2018 (10) TMI 1433 - AT - Income Tax

Transfer pricing adjustment - Selection of comparable - applying turnover of ₹ 1 crore to 300 crores while selecting the concerns as comparables - Held that - The issue of selection of suitable turnover to be applied has been adjudicated in series of cases and following the same parity of reasoning, we uphold the directions of DRP in applying turnover of ₹ 1 crore to 300 crores while selecting the concerns as comparables. Accordingly, we find no merit in the ground of appeal No.1 raised by the Revenue in this regard. Hence, five concerns are to be excluded from final set of comparables. Transfer pricing provisions to the segment of provision of software development services by the assessee to its associated enterprises in selection of three new concerns by the assessee during TP proceedings - Held that - The concerns which were found to be functionally comparable though selected during TP proceedings, then the same need to be considered in case they fulfill all the other filters, by the TPO. Accordingly, we uphold the directions of DRP in this regard and dismiss the ground of appeal No.2 raised by Revenue. Adjustment made to provision of intra-group cost - Held that - The case of assessee before us was that theses costs had been recovered on cost plus markup from associated enterprises and hence, there is no merit in adopting the same at Nil. The Tribunal in assessment year 2009-10 had also remitted the issue back to the file of TPO. Accordingly, we remit this issue to the file of TPO/Assessing Officer to adjudicate the issue after affording reasonable opportunity of hearing to the assessee in line with directions of Tribunal in earlier years. The TPO/Assessing Officer shall also consider the plea of assessee in recovering intra-group cost at cost plus markup and decide the issue in accordance with law.

Summary

Issues Involved:
1. Exclusion of comparables by the Dispute Resolution Panel (DRP).
2. Acceptance of comparables selected by the assessee.
3. Transfer pricing adjustment for management fees, meeting expenses, and communication costs.
4. Initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act.
5. Levy of interest under section 234B of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Exclusion of Comparables by the DRP:
The Revenue contended that the DRP erred in excluding certain comparables based on higher turnover and higher assets without analyzing the Functions, Assets, and Risks (FAR) of the company. The Tribunal upheld the DRP’s direction to apply a turnover filter of ?1 crore to ?300 crores, thereby excluding companies like Mindtree Ltd., Infosys Technology Ltd., Larsen & Turbo Infotech Ltd., Persistent Systems Ltd., and Sasken Communication Tech Ltd. This decision was based on the precedent that turnover filters are a valid criterion for selecting comparables.

2. Acceptance of Comparables Selected by the Assessee:
The Revenue challenged the inclusion of new comparables selected by the assessee during the Transfer Pricing (TP) proceedings. The Tribunal referred to the case of M/s. Vishay Components India Pvt. Ltd. Vs. DCIT, which allowed the inclusion of functionally comparable companies identified during TP proceedings, provided they meet all other filters. Consequently, the Tribunal upheld the DRP’s direction to include Maveric Systems Ltd., Silverline Technologies Ltd., and Evoke Technologies Pvt. Ltd. as comparables.

3. Transfer Pricing Adjustment for Management Fees, Meeting Expenses, and Communication Costs:
The assessee challenged the TP adjustment of ?2,00,61,662 made by disallowing expenses towards management fees, meeting expenses, and communication costs. The Tribunal noted that similar adjustments were made in previous assessment years (2008-09 and 2009-10) and remitted the issue back to the TPO/Assessing Officer to decide afresh. The Tribunal directed the TPO/Assessing Officer to consider the assessee’s plea that these costs were recovered on a cost-plus markup basis and to adjudicate the issue in accordance with the law.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed the assessee’s challenge against the initiation of penalty proceedings under section 271(1)(c) as premature, noting that the issue of penalty would be considered separately after the final determination of the TP adjustments.

5. Levy of Interest under Section 234B:
The Tribunal dismissed the assessee’s ground against the levy of interest under section 234B, stating that it is consequential to the final determination of the total income after TP adjustments. The Tribunal noted that the shortfall in advance tax resulted from unanticipated additions to total income.

Conclusion:
The appeal of the Revenue was dismissed, and the appeal of the assessee was partly allowed. The Tribunal remitted the issue of TP adjustment for management fees, meeting expenses, and communication costs back to the TPO/Assessing Officer for reconsideration. The initiation of penalty proceedings and the levy of interest were dismissed as premature and consequential, respectively. The Tribunal upheld the DRP’s application of turnover filters and inclusion of new comparables identified during TP proceedings.