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2016 (6) TMI 589 - AT - Income TaxAddition on account of transfer pricing adjustment - selection of comparable - Held that - Airline Financial Support Services (I) Ltd. - As find from the Annual report of this company, which is available on page 107 onwards of the paper book, that as against its gross revenue from service fees amounting to ₹ 29.32 crore, there is receipt of revenue from its associated enterprises to the tune of ₹ 9.31 crore. This shows that the percentage of RPT is 32% (approx.), thereby failing the RPT filter of 25% as held in several cases discussed above. In view of the fact that the RPTs of this company are more than 25%, it becomes a controlled transaction and disqualifies from being considered as a comparable uncontrolled transaction, so as to find a place in the list of comparables. Ergo, we uphold the action of the ld. CIT(A) in excluding Airline Financial Support Services (I) Ltd. from the list of comparables. CS Software Enterprises Ltd. and Spanco Telesystems and Solutions Ltd. - Held that - When we compute the percentage of Personnel cost to Total cost on the basis of these two figures, there emerges figure of 45%. If we go ahead with the correct ratio of the assessee s Personnel cost to total cost at 45%, even the filter applied by the TPO between 48% to 53.5% becomes erroneous because that was based on the TPO s calculation of the assessee s ratio of Personnel expenses to total expenses at 52.11%, which itself is wanting. Under the given circumstances, we are of the considered opinion that the impugned order treating these two companies as comparable cannot be upheld on the assigned reasoning and, at the same time, the action of the TPO in excluding these two companies on the basis of incorrect calculation of the assessee s percentage of Personnel cost to Total expenses and the consequential wrong filter also cannot be countenanced. In our considered opinion, the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is remitted to the AO/TPO for a fresh determination of the comparability or otherwise of CS Software Enterprises Ltd. and Spanco Telesystems and Solutions Ltd.
Issues Involved:
1. Deletion of addition of ? 2,86,92,601/- made by the Assessing Officer (AO) on account of transfer pricing adjustment. 2. Exclusion of Airline Financial Support Services (I) Ltd. from the list of comparables. 3. Inclusion of CS Software Enterprises Ltd. and Spanco Telesystems and Solutions Ltd. in the list of comparables. Issue-wise Detailed Analysis: 1. Deletion of Addition of ? 2,86,92,601/- on Account of Transfer Pricing Adjustment: The assessee, a subsidiary of Keane Worldzen Inc., rendered business process services in insurance, healthcare, collection, and financial services. The assessee used the Transactional Net Margin Method (TNMM) with the Profit Level Indicator (PLI) of Operating Profit to Total Cost (OP/TC), showing a profit margin of 15.62%. The Transfer Pricing Officer (TPO) accepted TNMM but recalculated the profit margin of comparables using current year data only, leading to a proposed adjustment of ? 2,86,92,601/-. The AO added this amount to the total income, which was challenged by the assessee. The CIT(A) deleted the addition by modifying the list of comparables, leading to the Revenue's appeal. 2. Exclusion of Airline Financial Support Services (I) Ltd. from the List of Comparables: The TPO included Airline Financial Support Services (I) Ltd. as a comparable, which the assessee initially accepted. However, the CIT(A) excluded this company due to its related party transactions (RPTs) being 37.38% of its sales, exceeding the acceptable threshold of 25%. The Tribunal upheld the CIT(A)'s decision, noting that a company with more than 25% RPTs is considered controlled and not comparable. The Tribunal referenced Rule 10B(1)(e) and Rule 10A(a) to support this exclusion, emphasizing that the assessment must reflect the correct income chargeable to tax. 3. Inclusion of CS Software Enterprises Ltd. and Spanco Telesystems and Solutions Ltd. in the List of Comparables: The TPO excluded these companies based on filters of Personnel cost to Total cost (48% to 53.5%) and Depreciation to Total cost. The CIT(A) included them, noting their comparability in subsequent years. The Tribunal found the CIT(A)'s reasoning insufficient, as comparability must be assessed for the specific year. The Tribunal also found the TPO's filters erroneous due to incorrect calculation of the assessee's Personnel cost ratio. Consequently, the Tribunal remitted the matter back to the AO/TPO for fresh determination, ensuring the correct application of filters and comparability assessment. Conclusion: The Tribunal set aside the CIT(A)'s order regarding the transfer pricing adjustment and remitted the matter to the AO/TPO for a fresh determination, allowing the assessee a reasonable opportunity to be heard. The appeal was allowed for statistical purposes, with the order pronounced in the open court on 16.05.2016.
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