2024 (2) TMI 523 - AT - Income Tax

TP Adjustment - comparable selection - ALP which is worked out after applying the 5% range - HELD THAT - TPO had adopted certain criteria for rejection of comparables as highlighted above. If those criteria itself are adopted on the comparables which has been chosen by the ld. TPO and applying the filters adopted by him on the final set of comparables selected by him under ITES and IT segment, then as noted by the CIT (A) the arithmetic mean in ITES segment comes to 13.73% and in IT segment comes to 17.51%. In that case, in ITES segment margin shown by the assessee and margin which has been determined falls within the tolerance limit of /- 5% as provided in proviso to Section 92CA which was applicable prior to 01/10/2009, then assessee s price of Rs. 30,29,93,009/-, which is well within the tolerance range, because -5 comes to Rs. 29,28,59,642/- and 5% comes to 32,36,86,978/-. CIT (A) has correctly held that in such a case, no adjustment is called for. Similarly, in software services, the assessee s price is Rs. 7,39,80,534/- whereas /-5% range comes between Rs. 7,18,98,974/- to Rs. 7,94,67,787/-. Accordingly, no adjustment can be made. Thus, we do not find any infirmity in the order of the ld. CIT (A) and the same is confirmed. Accordingly, the appeal of the Revenue is dismissed.

Summary

Issues Involved:

1. Deletion of addition of Rs. 4,45,29,090/- based on the provisions of section 92(1) of the Act.
2. Acceptance and rejection of comparables by the CIT(A) and TPO.
3. Scope for adding, amending, varying, omitting, or substituting grounds of appeal.

Summary:

Issue 1: Deletion of Addition of Rs. 4,45,29,090/-

The Revenue contested the deletion of an addition of Rs. 4,45,29,090/- made by the Assessing Officer (AO) to the appellant's income based on section 92(1) of the Act. The assessee, engaged in providing back office support and software development services, had benchmarked its international transactions using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) rejected the comparables selected by the assessee and introduced his own, leading to an upward adjustment.

Issue 2: Acceptance and Rejection of Comparables

The CIT(A) found inconsistencies in the TPO's approach in accepting and rejecting comparables. The TPO's criteria included related party transactions (RPT) > 25%, no export income, salary < 1.15% of turnover, lack of segmental data, and consistent loss-making. The CIT(A) observed that the TPO did not uniformly apply these criteria, leading to the inclusion of inappropriate comparables and exclusion of appropriate ones.

For instance, the TPO rejected Spanco Telesystems and Solutions Ltd. for having RPT > 25%, but the actual RPT was only 1.55%. Conversely, Airline Financial Support Services (India) Ltd. was accepted despite having RPT of 31.75%. The CIT(A) also noted that the TPO accepted companies with no export income and inconsistent salary expenditures, further highlighting the arbitrary application of criteria.

Issue 3: Scope for Adding, Amending, Varying, Omitting, or Substituting Grounds of Appeal

The Revenue sought the liberty to add, amend, vary, omit, or substitute any grounds of appeal before or during the hearing. However, the Tribunal decided the appeal on the merits based on the existing grounds.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, confirming that the TPO's inconsistent application of criteria for comparables led to erroneous adjustments. The arithmetic mean of the comparables, when correctly applied, showed that the assessee's pricing fell within the acceptable +/- 5% range, negating the need for any adjustment. Consequently, the Revenue's appeal was dismissed.