2020 (11) TMI 611 - AT - Income Tax

TP Adjustment - assessee challenging that Additional Commissioner is not empowered to pass an order for determining the arm s-length price - HELD THAT - Assessee is not arguing that there is no authority from the board in favour of the learned transfer pricing officer i.e. the Additional Commissioner Of Income Tax who passed the order u/s 92CA (3) of the act. The challenge of the assessee is that that Additional Commissioner as a class of officers, are not included in the definition of the Transfer Pricing Officer u/s 92CA of the Act. The Joint Commissioner of Income Tax has been authorised to pass an order u/s 92CA of the Act. The Joint Commissioner has been defined u/s 2 (28C) of the Act wherein the Joint Commissioner means a person appointed to be a Joint Commissioner Of Income Tax Or An Additional Commissioner Of Income Tax Under subsection (1) of Section 117 of the Act. Therefore the definition of the Joint Commissioner includes the Additional Commissioner also. In view of this, additional ground raised by the assessee does not have any merit. Hence dismissed. Comparability analysis - selection of comparable - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected. Extraordinary events during the year in the comparable company s financial statements, which has impacted its profitability margins adversely need to be seen. When the comparable company is taken as good comparable, only requirement is to seen the functional operations of the standalone balance sheet. There are various issues which are mentioned in the management discussion and analysis of the consolidated accounts of the comparable company which are not at all relevant for the comparability analysis as it does not reflect in the annual accounts of the comparable company on standalone basis. Even otherwise, the revenue streams of the comparable also do not show that it earns any revenue from its LPO business or KPO business.- Accentia technologies Ltd, in absence of any other argument by the learned authorized representative, is held to be comparable and action of the learned transfer pricing officer and learned dispute resolution panel by including the above comparable company in the comparability analysis is upheld. Rejection of entities on account of huge turnover - exclude I gate global Ltd., Infosys BPO Ltd and TCS E Serve Limited from the comparability analysis. Comparable has different financial year - Though R Systems International Ltd follows calendar year as its accounting year, its financial for the financial year can be recast by considering its quarterly financial results. Several coordinate benches have taken this view therefore, we also direct the assessee to reconstruct the financial results of this comparable by producing credible information with respect to eliminating and includible quarter before the learned transfer-pricing officer.Ld TPO is directed to examine the same and if found in order, include this comparable in the comparability analysis.

Summary

Issues Involved:
1. Legality of the reference made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO).
2. Appropriateness of the upward Transfer Pricing (TP) adjustment.
3. Acceptance of the economic analysis and comparables selected by the assessee.
4. Use of multiple-year data versus single-year data for determining the Arm's Length Price (ALP).
5. Rejection of the comparables selected by the assessee and selection of new comparables by the TPO.
6. Non-provision of appropriate economic adjustments for differences in risk profiles.
7. Denial of the 5% range benefit under Section 92C(2) of the Income Tax Act.
8. Charging of interest under Section 234B of the Act.
9. Jurisdictional validity of the TPO's order.

Issue-wise Detailed Analysis:

1. Legality of the Reference to TPO:
The assessee contended that the reference made by the AO to the TPO was void ab initio and violated the principle of natural justice as the AO failed to provide a copy of the approval granted by the Commissioner of Income Tax. However, the Tribunal found no merit in this argument and dismissed the additional ground raised by the assessee, stating that the definition of the Joint Commissioner includes the Additional Commissioner under Section 2(28C) of the Act.

2. Upward TP Adjustment:
The assessee challenged the upward TP adjustment of ?32,241,526 made by the TPO, arguing that the transactions were at arm's length. The TPO had determined the ALP using single-year data and selected new comparables, which led to the adjustment. The Tribunal upheld the TPO's adjustment, noting that the TPO's selection of comparables was based on a detailed analysis.

3. Acceptance of Economic Analysis and Comparables:
The assessee argued that the TPO/DRP erred in not accepting its economic analysis and comparables. The Tribunal examined the comparables selected by the TPO and the assessee and found that the TPO's selection was justified. The Tribunal upheld the inclusion of Accentia Technologies Ltd but directed the exclusion of I Gate Global Ltd, Infosys BPO Ltd, and TCS E-Serve Ltd due to their significantly higher turnovers compared to the assessee.

4. Use of Multiple-Year Data:
The assessee contended that the TPO erred in ignoring the provisions of Rule 10B(4) of the Income Tax Rules, which allows the use of multiple-year data. The Tribunal did not specifically address this issue, focusing instead on the comparability analysis and the selection of comparables.

5. Rejection and Selection of Comparables:
The Tribunal upheld the TPO's rejection of certain comparables selected by the assessee and the inclusion of new comparables. However, it directed the TPO to include R Systems International Ltd in the comparability analysis, provided the financial results could be reconstructed credibly.

6. Economic Adjustments for Risk Profiles:
The assessee argued that the TPO/DRP failed to provide appropriate economic adjustments for differences in risk profiles. The Tribunal did not specifically address this issue in detail but focused on the comparability analysis.

7. Benefit of 5% Range:
The assessee contended that it was not allowed the benefit of the 5% range as provided under the proviso of Section 92C(2) of the Act. The Tribunal did not specifically address this issue.

8. Charging of Interest under Section 234B:
The assessee argued against the charging of interest under Section 234B of the Act. The Tribunal did not specifically address this issue.

9. Jurisdictional Validity of TPO's Order:
The assessee raised an additional ground challenging the jurisdictional validity of the TPO's order, arguing that the Additional Commissioner was not authorized to act as TPO. The Tribunal dismissed this ground, stating that the definition of the Joint Commissioner includes the Additional Commissioner.

Conclusion:
The appeal of the assessee was partly allowed. The Tribunal directed the exclusion of I Gate Global Ltd, Infosys BPO Ltd, and TCS E-Serve Ltd from the comparability analysis due to their significantly higher turnovers. It also directed the inclusion of R Systems International Ltd, provided the financial results could be reconstructed credibly. Other grounds raised by the assessee were dismissed or not specifically addressed. The Tribunal upheld the TPO's adjustment and the selection of comparables based on a detailed analysis.