Pramod Kumar, Accountant Member - By way of this appeal, the assessee appellant has called into question correctness of order dated 24th September 2012, passed by the learned Assistant Commissioner of Income Tax, Circle (1), Baroda, in the matter of assessment under section 143(3) r.w.s. 92 CA and 144C of the Income Tax Act, 1961, for the assessment year 2008-09.
2. Grievances raised by the assessee are as follows :
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The ld. Assessing Officer ('AO') pursuant to the directions of the ld. Dispute Resolution Panel ('DRP') erred in rejecting the benchmarking approach adopted by the appellant and thereby making a transfer pricing adjustment of Rs,1,72,95,113/- to the income of the appellant by holding that the international transaction of provision of software development services of the appellant does not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 ('the Act'). |
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On the facts and in the circumstances of the case, the ld. AO/DRP erred in modifying the set of comparable companies identified by the appellant in its Transfer Pricing Study Report for provision of software development services. In doing so, the ld. AO/DRP specifically erred in : |
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considering Compu-U-learn Tech India Ltd. as a comparable, on the basis of selective comparability analysis, and by disregarding the information submitted by the appellant. |
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considering FCS Software Ltd. as a comparable company without considering the information submitted by the appellant during the assessment proceedings. |
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excluding certain comparables selected by the appellant in its transfer pricing study report. |
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The learned DRP/AO erred in not allowing an adjustment for the difference between the level of risk borne by the comparables and the appellant. In doing so, the ld. DRP/AO erred in : - |
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falling to consider that the appellant is a routine captive service provider as against the comparable companies selected by the ld. TPO, which include entrepreneurial companies and hence an adjustment is necessary; |
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disregarding the provisions of Rules 10B(2) and 10B(3) read with Rule 10C of the Rules, |
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The ld. DRP/AO erred in not allowing the use of multiple year data as prescribed under Rule 10B(4) of the Income Tax Rules, 1962 ('the Rules') and determining the arm's length price on the basis of financial information of the comparables for the previous year 2007-08 which was available in the public domain at the time of assessment proceedings but not at the time when the appellant conducted its analysis to comply with the provisions of Rules 10B(4) and 10D(4) of the Rules. |
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On the facts and circumstances of the case and in law, the ld. AO ought to have considered the fact that the appellant provided all the information requested during the assessment proceedings and has neither concealed any income nor furnished any inaccurate particulars of its income. Therefore, the ld. AO has erred in initiating the penalty proceedings under section 271(1)(c) of the Act." |
The short issue that we are required is whether or not the Assessing Officer was justified in making the impugned arm's length price adjustment of Rs 1,72,95,113 to the income of the assessee.
When this case was called out for hearing, learned counsel of the assessee submitted that all that is required to be adjudicated in this appeal is whether or not two comparables, namely Compu U learn Tech India Ltd and FCS Software Ltd can be valid comparable for the purpose of TNMM. It was submitted that the assessee Company is engaged in captive software development services to its associate enterprises i.e. Eclipsys US, and that during the relevant previous year, the assessee has provided software services to the tune of Rs 29,20,12,656. The assessee had adopted TNMM and selected certain comparables. These comparables were rejected by the Transfer Pricing Officer, and the Transfer Pricing Officer selected his set of comparables. Learned counsel submits that barring these two comparables, he has no issues with the comparables adopted by the Transfer Pricing Officer himself. Learned counsel made elaborate submissions on how these two companies are not appropriate comparables for the assessee before us, even though, for the reasons we will set out in a short while, it is not really necessary to deal with these contentions on merits. Suffice to say that the emphasis of the learned counsel has been that these two comparables adopted by the Transfer Pricing Officer cannot be treated as valid comparables for the purposes of this assessee. When asked whether all the comparables selected by the Transfer Pricing Officer have been subjected to the same test of rigorous scrutiny as these two comparables selected by the TPO, learned counsel fairly accepted that the assessee has not done so. He frankly stated that as long as assessee has no grievance with the comparables selected by the TPO there was no need to examine the appropriateness of comparables.
We also asked learned counsel for the assessee to step wise process whereby assessee's comparables were selected, and asked him to take us through the screenshots of various stages in narrowing down the results found in the database to the comparables eventually selected. Learned counsel took us through the transfer pricing study. While learned counsel took us through the transfer pricing study and explained the selection process, he could not show the process of 'qualitative screening' which resulted in selection of 20 comparables out of 463 comparables found in the preceding stage of selection process. When asked as to what was the objective criterion adopted in this narrowing down process, learned counsel did not have much to say. He, however, prayed that the matter be remitted to the file of the Assessing Officer so that assessee has a reasonable opportunity of explaining these issues, which, according to him, were not raised earlier.
Learned Departmental Representative, on the other hand, submitted that there cannot be cherry picking in putting selected comparables to the rigorous test. He pointed out that learned counsel has fairly accepted that they have scrutinized only those comparables which they find to be against their interests. The very foundation of this exercise is not on the legally sustainable basis. The application of any test has to be on uniform and consistent basis. Learned departmental Representative also highlighted the fact that the process of narrowing down to 20 comparables by the assessee is not transparent, nor the assessee is able to show any objective criterion adopted for this process. The selection of comparables thus is also a cherry picking exercise, which is contrary to the scheme of things envisaged in the transfer pricing legislation. Learned Departmental Representative, however, did not oppose the prayer to remit the matter to the file of the Assessing Officer.
Having heard the rival contentions, and having perused the material on record we find that the matter indeed deserves to be remitted to the file of the Assessing Officer so that both the above aspects, which are very crucial to determination of correctness of arm's length price in this case, can be reexamined by the Assessing Officer in the light of appropriate clarifications of the assessee. We have noted that at page 259 and 260 of the paper-book 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. Similarly, 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. The income tax proceeding are not adversarial proceedings, as these are the proceedings to reach the correct position. In the process of any analysis, objectivity and consistency is to be maintained. In view of these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to remit the matter back to the assessment stage for fresh adjudication in the light of our above observations, in accordance with the law and by way of a speaking order. We order so. All other issues raised in the appeal are thus rendered infructuous.
In the result, the appeal is allowed for statistical purposes in the terms indicated above.