2018 (2) TMI 1147 - AT - Income Tax

TPA - comparable selection criteria - MAP selection - Held that - Where part of the same transaction both in IT segment as well as ITEs Segment margins of 15.70% and 14.68% have been accepted by the assessee and by the revenue authorities. Now for the same nature of transactions it would be very difficult to accept assessee s margin of 13% or that of the TPO who has applied higher margin. Accordingly, in wake of MAP settlement, we hold that for the Software Development Services (IT service) the profit margin for the assessment year 2007-08 should be taken as 15.70%; and for the 2008-09 it should be taken as 15.91%; whereas, in the ITeS segment the profit margin for the assessment year 2007-08 should be taken as 14.68%; and for AY 2008-09 it should be taken as 14.89%. Thus, we direct the TPO to make the adjustment after taking into the net profit margin as adopted/ agreed in the MAP to benchmark the transaction of non US AE also. In view of the above, the grounds relating to transfer pricing adjustment are treated as partly allowed. Non granting of TDS at source - Held that - We direct the AO to verify the same and allow in accordance with law.

Issues Involved:
1. Validity of the assessment order.
2. Rejection of Transfer Pricing (TP) documentation.
3. Transfer pricing adjustments for Software Development Services and IT enabled services.
4. Comparability analysis and selection of comparables.
5. Working capital adjustment.
6. Benefit of lower range of +/-5% in arm’s length price determination.
7. Consideration of returned income.
8. Credit for tax deducted at source, advance tax, and self-assessment tax.
9. Levying of interest under section 234B.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contended that the assessment order was "bad in law, contrary to facts and circumstances of the case and liable to be quashed." However, this issue was not elaborately discussed in the judgment.

2. Rejection of Transfer Pricing (TP) Documentation:
The AO and the Dispute Resolution Panel (DRP) upheld the rejection of the assessee's TP documentation by the Transfer Pricing Officer (TPO). The TPO rejected most of the comparables selected by the assessee and conducted his own search, leading to significant adjustments.

3. Transfer Pricing Adjustments:
The primary issue was the transfer pricing adjustments for services rendered to non-USA Associated Enterprises (AEs). The adjustments were made for:
- Software Development Services to Fidelity Investments Management (HK) Ltd., Hong Kong, and KVH Systems Solutions Ltd., Bermuda.
- Information Technology enabled services to Fidelity Investments Management (HK) Ltd., Hong Kong, and KVH Co. Ltd., Japan.
The TPO made adjustments amounting to ?121,107,610 for software services and ?164,322,789 for IT enabled services, holding that these transactions did not satisfy the arm’s length principle.

4. Comparability Analysis and Selection of Comparables:
The assessee contested the inclusion of certain comparables selected by the TPO. For the IT segment, the contested comparables included Infosys Technologies Ltd., Persistent Systems Ltd., and Wipro Ltd., among others. For the ITeS segment, comparables like Accentia Technologies Ltd., Infosys BPO Ltd., and Eclerx Services Ltd. were contested. The assessee argued that these comparables were functionally dissimilar, involved mergers, or had significant intangibles, making them unsuitable for comparison.

5. Working Capital Adjustment:
The assessee argued that the working capital adjustment done by the TPO was incorrect. The Tribunal directed the TPO to correctly compute the working capital adjustment for the software development services segment.

6. Benefit of Lower Range of +/-5%:
The assessee sought the benefit of the lower range of +/-5% in determining the arm’s length price. This ground was not pressed during the proceedings and hence not adjudicated.

7. Consideration of Returned Income:
The AO considered the returned income as ?8,82,21,970 instead of ?8,75,60,355 as per the revised return filed by the assessee. This discrepancy was noted but not elaborately discussed in the judgment.

8. Credit for Tax Deducted at Source, Advance Tax, and Self-Assessment Tax:
The AO did not grant credit for tax deducted at source amounting to ?1,70,80,955, advance tax of ?83,00,000, and self-assessment tax of ?53,36,223. The Tribunal directed the AO to verify and allow the credits in accordance with the law.

9. Levying of Interest under Section 234B:
The AO levied interest of ?18,87,61,258 under section 234B. The Tribunal noted that this ground was consequential and did not require separate adjudication.

Conclusion:
The Tribunal directed that for Software Development Services, the profit margin should be 15.70% for AY 2007-08 and 15.91% for AY 2008-09. For IT enabled services, the profit margin should be 14.68% for AY 2007-08 and 14.89% for AY 2008-09. The TPO was instructed to make adjustments based on these margins. The appeals were partly allowed, and the AO was directed to verify and allow the credits for tax deducted at source, advance tax, and self-assessment tax.

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