2015 (2) TMI 897 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - For M/s Accentia Technologies Ltd. has not been found to be comparable to a concern rendering IT enabled services. The arguments putforth by the TPO, which has been reiterated before us, do not justifiably meet with the assessee s plea for exclusion of M/s Accentia Technologies Ltd. from the final set of comparables. The plea of the assessee is quite potent and is in-fact based on the discussion available in public domain in the form of Annual financial statement of the said concern. Moreover, in the light of the decision of the Pune Bench of the Tribunal in the case of PTC Software (India) Private Limited (2015 (1) TMI 466 - ITAT PUNE), we find no reason to negate the plea raised by the assessee for exclusion of Accentia Technologies Ltd. from the final set of comparables. For Crossdomain Solutions Ltd it is indulged in high skill IT services which are not comparable to the routine I.T. Enabled services. Further, the company is engaged in providing Niche services as well as developed its own brand Exdion to target the insurance industry in US. Thus we uphold assessee s plea for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. For M/s Cosmic Global Ltd.in relation to the financial year under consideration, the business model in which M/s Cosmic Global Ltd. has functioned is quite dissimilar to the business model of the assessee while carrying out the activity of an ITES provider. Moreover, none of the objections raised by the assessee have been met by the TPO on the basis of any cogent reasoning. On that count also, we find that the plea of the assessee to exclude M/s Cosmic Global Ltd. from the final set of comparables is justified. The objection of the TPO that the said concern was found comparable by the assessee in earlier year cannot be the sole basis to include the said concern in the list of comparables. For Eclerx Services Ltd. the plea of the assessee that the said concern is functionally dissimilarly to the assessee, has been wrongly rejected by the TPO. Even before us, there is no cogent reasoning brought out by the Revenue to assail assessee s plea for exclusion of M/s Eclerx Services Ltd. from the final set of comparables. We direct accordingly. For Coral Hubs Ltd. (Formerly known as Vishal Informational Technologies Ltd.) the Tribunal in the assessee s own case had held that the said concern was found to be operating in different functional environment and the same was excluded for the purpose of comparability analysis, thus we uphold the plea of the assessee in excluding the margins of the said concern M/s. Vishal Technologies Ltd. Since we have upheld the plea of the assessee for exclusion of (i) Accentia Technologies Limited; (ii) Crossdomain Solutions Limited.; (iii) Cosmic Global Limited; (iv) Eclerx Services Limited; and, (v) Coral Hubs Limited from the final set of comparables, the other Grounds of Appeal raised by the assessee in order to assail the addition of ₹ 9,56,21,498/- on account of transfer pricing adjustment are rendered academic and are not being adjudicated for the present. - Decided in favour of assessee.

Issues Involved:
1. Adjustment to the value of international transactions.
2. Selection and rejection of comparable companies.
3. Selection of ITES and KPO companies as comparables to a BPO company.
4. Selection of outlier companies as comparables.
5. Calculation of working capital adjustment.
6. Non-sharing of search matrix and FAR analysis.
7. Rejection of multiple year data for comparables.
8. Non-consideration of risk adjustment.
9. Transfer pricing adjustment without +/- 5% benefit.
10. Initiation of penalty proceedings.
11. Levying of interest under sections 234B and 234D.

Detailed Analysis:

1. Adjustment to the Value of International Transactions:
The core issue revolves around the adjustment of Rs. 9,56,21,498 to the value of international transactions between the assessee and its associated enterprise (AE) for export of transaction processing services. The assessee used the Transactional Net Margin Method (TNM) with a Profit Level Indicator (PLI) of Operating Profit/Operating Cost, resulting in a PLI of 16.33%. The TPO, however, determined the arm's length price to be higher, leading to the adjustment.

2. Selection and Rejection of Comparable Companies:
The TPO included five companies in the final set of comparables: Accentia Technologies Limited, Crossdomain Solutions Limited, Cosmic Global Limited, Eclerx Services Limited, and Coral Hubs Limited. The assessee argued for their exclusion based on functional dissimilarity and other factors.

Accentia Technologies Limited: The Tribunal noted that this company had different income streams and was involved in activities like medical transcription and software development, making it functionally dissimilar to the assessee. The Tribunal cited a precedent where Accentia Technologies was excluded due to its different functional profile and extraordinary circumstances like amalgamation.

Crossdomain Solutions Limited: This company was involved in diverse activities such as outsourcing, human resources, and consulting, which were not comparable to the assessee's ITES activities. The Tribunal upheld the exclusion based on a precedent where Crossdomain was found to be providing high-skill IT services, unlike the routine ITES provided by the assessee.

Cosmic Global Limited: The Tribunal found that this company was engaged in translation and transcription services, which were functionally different from the assessee's BPO services. The Tribunal cited previous decisions where Cosmic Global was excluded due to its different business model and significant outsourcing activities.

Eclerx Services Limited: The Tribunal observed that Eclerx was engaged in high-end KPO services involving specialized knowledge, unlike the assessee's low-end BPO services. Previous decisions supported the exclusion of Eclerx due to its functional dissimilarity.

Coral Hubs Limited: The Tribunal noted that this company was involved in digitization and e-publishing, with a different business model characterized by low employee costs and significant outsourcing. The Tribunal upheld the exclusion based on precedents where Coral Hubs was found to be functionally dissimilar to BPO services.

3. Selection of ITES and KPO Companies as Comparables to a BPO Company:
The Tribunal found that the TPO erred in selecting ITES and KPO companies as comparables for the assessee, which was engaged in BPO services. The functional dissimilarity between the services provided by the assessee and the selected comparables was a key factor in the decision.

4. Selection of Outlier Companies as Comparables:
The Tribunal noted that the selected comparables, such as Accentia Technologies and Cosmic Global, had abnormally high profit margins, making them outliers. The inclusion of such companies skewed the comparability analysis, leading to an unjustified adjustment.

5. Calculation of Working Capital Adjustment:
The Tribunal did not specifically address the issue of working capital adjustment in detail, as the primary focus was on the selection of comparables.

6. Non-sharing of Search Matrix and FAR Analysis:
The Tribunal did not specifically address the issue of non-sharing of the search matrix and FAR analysis, as the primary focus was on the selection of comparables.

7. Rejection of Multiple Year Data for Comparables:
The Tribunal did not specifically address the issue of rejecting multiple year data for comparables, as the primary focus was on the selection of comparables.

8. Non-consideration of Risk Adjustment:
The Tribunal did not specifically address the issue of non-consideration of risk adjustment, as the primary focus was on the selection of comparables.

9. Transfer Pricing Adjustment without +/- 5% Benefit:
The Tribunal noted that if the assessee's plea for exclusion of the disputed comparables was accepted, the variation between the arm's length price and the stated value of the international transactions would fall within the +/- 5% range, eliminating the need for any adjustment.

10. Initiation of Penalty Proceedings:
The Tribunal did not specifically address the issue of initiation of penalty proceedings under section 271(1)(c) of the Act, as the primary focus was on the selection of comparables.

11. Levying of Interest under Sections 234B and 234D:
The Tribunal did not specifically address the issue of levying interest under sections 234B and 234D, as the primary focus was on the selection of comparables.

Conclusion:
The Tribunal upheld the assessee's plea for the exclusion of Accentia Technologies Limited, Crossdomain Solutions Limited, Cosmic Global Limited, Eclerx Services Limited, and Coral Hubs Limited from the final set of comparables. As a result, the variation between the arm's length price and the stated value of the international transactions fell within the permissible range, negating the need for any adjustment. The appeal was partly allowed, and other grounds of appeal were rendered academic.

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