2020 (12) TMI 1110 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee is characterised to be rendering contract software development services to its AE. Thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved
1. Adjustment of transfer price under section 92CA of the Income-tax Act, 1961.
2. Rejection of Transfer Pricing (TP) documentation by the Assessing Officer (AO), Transfer Pricing Officer (TPO), and Dispute Resolution Panel (DRP).
3. Rejection of comparability analysis and conducting a fresh analysis.
4. Non-consideration of previous two years' financial data.
5. Application of different financial year ending filter.
6. Application of export earning filter of 75% instead of 25%.
7. Application of related party filter of 25%.
8. Non-application of upper limit on turnover.
9. Conflicting directions by DRP on comparables.
10. Errors in computation of working capital adjustment.
11. Directions on forex gain or loss.
12. Non-allowance of adjustment towards risk differential.
13. Levying of interest under sections 234B and 234C of the Act.

Detailed Analysis

1. Adjustment of Transfer Price
The AO, TPO, and DRP erred in adjusting the transfer price by INR 3,55,53,274/- concerning international transactions under section 92CA of the Income-tax Act, 1961. The TPO disagreed with the comparables adopted by the assessee and shortlisted a set of 10 comparables with an average margin of 22.63%, leading to the adjustment.

2. Rejection of TP Documentation
The authorities erred in rejecting the TP documentation maintained by the appellant by invoking provisions of sub-section (3) of 92C of the Act. The TPO issued a notice to the assessee to file the economic analysis of international transactions in Form 3 CEB, which was not accepted.

3. Rejection of Comparability Analysis
The authorities erred in rejecting the comparability analysis carried out in the TP documentation and conducted a fresh comparability analysis by introducing various filters while determining the Arm's Length Price (ALP). The TPO's analysis resulted in a higher average margin, which was contested by the assessee.

4. Non-Consideration of Previous Financial Data
The authorities erred in not considering the previous two years' financial data of the comparable companies while determining the ALP. This was a significant point of contention as it could affect the accuracy of the comparability analysis.

5. Application of Different Financial Year Ending Filter
The authorities erred in applying different financial year ending filters while selecting the comparable companies. The relevant data for the concerned financial year could be deduced from the corresponding financials, which was not considered.

6. Application of Export Earning Filter
The authorities erred in applying an export earning filter of 75% instead of 25% of the total sales, leading to a narrower comparable set. This filter significantly impacted the selection of comparable companies.

7. Application of Related Party Filter
The authorities erred in applying a related party filter of 25% without providing any cogent reason for doing so. This arbitrary application of the filter was contested by the assessee.

8. Non-Application of Upper Limit on Turnover
The authorities erred in not applying the upper limit on turnover while selecting the comparable companies. The lower limit on turnover was mutually applied, and the upper limit should have been considered based on a similar principle.

9. Conflicting Directions by DRP
The DRP provided conflicting directions while adjudicating on the acceptance or rejection of comparable companies. The DRP directed the exclusion of certain companies but ultimately held that a larger set of comparables takes care of the differences, which was contradictory.

10. Errors in Computation of Working Capital Adjustment
The authorities made errors in the computation of working capital adjustment by not providing the basis of computation of the margin of the appellant and considering the wrong SBI PLR while computing the adjustment.

11. Directions on Forex Gain or Loss
The DRP erred in directing the AO to consider forex gain or loss as operating in nature while computing the margin of the appellant. This direction was contested by the assessee.

12. Non-Allowance of Adjustment Towards Risk Differential
The authorities erred in not allowing appropriate adjustment towards the risk differential existing between the appellant and independent comparable companies. This non-allowance was a significant point of contention.

13. Levying of Interest Under Sections 234B and 234C
The authorities erred in levying interest under sections 234B and 234C of the Act. The assessee contested these levies as part of the appeal.

Conclusion
The appeal was partly allowed, with the exclusion of certain comparables from the final list. The Tribunal held that the comparables selected by the TPO were not appropriate, and the assessee's arguments were accepted for the exclusion of specific companies. The grounds raised by the assessee were partly allowed, and the appeal resulted in a partial relief to the assessee. The order was pronounced in the open court on 4th September 2020.

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