2018 (10) TMI 1429 - AT - Income Tax

TPA - Exclusion of comparables from final set of comparables being functionally not comparable - Exclusion of SIP Technologies and Exports Ltd. on the ground that it was persistent loss making concern - Held that - The assessee was engaged in providing software development services to its associated enterprises. The total international transactions undertaken by assessee were ₹ 48.29 crores. The assessee had applied TNNM method and there is no dispute about application of said method, thus companies functionally dissimilar with that of assessee need to be deselected from final list. SIP Technologies and Exports Ltd. - If we look at the details filed by assessee i.e. summary of operating profit margins for three years of SIP Technologies and Exports Ltd., then in assessment year 2007-08, unadjusted operating margins were to the tune of 10.19%; in assessment year 2008-09, it was (-)33.20% and in the year under appeal, it was (-) 19.33%, The assessee in support has furnished the audit report along with attachments to establish its case that the said concern SIP Technologies and Exports Ltd. was not persistent loss making.

Issues Involved:

1. Transfer Pricing Adjustment
2. Use of Single Year and Non-Contemporaneous Financial Data
3. Modification of Export Earning Filter
4. Rejection of Loss Making Companies
5. Acceptance of Supernormal Profit Making Companies
6. Modification of Turnover Filter
7. Rejection of Certain Comparable Companies
8. Consideration of Functionally Different Companies
9. Adjustment for Differences in Functions and Risk Profile
10. Tax Holiday under Section 10A
11. Computation of Transfer Pricing Adjustment
12. Levy of Penalty and Interest

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contended that the transfer pricing adjustment was inappropriate as the pricing of all international transactions was at arm's length. The Tribunal noted that the TPO had selected five concerns as comparables and did not allow risk adjustment, resulting in an upward adjustment of ?8.84 crores. The CIT(A) included five out of six comparables rejected by TPO and upheld the inclusion of four new ones.

2. Use of Single Year and Non-Contemporaneous Financial Data:
The assessee argued against the use of single-year financial data for transfer pricing analysis. The TPO had considered data for the year ending 31.03.2009, rejecting the use of multiple years' data.

3. Modification of Export Earning Filter:
The assessee applied a filter of 25% export earnings, while the TPO modified it to 75%. The Tribunal did not specifically address this issue in the final judgment as it was not pressed by the assessee.

4. Rejection of Loss Making Companies:
The assessee challenged the rejection of SIP Technologies and Exports Ltd. as a comparable, arguing it was not a persistent loss-making company. The Tribunal directed the inclusion of SIP Technologies and Exports Ltd. in the final set of comparables, noting it had profits in one of the three years considered.

5. Acceptance of Supernormal Profit Making Companies:
The assessee argued against the inclusion of companies with supernormal profits. The Tribunal did not specifically address this issue as it was not pressed by the assessee.

6. Modification of Turnover Filter:
The Revenue contended against the CIT(A)'s direction to apply a turnover filter of ?1 crore to ?200 crores. The Tribunal upheld the CIT(A)'s decision, aligning with the UN and OECD guidelines.

7. Rejection of Certain Comparable Companies:
The assessee argued against the rejection of certain companies identified in its transfer pricing study. The Tribunal directed the inclusion of SIP Technologies and Exports Ltd. and exclusion of Bodhtree Consulting Ltd. and KALS Information Systems Ltd. from the final set of comparables.

8. Consideration of Functionally Different Companies:
The assessee argued that Bodhtree Consulting Ltd. and KALS Information Systems Ltd. were functionally different and should be excluded. The Tribunal agreed, noting that Bodhtree Consulting Ltd. had fluctuating margins and KALS Information Systems Ltd. was engaged in product development, not comparable to software development services.

9. Adjustment for Differences in Functions and Risk Profile:
The assessee sought adjustments for differences in functions and risk profiles. The Tribunal did not specifically address this issue as it became academic after the exclusion of certain comparables.

10. Tax Holiday under Section 10A:
The assessee argued that it was availing tax holiday under section 10A, indicating no intention to shift profits out of India. The Tribunal did not specifically address this issue as it was not pressed by the assessee.

11. Computation of Transfer Pricing Adjustment:
The assessee contended that the adjustment should consider the lower 5% arithmetic mean variation. The Tribunal directed the re-determination of mean margins of comparables in line with its directions, which would bring the margins within the permissible range.

12. Levy of Penalty and Interest:
The assessee argued against the initiation of penalty proceedings under sections 271(1)(c) and the levy of interest under section 234B. The Tribunal dismissed this ground as premature.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal. It directed the inclusion of SIP Technologies and Exports Ltd. and the exclusion of Bodhtree Consulting Ltd. and KALS Information Systems Ltd. from the final set of comparables. The Tribunal also directed the re-determination of mean margins, which would bring the margins within the permissible range, making the issues raised by the Revenue academic.

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