2018 (7) TMI 1748 - AT - Income Tax

TPA - comparable selection - Held that - Assessee is engaged in the business of providing research and development for automotive engineering to its holding company i.e. DAG. It is stated that the assessee-company is compensated on the cost mark up of 10%, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Rejection of CUP/CPM method and adoption of TNMM as the most appropriate method.
2. Exclusion and inclusion of specific comparable companies for Transfer Pricing analysis.
3. Application of various quantitative and qualitative filters by TPO.
4. Use of current year data for Transfer Pricing study.
5. Rejection of certain comparable companies based on functional differences and lack of segmental information.
6. Additional grounds of appeal regarding inclusion of new comparables.

Detailed Analysis:

1. Rejection of CUP/CPM method and adoption of TNMM as the most appropriate method:
The Tribunal upheld the TPO's decision to reject the CUP/CPM method and adopt TNMM as the most appropriate method for determining the arm's length price. This decision was based on the assessee's failure to provide sufficient data to support the Cost Plus Method and the unreliability of the CUP method due to various assumptions and lack of internal comparables. The Tribunal referenced a prior decision in Mercedes Benz Research & Development India (P.) Ltd. v. Asstt. CIT 2016 (3) TMI 1114, which similarly upheld TNMM as the most appropriate method.

2. Exclusion and inclusion of specific comparable companies for Transfer Pricing analysis:
The Tribunal reviewed the inclusion and exclusion of specific comparables proposed by the assessee and the TPO. The Tribunal upheld the inclusion of Persistent Systems Ltd., rejecting the assessee's objections regarding functional differences and extraordinary events. However, the Tribunal directed the inclusion of Akshay Software Technologies Ltd. and Evoke Technologies Ltd., finding that the lower authorities' exclusions were not based on accurate facts. Conversely, the Tribunal upheld the exclusion of several companies, such as CAT Technologies Ltd., Cignity Technologies, Helios & Matheson Information Technology Ltd., R Systems International Ltd., Caliber Point Business Solutions Ltd., Thinksoft Global Services Ltd., Lucid Software Ltd., and Spry Resources India Pvt. Ltd., due to functional differences, lack of segmental information, or failure to meet specific filters.

3. Application of various quantitative and qualitative filters by TPO:
The Tribunal examined the TPO's application of various filters, such as the use of current year data, employee cost filter, export earnings filter, and turnover filter. The Tribunal upheld the TPO's rejection of comparables that did not meet these filters, emphasizing the importance of consistency and relevance in applying these criteria.

4. Use of current year data for Transfer Pricing study:
The Tribunal supported the TPO's decision to use current year data for the Transfer Pricing study, rejecting the assessee's use of average data from previous years. This decision was based on the need for accurate and relevant data to determine the arm's length price.

5. Rejection of certain comparable companies based on functional differences and lack of segmental information:
The Tribunal upheld the exclusion of several comparables due to functional differences and lack of segmental information. For instance, companies engaged in software testing or product development were deemed not comparable to the assessee's software development services. The Tribunal emphasized the need for functional similarity and availability of segmental data to ensure accurate comparability.

6. Additional grounds of appeal regarding inclusion of new comparables:
The Tribunal dismissed the additional grounds of appeal seeking the inclusion of Larsen & Toubro Infotech Ltd. and CG-VAK Software and Exports Ltd. The Tribunal cited the lack of material on record and the need for verification of facts, referencing the decision of the Hon'ble Bombay High Court in Ultratech Cement Ltd. v. Addl. CIT 2017 (4) TMI 923, which emphasized that new claims requiring factual verification cannot be raised for the first time at the appellate stage without sufficient reasons.

Conclusion:
The Tribunal's judgment comprehensively addressed the issues related to the selection of the most appropriate Transfer Pricing method, inclusion and exclusion of comparables, application of filters, and use of current year data. The Tribunal upheld the TPO's decisions in most instances, emphasizing the need for functional similarity, accurate data, and consistency in applying filters. The appeal was partly allowed, with specific directions for inclusion and exclusion of certain comparables.

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