Tribunal directs corrections in transfer pricing, dismisses Department's appeal.

The Tribunal partly accepted the assessee's appeal, directing corrections and re-evaluation of certain comparables and adjustments related to transfer pricing issues. The Tribunal dismissed the Department's appeal, with the order pronounced on December 28, 2016.

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Issues Involved:

1. Transfer Pricing Adjustment
2. Disregarding Search Methodology
3. Use of Financial Information of Comparable Companies
4. Rejection of a Comparable Company
5. Inclusion of Functionally Non-Comparable Companies
6. Erroneous Consideration of Operating Margin
7. Non-Granting of Risk Adjustment
8. Benefit of the Variation/Reduction of 5 Percent from the Arithmetic Mean
9. Non-Applicability of Transfer Pricing Provisions
10. Initiation of Penalty Proceedings

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contested the adjustment of Rs. 2,41,00,000/- made to the value of international transactions related to IT enabled and market support services. The Tribunal examined the comparables selected by the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) and found discrepancies in the inclusion of certain companies, leading to adjustments in the final list of comparables.

2. Disregarding Search Methodology:
The assessee argued that the TPO, following DRP's directions, disregarded the search methodology adopted by the assessee without providing cogent reasons. The Tribunal did not specifically address this issue separately but considered it in the context of the overall transfer pricing analysis.

3. Use of Financial Information of Comparable Companies:
The assessee contended that the TPO did not consider multiple-year data and contemporaneous data when determining the arm's length price. The Tribunal did not provide a separate ruling on this issue but focused on the correctness of the comparables used.

4. Rejection of a Comparable Company:
The assessee objected to the rejection of a functionally comparable company by the TPO. The Tribunal directed a re-evaluation of the comparables, including the correct operating margins and segmental data of companies like Jeevan Scientific Technology Ltd.

5. Inclusion of Functionally Non-Comparable Companies:
The Tribunal addressed the inclusion of Genesys International Ltd., Accentia Technologies Ltd., and ICRA Online Ltd. (segmental) in the final list of comparables. The Tribunal excluded Genesys International Ltd. due to abnormal profits and functional differences, and Accentia Technologies Ltd. due to extraordinary events during the year. The issue of ICRA Online Ltd. was remitted back to the TPO/AO for reconsideration based on export turnover filter.

6. Erroneous Consideration of Operating Margin:
The assessee highlighted the incorrect percentage of the Profit Level Indicator (PLI) of Fortune Infotech Limited used by the TPO. The Tribunal directed the Assessing Officer to rectify the operating margin of Fortune Infotech Limited as per the DRP's directions.

7. Non-Granting of Risk Adjustment:
The Tribunal noted that the assessee had not provided detailed working of risk adjustment. The issue was remitted back to the AO/TPO for re-adjudication, with directions to the assessee to furnish the details of risk adjustment.

8. Benefit of the Variation/Reduction of 5 Percent from the Arithmetic Mean:
The Tribunal remitted this issue back to the Assessing Officer to grant the benefit of +/-5% without granting standard deduction, in accordance with the amended proviso to Section 92C(2) of the Act.

9. Non-Applicability of Transfer Pricing Provisions:
The assessee did not press this ground during the hearing, and thus, it was dismissed as not pressed.

10. Initiation of Penalty Proceedings:
The Tribunal dismissed this ground as premature, as it pertained to the initiation of penalty proceedings under section 271(1)(c) of the Act.

Other Grounds:
The Tribunal noted that grounds 1, 2, 11, and 12 were general in nature and required no adjudication. Additionally, the assessee did not press grounds 3, 4, and 9, leading to their dismissal as not pressed.

Conclusion:
The Tribunal partly accepted the appeal of the assessee, directing corrections and re-evaluation of certain comparables and adjustments, while dismissing the appeal of the Department. The order was pronounced on December 28, 2016.

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