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2020 (5) TMI 731 - AT - Income TaxTP Adjustment - comparable selection - RPT filter @ 25% - HELD THAT - We are of the considered opinion that this matter requires verification at the level of TPO for determination of the inclusion and/or exclusion of this comparable on the basis of RPT filter as adopted by the assessee and the TPO. We, therefore, deem it proper to restore this issue to the file of the AO/TPO for deciding this issue afresh after verification of the RPT from the financials already furnished by the assessee. Ground of appeal No.1 is accordingly allowed for statistical purposes. Adjustment on account of difference of working capital employed by the assessee company and the comparables - HELD THAT - Both the sides agreed that this issue needs to go back to the file of AO/TPO for correct determination of computation of working capital adjustment. We, therefore, deem it proper to restore the issue to the file of AO/TPO for determination of the working capital adjustment. Ground No.3 of the assesseee is accordingly allowed for statistical purposes. Inclusion/exclusion of certain comparables - Companies functionally dissimilar with that of assessee or any extraordinary events on account of amalgamation need to be deselected from final list.
Issues Involved:
1. Incorrect acceptance of HCL Comnet Systems & Services Ltd. as a comparable. 2. Arbitrary rejection of comparable companies. 3. Incorrect computation of adjustment on account of working capital differences. 4. Arbitrary rejection of comparable companies selected by the assessee. 5. Selection of super normal profit-making companies as comparables. 6. Computation of operating margins without allowing Fringe Benefits Tax (FBT) as an allowable expenditure. 7. Non-allowance of adjustment for differences in risk profile. 8. Use of single-year data for benchmarking analysis. Detailed Analysis: Issue 1: Incorrect Acceptance of HCL Comnet Systems & Services Ltd. as a Comparable The assessee argued that HCL Comnet Systems & Services Ltd. had significant related party transactions (RPT) exceeding 25%, making it an inappropriate comparable. The Tribunal restored this issue to the AO/TPO for verification of the RPT, directing exclusion if the RPT exceeded 25%. Issue 2: Arbitrary Rejection of Comparable Companies The Tribunal noted that the TPO had rejected the assessee's comparables without identifying specific deficiencies. The Tribunal allowed the assessee's appeal for statistical purposes, directing the AO/TPO to re-evaluate the comparables. Issue 3: Incorrect Computation of Adjustment on Account of Working Capital Differences Both parties agreed that the issue of working capital adjustment needed re-evaluation. The Tribunal restored the issue to the AO/TPO for correct determination. Issue 4: Arbitrary Rejection of Comparable Companies Selected by the Assessee The Tribunal directed the AO/TPO to re-evaluate the comparables, considering the assessee's arguments and previous Tribunal decisions. Specific companies like Accentia Technologies Ltd., Crossdomain Solutions Pvt. Ltd., Datamatics Financial Services Ltd., eClerx Services Ltd., Infosys BPO, Acropetal Technologies Ltd., and Wipro BPO were discussed in detail, with many being excluded based on functional dissimilarities and extraordinary events. Issue 5: Selection of Super Normal Profit-Making Companies as Comparables The Tribunal excluded companies like Accentia Technologies Ltd. and eClerx Services Ltd. due to their high-profit margins and functional differences, aligning with previous Tribunal decisions. Issue 6: Computation of Operating Margins Without Allowing Fringe Benefits Tax (FBT) as an Allowable Expenditure The Tribunal did not specifically address this issue as the assessee's counsel did not press it during the hearing. Issue 7: Non-Allowance of Adjustment for Differences in Risk Profile The Tribunal did not specifically address this issue as the assessee's counsel did not press it during the hearing. Issue 8: Use of Single-Year Data for Benchmarking Analysis The Tribunal did not specifically address this issue as the assessee's counsel did not press it during the hearing. Conclusion: The Tribunal partly allowed the assessee's appeal, directing the AO/TPO to re-evaluate the comparables and working capital adjustments, and exclude certain companies based on functional dissimilarities and extraordinary events. The decision emphasized the need for accurate and fair comparability analysis in transfer pricing cases.
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