Tribunal rules on comparables, interest, and penalty in transfer pricing appeal

The Tribunal partially allowed the assessee's appeal, directing the exclusion of specific comparables for transfer pricing adjustment and providing guidance on the levy of interest and penalty proceedings. The order was issued on 30.08.2019.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Levy of Interest under Sections 234B and 234D
3. Initiation of Penalty Proceedings under Section 271(1)(c)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary dispute concerns the selection of certain comparables for transfer pricing adjustment amounting to Rs. 4,46,63,527. The assessee objected to the selection of four specific comparables: Vishal Information Technologies Ltd, Datamatics Financial Services Ltd, Maple E-Solutions Ltd, and Asit C. Mehta.

- Vishal Information Technologies Ltd.:
The assessee argued that this company has a different business model, outsourcing a major portion of its work, which is evident from its low personnel cost compared to the assessee. Various judicial precedents and the assessee's own past cases supported the exclusion of this company as a comparable. The Tribunal agreed, noting the distinct business model and previous exclusions in similar cases, and held that Vishal Information Technologies Ltd. cannot be treated as a comparable.

- Datamatics Financial Services Ltd.:
The assessee contended that this company does not satisfy the Transfer Pricing Officer's (TPO) filters, including the service income filter and related party transaction (RPT) filter. The Tribunal noted that the company’s ITeS revenue constituted only 22% of total income and had substantial related party transactions, thus failing the TPO's criteria. The Tribunal directed the Assessing Officer to verify these aspects and exclude the company if the filters are not met.

- Maple E-Solutions Ltd.:
The assessee argued that the financial statements of this company are unreliable due to past fraud by its promoters. The Tribunal referred to various judicial precedents, including decisions by the Hon'ble Jurisdictional High Court, which excluded this company as a comparable due to unreliable financials. The Tribunal concluded that Maple E-Solutions Ltd. cannot be treated as a comparable.

- Asit C. Mehta:
The assessee highlighted that this company has multiple segments, including GIS services which are considered high-end KPO services, making it functionally different from the assessee. Additionally, the company underwent an extraordinary event of acquiring another company during the assessment year. The Tribunal, considering judicial precedents and the functional differences, held that Asit C. Mehta cannot be treated as a comparable.

The Tribunal directed the Assessing Officer to determine the arm's length price of the transactions related to ITeS in accordance with the observations and consider the assessee’s claim of risk adjustment.

2. Levy of Interest under Sections 234B and 234D:
The assessee raised issues regarding the levy of interest under sections 234B and 234D of the Act. The Tribunal noted that the levy of interest is consequential in nature and directed the Assessing Officer to apply the provisions in accordance with the law.

3. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee challenged the initiation of penalty proceedings under section 271(1)(c) of the Act. The Tribunal dismissed this ground as premature at this stage.

Conclusion:
The Tribunal allowed the assessee’s appeal partly, directing the exclusion of certain comparables for transfer pricing adjustment and providing directions for the levy of interest and penalty proceedings. The order was pronounced in the open court on 30.08.2019.

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