2016 (8) TMI 1162 - AT - Income Tax

TPA - ALP - selection of comparable - Held that - In view of the low employee cost and high related party transactions Coral Hubs Ltd. should be excluded from the comparables. Cross Domain Solutions Ltd. is engaged in high skilled IT services which cannot be compared with the services rendered by the assessee, we direct the TPO to exclude the said company from the list of comparables. E4e Health care Solutions company is engaged in business of providing healthcare outsourcing services for the healthcare industries, the same in our opinion cannot be compared with the assessee which is engaged in providing ITES enabled services Denial of adjustment in respect of extraordinary/non-operating expenses - Held that - Since the assessee in the instant case has given full details of the various expenses justifying its treatment as non-operating expenditure, therefore, considering the totality of the facts we hold that the assessee was fully justified in adjusting the above expenses for computing its operating margin. Therefore, we set aside the order of the CIT(A) on this issue and direct the AO to compute the operating margin of the assessee company by adjusting the above expenses. Grounds raised by the assessee on this issue are accordingly allowed. Non granting of working capital adjustment in respect of comparable companies selected by the TPO - Held that - We find the different Benches of the Tribunal are consistently taking the view that adjustment on account of working capital should be provided. Although this ground was raised before the CIT(A) he has not adjudicated the issue. We find the Pune Bench of the Tribunal in the case of Ariston Thermo India Ltd. 2015 (8) TMI 977 - ITAT PUNE as held to remit the matter back to the file of the Assessing Officer who shall examine as to whether or not in the present case the working capital requirement constitute an item of difference so as to require adjustment as per the parameters laid down by rule 10B(1)(e)(iii) r.w.rule 10B(3) of the Rules for the purposes of analyzing the comparability of the comparable uncontrolled transactions with the international transactions of the assessee. Thus we restore the issue to the file of the AO with a direction to decide the issue of working capital adjustment in the light of the decision above Include loss making concerns - Held that - We find no infirmity in CIT-A order directing the AO to include the loss making companies also in the list of comparable companies Once loss making companies are included in the list of comparable companies, then the average net margin of the comparable companies would fall within /-5% of safe harbour range u/s.92C(2) and the addition made on account of transfer pricing adjustment should be deleted.

Summary

Issues Involved:
1. Selection of comparable companies for Transfer Pricing (TP) analysis.
2. Treatment of specific expenses as extraordinary or non-operating for computing the operating margin.
3. Inclusion of loss-making companies in the list of comparables.
4. Granting of working capital adjustments.

Issue-wise Detailed Analysis:

1. Selection of Comparable Companies for Transfer Pricing Analysis:

The Assessee selected eight companies as comparables in its TP study report. The AO rejected seven of these and only accepted Infinite Data Systems Pvt. Ltd. as comparable. The AO selected three new companies: Coral Hubs Ltd., Crossdomain Solutions Ltd., and e4e Healthcare Solutions Ltd. The Assessee contested these selections, arguing that Coral Hubs Ltd. had a low employee cost and high related party transactions, Crossdomain Solutions Ltd. was engaged in high-skilled IT services, and e4e Healthcare Solutions Ltd. was involved in healthcare outsourcing services, making them functionally different from the Assessee's business.

The Tribunal accepted the Assessee's arguments and directed the exclusion of Coral Hubs Ltd., Crossdomain Solutions Ltd., and e4e Healthcare Solutions Ltd. from the list of comparables, citing functional dissimilarities and precedents from other Tribunal decisions.

2. Treatment of Specific Expenses as Extraordinary or Non-operating:

The Assessee claimed certain expenses as extraordinary/non-operating, including costs related to raising finance and buyback of shares, rejected tax refund claims, and salary expenses for accounting, MIS process, and software team employees. The AO and CIT(A) rejected these claims, stating the Assessee did not provide sufficient evidence to substantiate these expenses as extraordinary or non-operating.

The Tribunal found merit in the Assessee's submission that these expenses were indeed extraordinary and non-operating. It noted that the Assessee had provided detailed evidence and justification for excluding these expenses from the operating margin calculation. The Tribunal directed the AO to recompute the operating margin by excluding these expenses.

3. Inclusion of Loss-making Companies in the List of Comparables:

The CIT(A) directed the inclusion of loss-making companies in the list of comparables, reasoning that excluding them would be unfair and against the principles of transfer pricing. The Revenue contested this, arguing that the Assessee had initially excluded loss-making companies during the TP assessment proceedings.

The Tribunal upheld the CIT(A)'s decision, citing that if a company satisfies the FAR analysis, it should be included regardless of whether it is loss-making. The Tribunal referenced the Hon’ble Delhi High Court's decision in Chryscapital Investment Advisors (India) Pvt. Ltd., which held that high/extremely high profit or loss does not automatically exclude a company from being a comparable.

4. Granting of Working Capital Adjustments:

The Assessee claimed that working capital adjustments should be granted for the comparable companies selected by the TPO. The CIT(A) did not adjudicate this issue.

The Tribunal noted that different Benches of the Tribunal consistently held that working capital adjustments should be provided. It restored the issue to the AO for examination and decision in light of the Tribunal's consistent stance on granting working capital adjustments.

Conclusion:

The Tribunal allowed the Assessee's appeal, directing the exclusion of certain companies from the list of comparables and recognizing specific expenses as extraordinary/non-operating. It also upheld the inclusion of loss-making companies in the comparables list and restored the issue of working capital adjustments to the AO. The Revenue's appeal was dismissed.