2014 (11) TMI 137 - AT - Income Tax

Transfer pricing adjustment Selection of comparables - Inclusion of Axis IT & T Ltd. - Held that - The company was found to be engaged in the business of providing ITES services as well as software development services and the Revenue generated from ITES services was only 53.26% of the total revenue - Since the relevant details of ITES segment were not available, the TPO held that M/s. Axis IT & T Ltd. could not be included in the list of final comparables - the relevant segmental details of Axis IT&T Ltd. are available - the details prepared and furnished by the assessee are not tallying with the corresponding figures appearing in the final accounts of Axis IT&T Ltd. As a matter of fact, policy adopted by Axis IT&T Ltd. for segment reporting is given in the relevant schedule forming part of the consolidated financial statements which shows that there are many items of revenue and expenditure, which relate to the group as a whole, are not allocable to segments on a reasonable basis - M/s. Axis IT&T Ltd. cannot be included in the list of final comparables in the absence of reliable segmental details. Exclusion of Genesys International Corporation Ltd. eClerx Services Ltd. - Cosmic Global Ltd. - Functionally different company - Held that - Following the decision in M/s. Parexel International (India) Private Limited Versus Asst. Commissioner of Income-tax 2014 (11) TMI 129 - ITAT HYDERABAD - assessee is basically providing various services to the customers of its AEs in relation to human resources which are more or less centered around the employees of the prospective clients - they are providing full range of geospatial services to its customers - the mere fact that two services are placed under this category do not become automatically comparable - If a case providing one category of services under ITES is claimed as comparable with another in the category of service under ITES as per this circular, then it must be shown ex facie that it is broadly similar - there is a vast difference which make one quite distinct from the other - this company cannot be treated as comparable Decided in favour of assessee. Computation of deduction u/s 10A - Inclusion/exclusion of the communication costs from the total turnover Held that - Following the decision in The Commissioner of Income Tax Versus M/s. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT - wherein it was held that although the expression total turnover has not been defined at all by the Parliament for the purposes of S.10A, when the definition of export turnover excludes specifically certain items, the expression total turnover cannot have a different meaning than the total turnover especially when the export turnover forms a constituent part of the total turnover for the purpose of the application of the formula - any item which is excluded for the purpose of computing export turnover has necessarily to be excluded for computing the total turnover for the purpose of computing deduction u/s 10A of the Act Decided against revenue.

Summary

Issues Involved:
1. Addition of Rs. 2,17,81,312 on account of Transfer Pricing Adjustment.
2. Inclusion/exclusion of communication costs from the total turnover while computing the deduction under S.10A.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2,17,81,312 on account of Transfer Pricing Adjustment:

The assessee, a company providing call center and web-based services, filed its return of income for the relevant year, declaring a total income of Rs. 9,27,600 after claiming an exemption under S.10A of the Income Tax Act. The Assessing Officer (AO) noticed that the assessee provided call center services to its Associated Enterprise (AE), Knoah Solutions Inc., USA, and charged Rs. 32,13,75,110 for these services. To determine the Arm's Length Price (ALP) of these international transactions, the AO referred the matter to the Transfer Pricing Officer (TPO).

The assessee applied the Transactional Net Margin Method (TNMM) using Operating Profit to Operating Cost (OP/OC) as the Price Level Indicator (PLI). The Arithmetic Mean of OP/OC of seventeen comparables selected by the assessee was 11.91%, against the assessee's OP/OC of 17.50%. The TPO, however, found defects in the method adopted by the assessee and selected twelve comparables with an Arithmetic Mean of OP/OC at 27.42%. After allowing a working capital adjustment of -1.35%, the TPO adjusted the Arm's Length Margin to 28.77% and determined the ALP at Rs. 39,01,81,878, resulting in a TP adjustment of Rs. 6,33,28,057.

The Dispute Resolution Panel (DRP) partly sustained the assessee's objections and directed the inclusion of Datamatics Financial Services P. Ltd. in the comparables list and the application of the Arm's Length Margin only to the cost related to international transactions with AE. Consequently, the AO/TPO recomputed the ALP, resulting in an addition of Rs. 2,70,81,312.

The assessee appealed, disputing the addition on several grounds, including the exclusion/inclusion of certain comparables. The Tribunal examined the issues and found:

- Ground No.2: Axis IT & T Ltd. could not be included due to the lack of reliable segmental details.
- Ground No.3: Genesys International Corporation Ltd. was excluded as it was functionally different, providing geographical information services.
- Ground No.4: eClerx Services Ltd. was excluded as it was a KPO providing data analysis and data process solutions, unlike the assessee's BPO services.
- Ground No.5: Cosmic Global Ltd. was excluded due to its different business model, outsourcing substantial work.

With the exclusion of these comparables, the Arithmetic Mean Margin of the remaining nine comparables was 17.33%, within the permissible range of the assessee's margin. Thus, no addition on account of TP adjustment was required, and the assessee's appeal was allowed.

2. Inclusion/exclusion of communication costs from the total turnover while computing the deduction under S.10A:

The Revenue's appeal involved the inclusion/exclusion of communication costs from the total turnover for computing the deduction under S.10A. Both parties agreed that the issue was covered by the Hon'ble Bombay High Court's decision in the case of Gem Plus Jewellery Ltd. (330 ITR 175). The court held that items excluded from export turnover should also be excluded from total turnover for computing deductions under S.10A. Respectfully following this precedent, the Tribunal found no merit in the Revenue's appeal, which was accordingly dismissed.

Conclusion:

In conclusion, the assessee's appeal was allowed, resulting in the exclusion of certain comparables and no addition on account of TP adjustment. The Revenue's appeal was dismissed, affirming the exclusion of communication costs from the total turnover for computing the deduction under S.10A. The order was pronounced on 31st October 2014.