2016 (1) TMI 1300 - AT - Income Tax

Tribunal directs recalculations, exclusions, and adjustments in Transfer Pricing case

The Tribunal partly allowed the appeal, directing the Assessing Officer/Transfer Pricing Officer to exclude certain companies from the list of ... TPA - comparability - Held that:- Assessee provides software development services to the group and is stated to have been compensated at cost plus 15% mark up on such cost. It also provides software developments services to third parties. Thus companies functionally dissimilar with that of assessee need o be deselected from final list of comparable. Erroneous adoption of operating margin and arithmetic mean of comparable companies by the learned Transfer Pricing Officer - It was submitted that the TPO did not calculate the PLI of the assessee properly and excluded certain costs from the operating cost. Thereby as against the assessee’s margin at 11.72%, TPO determined the margin at 10.21%. Even though learned counsel relied on various case-law, it was fairly admitted that this issue becomes academic, if Ground No.4 is considered favourably. Consequently, we direct the TPO to keep in mind the objections of the assessee, while working out the PLI of the assessee company in the re-assessment proceedings. Exclude the TP adjustment on the non-AE transactions - Held that:- The entire cost was taken by the TPO for making adjustment, thereby invoking the TP proceedings on non-AE transactions as well. Therefore, we direct the Assessing Officer/Transfer Pricing Officer to exclude the TP adjustment on the non-AE transactions and re-work out the costs pertaining to the AE transactions and restrict the adjustment if any, only to the AE transactions. With these directions, this ground is considered as allowed. Non-granting full TDS credit - Dispute Resolution Panel directed the Assessing Officer to examine and give full credit or take suitable action but the Assessing Officer did not give full credit - Held that:- After considering the submissions of the learned counsel and the direction given by the Dispute Resolution Panel, we are of the opinion that the Assessing Officer did not follow the directions of the Dispute Resolution Panel while giving credit, as claimed by the assessee at ₹ 55,70,991. We therefore, reiterate the direction given by the Dispute Resolution Panel to examine the issue and give credit of TDS to the assessee. Issues Involved:1. Selection of comparables for Transfer Pricing (TP) analysis.2. Computation of Operating Profit to Cost ratio.3. Negative working capital adjustment.4. Inclusion of costs incurred for third-party services in TP analysis.5. Application of the proviso to Section 92C(2) of the Act.6. Granting full Tax Deducted at Source (TDS) credit.Detailed Analysis:1. Selection of Comparables for Transfer Pricing Analysis:The assessee objected to the selection of certain companies as comparables by the Transfer Pricing Officer (TPO). The Dispute Resolution Panel (DRP) had directed the exclusion of two companies, Celestial Labs Ltd. and M/s. Geometric Ltd., from the list of comparables. The assessee further contested the inclusion of eleven other companies, arguing functional dissimilarities and other discrepancies. The Tribunal referenced various precedents, including the cases of United Online Software Development India Pvt. Ltd. and Sumtotal Systems India Pvt. Ltd., to exclude these companies from the list of comparables. The Tribunal directed the Assessing Officer (AO)/TPO to redetermine the Arm's Length Price (ALP) after excluding these companies.2. Computation of Operating Profit to Cost Ratio:The assessee contended that the TPO erroneously calculated the Profit Level Indicator (PLI) by excluding certain costs from the operating costs, leading to a lower margin determination. The Tribunal noted that this issue would become academic if Ground No.4 was decided favorably. The TPO was directed to consider the assessee's objections while recomputing the PLI in the reassessment proceedings.3. Negative Working Capital Adjustment:The assessee argued against the negative working capital adjustment made by the TPO, asserting that it did not bear any working capital risk as a captive service provider. The Tribunal referenced the case of Adaptec (India) P. Ltd. and other precedents, directing the TPO not to make a negative working capital adjustment. The TPO was instructed to rework the working capital adjustment, considering the principles laid down in previous cases and after giving due opportunity to the assessee.4. Inclusion of Costs Incurred for Third-Party Services in TP Analysis:The assessee objected to the TPO's inclusion of costs incurred for rendering services to third parties in the TP analysis. The Tribunal, referencing the assessee's own case for the assessment year 2008-09, directed the TPO to exclude the TP adjustment on non-AE transactions and rework the costs pertaining to AE transactions only. The adjustment, if any, should be restricted to AE transactions.5. Application of Proviso to Section 92C(2) of the Act:The Tribunal noted that the provisions of Section 92C(2) were clear and directed the TPO to keep them in mind while making any TP adjustment consequent to the order.6. Granting Full TDS Credit:The assessee claimed a short credit of TDS amounting to Rs. 31,81,369. The Tribunal observed that the AO did not follow the DRP's directions to examine and grant full TDS credit. The Tribunal reiterated the DRP's direction for the AO to examine the issue and grant the credit as claimed by the assessee.Conclusion:The appeal was partly allowed for statistical purposes, with the Tribunal directing the AO/TPO to rework the TP adjustments and TDS credit as per the guidelines and principles established in the order. The assessee was to be given due opportunity during the consequential proceedings.