2022 (9) TMI 453 - AT - Income Tax

TP Adjustment - Analysing the international transaction - services rendered by assessee to be ITES by the Ld. TPO, as against back office support services carried considered by assessee - HELD THAT - We note that analysing the international transaction based on wrong assumption of the services rendered would prejudice the computation of arms length. In the interest of justice, we remand the entire computation of arms length to the Ld. TPO for denovo assessment. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Accordingly, the grounds raised by assessee stands allowed for statistical purposes.

Issues:
1. Characterization of services rendered by the appellant as ITES.
2. Defective comparability analysis.
3. Adjustment not restricted to international transactions.
4. Exclusion of comparables on application of upper turnover filter.
5. Erroneous inclusion of One Touch Solutions as comparable.
6. Wrong computation of margin.
7. Failure to allow working capital adjustment.

Characterization of services rendered by the appellant as ITES:
The appellant contested the characterization of its services as ITES by the Learned TPO, arguing that it actually provides staff recruitment services akin to back office support services. Despite the Ld. TPO's observation of the appellant's services as back office support in the functional analysis, the international transaction was analyzed based on the assumption that the appellant is an IT enabled service provider. The appellant requested a remand to the Ld. AO/TPO for a reassessment based on the actual functions performed, assets owned, and risks assumed. The Tribunal found that the wrong assumption of services rendered could prejudice the arms-length computation and remanded the assessment to the Ld. TPO for a fresh determination, emphasizing the need for proper opportunity for the appellant to be heard.

Defective comparability analysis:
The appellant raised concerns regarding the defective comparability analysis conducted by the Learned TPO, highlighting issues such as collating non-publicly available information without disclosure, rejecting the TP documentation's analysis, and introducing inappropriate filters. The Tribunal noted the potential prejudice caused by the flawed comparability analysis and remanded the assessment to the Ld. TPO for a denovo assessment to ensure a fair computation of arms length, emphasizing the importance of granting the appellant a proper opportunity to be heard.

Adjustment not restricted to international transactions:
The Learned TPO was criticized for not restricting the transfer pricing adjustment solely to international transactions, despite a direction from the DRP to do so. The Tribunal acknowledged this error and emphasized the necessity of ensuring that transfer pricing adjustments are appropriately limited to international transactions to maintain fairness and compliance with regulatory directives.

Exclusion of comparables on application of upper turnover filter:
The inclusion of certain companies as comparables without applying an upper limit to the turnover filter was contested by the appellant. The Tribunal noted the error in not applying the upper limit to the turnover filter, which led to the inclusion of companies that may not be functionally comparable to the appellant. The Tribunal highlighted the importance of applying consistent and appropriate filters to ensure a valid and accurate comparability analysis in transfer pricing assessments.

Erroneous inclusion of One Touch Solutions as comparable:
The appellant raised objections to the inclusion of One Touch Solutions (India) Pvt. Ltd. as a comparable company, citing differences in functionality and procedural inconsistencies in its inclusion. The Tribunal acknowledged the error in including One Touch Solutions without affording the appellant an opportunity to respond and emphasized the importance of ensuring that comparables are selected based on valid criteria and procedural fairness.

Wrong computation of margin:
The appellant alleged mistakes in the computation of margin by the Learned TPO and highlighted a failure to follow the directions of the DRP in this regard. The Tribunal noted the concerns raised by the appellant regarding the margin computation and emphasized the need for accuracy and compliance with directives in determining the appropriate margin for transfer pricing assessments.

Failure to allow working capital adjustment:
The appellant contested the failure to allow a working capital adjustment at actuals, as upheld by judicial authorities. The Tribunal noted the error in not permitting the working capital adjustment and emphasized the importance of considering all relevant adjustments supported by legal precedents to ensure a fair and accurate transfer pricing assessment.

In conclusion, the Tribunal remanded the assessment to the Ld. TPO for a fresh determination to address the issues raised by the appellant, emphasizing the need for procedural fairness, accurate comparability analysis, and compliance with regulatory directives in transfer pricing assessments.

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