2015 (10) TMI 1005 - AT - Income Tax

Tribunal partially allows appeal, excludes certain comparables, upholds others for transfer pricing.

The appeal was partly allowed by the Tribunal. Certain comparables like Infosys and Wipro Technology Services Limited were excluded, while others like TCS ... Transfer pricing adjustment - determining the arm's length margin/ price using multiple year data - Held that:- Only the contemporaneous year data is to be taken into consideration for the purposes of bench marking purposes as per Rule 10B (4) of the Incometax Rules, 1962 (hereinafter ‘the Rules’). This position is now well settled by the decision of Hon’ble jurisdictional High Court in the case of Chrys Capital Investment Advisors (I) Pvt. Ltd. Vs. DCIT [2015 (4) TMI 949 - DELHI HIGH COURT]. More so, it is admitted by the parties that the current appeal will not fall within the exception provided under the Proviso to Rule 10B (4). International transaction of provision of IT services and ITES SEGMENT - selection of comparable - Held that:- A captive unit of a comparable company which assumed only a limited risk cannot be compared with a giant company in the area of development of software who assumes all types of risks leading to higher profits. The facts of the appellant are akin and the comparative chart of assessee vis –a-vis M/s Infosys clearly depicts the same and therefore, do not warrant any different conclusion. The appellant is also captive service provider to its AE and as such, M/s. Infosys Ltd. is not a valid comparable with the appellant and we direct it’s exclusion from the comparables. M/S. WIPRO TECHNOLOGY SERVICES LIMTIED - We concur with the finding of DRP while repelling the objection regarding extra-ordinary event taking place for this comparable, but for a different reason, i.e. the relevant extra ordinary event took place in the preceding Financial Year i.e. FY 2008-09. However, we concur with the submissions advanced by Ld AR that the Director’s Report and Notes to Account for this comparable are not available in public domain. Ld. DR has not been able to controvert this fact. Since sufficient information for this comparable is not available, we direct exclusion of this company as a comparable. CALIBER POINT BUSINESS SOLUTIONS LTD. & R SYSTEMS INTERNATIONAL LTD. - We direct the TPO to re-examine these comparables by reworking their margins as on 31st March 2010 as aforestated in the order in the case of M/s. Mercer Consulting (India) Pvt. Ltd. [2014 (10) TMI 467 - THE ITAT DELHI] ITES SEGMENT - ACCENTIA TECHNOLOGIES LTD. - In the light of the amalgamation, which is having an impact on the figures disclosed as of 31st March 2010, we find force in the contention of the ld. AR, this company should be excluded from the comparable and we order accordingly. TCS E – SERVE INTERNATIONAL LTD. & TCS E-SERVE LTD. - the principal source of revenue of this comparable is only one i.e. transaction processing and other services of ₹ 1.35 crores credited in the P&L account. The ld. AR has not been able to substantiate that the other services element is having a different nature or class vis-à-vis transaction processing receipt of this comparable. Contrary to this, the audited annual accounts, certify that both, these receipts are rank parri passu and have the same nature and function. Similar is the position with M/s. TCS E-serve International Ltd. so therefore we uphold the inclusion of these two comparables. - Decided in favour of assessee in part. Issues Involved:1. Incorrect interpretation of law.2. Assessment of total income.3. Adjustment in arm's length price (ALP) for IT enabled services and software development services.4. Economic analysis for determining ALP.5. Use of multiple year data.6. Selection of comparables.7. Adjustments for working capital differences.8. Adjustments for risk profile differences.9. Initiation of penalty proceedings under section 271(l)(c).Issue-wise Detailed Analysis:1. Incorrect Interpretation of Law:The appellant contended that the order of the Assessing Officer (AO) and the directions of the Disputes Resolution Panel (DRP) were based on an incorrect interpretation of law, rendering them bad in law. This was a general ground and did not require specific adjudication.2. Assessment of Total Income:The AO assessed the total income of the appellant at Rs. 16,65,79,490 against the returned income of Rs. 12,61,73,755. This was challenged by the appellant on the grounds of incorrect adjustments and interpretations.3. Adjustment in Arm's Length Price (ALP):The AO and Transfer Pricing Officer (TPO) made additions to the total income of the appellant amounting to Rs. 2,14,03,620 for IT enabled services and Rs. 1,90,02,115 for software development services. The appellant argued that these adjustments were erroneous.4. Economic Analysis for Determining ALP:The appellant contended that the economic analysis conducted by the AO and TPO was flawed. The appellant had used the Transactional Net Margin Method (TNMM) and conducted a search on databases like Prowess and Capitaline for comparables. The TPO, however, conducted a fresh analysis and determined higher margins for comparables.5. Use of Multiple Year Data:Ground No. 5 was regarding the use of multiple year data. The Tribunal noted that the settled position of law, as per Rule 10B(4) of the Income-tax Rules, 1962, and the decision of the Hon'ble jurisdictional High Court in ChrysCapital Investment Advisors (I) Pvt. Ltd. Vs. DCIT, was that only contemporaneous year data should be used for benchmarking purposes.6. Selection of Comparables:The appellant objected to the inclusion of certain comparables like Infosys and Wipro Technology Services Limited. The Tribunal upheld the exclusion of Infosys, citing its functional differences and significant intangible assets. Wipro Technology Services Limited was also excluded due to insufficient public financial information.7. Adjustments for Working Capital Differences:The appellant argued that suitable adjustments were not made for working capital differences. However, this specific issue was not separately adjudicated in detail.8. Adjustments for Risk Profile Differences:The appellant contended that adjustments were not made for differences in the risk profile between the appellant and comparables. The Tribunal noted the functional differences and risk profiles, especially in the case of Infosys, which was excluded as a comparable.9. Initiation of Penalty Proceedings under Section 271(l)(c):The appellant challenged the initiation of penalty proceedings under section 271(l)(c) of the Act. This ground was also general in nature and did not require specific adjudication.Separate Judgments:The Tribunal delivered a single comprehensive judgment without separate judgments from different judges.Conclusion:The appeal was partly allowed. The Tribunal directed the exclusion of certain comparables like Infosys and Wipro Technology Services Limited and upheld the inclusion of others like TCS E-Serve International Ltd. and TCS E-Serve Ltd. The Tribunal also directed the TPO to re-examine certain comparables like Caliber Point Business Solutions Ltd. and R Systems International Ltd. based on their financial year data.