2017 (5) TMI 530 - AT - Income Tax

TPA - selection of comparables - Held that - We find that the assessee is into contracts software development services, backup office support services, marketing support services, corporate IT etc. thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable.

Issues Involved:
1. Rejection of transfer pricing analysis by the assessee.
2. Selection of comparables by the Transfer Pricing Officer (TPO).
3. Adjustment to the Arm's Length Price (ALP).
4. Inclusion and exclusion of specific comparables.
5. Applicability of working capital and risk profile adjustments.
6. Use of multiple year data for ALP determination.
7. Application of the +/-5 percent range as per Section 92C(2) of the Income Tax Act.
8. Levy of interest under sections 234B and 234C of the Act.

Detailed Analysis:

1. Rejection of Transfer Pricing Analysis:
The TPO rejected the transfer pricing (TP) analysis conducted by the assessee, which used Prowess and Capitaline Plus databases to select comparables. The TPO found the search process and filters used by the assessee to be non-compliant with TP regulations, leading to the selection of inappropriate comparables. Consequently, the TPO conducted an independent analysis using the Transactional Net Margin Method (TNMM).

2. Selection of Comparables by the TPO:
The TPO selected 13 comparables with an average Operating Profit to Operating Cost (OP/OC) margin of 20.84%. The assessee objected to several of these comparables, including Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd., citing reasons such as lack of segmental data and involvement in software products and R&D activities.

3. Adjustment to the Arm's Length Price (ALP):
The TPO computed an adjusted arm’s length margin of 16.29% after considering working capital adjustments. This resulted in an adjustment of ?4,14,20,080 to the assessee’s declared income. The Dispute Resolution Panel (DRP) upheld the TPO’s findings, leading to the final assessment order reflecting the same adjustment.

4. Inclusion and Exclusion of Specific Comparables:
- Larsen & Toubro Infotech Ltd.: The Tribunal excluded this company as a comparable due to the non-availability of segmental data, following precedents set in similar cases.
- Persistent Systems Ltd.: The Tribunal also excluded this company, noting its involvement in product development and significant R&D activities, which made it functionally dissimilar to the assessee.
- Evoke Technologies Pvt. Ltd.: The assessee sought to include this company as a comparable, but the Tribunal rejected this inclusion due to the company's involvement in various consultancy services and lack of segmental information.

5. Applicability of Working Capital and Risk Profile Adjustments:
The assessee’s request for adjustments based on differences in working capital and risk profile was rejected by the TPO, and this rejection was upheld by the DRP and the Tribunal.

6. Use of Multiple Year Data for ALP Determination:
The assessee argued for the use of multiple year data as authorized by Rule 10B(4) of the Income Tax Rules, 1962. However, the TPO and DRP did not accept this argument, and the Tribunal did not provide relief on this ground.

7. Application of the +/-5 Percent Range as per Section 92C(2) of the Income Tax Act:
The assessee sought the benefit of the +/-5 percent range for ALP determination. This request was not granted by the TPO, DRP, or the Tribunal.

8. Levy of Interest under Sections 234B and 234C of the Act:
The assessee objected to the levy of interest under sections 234B and 234C. However, the Tribunal did not provide specific relief on this issue, focusing instead on the primary TP adjustments.

Conclusion:
The Tribunal partly allowed the assessee's appeal by directing the exclusion of Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. from the list of comparables. All other grounds raised by the assessee were rejected, including the inclusion of Evoke Technologies Pvt. Ltd. as a comparable and the requests for working capital and risk profile adjustments, multiple year data usage, and the +/-5 percent range benefit. The final adjustment of ?4,14,20,080 to the ALP was upheld.

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