2014 (9) TMI 1163 - AT - Income Tax

Tribunal directs re-evaluation of comparables for fair TP adjustment

Ness Technologies (India) (P.) Ltd. Versus Assistant Commissioner of Income-tax,

The Tribunal allowed the appeal for statistical purposes, directing the AO/TPO/DRP to re-evaluate the comparables by correctly applying the employee cost ... Adjustment to ALP of the international transactions - comparable selection criteria - Held that:- From the TPO report, we found that for the purpose of selection of comparables, the TPO had applied a filter of rejecting companies having employee costs less than 25% of revenues. However, the four companies as part of comparables selected by TPO fails the filter of 25% employee cost to the revenue. Since the employee cost to revenue ratio in case of these company is less than 25% of revenue, we restore the appeal back to the file of AO/TPO/DRP for considering afresh and applying the filter properly to the all comparables selected by TPO, keeping in view our above observation. Issues Involved:1. Transfer Pricing (TP) adjustment made by the Assessing Officer (AO).2. Application of the employee cost to sales filter by the Transfer Pricing Officer (TPO).Issue-wise Detailed Analysis:1. Transfer Pricing (TP) Adjustment:The primary issue in this appeal is the TP adjustment made by the AO. The assessee, engaged in software development/export and IT-enabled services, reported total receipts of Rs. 278.50 crores and other income of Rs. 223.59 lakhs for the Assessment Year 2008-09. The assessee claimed exemption under Section 10A on the profits of its STP Units, resulting in a business income of Rs. 63,559,637. The AO referred the matter to the Addl. Commissioner of Income Tax, Transfer Pricing-II (2), Mumbai, who determined an adjustment to the Arms Length Price (ALP) of Rs. 258,799,366. The assessee objected to the AO/TPO's rejection of its TP documentation, which was prepared in good faith under Section 92C of the Act. The TPO rejected the comparables identified by the assessee and conducted a fresh search, selecting 26 comparables.2. Application of Employee Cost to Sales Filter:The TPO applied an employee cost to sales filter of 25% for selecting comparables. However, the assessee argued that four out of the 26 comparables selected by the TPO failed this filter. The Tribunal found merit in the assessee's contention, noting that:(i) Celestial Biolabs Ltd.: The employee cost was only 20.05% of the total turnover, failing the 25% filter. Additionally, the company was functionally different as it operated in biotechnology and developed products/tools and other intangibles.(ii) Cybermate Infotech Limited: The employee cost was 18.68% of the total turnover, failing the 25% filter. The company had four segments and did not provide segmental financials, indicating it was a software product company with exceptional growth in net margin.(iii) 3K Technologies Limited: The employee cost was only 5.56% of the total turnover, failing the 25% filter.(iv) Acropetal Technologies Limited: The employee cost was 8.20% of the total turnover, failing the 25% filter. Additionally, 73% of its total expenditure was in foreign currency under 'Onsite development expenses,' indicating substantial onsite services.The Tribunal directed the AO/TPO/DRP to reconsider the appeal, applying the employee cost to sales filter correctly to all comparables selected by the TPO.Conclusion:The Tribunal allowed the appeal for statistical purposes, directing the AO/TPO/DRP to re-evaluate the comparables by correctly applying the employee cost to sales filter, thereby ensuring a fair assessment of the TP adjustment.