2014 (10) TMI 213 - AT - Income Tax

Determination of ALP Selection of comparables - CUP method and TNMM method Held that - The TPO rejected the comparables given by the assessee on the ground that the Annual Reports are not available - certain companies selected by the TPO were not considered as comparables on the ground that annual report of those companies were not available - the assessee has filed the financial summaries of those 9 companies and annual reports in case of 7 companies out of the 9 companies - Helios and Matherson Information Technology Ltd. whose turnover is ₹ 213 crores, i.e. above ₹ 200 crores is not a comparable case - KALS Information System Ltd. cannot be considered as a comparable thus, the matter is to be remitted back to the TPO to pass appropriate order after giving due opportunity of being heard to the assessee and determine the adjustment to the Arm s Length Price Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of comparables by the TPO.
2. Determination of Arm's Length Price (ALP) for software sales transactions.
3. Adoption of mark-up percentage over costs.
4. Granting of appropriate working capital adjustment.
5. Consideration of the CUP approach for benchmarking transactions.
6. Benefit of proviso to section 92C(2) of the ITA, 1961.
7. Effect to taxes paid/TDS in final tax liability.

Issue-Wise Detailed Analysis:

1. Rejection of Comparables by the TPO:
The Transfer Pricing Officer (TPO) rejected the comparables given by the assessee on the ground that the Annual Reports were not available. However, the assessee argued that all those Annual Reports were available in the public domain and should not have been rejected. The assessee also submitted that by using the Assessing Officer's filtering process, there were 9 new comparables that ought to have been selected. The TPO did not ask the assessee to produce Annual Reports of those 9 companies, and the Dispute Resolution Panel (DRP) also ignored the financial summaries and Annual Reports of 7 comparables out of those 9 companies. The Tribunal found merit in the assessee's argument and deemed it proper to restore the matter to the TPO for fresh adjudication.

2. Determination of Arm's Length Price (ALP) for Software Sales Transactions:
The TPO and DRP determined the ALP of the software sales transaction at Rs. 19,77,57,084 instead of Rs. 17,74,35,971. The TPO made an adjustment of Rs. 3,20,93,437/- to the international transaction relating to the provision of software development services. The Tribunal found that the TPO's rejection of certain comparables was not correct and restored the matter to the TPO for fresh adjudication.

3. Adoption of Mark-Up Percentage Over Costs:
The TPO and DRP adopted a mark-up of 28.33% over costs instead of the assessee's earned mark-up of 13.04% on cost. The Tribunal found that the TPO/DRP selected Helios & Matherson Information Technology Ltd. as a comparable, but its turnover was Rs. 213 crores, which is above Rs. 200 crores and should not have been considered as a comparable. Similarly, KALS Information System Ltd. was also found not to be a suitable comparable. The Tribunal restored the matter to the TPO for fresh adjudication.

4. Granting of Appropriate Working Capital Adjustment:
The DRP directed the Assessing Officer/TPO to allow working capital adjustment after verification. The Tribunal found merit in the assessee's argument that appropriate working capital adjustment should be granted and restored the matter to the TPO for fresh adjudication.

5. Consideration of the CUP Approach for Benchmarking Transactions:
The assessee's alternate contention for benchmarking the transactions under the CUP approach (95:5 sharing of revenue between the appellant and its USA AE) was not considered by the TPO and DRP. The Tribunal did not specifically address this issue but restored the matter to the TPO for fresh adjudication, which implies that this contention should also be considered.

6. Benefit of Proviso to Section 92C(2) of the ITA, 1961:
The TPO, AO, and DRP did not grant the benefit of the proviso to section 92C(2) of the ITA, 1961, though specifically requested during the course of hearing. The Tribunal restored the matter to the TPO for fresh adjudication, which implies that this issue should also be considered.

7. Effect to Taxes Paid/TDS in Final Tax Liability:
The assessee claimed that the AO erred on facts in not giving effect to the taxes paid/TDS amounting to Rs. 58,06,211 while deciding the final tax liability. The Tribunal did not specifically address this issue but restored the matter to the TPO for fresh adjudication, which implies that this issue should also be considered.

Conclusion:
The Tribunal found merit in the assessee's arguments and restored the matter to the TPO for fresh adjudication of the issues, including the selection of comparables, determination of ALP, adoption of mark-up percentage, granting of working capital adjustment, consideration of the CUP approach, benefit of proviso to section 92C(2), and effect to taxes paid/TDS in final tax liability. The appeal filed by the assessee was allowed for statistical purposes.