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2021 (3) TMI 989 - AT - Income Tax


Issues Involved:
1. Adjustment of transfer price for international transactions.
2. Rejection of Transfer Pricing (TP) documentation.
3. Rejection of comparability analysis.
4. Consideration of previous financial data for comparables.
5. Application of different financial year ending filters.
6. Application of export earning filter.
7. Application of related party filter.
8. Application of upper turnover limit.
9. Inclusion/exclusion of specific comparable companies.
10. Computation of working capital adjustment.
11. Risk differential adjustment.
12. Consideration of income from revised return.

Detailed Analysis:

1. Adjustment of Transfer Price:
The learned Assessing Officer (AO), Transfer Pricing Officer (TPO), and Dispute Resolution Panel (DRP) erred in adjusting the transfer price by INR 2,32,56,458 of the Appellant's international transactions with its Associated Enterprises (AEs) concerning Information Technology enabled Services (ITeS) rendered by the taxpayer under section 92CA of the Income-tax Act, 1961.

2. Rejection of TP Documentation:
The AO, TPO, and DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of subsection (3) of section 92C of the Act.

3. Rejection of Comparability Analysis:
The AO, TPO, and DRP erred in rejecting the comparability analysis carried out in the TP documentation and conducting a fresh comparability analysis by introducing various filters in determining the Arm's Length Price (ALP).

4. Consideration of Previous Financial Data:
The AO, TPO, and DRP erred in not considering the previous two years' financial data of the comparable companies while determining the ALP.

5. Application of Different Financial Year Ending Filters:
The AO, TPO, and DRP erred in applying different financial year ending filters while selecting the comparable companies, thereby not considering the fact that the relevant data for the concerned financial year could be deduced from the corresponding financials.

6. Application of Export Earning Filter:
The AO, TPO, and DRP erred in applying an export earning filter of 75% instead of 25% of the total sales, leading to a narrower comparable set.

7. Application of Related Party Filter:
The AO, TPO, and DRP erred in applying a related party filter of 25% without giving any cogent reason for doing so.

8. Application of Upper Turnover Limit:
The AO, TPO, and DRP erred in not applying the upper limit on turnover while selecting the comparable companies. The lower limit on turnover had already been applied mutually by the Appellant and the TPO.

9. Inclusion/Exclusion of Specific Comparable Companies:
The Tribunal considered the exclusion of specific comparables such as Universal Print Systems Ltd., Infosys BPO Ltd., TCS e-Serve Ltd., BNR Udyog Ltd., and Excel Infoways Ltd. based on functional dissimilarity and other criteria. The Tribunal also remanded the inclusion of Accentia Technologies Ltd. and Informed Technologies Ltd. back to the TPO for verification.

10. Computation of Working Capital Adjustment:
The Tribunal noted that the AO did not rectify the working capital adjustment as directed by the DRP. The Tribunal remanded this issue back to the AO/TPO to recompute the working capital adjustment necessary to bring the comparables on par with the assessee.

11. Risk Differential Adjustment:
The Tribunal did not adjudicate the risk adjustment as the counsel did not press for it.

12. Consideration of Income from Revised Return:
The Tribunal noted that the DRP had directed the AO to consider the income reported in the revised return of income. The Tribunal directed the AO to follow the DRP's directions for computing income in the hands of the assessee.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal directed the AO/TPO to exclude certain comparables, remand others for fresh consideration, and recompute the working capital adjustment. The Tribunal also directed the AO to consider the income reported in the revised return as per the DRP's directions.

 

 

 

 

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