2017 (11) TMI 1473 - AT - Income Tax

TPO - comparable selection - Held that - Referring to assessee s transaction qua provision of contract content / online courseware development services, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Computation of Arm's Length Price (ALP).
3. Charging of interest under section 234B.
4. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

GROUND NO.1: Validity of the Assessment Order
The taxpayer challenged the assessment order passed by the AO pursuant to the directions of the DRP. However, the tribunal noted that this ground is general in nature and does not require any adjudication.

GROUND NO.2: Computation of Arm's Length Price (ALP)
The taxpayer contested the computation of ALP which resulted in a proposed addition of ?1,07,20,111/-. The taxpayer argued that the AO/TPO made several errors including not appreciating the conditions set out in Section 92(3) of the Income Tax Act, making a reference without recording necessary reasons, and disregarding the ALP determined by the taxpayer.

At the outset, the taxpayer sought exclusion of four comparables: Infosys Technologies Ltd., KALS Information Systems, Tata Elexi Ltd. (seg), and Wipro Limited. The tribunal accepted the taxpayer's contention based on the following:

- Infosys Technologies Limited (Infosys): Infosys was excluded due to its giant size, different risk profile, nature of services, and huge turnover, which made it not a suitable comparable. The tribunal followed the taxpayer's own case for AY 2007-08 and the decision in CIT vs. Agnity India Technologies Pvt. Ltd.

- KALS Information Systems (KALS): KALS was excluded due to functional dissimilarity as it is a product company. The tribunal followed the taxpayer's own case for AY 2007-08 and the decision in Toluna India Pvt. Ltd.

- Tata Elexi Ltd. (Tata): Tata was excluded due to its involvement in creating intellectual properties, significant R&D expenses, and distinct activities such as hardware and software development for embedded products. The tribunal followed the taxpayer's own case for AY 2007-08.

- Wipro Limited (Wipro): Wipro was excluded due to its global presence, significant investment in R&D, huge turnover, and substantial intangible assets. The tribunal followed the taxpayer's own case for AY 2007-08 and the decision in Ciena India Pvt. Ltd. vs. DCIT.

The tribunal directed the AO to recompute the margin after excluding these comparables.

GROUND NO.3: Charging of Interest under Section 234B
The taxpayer's contention regarding the charging of interest under section 234B was noted as consequential in nature.

GROUND NO.4: Initiation of Penalty Proceedings under Section 271(1)(c)
The taxpayer argued that the initiation of penalty proceedings under section 271(1)(c) was mechanical and without adequate reasons. The tribunal noted that this ground is premature and does not require adjudication at this stage.

Conclusion:
The appeal filed by the taxpayer was allowed for statistical purposes, with specific directions to recompute the margin after excluding the identified comparables. The tribunal's decision focused on ensuring that the comparables used for benchmarking the international transactions were appropriate and aligned with the taxpayer's functional profile.