for fresh decision. The tribunal emphasized adherence to legal precedents and proper application of the arm's length principle.