2017 (11) TMI 1856 - AT - Income Tax

TP Adjustment - Comparable selection - functional similarity - HELD THAT - Accentia Technologies Ltd. - The said concern was pointed out to be not functionally comparable as it was engaged in providing services of medical transcription which was not at all comparable to the back office support services provided by the assessee. We find merit in the plea of assessee in this regard. Also extraordinary event of merger which had happened during the financial year under consideration. Following the case EQUANT SOLUTIONS INDIA PVT. LTD. VERSUS DCIT CIRCLE 3 GURGAON 2016 (1) TMI 1260 - ITAT DELHI we hold that Accentia Technologies Ltd. be excluded from final list of comparables. Jeevan Softech Ltd - The services which are provided by the said concern include medical writing clinical data management biostatistics and other services. The name of said concern has also been changed to Jeeven Scientific Technology Ltd. The assessee on the other hand is engaged in providing back office support service. Accordingly we hold that the said concern is not comparable to the assessee and to be excluded from final list of comparables. Fortune Infotech Ltd - The assessee is operating in ITES segment wherein the services are being provided to associated enterprises whereas the concern Fortune Infotech Ltd. had its own unique web based software through which it provides services to its customers. The said concern is not comparable to the entity engaged in ITES segment has been deliberated upon by the Delhi Bench of Tribunal in Equant Solutions India Pvt. Ltd. Vs. DCIT 2016 (1) TMI 1260 - ITAT DELHI and it has been held that the concern develops its own software for performing specialized services in medical transcription and patient record management and the same was held to be not functionally comparable to an entity engaged in ITES segment. We find merit in the claim of assessee that once the concern is functionally not comparable to the assessee then the same cannot be included in final list of comparables. Excluding certain comparables in software segment - exclusion of Infosys Ltd. from final list of comparables which is so directed by the DRP - HELD THAT - We find that exclusion of said concern Infosys Ltd. on the basis of its high turnover and brand value has been considered by us in several decisions and because of its huge brand value and also high turnover the said concern is not comparable to the assessee and hence the margins of Infosys Ltd. are to be excluded from final list of comparables. Accordingly we hold so. Once the said concern is excluded from final list of comparables then the assessee claim that its margins are within /-5% of mean margins of comparables finally selected and hence no TP adjustment is to be made in the hands of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for IT Enabled Services (ITES)
2. Selection/Rejection of Comparables for Benchmarking
3. Use of Single Year Data vs. Multiple Year Data
4. Risk Adjustment and Asset Employed Differences
5. Exclusion of Specific Comparables by Dispute Resolution Panel (DRP)
6. Cross Objections by Assessee on Comparable Selection

Detailed Analysis:

1. Transfer Pricing Adjustment for IT Enabled Services (ITES):
The primary issue revolves around the transfer pricing adjustment of ?1,82,90,976 made by the Assessing Officer (AO) and Dispute Resolution Panel (DRP) concerning the ITES provided to associated enterprises. The assessee adopted the Transactional Net Margin Method (TNMM) for benchmarking, which was accepted. However, the dispute arose regarding the selection of comparables.

2. Selection/Rejection of Comparables for Benchmarking:
The assessee contended the inclusion of certain companies like Accentia Technologies Ltd., Jeevan Softech Ltd., and Fortune Infotech Ltd. in the final set of comparables. The Tribunal agreed with the assessee, noting that Accentia Technologies Ltd. was not functionally comparable due to its involvement in healthcare services and an extraordinary merger event. Similarly, Jeevan Softech Ltd. and Fortune Infotech Ltd. were excluded due to functional dissimilarities, such as providing specialized services and owning unique software.

3. Use of Single Year Data vs. Multiple Year Data:
The assessee objected to the AO/DRP's consideration of single-year data for comparables, arguing for the use of multiple-year data as per Rule 108(4) of the Income-tax Rules, 1962. However, this issue became academic after the exclusion of certain comparables.

4. Risk Adjustment and Asset Employed Differences:
The assessee argued for adjustments due to differences in the level of risk borne and assets employed compared to the selected comparables. The Tribunal noted that the assessee is a routine captive service provider, unlike the entrepreneurial companies selected by the TPO, necessitating an adjustment. However, this issue also became academic following the exclusion of certain comparables.

5. Exclusion of Specific Comparables by Dispute Resolution Panel (DRP):
The Revenue appealed against the DRP's exclusion of certain functionally comparable companies based on turnover and non-availability of segmental data. The Tribunal upheld the DRP's decision, emphasizing the importance of functional comparability and excluding Infosys Ltd. due to its high turnover and brand value, which made it incomparable to the assessee.

6. Cross Objections by Assessee on Comparable Selection:
The assessee's cross objections focused on the inclusion of functionally dissimilar companies like Acropetal Technologies Ltd. and Thirdware Solutions Ltd. and the exclusion of Akshay Software Technologies Ltd. The Tribunal's decision to exclude certain comparables rendered these objections academic.

Conclusion:
The Tribunal partly allowed the assessee's appeal, dismissing the Revenue's appeal and the assessee's cross objections as academic. The significant outcome was the exclusion of specific comparables, leading to the assessee's margins being within the acceptable range, nullifying the need for further transfer pricing adjustments. The order was pronounced on November 29, 2017.