Tax Appeals Allowed with Directions on Comparable Companies and Interest Calculation

The Tribunal partly allowed both appeals for AY 2011-12 and AY 2012-13. It directed the TPO to reconsider the inclusion/exclusion of comparable companies, excluding negative working capital adjustments. The AO was instructed to correctly compute interest under sections 234A and 234B of the Income Tax Act.

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Issues Involved:

1. Determination of Arm's Length Price (ALP) for international transactions.
2. Exclusion and inclusion of specific comparable companies.
3. Negative working capital adjustment.
4. Charging of interest under sections 234A and 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for international transactions:

The Assessee, a wholly-owned subsidiary of FNF Mauritius, provides Information Technology Enabled Services (ITES) to its Associated Enterprise (AE). For AY 2011-12 and AY 2012-13, the Assessee filed a Transfer Pricing Study (TP Study) adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) to justify the price paid in the international transactions as at Arm's Length Price (ALP). The Assessee selected Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) for comparison. For AY 2011-12, the Assessee's OP/TC was 12.49%, and for AY 2012-13, it was 15%.

The Transfer Pricing Officer (TPO) accepted TNMM as the MAM and used the same PLI but selected different comparable companies, leading to proposed adjustments to ALP for both years. For AY 2011-12, the TPO's adjustment was Rs. 4,03,42,661, and for AY 2012-13, it was Rs. 6,30,43,252.

2. Exclusion and inclusion of specific comparable companies:

For AY 2011-12, the Assessee sought the exclusion of ICRA Online Ltd. and the inclusion of R Systems Ltd. and Informed Technologies India Ltd. The Tribunal remanded the comparability of ICRA Online Ltd. to the TPO/AO for fresh consideration and directed the TPO to consider the financial results of R Systems Ltd. for the relevant period. The Tribunal also directed the TPO to reconsider the exclusion of Informed Technologies India Ltd.

For AY 2012-13, the Assessee sought the exclusion of Infosys BPO Ltd., BNR Udyog Ltd., and TCS e-serve Ltd., and the inclusion of Crystal Voxx Ltd. and Jindal Intellicom Ltd. The Tribunal excluded Infosys BPO Ltd. and remanded the comparability of BNR Udyog Ltd. and TCS e-serve Ltd. to the TPO for fresh consideration. The Tribunal directed the TPO to include Crystal Voxx Ltd. and to examine the comparability of Jindal Intellicom Ltd. afresh.

3. Negative working capital adjustment:

The Assessee contended that the TPO and the Dispute Resolution Panel (DRP) erred in adding a negative working capital adjustment to the average arithmetic profit margin of the comparable companies. The Tribunal referred to the decision of the Hyderabad Bench of the ITAT in the case of Adaptec (India) P. Ltd. and concluded that no negative working capital adjustment should be made when the Assessee does not carry any working capital risk. The Tribunal directed the TPO not to make any negative working capital adjustment.

4. Charging of interest under sections 234A and 234B of the Income Tax Act:

The grounds relating to the charging of interest under sections 234A and 234B were challenged on the basis of improper computation. The Tribunal directed the Assessing Officer (AO) to verify the correctness of the Assessee's claim and compute the correct liability of interest under these sections.

Conclusion:

Both appeals by the Assessee for AY 2011-12 and AY 2012-13 were partly allowed. The Tribunal provided detailed directions for the TPO to reconsider the inclusion and exclusion of specific comparable companies and to avoid negative working capital adjustments. The AO was also directed to verify and correctly compute the interest under sections 234A and 234B.

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