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2014 (1) TMI 892 - AT - Income Tax
Transfer pricing adjustment Arm s length principle not followed Provision of software development services made - Benchmarking approach rejected Selection of comparable - Held that - The matter indeed deserves to be remitted to the file of the Assessing Officer so that both the aspects which are very crucial to determination of correctness of arm s length price can be reexamined by the Assessing Officer in the light of appropriate clarifications of the assessee - the assessee has set out various objective tests employed in narrowing down universe of 18, 249 comparables available in the Prowess database to 463 comparables. However the qualitative analysis based on which 20 comparables were finally selected from these 463 comparables is not specified - there cannot be cherry picking for selecting unsuitability of comparables either The assessee should have subjected all the comparables selected by the revenue to the same tests - Decided in favour of Assessee.
Issues:
1. Transfer pricing adjustment under section 143(3) r.w.s. 92 CA and 144C of the Income Tax Act, 1961 for the assessment year 2008-09.
2. Validity of comparables selected for Transfer Pricing Study Report.
3. Adjustment for the difference in the level of risk borne by comparables.
4. Use of multiple year data for determining arm's length price.
5. Penalty proceedings under section 271(1)(c) of the Act.
Issue 1: Transfer Pricing Adjustment
The appellant challenged the correctness of the order by the Assistant Commissioner of Income Tax, questioning the arm's length price adjustment of Rs 1,72,95,113 to the income of the appellant. The focus was on whether the Assessing Officer was justified in making this adjustment.
Issue 2: Validity of Comparables
The main contention revolved around the validity of two comparables, Compu U learn Tech India Ltd and FCS Software Ltd, selected for the Transfer Pricing Study Report. The appellant argued that these comparables were not appropriate for the captive software development services provided by the appellant to its associate enterprises. The Assessing Officer's selection process and the lack of rigorous scrutiny of all comparables were also highlighted.
Issue 3: Adjustment for Risk Difference
The appellant sought an adjustment for the difference in the level of risk borne by the comparables and the appellant. It was argued that being a routine captive service provider, the appellant required an adjustment compared to the entrepreneurial companies included in the comparables selected by the Transfer Pricing Officer.
Issue 4: Use of Multiple Year Data
The appellant contended that the Assessing Officer erred in not allowing the use of multiple year data as prescribed under the Income Tax Rules. The appellant emphasized the importance of using financial information of comparables for the previous year 2007-08, which was not available at the time of the appellant's analysis.
Issue 5: Penalty Proceedings
Regarding penalty proceedings under section 271(1)(c) of the Act, the appellant argued that all requested information was provided during the assessment proceedings, and there was no concealment of income or furnishing of inaccurate particulars. Therefore, the initiation of penalty proceedings was deemed erroneous.
In the judgment, the Tribunal decided to remit the matter back to the Assessing Officer for fresh adjudication. The Tribunal emphasized the need for a thorough examination of the comparables selected, ensuring objectivity and consistency in the analysis process. The lack of transparency in the selection of comparables and the necessity for all comparables to undergo the same rigorous scrutiny were highlighted. The Tribunal stressed the importance of maintaining consistency and objectivity in income tax proceedings to reach the correct position. Consequently, the appeal was allowed for statistical purposes, rendering other issues raised in the appeal moot.