2015 (10) TMI 2248 - AT - Income Tax

Transfer pricing adjustment - Arm s Length Price (ALP) of the international transaction representing software development services provided to the AEs is determined by applying Transactional Net Margin Method (TNMM) - selection of comparable - Held that - FCS SOFTWARE - annual report states that the said company is engaged in software consultancy, technical support services, e-learning and other related allied services and it is recorded in the annual report that it is not possible to give the quantitative details of sales reveals that the assessee is engaged in E-Learning and Digital Consulting which constitutes 30% of its functions; application support is 11%, infrastructure management service is 15% and IT consulting is 44%; and thus contended that the said company is engaged in different activities and so is not a comparable with the functional profile of the assessee. The ld. DR could not point out from the annual report of the said company the segmental breakup which is essential to work out the PLI, because admittedly this company operates in different segments. In such circumstances, we deem it fit to remand the matter back to the file of the TPO to examine whether the segmental data relating to software development are available to compute the PLI at segmental level of this company. In case, it is not able to discern the segmental data as aforesaid of this company then this company should be excluded from the list of comparables. GOLDSTONE TECHNOLOGIES - after perusal of the annual report that the company in the present assessment year is engaged in the software development, so is functionally similar, therefore, we uphold the decision of TPO/DRP to include this company as a comparable. LANCO GLOBAL SYSTEMS - We find that the TPO in assessee s own case for assessment year 2009-10 has not included this company as a comparable. We are of the opinion that the TPO may de novo decide whether to include this company as a comparable for the instant year under consideration. Accordingly, we remand the matter back to the file of the TPO for de novo consideration. Disallowance of risk adjustment - Held that - initial onus for claiming any adjustment in the computation of ALP is always on the assessee. It is only when such initial onus is discharged that the turn of the TPO comes for ascertaining whether the claim so made by the assessee is correct or not. Adverting to the facts of the instant case, we find that there is no material worth the name justifying the claim of risk adjustment by comparatively showing particular risks undertaken or not undertaken by the assessee vis-a-vis the comparables. A generalized submission about the assessee assuming low/no risk vis-a-vis its comparables, cannot be countenanced. The assessee has to expressly exhibit that the specific risks undertaken by the comparables were absent in its case and vice versa. In the absence of any such working available either before the authorities below or us, we are disinclined to direct the granting of any risk adjustment. - Decided against assessee.

Summary

Issues Involved:
1. Transfer Pricing Matters
2. Corporate Tax Matters

Detailed Analysis:

Transfer Pricing Matters

Issue 1: Computation of Mean Margin and Transfer Pricing Adjustment
- The assessee contested the recomputation of the mean margin of comparable companies, which led to an enhancement of Rs. 5,805,299 in the income on account of the initial Transfer Pricing (TP) adjustment.
- The Tribunal noted that the Transfer Pricing Officer (TPO) had rejected the assessee's transfer pricing study and substituted it with a fresh analysis, modifying the filters and comparables selected by the assessee.
- The TPO used current year data instead of multiple year data for comparables and included high-profit-making companies, leading to a TP adjustment of Rs. 8,409,662.
- The Dispute Resolution Panel (DRP) upheld the TPO's adjustment but added one more comparable, resulting in a final adjustment of Rs. 5,805,299.

Issue 2: Rejection of Assessee's Transfer Pricing Documentation
- The DRP and the TPO disregarded the Arm's Length Price (ALP) determined by the assessee in its TP documentation, rejecting the filters and multiple year data used by the assessee.
- The Tribunal found that the TPO's approach of using only current year data was justified as the same was not available to the assessee at the time of preparing its TP documentation.

Issue 3: Inclusion/Exclusion of Comparables
- The assessee argued against the inclusion of certain high-profit-making companies (FCS Software, Goldstone Technologies, Lanco Global Systems) as comparables.
- The Tribunal decided:
- FCS Software: The matter was remanded back to the TPO to examine if segmental data for software development were available. If not, this company should be excluded.
- Goldstone Technologies: Upheld as a comparable since the company was engaged in software development.
- Lanco Global Systems: The matter was remanded back to the TPO for de novo consideration, as the company was involved in diverse activities.

Issue 4: Risk Adjustment
- The assessee claimed a risk adjustment, arguing it was a low-risk captive service provider.
- The Tribunal denied the risk adjustment, noting that the assessee failed to provide specific evidence of risks undertaken by comparables that were absent in its case.

Corporate Tax Matters

Issue 1: Addition of Rent Equalisation Reserve
- The Assessing Officer (AO) added back the amount of Rent Equalisation Reserve of Rs. 18,45,875 to the book profits declared under section 115JB of the Act.
- The AO erroneously proposed that the amount charged to the profit and loss account was covered under clause (b) or (c) of Explanation 1 to Section 115JB of the Act, necessitating its addition to book profits.
- The Tribunal's order did not explicitly address this issue, implying that the primary focus was on transfer pricing matters.

Conclusion:
The Tribunal's judgment addressed multiple key issues related to transfer pricing adjustments, comparables selection, and risk adjustment claims. The matter was partly allowed for statistical purposes, with specific issues remanded back to the TPO for further examination. The Tribunal upheld the inclusion of Goldstone Technologies as a comparable while remanding the inclusion of FCS Software and Lanco Global Systems to the TPO for further consideration. The risk adjustment claim by the assessee was denied due to lack of specific evidence.