2017 (3) TMI 1963 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - E-Infochips Banglore Ltd. is engaged in both software development as well as ITes. Assessee being characterized as a routine service provider the above company cannot be considered as comparable on functional basis. Thus in absence of segmental information we direct the AO/TPO to exclude this company from the final list of comparables. Infinite Data Systems Pvt. Ltd. company has no sufficient segmental information and functionally dissimilar. Persistent Systems Limited company was involved in software development software products and marketing. Furthermore and perhaps more importantly published segmental data was not available. In these circumstances having regard to the specificity of the Transfer Pricing Rules under Rule 10(b) to 10(e) of the Income Tax Rules the data of the said firm i.e. Persistent Systems Ltd. could not have been included. Thirdware Solutions company cannot be selected as comparable for TP analysis.. Since no distinguishing features of the functional profile of this company and the assessee for the current year vis-a-vis the preceding year have been brought out to our notice following the preceding we direct the TPO/AO for removal of this company from the list of comparables. PSI Data Systems company had been merged w.e.f. 12.08.2009 with Aditya Birla Minacs IT Services Ltd. and as such said company had no locus standi for the whole year. Therefore the TPO has rightly excluded this company from the list of comparables. Crazy Infotech Ltd.- As assessee company is engaged in 100% export of software development services to its holding company. The total percentage of turnover in software development segment of the aforesaid company is only 4.66% of the total turnover of Assessee Company which too was generated from the state of Tamilnadu and Andhra Pradesh but not from foreign export as in the case of assessee. Therefore the TPO has rightly excluded this company from the set of comparables. Infosys Technologies Ltd. cannot be treated as comparable with the assessee company as assessee is also a captive service provider and also not owning any branded products with no expenditure of its own on R D etc. Arithmetical errors while computing the net margin of comparable companies - Assessee did not specify as to what arithmetical inaccuracies have been committed by the TPO. Therefore the assessee is directed to demonstrate before the TPO the errors whatsoever. Use of multiple year data and determining the Arm s Length Margin - Rule 10B(4) of the Income-tax Rules clearly stipulates that normally current year data should be used. The proviso to the Rule allows the use of data pertaining to previous years only if the taxpayer can prove that there were certain factors relevant to those years that have affected the transfer prices of the year under review. However the assessee has failed to bring any fact on record to cover the case of assessee under Rule 10B(4). The TPO has relied on a number of cases for the proposition that normally current year data should be used. Working capital adjustment margins of the comparable companies the advances have not been considered for calculating working capital adjustment - We are afraid that while calculating the working capital adjustment it is necessary to ascertain as to whether the advance so given was for revenue items purpose or capital items purpose. If the amount is found to be advanced for Revenue items purposes then it should be considered for working capital adjustment and if it is found otherwise the same cannot be considered for working capital adjustment. Therefore this issue is restored to the file of AO/TPO for deciding the same afresh in the light of observations made above. Accordingly this ground deserves to be allowed for statistical purposes. Disallowance of deduction u/s 10AA - We are unable to countenance this view of the AO because the assessee brought in India sale proceeds from rendering of services to its AE. The remuneration model has been decided by the parties inter se with a cost plus mark-up which in the instant case is 15% of costs. What the assessee has realized in India is nothing but sale proceeds of software service provided by it to its foreign AE which include not only the costs incurred by it in providing software services but also such mark-up. This in our considered opinion satisfies the requirement of receipt of foreign currency in India. Since the assessee has satisfied all the requisite conditions for availing of the benefit of deduction u/s 10AA we are of the considered opinion that the authorities below erred in refusing to grant such deduction. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

- Whether the Transfer Pricing Order and the directions issued by the Dispute Resolution Panel (DRP) were in accordance with the law.

- The validity of the Transfer Pricing Officer's (TPO) selection and rejection of comparable companies for benchmarking the arm's length price (ALP) of international transactions.

- The appropriateness of the adjustments made by the TPO in determining the ALP, including the use of current year data and working capital adjustments.

- The eligibility of the assessee for deduction under section 10AA of the Income-tax Act, 1961.

2. ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Issues:

- Relevant legal framework and precedents: The Transfer Pricing provisions under the Income-tax Act, 1961, and the associated rules and guidelines were considered. The Tribunal also referred to various judicial precedents, including decisions by the ITAT and the High Courts, regarding the selection of comparables and the application of the Transfer Pricing methods.

- Court's interpretation and reasoning: The Tribunal scrutinized the TPO's selection of comparables, particularly focusing on the functional similarity of the companies and the availability of segmental data. The Tribunal emphasized the need for functional comparability and reliable segmental information to ensure an accurate benchmarking process.

- Key evidence and findings: The Tribunal examined the functional profiles of the assessee and the selected comparables, the financial data, and the TPO's rationale for including or excluding certain companies.

- Application of law to facts: The Tribunal applied the principles of Transfer Pricing, emphasizing the need for comparability in terms of functions, assets, and risks. It also considered the appropriateness of using current year data and the necessity of making working capital adjustments.

- Treatment of competing arguments: The Tribunal evaluated the arguments presented by both the assessee and the Revenue, considering the objections raised by the assessee regarding the TPO's selection of comparables and the DRP's directions.

- Conclusions: The Tribunal directed the exclusion of certain companies from the list of comparables due to functional dissimilarity or lack of segmental data, while upholding the inclusion of others. It also addressed the issue of working capital adjustments, directing the TPO to reconsider the inclusion of advances for revenue items in the working capital adjustment.

Corporate Tax Issues:

- Relevant legal framework and precedents: The eligibility criteria for deduction under section 10AA of the Income-tax Act were considered, alongside the legislative intent behind the provision.

- Court's interpretation and reasoning: The Tribunal analyzed the conditions for claiming deduction under section 10AA, particularly focusing on the requirement of export and the receipt of foreign currency.

- Key evidence and findings: The Tribunal reviewed the nature of the transactions between the assessee and its associated enterprises, the receipt of foreign currency, and the fulfillment of conditions under section 10AA.

- Application of law to facts: The Tribunal applied the provisions of section 10AA, considering the nature of the transactions and the receipt of foreign currency as constituting export.

- Treatment of competing arguments: The Tribunal evaluated the AO's reasoning for denying the deduction and the assessee's arguments regarding the fulfillment of conditions under section 10AA.

- Conclusions: The Tribunal held that the assessee was eligible for deduction under section 10AA, as the transactions constituted export, and the foreign currency was duly received in India.

3. SIGNIFICANT HOLDINGS

- The Tribunal directed the exclusion of certain companies from the list of comparables due to functional dissimilarity or lack of segmental data, while upholding the inclusion of others.

- The Tribunal emphasized the need for functional comparability and reliable segmental information in the selection of comparables.

- The Tribunal held that the assessee was eligible for deduction under section 10AA, as the transactions constituted export, and the foreign currency was duly received in India.

- The Tribunal directed the TPO to reconsider the inclusion of advances for revenue items in the working capital adjustment.

- The Tribunal's decision reflects a careful consideration of the functional profiles of the companies, the nature of the transactions, and the legislative intent behind the provisions of the Income-tax Act.