2018 (4) TMI 1791 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee is engaged primarily in providing I.T. enabled services to its parent company thus companies functionally dissimilar with that of assessee need to be deselected from final list. See M/S RAMPGREEN SOLUTIONS PVT. LTD. (ERSTWHILE VCUSTOMER SERVICES INDIA PVT. LTD.) 2015 (11) TMI 1651 - ITAT DELHI

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Comparables for Transfer Pricing
3. Exclusion of Certain Comparables
4. Functional Similarity and Extraordinary Events Impacting Comparability

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The appeal is directed against the order of the DCIT Circle 12(2), New Delhi, which made an addition of ?4,80,19,591/- to the total income of the assessee on account of transfer pricing adjustment. The assessee, a business process outsourcing company, filed a return declaring a total income of ?12,16,81,262/-. The AO referred the case to the TPO under section 92 CA of the Income Tax Act, 1961, for determining the arm’s length price of international transactions involving I.T. enabled services provided to associated enterprises (AEs).

2. Selection of Comparables for Transfer Pricing:
In the TP study report, the assessee adopted the Transactional Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the profit level indicator. Eight comparables were selected, showing an average OP/TC of 8.36%, below the assessee's OP/TC of 16.94%, indicating the price charged was at arm’s length. However, the TPO found these comparables unsuitable due to various reasons such as significant related party transactions, persistent losses, and failing export sales filters.

3. Exclusion of Certain Comparables:
The TPO selected seven new comparables, which included Accentia Technology, Cosmic Global Limited, Fortune Infotech Limited, Igate Global Solutions Limited, Infosys BPO Limited, TCS E-Serve International Ltd., and TCS E-Serve Ltd., and worked out their average profit margin at 36.80%. This led to a TP adjustment of ?4,82,2,513/-. The DRP confirmed this adjustment, leading to the final addition of ?4,80,90,591/- to the total income of the assessee.

4. Functional Similarity and Extraordinary Events Impacting Comparability:
The Tribunal considered the exclusion of five comparables: Accentia Technologies, I-gate Global Solutions Limited, Infosys BPO Limited, TCS E-Serve International Ltd., and TCS E-Serve Ltd. The Tribunal referred to previous decisions, including M/s Rampgreen Solutions Pvt. Ltd. and Techbook International Pvt. Ltd., where similar entities were excluded due to functional dissimilarity and extraordinary financial events like mergers and acquisitions.

Accentia Technologies:
Excluded due to amalgamation with Asscent Infoserve Ltd., leading to extraordinary financial results and increased asset base, making it incomparable.

I-gate Global Solutions Limited:
Excluded due to amalgamation with i-Gate Global Solutions Sdn. Bhd., an extraordinary financial event, rendering it unfit for comparison.

Infosys BPO Limited:
Excluded due to acquisition of McCamish Systems LLC, an extraordinary financial event affecting comparability.

TCS E-Serve International Ltd.:
Excluded as it was engaged in software development services, unlike the assessee's non-development software services.

TCS E-Serve Ltd.:
The issue was remitted back to the AO/TPO for fresh consideration, including the aspect of substantial related party transactions.

Conclusion:
The Tribunal directed the exclusion of Accentia Technologies, I-gate Global Solutions Limited, Infosys BPO Limited, and TCS E-Serve International Ltd. from the final list of comparables. The issue of TCS E-Serve Ltd. was remitted back to the AO/TPO for fresh analysis. The appeal was treated as allowed as indicated above. The judgment was pronounced in the open court on 27.04.2018.

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