2015 (6) TMI 805 - AT - Income Tax

Tribunal directs re-computation of comparables, dismisses penalty objections

Maximize Learning Private Limited Versus The Asst. Commissioner of Income Tax, Circle 11 (2), Pune

The Tribunal partially allowed the appeal, directing the Assessing Officer to re-compute the margin of comparables by excluding certain contested ... Transfer Pricing adjustment - addition made to the value of international transaction entered into by the assessee with its associated enterprise in respect of Provision of Information Technology Enabled Service - selection of comparable - Held that:- Accentia Technologies Ltd. - As during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable Coral Hub Ltd.(Earlier known as Vishal Information Technologies Ltd.) - The Tribunal in assessee’s own case for assessment year 2008-09 has given a finding that Coral Hub Ltd. could not be selected as a comparable.The said company was providing IT enabled services and was also engaged in other diversified activities. Further, it has outsourced its services to third party vendor and acted as intermediary between the final customer and the vendor. The assessee on the other hand was engaged in the running of a call centre and was providing technical support to its AEs. Cosmic Global Ltd. needs to be rejected on the ground that it was engaged in BPO and Translation services whereas assessee was an ITES provider, and therefore concern was functionally dissimilar. Crossdomain Solutions Ltd. was not comparable with the assessee as the said concern was engaged in the payroll activity apart from being engaged in KPO services. Also the said concern was identified as a Knowledge Process Outsourcing services provider (KPO) and not a simple business process outsourcing services provider, thus is to be excluded from the final set of comparables. Issues Involved:1. Transfer Pricing adjustment2. Rejection of benchmarking done by the Appellant3. Binding directions of the DRP not followed4. Erroneous selection of comparable companies5. Benefit of the risk adjustment6. Benefit of the variation/reduction of 5 percent from the arithmetic mean7. Initiation of penalty proceedings8. Levy of interest obligation on account of transfer pricing adjustmentDetailed Analysis:1. Transfer Pricing Adjustment:The primary issue revolves around an addition of Rs. 3,36,97,885/- to the value of international transactions entered into by the assessee with its associated enterprise in respect of the provision of Information Technology Enabled Services (ITES). The assessee had applied the Transactional Net Margin (TNM) Method to determine that the services provided to its associated enterprise were at arm's length. The Transfer Pricing Officer (TPO) also applied the TNM Method but selected a set of comparables that led to a proposed adjustment. The DRP revised this adjustment, which was subsequently added to the income of the assessee.2. Rejection of Benchmarking Done by the Appellant:The learned ACIT, following the directions of the DRP, rejected the benchmarking approach and methodology followed by the appellant for benchmarking the international transaction of provision of ITES. The TPO's selection of comparables was contested by the appellant, who argued that the comparables selected were not appropriate.3. Binding Directions of the DRP Not Followed:The appellant contended that the ACIT did not follow the binding directions of the DRP with respect to the exclusion of Crossdomain Solutions Limited from the list of comparable companies. The Tribunal found that the DRP had upheld the need for an adjustment based on the margin differences between the assessee and the comparables selected by the TPO.4. Erroneous Selection of Comparable Companies:The appellant objected to the selection of certain comparable companies by the TPO, arguing that they were not functionally similar. The Tribunal reviewed the selection of the following comparables:- Accentia Technologies Ltd.: Excluded due to functional dissimilarities and extraordinary events like amalgamation.- Coral Hub Ltd.: Excluded as it was engaged in outsourcing most of its work, making it functionally different from the assessee.- Cosmic Global Ltd.: Excluded due to its different business model involving significant outsourcing.- Crossdomain Solutions Ltd.: Excluded as it was engaged in high-end KPO services, which were not comparable to the assessee's ITES.5. Benefit of the Risk Adjustment:The appellant argued that the learned ACIT did not grant the risk adjustment. However, this issue was not elaborated upon in the Tribunal's final decision.6. Benefit of the Variation/Reduction of 5 Percent from the Arithmetic Mean:The appellant sought the benefit of +/- 5 percent variation as per the proviso to section 92C(2) of the Act. The Tribunal noted that if the comparables selected by the TPO were excluded, the margin of the remaining comparables would fall within the acceptable range, making the transactions at arm's length.7. Initiation of Penalty Proceedings:The appellant contested the initiation of penalty proceedings under section 271(1)(c) of the Act. The Tribunal dismissed this ground as premature.8. Levy of Interest Obligation on Account of Transfer Pricing Adjustment:The appellant objected to the levy of interest under section 234B of the Act due to the unanticipated adjustments made by the TPO. The Tribunal dismissed this ground as it was consequential.Conclusion:The Tribunal directed the Assessing Officer to re-compute the margin of the comparables after excluding the four contested companies and determine the arm's length price of the international transactions. The appeal was partly allowed, with specific directions to exclude certain comparables and re-evaluate the arm's length price. The grounds related to penalty proceedings and interest levy were dismissed.