2022 (3) TMI 1476 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Rejection of companies non-comparable to assessee's international transaction of Information Technology Enabled Services. We noticed that the Cosmic Global Limited was excluded from the comparables in the earlier Assessment Years and the Coordinate Benches consistently confirmed the same. The major part of the income is from translation charges and functions of this comparable is different to the assessee company, therefore consistent with the earlier assessment year, we also direct the Assessing Officer/TPO to exclude this company from the list of comparables. We direct the AO/TPO to exclude the comparable E-Clerx Services Ltd., and Coral Hubs Ltd., from the list of comparables as substantially different from that of the assessee.

Summary

Issues Involved:
1. Upward adjustment in determining the arm's length price (ALP) of international transactions.
2. Rejection of transfer pricing (TP) analysis by the assessee.
3. Fresh economic analysis without providing selection criteria.
4. Use of single-year data for determining ALP.
5. Rejection of comparable companies selected by the assessee.
6. Identification of comparable companies without specifying the selection matrix.
7. Non-granting of working capital adjustment.
8. Non-allowance of adjustment for differences in risk levels.
9. Non-adoption of ALP considering a 5% variation margin.
10. Reliance on material not furnished to the assessee.
11. Non-granting of credit for advance tax.
12. Levying of interest under section 234D.

Detailed Analysis:

1. Upward Adjustment in Determining ALP:
The learned AO, based on the directions of the DRP, made an upward adjustment of Rs 3,34,57,335 in determining the ALP of the international transaction of ITES rendered by the appellant. The Tribunal admitted the additional ground regarding the exclusion of Cosmic Global Limited from the list of comparables, as it was involved in Medical Transcription and Translation services, which was not comparable to the assessee's ITES.

2. Rejection of TP Analysis by the Assessee:
The AO rejected the TP analysis undertaken by the appellant for computing the ALP and applied the KPO search to arrive at the ALP. The Tribunal noted that the issue had been considered in the assessee's own case for the preceding A.Y. 2008-09 and decided in favor of the assessee.

3. Fresh Economic Analysis Without Providing Selection Criteria:
The AO conducted a fresh economic analysis for determining the ALP without providing the selection criteria adopted. The Tribunal observed that the facts were on record and did not require fresh investigation, following the decision of the Hon'ble Supreme Court in National Thermal Power Co., Limited v. CIT.

4. Use of Single-Year Data for Determining ALP:
The AO used only single-year data for FY 2008-2009, which was not available to the appellant at the time of complying with the TP documentation requirements. The Tribunal directed the exclusion of Cosmic Global Limited from the list of comparables, consistent with the earlier assessment year.

5. Rejection of Comparable Companies Selected by the Assessee:
The AO rejected the comparable companies selected by the appellant in the TP report without providing appropriate reasons. The Tribunal directed the inclusion of R System International Limited and Allsec Technologies as comparables, following the decision in the assessee's own case for A.Y. 2008-09.

6. Identification of Comparable Companies Without Specifying the Selection Matrix:
The AO identified comparable companies without specifying the selection matrix. The Tribunal excluded eClerx Services Ltd, Coral Hubs Limited, and Crossdomain Solutions Limited from the list of comparables, consistent with the earlier assessment years.

7. Non-Granting of Working Capital Adjustment:
The AO did not grant a working capital adjustment to the average Profit Level Indicator of the selected comparable companies. The Tribunal did not adjudicate this ground as it was not pressed by the assessee.

8. Non-Allowance of Adjustment for Differences in Risk Levels:
The AO did not allow the adjustment for differences in the level of risks assumed by the appellant vis-a-vis the selected comparable companies. This ground was also not pressed by the assessee and thus not adjudicated.

9. Non-Adoption of ALP Considering a 5% Variation Margin:
The AO did not adopt the ALP after considering an amount varying by 5% of the arithmetic mean of the margins of the selected comparable companies. This ground was not pressed by the assessee and thus not adjudicated.

10. Reliance on Material Not Furnished to the Assessee:
The AO relied on material obtained without furnishing copies to the appellant, violating the principle of natural justice. This ground was not pressed by the assessee and thus not adjudicated.

11. Non-Granting of Credit for Advance Tax:
The AO did not grant the credit of advance tax claimed by the appellant to the extent of Rs 7,200,000. This ground was not pressed by the assessee and thus not adjudicated.

12. Levying of Interest Under Section 234D:
The AO levied interest of Rs 1,620,315 under section 234D of the Act. This ground was not pressed by the assessee and thus not adjudicated.

Conclusion:
The Tribunal directed the exclusion of Cosmic Global Limited, eClerx Services Ltd, Coral Hubs Limited, and Crossdomain Solutions Limited from the list of comparables and the inclusion of R System International Limited and Allsec Technologies. The appeal filed by the assessee was allowed, and the AO/TPO was directed to recompute the ALP of the international transactions accordingly.