2015 (7) TMI 797 - AT - Income Tax

Transfer pricing adjustment - addition made on the basis of Arm s Length Price - impugned action of the Ld CIT(A) to exclude M/s Satyam computers Ltd,from the list of comparables selected by the by the TPO,/AO questioned - CIT(A) delted the TPO addition - Held that - CIT(A) has noted that in the case of Agnity Technologies Private Limited vs. Income Tax Officer, Ward 12(1), New Delhi 2010 (11) TMI 852 - ITAT DELHI has upheld the decision of the DRP which had excluded M/s. Satyam from the list of comparables. Ld. CIT(A) further observed that in view of this, M/s Satyam Computers Services Ltd. should be taken out from the list of comparable companies. In the light of the aforesaid facts, ld. CIT (A) took the decision to exclude M/s. Satyam from the list of comparables, which we uphold since the financial results of the said company is the result of admitted financial irregularities and conspiracy hatched and committed by the directors and cannot be relied upon. So the financial result of the said company cannot be used by the TPO to compute the ALP, which has been rightly done by the ld. CIT (A), so we concur with his decision to exclude M/s. Satyam from the list of comparables, so the Revenue s ground is dismissed. Thus by excluding M/s. Satyam from the list of comparables, the mean of the assessee falls within 5% of 22.15%. Hence, we do not see any reason to interfere with the impugned order passed by the Ld. CIT(A), hence, we uphold the same. Therefore, the issues in dispute raised by the Revenue are rejected. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of the addition of Rs. 74,80,644/- made on the basis of Arm's Length Price (ALP) determined by the Transfer Pricing Officer (TPO) under Section 92CA(3) of the Income Tax Act, 1961.
2. Determination of whether the International Transactions of the assessee should be treated as at Arm's Length.
3. Exclusion of M/s Satyam Computer Services Ltd. from the list of comparables.

Issue-Wise Detailed Analysis:

1. Deletion of Addition Based on ALP Determined by TPO:
The Revenue's appeal contested the deletion of the addition of Rs. 74,80,644/- made by the TPO. The TPO had determined the ALP for the assessee's international transactions related to software development and designing services. The TPO's computation included a detailed analysis of the income, expenditure, and operating profit margins of the assessee and comparables. The TPO concluded that the difference in the ALP was 5.59%, leading to the addition of Rs. 74,80,644/- to the assessee's income.

2. Determination of International Transactions at Arm's Length:
The assessee argued that during the financial year 2004-05, it was entitled to a tax holiday under Section 10B of the Act, which negated any motive to manipulate transfer prices for tax advantage. The Assessing Officer (AO) computed the income in conformity with the TPO's order, resulting in the addition of Rs. 74,80,644/- and an assessed income of Rs. 22,97,300/-.

3. Exclusion of M/s Satyam Computer Services Ltd. from Comparables:
The core issue revolved around the exclusion of M/s Satyam Computer Services Ltd. from the list of comparables used by the TPO. The CIT(A) excluded Satyam from the comparables list due to its involvement in financial fraud, which rendered its financial statements unreliable. The CIT(A) referenced the company's own admission and the ITAT's decision in Agnity Technologies Private Limited vs. Income Tax Officer, which upheld the exclusion of Satyam from comparables. The Tribunal concurred with the CIT(A), noting that Satyam's financial results were the product of admitted financial irregularities.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to exclude M/s Satyam Computer Services Ltd. from the list of comparables, leading to a revised mean margin of 22.15% for the remaining comparables. The assessee's margin of 17.46% fell within the permissible range of +/- 5% of the ALP margin, thus treating the international transaction as at arm's length. Consequently, the addition made by the AO/TPO was deleted, and the Revenue's appeal was dismissed.

Final Order:
The appeal filed by the Revenue was dismissed, and the order pronounced in the open court on 22.07.2015 confirmed the CIT(A)'s decision.