2016 (8) TMI 1292 - AT - Income Tax

TPA - selection/rejection of comparables - Held that - Assessee is engaged in providing data processing and back office support service including payment processing, data processing, documentation processing, investigation related services and trade processing service to its A.E. only. Thus, in a sense, the assessee is a purely captive service provider. thus companies functionally dissimalir with that of assessee need to be deslected from final list. Claim of risk adjustment - Held that - We have noted that the assessee in its Transfer Pricing study has claimed risk adjustment which is evident from the order of the Transfer Pricing Officer. In fact, the Transfer Pricing Officer has also observed that the assessee appears to bear some amount of risk, such as, single customer risk. However, he has rejected assessee s claim primarily for the reason that the assessee has not properly quantified the risk adjustment. As far as the learned Commissioner (Appeals) is concerned, he has not given any independent finding but has simply endorsed the view of the Transfer Pricing Officer. Thus we are inclined to restore the issue relating to risk adjustment to the file of the Transfer Pricing Officer/Assessing Officer for deciding afresh keeping in view in the decisions relied upon as referred to herein before and after due opportunity of being heard to the assessee.

Issues Involved:
1. Selection/Rejection of Comparables
2. Allowance of Risk Adjustment
3. Adjustment of ±5% as Standard Deduction

Issue-Wise Detailed Analysis:

1. Selection/Rejection of Comparables:

Cepha Imaging Pvt. Ltd.:
The assessee objected to the selection of Cepha Imaging Pvt. Ltd. by the Transfer Pricing Officer (TPO) on the grounds that the annual report for the financial year 2004-05 was not available in the public domain and the company was engaged in software development services, making it functionally different from the assessee. The ITAT, following precedents, held that Cepha Imaging Pvt. Ltd. could not be treated as comparable to the assessee, which is a BPO service provider.

Cosmic Global Ltd.:
The assessee argued that Cosmic Global Ltd. was mainly engaged in translation services and outsourced significant translation activities, making its business model different from the assessee. The ITAT agreed, noting the substantial outsourcing and functional dissimilarity, and excluded Cosmic Global Ltd. as a comparable.

Vishal Information Technologies Ltd.:
The assessee contended that Vishal Information Technologies Ltd. outsourced a major portion of its activities, as evidenced by its low employee cost. The ITAT found that the business model of Vishal Information Technologies Ltd. was different from that of the assessee due to high outsourcing and low employee cost, and thus excluded it as a comparable.

Wipro BPO Solutions Ltd.:
The assessee objected to Wipro BPO Solutions Ltd. due to its high turnover and different functional profile. The ITAT noted that the TPO had applied a turnover filter for low turnover companies but not for high turnover companies. Following the principle of excluding high turnover companies, the ITAT excluded Wipro BPO Solutions Ltd. as a comparable.

Tricom India Ltd.:
The assessee argued that Tricom India Ltd. had substantial related party transactions (RPT), exceeding the 25% filter applied by the TPO. The ITAT restored the issue to the TPO for verification of the RPT percentage, directing that if the RPT exceeded 25%, Tricom India Ltd. should not be treated as a comparable.

Safron Global Ltd.:
The assessee sought exclusion of Safron Global Ltd. due to fraud committed by its directors, making its financial results unreliable. The ITAT agreed that if the financial results were unreliable due to fraud, the company should not be considered for comparability analysis.

Inclusion of Certain Comparables:

AKS ME Info Hubs Ltd.:
The ITAT restored the issue of comparability of AKS ME Info Hubs Ltd. to the TPO for fresh consideration, noting the need for a detailed examination of its functional similarity to the assessee.

C.S. Software Enterprise Ltd.:
The ITAT restored the issue of comparability of C.S. Software Enterprise Ltd. to the TPO for fresh examination, noting the need to verify its functional profile.

Tata Share Registry Ltd. and M.C.S. Limited:
The ITAT directed the TPO to re-examine the comparability of Tata Share Registry Ltd. and M.C.S. Limited, considering the assessee's submissions in detail.

2. Allowance of Risk Adjustment:
The assessee claimed a risk adjustment of 10.65%, which the TPO rejected, stating that the assessee did not properly quantify the risk borne. The ITAT noted that the assessee bore some risk, such as single customer risk, and restored the issue to the TPO for fresh consideration, directing the TPO to consider relevant decisions and provide due opportunity to the assessee.

3. Adjustment of ±5% as Standard Deduction:
The ITAT noted that after the amendment to section 92C(2), no standard deduction of ±5% was allowable. The grounds raised by the Department were allowed, and the adjustment of ±5% as standard deduction was disallowed.

Conclusion:
The ITAT partly allowed the assessee's appeal and allowed the Department's appeal, directing the TPO to re-examine certain comparables and the risk adjustment claim, and disallowing the ±5% standard deduction.

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