Tribunal dismisses Revenue's appeal, instructs AO/TPO to exclude comparables and rework ALP

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes. The Tribunal directed the A.O./TPO to exclude the seven comparables objected to by the assessee and rework the Arm's Length Price. The Tribunal also instructed that the assessee should be given an opportunity to make submissions on risk adjustments/working capital adjustments before finalizing the order.

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Issues Involved:
1. Transfer Pricing (T.P.) Adjustments on Assessee's International Transactions.
2. Selection of Comparable Companies.
3. Exclusion of Communication Charges from Export Turnover and Total Turnover for Section 10A Deduction.

Detailed Analysis:

1. Transfer Pricing (T.P.) Adjustments on Assessee's International Transactions:
The core issue in the appeal relates to the T.P. adjustments made by the Assessing Officer (A.O.)/Transfer Pricing Officer (TPO) concerning the assessee's international transactions under Section 92C of the Income-tax Act. The assessee, a wholly-owned subsidiary providing back-office support services, preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] rather than the Disputes Resolution Panel (DRP). The TPO suggested an adjustment of Rs. 1,84,52,948 under Section 92CA of the Income-tax Act, which was added to the total income of the assessee by the A.O. Additionally, the A.O. made a disallowance of Rs. 20,37,817 on account of communication expenses as per Explanation 2 to Section 10A and recalculated the exemption under Section 10A.

2. Selection of Comparable Companies:
The CIT(A) concentrated on the selection of comparable companies. The TPO had selected 20 comparables, but the assessee objected to 9 of them based on functionality. The CIT(A) excluded two comparables, Coral Hub and Moldtek Technologies, based on the decisions of the Coordinate Bench and DRP in various cases. The CIT(A) noted that excluding these two comparables would bring the assessee's Arm's Length Price (ALP) within the acceptable range, rendering other T.P. adjustment grounds academic. The Revenue's appeal contested the exclusion of these two comparables, but the Tribunal upheld the CIT(A)'s decision, noting that Coral Hub outsourced its work and Moldtek Technologies had exceptional financial results due to merger/demerger, making them non-comparable.

3. Exclusion of Communication Charges from Export Turnover and Total Turnover for Section 10A Deduction:
The A.O. excluded communication charges from the export turnover while calculating deductions under Section 10A. The CIT(A), following various judicial precedents, directed the A.O. to exclude these charges from the total turnover as well. The Revenue's appeal against this direction was dismissed by the Tribunal, which upheld the CIT(A)'s decision as it aligned with the decisions of the Coordinate Bench and the Bombay High Court.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes. The Tribunal directed the A.O./TPO to exclude the seven comparables objected to by the assessee and rework the ALP. The Tribunal also instructed that the assessee should be given an opportunity to make submissions on risk adjustments/working capital adjustments before finalizing the order. The Tribunal's decision was pronounced in the open court on 19.11.2014.

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