2017 (8) TMI 1561 - AT - Income Tax

Tribunal Rules on Transfer Pricing, Turnover Filters, and Related Party Transactions

The Tribunal addressed transfer pricing adjustment, turnover and related party transaction filters, functional dissimilarity of comparables, and exclusion ... TP Adjustment - Comparable selection - TP issue including the turnover filter and 0% RPT filter applied by the DRP - HELD THAT:- As regards the turnover filter applied by the DRP and challenged by the revenue, the learned Authorised Representative of the assessee has submitted that the assessee has no objection if the directions of the DRP to the extent of applying the turnover filter are set aside. However the companies which were excluded by the DRP on this ground may be excluded on functional dissimilarity. In view of the statement of learned Authorised Representative that the assessee has no objection if the directions of the DRP to the extent of applying the turnover filter are set aside. We set aside the directions of the DRP to the extent of applying turnover filter in respect of the comparables selected by the TPO. The functional comparability of those companies will be examined separately. 0% RPT filter by DRP - when there is good number of comparables available then, we concur with the view of the co-ordinate bench that the RPT filter of 15% is proper in the case of the assessee. Accordingly we direct the Assessing Officer/TPO to exclude the comparable companies having the revenue of more than 15% from related parties. Since we have determined the RPT filter at 15% and the assessee has agreed not to apply any turnover filter, the only issue remained to be decided is functional comparability of various companies selected by the TPO and objected by the assessee. Tribunal in the case of DCIT Vs. Electronics for Imaging India (P.) Ltd. [2016 (2) TMI 1123 - ITAT BANGALORE] companies not functionally comparable to the assessee and therefore the TPO / A.O is directed to exclude these companies from the set of comparables. MINDTREE LIMTIED - There is a restructuring in this company which has influenced the profits however, the decision relied upon by the learned Authorised Representative in the case of HSBC Electornic Data Processing (I) Pvt. Ltd. Vs. ACIT [2015 (1) TMI 1063 - ITAT HYDERABAD] is not directly on the comparability of this company but it was in respect of some other company which was under restructuring of event like merger, demerger, etc. In the facts and circumstances of the case and in the interest of justice, we set aside the issue of functional comparability of this company to the record of the TPO/A.O. for considering the objections raised by the assessee and fresh adjudication. Exclusion of telecommunication expenses from the export turnover while computing the deduction under Section 10B - HELD THAT:- As per the definition of export turnover provided in Expln. 2 below Section 10B(9A), the export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India or expenses if any incurred in foreign exchange in providing the technical services outside India. Thus from the plain language of the definition of the export turnover, it is clear that the expenses which are not in the nature of freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India but expenses incurred in foreign exchange are to be excluded only when the same are incurred for providing technical services outside India. In the case of the assessee, the assessee has claimed that the traveling expenses incurred by the assessee are not for providing the technical services outside India and therefore the same are not required to be excluded from the export turnover. On principle, we do agree with the contention of the learned Authorised Representative that if the expenditure other than the freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India incurred in foreign exchange not for providing the technical services outside India then the same are not required to be excluded from the export turnover. Issues Involved:1. Transfer Pricing Adjustment2. Turnover Filter and Related Party Transaction (RPT) Filter3. Functional Dissimilarity of Comparable Companies4. Exclusion of Telecommunication and Travelling Expenses from Export Turnover5. Levy of Interest under Sections 234B & 234CIssue-wise Detailed Analysis:1. Transfer Pricing Adjustment:The assessee challenged the transfer pricing adjustment of Rs. 1,16,68,539 made under Section 92CA of the IT Act. The assessee contended that the TPO used incorrect operating revenue and expenses, and the DRP upheld the TPO's action. The DRP also rejected certain comparable companies selected by the TPO on grounds of turnover filter and related party transactions (RPT). The assessee argued that the DRP was unjustified in rejecting companies with RPT within 15% and in selecting companies like ICRA Techno Analytics Ltd. and Kals Information Systems Ltd., which were functionally dissimilar.2. Turnover Filter and Related Party Transaction (RPT) Filter:The DRP applied a turnover filter of Rs. 1 to Rs. 200 Crores and a 0% RPT filter, which was challenged by both the revenue and the assessee. The Tribunal noted that the ALP should consider uncontrolled comparable prices, and a 0% RPT is impractical. A tolerance range of 5% to 25% RPT is generally acceptable. The Tribunal concurred with the view that a 15% RPT filter is appropriate for the assessee. Consequently, the Tribunal directed the exclusion of companies with more than 15% RPT and set aside the turnover filter applied by the DRP.3. Functional Dissimilarity of Comparable Companies:The assessee sought the exclusion of eight companies from the set of comparables selected by the TPO on grounds of functional dissimilarity and exceeding the 15% RPT threshold. The Tribunal examined each company's functional profile:- ICRA Techno Analytics Ltd. (Seg.): Engaged in diversified activities like software development, consultancy, engineering services, and business analytics. The Tribunal found it functionally dissimilar and noted its RPT was 15.37%.- Infosys Ltd.: Engaged in diversified services with significant brand value and intangible assets. The Tribunal found it incomparable due to its high revenue and brand value.- KALS Information Systems Ltd. (Seg.): Engaged in software product development with incorrect segmental information. The Tribunal found it functionally dissimilar.- L&T Infotech Ltd.: Significant brand value and revenue from on-site software services. The Tribunal found it functionally dissimilar and noted its RPT was 18.66%.- Persistent Systems Ltd.: Derived income from software services and products without segmental information. The Tribunal found it functionally dissimilar and noted its RPT was 15.47%.- Sasken Communication Technology Ltd.: Earned revenue from software services, products, and other services without segmental information. The Tribunal found it functionally dissimilar.- Tata Elxsi Ltd.: Engaged in diversified activities within the software development segment. The Tribunal found it functionally dissimilar.The Tribunal directed the exclusion of these companies from the set of comparables.4. Exclusion of Telecommunication and Travelling Expenses from Export Turnover:The assessee argued that telecommunication and travelling expenses should not be excluded from export turnover as they were not charged to the AE and were not part of the export turnover. The Tribunal referred to the assessee's own case for the Assessment Year 2009-10 and other decisions, noting that such expenses should not be excluded if they were not part of the export turnover. The Tribunal directed the Assessing Officer to verify this aspect and decide accordingly.5. Levy of Interest under Sections 234B & 234C:The assessee challenged the levy of interest under Sections 234B & 234C, arguing that the conditions for levying such interest did not exist. The Tribunal did not provide a specific ruling on this issue within the provided text.Conclusion:The Tribunal addressed the issues of transfer pricing adjustment, turnover and RPT filters, functional dissimilarity of comparables, and exclusion of expenses from export turnover. It directed the exclusion of certain companies from the set of comparables based on functional dissimilarity and RPT thresholds and remanded the issue of telecommunication and travelling expenses to the Assessing Officer for verification. The Tribunal's decisions were guided by precedents and the specific facts of the case.