2017 (1) TMI 1570 - AT - Income Tax

Appeal partially allowed, Transfer Pricing documentation relief, adjustments on AE transactions, margins re-examined

The appeal was partly allowed for statistical purposes. The Transfer Pricing (TP) documentation rejection was relieved, directing a reworking of margins. ... Determination of Adjustment Determining the TP adjustment on transactions with non-AE's - Held that:- This issue has to be considered in favour of assessee and AO/TPO is directed to make adjustments only to the extent of transactions with AE and exclude the adjustment on the transactions with non-AEs. This issue is already decided in favour of assessee in assessee's own cases in earlier years and later years. AO/TPO is directed accordingly. Ground is considered allowed. Margin computation of the Appellant under TNMM - Non consideration of Work-In-Progress (WIP) movement for the computation of the operating margin of the Appellant - Held that:- This ground pertains to computation of margin under TNMM. It was submitted that the WIP movement for the computation of operating margin of assessee was not considered by the TPO. Since this issue is required to be examined by the TPO, we direct the AO/TPO to examine this issue and work out the correct margin. Ground is allowed for statistical purposes. Incorrect computation of working capital adjustment - Held that:- As relying on Adaptec (India) P. Ltd. Versus The ACIT, Circle 1 (1) Hyderabad [2015 (6) TMI 288 - ITAT HYDERABAD] we direct the AO/TPO not to make negative working capital adjustment. Comparable selection criteria - Held that:- Assessee is engaged in rendering market research and related back office services for domestic and international clients thus companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction u/s. 10A - denying deduction to the Offshore Research Service Centre (ORSC) unit by concluding that the ORSC unit has been formed by reconstruction of the existing business - Held that:- AO/TPO is directed to examine the issue in the light of the facts and if any un-availed portion was available for STPI unit, the deduction will be allowed. Accordingly, this issue is restored to the file of the AO to re-examine Disallowance of license fees - revenue or capital expenditure - Held that:- As relying on TNS India (P.) Ltd., v. Dy. CIT [2015 (5) TMI 45 - ITAT HYDERABAD] we uphold the direction of the DRP to treat the amount as 'capital in nature' to allow the depreciation. However, the rate of depreciation is to be determined at 60%. With the above directions, the ground is considered partly allowed. Issues Involved:1. Rejection of Transfer Pricing (TP) documentation maintained.2. Non-consideration of internal uncontrolled transactions.3. Determination of TP adjustment on transactions with non-AE's.4. Margin computation of the Appellant under TNMM.5. Incorrect computation of working capital adjustment.6. Use of information obtained under section 133(6).7. Selection of comparables.8. Adjustment for risk differences.9. Applicability of proviso to Section 92C(2).10. Deduction u/s. 10A.11. Capitalization of license fees.12. Adjustment of refund.Issue-wise Detailed Analysis:1. Rejection of Transfer Pricing (TP) documentation maintained:The appellant's TP documentation was rejected, and an adjustment of Rs. 14,94,53,910 was made for international transactions with AEs. The DRP provided relief on this issue, making it redundant. The DRP directed reworking the margin by excluding the disputed amounts.2. Non-consideration of internal uncontrolled transactions:This issue was not pressed during arguments.3. Determination of TP adjustment on transactions with non-AE's:The TPO's adjustment on non-AE transactions was contested. The appellant maintained separate accounts for ORSC and Market Research divisions. The tribunal directed the AO/TPO to limit adjustments to AE transactions, excluding non-AE transactions, consistent with previous rulings.4. Margin computation of the Appellant under TNMM:The TPO did not consider WIP movement in margin computation. The tribunal directed the AO/TPO to re-examine and correctly compute the operating margin, allowing the ground for statistical purposes.5. Incorrect computation of working capital adjustment:The working capital adjustment included third-party transactions, resulting in a negative adjustment. The tribunal directed the AO/TPO to recompute the working capital adjustment, excluding negative adjustments, following the precedent set in Adaptec (India) (P.) Ltd. v. Asstt. CIT.6. Use of information obtained under section 133(6):This issue was considered along with the selection of comparables.7. Selection of comparables:The appellant objected to several comparables selected by the TPO. The tribunal referred to previous rulings, directing the AO/TPO to exclude certain comparables and re-examine others. Specific companies like Accentia Technologies Ltd., Accurate Data Convertors Pvt Ltd., and others were either excluded or remitted for further examination based on functional dissimilarities and exceptional financial results.8. Adjustment for risk differences:The appellant's margin was within the ALP after excluding certain comparables, rendering this issue academic. The ground was treated as withdrawn.9. Applicability of proviso to Section 92C(2):The appellant sought a 5% standard deduction under the proviso to Section 92C(2). The tribunal directed the AO/TPO to consider this proviso while determining the ALP adjustment, allowing the ground for statistical purposes.10. Deduction u/s. 10A:The AO denied the deduction u/s. 10A for the ORSC unit, considering it a reconstruction of existing business. The tribunal referred to the ruling in TNS India (P.) Ltd. v. Addl. CIT, directing the AO/TPO to examine if any un-availed portion of the deduction was available for the STPI unit and allow it accordingly.11. Capitalization of license fees:The AO treated the license fees as capital expenditure, allowing depreciation at 25%. The tribunal upheld the capital nature but directed the AO to allow depreciation at 60%, following the precedent in TNS India (P.) Ltd. v. Dy. CIT.12. Adjustment of refund:The appellant claimed not to have received a refund of Rs. 51,96,176 issued u/s. 143(1). The tribunal directed the AO to verify and adjust the refund accordingly, allowing the ground for statistical purposes.Conclusion:The appeal was partly allowed for statistical purposes, with specific directions to the AO/TPO to re-examine and adjust various issues as per the tribunal's detailed instructions.