2020 (6) TMI 154 - AT - Income Tax

TP Adjustment - selection of comparable - HELD THAT - We have gone through the T.P order and also DRP s directions and have also considered the argument of the learned Counsel for the assessee that most of these companies are not comparable to the assessee in the light of the various decisions of the Tribunal in similar cases. We find that the assessee has returned a margin of 9.02% as against the average margin of the final comparables adopted by the TPO at 22.69%. It is the case of the assessee that the decisions of the ITAT on various comparables though cited by the assessee, have not been considered by the authorities below. Since both the parties have tentatively agreed for a remand of the issue to the TPO, we deem it fit and proper to set aside the issues to the TPO for denovo consideration. We make it clear that the TPO shall examine whether the assessee s case is similar to the cases on which he has placed reliance upon and whether thedistinguishable factors for exclusion of the comparables in those cases also existed in the assessee s case. If it is found that the assessee s case is similar and the distinguishing factors exist, then the TPO shall exclude such companies from the final list of comparables and the TPO shall be free to adopt any other comparable companies if they are so comparable to the assessee. Provisions for bad debts being considered as non-operating expenditure in computing the margin of only 3 companies - HELD THAT - We direct the AO/TPO to reconsider the same and bring out the reasons for considering the same as nonoperating in the case of these three companies only, because the AO/TPO have to follow a uniform and consistent manner in adopting a filter and cannot deviate from the same in respect of some companies. Foreign exchange loss - Whether an extraordinary item for the year and hence adjustment should be provided for the same? - HELD THAT - We are not convinced that the foreign exchange loss is an extra-ordinary item in the year to the assessee alone. Similar foreign exchange loss would have been incurred by the comparable companies as well and therefore, it is not a distinguishing factor to be considered for arriving at the ALP of the international transaction.

Summary

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

Detailed Analysis

Transfer Pricing Matters

Rejection of Transfer Pricing Documentation:
The assessee's transfer pricing documentation was rejected by the AO/TPO, leading to an adjustment of ?3,22,58,649 for international transactions related to software services provided to its AE. The Tribunal noted that the TPO conducted a fresh economic analysis during the assessment proceedings.

Use of Contemporaneous Data and Multiple Year Data:
The TPO used single-year data (FY 2009-10) of comparable companies, rejecting the use of multiple-year data. The Tribunal acknowledged this issue but did not provide a specific ruling, indicating a need for uniformity and consistency in adopting filters.

Use of Additional Filters:
The TPO applied additional filters such as diminishing revenues, persistent losses, different financial year-end, and export sales less than 75% of total sales. The Tribunal directed the TPO to re-examine the use of these filters uniformly across all comparables.

Selection of Comparables:
The selection of comparable companies by the TPO was contested. The Tribunal noted that the TPO selected 19 comparables, including companies initially chosen by the assessee. The Tribunal directed the TPO to re-evaluate the comparability of these companies, considering the decisions of the ITAT in similar cases.

Rejection of Comparables:
The Tribunal observed that the TPO rejected certain comparables without objective analysis. The Tribunal instructed the TPO to reassess these rejections, ensuring a consistent approach.

Error in Margin Computation:
The Tribunal directed the AO/TPO to reconsider the computation of net margins, especially regarding the treatment of provisions for bad debts and advertisement expenses. The Tribunal emphasized the need for a consistent approach in margin computation.

Foreign Exchange Loss:
The Tribunal was not convinced that the foreign exchange loss of ?1,30,72,615 was an extraordinary item unique to the assessee. The Tribunal noted that similar losses would likely have been incurred by comparable companies, thus not warranting a separate adjustment.

Negative Working Capital Adjustment:
The Tribunal directed the AO/TPO to reconsider the negative working capital adjustment, noting that the assessee claimed not to bear any working capital risks.

Adjustment for Risk Differences:
The Tribunal instructed the AO/TPO to re-evaluate the net margins of comparable companies, taking into account functional and risk differences as per Rule 10B(1)(e).

Corporate Tax Issues

Disallowance of Expenditure:
The AO disallowed expenditure incurred towards maintenance and replacement of computer parts and software licenses, considering it as capital expenditure. The Tribunal directed the AO to reconsider this disallowance in accordance with the law.

Non-Grant of TDS Credit:
The assessee claimed a shortfall in TDS credit of ?4,443. The Tribunal directed the AO to grant the correct TDS credit as per the law.

Addition of Refund to Current Year Tax Demand:
The AO added a refund of ?31,82,740 to the current year's tax demand, which was adjusted against other years' tax demands where no tax demand was outstanding. The Tribunal directed the AO to correct this adjustment.

Conclusion
The Tribunal remanded the issues back to the TPO for de novo consideration, emphasizing the need for a consistent and objective approach in transfer pricing analysis. The Tribunal also directed the AO to reconsider corporate tax issues in accordance with the law, providing consequential relief to the assessee where applicable. Both appeals were partly allowed for statistical purposes.