2018 (3) TMI 940 - AT - Income Tax

Transfer pricing adjustment - TPO rejected the approach adopted by assessee i.e. segmental profitability of AE segment and benchmarked the international transactions by considering the entity level profitability of assessee - assessee had applied man-hour basis for preparing segmental details of AE segment - Held that - The assessee has filed on record the copies of orders of TPO / Assessing Officer in this regard. In the totality of the above said facts and circumstances, we hold that while benchmarking international transactions of provision of services to Tieto Group companies by the assessee, the segmental details of AE segment need to be applied and not the results at entity level are to be applied. The assessee had applied a systematic manner of allocating the expenses to the AE segment i.e. on the basis of man-hour which is accepted method of allocation of cost. The same has also been applied under APA agreement signed by the assessee. Further, the assessee has also explained in detail the allocation of other costs either on actual basis or turnover basis and the same cannot be rejected. Accordingly, we reverse the order of Assessing Officer / TPO in applying the margins at entity level and direct to accept margins shown in segmental profitability of AE segment by the assessee. The case of assessee is that in case the segmental profitability of AE segment is applied, then the margins shown by the assessee are within /- 5% range of mean margins of comparables as worked out by the TPO and no adjustment needs to be made on account of international transactions undertaken by the assessee. Accordingly, we hold so. Comparability analysis - Rejection of concern on turnover basis - Held that - Though the ground of appeal raised by the Revenue is vague in this regard but the perusal of order of DRP shows that it had directed exclusion of Infosys Technologies Ltd. on turnover basis. We find that the issue is covered by the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Pentair Water India Pvt. Ltd. (2016 (5) TMI 137 - BOMBAY HIGH COURT ), wherein it has been held that the concern Infosys Technologies Ltd. having high turnover and having intangibles is not comparable to the concern providing software services to its associated enterprises. Applying the said ratio to the facts of present case, we uphold the order of DRP in excluding Infosys Technologies Ltd. from final set of comparables.

Summary

Issues Involved:
1. Set off of brought forward loss.
2. Consideration of business loss.
3. Transfer pricing adjustment.
4. Disregarding segmental information.
5. Selection of comparables.
6. Rejection of comparables.
7. Application of additional quantitative filters.
8. Computation of operating margin.
9. Allowance of economic adjustments.
10. Consideration of single year financial data.
11. Computation of transfer pricing adjustment on entity level turnover.
12. Correct computation of transfer pricing adjustment.

Detailed Analysis:

1. Set off of brought forward loss:
The assessee did not press this ground during the hearing, leading to its dismissal as not pressed.

2. Consideration of business loss:
Similar to the first issue, this ground was not pressed by the assessee and was dismissed as not pressed.

3. Transfer pricing adjustment:
The assessee's appeal against the transfer pricing adjustment of ?9,61,57,054 was not pressed, leading to its dismissal as not pressed.

4. Disregarding segmental information:
The main contention was the transfer pricing adjustment made by disregarding segmental information. The assessee argued that segmental profitability should be considered instead of entity-level margins. The Tribunal agreed, noting that the segmental details were systematically prepared and accepted in APA proceedings. It directed the Assessing Officer to accept the segmental profitability of the AE segment, which showed margins within the +/- 5% range of comparables.

5. Selection of comparables:
The Tribunal addressed the inclusion/exclusion of comparables, focusing on Infosys Technologies Ltd. The DRP had excluded Infosys based on high turnover, which the Tribunal upheld, referencing the Hon’ble Bombay High Court's decision in CIT Vs. Pentair Water India Pvt. Ltd., affirming that Infosys with high turnover and intangibles is not comparable to the assessee's software services.

6. Rejection of comparables:
The Tribunal did not delve into the rejection of other comparables, given the assessee's concession that if segmental details were accepted, other grounds would become academic.

7. Application of additional quantitative filters:
This issue was not specifically addressed in the Tribunal's final order, as the primary focus was on segmental profitability.

8. Computation of operating margin:
The Tribunal directed that the operating margins should be computed based on segmental details rather than entity-level results, aligning with the assessee's systematic cost allocation method.

9. Allowance of economic adjustments:
This issue was not separately addressed, as the Tribunal's acceptance of segmental details rendered other contentions academic.

10. Consideration of single year financial data:
The Tribunal did not provide a specific ruling on this issue, focusing instead on the broader acceptance of segmental profitability.

11. Computation of transfer pricing adjustment on entity level turnover:
The Tribunal rejected the computation of transfer pricing adjustment based on entity-level turnover, directing the use of segmental details.

12. Correct computation of transfer pricing adjustment:
The Tribunal emphasized the need for accurate computation based on segmental profitability, which showed the assessee's margins within the acceptable range of comparables.

Conclusion:
The Tribunal partly allowed the assessee's appeal by directing the use of segmental profitability for transfer pricing adjustments and dismissed the Revenue's appeal, upholding the exclusion of Infosys Technologies Ltd. from comparables. The decision emphasized systematic cost allocation and the acceptance of segmental details in benchmarking international transactions.