2015 (3) TMI 1022 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Cosmic Global Ltd. company outsourced its activities and the outsourcing expenses constitute 57% of the total expenses. The entire outsourcing is confined to Translation charges paid at ₹ 3.00 crore. We can see from the TPO s order that he considered the results of this company on entity level, thereby reckoning income from all the three segments. Since Translation charges constitute a larger chunk of this company s income, for which the services were mainly outsourced, we cannot consider this company as comparable on an entity level. Genesys International falls under serial No. vi. of the Circular with the caption Geographic Information System Services. There can be no comparison of the services carried out by this company with those rendered by the assessee to its AEs, which are basically in the nature of Accounts payable services and General accounting for funds, falling under (i) Back office operations; (ii) Call centres; (iv) Data processing; and (xiii) Revenue accounting. By no standard, Genesys International can be considered as comparable with the assessee company. Vishal Information Technologies (Coral Hub) has outsourcing charges constitute 90% of the total operating cost. The business model adopted by this company in outsourcing its activities in contrast to that of the assessee in rendering services at its own, makes the two incomparable to each other. Thus we order for the exclusion of this company from the list of comparables. Accentia Technologies company, apart from being engaged in the business of rendering ITES, is also dealing with software products. As the segmental figures of this company are not available and the TPO has taken its entity level figures, it ceases to be comparable. To what extent the overall profitability of this entity is affected because of software products, is not capable of ascertainment with precision. Also the Annual report of this company that it completed acquisition of Oak Technologies Inc. USA during the year. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. vs. DCIT (2015 (3) TMI 1010 - ITAT MUMBAI) has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers etc. We, therefore, order for the exclusion of this company from the list of comparables. Eclerx Services Pvt. Ltd.being a KPO company, is providing data process solutions to its clients, which activity is a way different from that of the assessee company, which is basically of providing accounts payable services and general accounting services to its AEs alone. Not only that, this company has significant intangibles which its uses for the purposes of rendering KPO services. As the assessee is a captive unit rendering services to its AEs without any intangibles, there can be no comparison between the assessee and Eclerx Services Pvt. Ltd. Allsec Technologies Ltd. If a company fails on one of the filters adopted by the TPO, it has to be excluded. We, therefore, uphold the impugned order in not considering Allsec Technologies as a comparable company. R. Systems International Ltd.from the audited accounts of this company that the audited data for the quarter ending 31.3.2009 and 31.3.2008 has been provided by the company itself. Ordinarily, there should be no difficulty in determining the relevant figures for the year ending 31.3.2009 by excluding the results for the quarter ending 31.3.2008 and including the results of the quarter ending 31.3.2009 to the annual figure for the year ending 31.12.2008. Thus, it is apparent that the figure of profit for the year ending 31.3.2009 is capable of ascertainment. We, therefore, set aside the impugned order on this issue and direct to include R. Systems in the list of comparables by working out the figures relevant to the financial year ending 31.3.2009 from the audited accounts - remit the matter to the file of AO/TPO for calculating the ALP of the international transaction afresh - Decided partly in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Selection of comparables for Transfer Pricing Adjustment.

Detailed Analysis:

1. Selection of Comparables for Transfer Pricing Adjustment:

Cosmic Global Ltd.:
The TPO included Cosmic Global Ltd. as a comparable, but the assessee objected, arguing functional dissimilarity. The Annual accounts revealed that this company's revenue was significantly derived from Translation charges, with 57% of expenses outsourced. The Tribunal noted that the nature of services provided by the assessee was similar to Mercer Consulting (India) Pvt. Ltd., where Cosmic Global Ltd. was excluded due to outsourcing. Hence, it was ordered to exclude Cosmic Global Ltd. from the list of comparables.

Genesys International:
Initially included by the assessee, Genesys International was later argued to be functionally different. The TPO included it based on the assessee's initial selection. However, the Tribunal emphasized evaluating comparability on merits rather than initial inclusion. Genesys International, engaged in geospatial services, was found to be functionally different from the assessee's back-office operations and accounting services. Following the precedent in Mercer Consulting (India) Pvt. Ltd., the Tribunal ordered its exclusion.

Vishal Information Technologies (Coral Hub):
The TPO included Vishal Information Technologies despite the assessee's objections. The Tribunal noted that 90% of its operating cost was outsourcing charges, making its business model different from the assessee's. Citing similar decisions in Mercer Consulting (India) Pvt. Ltd. and other cases, the Tribunal ordered its exclusion from the comparables.

Accentia Technologies:
The TPO included Accentia Technologies, but the assessee argued for its exclusion due to involvement in software products and acquisitions during the year. The Tribunal found that Accentia engaged in both ITES and software products, with no segmental figures available, making it incomparable. Additionally, the acquisition of Oak Technologies Inc. was considered an extraordinary event. Citing precedents, the Tribunal ordered its exclusion.

Eclerx Services Pvt. Ltd.:
The TPO included Eclerx Services Pvt. Ltd., which the assessee objected to, arguing functional dissimilarity. The Tribunal found Eclerx to be a KPO with significant intangibles, unlike the assessee's captive ITES operations. Hence, Eclerx Services Pvt. Ltd. was ordered to be excluded.

Allsec Technologies Ltd.:
The TPO excluded Allsec Technologies based on extraordinary business activities, diminishing revenue, and failing the export filter. The Tribunal found the exclusion on the export filter (74.45% vs. 75%) nominal and not justifiable. However, the consistent losses and extraordinary events (acquisition and dissolution) justified its exclusion. The Tribunal upheld the exclusion of Allsec Technologies.

R. Systems International Ltd.:
The TPO excluded R. Systems International Ltd. due to a different accounting year ending. The Tribunal noted that audited data for the relevant quarters was available, making it possible to align the financial year with the assessee's. The Tribunal directed the inclusion of R. Systems International Ltd. if correct figures could be deduced.

Conclusion:
The Tribunal set aside the impugned order and remitted the matter to the AO/TPO for recalculating the ALP of the international transaction afresh, considering the directions for inclusion and exclusion of specific companies. The appeal was allowed for statistical purposes.