Tribunal remands transfer pricing issue for rework, emphasizes risk levels and profit margins.

Allscripts (India) Private Ltd. (Formerly Known Eclipsys (India) Pvt. Ltd. Versus The D.C.I.T Circle-1 (1), Baroda

Allscripts (India) Private Ltd. (Formerly Known Eclipsys (India) Pvt. Ltd. Versus The D.C.I.T Circle-1 (1), Baroda - TMI Issues Involved:
1. Transfer pricing adjustment and benchmarking approach.
2. Modification of comparable companies set by the appellant.
3. Use of single-year data versus multiple-year data for comparables.
4. Adjustment for differences in risk levels and assets employed.
5. Initiation of penalty proceedings under Section 271(i)(c).
6. Non-disposal of rectification application by the TPO/AO.

Detailed Analysis:

1. Transfer Pricing Adjustment and Benchmarking Approach:
The appellant contested the transfer pricing adjustment of Rs. 4,12,15,474 made by the AO following DRP's directions. The primary issue was whether the international transaction of software development services adhered to the arm's length principle. The appellant used the Transactional Net Margin Method (TNMM) with an operating profit to total cost ratio as the profit level indicator (PLI). The PLI of the appellant was 14.58%, while the average PLI of 14 comparables was 14.45%. The TPO, however, disagreed with the appellant's benchmarking approach and made an upward adjustment by including additional comparables with higher margins.

2. Modification of Comparable Companies Set by the Appellant:
The appellant argued against the modification of its set of comparable companies by the AO/DRP. The TPO conducted a fresh search using additional quantitative/qualitative filters and included companies like Bodhtree Consulting Ltd. and E-Infochip Bangalore Ltd., which the appellant claimed were functionally dissimilar and had abnormal profit margins. The Tribunal found that Bodhtree Consulting Ltd. had fluctuating margins, indicating abnormal business conditions, and E-Infochip Bangalore Ltd. lacked segmental information. Both companies were deemed unsuitable as comparables, and the issue was remanded to the AO/TPO to rework the addition after excluding these companies.

3. Use of Single-Year Data Versus Multiple-Year Data for Comparables:
The appellant used multiple-year data for comparables, while the AO/DRP considered single-year data for FY 2008-09. The Tribunal upheld the use of single-year data as per the provisions of Rule 10B(4) of the Income-tax Rules, 1962, but acknowledged that high profit margins should trigger further investigation to establish whether they reflect normal business conditions.

4. Adjustment for Differences in Risk Levels and Assets Employed:
The appellant sought adjustments for differences in risk levels and assets employed between itself and the comparables. The Tribunal noted that the appellant was a routine captive service provider, while some comparables included entrepreneurial companies. The Tribunal directed the AO/TPO to consider these differences and make necessary adjustments as per Rules 10B(2) and 10B(3) read with Rule 10C.

5. Initiation of Penalty Proceedings Under Section 271(i)(c):
The appellant argued that it provided all requested information during the assessment proceedings and neither concealed income nor furnished inaccurate particulars. Therefore, the initiation of penalty proceedings under Section 271(i)(c) was contested. The Tribunal did not provide a detailed ruling on this issue, focusing instead on the transfer pricing adjustment.

6. Non-Disposal of Rectification Application by the TPO/AO:
The appellant claimed that the TPO/AO did not dispose of its rectification application for correcting mistakes in the revised TP adjustment workings. The Tribunal did not specifically address this issue in its ruling, as the primary focus was on the transfer pricing adjustment and the comparability analysis.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remanding the issue of transfer pricing adjustment to the AO/TPO to rework the addition after excluding Bodhtree Consulting Ltd. and E-Infochip Bangalore Ltd. from the comparables. The AO/TPO was directed to grant the appellant adequate opportunity of hearing and consider adjustments for differences in risk levels and assets employed. The Tribunal emphasized the need for further investigation into high profit margins to ensure they reflect normal business conditions.