2015 (8) TMI 1448 - AT - Income Tax

TPA - selection of comparable - Held that - The assessee is a resident private limited company as engaged in the business of providing software development services to its AEs thus companies functionally thus companies functionally dissimilar with that of assessee need to be deselected from final list. Foreign exchange gain on realization of consideration for rendering software development services is to be regarded as part of operating revenues. Assessing Officer/TPO are directed to verify this aspect as to whether the foreign exchange gain is on account of realisation of consideration and if that is so to then consider the same as operating in nature. Working Capital Adjustment - Held that - We deem it fit to remand the matter back to the file of the TPO to examine and verify the assessee s claim that the amount of receivables and payables have been taken incorrectly in computing the working capital adjustment and to recompute the working capital adjustment accordingly if so required after affording the assessee adequate opportunity of being heard and to file details/submissions required in this regard. Risk Adjustment - Held that - the assessee has raised the issue of grant of market risk adjustment. However during the proceedings before us it was admitted that the assessee apart from putting forth this claim has not quantified the adjustment to be granted in this regard. In view of this this plea of the assessee is hypothetical in nature and not maintainable and is accordingly dismissed. Grant of benefit of deduction of 5% in computing the ALP of the Transactions - Held that - The new section 92C(2A) of the Act mandates that if the AM price falls beyond /- 5% from the price charged in the international transactions then the assessee does not have any option as referred to in Section 92C(2) of the Act. Thus as per the above amendment it is clear that /- 5% variation is allowed to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly the 5% benefit is not available to the assessee. Consequently Ground No.2 raised by the assessee is dismissed. Charging of Interest u/s.234B - Held that - The charging of interest The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld in the case of CIT v. Anjum H. Ghaswala 2001 (10) TMI 4 - SUPREME COURT and we therefore uphold the action of the Assessing Officer in charging the said interest. The Assessing Officer is however directed to recompute the interest chargeable u/s. 234B and 234C of the Act if any while giving effect to this order.

Issues Involved:
1. Transfer Pricing Adjustment
2. Use of Multiple Year Data
3. Rejection of Comparables
4. Working Capital Adjustment
5. Foreign Exchange Gain/Loss
6. Risk Adjustment
7. Benefit of +/- 5% in Computing ALP
8. Charging of Interest under Section 234B
9. Initiation of Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue was the addition of Rs. 5,09,95,875 made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) to the Arm's Length Price (ALP) of payments made by the assessee to its Associated Enterprises (AEs) for software development services. The TPO rejected the assessee's Transfer Pricing (TP) documentation and conducted a fresh economic analysis, determining that the international transactions were not at arm's length.

2. Use of Multiple Year Data:
The TPO used only the current year's data (FY 2008-09) for determining the ALP, rejecting the assessee's use of multiple year data. The CIT (Appeals) upheld the TPO's decision, which the assessee contested.

3. Rejection of Comparables:
The TPO rejected certain comparables considered by the assessee and applied different quantitative and qualitative filters. The assessee objected to the rejection of companies with different accounting years, high employee costs, and low export sales as comparability criteria.

- Bodhtree Consulting Ltd.: The Tribunal excluded this company from the list of comparables, citing its involvement in software products and web solutions, making it functionally dissimilar to the assessee.
- Upper Turnover Filter: Companies with turnovers exceeding Rs. 200 Crores were excluded based on the Tribunal's decision in Mindteck (India) Ltd. for AY 2009-10. The companies excluded were Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Zylog Systems Ltd., Mindtree Ltd., L&T Infotech Ltd., and Infosys Ltd.
- SIP Technologies & Exports Ltd.: The Tribunal remanded the matter back to the TPO for a factual examination of the Related Party Transactions (RPT) filter, as the assessee claimed NIL RPT for the year.

4. Working Capital Adjustment:
The assessee claimed that the amount of receivables and payables was incorrectly taken in computing the working capital adjustment. The Tribunal remanded this issue back to the TPO for verification and recomputation if necessary.

5. Foreign Exchange Gain/Loss:
The Tribunal held that foreign exchange gain on realization of consideration for rendering software development services should be regarded as part of the operating revenue. The TPO was directed to verify if the foreign exchange gain was on account of realization of consideration and, if so, to consider it as operating in nature.

6. Risk Adjustment:
The assessee's claim for risk adjustment was dismissed as hypothetical and not maintainable, as it was not quantified.

7. Benefit of +/- 5% in Computing ALP:
The Tribunal dismissed the assessee's claim for the benefit of +/- 5% in computing the ALP, citing the amendment to Section 92C(2A) of the Act, which mandates that if the AM price falls beyond +/- 5% from the price charged in the international transactions, the assessee does not have any option for adjustment purposes.

8. Charging of Interest under Section 234B:
The Tribunal upheld the charging of interest under Section 234B, as it is consequential and mandatory. The AO was directed to recompute the interest chargeable while giving effect to the Tribunal's order.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed the ground related to the initiation of penalty proceedings under Section 271(1)(c) as premature and not maintainable, as no penalty had been levied by the AO in the impugned order.

Conclusion:
The assessee's appeal was partly allowed, with specific directions to the TPO for reconsideration and verification on certain issues, while other claims were dismissed based on legal provisions and previous Tribunal decisions.

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