2016 (4) TMI 1313 - AT - Income Tax

TPA - comparable selection - Held that - Assessee is engaged in two kinds of activities i.e. software services segment and back office support services i.e. both in the field of IT services and ITES, respectively, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Transfer Pricing Adjustment for IT and ITES services.
2. Inclusion and exclusion of comparable companies.
3. Use of single year vs. multiple year data.
4. Adjustment for differences in risk levels/assets employed.
5. Exclusion of high turnover companies as comparables.
6. Sub-classification within ITES segment (KPO vs. BPO).

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for IT and ITES Services:
The assessee and the Revenue filed cross appeals against the transfer pricing adjustments made by the Assessing Officer (AO) following the directions of the Dispute Resolution Panel (DRP). The AO rejected the benchmarking approach adopted by the assessee and made an adjustment of ?1,95,83,147 to the income by holding that the international transactions for IT and ITES services were not at arm’s length. The DRP modified the list of comparables and revised the TP adjustments for both IT and ITES segments.

2. Inclusion and Exclusion of Comparable Companies:
The assessee contested the inclusion of Bodhtree Consulting Ltd. and Vishal Information Technologies Ltd. (Coral Hub) in the final list of comparables. The Tribunal upheld the exclusion of Bodhtree Consulting Ltd. due to its unusual trend of profitability and functional dissimilarities, referencing previous Tribunal decisions. Similarly, Vishal Information Technologies Ltd. was excluded from the ITES segment as it was functionally different, relying on the Pune Bench of Tribunal and the Delhi High Court's decision in Rampgreen Solutions Pvt. Ltd.

3. Use of Single Year vs. Multiple Year Data:
The DRP/AO's use of single-year data for comparables was contested by the assessee, who argued for the use of multiple-year data as per Rule 10B(4) of the Income-tax Rules, 1962. The Tribunal did not specifically adjudicate on this issue as the exclusion of certain companies rendered the other arguments academic.

4. Adjustment for Differences in Risk Levels/Assets Employed:
The assessee argued for adjustments due to differences in the level of risk borne and assets employed, claiming it was a routine captive service provider unlike the entrepreneurial companies selected by the TPO. This argument was not specifically addressed in the Tribunal's decision as the main focus remained on the inclusion/exclusion of comparables.

5. Exclusion of High Turnover Companies as Comparables:
The Tribunal upheld the exclusion of Infosys Technologies Ltd. from the list of comparables due to its significantly higher turnover, following precedents set by the Delhi High Court and other Tribunal decisions. The Tribunal noted that Infosys Technologies Ltd.'s turnover was ?1314 crores compared to the assessee's ?26.28 crores, making it incomparable.

6. Sub-classification within ITES Segment (KPO vs. BPO):
The Tribunal supported the DRP's decision to exclude companies engaged in Knowledge Process Outsourcing (KPO) from the comparables for the assessee's Business Process Outsourcing (BPO) services. This included Visesh Infotecnics Ltd., Eclerx Services Ltd., and CS Software Enterprises, following the Delhi High Court's decision in Rampgreen Solutions Pvt. Ltd. The Tribunal emphasized the need for functional similarity in comparability analysis.

Conclusion:
The Tribunal's order resulted in the appeal of the assessee being allowed and the appeal of the Revenue being dismissed. The Tribunal directed the AO to re-compute the arm’s length price of the transactions, excluding the identified non-comparable companies, and to check if the difference falls within the permissible +/- 5% range, negating the need for further adjustments.

← Previous Next →