2021 (5) TMI 1049 - AT - Income Tax

TP Adjustment - comparable selection - TPO rejected / excluded the comparables selected by the assessee (being non KPO) and further selected / included KPO companies as comparable to the assessee - HELD THAT -assessee is a captive service provider providing Information Technology Enabled Service (ITES) to its Associated Enterprises (A.E) globally and the assessee s margin from the said international transaction for the assessment year 2009 10 is 23.07%. The assessee is providing only ITES services to its A.Es and is not a KPO consequent to which classified as KPO companies cannot be considered as comparable to the assessee, which is evident from the order passed by the Tribunal in assessee s own case in assessment year 2007 08 2019 (9) TMI 972 - ITAT MUMBAI and 2008 09 respectively 2020 (8) TMI 170 - ITAT MUMBAI Thus Companies functionally dissimilar with that of assessee need not to be selected as a comparable.

Issues Involved:
1. Upward adjustment in determining the arm's length price (ALP) of international transactions.
2. Rejection of the transfer pricing (TP) analysis undertaken by the assessee.
3. Fresh economic analysis without providing selection criteria.
4. Ignoring tax holiday under section 10A of the Act.
5. Use of single-year data for ALP determination.
6. Application of inappropriate filters in selecting comparable companies.
7. Use of data obtained from own sources without furnishing details to the assessee.
8. Identification of comparable companies without specifying the selection matrix.
9. Treatment of foreign exchange fluctuation and miscellaneous income as non-operating.
10. Non-granting of working capital adjustment.
11. Non-allowance of adjustment for risk differences.
12. Not adopting the ALP after considering a 5% variance.
13. Relying on material without furnishing copies to the appellant.
14. Non-granting of credit for taxes deducted at source.

Detailed Analysis:

1. Upward Adjustment in ALP:
The assessee challenged the upward adjustment of Rs 17,60,16,346 in determining the ALP of the international transaction of ITES rendered. The Tribunal found that the Transfer Pricing Officer (TPO) had re-characterized the assessee as a Knowledge Process Outsourcing (KPO) service provider, which was incorrect as the assessee was providing only ITES services.

2. Rejection of TP Analysis:
The TPO's rejection of the TP analysis undertaken by the assessee was contested. The Tribunal noted that the TPO had wrongly applied the KPO search to arrive at the ALP, which was not appropriate for the assessee's ITES services.

3. Fresh Economic Analysis Without Criteria:
The Tribunal observed that the TPO conducted a fresh economic analysis for determining the ALP without providing the selection criteria, which was against the principles of natural justice.

4. Ignoring Tax Holiday:
The Tribunal acknowledged the assessee's argument that since it was availing of a tax holiday under section 10A, there was no motive to shift profits out of India, which is the basic intention behind transfer pricing provisions.

5. Use of Single-Year Data:
The Tribunal found that the TPO used single-year data for FY 2008-2009, which was not available to the assessee at the time of complying with TP documentation requirements, thus using non-contemporaneous data for calculating the ALP.

6. Application of Inappropriate Filters:
The Tribunal noted that the TPO applied inappropriate filters and rejected the companies selected as comparable by the assessee based on these filters.

7. Use of Data from Own Sources:
The Tribunal held that the TPO used data obtained from his own sources against the assessee without furnishing the complete details to the assessee, which violated the principles of natural justice.

8. Identification of Comparable Companies:
The Tribunal found that the TPO identified comparable companies for determining the ALP without specifying the selection matrix, which was not appropriate.

9. Treatment of Foreign Exchange Fluctuation:
The Tribunal agreed with the assessee that the profit/loss on account of foreign exchange fluctuation and miscellaneous income should not be treated as non-operating while computing the operating margin.

10. Non-Granting of Working Capital Adjustment:
The Tribunal observed that the TPO erred in not granting working capital adjustment to the average Profit Level Indicator of identified comparable companies.

11. Non-Allowance of Risk Adjustment:
The Tribunal found that the TPO erred in not allowing the adjustment for differences in the level of risks assumed by the assessee vis-a-vis the risk of identified comparable companies.

12. Not Adopting ALP with 5% Variance:
The Tribunal noted that the TPO did not adopt the ALP after considering an amount varying by 5% of the arithmetic mean of the margins of identified comparable companies.

13. Relying on Material Without Copies:
The Tribunal held that the TPO erred in relying on material obtained without furnishing copies to the appellant, thus violating the principle of natural justice.

14. Non-Granting of Credit for Taxes Deducted:
The Tribunal observed that the TPO erred in not granting the credit of taxes deducted at source claimed by the appellant to the extent of Rs 258,940.

Conclusion:
The Tribunal allowed the appeal partly, directing the exclusion of certain comparables and inclusion of others based on functional comparability and adherence to judicial precedents. The Tribunal emphasized the need for proper selection criteria and adherence to principles of natural justice in transfer pricing assessments.

← Previous Next →