2017 (11) TMI 1592 - AT - Income Tax

TP adjustment - selection of comparable - Held that - Assessee is into rendering ITES services thus companies functionally dissimlar with that of assessee need to be deselected from final list of comparable.

Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of Transfer Pricing Documentation
3. Use of Multiple Year Data
4. Filters and Quantitative Criteria Applied by the Assessee
5. Risk Adjustment and Working Capital Adjustment
6. Other Corporate Tax Matters
7. Levy of Interest under Section 234B
8. Initiation of Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The taxpayer, M/s. NCS Pearson India Private Limited, contested the adjustment to the arm's length price (ALP) made by the AO based on the TPO's order under section 92CA of the Income-tax Act, 1961. The Tribunal noted that the taxpayer charged cost + 15% for ITES support services and cost + 5% for business support services to its AE. The TPO accepted the TNMM method used by the taxpayer but selected 9 comparables with an average margin of 37.72% for ITES and 22.35% for business support services. The Tribunal examined the suitability of three comparables—Accentia Technologies Limited, Cosmic Global Limited, and Eclerx Services Limited—and ordered their exclusion due to functional dissimilarity, extraordinary events, and lack of segmental data.

2. Rejection of Transfer Pricing Documentation:
The taxpayer's TP documentation was rejected by the TPO, who found defects in the determination of ALP and selected fresh comparables. The Tribunal upheld the exclusion of certain comparables and noted that the TPO's adjustments were partly allowed by the DRP.

3. Use of Multiple Year Data:
The Tribunal noted that the DRP and AO/TPO rejected the use of multiple year data, which the taxpayer argued was necessary for determining the ALP. However, this ground was not pressed by the taxpayer and was dismissed.

4. Filters and Quantitative Criteria Applied by the Assessee:
The Tribunal addressed the taxpayer's contention regarding the filters and quantitative criteria applied by the TPO. The taxpayer argued against the inclusion of certain comparables and the rejection of others. The Tribunal excluded Accentia Technologies Limited, Cosmic Global Limited, and Eclerx Services Limited from the final set of comparables due to functional dissimilarity and other factors.

5. Risk Adjustment and Working Capital Adjustment:
The taxpayer argued for appropriate risk adjustments, contending that it operated at lower risk levels compared to the comparables. The Tribunal noted that the DRP upheld the TPO's/AO's conclusion regarding single customer and political risk, and this ground was not pressed by the taxpayer and was dismissed.

6. Other Corporate Tax Matters:
The Tribunal noted that the DRP made an observation regarding the taxpayer being a permanent establishment of NCS USA and the requirement to withhold taxes on remittance of fees. However, this ground was not pressed and was dismissed.

7. Levy of Interest under Section 234B:
The Tribunal noted that the AO levied interest under section 234B of the Act, but this ground was academic and did not require adjudication at this stage.

8. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal noted that the AO initiated penalty proceedings under section 271(1)(c) of the Act, but this ground was premature and did not require adjudication.

Conclusion:
The Tribunal partly allowed the appeal filed by the taxpayer, ordering the exclusion of certain comparables and dismissing other grounds as not pressed or academic. The additional ground raised by the taxpayer was deemed infructuous in view of the order passed by the AO under section 154 of the Act. The order was pronounced in open court on October 25, 2017.

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