2021 (9) TMI 849 - AT - Income Tax

TP Adjustment - Comparable selection - exclusion of Acropetal Technologies Ltd. - HELD THAT - As regards allegation of fraud against the company in light of notice issued by SEBI, we find that the notice was issued in financial year 2016-17, whereas the assessment year in question pertains to 2012-13. The assessee has not filed any evidences to demonstrate the disciplinary proceedings initiated by SEBI is having any bearing on financial results of assessment year 2012-13, but the assessee is supporting its arguments only on the basis of certain newspaper reports. Although, the assessee has referred the investigation report of SEBI, but on perusal of report issued by SEBI, we could not find any adverse comments on financial results for the relevant assessment year except violation of certain regulatory guidelines in respect of trading of shares in stock market. Therefore, we are of the considered view that unless the assessee demonstrate with evidences that disciplinary proceedings initiated by certain agencies are having bearing on financial results of the company for relevant assessment year, the company cannot be excluded from the list of comparables, more particularly when the assessee itself had included said company in the list of final comparables in its TP documentation. Therefore, on this count also, exclusion of Acropetal Technologies Ltd., is rejected. Bloom Energy India Pvt. Ltd - No merit in arguments of the assessee to exclude Acropetal Technologies Ltd., from the list of comparables and hence, we are inclined to uphold the findings of ld. DRP and reject ground taken by the assessee. Onward Technologies Ltd.- In light of reasons given by the ld. DRP to exclude Onward Technologies Ltd., from the list of comparables and find that one side, the ld. DRP is accepting the fact that the company is engaged in engineering design services and IT consulting, but on the other side, rejected objection filed by the assessee only for the reason that segmental data is not available in the financial years. Therefore, once the DRP having accepted fact that functions performed by Onward Technologies Ltd., is similar to functions performed by the assessee, it ought not to have rejected inclusion of said company, merely for non-availability of segmental data - we are of the considered view that the ld. TPO needs to re-examine the claim of the assessee for inclusion of Onward Technologies Ltd., in the list of comparables by analyzing FAR studies of both companies - we set aside the issue to the file of the ld. TPO and direct him to reconsider the claim of the assessee in light of various averments made and in accordance with law.

Summary

Issues Involved:
1. Principles of natural justice and jurisdiction.
2. Application of Transfer Pricing (TP) adjustments and methodologies.
3. Non-speaking orders by DRP and TPO.
4. Inclusion of Acropetal Technologies Limited as a comparable.
5. Introduction of additional quantitative filters.
6. Application of employee cost filter.
7. Application of asset turnover filter.
8. Rejection of additional comparables suggested by the assessee.
9. Computation of operating margin.
10. Use of multiple-year data for comparability analysis.

Detailed Analysis:

1. Principles of Natural Justice and Jurisdiction:
The assessee argued that the final assessment order violated principles of natural justice and was devoid of merits. The Tribunal reviewed the procedures followed by the DRP, AO, and TPO and found no substantial evidence to support the claim of jurisdictional error or violation of natural justice principles.

2. Application of Transfer Pricing (TP) Adjustments and Methodologies:
The TPO re-characterized the TP documentation and applied filters such as employee cost and turnover filters, excluding three comparables and retaining two with an arithmetic mean of 33.77%. The assessee objected to these filters and the inclusion of Acropetal Technologies Ltd. The Tribunal upheld the TPO's application of filters and methodologies, finding them reasonable and justified.

3. Non-Speaking Orders by DRP and TPO:
The assessee claimed that the DRP and TPO passed non-speaking orders without addressing the contentions raised. The Tribunal found that the orders provided sufficient reasoning and reference to judicial precedents, thus rejecting the assessee's claim.

4. Inclusion of Acropetal Technologies Limited as a Comparable:
The assessee argued against the inclusion of Acropetal Technologies Ltd., citing functional dissimilarity and extraordinary financial circumstances. The Tribunal noted that the assessee had initially included this company in its TP documentation. The Tribunal found no evidence to support the exclusion based on SEBI's regulatory actions, as these actions pertained to a different financial year. The Tribunal upheld the inclusion of Acropetal Technologies Ltd. as a comparable.

5. Introduction of Additional Quantitative Filters:
The assessee challenged the introduction of additional quantitative filters without rejecting the TP documentation. The Tribunal found that the TPO's application of these filters was justified and in line with judicial precedents and Rule 10B of the Income-tax Rules.

6. Application of Employee Cost Filter:
The assessee objected to the application of the employee cost filter. The Tribunal upheld the TPO's decision, noting that employee cost is a significant factor for companies in the service sector. The Tribunal found the 50% filter reasonable given the nature of the assessee's business.

7. Application of Asset Turnover Filter:
The assessee argued against the asset turnover filter, stating it was arbitrary and not relevant to its service-oriented business. The Tribunal upheld the TPO's application of the filter, finding it justified and supported by judicial precedents.

8. Rejection of Additional Comparables Suggested by the Assessee:
The assessee contended that the TPO and DRP wrongly rejected additional comparables, including Onward Technologies Ltd. The Tribunal directed the TPO to reconsider the inclusion of Onward Technologies Ltd. after a detailed analysis of the functions performed by both companies.

9. Computation of Operating Margin:
The assessee disputed the computation of the operating margin of the final comparables. The Tribunal reviewed the methodology and upheld the TPO's computation, finding no substantial error.

10. Use of Multiple-Year Data for Comparability Analysis:
The assessee argued for the use of multiple-year data. The Tribunal upheld the DRP's decision to reject this, citing Rule 10B(4) which mandates the use of current financial year data unless earlier data significantly influences the determination of transfer prices. The assessee failed to demonstrate such influence.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal upheld most of the TPO and DRP's decisions but directed the TPO to reconsider the inclusion of Onward Technologies Ltd. as a comparable. The Tribunal rejected other grounds related to employee cost filter and multiple-year data as not pressed by the assessee.