2016 (9) TMI 1392 - AT - Income Tax

TPO - comparability selection analysis - Held that - The assessee was engaged in the provision of BPO/Data Processing Services to its AE and provided IT Enabled services relating to phone activation and local number portability to various clients for and on behalf of its parent company, thus companies functionally dissimlar with that of assessee need to be deselected from final list of comparability

Issues Involved:
1. Completion of assessment under section 144C read with section 143(3).
2. Addition on account of difference in the arm's length price of international transactions.
3. Non-acceptance of associated enterprise's loss as a reason to avoid Transfer Pricing adjustment.
4. Limitation on Transfer Pricing adjustment to not exceed total group profit.
5. Rejection of risk adjustment for the appellant being a low-risk-bearing captive service provider.
6. Adoption of additional filters for selection/rejection of comparable companies.
7. Incorrect calculation of Operating Profit to Operating Cost (OP/OC) ratio for comparable companies.
8. Consideration of foreign exchange loss as non-operating in nature.
9. Inclusion of certain companies as comparables without complete financial information.
10. Levying of interest under Sections 234B and 234D.
11. Initiation of penalty proceedings under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Completion of Assessment:
The assessment was completed under section 144C read with section 143(3) at an income of ?5,11,78,590 for the year 2009-10, against the returned income of ?1,42,06,264. The same procedure was followed for the year 2010-11 with an assessed income of ?5,62,33,670.

2. Addition on Account of Arm's Length Price Difference:
The AO/TPO made an addition of ?3,69,72,323 for the year 2009-10 and ?4,20,27,410 for the year 2010-11 due to differences in the arm's length price of international transactions of BPO/ITES services rendered to the associated enterprise. The TPO selected his own set of comparables and worked out the average PLI, leading to the proposed adjustments.

3. Non-acceptance of AE's Loss:
The appellant claimed that since the associated enterprise incurred a loss, no Transfer Pricing adjustment was warranted. However, this ground was considered academic and did not require comments from the tribunal.

4. Limitation on Transfer Pricing Adjustment:
The appellant argued that the Transfer Pricing adjustment should not exceed the total profit earned by the group to avoid taxation of notional income. This ground was also considered academic and did not require comments.

5. Rejection of Risk Adjustment:
The DRP/TPO did not allow appropriate risk adjustment for the appellant being a low-risk-bearing captive service provider. The tribunal noted that the TPO/AO needs to verify if Crossdomain Solutions Pvt. Ltd. is a KPO and not a BPO, as claimed by the appellant.

6. Adoption of Additional Filters:
The TPO adopted additional filters such as turnover of at least ?5 crores and export sales of at least 75% for selecting/rejecting comparable companies. The appellant argued that these filters were applied inconsistently, eliminating loss-making companies but not those with high margins or turnover.

7. Incorrect Calculation of OP/OC Ratio:
The TPO considered the OP/OC ratio of Allsec Technologies Ltd. at -2% instead of the actual -15.78% submitted by the appellant. The tribunal directed the TPO/AO to re-evaluate the OP/OC ratio after including the additional evidence provided by the appellant.

8. Consideration of Foreign Exchange Loss:
The appellant contended that the TPO wrongly considered foreign exchange loss as non-operating in nature. The tribunal admitted additional evidence and set aside the issue for fresh adjudication by the TPO/AO.

9. Inclusion of Certain Companies as Comparables:
The appellant objected to the inclusion of companies like Omega Healthcare Ltd., TCS E-Serve Ltd., and TCS E-Serve International Ltd. as comparables without complete financial information. The tribunal directed the TPO/AO to exclude these companies from the list of comparables based on functional dissimilarity and lack of financial data.

10. Levying of Interest:
Both parties agreed that the issue of levying interest under Sections 234B and 234D is consequential in nature. The tribunal ordered accordingly.

11. Initiation of Penalty Proceedings:
The ground related to the initiation of penalty proceedings under Section 271(1)(c) was prematurely raised and did not require comments from the tribunal.

Conclusion:
The tribunal partly allowed the appeals, directing the TPO/AO to re-evaluate certain issues based on additional evidence and functional dissimilarity of comparables. The tribunal also ordered the exclusion of certain companies from the list of comparables and addressed the issue of levying interest as consequential.

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