2017 (6) TMI 1179 - AT - Income Tax

TPA - selection of comparable - Held that - American Express group is engaged in the business of rendering travel related services of American Express card travellers cheques and travel services financial advisory services and international banking services throughout the world thus companies functionally dissimilar with that of assessee need to deselected from final list. A comparable cannot be included in the comparability analysis for comparing the PLI of the assessee for the reason of non-availability of comparable financial information.

Issues Involved:
1. Transfer Pricing Adjustment
2. Determination of Arm's Length Price (ALP)
3. Selection of Comparable Companies
4. Rejection of Economic Analysis by Assessee
5. Use of Single Year Data
6. Functional Differences in Comparables
7. Risk Profile Adjustments
8. Foreign Exchange Gain/Loss as Operating Expenditure
9. Penalty Proceedings under Section 271(1)(c)
10. Charging of Interest under Sections 234B and 234C

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee filed its return of income declaring a total income of Rs. 666,599,500, which was subsequently revised. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) for certain international transactions. The TPO proposed an upward adjustment of Rs. 559,965,116. The AO framed a draft assessment order incorporating this adjustment.

2. Determination of Arm's Length Price (ALP):
The TPO initially computed the ALP for the international transactions and proposed an adjustment. The Dispute Resolution Panel (DRP) issued directions, and the AO incorporated these in the final assessment order. The adjustment was revised to Rs. 593,929,260 after considering the DRP's directions.

3. Selection of Comparable Companies:
The assessee contested the inclusion of several comparables on various grounds. The Tribunal examined each comparable's functional profile, assets, and risks to determine their suitability. For instance, Vishal Information Technologies Ltd was excluded due to its different business model involving significant outsourcing. Similarly, Mold Tek Technologies Ltd was excluded as it was a Knowledge Process Outsourcing (KPO) unit, not comparable to the assessee's Business Process Outsourcing (BPO) services.

4. Rejection of Economic Analysis by Assessee:
The TPO/AO/DRP rejected the economic analysis undertaken by the assessee, conducting a fresh economic analysis using arbitrary filters. The Tribunal noted that each comparable needs to be tested on its own merits and functional comparability, and not merely based on judicial precedents.

5. Use of Single Year Data:
The TPO used single-year data for the financial year 2006-07 for comparables, disregarding the assessee's claim for using multiple-year data. The Tribunal emphasized the importance of using relevant and comparable data to determine the ALP accurately.

6. Functional Differences in Comparables:
The Tribunal analyzed the functional profiles of various comparables. For example, E-clerx Services Ltd was excluded as it provided high-end KPO services, whereas the assessee was engaged in ITES services. Similarly, Infosys BPO Ltd was excluded due to its significantly larger size and different functional profile.

7. Risk Profile Adjustments:
The DRP failed to make appropriate adjustments for varying risk profiles between the assessee and the comparables. The Tribunal noted the importance of considering the risk-bearing capacity and functional differences when selecting comparables.

8. Foreign Exchange Gain/Loss as Operating Expenditure:
The DRP directed the TPO to treat foreign exchange gain/loss as operating expenditure for both the assessee and the comparables. The Tribunal upheld this direction, noting that such treatment is consistent with the principles of computing the profit level indicator.

9. Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under Section 271(1)(c) related to the transfer pricing adjustment without recording adequate reasons. The Tribunal did not provide specific details on this issue in the summarized judgment.

10. Charging of Interest under Sections 234B and 234C:
The AO charged interest under Sections 234B and 234C, which the assessee contested. The Tribunal did not provide specific details on this issue in the summarized judgment.

Conclusion:
The Tribunal provided a detailed analysis of each contested comparable, emphasizing the importance of functional comparability, risk adjustments, and the correct treatment of foreign exchange gains/losses. The Tribunal directed the exclusion of several comparables and upheld the DRP's direction to treat foreign exchange gains/losses as operating expenditure. The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed.

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