2020 (10) TMI 1075 - AT - Income Tax

Transfer Pricing Dispute Decision: Comparable Companies Reconsidered

ACIT 14 (1) (2), Mumbai Versus General Mills India Pvt. Ltd. And (Vice-Versa)

ACIT 14 (1) (2), Mumbai Versus General Mills India Pvt. Ltd. And (Vice-Versa) - TMI Issues Involved:1. Transfer pricing adjustment.2. Rejection of comparable companies.3. Working capital and risk adjustment.4. Set-off of losses against profits under section 10A.5. Penalty proceedings under section 271(1)(c).Detailed Analysis:1. Transfer Pricing Adjustment:The assessee reported various international transactions and applied the Transactional Net Margin Method (TNMM) to determine the Arm's Length Price (ALP). The Transfer Pricing Officer (TPO) applied several filters and rejected six out of nine comparables selected by the assessee, leading to a transfer pricing adjustment of Rs. 4,86,45,217. The assessee objected to the rejection of CG-VAK Software and Exports Ltd. and R Systems International Ltd. as comparables, arguing that these companies were functionally similar and had been accepted as comparables in other assessment years.2. Rejection of Comparable Companies:The TPO rejected CG-VAK Software and Exports Ltd. on the grounds that it was predominantly an IT services company, with only 14% of its revenue from BPO services. The TPO also rejected R Systems International Ltd. because it was a leading provider of outsourced product development and customer support services, not ITES, and followed a different financial year. The assessee argued that segmental data for BPO services was available and should be considered.3. Working Capital and Risk Adjustment:The assessee argued that as a captive service provider, it faced different risks compared to full-fledged ITES providers and that working capital adjustments should be made. The TPO did not consider these adjustments, and the Dispute Resolution Panel (DRP) rejected the assessee's contention.4. Set-off of Losses Against Profits Under Section 10A:The Assessing Officer (AO) disallowed the exemption claimed under section 10A by setting off losses of non-STPI units against the profit of the STPI unit. The DRP, relying on the case of Black and Veatch Consulting P Ltd (348 ITR 72), allowed the assessee's contention. The revenue appealed against this decision.5. Penalty Proceedings Under Section 271(1)(c):The assessee objected to the initiation of penalty proceedings under section 271(1)(c) for concealment of income or furnishing inaccurate particulars.Judgment:Transfer Pricing Adjustment:The Tribunal found that CG-VAK Software and Exports Ltd. was correctly rejected due to its low turnover and predominant IT services revenue. However, R Systems International Ltd. was deemed functionally comparable, and the Tribunal directed the TPO to obtain the last quarter data to align its financial year with the assessee’s and reconsider its inclusion as a comparable.Working Capital and Risk Adjustment:The Tribunal remitted the issue back to the TPO to calculate the risk adjustment and working capital adjustment, considering the assessee's status as a captive service provider.Set-off of Losses Against Profits Under Section 10A:The Tribunal dismissed the revenue's appeal, citing the Supreme Court's decision in CIT & Anr. v. M/s Yokogawa India Ltd. (391 ITR 274), which held that the deduction under section 10A should be made before the set-off of losses.Penalty Proceedings Under Section 271(1)(c):The Tribunal did not specifically address the penalty proceedings under section 271(1)(c) as it was not pressed by the assessee.Conclusion:The appeal filed by the assessee was allowed for statistical purposes, and the appeal filed by the revenue was dismissed. The Tribunal directed the TPO to reconsider the inclusion of R Systems International Ltd. as a comparable and to calculate the necessary adjustments for working capital and risk.