2016 (7) TMI 1437 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - Service provided by the assessee are in the nature of Information Technology Enabled Services (ITES) or commonly known as business process out sourcing (BPO) service relating to transaction processing, data entry, re conciliation of statements and other similar support services. As per the terms of agreement, for the service provided by the assessee to its A.E., it is remunerated on a cost plus mark up basis, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Non-conformity of the assessment order with the directions of the Dispute Resolution Panel (DRP).
2. Selection and rejection of comparable companies for transfer pricing analysis.
3. Inclusion of working capital adjustment.
4. Specific objections to the selection of Accentia Technologies Ltd. and Infosys BPO Ltd. as comparables.
5. Rejection of R. Systems International Ltd. as a comparable.

Detailed Analysis:

1. Non-conformity of the Assessment Order with DRP Directions:
The assessee argued that the assessment order under section 143(3) was not in conformity with the directions issued by the DRP, thus violating sections 144C(10) and 144C(13) of the Income Tax Act, 1961. The DRP had directed the exclusion of certain companies and the inclusion of others, as well as the allowance of a working capital adjustment. However, the Assessing Officer (AO) ignored these directions in the final assessment order. The Tribunal noted that the AO's failure to implement the DRP's directions was contrary to the statutory mandate, and thus directed the AO/Transfer Pricing Officer (TPO) to recompute the arm's length price after implementing the DRP's directions.

2. Selection and Rejection of Comparable Companies:
The DRP had directed the exclusion of E-clerx Services Ltd., Coral Hubs Ltd., ICRA Online Ltd., and BNR Udyog Ltd., and the inclusion of Spanco Ltd. and Caliber Point Business Solutions Ltd. The AO failed to follow these directions, leading to the Tribunal's directive to recompute the arm's length price as per the DRP's instructions.

3. Inclusion of Working Capital Adjustment:
The DRP had directed the TPO to allow a working capital adjustment, which the AO ignored in the final assessment order. The Tribunal reiterated that the AO must comply with the DRP's directions and include the working capital adjustment in the computation of the arm's length price.

4. Specific Objections to Accentia Technologies Ltd. and Infosys BPO Ltd.:
- Accentia Technologies Ltd.: The assessee objected to the inclusion of this company as a comparable, arguing that it provides high-end KPO services, has diversified activities, and lacks segmental information. The Tribunal noted that Accentia Technologies Ltd. was functionally different from the assessee, as it provides high-end KPO services and has substantial goodwill and brand value. The Tribunal directed the exclusion of Accentia Technologies Ltd. from the list of comparables.

- Infosys BPO Ltd.: The assessee argued that Infosys BPO Ltd. is a giant in the field with significant goodwill and brand value, making it functionally different from the assessee. The Tribunal agreed, noting that Infosys BPO Ltd. incurs marketing and selling expenses and takes on marketing risks, unlike the assessee. The Tribunal directed the exclusion of Infosys BPO Ltd. from the list of comparables.

5. Rejection of R. Systems International Ltd. as a Comparable:
The assessee challenged the rejection of R. Systems International Ltd. as a comparable, arguing that it had been accepted as a comparable in previous and subsequent assessment years. The DRP had rejected this company solely due to its different accounting period (calendar year). The Tribunal noted that contemporaneous data for nine months was available and could be used for comparability analysis. The Tribunal directed the AO/TPO to include R. Systems International Ltd. as a comparable, following the precedent set in earlier and subsequent assessment years.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the AO/TPO to recompute the arm's length price by implementing the DRP's directions, excluding Accentia Technologies Ltd. and Infosys BPO Ltd. as comparables, and including R. Systems International Ltd. as a comparable. The other grounds raised by the assessee were dismissed as "not pressed."

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