2018 (6) TMI 505 - AT - Income Tax

Appeal partly allowed, key issues remitted to TPO for fresh consideration. Fair opportunity emphasized.

The appeal was partly allowed, remitting key issues back to the Transfer Pricing Officer (TPO) for fresh consideration. The Tribunal emphasized the need ... Determining Arm’s Length Price u/s 92CA - comparables selection - extraordinary event - Held that:- The assessee company is engaged in providing/rendering R&D support services in respect of CAD and CAE tools in designing the automobile parts and is into modelling and iterative simulation. It receives the basic design from its group company. With respect of CAD modelling, it made a 3-D CAD modelling data of vehicle components using CAD software tools primarily CIT-A. Companies selected as comparable must match functionally with assessee. Provision for bad and doubtful debts and bad debts written off as non operating expenses for the purpose of margin computation of comparable companies as selected by the TPO - Held that:- We direct the AO/TPO to recompute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies. Accordingly, this ground is allowed. Adjustment should be restricted to the value of international transactions - Since the assessee failed to furnish the evidence in respect of the invoices raised for revenue of ₹ 71,26,20,193/- either before the TPO or before the DRP, the DRP rejected the objections raised by the assessee. To meet the ends of justice, we remit this issue back to the file of the TPO with a direction to give one more opportunity to the assessee to submit the required information to substantiate its claim. We direct the assessee to file the required information to substantiate its claim. This ground is allowed for statistical purposes. Issues Involved:1. Selection of Comparable Companies2. Treatment of Bad and Doubtful Debts3. Rejection of Comparable Companies4. Adjustment to International Transactions5. Working Capital Adjustment6. Use of Filters7. Rejection of Multiple Year Data8. Adjustment for Risk Differences9. Arm's Length Range of 5%Issue-wise Detailed Analysis:1. Selection of Comparable Companies:The assessee contested the inclusion of certain companies as comparables by the TPO, arguing functional dissimilarity and extraordinary events. The Tribunal reviewed the submissions and previous decisions, concluding:- Eclerx Services Ltd.: Despite the acquisition of Agilyst Inc., the Tribunal found no significant impact on financials and retained it as a comparable.- Infosys BPO Ltd.: Excluded due to functional dissimilarity, brand value, and high turnover, following previous Tribunal decisions.- TCS eServe Ltd.: Excluded based on functional dissimilarity, high turnover, and possession of brand value and intangibles.- Crossdomain Solutions Pvt. Ltd.: Retained as a comparable, following previous Tribunal decisions and rejecting website-based objections.2. Treatment of Bad and Doubtful Debts:The TPO treated bad and doubtful debts as non-operating expenses unless consistently incurred over three years. The Tribunal directed the TPO to include bad debts and provisions for bad and doubtful debts as operating expenses, aligning with the decision in M/s Kenexa Technologies Pvt. Ltd.3. Rejection of Comparable Companies:The assessee argued for the inclusion of Crystal Voxx Ltd., which the TPO rejected due to failing service income filters and persistent losses. The Tribunal remitted the issue back to the TPO for fresh consideration, emphasizing the need for a fair opportunity for the assessee to present its case.4. Adjustment to International Transactions:The assessee contended that adjustments should be limited to international transactions with AEs, not the total turnover. The Tribunal remitted the issue back to the TPO, directing the assessee to provide necessary evidence to substantiate its claim.5. Working Capital Adjustment:No specific arguments were advanced by the assessee regarding working capital adjustments, leading to the dismissal of related grounds.6. Use of Filters:The Tribunal did not specifically address the use of different financial year-end filters, as no arguments were advanced.7. Rejection of Multiple Year Data:Similarly, the Tribunal did not address the rejection of multiple year data due to the lack of arguments presented.8. Adjustment for Risk Differences:No arguments were advanced regarding risk adjustments, leading to the dismissal of related grounds.9. Arm's Length Range of 5%:The Tribunal did not specifically address the arm's length range of 5%, as no arguments were advanced.Conclusion:The appeal was partly allowed for statistical purposes, with key issues remitted back to the TPO for fresh consideration and directions to provide the assessee with a fair opportunity to present its case. The Tribunal emphasized adherence to previous decisions and proper substantiation of claims.