2016 (2) TMI 1153 - AT - Income Tax

TPA - comparable selection criteria - functional difference analysis - Held that - Assessee is a provider of ITES services and also BPO services, thus companies functionally dissimlar with that of assessee need to be deselected from final list.

Issues Involved:
1. Adoption of incorrect segmental data by TPO.
2. Application of various filters by TPO.
3. Exclusion of certain companies as comparables.
4. Application of turnover and abnormal profits filter.
5. Exclusion of extraordinary events influenced companies.
6. Exclusion of companies with different functional profiles.
7. Exclusion of companies due to ownership of intangibles.
8. Exclusion of expenditure from export turnover calculation.

Detailed Analysis:

1. Adoption of Incorrect Segmental Data by TPO:
The assessee argued that the TPO used the aggregate cost of both international and domestic transactions, leading to an incorrect shortfall calculation under Section 92CA. The CIT (A) agreed with the assessee, directing the TPO to verify the figures and confine adjustments only to the ITES segment.

2. Application of Various Filters by TPO:
The assessee objected to several filters applied by the TPO, including the export sales filter of 75%, non-application of turnover and abnormal profits filter, and non-application of fluctuating profits filter. The CIT (A) upheld the export sales filter but directed the application of the turnover and abnormal profits filter as per the decision in Genisys Integrating Systems (India) P. Ltd.

3. Exclusion of Certain Companies as Comparables:
The CIT (A) excluded companies like M/s. Accentia Technologies Ltd., M/s. Genesys International Corporation Ltd., and others due to extraordinary events, functional differences, and ownership of intangibles. The Tribunal upheld these exclusions, noting that extraordinary events like mergers and acquisitions influenced the financial results, making them incomparable.

4. Application of Turnover and Abnormal Profits Filter:
The Revenue contested the exclusion of companies based on turnover and abnormal profits. The Tribunal, referencing the Bombay High Court judgment in Pentair Water India P. Ltd., upheld the turnover filter as a valid criterion. However, it noted that the abnormal profits filter was not appropriate per the Special Bench decision in Maersk Global Service Centres (I) P. Ltd.

5. Exclusion of Extraordinary Events Influenced Companies:
The CIT (A) excluded M/s. Accentia Technologies Ltd. due to acquisitions and mergers during the relevant year. The Tribunal supported this exclusion, citing the decision in Symphony Marketing Solutions India P. Ltd., which held that extraordinary events significantly impacting financial results warranted exclusion.

6. Exclusion of Companies with Different Functional Profiles:
The CIT (A) excluded companies like M/s. Genesys International Corporation Ltd. due to functional differences, such as performing R&D activities and owning intangibles. The Tribunal agreed, noting that these differences made them unsuitable comparables for the assessee's ITES services.

7. Exclusion of Companies Due to Ownership of Intangibles:
The Tribunal upheld the exclusion of companies like Infosys BPO Ltd. and Wipro Ltd. (seg) due to their significant ownership of intangibles and brand value, which differentiated them functionally from the assessee.

8. Exclusion of Expenditure from Export Turnover Calculation:
The Revenue contested the CIT (A)'s direction to exclude certain expenditures from the export turnover calculation. The Tribunal dismissed this ground, noting that the CIT (A) followed the jurisdictional High Court's judgment in CIT v. Tata Elxsi Ltd., which mandated such exclusions.

Conclusion:
The Tribunal partly allowed the appeals of both the Revenue and the assessee. It upheld the CIT (A)'s decisions on various exclusions and filters, emphasizing the need for accurate segmental data and appropriate application of filters to ensure proper comparability analysis. The Tribunal also reinforced the importance of adhering to jurisdictional High Court judgments in calculating deductions.

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