2015 (10) TMI 2819 - AT - Income Tax

TP Adjustment - exclusion of comparables by the DRP from the set of comparables companies chosen by the TPO - contention of revenue that these companies qualify all the qualitative and quantitative filters applied by the TPO and therefore the DRP was wrong in directing the exclusion of these companie - HELD THAT - Revenue has raised a general ground without specifying or bringing on record material to establish why it considers the decision of the DRP to be erroneous. We find that the DRP has given elaborate reasons for directing the exclusion of each of the companies. In the absence of any material evidence to controvert the findings of the DRP, the contentions of Revenue in this ground remain unsubstantiated and therefore we are unable to concur with the same. In this view of the matter, we dismiss Ground No.1. Risk Adjustment - Revenue contends that risk adjustment is not required in this case as the assessee face risks like political risk, foreign exchange risk and also market risks - Since these details and quantification of the assessee's claim for risk adjustment has only been placed before us and was not before the authorities below, we deem it appropriate to remand this issue back to the file of the TPO with a direction that the TPO examine the assessee's claim for risk adjustment and allow the same if the facts of the case on hand so warrant such adjustment. Needless to add, the assessee shall be afforded sufficient opportunity of being heard and to make its submissions in this regard which shall be considered by the TPO before he takes a decision in the matter. It is ordered accordingly. Comparable selection - IDL (India) Ltd - It is seen that the facts submitted by the assessee in this regard emerge from the records. This company was included in the list of comparables chosen by the assessee in its T.P. Study. We find that the TPO has indeed mentioned in the T.P. order that this company is functionally comparable and acceptable . That being so, it is not clear as to why this company was not selected and included in the final set of comparables and why this company did not figure in the search process conducted by the TPO. In this view of the matter, we consider it appropriate to remand this issue to the TPO for consideration with a direction that the TPO may consider the submissions made by the assessee for inclusion of this company in its list of comparables. Needless to add, the assessee shall be afforded adequate opportunity of being heard and to make submissions/file details in this regard which shall be considered by the TPO before deciding the issue. Kores (India) Ltd. - Business and Computer Systems Division is involved in a variety of operations like marketing of equipment relating to banking, postal offices, etc and after sales services including software support. The after sales services referred to in this division is an insignificant component of the revenue of the company and therefore it is not appropriate to compare the division of this company with the Market Support Services performed by the assessee. We find that the DRP has given detailed reasoning for rejection of this company as a comparable company to the assessee in the case on hand. Before us, the assessee had failed to adduce any material evidence to controvert the findings of the DRP. In this factual matrix, we find no infirmity, in the order of the DRP that would require our interference and therefore uphold its decision to exclude this company from the set of comparables to the assessee. Computation of Margin - as submitted by the assessee that the assessee has computed the margin of Cyber Media Research Ltd./IDC (India) Ltd - We have perused the relevant portions of the TPO s order and find that the OP/Cost is given by the TPO at 13.68% (Page 6 of TPO s order) and later computed at 19.52% (Page 9 of TPO s order). In these circumstances, the TPO is directed to verify the above contention of the assessee and adopt the correct margin of IDC (India) Ltd. / Cyber Media Research Ltd. after affording the assessee adequate opportunity to be heard and make submissions in the matter, which shall be considered by the TPO before coming to a finding in the matter. It is ordered accordingly. Consequently, Ground No.6.3 is allowed for statistical purposes. Comparables for Global Support Services Segment - G.K.Consultants Ltd. - From the TPO s order, it is not clear as to whether the TPO has examined this aspect of the company operating in several segments out of which professional services is only a small portion. It is also not clear as to whether the TPO has adopted the segmental details or the entity level details. In fact, the DRP has directed that it is to be ascertained whether segmental margins were adopted or entity level margins. In this factual matrix as discussed above, we are of the view that it would be appropriate to remand the issue back to the file of the Assessing Officer / TPO to examine the comparability of this company with the assessee, in the light of our observations above and if this company is found comparable, to adopt the margins as per the segmental details. Maruti Insurance Agency Logistics Ltd. - As seen from the orders of the Insurance Regulatory Development Authority ( IRDA ) that this company is a group entity belonging to the Maruti Suzuki Ltd. group and is acting as its corporate agent. In that order of the IRDA, it has been held that no insurer is supposed to be granted license to act as corporate agent on the basis of reputation and strength of the applicant firm and a finding has been rendered that the corporate agent; namely this company has violated the statutory provisions. We find that the documents filed before us were evidently not placed before the TPO and DRP and therefore this aspect has not been examined by the authorities below. In this view of the matter, we deem it appropriate to remand the issue back to the file of the Assessing Officer / TPO to examine the comparability of this company with the assessee. Inclusion of CRA Management Consulting Services Ltd. ( ICRA ) and Pagaria Energy Ltd. - Evidently these two companies have not been selected as part of or as a result of any search process and therefore could be a case of cherry picking by the assessee. However, it is also a fact on record that the assessee had included the Global Support Services Segment in the Distribution Segment and therefore had not conducted an independent bench marking for this segment. Therefore, if the Global Support Services Segment is considered as a separate segment, as has been done by the TPO, the assessee should have the right to conduct its search process and select its set of comparables; which of course will be subjected to the examination and scrutiny of the TPO. In this view of the matter, we deem it appropriate to remand the issue back to the file of the Assessing Officer / TPO to examine the comparability of these two companies with the assessee Working Capital Adjustment - On perusal of the orders of the authorities below, we find that the DRP has granted the assessee working capital adjustment, subject to the upper limit of average cost of capital of the comparables. The Assessing Officer / TPO is directed to examine the assessee's claim for and allow working capital adjustment vis- -vis the comparable companies, in accordance with law, if so warranted. Risk Adjustment - This claim was put forth before the DRP, though bereft of any detailed quantification of the adjustment claimed on account of risk differential. However, before us, as submitted by the learned Authorised Representative of the assessee has submitted its documentation in respect of risk adjustment and quantification of its claim - Since these details and quantification of the assessee's claim for risk adjustment has only been placed before us and was not before the authorities below, we deem it appropriate to remand this issue back to the file of the TPO with a direction that the TPO to examine the assessee's claim for risk adjustment and allow the same if the facts of the case on hand so warrant such adjustment. Needless to add, the assessee shall be afforded sufficient opportunity of being heard and to make its submissions in this regard which shall be considered by the TPO before he takes a decision in the matter. Benefit of / - 5% as set out under the proviso to Section 92C(2) - The new section 92C(2A), mandates that if the AM price falls beyond / - 5% from the price charged in international transactions, then the assessee does not have any option referred to in Section 92C(2) of the Act. Thus, as per the above amendment, it is clear that the / - 5% variation is allowed to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly, the 5% benefit is not allowable in the assessee's case. In view of the retrospective amendment by way of insertion of Section 92C(2A) w.r.e.f. 1.4.2012 brought about therein by Finance Act, 2012, this Ground of the assessee's appeal is not maintainable and is accordingly dismissed.

