2016 (3) TMI 1431 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Vishal Information Technologies cannot be considered as a comparable with the assessee-company. Hence, we direct the AO/TPO to exclude this company from the list of comparables for the purpose of bench marking the international transactions with its AE. Saffron Global Ltd - The fact that there was a proposal for merger of this company with Triton Corporation and the accumulated losses are more than 50% of net worth, the internal controls require to be improved and increase in turnover is not a relevant factor for excluding this company as a comparable. These factors have no impact either on the comparability or profitability of the current year and therefore, we uphold the findings of the ld.CIT(A) and this ground of appeal filed by the assessee-company is dismissed. Companies not comparable as they have related party transaction - The provisions of Section 92 provides that income arising from international transaction is to be computed having regard to ALP. Section 92F(ii) defines arm s length price to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. To compute ALP the results of the international transaction are bench marked against comparable uncontrolled transaction. The mandate of s. 92F(ii) is that ALP shall be computed considering price applied or proposed to be applied in transactions between non- AE s. When selection of external comparables, one needs to ensure that such external comparables are uncontrolled. The companies having controlled transactions therefore needs to be eliminated. Then the issue that crops up is what should be the related party transaction ratio for excluding as comparable. This issue had come up before the Tribunal in numerous cases. The Delhi Coordinate Bench in the case of M/s Sony India Pvt. Ltd 2008 (9) TMI 420 - ITAT DELHI-H , held that the companies having relating party transactions of not exceeding 15% can be taken as a comparable. The law is fairly well settled to the extent that the companies having in related party transactions more than 15% cannot be considered as comparable. Accordingly, we are of the opinion that the ld.CIT(A) was not justified in holding that only the companies having no RPT should alone be considered. Therefore, we hold that Allsec Technologies, Transworks Information and Ace Software can be considered as comparable. However, Wipro BPO cannot be considered as a comparable on account of fact that it is substantial intangibles and enjoying huge goodwill - we hold that Wipro BPO cannot be considered as a comparable.

Summary

Issues Involved:
1. Validity of assessment and reference to Transfer Pricing Officer (TPO).
2. Fresh comparable search undertaken by TPO.
3. Comparability analysis adopted by TPO for determining arm's length price (ALP).
4. Use of erroneous data by AO/TPO.
5. Non-allowance of appropriate adjustments to comparable companies.
6. Interest levied under section 234B of the Act.
7. Interest under section 234D.
8. Initiation of penalty proceedings under section 271(1)(c).
9. Relief sought by the assessee.

Detailed Analysis:

1. Validity of Assessment and Reference to TPO:
The assessee argued that the assessment order and reference to the TPO were invalid due to lack of compliance with principles of natural justice and misinterpretation of statutory provisions. The CIT(A) upheld the validity of the reference to the TPO, confirming that the amendment to section 92CA(4) was intended to correct a lacuna.

2. Fresh Comparable Search Undertaken by TPO:
The assessee contested the TPO’s fresh comparable search, arguing that it was based on non-contemporaneous data and was not shared during the assessment. The CIT(A) supported the TPO's approach but directed the exclusion of certain comparables with related party transactions. The TPO's filters for selecting comparables were upheld, but the CIT(A) excluded companies like Allsec Technologies Ltd., Transworks Information Service Ltd., Wipro BPO Solutions Ltd., and Ace Software Export Ltd. due to related party transactions.

3. Comparability Analysis Adopted by TPO:
The TPO's selection of comparables was challenged by the assessee on grounds of functional dissimilarity and differences in business models. The CIT(A) upheld the inclusion of some comparables but rejected others, such as Maple e-Solutions and Nucleus Netsoft Technologies, due to lack of segmental data and operational inconsistencies. The Tribunal excluded Vishal Information Technologies Ltd. as it outsourced major portions of its work, making it functionally dissimilar to the assessee.

4. Use of Erroneous Data by AO/TPO:
The assessee argued that the TPO used non-contemporaneous data and did not apply multiple-year data. The CIT(A) upheld the TPO's use of current year data, rejecting the comparability of companies like Intelnet Global Services Ltd. and Netvista Information Solutions Ltd. due to the use of multiple-year data.

5. Non-Allowance of Appropriate Adjustments:
The assessee claimed that the TPO and CIT(A) did not allow adjustments for differences in accounting practices, marketing expenditure, research and development expenditure, and risk profiles. The CIT(A) rejected these claims, stating that the differences did not materially affect comparability.

6. Interest Levied Under Section 234B:
The CIT(A) confirmed the levy of interest under section 234B amounting to Rs. 394,163, which the assessee contested.

7. Interest Under Section 234D:
The CIT(A) also confirmed the interest under section 234D amounting to Rs. 383,684, which was disputed by the assessee.

8. Initiation of Penalty Proceedings:
The CIT(A) upheld the initiation of penalty proceedings under section 271(1)(c), which the assessee argued was unjustified.

9. Relief Sought by the Assessee:
The assessee sought various reliefs, including the deletion of transfer pricing adjustments made by the AO/TPO and upheld by the CIT(A). The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain comparables and upholding the inclusion of others.

Tribunal's Decision:
The Tribunal excluded Vishal Information Technologies Ltd. and upheld the inclusion of Saffron Global Ltd. The Tribunal also ruled that companies with related party transactions exceeding 15% should not be considered as comparables, while rejecting Wipro BPO Solutions Ltd. due to its substantial intangibles and goodwill. The Tribunal partly allowed both the assessee's and revenue's appeals, providing detailed reasoning for each decision.

Conclusion:
The Tribunal's order addressed multiple issues related to transfer pricing adjustments, comparability analysis, and procedural validity, providing a comprehensive resolution to the disputes raised by both the assessee and the revenue. The detailed analysis ensures adherence to legal principles and appropriate application of statutory provisions.