2016 (7) TMI 1364 - AT - Income Tax

Appeal granted for transfer pricing adjustments, emphasizing limits on international transactions.

The Tribunal allowed the appeal for statistical purposes, directing the Transfer Pricing Officer and Assessing Officer to re-evaluate the transfer pricing ... TPA - selection of comparable - selection criteria - bench marking international transactions - Held that:- Assessee provides computer aided software solutions, maintenance and imaging services to its AE which provided services to oil and gas companies operating in India and was granted permission for setting up 100% EOU under STPI scheme. The assessee was categorized as ITES service provider. When the assessee has furnished segmental profits, the entity level profits cannot be considered for bench marking international transactions in view of the Jurisdictional High Court decision. Therefore, respectfully following the said decisions, we hold that the ALP of the assessee should be determined only on the international transactions and not on the entire transactions at entity level. We also find from various decisions that the four comparables selected by the TPO out of 9 have been rejected for various reasons like high turnover, functionally different, abnormal profits etc. Taking the totality of the facts and circumstances, we are of the view that this matter has to go back to the TPO for denovo adjudication in view of the fact that no proper opportunity was given by the TPO. Therefore, we direct the TPO to complete the denovo assessments keeping in view the decisions of the Jurisdictional High Court and various other Tribunals in rejecting various comparables selected by the TPO after providing adequate opportunity of being heard to the assessee. Upward adjustment on account of invoices raised on ONGC without appreciating that the same were pending acceptance/approval by ONGC - Held that:- We hold that the Assessing Officer should examine this matter afresh in the light of the submission that the said amount has already been taxed in the Assessment Year 2010-11. Therefore, we restore this issue to the file of the Assessing Officer for fresh adjudication. We make it clear that this amount should be taxed either in the Assessment Year 2010-11 or in the Assessment Year 2009-10 but not in both Assessment Years since it amounts to double taxation. The Assessing Officer shall consider and decide accordingly. Addition made on account of remission of liability - Held that:- We restore this issue to the file of the Assessing Officer who shall pass necessary order keeping in view of the fact that this amount was already taxed in the Assessment Year 2008-09 against which appeal is pending and if assessee succeeds in Assessment Year 2008-09, the Assessing Officer shall tax this amount in Assessment Year 2009-10 as offered by the assessee himself. In case, if the assessee fails in the Assessment Year 2008-09, the Assessing Officer shall not make addition of this amount in the current Assessment Year i.e. 2009-10. Thus we restore this matter to the file of the Assessing Officer with a direction to pass consequential orders accordingly. Issues Involved:1. Transfer Pricing Adjustment2. Rejection of Audited Segmental Results3. Selection of Comparable Companies4. Opportunity of Being Heard and Natural Justice5. Domestic Issues: Upward Adjustment on Account of Invoices and Remission of LiabilityDetailed Analysis:1. Transfer Pricing Adjustment:The assessee challenged the upward adjustments of Rs. 26,13,95,031 made by the Transfer Pricing Officer (TPO) while determining the arm's length price (ALP) for IT-enabled services provided to associated enterprises (AEs). The TPO rejected the segmental profitability calculated by the assessee and adopted an entity-level approach, resulting in an operating profit to operating cost margin of 60.81%. The TPO proposed a new set of 9 comparable companies and arrived at an adjustment of Rs. 26,13,95,031, which was upheld by the Dispute Resolution Panel (DRP).2. Rejection of Audited Segmental Results:The TPO and DRP rejected the segmental accounts submitted by the assessee, which were prepared as per AS 17-Segmental Reporting and Clause 2(f) of the Companies (Accounting Standards) Rules 2006. The TPO adopted an entity-level approach to determine the ALP, disregarding the segmental accounts, which led to the transfer pricing adjustment being applied to the entire entity rather than just the international transactions.3. Selection of Comparable Companies:The TPO's selection of 9 comparable companies was contested by the assessee. The Tribunal noted that four of these comparables were rejected by various benches of the Tribunal for reasons such as high turnover, functional differences, and abnormal profits. The Tribunal directed the TPO to exclude these comparables and re-evaluate the ALP.4. Opportunity of Being Heard and Natural Justice:The assessee argued that the TPO did not provide sufficient time to respond to the show cause notice and did not consider the detailed analysis of the comparables submitted by the assessee. The Tribunal found that the TPO provided only one opportunity within a short period, which did not adhere to the principles of natural justice. The Tribunal directed the TPO to complete the denovo assessments, ensuring adequate opportunity for the assessee to be heard.5. Domestic Issues: Upward Adjustment on Account of Invoices and Remission of Liability:- Invoices Raised on ONGC: The assessee contended that invoices amounting to Rs. 82,84,696 were pending acceptance/approval by ONGC and were recognized as revenue in the subsequent year (AY 2010-11). The Tribunal directed the Assessing Officer (AO) to examine this matter afresh and ensure the amount is taxed only once, either in AY 2009-10 or AY 2010-11.- Remission of Liability: The assessee argued that the remission of liability was already taxed in AY 2008-09, which was under appeal. The Tribunal directed the AO to consider the outcome of the appeal for AY 2008-09 and tax the amount in AY 2009-10 only if it is not taxed in AY 2008-09.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the TPO and AO to re-evaluate the transfer pricing adjustments and domestic issues in light of the principles of natural justice and relevant judicial precedents. The Tribunal emphasized that transfer pricing adjustments should be restricted to international transactions with AEs and not applied at the entity level.