Summary

Issues Involved:
1. Exclusion of comparables by the DRP.
2. Risk adjustment.
3. Rejection of the T.P. Study by the assessee.
4. Inclusion of comparables sought by the assessee.
5. Computation of margin.
6. Working capital adjustment.
7. Benefit of +/- 5% range.

Detailed Analysis:

1. Exclusion of Comparables by the DRP:
The Revenue contended that the DRP wrongly excluded certain comparables that qualified all qualitative and quantitative filters. The Tribunal found that the Revenue did not provide material evidence to establish why the DRP's decision was erroneous. The DRP had given elaborate reasons for the exclusion, and in the absence of any material evidence to counter these findings, the Tribunal dismissed this ground.

2. Risk Adjustment:
The Revenue argued that risk adjustment was not required as the assessee faced significant risks. The DRP had directed a 1% risk adjustment without specifying the method of computation. The Tribunal noted that the DRP had directed the TPO to examine the assessee's claim for risk adjustment and decide the percentage if warranted. The Tribunal remanded this issue back to the TPO for examination, directing the TPO to allow the adjustment if the facts warranted it.

3. Rejection of the T.P. Study by the Assessee:
The Tribunal noted that the assessee did not press or urge grounds related to the rejection of the T.P. Study, application of multiple-year data, and use of contemporaneous data. These grounds were rendered infructuous and dismissed.

4. Inclusion of Comparables Sought by the Assessee:
- IDL (India) Ltd.: The Tribunal found that this company was functionally comparable and acceptable as per the TPO's initial analysis but was not included in the final set of comparables. The Tribunal remanded this issue back to the TPO for consideration.
- Kores (India) Ltd.: The Tribunal found that this company was not selected from a search process and could be a case of "cherry picking." The DRP had given detailed reasoning for its exclusion, and the Tribunal upheld the DRP's decision.

5. Computation of Margin:
The assessee contended that the margin of Cyber Media Research Ltd. was wrongly computed. The Tribunal directed the TPO to verify the correct margin and adopt it after affording the assessee an opportunity to be heard.

6. Working Capital Adjustment:
The Tribunal noted that the DRP had granted working capital adjustment subject to the upper limit of the average cost of capital of the comparables. The TPO was directed to examine and allow the working capital adjustment if warranted.

7. Benefit of +/- 5% Range:
The Tribunal noted that the amendment to Section 92C(2A) of the Act, effective from 1.4.2002, clarified that the +/- 5% variation is allowed to justify the price charged in international transactions and not for adjustment purposes. Consequently, this ground was not maintainable and was dismissed.

Conclusion:
- The Revenue's appeal for Assessment Year 2010-11 was dismissed.
- The assessee's cross appeal was partly allowed for statistical purposes.
- The Tribunal remanded specific issues back to the TPO for further examination and directed the TPO to allow adjustments if warranted based on the facts of the case.