2023 (3) TMI 456 - AT - Income Tax

TP Adjustment u/s. 92CA(3) - exclusion/inclusion of comparables for determination of arms length price of the international transactions - CIT(A) upholding the order of the AO/TPO in rejecting functionally comparable companies selected by the Appellant in its transfer pricing report - HELD THAT - We find that assessee is engaged in recruiting personals in India on the basis of their academic qualifications and skill sets for the work of audit in various fields of finance management information technology etc. for Associated Enterprises. The auditors selected by the assessee are being further screened and trained by respective entity who is using the services. These auditors perform services of reviewing the existing operations of the contracting entities and assist them in writing audit report. These auditors would do on-site auditing (at the place of the contracting entity) and one week of report writing (off-site work) at the office of the assessee. Vishal Information Technologies Ltd - Percentage of outsourced business of the comparable company has been reported as 44.81% whereas before us the assessee has pointed out the ratio of outsourcing expenses to the total expenses as 65.98%. Therefore it is essential to verify the exact quantum of outsourcing expenses in the case of the comparable company. Accordingly we set aside the matter of exclusion of the company to the file of the Ld. TPO with the direction to ascertain quantum of outsourcing expenses and the business model of the company by way of issue of notice under section 133(6) of the Act and then if the business model of the company is found to be based on outsourcing then same shall be excluded from the set of the comparables in accordance with law. Asit C Mehta financial services ( Nucleus netsoft and GIS (India) Limited - Concern with extraordinary events of merger/demerger cannot be comparable in the years of such merger/demerger we direct the Ld. AO/TPO to exclude this company from the set of the comparables for computing arithmetic mean of PLI of comparables. Transworks information services Ltd - We find that the Ld. TPO has gathered financial and functional details of the company by way of using his authority u/s 133(6) of the Act. Since the said information has not been provided to the assessee we feel it appropriate to restore this issue back to the file of the Ld. AO/TPO with the direction to provide all the information gathered under section 133(6) about the company to the assessee and decide the issue of exclusion/inclusion of the company after providing adequate opportunity of being heard to the assessee. Datamatics financial services Ltd (segmental) - We find that information gathered under section 133(6) of the Act has not been provided to the assessee to ascertain the fact of RPT being more than 25% i.e. a filter applied by the Ld. TPO therefore we set aside the finding of the Ld. CIT(A) and restore the issue of exclusion/inclusion of the company from the final set of the comparables to the file of the Ld. AO/TPO for deciding a fresh after providing information gathered under section 133(6) of the Act to the assessee. Goldstone Infratech Limited (Segmental) - The first division is telecom and insulated divisions wherein the turnover has been bifurcated in domestic turnover at Rs.25, 84, 43, 794/- and export turnover of Rs.2, 29, 721/-. The other division is BPO division wherein the turnover has been mentioned at Rs.5, 02, 71, 015/-. In the BPO division no such bifurcations of domestic and export turnover has been reported. Since the TPO has considered only BPO division for comparison with the assessee the contention of the Ld. counsel of the assessee of complying up export filter is not relevant. The said objection of the Ld. counsel of the assessee is accordingly rejected. As the assessee in its transfer pricing study has considered ITes/BPO activity as functionally similar to the assessee the comparable company is held to be functionally similar and therefore contentions of the Ld. counsel to exclude this company are accordingly rejected. Spanco Telesystems and Sloutions Limited (segmental) - Before us the assessee has not filed annual report of the company in support of its claim of merger of another company with the assessee and also for verification of application of export filter.Therefore in the interest of justice we feel it appropriate to restore the issue of exclusion/inclusion of this company into set of the comparables to the file of the Ld. AO/TPO for deciding afresh. Maple e-solutions Ltd - As relying on Commins turbo technologies Ltd 2018 (3) TMI 1588 - BOMBAY HIGH COURT we direct the Ld. AO/TPO to exclude the company out of the set of the comparables on the ground of unreliability of financial data because of fraud committed by the owners/directors. C S software Enterprises Ltd - From the reporting in Annual Report it is evident that company is having only one segment of Information Technology enabled services. Further on perusal of the other pages of the Annual Report also it is evident that company is primarily in the field of IT-BPO and no where it is reported that company is in software development. The observation of the CIT(A) that company is engaged in software development and there is no separate segment of ITes is without any basis. Accordingly The Ld. AO/TPO is directed to include the company into the set of the comparables.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Benchmarking Analysis
3. Inclusion/Exclusion of Comparables
4. Use of Non-Contemporaneous Data
5. Use of Secret Comparables
6. Determination of Arm's Length Price
7. Levy of Interest under Section 234B and 234C

