2015 (12) TMI 769 - AT - Income Tax

Transfer pricing adjustment - selection of comparbales - assessment proceedings on dissimilar companies - Held that - The Hon ble Delhi High Court held in the case of CIT Vs. Agnity India Technologies Pvt. Ltd. (2013 (7) TMI 696 - DELHI HIGH COURT) that comparison where super normal profit is shown by the company, it cannot be applied for ALP adjustment. The assessee had shown operating margin @ 13.17%, which is within /- 5% variation of arithmetic mean i.e. 16.71% calculated on the basis of proper comparables. Therefore, we allow the assessee s appeal and no adjustment is required to be made in ALP during the year under consideration. - Decided in favour of assessee. Comparing full-fledged risk bearing entities with the appellant s captive operations without making any risk adjustment for difference between the functional and risk profile of comparable companies - Held that - The ld TPO was right by accepting the arithmetic mean of comparable of comparable companies if any risk as claimed by the appellant was concerned, it will be resulted in the arithmetic mean of all the companies as these risks adjustments also applicable for them. The assessee could not show how such difference in risk and functions affected result of comparables. The assessee in comparing the case with Infosys and Wipro had claimed that the appellant had negligible risk as it is a captive unit providing service to its AE and is remunerated on cost which marked up basis. - Decided against assessee.

Issues Involved:
1. Assessment of total income.
2. Transfer pricing adjustment and arm's length price (ALP) determination.
3. Rejection of economic analysis and comparables.
4. Use of non-contemporaneous and single-year data.
5. Use of information not in the public domain.
6. Comparability criteria and selection of comparables.
7. Turnover criteria and supernormal profits.
8. Penalty proceedings and interest levied.

Detailed Analysis:

1. Assessment of Total Income:
The assessee challenged the assessment of total income at Rs. 91,36,830/- against Rs. 5,61,900/- computed by the appellant. This ground was not pressed and dismissed as not pressed.

2. Transfer Pricing Adjustment and Arm's Length Price (ALP) Determination:
The core issue revolved around the transfer pricing adjustments made by the TPO. The TPO had determined the ALP for software development services provided to the associated enterprise (AE) using the Transactional Net Margin Method (TNMM) and selected comparables with an adjusted arithmetic mean PLI of 23.69% for A.Y. 2007-08 and 26.38% for A.Y. 2008-09. The resultant adjustments were Rs. 85,74,926/- for A.Y. 2007-08 and Rs. 1,23,23,977/- for A.Y. 2008-09.

3. Rejection of Economic Analysis and Comparables:
The assessee's economic analysis and comparables were rejected by the TPO. The TPO conducted a fresh search, resulting in a different set of comparables. The assessee's objections to the rejection of certain comparables and the inclusion of others were considered but not accepted by the TPO and DRP.

4. Use of Non-Contemporaneous and Single-Year Data:
The TPO used single-year data for the comparability analysis, which the assessee contested, arguing for the use of multiple-year data. The DRP upheld the TPO's use of single-year data, citing Rule 10B(4) which mandates the use of data for the year in which the transaction took place.

5. Use of Information Not in the Public Domain:
The TPO used information obtained under Section 133(6) of the Act, which was not available in the public domain. The assessee argued that this approach was inconsistent and non-transparent. The DRP dismissed this objection, supporting the TPO's methodology.

6. Comparability Criteria and Selection of Comparables:
The TPO applied various filters, including a salary and wages cost ratio of 25%, to select comparables. The assessee argued for a 50% ratio, citing previous years' assessments. The Tribunal found the assessee's argument logical and allowed the appeal on this ground, rejecting comparables with a salary and wages cost ratio of less than 50%.

7. Turnover Criteria and Supernormal Profits:
The TPO's selection of comparables included companies with supernormal profits and those with different accounting years. The Tribunal excluded such companies, finding them dissimilar to the assessee. The Tribunal also noted that the resultant arithmetic mean of the comparables was within the +/- 5% range, thus no adjustment was required.

8. Penalty Proceedings and Interest Levied:
Ground No. 18 regarding the initiation of penalty proceedings under sections 271(1)(c), 271AA, and 271G, and the levying of interest under sections 234B and 234D was found to be consequential to the findings of the Tribunal.

Conclusion:
The Tribunal partly allowed the appeals, rejecting certain comparables selected by the TPO and accepting the assessee's argument for a higher salary and wages cost ratio filter. The Tribunal concluded that the assessee's margins were within the acceptable range, thus no adjustment to the ALP was necessary. The penalty proceedings and interest levied were deemed consequential.

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