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2018 (1) TMI 141 - AT - Income TaxTPA - comparable selection criteria - Held that - Assessee is engaged in providing contract software services back office support services corporate IT support services and marketing support services to its Associated Enterprises AE thus companies functionally dissimilar with that of assessee need to be deselected from final list.
Issues Involved:
1. Transfer pricing adjustments made by the Transfer Pricing Officer (TPO). 2. Inclusion and exclusion of comparable companies. 3. Directions and clarity provided by the Dispute Resolution Panel (DRP). Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustments by TPO: The assessee, a subsidiary of Electronic Arts Games (India) Private Limited, contested the transfer pricing adjustments made by the TPO for the Assessment Year (AY) 2011-12. The TPO conducted a fresh search and benchmarked the net operating profit margin at 17.03% after a 3.78% working capital adjustment, selecting 18 comparable companies. 2. Inclusion and Exclusion of Comparable Companies: The DRP rejected 15 out of the 18 comparable companies selected by the TPO, retaining only Persistent Systems and Solutions Limited, Persistent Systems Limited, and Sasken Communication Technologies Limited. The retained companies' mean margin was 22.46%, higher than the TPO's computed margin of 17.03%. The assessee raised objections primarily focusing on the inclusion and exclusion of comparables: - Evoke Technologies Pvt. Ltd.: The assessee argued that this company, involved strictly in software development services, was wrongly excluded by the DRP. The annual report clearly stated its involvement only in software development services. - Persistent Systems & Solutions Ltd.: The assessee contended that this company was engaged in diversified services, including software consultancy, product development, and system integration, which were not comparable to the assessee's activities. - Persistent Systems Ltd.: Similar to Persistent Systems & Solutions Ltd., this company was involved in diversified services, including intellectual property-led solutions and software products, making it non-comparable. - Sasken Communication Technologies Ltd.: The assessee argued that this company had an abnormally high turnover and was involved in product and technology licensing, making it non-comparable. The assessee suggested that excluding these three companies and retaining Evoke Technologies Pvt. Ltd. would result in an arithmetic mean within the acceptable range, negating the need for any addition. 3. Directions and Clarity by DRP: The DRP's directions were unclear, leading to confusion regarding the selection of comparables. The DRP retained only three companies, resulting in a mean margin of 22.46%, higher than the TPO's margin. The DRP's lack of clear directions led to ambiguity about whether a fresh search was required or if the addition should be deleted. The tribunal noted that the DRP had not applied its mind correctly, retaining companies that were excluded in previous and subsequent years. The tribunal found that excluding the three companies retained by the DRP would leave no comparables, resulting in a peculiar situation. Conclusion: The tribunal concluded that the TPO's selection of comparables was improper and the exercise in selecting fresh comparables resulted in unnecessary academic work. The tribunal set aside the TPO's order and the consequential orders of the DRP and AO, restoring the issue to the TPO for a fresh exercise based on either the assessee's report or a new search with new parameters/comparables. The tribunal advised the DRP to provide clear directions to avoid future confusion. Final Order: The appeal of the assessee was allowed for statistical purposes, and the order was pronounced in the open court on 29th December 2017.
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