2017 (6) TMI 645 - AT - Income Tax

TPA - selection of comparables - Held that - Assessee rendered back office service to its overseas Siemens thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable.

Issues Involved:
1. Legality of Assessment and Reference to Transfer Pricing Officer (TPO)
2. Determination of Arm's Length Price (ALP)
3. Fresh Comparable Search by TPO
4. Determination of ALP by TPO
5. Use of Erroneous Data by AO/TPO
6. Non-Allowance of Adjustments to Comparables
7. Interest under Section 234B
8. Interest under Section 234D
9. Initiation of Penalty Proceedings
10. Relief

Detailed Analysis:

1. Legality of Assessment and Reference to TPO:
The assessee contended that the assessment order under section 143(3) and the order by CIT(A) under section 250 were flawed. The CIT(A) erred in determining the arithmetical mean of the arm’s length net cost plus margin at 35.895% and a transfer pricing adjustment of ?2,08,50,103. The CIT(A) also misinterpreted the phrase “having regard to” in sections 92 and 92CA(4) and confirmed the amendment to section 92CA(4) by the Finance Act, 2007.

2. Determination of Arm's Length Price:
The CIT(A) erred in substituting the arm’s length price determined by the appellant and rejecting the value of international transactions recorded in the books. The assessee's international transactions were claimed to be at arm’s length with a PLI of 11.85% compared to the average PLI of 9.63% of selected comparables.

3. Fresh Comparable Search by TPO:
The CIT(A) upheld the TPO's fresh comparability analysis using non-contemporaneous data, which the assessee argued was conducted on conjectures and surmises. The TPO did not share the fresh comparability analysis at the time of assessment, and there was no demonstration that the appellant aimed to shift profits outside India by manipulating prices in international transactions.

4. Determination of ALP by TPO:
The AO/TPO benchmarked IT-enabled services transactions of the appellant with companies operating as full-fledged entrepreneurs without considering differences in functions, assets, and risks. The CIT(A) confirmed the comparability analysis without analyzing the functional and risk profile differences between the appellant and the comparables.

5. Use of Erroneous Data by AO/TPO:
The AO/TPO used non-contemporaneous data not available in the public domain during the appellant's transfer pricing study and did not apply multi-year data while computing margins of comparable companies.

6. Non-Allowance of Adjustments to Comparables:
The AO/TPO and CIT(A) did not allow appropriate adjustments under Rule 10B to account for differences in risk profiles between the appellant and comparable companies.

7. Interest under Section 234B:
The CIT(A) confirmed the AO's action of levying interest under section 234B of the Act.

8. Interest under Section 234D:
The CIT(A) upheld the AO's action of levying interest under section 234D of the Act.

9. Initiation of Penalty Proceedings:
The CIT(A) did not conclude that the initiation of penalty proceedings under section 271(1)(c) was unjustified.

10. Relief:
The appellant sought directions for relief arising from the above grounds and consequential relief. The appellant also requested the adjustment in relation to Transfer Pricing matters made by the AO/TPO and upheld by the CIT(A) to be deleted.

Tribunal's Findings:

1. 0% RPT Filter: The Tribunal found that a 0% RPT filter is impractical and applied a tolerance range of 15% RPT, deciding the issue partly in favor of the revenue.

2. Functional Comparability: The Tribunal examined each comparable objected by the assessee:
- Tricom India Limited: Excluded due to low employee cost and specialized services.
- Fortune Infotech Limited: Excluded as it owns proprietary software.
- Wipro BPO Solution Ltd.: Excluded due to high turnover and significant intangibles.
- Vishal Information Technology Ltd.: Excluded as it provides specialized services and outsources significant work.

3. Ultramarine & Pigments Limited: The Tribunal set aside the issue for re-examination by the TPO/AO due to lack of clarity on objections raised.

4. Spanco Telesystems & Solutions Ltd.: The Tribunal set aside the issue for re-examination by the TPO/AO to verify functional comparability.

5. Allsec Technologies Ltd.: The Tribunal directed the TPO/AO to examine the nature of expenses incurred for business expansion and decide on their allowability as operating or extraordinary.

6. Proviso to Section 92CA(2): The Tribunal clarified that the proviso is a tolerance range and not a standard deduction, directing the TPO/AO to consider this benefit.

Conclusion:
The appeals of the assessee and the revenue were partly allowed, with the Tribunal directing re-examination of certain issues by the TPO/AO and upholding the CIT(A)'s decision on others. The order was pronounced on June 5, 2017.

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