2016 (11) TMI 1566 - AT - Income Tax

TPA - comparable selection - functinal dissimilarity - Held that - Assessee is engaged in the business of providing medical transcription services falling within the category of information technology enabled services ITES to its AEs i.e. Acusis LLC USA thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:

1. Selection of comparables for Transfer Pricing (TP) analysis.
2. Inclusion of foreign exchange fluctuation gain/loss in operating profit.
3. Application of filters for comparables.
4. Adjustment under Section 92CA of the Income Tax Act.
5. Deduction under Section 10A of the Income Tax Act.
6. Standard deduction under the proviso to Section 92C(2) of the Income Tax Act.

Detailed Analysis:

1. Selection of Comparables for Transfer Pricing Analysis:
The primary issue was the selection of comparables for determining the Arm's Length Price (ALP) of international transactions. The assessee company and the Transfer Pricing Officer (TPO) had differing views on which companies should be considered as comparables. The assessee's list included entities like Allsec Technologies Ltd., Mercury Outsourcing Ltd., Mapro Industries Ltd., Cosmic Global Ltd., and CS Software Enterprise Ltd. The TPO rejected some of these and introduced new comparables such as Nucleus Net Soft & GIS India Ltd., Vishal Information Technologies Ltd., Wipro BPO Ltd., and others.

The Tribunal held that:
- Tricom India Limited was upheld as a comparable since it was engaged wholly in ITES/BPO business.
- Wipro BPO Ltd. was excluded due to its high brand value, goodwill, and high turnover.
- Allsec Technologies Ltd. was remitted back to the TPO to determine if its losses were due to special reasons.
- Mercury Outsourcing Ltd. was included as a comparable.
- Mapro Industries Ltd. and Cosmic Global Ltd. were included as comparables since they were not persistent loss-making companies.
- CS Software Enterprise Ltd. was excluded based on the 25% export earnings filter.

2. Inclusion of Foreign Exchange Fluctuation Gain/Loss in Operating Profit:
The Tribunal upheld the CIT(A)'s decision to include foreign exchange fluctuation gains as part of the operating profit for computing margins. This was based on the rationale that such gains are inextricably connected with the business activities of the assessee company.

3. Application of Filters for Comparables:
The TPO applied several filters, such as excluding companies with diminishing revenue, substantial underutilization of assets, persistent losses, and those with less than 25% export earnings. The Tribunal upheld the use of these filters but directed the TPO to reconsider the inclusion of certain companies based on functional comparability and specific business conditions.

4. Adjustment under Section 92CA of the Income Tax Act:
The TPO made a transfer pricing adjustment of ?2,35,24,271/- for AY 2004-05 and ?1,33,59,948/- for AY 2005-06. The Tribunal directed the TPO to reassess the comparables and adjustments based on the revised list of comparables and the inclusion of foreign exchange gains in operating profits.

5. Deduction under Section 10A of the Income Tax Act:
The Tribunal upheld the CIT(A)'s direction to reduce telecommunication and internet charges from both export turnover and total turnover for computing the deduction under Section 10A. This was consistent with the decision of the Hon'ble High Court in CIT vs. Tata Elxsi Ltd.

6. Standard Deduction under the Proviso to Section 92C(2) of the Income Tax Act:
The Tribunal ruled against the assessee's claim for a standard deduction of 5% from the arithmetical mean of the profit margin of the comparables. This decision was based on the retrospective amendment to Section 92C by the Finance Act, 2012, and supported by the Special Bench decision in IHG IT Services (India) (P.) Ltd. v. ITO.

Conclusion:
The appeals filed by the assessee were partly allowed, leading to a reassessment of comparables and adjustments. The revenue's appeals were also partly allowed, particularly concerning the exclusion of super profit and low margin companies from the list of comparables. The Tribunal's decisions were guided by established legal precedents and the functional comparability of the entities involved.

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