2019 (5) TMI 1690 - AT - Income Tax

TP Adjustment - comparable selection - inappropriate selection of comparables which are functionally different from that of the assessee - HELD THAT - Asessee is engaged in the business of designing and development of chip, integrated circuits and storage components and allied services for its holding company AMCC, USA thus companies functionally dissimilar with that of assessee need to be deselected from final list. Two comparables i.e. (i) Eclerx Services Limited and (ii) Genesys International Corporation Limited are required to be excluded for the purpose of benchmarking of the international transactions. Rejection of the risk adjustment - We set-aside the orders of the DRP/TPO on this issue and direct the Assessing Officer to allow the risk adjustments. The Assessing Officer shall grant reasonable opportunity of being heard to the assessee in accordance with the set principles of natural justice.

Summary

Issues Involved:
1. Inappropriate selection of comparables.
2. Inappropriate rejection of risk adjustment.

Detailed Analysis:

1. Inappropriate Selection of Comparables:

The assessee, a wholly-owned subsidiary engaged in designing and developing chips, integrated circuits, and storage components, contested the inclusion of certain comparables by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP). The TPO rejected three of the assessee's comparables and included four others, leading to a Profit Level Indicator (PLI) of 23.57%, significantly higher than the assessee’s PLI of 16.11%, resulting in an addition of ?3,40,02,747.

The assessee argued that E Clerx Services Ltd. and Genesys International Corporation Ltd. were functionally dissimilar. The TPO justified their inclusion by categorizing them under Knowledge Process Outsourcing (KPO) services, which the DRP upheld. However, the Tribunal found that mere categorization under KPO was insufficient for comparability. The Tribunal cited the Hon'ble Delhi High Court's decisions in Actis Global Services Pvt. Ltd. vs. PCIT and Rampgreen Solutions Pvt. Ltd. vs. CIT, emphasizing that the actual functions and characteristics of services rendered must be similar. The Tribunal noted that E Clerx was engaged in data analytics and Genesys in geographical information system services, both functionally different from the assessee's business. Consequently, the Tribunal directed the exclusion of these two comparables for benchmarking.

2. Inappropriate Rejection of Risk Adjustment:

The assessee sought risk adjustments, arguing that it operated as a risk-mitigated entity, unlike the comparables which bore full-fledged risks. The TPO and DRP rejected this request. The Tribunal, referencing its own decision in the assessee's case for a previous year and the decision in Sony India Pvt. Ltd. vs. DCIT, held that risk adjustments should be granted. The Tribunal directed the Assessing Officer to allow risk adjustments and re-compute the margins of comparables accordingly, ensuring the assessee is given a reasonable opportunity to present its case.

Conclusion:
The appeal was allowed, with the Tribunal directing the exclusion of E Clerx Services Ltd. and Genesys International Corporation Ltd. as comparables and granting risk adjustments, thus reversing the orders of the DRP and TPO on these issues.