2019 (2) TMI 1322 - AT - Income Tax

TP Adjustment - computation of arm s length price - aggregation of international and domestic segments pertaining to IT segment - TPO re-characterized the assessee s limited risk IT services as ITeS, thereby rejecting the functional analysis as documented in the Transfer Pricing Documentation - HELD THAT - Assessee company has given all the information relating to international segment and domestic segment with the related party sales transaction of the assessee company with its AE s. Besides that the TPO has also re-characterized the assessee s limited risk IT services as ITeS, thereby rejecting the functional analysis as documented in the Transfer Pricing Documentation. The TPO while re-characterizing the IT services as IT enabled Services has not given any finding or reasons as to why the same is done. Thus, on both account that is aggregation of international and domestic segments pertaining to IT segment and the re-characterization of the IT services as IT enabled Services, the issues need to be addressed by the TPO after taking into account all the relevant evidence provided by the assessee company during the assessment proceedings which the TPO failed to take into account. Therefore, it will be appropriate to remand back the entire Transfer pricing issue to the file of the TPO/AO. Allowability of provision for warranty - HELD THAT - The assessee company s submissions were not properly taken into account by the Assessing Officer during the Assessment Proceedings while deciding the provision for warranty. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer who will decide the same after taking into account all the submissions and evidence provided by the assessee company during the assessment proceedings.

Issues Involved:
1. Validity of the final assessment order.
2. Computation of total income and adjustments related to Transfer Pricing and Corporate Tax matters.
3. Rejection of economic analysis and comparable companies for Transfer Pricing.
4. Recharacterization of IT services as IT enabled services (ITeS).
5. Application of arbitrary filters for identifying comparable companies.
6. Use of single-year data for comparables.
7. Selection of functionally different companies as comparables.
8. Inclusion of companies with supernormal profits as comparables.
9. Allocation of operating costs and exclusion of certain expenses in computing operating margins.
10. Application of Safe Harbour Rules.
11. Adjustments for working capital and risk profiles.
12. Disallowance of provision for warranty expenses.
13. Initiation of penalty under section 271(1)(c).
14. Charging of interest under section 234B.

Detailed Analysis:

1. Validity of the Final Assessment Order:
The appellant contested the final assessment order dated 30 January 2015, arguing it was "bad in law and void-ab-initio." However, the tribunal dismissed these grounds as general in nature.

2. Computation of Total Income and Adjustments:
The appellant's total income was computed at INR 3,03,89,190/- against the declared loss of INR 2,57,12,740/-, with upward adjustments of INR 50,764,694/- and INR 53,37,240/- for Transfer Pricing and Corporate Tax matters, respectively.

3. Rejection of Economic Analysis and Comparable Companies:
The appellant argued that the DRP/TPO/AO erred in rejecting the economic analysis and comparable companies used for benchmarking the international transaction of IT services. The tribunal noted that the TPO disregarded the segmental bifurcation of revenues and expenses provided by the appellant, which was necessary for accurate computation of the arm's length price.

4. Recharacterization of IT Services as IT Enabled Services (ITeS):
The TPO recharacterized the nature of the transactions as ITeS, stating no difference between IT services and ITeS for comparability. The tribunal found that the TPO did not appreciate the functional profile of the appellant, which was primarily engaged in providing limited IT support services.

5. Application of Arbitrary Filters:
The TPO applied arbitrary filters for identifying comparable companies, such as turnover thresholds and revenue composition, which were inconsistent with previous approaches. The tribunal found that these filters were applied without concrete reasons.

6. Use of Single-Year Data:
The TPO used single-year data for FY 2009-10 for comparables, disregarding the appellant’s claim for multiple-year data. The tribunal agreed that the TPO should consider multiple-year data for a fair comparison.

7. Selection of Functionally Different Companies:
The appellant argued that the TPO selected companies that were functionally different as comparables. The tribunal noted that the TPO failed to provide reasons for recharacterizing the appellant’s services and selecting inappropriate comparables.

8. Inclusion of Companies with Supernormal Profits:
The TPO included companies with supernormal profits as comparables, which the appellant argued was erroneous. The tribunal found that this inclusion was not justified and needed reconsideration.

9. Allocation of Operating Costs and Exclusion of Certain Expenses:
The appellant contended that the DRP/TPO/AO erroneously allocated operating costs and excluded foreign exchange gains/losses and provision for doubtful debts while computing operating margins. The tribunal agreed that these elements should be considered.

10. Application of Safe Harbour Rules:
The DRP directed the TPO to apply Safe Harbour provisions retrospectively, which the appellant argued was incorrect. The tribunal noted that Safe Harbour Rules could not be applied retrospectively and only for specific assessment years.

11. Adjustments for Working Capital and Risk Profiles:
The appellant argued that appropriate adjustments for working capital and varying risk profiles were not made. The tribunal found that these adjustments were necessary for accurate benchmarking.

12. Disallowance of Provision for Warranty Expenses:
The appellant argued that the provision for warranty expenses was disallowed without proper consideration. The tribunal remanded the issue back to the Assessing Officer for reconsideration, ensuring the appellant is given an opportunity to present evidence.

13. Initiation of Penalty under Section 271(1)(c):
The appellant contested the initiation of penalty under section 271(1)(c) as a consequence of the additions made. The tribunal did not adjudicate this issue at this juncture.

14. Charging of Interest under Section 234B:
The appellant contested the charging of interest under section 234B as a consequence of the additions made. The tribunal did not adjudicate this issue at this juncture.

Conclusion:
The appeal was partly allowed for statistical purposes, with the tribunal remanding the Transfer Pricing and warranty provision issues back to the TPO/AO for reconsideration, ensuring the appellant is given due opportunity of hearing. The tribunal emphasized following the principles of natural justice in the reassessment.

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