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2019 (7) TMI 655 - AT - Income TaxTP adjustment - management and administrative cost allocation by AE - argument that issue stands settled by APAs made u/s 92CC - HELD THAT - In assessee s own case for assessment year 2008-09, we find that in 2018 (11) TMI 264 - ITAT PUNE the issue has been deliberated upon but is not being reproduced for the sake of brevity. Following the same parity of reasoning, we remit this issue back to the file of AO to examine the facts and decide the issue of applicability of APAs to assessee s case for the year under consideration in principle. TP adjustment for rendering of supply base development and other back office services under the Business Support Services (BSS) - HELD THAT - Objection of authorities below that the assessee itself had included the said concern as comparable in its TP report, but during TP proceedings objected to its inclusion. We find that the issue now stands covered by the dictate of Jurisdictional High Court in CIT Vs. Tata Power Solar Systems Limited 2016 (12) TMI 1600 - BOMBAY HIGH COURT where it has been held that a concern can be excluded though it was originally selected by assessee as comparable, where the assessee establishes that it was not functionally comparable. Hence, we direct the Assessing Officer to exclude Saket Projects Limited from the final list of comparables for BSS segment of assessee. TSR Darashaw Limited stands covered by order of Tribunal in assessment year 2008-09, wherein the said concern was excluded being not functionally comparable to the assessee. Following the same parity of reasoning, we direct that the said concern be excluded. We find no merit in the observations of TPO that a concern which was selected by assessee in its TP study in earlier years cannot be excluded in this year, since the finding of TPO has been reversed by Tribunal in assessment year 2008-09. Saket Projects Limited and TSR Darashaw Limited are excluded from final list of comparables, then the margins in BSS segment would be within /- 5% range and there is no need to adjudicate the issue of exclusion of ICRA Online Limited and risk adjustment as they would become academic. In view thereof, we do not adjudicate other connected issues raised in BSS segment and direct the AO to exclude Saket Projects Limited and TSR Darashaw Limited in the said BSS segment and work out the arm's length price of international transactions and if the same is within /- 5% range, then no adjustment is to be made in the hands of assessee. Adjustment pertaining to Application Engineering Services Segment - Comparable selection - HELD THAT - Vardaan Projects Ltd. was rendering services of financial structuring, financial analysis, financial arrangements, etc. and was also engaged in asset valuation for compliance with IFRS and others. In such case, where the segmental details were not available, then the said company could not be held to be functionally comparable to the assessee, though the entire operating revenue earned by assessee was reported under the head Income from Engineering Consultancy Services . Accordingly, we hold that Vardaan Projects Ltd. needs to be excluded from final list of comparables in the hands of assessee in Application Engineering Services segment. Rejection of CG VAK - assessee was providing services which comprised of customization of design of turbochargers to particular vehicle models of different customers, such design services fall within ambit of Information Technology Enabled Services. M/s. CG VAK was also engaged in providing similar ITES services though in medical field and was selected as comparable to the assessee by TPO in assessment year 2008-09. Assessee has drawn our attention to the functional analysis of the said concern and has pointed out that there were no changes in functionality during the year when compared with earlier year. In such circumstances, we find no merit in the order of TPO in excluding CG VAK from the final list of comparables. Hence, we direct him to include the same for benchmarking transactions in ITES segment. Additional companies were identified based on updated data on the basis of revised filters applied by TPO and the same should have been included in final list of comparables - HELD THAT - The perusal of order of TPO / DRP reflects that Agrima Consultants International Ltd. was proposed to be included in final list of comparables. The objection of assessee before both the authorities was on that ground of supernormal profitability. But this contention of assessee was not accepted by any of the authorities. However, before us, AR for the assessee has pointed out that the financials of Agrima Consultants International Ltd. which were available in public domain covers period only upto 31.12.2008. Since the said concern was unlisted company, data for the three months was not available in public domain. We find that the Hon ble Bombay High Court in CIT Vs. PTC Software (I) (P) Ltd. 2018 (4) TMI 1002 - BOMBAY HIGH COURT have held that provisions of Rule 10B(4) of the Income Tax Rules are clear in as much as it obliges that data to be used for comparability analysis should be of the same financial year in which international transactions were entered into by tested parties. Applying the said principle, we hold that in case the data for same financial year as followed by assessee is not available in public domain, then the margins of said concern could not be applied to benchmark the international transactions of said segment. In this regard, as this issue was not raised before any of the authorities below, this needs verification. Hence, we remit this issue back to the file of Assessing Officer/TPO to carry out necessary verification and decide the issue. Cosmic Global Ltd. is to be excluded from final list of comparables. We are not addressing the issue of supernormal margins as we have directed exclusion of Cosmic Global Ltd. otherwise. ICRA Online Ltd. being KPO division could not be held to be functionally comparable during the year, to the assessee and hence, the same is directed to be excluded. Microgenetics - assessee pointed out that in case updated margins are to be applied, then the said concern would be included in the final list of comparables. The assessee had not included the said concern in TP study report. After updated margins were applied by the TPO, no such concern was selected and even before the DRP, AR for the assessee was not able to point out the para in which the said issue was raised. However, in the written note, it relied on DRP directions for assessment year 2011-12. We find no merit in the plea of assessee and the issue of inclusion of Microgenetics is decided against assessee. Grant of risk adjustment in the Application Engineering Services - HELD THAT - Ground of appeal relates to both the segments i.e. BSS segment and AE segment; but in respect of BSS segment, the learned Authorized Representative for the assessee pointed out that the said issue be not decided as its margins were within /- 5% range. However, in respect of AE segment, it was pointed out that the ratio laid down in the case of Sony India Pvt. Ltd. 2008 (9) TMI 420 - ITAT DELHI-H be applied to allow 20% as it was not possible to quantify the risk adjustment. It was also pointed out that the said directions have been given in assessee s own case for assessment year 2008-09. Accordingly, we hold that risk adjustment as directed in the case of Sony India Pvt. Ltd. (supra) should be allowed on operating margins of comparables in the provision of Application Engineering Services segment.
