2019 (11) TMI 1183 - AT - Income Tax

TP Adjustment - comparable selection - authorities below rejecting CUP as the most appropriate method for determining ALP of the international transactions entered into by the assessee with its group concerns under software development services - contention of assessee is that the TPO had secretly received information from Syntel India and said information was not available in public domain and hence the same cannot be applied against the assessee - HELD THAT - Since, the information from Syntel India was not available in public domain, the assessee was deprived of information being used against it. We are of considered view that fair opportunity should have been granted by the authorities below in line with the principles of natural justice Inclusion/exclusion of comparables for determining ALP of the transactions under ALM segment HELD THAT - As during the course of submissions the ld. AR of assessee has not specified the comparables that need to be included/excluded in the final list of comparables. Accordingly, ground Nos. 6 and 7 of the appeal are dismissed. Method of computation of operating profit margin - HELD THAT - Assessee deserves the benefit of adjustment in operating margins on account of substantial salary and travel cost in initial year of operation. The ground Nos. 8 and 9 of the appeal are restored back to the file of Assessing Officer/TPO for recomputation of operating margin after allowing adjustments as mentioned above. The assessee is directed to produce all relevant documents before the Assessing Officer/TPO in support of its claim. Non considering multiple year data - HELD THAT - It is a well settled legal position that only data relevant to the corresponding single year has to be considered. We do not find any merit in ground No. 10 of the appeal. Comparable selection - Lanco Global Systems Limited and Gebbs Infotech Limited - HELD THAT - We do not find any infirmity in the order of CIT(A) in including the said companies in the list of comparables. The objection raised by the assessee i.e. information in respect of Gebbs Infotech Limited is not available in public domain is without any merit. The assessee has furnished information regarding the services of Gebbs Infotech Limited. Inclusion of Asian CERC Information Technology Limited is concerned the said company has been included in the list of comparables by TPO itself. The same has been accepted by the CIT(A). We do not see any prejudice caused to the Revenue in CIT(A) accepting the comparable selected by the TPO. In our considered view the ground No. 4 of the appeal is misconceived and hence, needs to be rejected.

Summary

Issues Involved:
1. Rejection of Comparable Uncontrolled Price (CUP) method for software development services.
2. Inclusion/exclusion of comparables for determining Arm’s Length Price (ALP) under Application Lifestyle Management (ALM) services.
3. Adjustment on account of travel cost and salary cost.
4. Use of multiple year data.
5. Initiation of penalty under section 271(1)(c) of the Income Tax Act.
6. Charging of interest under section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Rejection of Comparable Uncontrolled Price (CUP) method for software development services:
The assessee company applied the CUP method to benchmark its international transactions under the software development segment. The Transfer Pricing Officer (TPO) rejected this method and adopted the Transactional Net Margin Method (TNMM) instead. The TPO's decision was based on information received from Syntel India, which was not shared with the assessee, violating principles of natural justice. The Tribunal found merit in the assessee's contention that the information used against it was not available in the public domain and thus restored the matter back to the Assessing Officer/TPO for fresh adjudication, emphasizing the need for a fair opportunity for the assessee to represent its case.

2. Inclusion/exclusion of comparables for determining ALP under ALM services:
The assessee selected 19 comparables, but the TPO accepted only two and added two more. The CIT(A) further included two additional comparables. The Tribunal dismissed the assessee's appeal regarding the inclusion/exclusion of comparables due to a lack of specific arguments. The Revenue's appeal against the inclusion of Lanco Global Systems Limited and Gebbs Infotech Limited was dismissed, as the Tribunal found no infirmity in the CIT(A)'s order. The inclusion of Asian CERC Information Technology Limited, selected by the TPO and accepted by the CIT(A), was also upheld.

3. Adjustment on account of travel cost and salary cost:
The assessee argued for adjustments due to substantial travel and salary costs in its first year of operation. The Tribunal noted that similar adjustments for low capacity utilization and high fixed operation costs in initial years were allowed in other cases. The Tribunal restored the issue to the Assessing Officer/TPO for recomputation of operating margin after allowing the necessary adjustments, directing the assessee to provide relevant documents to support its claim.

4. Use of multiple year data:
The assessee's appeal to consider multiple year data was dismissed. The Tribunal upheld the well-settled legal position that only data relevant to the corresponding single year should be considered.

5. Initiation of penalty under section 271(1)(c) of the Income Tax Act:
The assessee's challenge to the initiation of penalty proceedings under section 271(1)(c) was dismissed as premature.

6. Charging of interest under section 234B of the Income Tax Act:
The assessee's appeal against the charging of interest under section 234B was dismissed as it is consequential and mandatory.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, with specific issues remanded for fresh adjudication. The Revenue's appeal was dismissed. The Tribunal emphasized the need for fair representation and proper opportunity for the assessee in line with the principles of natural justice.