2017 (7) TMI 1079 - AT - Income Tax

TPA - comparable selection criteria - Held that - Assessee is engaged in providing engineering services and IT enabled services for off shore facilitates, thus companies functionality dissimlar with that of assessee need to be deselection from final list of comparable.

Issues Involved:
1. Selection of comparables for determining the Arm’s Length Price (ALP).
2. Exclusion of high-profit companies.
3. Functional dissimilarity of selected comparables.
4. Application of various filters by the Transfer Pricing Officer (TPO).
5. Working capital adjustment.
6. Jurisdictional error in the reference made by the Assessing Officer (AO) to the TPO.

Detailed Analysis:

1. Selection of Comparables:
The primary issue revolves around the selection of comparables for determining the ALP of the international transactions. The assessee argued that certain companies included by the TPO as comparables were functionally different and should be excluded. These companies included Accentia Technologies Ltd., E-clerx Services Ltd., TCS-e-serve Ltd., and TCS e-serve International Ltd. The Tribunal agreed with the assessee, noting that Accentia Technologies Ltd. was involved in diverse activities such as KPO, LPO, and DPO, and had undergone significant restructuring, making it functionally dissimilar. Similarly, E-clerx Services Ltd. was involved in financial services and KPO services, and TCS-e-serve Ltd. and TCS e-serve International Ltd. had high turnovers and were involved in technical services, making them non-comparable.

2. Exclusion of High-Profit Companies:
The assessee contended that high-profit companies should not be included as comparables for benchmarking a low-risk captive unit. The Tribunal agreed, noting that the inclusion of such companies would not provide a fair comparison. The Tribunal directed the exclusion of high-profit companies like TCS-e-serve Ltd. and TCS e-serve International Ltd. from the list of comparables.

3. Functional Dissimilarity:
The Tribunal emphasized the necessity of establishing functional comparability. It noted that companies like Accentia Technologies Ltd. and E-clerx Services Ltd. were functionally dissimilar to the assessee, which was engaged in providing engineering design and related services. The Tribunal cited various judicial precedents to support the exclusion of these companies based on functional dissimilarity.

4. Application of Various Filters by TPO:
The assessee challenged the application of several filters by the TPO, such as the rejection of companies with less than 75% export sales, less than 25% employee cost, and service income turnover of less than ?5 crores. The Tribunal found merit in the assessee's arguments, particularly regarding the functional dissimilarity and the impact of extraordinary events on the comparables' financials.

5. Working Capital Adjustment:
The assessee argued for a working capital adjustment, which the TPO/DRP had not allowed. The Tribunal noted that working capital adjustments are generally allowed by various benches of the Tribunal and directed the AO/TPO to allow the working capital adjustment after providing the assessee an opportunity to substantiate the amount with evidence.

6. Jurisdictional Error in Reference by AO to TPO:
The assessee contended that the reference made by the AO to the TPO suffered from a jurisdictional error as the AO did not record any reasons for the necessity of such a reference. However, this ground was not pressed by the assessee during the hearing, and the Tribunal did not address it.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of certain non-comparable companies and the allowance of working capital adjustment. The Tribunal emphasized the importance of functional comparability and the exclusion of high-profit companies for a fair determination of the ALP. The case was restored to the AO/TPO for recalculating the ALP after excluding the identified non-comparable companies and allowing the working capital adjustment.

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