2018 (7) TMI 1549 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee is a captive service provider to its Associated Enterprises only thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Validity of the assessment order based on the directions of the Dispute Resolution Panel (DRP).
2. Transfer pricing adjustments and the arm’s length principle for IT enabled services (ITES) and Marketing Support Services (MSS).
3. Exclusion of certain costs while computing margins/profitability.
4. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order, arguing that the DRP erred in partially confirming the addition made by the Assessing Officer (AO) without proper appreciation of facts and law. The Tribunal did not provide a specific ruling on this issue, focusing instead on the transfer pricing adjustments.

2. Transfer Pricing Adjustments:

Common Transfer Pricing Objections:
- Section 92C(3) Conditions: The assessee argued that none of the conditions set out in Section 92C(3) were satisfied. The Tribunal did not explicitly address this, focusing on the comparables used for benchmarking.
- Tax Holiday under Section 10A: The assessee claimed entitlement to a tax holiday, negating any motive for manipulating transfer prices. The Tribunal did not directly address this, concentrating on the comparability analysis.
- TP Documentation Rejection: The Tribunal noted the AO’s rejection of the TP documentation and fresh comparability analysis. The Tribunal reviewed the comparables selected by the TPO.
- Multiple Year Data: The Tribunal did not specifically address the use of multiple year/prior years’ data, focusing on the comparability of selected companies.
- Selective Information Collection: The Tribunal acknowledged the selective information collection by the TPO under Section 133(6) but did not rule on its appropriateness.
- Risk Adjustment: The Tribunal did not specifically address the risk adjustment argument.
- Margin Computation Errors: The Tribunal reviewed the comparables and directed the exclusion of certain companies.
- 5% Range Benefit: The Tribunal did not specifically address the denial of the 5% range benefit.
- Judicial Pronouncements Disregard: The Tribunal considered relevant judicial pronouncements in its analysis.

Transfer Pricing Objections – ITES:
- Comparability Analysis: The Tribunal reviewed the comparables selected by the TPO and directed the exclusion of certain companies:
- Accentia: Excluded due to financial distortion from mergers.
- Coral Hub: Excluded as it was a KPO service provider.
- Eclerx: Excluded as it was a KPO, not comparable to the assessee’s ITES.
- Genesis International: Excluded due to its engagement in GIS services, functionally different from the assessee.
- HCL Comnet: Excluded due to involvement in R&D, related party transactions, and inconsistent financial year data.
- Infosys BPO: Excluded due to its high turnover, ownership of IPR, and brand value.
- Acropetal Technologies: Excluded due to its engagement in engineering design services and R&D activities.

Transfer Pricing Objections – MSS:
- The assessee did not press objections related to the Marketing Support Services segment due to the low value of transactions. The Tribunal dismissed these grounds with liberty to raise them in subsequent years.

3. Exclusion of Certain Costs:
The assessee did not argue this ground before the Tribunal, and it was dismissed.

4. Initiation of Penalty Proceedings:
The Tribunal deemed the initiation of penalty proceedings under Section 271(1)(c) premature and did not require adjudication at this stage.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the exclusion of specific comparables from the final list used for transfer pricing adjustments. The Tribunal did not rule on the validity of the assessment order or the exclusion of certain costs, and it found the penalty proceedings premature.

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