2015 (1) TMI 466 - AT - Income Tax

Tribunal directs AO to recompute arm's length price, consider assessee's fresh search

The Tribunal allowed the appeal, directing the AO to re-compute the arm's length price by excluding certain comparables and considering the assessee's ... Benchmarking approach adopted / contemporaneous documentation rejected - transfer pricing adjustment - international transaction, pertaining to provision of software services ('IT services') and customer support back office services ('ITES Services') to the associated enterprise ('AE'), are not at arm's length under the Income-tax Act, 1961 - Held that:- We have upheld the plea of the assessee for IT service vis-à-vis exclusion of KALS Information System Ltd. and Bodhtree Consulting Ltd. from the final set of comparables. We accordingly, direct the Assessing Officer to re-compute the arm’s length price of the transactions of assessee company with its AEs applying the average profit margin of remaining comparables and if the difference between the arm’s price length so recomputed and the price actually charged is within the limit of +/- 5%, then no Transfer Pricing adjustment is to be made. The grounds of appeal raised by assessee are thus, allowed for statistical purposes. TPO wrongly added and rejected some comparables without even examining as to whether they are functionally comparable or not. If at all the TPO was to reject the same, it was imperative for him to examine all the comparables in the light of the FAR analysis and only thereafter reject the same after passing a speaking order. In the absence of such an approach by the TPO, in our view, the comparability analysis carried out by him is vitiated. In the entirety of the facts and circumstances, we deem it fit to restore this aspect of the issue back to the file of the AO / TPO, who shall consider the aforesaid companies picked up by way of fresh search carried out in ITES segments. Reasonable opportunity of being heard to the assessee should be given in this regard. The said issue with respect to determination of arm’s length price in ITES segment is thus, set aside to the file of AO / TPO and the ground of appeal raised by the assessee in this regard is thus, allowed for statistical purposes. Issues Involved:1. Rejection of benchmarking approach and transfer pricing adjustment.2. Modification of benchmarking analysis and selection of comparables.3. Use of single-year data versus multiple-year data.4. Adjustment for differences in risk levels and assets employed.5. Non-disposal of rectification application by the AO.6. Errors in computing tax demand/liability.Issue-wise Detailed Analysis:1. Rejection of Benchmarking Approach and Transfer Pricing Adjustment:The assessee contested the AO's rejection of their benchmarking approach for international transactions related to IT and ITES services and the subsequent transfer pricing adjustment of Rs. 12,91,06,230. The AO, following the DRP's directions, concluded that the transactions were not at arm's length. The assessee argued that the benchmarking analysis using TNMM and the set of comparables they provided were valid. However, the TPO conducted a fresh search using specific criteria, which led to the rejection of certain comparables initially selected by the assessee.2. Modification of Benchmarking Analysis and Selection of Comparables:The TPO applied additional quantitative and qualitative filters, leading to the inclusion and exclusion of various comparables. The assessee objected to the TPO's selective analysis, arguing that it resulted in cherry-picking comparables, which contradicted scientific search principles. The TPO's criteria included using only current year data (FY 2008-09), selecting companies with more than 50% income from IT services, and excluding companies with less than 75% export earnings, among other filters. The TPO's final set of comparables included companies like FCS Software Solutions Ltd., Akshay Software Technology, KALS Information Systems Ltd., Bodhtree Consulting Ltd., LGS Global Ltd., and Goldstone Technologies Ltd. The assessee objected to the inclusion of KALS Information Systems Ltd. and Bodhtree Consulting Ltd., citing functional dissimilarity and fluctuating profits, respectively. The Tribunal upheld the assessee's objections, excluding these companies from the final set of comparables.3. Use of Single-Year Data Versus Multiple-Year Data:The assessee argued for the use of multiple-year data to benchmark international transactions, while the TPO insisted on using only the current year's data, as mandated by Rule 10B(4) of the IT Rules. The Tribunal noted that the TPO's approach was consistent with the rules but considered the assessee's plea for multiple-year data in specific contexts, such as the inclusion of companies with fluctuating profits.4. Adjustment for Differences in Risk Levels and Assets Employed:The assessee claimed that adjustments for differences in risk levels and assets employed were necessary, as they were a routine captive service provider, unlike the entrepreneurial companies selected as comparables. The TPO and DRP disregarded this argument, but the Tribunal acknowledged the need for such adjustments under Rules 10B(3) and 10C, emphasizing that comparables should reflect similar business conditions.5. Non-disposal of Rectification Application by the AO:The assessee highlighted that the AO did not dispose of their rectification application for correcting mistakes in the transfer pricing order. The Tribunal directed the AO to address this issue in compliance with procedural fairness.6. Errors in Computing Tax Demand/Liability:The assessee pointed out errors in computing the tax demand/liability in the assessment order. The Tribunal instructed the AO to rectify these errors and recompute the tax demand accurately.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the AO to re-compute the arm's length price of the transactions by excluding KALS Information Systems Ltd. and Bodhtree Consulting Ltd. from the final set of comparables. The Tribunal also instructed the AO to consider the fresh search conducted by the assessee for the ITES segment and provide a reasonable opportunity for the assessee to present their case. The Tribunal emphasized the need for adjustments reflecting similar business conditions and directed the AO to address the rectification application and errors in computing the tax demand.