2017 (1) TMI 1546 - AT - Income Tax

Appeal partially allowed, directions on comparables for arm's length pricing.

H&S Software Development and Versus ACIT,

The appeal was partly allowed with specific directions for the exclusion and inclusion of certain comparables for determining the arm's length price (ALP) ... TPA - selection of comparable - Held that:- Assessee is into providing Information Technology (IT) Enabled Back Office support services related to creation and maintenance of database of prospective employers and candidates who have submitted their resumes to HSII, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Issues Involved:1. Validity of the order passed by the CIT(A).2. Jurisdictional error by the AO in referring the matter to the TPO.3. Determination of the arm's length price (ALP) of the appellant's international transaction.4. Exclusion of 'Other Income' from profit eligible for deductions under section 10A.5. Validity of initiation of penalty proceedings under section 271(1)(c).Issue-wise Detailed Analysis:1. Validity of the Order Passed by the CIT(A):The appellant challenged the order passed by the CIT(A) as bad in law and void ab-initio. However, this ground was general in nature and did not require a specific finding.2. Jurisdictional Error by the AO:The appellant argued that the AO did not record any reasons for referring the matter to the TPO for computation of the arm's length price as required under section 92CA(1) of the Act. This ground was not pressed during the course of arguments and was determined against the appellant.3. Determination of the Arm's Length Price (ALP):The primary issue involved the determination of the ALP of the appellant's international transaction. The TPO accepted the Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) but rejected seven comparables selected by the appellant, introducing 21 new comparables. The TPO used current year data and made an ALP adjustment of Rs. 2,08,34,850. The CIT(A) upheld the TPO's order, except for excluding Mold-Tek Technologies Limited, reducing the margin to 25.40%.- Exclusion of Specific Comparables:- Accentia Technologies Ltd.: Excluded due to extraordinary events (amalgamation) affecting financial results and lack of annual report for FY 2006-07.- Bodhtree Consulting Ltd.: Excluded due to functional dissimilarity and contradiction between information supplied u/s 133(6) and the annual report.- Eclerx Services Ltd.: Excluded as it was a Knowledge Processing Outsourcing (KPO) company, not comparable with the appellant's routine ITES services.- HCL Comnet Systems & Services Ltd.: Excluded due to high Related Party Transactions (RPT) and inconsistent financial year data.- Informed Technologies India Ltd.: Excluded for failing the employee cost filter, as its employee cost was significantly lower than the appellant's.- Infosys BPO Ltd.: Excluded due to its large and diversified operations, brand value, and substantial intangible assets, making it incomparable with the appellant.- Vishal Information Technologies Ltd.: Excluded as it was engaged in KPO services with a different business model, primarily outsourcing services.- Wipro Ltd.: Excluded due to its giant size, diversified business, ownership of significant intangibles, and high R&D expenditure.- Inclusion of Specific Comparables:- B2K Corp Ltd.: The appellant's comparable was initially rejected by the TPO due to unavailability of current year data. However, it was found that the data was available, and the TPO was directed to examine its comparability on merits.4. Exclusion of 'Other Income' from Profit Eligible for Deductions under Section 10A:This ground was not pressed by the appellant and was dismissed as not pressed.5. Validity of Initiation of Penalty Proceedings under Section 271(1)(c):This ground was considered premature and required no adjudication.Conclusion:The appeal was partly allowed, with specific directions for the exclusion and inclusion of certain comparables for determining the ALP of the appellant's international transactions. The Tribunal ordered the exclusion of several companies from the final list of comparables and directed the TPO to re-examine the inclusion of B2K Corp Ltd.