2014 (11) TMI 840 - AT - Income Tax

Transfer pricing adjustment - Selection of compables Accentia Technologies Limited - different business strategies Held that - In M/s. Capital IQ Information Systems (India) Pvt. Ltd. Versus Addl. Commissioner of Income-tax 2014 (9) TMI 125 - ITAT HYDERABAD - it was a case of mergers and acquisition, and the company was also found to be functionally different - exceptional events like merger/demerger does impact the profitability of a company - it is necessary to look into this aspect before selecting a particular company as comparable - the matter is remitted back to the AO who shall verify the fact whether in fact, the exceptional events like amalgamation and acquisition, which have taken place has any impact on the profitability of the company as claimed by the assessee. Acropetal Technologies Ltd. Functionally different unit - Held that - As decided in assessee s own case for the earlier assessment year, the decision in M/s. Market Tools Research Pvt. Ltd. Versus Dy. Commissioner of Income-tax 2014 (9) TMI 43 - ITAT HYDERABAD followed - the TPO has admitted that the aforesaid company has two segments, and only the IT Enabled Services Segment, relating to engineering design services was considered by the TPO for comparability analysis - the functions performed by the Engineering Design Services segment of the company cannot be considered as comparable to the ITES/BPO functions performed by the Assessee - this company could not have been selected as a comparable, especially when it performs engineering design services which only a Knowledge Process Outsourcing KPO would do and not a Business Process Outsourcing BPO the AO/TPO is directed to exclude the company from the list of comparables. Cosmic Global Ltd. - Outsourcing of main activity - Held that - Following the decision in M/s. Capital IQ Information Systems (India) Pvt. Ltd. Versus Addl. Commissioner of Income-tax 2014 (9) TMI 125 - ITAT HYDERABAD - outsourcing charges constitute 57.31% of the total operating costs - The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore, which is strictly in the realm of the Translation segment, revenues from which are to the tune of ₹ 6.99 crore - If this segment of Translation is not under consideration for deciding as to whether this case is comparable or not, we cannot take recourse to the figures which are relevant for segments other than accounts BPO - this case cannot be excluded on the strength of outsourcing activity, which is alien to the relevant segment the AO is directed to exclude this company. Eclerx Services Ltd. Functionally different unit - Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the TPO has accepted the assessee as a purely ITES provider the company is engaged in providing KPO services held that this company cannot be treated as comparable to an assessee which is engaged in provision of IT enabled services in BPO sector - it cannot be said that the company is comparable to the assessee - the aforesaid company has been treated as not to be a comparable, as it is involved in providing KPO services as well as it is earning super-normal profits thus, the AO/TPO is directed to exclude the company from the list of comparables. Genesys International Ltd. Held that - As decided in assessee s own case for the earlier assessment year, it has been held that after analysing the activities undertaken by the assessee company vis- -vis the activities of the assessee before it, which is engaged only ITE services to its AE, had remitted the issue to the file of the TPO for considering afresh - applying the rule of consistency, the decision of the Tribunal is followed Decided partly in favour of assessee.

Issues Involved:
1. Determination of Arm's Length Price (ALP) for IT enabled back office services.
2. Rejection of the assessee's Transfer Pricing (TP) documentation.
3. Rejection of comparability analysis by the assessee.
4. Selection of inappropriate comparables by the TPO.
5. Use of data available at the time of assessment instead of at the time of TP documentation.
6. Ignoring the limited risk nature of the services provided by the assessee.
7. Adjustment for the difference in depreciation rates.
8. Addition of TP adjustment while determining book profits under Section 115JB of the Act.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for IT enabled back office services:
The assessee, engaged in providing IT enabled back office services, filed a return declaring a total income of Rs. 15,39,573 after claiming a deduction under Section 10A of the Act. The Assessing Officer (AO) noticed transactions with the holding company and referred the matter to the Transfer Pricing Officer (TPO) to determine the ALP. The TPO found defects in the method adopted by the assessee for selecting comparables, leading to the selection of inappropriate comparables. The TPO selected 12 comparables, resulting in an Arithmetic Mean margin of 27.42%. After adjustments, the ALP was determined, leading to a TP adjustment of Rs. 1,83,11,450.

2. Rejection of the assessee's Transfer Pricing (TP) documentation:
The assessee's TP documentation was rejected by the TPO, who conducted a fresh comparability analysis. The Dispute Resolution Panel (DRP) upheld the TPO's decision, leading to the final assessment order including the TP adjustment.

3. Rejection of comparability analysis by the assessee:
The assessee challenged the comparables selected by the TPO. The Tribunal heard arguments and reviewed relevant material, including decisions from coordinate benches. The Tribunal directed the AO/TPO to reconsider the selection of certain comparables, following decisions in similar cases.

4. Selection of inappropriate comparables by the TPO:
The Tribunal examined the inclusion/exclusion of six specific comparables:
- Accentia Technologies Limited (Seg): The Tribunal restored this issue to the AO/TPO for fresh consideration, following the decision in the assessee's own case for the previous year.
- Acropetal Technologies Ltd. (Seg): Excluded by the Tribunal as it was found functionally different.
- Cosmic Global Ltd.: Issue restored to the AO/TPO for fresh consideration, following previous decisions.
- Eclerx Services Ltd.: Excluded by the Tribunal as it was found functionally different.
- Genesys International Ltd.: Issue restored to the AO/TPO for fresh consideration, following previous decisions.
- Infosys BPO: Excluded by the Tribunal due to its incomparable size of operations, following the Delhi High Court's decision in a similar case.

5. Use of data available at the time of assessment instead of at the time of TP documentation:
The Tribunal did not find it necessary to decide on this issue as it would become academic if the ALP falls within the range of +/-5%.

6. Ignoring the limited risk nature of the services provided by the assessee:
The Tribunal did not address this issue separately, as it would become academic if the ALP falls within the range of +/-5%.

7. Adjustment for the difference in depreciation rates:
The Tribunal did not address this issue separately, as it would become academic if the ALP falls within the range of +/-5%.

8. Addition of TP adjustment while determining book profits under Section 115JB of the Act:
The Tribunal held that the addition made by the AO on account of TP adjustment while determining the book profit under Section 115JB is not sustainable, following the Supreme Court's decision in Apollo Tyres Ltd. The addition was deleted.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO/TPO to reconsider the selection of certain comparables and recompute the ALP. The addition on account of TP adjustment while determining book profits under Section 115JB was deleted.

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