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2015 (12) TMI 1660 - AT - Income TaxTPA - selection of comparable - Held that - As gone through the Master Services Agreement between the assessee and its AE, namely, Tech Enterprises Inc., a Fairfax based incorporation having its registered office at Fairfax, Virginia, USA. This Agreement is valid for the year under consideration as well, whose copy is available at page 263 onwards of the paper book. As per this Agreement, the assessee specializes in provision of technical services, such as, data conversion, web-page construction, data entry/key boarding and software development. The assessee under this Agreement has undertaken to render Included services which have been described in Exhibit-A. The services so availed by the assessee s AE are ultimately given to end-customers. Thus companies dissimilar with that of assessee need to be excluded from final list of comparability.
Issues Involved:
1. Deletion of addition on account of transfer pricing adjustment. 2. Exclusion of Vishal Information Technology Ltd. from the list of comparables. 3. Computation of OP/TC of Ace Software Exports Ltd. 4. Inclusion of Ask Me Info Hubs Ltd. in the list of comparables. Detailed Analysis: 1. Deletion of Addition on Account of Transfer Pricing Adjustment: The Revenue's appeal concerns the deletion of an addition of Rs. 29,69,715/- made by the Assessing Officer (AO) due to a transfer pricing adjustment in computing the arm's length price (ALP) of an international transaction. The assessee, a wholly-owned subsidiary of Aptara, provided IT-Enabled data conversion services to its associated enterprise (AE) valued at Rs. 4,38,06,911/-. The Transactional Net Margin Method (TNMM) was used to determine the ALP, with a Profit Level Indicator (PLI) of Operating profit/Total cost (OP/TC). The TPO's adjustment was based on the arm's length margin of comparables at 23.29% against the assessee's OP/TC of 15.50%. The CIT(A) deleted the addition by excluding Vishal Information Technologies Ltd. from the comparables and altering the profit margin of Ace Software Exports Ltd., which led to the Revenue's appeal. 2. Exclusion of Vishal Information Technology Ltd. from the List of Comparables: The assessee contended that Vishal Information Technologies Ltd. should not be included as a comparable due to its different business model, which involved significant outsourcing (75% of operating expenses) compared to the assessee's in-house services (5% job work to total cost ratio). Despite functional similarities, the Tribunal found that the different business models (outsourcing vs. in-house) led to different profitability levels. Consequently, the Tribunal directed the exclusion of Vishal Information Technologies Ltd. from the list of comparables, overturning the CIT(A)'s decision. 3. Computation of OP/TC of Ace Software Exports Ltd.: The TPO included Ace Software Exports Ltd. as a comparable but recalculated its OP/TC at 2.03%, whereas the assessee had computed it at 8.24%. The CIT(A) agreed with the assessee's computation, which included a stock variance adjustment leading to an OP/TC of (-) 6.98%. The Tribunal upheld the CIT(A)'s computation, noting that the TPO had omitted the stock variance adjustment. The Tribunal also rejected the Revenue's preliminary objection against the functional similarity of Ace Software Exports Ltd., stating that the DR could not challenge the AO/TPO's decision in this regard. 4. Inclusion of Ask Me Info Hubs Ltd. in the List of Comparables: The TPO excluded Ask Me Info Hubs Ltd. from the comparables due to perceived declining turnover and profitability, suggesting it was in a negative economic phase. However, the CIT(A) found this observation factually incorrect. The Tribunal agreed with the CIT(A), noting that the company's turnover and profitability did not indicate a negative phase. The Tribunal upheld the inclusion of Ask Me Info Hubs Ltd. as a comparable, dismissing the Revenue's ground. Conclusion: The Tribunal set aside the CIT(A)'s order and remitted the matter to the AO/TPO for fresh computation of the ALP of the international transaction, in line with the Tribunal's findings. The assessee's cross-objection was allowed, and the Revenue's appeal was partly allowed for statistical purposes. The order was pronounced in the open court on 02.12.2015.
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