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2019 (1) TMI 1326 - AT - Income TaxTPA - international transactions entered into with its associated enterprises in respect of provision of IT enabled and marketing support services - Comparable selection - employees cost to sales ratio analysis - Held that - As directed in assessment year 2012-13 to verify the claim of the assessee whether in case employees cost to sales ratio was less than 25%, then both the concerns Ninestar Information Technologies Limited and Universal Print Systems Limited have to be excluded from final set of comparables. So far as Excel Infoways Ltd. is concerned, the Tribunal has held that same is not comparable on account of its fluctuation margins. With regard to Universal Print Systems Ltd., it also needs verification and in case it is less than 25% then the said concern is not be included in the final list of comparables. Thus we restore the matter for verification to the Assessing Officer to adjudicate this issue afresh after providing reasonable opportunity of hearing to the assessee. Thus, ground raised in appeal by assessee is allowed for statistical purposes.
Issues Involved:
1. Transfer pricing adjustment. 2. Not considering write back of provisions and foreign exchange gain as operating income. 3. Erroneous consideration of operating margin of certain companies. 4. Erroneous calculation of working capital adjustment. 5. Erroneous rejection of comparable companies. 6. Inclusion of functionally non-comparable companies. 7. Rejection of multiple year data of comparable companies. 8. Non-granting of risk adjustment. Detailed Analysis: Issue 1: Transfer Pricing Adjustment The learned Assessing Officer (AO) made an adjustment amounting to ?2,38,36,922/- to the value of international transactions entered into by the appellant with its associated enterprises in respect of provision of IT-enabled and marketing support services. The Tribunal did not delve into this issue specifically as the resolution of other issues rendered it academic. Issue 2: Write Back of Provisions and Foreign Exchange Gain - Write Back of Provisions (Ground No. 2.1): The AO did not implement the directions of the Dispute Resolution Panel (DRP) while computing the Profit Level Indicator (PLI) of the assessee by not considering the write back of earlier year's provisions of gratuity and leave entitlement as operating items. The Tribunal directed the AO/Transfer Pricing Officer (TPO) to verify the facts and treat the write back as operating income if the facts claimed by the assessee are correct. - Foreign Exchange Gain (Ground No. 2.2): The AO and DRP considered the foreign exchange gain as non-operating income. The Tribunal, following precedents, held that foreign exchange fluctuation gain should be considered as part of the operating income and allowed this ground of appeal. Issue 3: Operating Margin of Certain Companies The AO, pursuant to the direction of the DRP, considered the incorrect PLI of Excel Infoways Ltd and Microgenetics Systems Ltd. This issue was not specifically adjudicated as the resolution of other issues rendered it academic. Issue 4: Working Capital Adjustment The AO, pursuant to the directions of the DRP, incorrectly computed the working capital adjustment. This issue was not specifically adjudicated as the resolution of other issues rendered it academic. Issue 5: Rejection of Comparable Companies The AO, following the directions of the DRP, rejected certain functionally comparable companies selected by the appellant in its transfer pricing study report. This issue was not specifically adjudicated as the resolution of other issues rendered it academic. Issue 6: Inclusion of Functionally Non-Comparable Companies (Ground No. 6) The AO, following the directions of the DRP, included functionally non-comparable companies in the final set of comparable companies: - Excel Infoways Ltd.: The Tribunal noted that this company had fluctuating margins and had closed its ITES and BPO segment. It was held not comparable due to these factors and its low employee cost ratio. - Universal Print Systems Ltd.: The Tribunal directed the AO to verify the employee cost to sales ratio, and if found to be less than 25%, the company should be excluded from the final set of comparables. Issue 7: Rejection of Multiple Year Data The AO, following the directions of the DRP, rejected the multiple year data of the comparable companies. This issue was not specifically adjudicated as the resolution of other issues rendered it academic. Issue 8: Non-Granting of Risk Adjustment The AO, following the directions of the DRP, did not grant the market risk adjustment submitted by the appellant. This issue was not specifically adjudicated as the resolution of other issues rendered it academic. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, specifically directing the AO to verify and consider the write back of provisions as operating income and to include foreign exchange gain as part of operating income. It also directed the AO to exclude certain non-comparable companies from the final set of comparables after verification. The remaining grounds were rendered academic due to the resolution of these key issues.
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