2019 (1) TMI 1136 - AT - Income Tax

TPA - comparable selection criteria - functional similarity - Held that - Held that - Assessee is engaged in the business of Software Development and product support services, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Transfer Pricing Matters
2. Corporate Tax Matters

Detailed Analysis:

Transfer Pricing Matters:
1. Functional Profile Misapprehension:
- The appellant argued that the DRP and TPO/AO erred by not appreciating the correct functional profile of the appellant, concluding erroneously that the appellant is engaged in providing high-end software services.

2. Violation of Natural Justice:
- The appellant contended that the DRP and TPO/AO violated principles of natural justice by not considering detailed analysis and technical arguments submitted in response to the show cause issued by the TPO and objections filed with the DRP.

3. Invalid Reference and Profit Shifting:
- The appellant claimed the transfer pricing adjustment of ?2,14,48,19,158 was based on an invalid reference made by the AO without complying with statutory requirements. Additionally, the appellant's AE being chargeable to tax at a higher rate in the US negates the possibility of profit shifting.

4. Economic Analysis and Arm’s Length Price (ALP):
- The appellant argued that the DRP and TPO/AO erred in not accepting the economic analysis undertaken by the appellant, conducting a fresh economic analysis, and holding that the transactions were not at arm’s length.

5. Data Usage and Comparability Analysis:
- The appellant contended that the DRP and TPO/AO erred by using single-year data instead of multiple-year data and rejecting the data used by the appellant. They also erred in rejecting certain comparables identified by the appellant and performing a fresh comparability analysis using arbitrary filters.

6. Non-operating Items and Super Normal Profits:
- The appellant argued that the DRP and TPO/AO erred by treating certain items as non-operating while computing operating profitability and selecting companies with supernormal profits as comparables.

7. Risk Profile and Adjustments:
- The appellant claimed that the DRP and TPO/AO failed to appreciate that the appellant operates as a risk-free service provider, with all risks borne by the foreign AE, entitling the appellant to suitable adjustments.

8. Statutory Onus:
- The appellant argued that the DRP erred in confirming that the TPO discharged his statutory onus by establishing conditions specified in Section 92C(3) before disregarding the arm’s length price determined by the appellant.

Corporate Tax Matters:
1. Taxation of Rental Income:
- The appellant contended that the AO and DRP erred by taxing gross composite rental income under ‘Income from House Property’ instead of ‘Income from Other Sources’, disregarding the provisions of Section 56 and relevant jurisdictional High Court judgments.

2. Depreciation and Expenses:
- The appellant argued that the AO and DRP erred in not allowing proportionate tax depreciation and expenses under Section 57.

3. Res Judicata:
- The appellant contended that the AO and DRP erred in applying res judicata, which is not applicable in income tax proceedings, and failed to correct mistakes from earlier years.

4. Depreciation on Unrealized Foreign Exchange Loss:
- The appellant argued that the AO and DRP erred in not allowing depreciation on unrealized foreign exchange loss on capital creditors.

5. Material Adjustments and Penalty:
- The appellant contended that necessary adjustments would be required in computing total income, tax, and interest upon disposal of the appeal and that the AO erred in initiating penalty under Section 271(1)(c).

Tribunal's Findings:

Transfer Pricing Matters:
1. Exclusion of Comparables:
- The Tribunal excluded Infosys Technology Ltd. and Persistent Systems Ltd. from the list of comparables, following the precedent set in the appellant’s case for A.Y. 2011-12, as these companies were engaged in activities not comparable to the appellant.

2. Inclusion of Comparables:
- The Tribunal directed the TPO to examine the PLI of Mindtree Ltd. from IT services and Product engineering services and include it as a comparable. However, R.S. Software (India) Ltd., Cigniti Technologies Ltd., and Sasken Communication Technologies Ltd. were rightly excluded as they were involved in R&D activities, unlike the appellant.

Corporate Tax Matters:
1. Remand for Reconsideration:
- The Tribunal remanded the corporate tax issues to the AO for reconsideration, directing the AO to consider the decisions in Jay Metal Industries Pvt. Ltd. v. CIT and Asit C Mehta v. DCIT, and verify the facts of the appellant company.

2. Consequential Issues:
- The Tribunal noted that other grounds raised by the appellant, including the issue of MAT credit and TDS credit, were either consequential or not pressed, thus requiring no further adjudication.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the AO to reconsider certain corporate tax matters and the TPO to re-examine the inclusion/exclusion of specific comparables in the transfer pricing analysis.