2015 (6) TMI 88 - AT - Income Tax

Transfer pricing adjustment - adjustment to the arm s length price of the international transactions of call centre services - Held that - DRP has not addressed any of the contentions raised by the assessee and has not given reasons or findings on the rejection of the comparables considered by the assessee. The Ld. DRP has simply mentioned that the AO has given cogent and detailed reasons for the same. In our considered opinion, the finding given by the Ld. DRP is not a speaking one and is not sustainable in the eyes of law. Therefore, in the interest of justice, we cancel the assessment order dated 19.10.2010 passed u/s. 143(3) r.w.s. 144C of the I.T. Act and remit back all the issues to the file of the Ld. DRP with the directions to properly consider and examine the issues in detail and give a finding on each of the contention raised by the assessee in its appeal and pass a speaking order thereon. - Decided in favour of assesse for statistical purposes.

Issues involved:
1. Transfer pricing adjustment on international transactions.
2. Rejection of comparable companies by the DRP.
3. Exclusion of certain companies as comparables.
4. Inclusion of B2K corp. as a comparable company.
5. Failure to consider a fresh transfer pricing study.
6. Application of TNMM for benchmarking analysis.
7. Adjustment for low-risk captive service provider.
8. Consideration of financials of associated enterprises.
9. Exemption of income under section 10A.
10. Benefit under Section 92C(2) proviso.
11. Disallowance of expenses under section 35D.
12. Validity of assessment order.
13. Levy of interest under section 234B.

Analysis:

1. The appeal was against the assessment order under the IT Act for the assessment year 2006-07, challenging the addition of a specific amount to the returned income due to transfer pricing adjustments on international transactions. The appellant contested the adjustment based on the TPO's order and DRP's directions, arguing that the DRP erred in rejecting certain comparable companies identified by the assessee.

2. The DRP's decision to reject specific comparable companies was challenged on various grounds, including low revenue, functional differences, persistent losses, and related party transactions. The appellant argued that the rejection was unjustified and raised concerns about the lack of a detailed explanation in the DRP's order.

3. The appellant further contested the exclusion of certain companies as comparables, highlighting issues such as turnover thresholds, accumulated losses, functional dissimilarities, and the treatment of persistent losses. The appellant questioned the consistency in the rejection of companies and argued for fair consideration based on relevant factors.

4. The issue of including B2K corp. as a comparable company for benchmarking the arm's length price was raised, emphasizing the need for a comprehensive analysis of potential comparables to ensure a fair assessment.

5. The failure to consider a fresh transfer pricing study submitted by the appellant was highlighted as a procedural error, indicating the importance of reviewing all relevant documentation and data provided by the assessee.

6. Concerns were raised regarding the application of TNMM for benchmarking analysis, with the appellant arguing that relying on a limited number of high-profit margin companies could skew results and not accurately represent industry margins.

7. The appellant's status as a low-risk captive service provider was cited as a reason for requesting adjustments in operating profit margins for both the assessee and comparable companies, in line with Rule 10B of the Income Tax Rules.

8. The necessity of considering the financials of associated enterprises in determining arm's length prices for international transactions was stressed, highlighting the importance of a holistic assessment approach.

9. The appellant claimed income exemption under section 10A, arguing against any motive for transferring profits outside India, which should be considered in the assessment of arm's length prices.

10. The benefit under the Section 92C(2) proviso was contested, with the appellant arguing for a +/- 5% adjustment in determining the arm's length price of international transactions.

11. Disallowance of expenses under section 35D was challenged, with specific amounts being contested as not applicable to the appellant's circumstances.

12. The validity of the assessment order was questioned, leading to a detailed review of the grounds for the appeal and the legal basis for the additions made to the returned income.

13. Lastly, the excessive levy of interest under section 234B was contested, highlighting the need for a lawful and justified calculation of interest amounts in line with the relevant legal provisions.

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