2021 (6) TMI 1132 - AT - Income Tax

TP Adjustment - comparable selection - Application of on-site revenue filter - HELD THAT - We found the submissions by Ld.AR to be true and accordingly direct Ld.AO to include R.S Software Ltd. ,Evoke Technologies Ltd., CG-Vak Software and Exports Ltd. to the final list of comparables.

Summary

Issues involved:
1. Dispute regarding the direction of the Dispute Resolution Panel.
2. Disagreement over the exclusion of certain companies as comparables.
3. Transfer pricing adjustment proposed by the Transfer Pricing Officer.
4. Application of on-site revenue filter by the Dispute Resolution Panel.
5. Exclusion of certain comparables based on different criteria.
6. Penalty proceedings initiated under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:
1. The appeal involved a dispute regarding the direction of the Dispute Resolution Panel (DRP) in the final assessment order passed under section 143(3) read with 144C(3) of the Income Tax Act. The appellant challenged the DRP's decision to reduce the expenditure incurred in foreign currency from the Export Turnover and total Turnover for the computation of deduction under section 10 of the IT Act. The appellant argued that the statute only allows exclusion of such expenditure from Export Turnover, not total Turnover, and questioned the exclusion of certain companies as comparables.

2. The disagreement over the exclusion of certain companies as comparables was a key issue in the appeal. The Transfer Pricing Officer (TPO) and the DRP had excluded specific companies from the list of comparables, leading to a disagreement with the appellant. The appellant contended that the TPO and DRP erred in rejecting the companies selected as comparables on unjustifiable grounds, such as disregarding the functional profile of the appellant and applying arbitrary filters like the 'onsite revenue filter.'

3. Another significant issue was the transfer pricing adjustment proposed by the TPO, which resulted in a shortfall adjustment of Rs.2,54,87,730. The TPO applied the TNMM (Transactional Net Margin Method) and selected a final set of comparables with an average margin of 24.82%. The appellant disputed the proposed adjustment, highlighting errors in the computation of comparables' margins and the failure to make suitable adjustments for differences in risk profiles.

4. The application of the on-site revenue filter by the DRP was also contested in the appeal. The appellant argued that the DRP's use of this filter was erroneous and led to the exclusion of comparables with expenditure in foreign currency of less than 75% to total revenue. This issue raised concerns about the methodology and criteria applied by the DRP in determining the comparables.

5. The exclusion of certain comparables based on different criteria further complicated the appeal. The appellant challenged the exclusion of specific companies like E-Infochips Limited, ICRA Techno Analytics Limited, and Infosys Technologies Limited, questioning the rationale behind their exclusion despite qualifying the filters applied by the TPO. The appellant sought the restoration of these comparables in the final list for a fair assessment.

6. Lastly, the initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act was raised as an issue in the appeal. The appellant argued that the penalty proceedings were initiated mechanically by the Assessing Officer without recording adequate satisfaction, highlighting procedural irregularities in the penalty imposition process.

Overall, the appeal involved complex transfer pricing issues, challenges to the DRP's directions, and disputes over the selection and exclusion of comparables, emphasizing the importance of a thorough and fair assessment process in line with the provisions of the Income Tax Act.