2018 (4) TMI 32 - AT - Income Tax

TPA - comparables selection criteria - Held that - Assessee was engaged in the business of software development and exports, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Economic adjustment on account of risk differences - Held that - We direct the Assessing Officer to allow risk adjustment in turn relying on the proposition laid down by the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (2008 (9) TMI 420 - ITAT DELHI-H) wherein it was allowed @ 20%, and compute the TP adjustment, if any, in the hands of assessee. The ground of appeal Nos.3 to 8 are thus, allowed.

Issues Involved:
1. Transfer pricing adjustment.
2. Use of single year data.
3. Use of additional filters/modification of filters.
4. Comparison with companies having supernormal profits.
5. Rejection of certain comparable companies.
6. Determining inappropriate companies as comparables.
7. Adopting inappropriate approach of selection of companies as comparables.
8. Adjustment for risk differences.
9. Applicability of 5 percent variation from mean of comparable margins.
10. Eligibility under section 10A of the Act.
11. Penalty proceedings and levy of interest.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contested the transfer pricing adjustment made by the TPO. The TPO had rejected the analysis undertaken by the assessee to determine the arm's length price for its international transactions related to software development services. The TPO selected a different set of comparables, which led to an upward adjustment of ?7,64,94,655/- in the assessee's hands.

2. Use of Single Year Data:
This issue was not pressed by the assessee and hence dismissed.

3. Use of Additional Filters/Modification of Filters:
The assessee argued against the additional filters introduced by the TPO and the modification of filters adopted by the assessee. The TPO's final set of comparables included companies like Bodhtree Consulting Ltd., E-infochip Ltd., eZest Solutions Ltd., Helios & Matheson Information Technology Ltd., and KALS Information Systems Ltd. The assessee contended that some of these companies were functionally different and should not be included as comparables.

4. Comparison with Companies Having Supernormal Profits:
The TPO had included companies with supernormal profits as comparables. The assessee, being a captive service provider, argued that such companies should not be used for comparison.

5. Rejection of Certain Comparable Companies:
The assessee pointed out that companies like Thinksoft Global Services Ltd., CG Vak Software & Exports Ltd., and SIP Technologies & Exports Ltd. should be included in the final list of comparables. The Tribunal agreed with the assessee and directed the inclusion of these companies.

6. Determining Inappropriate Companies as Comparables:
The Tribunal found that companies like Bodhtree Consulting Ltd., E-infochip Ltd., eZest Solutions Ltd., Helios & Matheson Information Technology Ltd., and KALS Information Systems Ltd. were not functionally comparable to the assessee and directed their exclusion from the final set of comparables.

7. Adopting Inappropriate Approach of Selection of Companies as Comparables:
The Tribunal upheld the assessee's contention that the TPO had adopted an inappropriate approach in selecting certain additional companies as comparables. The Tribunal directed the exclusion of companies like Bodhtree Consulting Ltd., E-infochip Ltd., eZest Solutions Ltd., Helios & Matheson Information Technology Ltd., and KALS Information Systems Ltd. from the final set of comparables.

8. Adjustment for Risk Differences:
The Tribunal directed the Assessing Officer to allow risk adjustment for differences between the functional and risk profile of the comparable companies and the assessee. The Tribunal relied on the decision in DCIT Vs. Applied Micro Circuits India Pvt. Ltd., which applied the principle laid down by the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd.

9. Applicability of 5 Percent Variation from Mean of Comparable Margins:
The Tribunal directed the Assessing Officer to verify the assessee's claim that no further adjustment would be required as the margins shown by the assessee would be within the +/-5% range of the mean margins of comparables.

10. Eligibility under Section 10A of the Act:
This issue was not pressed by the assessee and hence dismissed.

11. Penalty Proceedings and Levy of Interest:
The Tribunal found this issue to be premature and hence dismissed it.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the Assessing Officer to re-compute the margins of comparables after allowing risk adjustment and to verify the assessee's claim regarding the +/-5% range. The Tribunal also directed the exclusion of certain companies from the final set of comparables and the inclusion of others, as per the assessee's contentions.

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