2018 (10) TMI 1262 - AT - Income Tax

Determination of arm s length price of international transaction qua selection of comparables - Held that - Assessee is primarily engaged in the business of provision of IT enabled services in the area of medical transcription to its associates enterprise and it provides such services exclusively to its foreign AE i.e. M/s. Heartland Medical Information services inc., USA. Assessee is remunerated on total cost plus basis for services rendered, thus on account of different business model, we direct the ld AO/ TPO to exclude the indifferent companies for comparability study. Merely because the assessee is carrying on its business through different tools simply cannot make it non comparable, if the functions performed by them and various filters applied in accept/ reject matrix allows it to be included. The assessee is relying on Annexure A to the Director s report where the assessee is required to show the efforts made by it in technology absorption and innovation. Further, the report says that the company has made considerable progress in development of its own web based software. Therefore, it is apparent that for the year it did not carry its business with different tools need to be added. The nature of filter applied by the TPO which is generally not applicable in service industry. The non utilization of the assets or under utilization thereof may be internal inefficiency built in of the comparable company however, when it is functionally comparable it cannot be rejected.

Issues Involved:
1. Opportunity to the Transfer Pricing Officer (TPO) before computing margins.
2. Deletion of addition on account of Arm's Length Price (ALP).
3. Use of financial information of comparable companies.
4. Rejection of certain functionally comparable companies.
5. Comparability adjustments on account of risk differences.
6. Availability of the benefit of proviso to section 92CA.
7. Tax holiday entitlement and motivation of shifting profits.
8. Selection of companies not comparable in terms of functions, assets, and risks.

Detailed Analysis:

1. Opportunity to the TPO Before Computing Margins:
The revenue argued that the CIT(A) erred in not affording any opportunity to the TPO before computing the margins of the comparables and the assessee. However, it was found that the CIT(A) had obtained a remand report during the hearing, ensuring proper opportunity for the AO/TPO. Thus, this ground was dismissed as there was no violation of natural justice principles.

2. Deletion of Addition on Account of ALP:
The revenue contested the deletion of the addition of ?3,16,16,086/- made by the AO on account of ALP. The CIT(A) had removed certain comparables, including Wipro BPO Solutions Ltd, due to high turnover and brand ownership, which was upheld by the tribunal. The tribunal also upheld the exclusion of Vishal Information Technologies Ltd due to its outsourcing model, and retained Ultramarine and Pigments Ltd, Fortune Infotech Ltd, and Tricom India Ltd as comparables.

3. Use of Financial Information of Comparable Companies:
The assessee argued against using financial information of comparable companies for FY 2003-04, as it was not available during the preparation of documentation. The TPO had accepted the characterization and method but used single-year data, rejecting multiple-year data. The tribunal upheld the CIT(A)'s decision to use single-year data, aligning with the Income Tax Act and Rules.

4. Rejection of Certain Functionally Comparable Companies:
The assessee contested the rejection of certain comparables by the TPO on grounds such as non-availability of annual reports, related party transactions, and absence of forex revenue. The tribunal analyzed each disputed comparable:
- Vishal Information Technologies Ltd: Excluded due to its outsourcing model.
- Ultramarine and Pigments Ltd: Retained as it was functionally comparable.
- Fortune Infotech Ltd: Retained despite the use of unique software.
- Tricom India Ltd: Retained despite claims of unique software impacting profits.

5. Comparability Adjustments on Account of Risk Differences:
The assessee sought adjustments for differences in risk assumed compared to comparables. The CIT(A) denied these adjustments due to the absence of a reasonable basis for quantification, and the tribunal found no infirmity in this decision.

6. Availability of the Benefit of Proviso to Section 92CA:
The assessee argued for the benefit of the proviso to section 92CA, which was not adjudicated by the CIT(A). The tribunal did not find any specific mention or argument regarding this issue in the provided text.

7. Tax Holiday Entitlement and Motivation of Shifting Profits:
The assessee claimed to be an STPI unit entitled to a tax holiday, arguing there was no motivation to shift profits through transfer pricing. This argument was not specifically addressed in the tribunal's detailed analysis.

8. Selection of Companies Not Comparable in Terms of Functions, Assets, and Risks:
The assessee raised additional grounds regarding the selection of non-comparable companies, which were addressed as follows:
- Wipro BPO Solutions Pvt. Ltd: Excluded due to high turnover and brand ownership.
- Ace Software: Retained as a good comparable despite being a single-customer company.
- Tulsyan Technologies Ltd: Retained despite turnover being marginally less than ?1 crore in one year.
- Transwork Information Technologies Ltd: Retained despite being a consistent loss-making company.
- Mapro Industries: Retained despite non-utilization of assets.

Conclusion:
The appeal of the revenue was dismissed, and the cross-objection of the assessee was partly allowed. The tribunal upheld the CIT(A)'s decisions on various comparables and adjustments, ensuring a comprehensive and fair determination of the arm's length price.

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