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Revenue challenged the deletion of a Transfer Pricing Adjustment of Rs. 1,06,65,264/- made under Section 92CA(3) of the Act by the CIT(A). The CIT(A) had allowed a -5% relief to the assessee, which was also contested by the Revenue. The Tribunal noted that the Revenue's appeal was withdrawn due to the tax effect being below the limit prescribed by the CBDT Circular No. 17 of 2019.

2. Benchmarking Analysis:
The assessee contended that the AO/TPO incorrectly disregarded the benchmarking analysis and comparable companies identified in the Transfer Pricing Report (TP Report). The Tribunal found that the AO/TPO had rejected the weighted average of multiple-year data and applied the current year data for computing the profit level indicator. The Tribunal also noted that the AO/TPO applied filters of export turnover more than 25% and related party transactions (RPT) less than 25% for selecting comparables.

3. Inclusion/Exclusion of Comparables:
The Tribunal addressed the inclusion/exclusion of certain comparables:
- Vishal Information Technologies Ltd: The Tribunal remanded the issue to the TPO to verify the quantum of outsourcing expenses and the business model.
- Asit C Mehta Financial Services Ltd: The Tribunal directed the exclusion of this company due to an amalgamation during the year.
- Transworks Information Services Ltd: The Tribunal remanded the issue to the TPO to provide information gathered under section 133(6) to the assessee.
- Datamatics Financial Services Ltd: The Tribunal remanded the issue to the TPO to verify the RPT filter.
- Goldstone Infratech Ltd: The Tribunal upheld the inclusion of this company as the BPO segment was considered functionally similar.
- Spanco Telesystems and Solutions Ltd: The Tribunal remanded the issue to the TPO for verification of the merger and export filter.
- Maple eSolutions Ltd: The Tribunal directed the exclusion of this company due to unreliable financial data because of fraud committed by the owners/directors.
- C S Software Enterprises Ltd: The Tribunal directed the inclusion of this company as it was found to be engaged in IT-enabled services only.

4. Use of Non-Contemporaneous Data:
The assessee argued that the AO/TPO erred in rejecting the use of data for two preceding financial years. The Tribunal found that the AO/TPO had applied the current year data for computing the profit level indicator, rejecting the weighted average of multiple-year data adopted by the assessee.

5. Use of Secret Comparables:
The assessee contended that the AO/TPO used secret comparable companies by considering companies for which data was not available in the public domain. The Tribunal noted that the TPO had gathered financial and functional details of some companies by issuing notices under section 133(6) of the Act.

6. Determination of Arm's Length Price:
The Tribunal noted that the AO/TPO determined the arm's length price based on data not available as on the specified date. The Tribunal directed the TPO to verify the business model and outsourcing expenses of certain comparables to ensure the arm's length price determination was in accordance with the law.

7. Levy of Interest under Section 234B and 234C:
The assessee challenged the levy of interest under sections 234B and 234C. The Tribunal did not provide a specific ruling on this issue in the summarized judgment.

Conclusion:
The Tribunal dismissed the Revenue's appeal due to the tax effect being below the prescribed limit and partly allowed the assessee's appeal for statistical purposes, directing the TPO to re-examine certain comparables and provide necessary information to the assessee. The Tribunal emphasized the need for a detailed functional analysis and verification of the business models and outsourcing expenses of the comparables.