2019 (4) TMI 1310 - AT - Income Tax

TP adjustment - comparable selection - HELD THAT - Assessee company, engaged in the business of span technology consulting, application services, systems integration, software development, maintenance, re-engineering and independent testing services thus companies functionally dissimilar with that of assessee need to be deselected from final list. Assessee has adopted 10% RPT whereas TPO adopted 25% filter for RPT. Generally, the %age of RPT is determined based on the availability of comparables. When the comparables are more, the RPT filter is adopted at minimum level whereas when the comparables are less, the RPT % are fixed liberally. Generally, it is selected between 15% or 25% depending upon the availability of comparables. In the given case, TPO has selected 19 comparables. Therefore, it shows that comparables are reasonably more, hence, TPO could have applied 15%. In the given case, out of 19 comparables, assessee accepted only 7 and balance it objected. Therefore, in our considered view, in the restricted atmosphere of selection of comparables, the %age should be 25% not 15%. The more we restrict, chances of loosing reasonable comparability. Therefore, we reject the contention of the assessee and exclusion of the said comparable by the assessee from the list of comparables, is hereby rejected. Exemption u/s 10B - scope of TP adjustment when assessee is eligible for exemption - shifting of profit - HELD THAT - The decision making and shareholder appetite of expansion will not remain same for all the time or countries. Irrespective of profit making ability and exemption available in the country of operation, the actual profit making ability cannot be determined. Irrespective of situation, the transfer price of the global market and the corporates must be within the band of pricing. It cannot fluctuate. It can be determined or evaluated only by means of comparing pricing pattern of Indian market and global market. When it is found that it is within the band of prices adopted globally, no need of making any adjustment. It cannot be restricted based on the prevailing tax rate in other countries. As we said earlier, the tax saving alone cannot be a decision making process to restrict any TP adjustment. Therefore, ground is dismissed. FBT expenditure treatment as business operating expenses - HELD THAT - As a principle, the profit margin should be compared with comparables by following similar set of rules and accounting principles. In case of following different methods/rules, we end up reaching different conclusions. Therefore, we remit this issue also to the file of AO/TPO to treat the FBT as business operating expenses for both the assessee as well as comparables to determine the margin and then compare the same for arriving proper ALP. Accordingly, additional ground raised by the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Reopening of assessment under section 147.
2. Transfer Pricing adjustments.
3. Selection of comparable companies.
4. Exemption under section 10B.
5. Treatment of Fringe Benefit Tax (FBT).

Detailed Analysis:

1. Reopening of Assessment under Section 147:
The assessee's case was reopened under section 147 of the Income Tax Act, 1961, and a notice under section 143(2) was issued. The reopening was based on the fact that the assessee did not file Form 3CEB despite having international transactions exceeding ?15 crores.

2. Transfer Pricing Adjustments:
The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) of the international transactions at ?18,88,23,969/- and made an adjustment of ?2,86,24,167/- under section 92CA(3). The TPO used 19 comparables to arrive at the arm's length margin of 26.20%.

3. Selection of Comparable Companies:
The Dispute Resolution Panel (DRP) directed the exclusion of certain companies from the list of comparables, leading to a revised ALP of ?18,77,04,788/- and an adjustment of ?2,75,04,986/-. The assessee objected to the inclusion of 8 specific companies on grounds of high turnover, functional dissimilarity, ownership of intangible assets, and lack of segmental information. The Tribunal examined each objection:

- Avani Cimcon Technologies Ltd: Excluded as it was engaged in both product and software services without segmental data.
- Bodhtree Consulting Ltd: Directed to be analyzed further for functional similarity and segmental data.
- Celestial Biolabs Ltd: Retained as comparable, as its R&D activities did not significantly impact profit margins.
- Infosys Technologies Ltd: Excluded due to its size, turnover, brand value, and diversified operations.
- LGS Global Ltd: Directed to be analyzed further for segmental data and product/service details.
- Persistent Systems Ltd: Excluded due to involvement in software product designing and lack of segmental data.
- Quintegra Solutions Ltd: Excluded due to engagement in product engineering services and proprietary software products.
- Softsol India Ltd: Retained as comparable, rejecting the assessee's objection based on the Related Party Transaction (RPT) filter.

4. Exemption under Section 10B:
The assessee argued that since it was claiming exemption under section 10B, there was no intention to shift profits outside India. The Tribunal dismissed this ground, stating that the tax saving alone cannot be a decision-making process to restrict any Transfer Pricing adjustment.

5. Treatment of Fringe Benefit Tax (FBT):
The assessee contended that FBT should not be treated as an operating expense. The Tribunal remitted this issue to the AO/TPO, directing that FBT should be treated as a business operating expense for both the assessee and comparables to determine the margin and compare the same for arriving at the proper ALP.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions to the AO/TPO to re-determine the ALP by excluding certain comparables and treating FBT consistently across the assessee and comparables. The Tribunal emphasized the need for a uniform approach in the treatment of expenses and comparables to ensure accurate determination of the ALP.