2017 (4) TMI 866 - AT - Income Tax

Transfer pricing adjustment - comparable selection - application of turnover filter - Held that - The assessee is aggrieved by the order of Assessing Officer / TPO in considering the turnover range on cost basis instead of turnover basis and hence the inclusion of Helios and Matheson Information Technology Ltd. which was identified as comparable even though its total turnover was 213.37 crores. The grievance of assessee in considering the turnover range on cost basis merits to be allowed. Various Benches of the Tribunal including the Pune Bench of Tribunal in series of cases have held that the turnover basis is to be adopted range for the selection of companies. The total turnover of the assessee was 14.37 crores as against which we hold that the turnover filter of 1 to 200 crores merits to be applied. Since the turnover of Helios and Matheson Information Technology Ltd. was more than 200 crores i.e. 213.39 crores then the same merits to be excluded from the final list of comparables. Accordingly we hold so. The ground of appeal raised by the assessee is thus partly allowed. Assessee which is providing software development services thus selection of comparable as companies functionality dissimilar with that of assessee need to dis-selected as final list of comparable. Non-allowance of risk adjustment - Held that - We direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (2008 (9) TMI 420 - ITAT DELHI-H) and compute the TP adjustment if any in the hands of assessee. Assessee is against applicability of /- 5% and the benefit can be allowed if the adjustment is within such range and hence no adjustment is to be made in case it is not more than 5% from the arm s length price. We hold so. Allowance of payment made for meeting expenses travel cost stay cost etc. - Held that - uthorized Representative for the assessee pointed out that the said expenditure was part of operating cost and was recovered @ 7%. The factual aspects of this issue are not clear and the Assessing Officer/Transfer Pricing Officer is directed to redecide the same after allowing reasonable opportunity of hearing to the assessee. We hold so.

Issues Involved:
1. General ground challenging the transfer pricing adjustment.
2. Transfer pricing adjustment relating to provision of software development services.
3. Application of turnover filter for identification of comparable companies.
4. Selection of qualitative filters and applying certain filters on selective basis.
5. Rejection of certain comparable companies identified by the appellant.
6. Selection of certain additional companies as comparable.
7. Selection of companies having supernormal profits.
8. Inconsistent approach for rejecting/selecting companies as comparable.
9. Adjustment for differences on account of functional and risk profile.
10. Applicability of +/-5% range.
11. Adjustment on account of payment for reimbursement of certain expenses.
12. Initiation of penalty proceedings under section 271(1)(c) of the Act.
13. Erroneous levy of interest under section 234B of the Act.

Detailed Analysis:

1. General ground challenging the transfer pricing adjustment:
The grounds of appeal No.1 and 2 raised by the assessee being general, are dismissed.

2. Transfer pricing adjustment relating to provision of software development services:
The assessee's original return of income was scrutinized, and the TPO agreed that the TNMM method was most appropriate. The TPO noted defects in the assessee's approach and applied filters to select comparable companies. After adjustments, the TPO proposed an adjustment of ?3,21,60,400/-, later revised to ?2,70,62,939/- following DRP's directions.

3. Application of turnover filter for identification of comparable companies:
The assessee's grievance regarding the turnover range on cost basis instead of turnover basis is allowed. The Tribunal held that the turnover filter of ?1 to ?200 crores merits to be applied, resulting in the exclusion of Helios and Matheson Information Technology Ltd. from the final list of comparables.

4. Selection of qualitative filters and applying certain filters on selective basis:
The Tribunal examined the selection/rejection of companies while benchmarking international transactions. It excluded Bodhtree Consulting Ltd., E-zest Solutions Ltd., and KALS Information Systems Ltd. from the final set of comparables due to functional differences and lack of segmental details.

5. Rejection of certain comparable companies identified by the appellant:
The Tribunal upheld the exclusion of Akshay Software Technologies Ltd., Maars Software International Ltd., and R S Software (India) Ltd. as they were on-site developers. Indium Software (India) Ltd. was excluded for not fulfilling the export turnover filter. Quintegra Solutions Ltd. was excluded due to having intangibles.

6. Selection of certain additional companies as comparable:
The Tribunal included Lanco Global Systems Ltd. in the final list of comparables as the assessee did not press for its exclusion.

7. Selection of companies having supernormal profits:
The Tribunal did not specifically address the issue of supernormal profits but focused on functional comparability and segmental details.

8. Inconsistent approach for rejecting/selecting companies as comparable:
The Tribunal's analysis ensured a consistent approach by applying the same filters and principles uniformly across all comparables.

9. Adjustment for differences on account of functional and risk profile:
The Tribunal directed the Assessing Officer to allow risk adjustment and re-compute the margins of comparables, following the ratio laid down by the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd.

10. Applicability of +/-5% range:
The Tribunal held that the benefit of +/-5% range can be allowed if the adjustment is within such range, and no adjustment is to be made if it is not more than 5% from the arm's length price.

11. Adjustment on account of payment for reimbursement of certain expenses:
The Tribunal directed the Assessing Officer/Transfer Pricing Officer to redecide the issue of payment for meeting expenses, travel cost, stay cost, etc., after allowing reasonable opportunity of hearing to the assessee.

12. Initiation of penalty proceedings under section 271(1)(c) of the Act:
The Tribunal found the initiation of penalty proceedings premature and hence, rejected the ground of appeal.

13. Erroneous levy of interest under section 234B of the Act:
The Tribunal dismissed the ground of appeal against the levy of interest under section 234B of the Act as it is consequential.

Conclusion:
The appeal of the assessee is partly allowed, with specific directions to the Assessing Officer for re-computation and adjustments as per the Tribunal's findings.

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