2016 (7) TMI 1265 - AT - Income Tax

TPA - selection of comparable - BPO and KPO similarity - Held that - Companies providing high end KPO services will be functionally different as there services are not similar to assessee s BPO services.

Issues Involved:
1. Selection of comparables for determining Arm's Length Price (ALP).
2. Application of filters by the Transfer Pricing Officer (TPO).
3. Functional differences between Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO).
4. Exclusion and inclusion of specific companies as comparables.
5. Computational errors in the margin of comparable companies.
6. Use of non-public information obtained under section 133(6) of the Income Tax Act.
7. Consistency and reliability of financial data.

Issue-wise Analysis:

1. Selection of Comparables for Determining ALP:
The TPO selected thirteen companies as comparables and arrived at an arithmetic mean of 25.73% as the Profit Level Indicator (PLI). The DRP accepted some objections from the assessee and excluded certain companies, directing the TPO/AO to re-work out the ALP. The final arithmetic mean of four companies approved by the DRP stood at 24.20%, with an arm’s length margin of 23.34% after working capital adjustments.

2. Application of Filters by the TPO:
The TPO adopted several filters, such as excluding companies whose data was not available for FY 2010-11, those with IT Enabled Services (ITES) income less than Rs. 1 crore, and companies with more than 25% related party transactions. The DRP accepted some of these filters but excluded others based on functional differences and other criteria.

3. Functional Differences Between BPO and KPO:
The DRP excluded companies like Acropetal Technologies Limited and eClerx Services Limited, citing functional differences as these companies provided high-end KPO services, which were not comparable to the low-end ITES/BPO functions performed by the assessee. The decision was supported by the Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT, which emphasized the importance of functional comparability.

4. Exclusion and Inclusion of Specific Companies as Comparables:
- Accentia Technologies Ltd.: Excluded due to its engagement in high-end KPO services and development of software products, making it functionally different from the assessee.
- Acropetal Technologies Ltd. (Seg): Excluded as it provided engineering design services, considered high-end KPO services.
- Cosmic Global Ltd.: Excluded due to a significant portion of its expenses being on subcontracting, indicating a different working model.
- Crossdomain Solutions Pvt. Ltd.: Excluded as it was engaged in high-end KPO services and software development.
- e4e Healthcare: Initially excluded by the DRP due to inconsistency in accounting but directed to be included by the TPO/AO after verification of PLI.
- Infosys BPO and TCS e-Serve Ltd.: Excluded due to functional differences and high turnover, which were not considered appropriate for comparability.
- Informed Technologies Ltd.: Excluded due to failure of the service revenue filter and being engaged in KPO services.
- Microgentic Systems Ltd.: Excluded due to outsourcing a significant portion of its activities and small turnover.
- Jeevan Scientific Technologies Ltd. and Jindal Intellicome Ltd.: No objections from either party, retained as comparables.

5. Computational Errors in the Margin of Comparable Companies:
The assessee raised concerns about computational errors in the margin of comparable companies used in determining the arm’s length margin. The DRP directed the TPO/AO to rework the PLI accordingly.

6. Use of Non-Public Information Obtained Under Section 133(6):
The assessee objected to the use of information obtained under section 133(6) of the Act, which was not available in the public domain. The DRP considered these objections while making its decisions.

7. Consistency and Reliability of Financial Data:
The DRP and the Tribunal emphasized the importance of consistent and reliable financial data for comparability purposes. Companies with inconsistent accounting practices or lack of segmental information were excluded from the list of comparables.

Conclusion:
Both the assessee's and Revenue's appeals were partly allowed, with specific directions for inclusion and exclusion of certain companies based on functional comparability, reliability of financial data, and adherence to appropriate filters. The final adjustment was made at ?17,90,40,176/-. The Stay Application was dismissed as infructuous following the disposal of the appeals.

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