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2017 (9) TMI 1823 - AT - Income TaxTPA - comparable selection - functional similarity - HELD THAT - TCS E-Serve Limited - As relying on ACTIS GLOBAL SERVICES PVT. LTD 2016 (8) TMI 1197 - DELHI HIGH COURT deletion of this comparable from the final set of comparables on the ground that TCS was involved both in transaction processing and technical services and was therefore not a comparable company with respect to a company engaged only in BPO activities. Therefore we deem it appropriate to exclude this company from the final set of comparables and direct the TPO/Assessing Officer accordingly. Eclerx Services Limited - this company is engaged in financial services web content management and merchandising execution web analytics social media moderation and analytics search engine analytics and support CRM platform support lead generation customer data management supply chain and channel analytics price and catalogue competitive intelligence and broader data collection cleansing enriching and reporting whereas the assessee s impugned segment is a back office segment which can only be characterised as a routine ITeS service provider. Therefore it is evident that this company is functionally dissimilar to the assessee company. Infosys BPO Limited - Hon ble Delhi High Court in Actis Global Services Pvt. Ltd. 2016 (8) TMI 1197 - DELHI HIGH COURT rejected this comparable on the ground of high turnover wherein the comparable had a turnover of 66 times of the taxpayer. In the assessee s case it is seen that the assessee s turnover from back office segment amounts to 4.35 crores whereas as per the annual report of Infosys BPO the turnover was 1129.11 crore which is approximately 260 times more than that of the assessee s turnover. Therefore we are inclined to agree with the contentions of the ld. AR and deem it fit to remit this comparable to the file of the Assessing Officer/TPO with the direction to delete this company from the final set of comparables after due verification of the figures of turnover of the assessee as well as of the comparable. Hence this company stands excluded for statistical purposes. R Systems international Limited - The Hon ble High Court has held in Mckinsey Knowledge Centre India Pvt. Ltd. 2015 (3) TMI 1226 - DELHI HIGH COURT that if from the available data on record the results for financial year can reasonably be extrapolated then the comparable cannot be excluded solely on the ground that the comparables have different financial year endings. Therefore we deem it appropriate to restore this comparable also to the file of the TPO/Assessing Officer for verifying the computation as recast by the assessee and include this comparable in the final set of comparables.
Issues Involved:
1. Functional characterization of the assessee as a Knowledge Process Outsourcing (KPO) or Information Technology Enabled Services (ITeS) provider. 2. Selection and rejection of comparable companies for Transfer Pricing (TP) analysis. 3. Adjustments related to working capital and risk. 4. Inclusion of foreign exchange gain/loss in operating margins. 5. Charging of interest under sections 234B and 234C of the Act. 6. Initiation of penalty proceedings under section 271(1)(c) of the Act. Issue-wise Detailed Analysis: 1. Functional Characterization: The assessee argued that it should be characterized as an ITeS provider rather than a KPO, as it was engaged in routine back office support services like application support, technical support, and hosting services. The Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) characterized the assessee as a KPO, which the assessee contested by referring to Rule 10TA(e) and Rule 10TA(g) of the Safe Harbour Rules. The ITAT agreed with the assessee, noting the functional profile was more akin to an ITeS provider rather than a KPO. 2. Selection and Rejection of Comparables: The primary contention revolved around the inclusion and exclusion of certain comparables: - TCS E-Serve Limited: The ITAT excluded this company, noting it provided transaction processing and technical services beyond routine back office support, aligning with the Hon'ble Delhi High Court's decision in Actis Global Services Pvt. Ltd. - Eclerx Services Limited: The ITAT excluded this company, recognizing it as a KPO engaged in high-end services, which was functionally dissimilar to the assessee's back office services. This was supported by various precedents including the Hon'ble Delhi High Court's decision in Actis Global Services Pvt. Ltd. - Infosys BPO Limited: Initially included by the assessee, the ITAT directed its exclusion due to its high turnover, brand value, and economies of scale, following precedents like the Hon'ble Delhi High Court's decision in Agnity India Technologies. - R Systems International Limited: The ITAT directed the inclusion of this company after verifying the financials as recast by the assessee, following the Hon'ble Delhi High Court's decision in Mckinsey Knowledge Centre India Pvt. Ltd. 3. Adjustments Related to Working Capital and Risk: The TPO did not initially provide working capital adjustment and risk adjustment. The DRP directed the TPO to provide these adjustments and correct computational errors. However, the TPO did not fully comply, leading to further rectification and reduction of adjustments. 4. Inclusion of Foreign Exchange Gain/Loss in Operating Margins: The assessee contended that foreign exchange gain/loss should be considered as operating in nature while computing margins. The ITAT did not explicitly address this issue in the provided summary, implying the focus was primarily on the comparables and functional characterization. 5. Charging of Interest Under Sections 234B and 234C: The assessee contested the charging of interest under sections 234B and 234C amounting to INR 44,95,692/- and INR 5,792/- respectively. The ITAT's decision on this matter was not explicitly detailed in the provided summary. 6. Initiation of Penalty Proceedings Under Section 271(1)(c): The assessee also contested the initiation of penalty proceedings under section 271(1)(c). The ITAT did not provide a detailed resolution on this issue within the summary. Conclusion: The ITAT allowed the appeals, directing the exclusion of TCS E-Serve Limited, Eclerx Services Limited, and Infosys BPO Limited from the final set of comparables and the inclusion of R Systems International Limited after due verification. The ITAT emphasized the proper functional characterization of the assessee as an ITeS provider and directed necessary adjustments and corrections as per DRP's directions. The appeals were allowed in terms of these directions.
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