Revenue's transfer pricing appeal dismissed as assessee's ITES and software services pricing within Section 92CA tolerance range

ITAT Mumbai dismissed Revenue's appeal regarding transfer pricing adjustments. The TPO had rejected certain comparables but when the same criteria were applied to TPO's selected comparables in ITES and IT segments, arithmetic mean came to 13.73% and 17.51% respectively. CIT(A) correctly held that assessee's pricing for both ITES services (Rs. 30,29,93,009) and software services (Rs. 7,39,80,534) fell within the +/-5% tolerance range under Section 92CA proviso applicable before 01/10/2009. Since prices were within tolerance limits, no adjustment was warranted. ITAT confirmed CIT(A)'s order dismissing Revenue's appeal.

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Issues Involved:

1. Deletion of addition of Rs. 4,45,29,090/- based on the provisions of section 92(1) of the Act.
2. Acceptance and rejection of comparables by the CIT(A) and TPO.
3. Scope for adding, amending, varying, omitting, or substituting grounds of appeal.

Summary:

Issue 1: Deletion of Addition of Rs. 4,45,29,090/-

The Revenue contested the deletion of an addition of Rs. 4,45,29,090/- made by the Assessing Officer (AO) to the appellant's income based on section 92(1) of the Act. The assessee, engaged in providing back office support and software development services, had benchmarked its international transactions using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) rejected the comparables selected by the assessee and introduced his own, leading to an upward adjustment.

Issue 2: Acceptance and Rejection of Comparables

The CIT(A) found inconsistencies in the TPO's approach in accepting and rejecting comparables. The TPO's criteria included related party transactions (RPT) > 25%, no export income, salary < 1.15% of turnover, lack of segmental data, and consistent loss-making. The CIT(A) observed that the TPO did not uniformly apply these criteria, leading to the inclusion of inappropriate comparables and exclusion of appropriate ones.

For instance, the TPO rejected Spanco Telesystems and Solutions Ltd. for having RPT > 25%, but the actual RPT was only 1.55%. Conversely, Airline Financial Support Services (India) Ltd. was accepted despite having RPT of 31.75%. The CIT(A) also noted that the TPO accepted companies with no export income and inconsistent salary expenditures, further highlighting the arbitrary application of criteria.

Issue 3: Scope for Adding, Amending, Varying, Omitting, or Substituting Grounds of Appeal

The Revenue sought the liberty to add, amend, vary, omit, or substitute any grounds of appeal before or during the hearing. However, the Tribunal decided the appeal on the merits based on the existing grounds.

Conclusion:

The Tribunal upheld the CIT(A)'s decision, confirming that the TPO's inconsistent application of criteria for comparables led to erroneous adjustments. The arithmetic mean of the comparables, when correctly applied, showed that the assessee's pricing fell within the acceptable +/- 5% range, negating the need for any adjustment. Consequently, the Revenue's appeal was dismissed.

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