2017 (3) TMI 1381 - AT - Income Tax

TPA - selection of comparable - Held that - Companies functionally different as that of assessee company which is a routine BPO service provider need to be exluded fro final list of comparability. Deduction under section 10A - Held that - Assessee stands eligible for claim of deduction u/s 10A, therein remand the matter to the file of the A.O for the limited purpose of determining the quantum of deduction so raised by the assessee u/s 10A in its return of income. That as regards the contention of the Ld. A.R that the A.O had erred in excluding the Miscellaneous income from the eligible profits for the purpose of computing deduction u/s 10A, we are of the considered view that the entitlement of an assessee towards claim of such deduction, as had clearly been spelt out in Sec. 10A(4), is restricted only as regards the Profits derived from export of articles or things or computer software , however, as neither from the orders of the lower authorities, nor from the records available before us it can be gathered as to what is the nature of Miscellaneous income nor anything as regards the same had been submitted before us by either of the parties during the course of hearing of the appeal, we therefore keeping in view the fact that as the issue as regards determining the quantum of deduction u/s 10A, as claimed by the assessee in its return of income had been restored by us to the file of the A.O, therefore restore this issue also to the file of the A.O. That in case if the Miscellaneous income falls within the bracket of Profits derived from export of articles or things or computer software , then the A.O shall be precluded from excluding the same from the scope of the profits eligible for claim of deduction u/s 10A.

Issues Involved:
1. Transfer Pricing Adjustment
2. Use of Contemporaneous Data
3. Comparable Companies Selected by the Appellant
4. Additional Comparables Identified by the TPO
5. Use of Data Obtained Under Section 133(6)
6. Erroneous Margin Computation
7. Working Capital Adjustment
8. Risk Adjustment
9. Benefit of +/- 5% Range
10. Deduction under Section 10A
11. Exclusion of Miscellaneous Income
12. Computation of Interest under Section 234B
13. Penalty Proceedings under Section 271(1)(C)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contested the transfer pricing adjustment of ?7,29,53,949 made by the AO/TPO, arguing that the international transactions with its AE were at arm's length. The Tribunal analyzed the inclusion of five specific comparables (Coral Hub, Crossdomain Solutions, Eclerx Services, Mold-Tek Technologies, and Accentia Technologies) and concluded that these companies were functionally different from the assessee. Consequently, the Tribunal directed the AO to exclude these comparables and recompute the ALP.

2. Use of Contemporaneous Data:
The assessee argued against the TPO's use of data for FY 2007-08 only, asserting that a new search post the specified date was unwarranted. The Tribunal did not explicitly address this issue separately but implied acceptance of the appellant's contention by focusing on the functional dissimilarity of the comparables.

3. Comparable Companies Selected by the Appellant:
The Tribunal found that the TPO erred in rejecting the comparables selected by the assessee without providing adequate opportunity for rebuttal. The Tribunal emphasized the need for functional similarity and rejected comparables that were functionally different from the assessee.

4. Additional Comparables Identified by the TPO:
The Tribunal scrutinized the additional comparables selected by the TPO and found that many were not functionally similar to the assessee. The Tribunal excluded these comparables from the final list.

5. Use of Data Obtained Under Section 133(6):
The assessee contended that the TPO erred in using data obtained from third-party companies under Section 133(6). The Tribunal's decision to exclude certain comparables implicitly addressed this concern.

6. Erroneous Margin Computation:
The assessee argued that the TPO made errors while computing operating margins. By directing the exclusion of certain comparables, the Tribunal indirectly addressed the issue of erroneous margin computation.

7. Working Capital Adjustment:
The Tribunal noted that the working capital adjustment had been previously allowed in the assessee's own case for AY 2006-07. However, this issue was rendered academic due to the exclusion of certain comparables.

8. Risk Adjustment:
The Tribunal did not explicitly address the risk adjustment issue but implied its acceptance by focusing on the functional dissimilarity of the comparables.

9. Benefit of +/- 5% Range:
The Tribunal directed the AO to recompute the ALP and consider the benefit of the +/- 5% range as per the second proviso to Section 92C(2) of the Act.

10. Deduction under Section 10A:
The Tribunal held that the assessee was entitled to claim deduction under Section 10A, following the methodology approved in the assessee's own case for AY 2006-07. The matter was remanded to the AO for determining the quantum of deduction.

11. Exclusion of Miscellaneous Income:
The Tribunal directed the AO to determine if the miscellaneous income of ?2,47,374 fell within the scope of "profits derived from export of articles or things or computer software." If so, it should not be excluded from the eligible profits for deduction under Section 10A.

12. Computation of Interest under Section 234B:
The Tribunal noted that the levy of interest under Section 234B was consequential to the assessment and directed the AO to give effect to it after determining the income in the set-aside proceedings.

13. Penalty Proceedings under Section 271(1)(C):
The Tribunal dismissed the ground related to the initiation of penalty proceedings under Section 271(1)(C) as premature.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of certain comparables for transfer pricing purposes and remanding the matter to the AO for recomputation of ALP and determination of the quantum of deduction under Section 10A. The Tribunal also addressed the issues of working capital adjustment, risk adjustment, and the benefit of the +/- 5% range, providing comprehensive directions to the AO.

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