2015 (5) TMI 754 - AT - Income Tax

Transfer pricing adjustment - entity M/s. E-Infochips Bangalore Ltd. taken by the Assessing Officer/TPO as comparable should be excluded from the list of final comparables for the purposes of transfer pricing analysis on the ground of functional differences as well as on the ground of insufficient information available in respect of the said entity in public domain - Held that - The profit margin of such entity in the immediately preceding year(s) may also be taken into consideration and the FAR analysis in such cases may be reviewed to ensure that the potential comparable earning higher profit satisfies the comparability condition. Since this exercise has not been done either by the AO/TPO or the DRP in the present case, we are of the view that the matter should go back to the Assessing Officer/TPO for fresh consideration. This, in our opinion, will also take care of the grievance of the assessee relating to the lack of sufficient information in respect of M/s. E-Infochips Bangalore Ltd. available in the public domain in as much as the TPO can obtain such information in the form of relevant schedules of the Profit & Loss Account of the said entity as well as the segmental details, if any, directly from the said entity. We therefore, set aside the impugned order of the Assessing Officer as well as the direction given by the DRP on this issue and restore the matter to the file of the Assessing Officer/TPO for deciding the same afresh in the light of the observations already made by us, after giving the assessee proper and sufficient opportunity of being heard - Decided in favour of assesse for statistical purposes.

Summary

Issues Involved:
1. Addition of Rs. 3,23,74,458 on account of transfer pricing adjustment.

Detailed Analysis:

1. General and Unpressed Grounds:
The appeal filed by the assessee included three grounds. Ground No.1 was general, and Ground No.3 was not pressed by the learned counsel for the assessee during the hearing. Consequently, both grounds were dismissed.

2. Transfer Pricing Adjustment:
The primary issue under consideration was the addition of Rs. 3,23,74,458 to the total income of the assessee due to transfer pricing adjustments.

3. Assessee's Business and Transactions:
The assessee, a company engaged in developing, publishing, marketing, and distributing interactive entertainment software games, provided various services to its Associated Enterprises (AEs). The international transactions included software development services, back office support services, marketing support services, corporate IT support services, and purchase of fixed assets, amounting to Rs. 44,92,71,672.

4. Transfer Pricing Officer's (TPO) Analysis:
The TPO, after examining the documents and analyzing the international transactions, found defects in the method adopted by the assessee for selecting comparables. The TPO consolidated all international transactions for transfer pricing analysis at the entity level, calculating the Operating Profit to Operating Cost (OP/OC) at 10.26%. The TPO selected 18 comparables with an Arithmetic Mean of OP/OC at 22.69% and, after adjustments, determined an Arm's Length Price (ALP) of Rs. 48,63,37,843, resulting in a TP adjustment of Rs. 3,83,08,894.

5. Dispute Resolution Panel (DRP) Directions:
The DRP partly sustained the assessee's objections, directing the exclusion of Infosys Technology Ltd. and L&T Infotech Ltd. from the comparables list. The Assessing Officer recomputed the ALP at Rs. 48,04,05,407, leading to a TP adjustment of Rs. 3,23,76,458.

6. Assessee's Appeal to Tribunal:
The assessee contested the inclusion of M/s. E-Infochips Bangalore Ltd. in the comparables list, arguing functional dissimilarity and insufficient public domain data. The assessee highlighted that M/s. E-Infochips Bangalore Ltd. was engaged in product development and end-to-end product lifecycle management, unlike the assessee, which provided contract software development services.

7. Tribunal's Observations and Decision:
The Tribunal noted the functional differences and insufficient data regarding M/s. E-Infochips Bangalore Ltd. The Tribunal found that the DRP did not address the assessee's detailed submissions on these aspects. The Tribunal also observed that the profit margin of M/s. E-Infochips Bangalore Ltd. was abnormally high, warranting further investigation. The Tribunal directed the Assessing Officer/TPO to reconsider the inclusion of M/s. E-Infochips Bangalore Ltd. in the comparables list after obtaining necessary information directly from the entity and providing the assessee an opportunity to be heard.

Conclusion:
The Tribunal set aside the impugned order and restored the matter to the Assessing Officer/TPO for fresh consideration, allowing the assessee's appeal for statistical purposes. The order was pronounced on 29th April, 2015.