Issues Involved:
1. Transfer pricing adjustment for international transactions. 2. Treatment of Arm's Length Price (ALP) for administrative and managerial services. 3. Application of Comparable Uncontrolled Price (CUP) method vs. Transactional Net Margin Method (TNMM). 4. Inclusion and exclusion of certain companies in the set of comparable companies for Business Support Services (BSS) and Application Engineering Services (AES) segments. 5. Consideration of contemporaneous data. 6. Adjustment for risk differences. 7. Levy of interest under section 234B. 8. Initiation of penalty proceedings under section 271(1)(c). Detailed Analysis: 1. Transfer Pricing Adjustment for International Transactions: The assessee challenged the transfer pricing adjustment of ?498.73 Lacs made by rejecting the analysis undertaken by HTI to determine the arm's length price for its international transactions. The Tribunal remitted this issue back to the Assessing Officer (AO) to apply legal propositions and decide the issue in light of Advance Pricing Agreements (APAs) made under section 92CC of the Income-tax Act. 2. Treatment of Arm's Length Price (ALP) for Administrative and Managerial Services: The Tribunal noted that the issue of treating the ALP of costs allocated by AEs for administrative and managerial services as NIL was settled by APAs in later years. The Tribunal remitted the issue back to the AO to examine the facts and decide the applicability of APAs to the assessee's case for the year under consideration. 3. Application of Comparable Uncontrolled Price (CUP) Method vs. Transactional Net Margin Method (TNMM): The Tribunal directed the AO to follow the same parity of reasoning as in the assessee's own case for the assessment year 2008-09, where the issue was set aside to the AO to apply legal propositions and decide the issue in light of APAs. 4. Inclusion and Exclusion of Certain Companies in the Set of Comparable Companies: - Business Support Services (BSS) Segment: - Saket Projects Limited: The Tribunal directed the exclusion of Saket Projects Limited due to functional differences and fluctuating margins. - TSR Darashaw Limited: The Tribunal directed the exclusion of TSR Darashaw Limited as it was not functionally comparable due to its engagement in software for payroll processing. - ICRA Online Limited: The Tribunal did not adjudicate the issue as the exclusion of Saket Projects Limited and TSR Darashaw Limited brought the margins within the acceptable range. - Application Engineering Services (AES) Segment: - Vardaan Projects Limited: The Tribunal directed the exclusion of Vardaan Projects Limited due to lack of segmental details and functional non-comparability. - CG VAK Software & Exports Ltd.: The Tribunal directed the inclusion of CG VAK as it was functionally comparable to the assessee. - Agrima Consultants International Ltd.: The Tribunal remitted the issue back to the AO for verification of financial year data availability. - Cosmic Global Ltd.: The Tribunal directed the exclusion of Cosmic Global Ltd. due to outsourcing major portions of its work. - Mahindra Consulting Engineers Ltd.: The Tribunal directed the AO to verify the accounting methods and exclude the concern if different methods were followed. 5. Consideration of Contemporaneous Data: The Tribunal directed the AO to verify and consider contemporaneous data for determining the arm's length price. 6. Adjustment for Risk Differences: The Tribunal directed the AO to allow risk adjustment as per the ratio laid down in the case of Sony India Pvt. Ltd., allowing 20% as it was not possible to quantify the risk adjustment. 7. Levy of Interest Under Section 234B: The Tribunal dismissed the issue as consequential. 8. Initiation of Penalty Proceedings Under Section 271(1)(c): The Tribunal dismissed the issue as premature. Conclusion: The Tribunal partly allowed the appeal in ITA No.377/PUN/2014 and allowed the appeal in ITA No.378/PUN/2014 for statistical purposes, directing the AO to re-examine and decide various issues in light of the Tribunal's directions and applicable APAs.
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