2020 (12) TMI 469 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - As regards exclusion of comparables, the assessee has demonstrated that Accentia Technologies Ltd. and Fortune Infotech Ltd. both are functionally dissimilar to assessee s ITeS Segment. In fact in Accentia Technologies Ltd. there is an influence to the pricing policy because of its possession of Brand Value/IPRs. Accentia Technologies Ltd. has also made acquisition/amalgamation which depicts that the company had plans to grow through tie-ups and acquisitions of other companies. As regards to Fortune InfoTech Ltd., there is a product development element which cannot be compared to the assessee s functioning. Therefore, both comparables selected by the TPO i.e. Accentia Technologies Ltd. and Fortune InfoTech Ltd. should be excluded. We direct the TPO to exclude these two companies from the final set of comparables. As regards inclusion of R Systems International Ltd., this comparable company appears to be functionally comparable with the assessee company. The only point which TPO raised is related to different Financial Year ending. This cannot be the sole reason for rejecting any comparable.Therefore, we direct the TPO to include this comparable i.e. R Systems International Ltd. Accentia Technologies Ltd. and ICRA Online Ltd. (seg.) both are functionally dissimilar to assessee s ITeS Segment. In fact in Accentia Technologies Ltd. there is an influence to the pricing policy because of its possession of Brand Value/IPRs. Accentia Technologies Ltd. has also made acquisition/amalgamation which depicts that the company had plans to grow through tie-ups and acquisitions of other companies. As regards to ICRA Online Ltd. (seg.), this company is functionally different and has three segment in which TPO has taken into account outsourced service segment which cannot be compared to the assessee s functioning. Therefore, both comparables selected by the TPO i.e. Accentia Technologies Ltd. and ICRA Online Ltd. (seg.) Ltd. should be excluded. We direct the TPO to exclude these two companies from the final set of comparables. Jindal Intellicom Ltd. the Ld. AR pointed out that incorrect margin was taken by the TPO and prima facie it appears that the margin taken by the TPO is not proper. Therefore, we direct the TPO to take appropriate margin for taking this comparable i.e. Jindal Intellicom Ltd. in final list of comparables. Direct the TPO to include this comparable i.e. Microgenetics Systems Ltd.

Issues Involved:

1. Adjustment to the arm’s length price (ALP) of international transactions.
2. Rejection of the Transfer Pricing (TP) documentation.
3. Selection and rejection of comparable companies.
4. Computation of employee cost filter.
5. Use of multiple year/prior year financial data.
6. Use of data available at the time of assessment proceedings.
7. Consideration of provision for bad and doubtful debts.
8. Determination of prime lending rate for working capital adjustment.
9. Risk adjustment for limited risk nature of services.
10. Benefit of range of +/- 5% as per Section 92C(2).
11. Negative working capital adjustment.
12. Export earning filter threshold.
13. Jurisdictional error in reference to the Transfer Pricing Officer (TPO).
14. Initiation of penalty under Section 271(1)(c).
15. Computation of interest under Section 270.

Detailed Analysis:

1. Adjustment to the Arm’s Length Price (ALP) of International Transactions:
The Tribunal reviewed the adjustments made by the TPO to the ALP of the appellant’s international transactions with its Associated Enterprises (AEs) related to Information Technology enabled Services (ITeS). The appellant argued that the adjustments were unjustified and that the TPO erred in rejecting the TP documentation and replacing it with a fresh comparability analysis.

2. Rejection of the Transfer Pricing (TP) Documentation:
The TPO rejected the TP documentation maintained by the appellant under Section 92C(3) of the Income-tax Act, 1961, claiming that the data used was not reliable or correct. The Tribunal noted that the TPO had applied additional/revised filters in determining the ALP, which led to the rejection of the appellant’s comparability analysis.

3. Selection and Rejection of Comparable Companies:
The Tribunal addressed the inclusion and exclusion of various comparable companies. The appellant contended that certain companies like Accentia Technologies Ltd. and Fortune Infotech Ltd. were functionally dissimilar to its ITeS segment and should be excluded. The Tribunal agreed and directed the TPO to exclude these companies. Conversely, the Tribunal directed the inclusion of R Systems International Ltd., noting that a different financial year ending should not be the sole reason for rejection.

4. Computation of Employee Cost Filter:
The appellant argued that the TPO erred in computing the employee cost filter, particularly by selecting Jeevan Scientific Technology Limited, which had an employee cost to sales ratio of 20.67%. This issue was not pressed further by the appellant.

5. Use of Multiple Year/Prior Year Financial Data:
The appellant contended that the TPO erred in not considering multiple year/prior year financial data of comparable companies. This issue was also not pressed further by the appellant.

6. Use of Data Available at the Time of Assessment Proceedings:
The appellant argued that the TPO should have used data available at the time of preparing the TP documentation rather than data available during the assessment proceedings. This issue was not pressed further by the appellant.

7. Consideration of Provision for Bad and Doubtful Debts:
The appellant contended that the TPO erred in not considering the provision for bad and doubtful debts as operating in nature. This issue was not pressed further by the appellant.

8. Determination of Prime Lending Rate for Working Capital Adjustment:
The appellant argued that the TPO erred in determining the prime lending rate for the purpose of computing working capital adjustment. This issue was not pressed further by the appellant.

9. Risk Adjustment for Limited Risk Nature of Services:
The appellant contended that the TPO ignored the limited risk nature of the contractual services provided by the appellant and did not provide an appropriate adjustment towards the risk differential. This issue was not pressed further by the appellant.

10. Benefit of Range of +/- 5% as per Section 92C(2):
The Tribunal directed the TPO to provide the benefit of the range of +/- 5% as per the proviso to Section 92C(2) of the Income-tax Act, 1961, wherever necessary.

11. Negative Working Capital Adjustment:
The appellant argued that as a captive service provider, it did not bear any working capital risk, and hence, a negative working capital adjustment was not warranted. This issue became infructuous due to the rectification order passed by the TPO.

12. Export Earning Filter Threshold:
The appellant contended that the TPO arbitrarily applied a 75% threshold on the export earning filter, rejecting comparable companies with export sales less than 75%. This issue was not pressed further by the appellant.

13. Jurisdictional Error in Reference to the TPO:
The appellant argued that the reference made by the AO to the TPO suffered from a jurisdictional error as the AO did not record reasons for the necessity of the reference. This issue was not pressed further by the appellant.

14. Initiation of Penalty under Section 271(1)(c):
The appellant argued that the AO erred in initiating a penalty under Section 271(1)(c) without recording any satisfaction for its initiation. This issue was not pressed further by the appellant.

15. Computation of Interest under Section 270:
The appellant argued that the AO erred in proposing to compute interest under Section 270 mechanically without recording satisfactory reasons. This issue was not pressed further by the appellant.

Conclusion:
The Tribunal partly allowed the appeals for both Assessment Years 2010-11 and 2011-12, directing the TPO to exclude certain comparables, include others, and provide the benefit of the range of +/- 5% as per Section 92C(2) of the Income-tax Act, 1961. The Tribunal also directed the TPO to re-compute the margins for certain comparables and consider the appellant’s contentions regarding the selection and rejection of comparable companies.

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