2016 (10) TMI 1313 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Acropetal Technologies Ltd. - Rejection of this company as comparable to low end BPO service providers on the reasoning that this company is providing KPO services. R. Systems International ltd. - Remit the issue of comparability of this company to the AO/TPO for examining afresh in the light of the relevant judicial precedents and of course after due opportunity of being heard to the assessee. Aditya Birla Minacs Word Wide Ltd. and Tata communication transformation Ltd. - Assessee s contention in relation to application of RPT filter to these two comparables needs to be looked into fresh keeping in view the observations of the ITAT in case of Nokia India (P) Ltd. v/s DCIT 2014 (11) TMI 101 - ITAT DELHI - We, therefore, remit the issue of comparability of the aforesaid two comparables to the Assessing Officer / Transfer Pricing Officer for deciding afresh after due opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Selection/Rejection of Comparables (Acropetal Technologies Ltd., R. Systems International Ltd., Aditya Birla Minacs Worldwide Ltd., Tata Communication Transformation Ltd.)
2. Application of Related Party Transaction (RPT) Filter

Issue-wise Detailed Analysis:

1. Selection/Rejection of Comparables:

Acropetal Technologies Ltd.:
The assessee objected to the selection of Acropetal Technologies Ltd. as a comparable, arguing that it provides high-end KPO services, whereas the assessee offers low-end BPO services, making them functionally dissimilar. The assessee highlighted the company's involvement in diversified activities such as healthcare and energy solutions, and the incurrence of on-site development and marketing expenses, indicating software development activities. The Tribunal, after reviewing the annual report and noting the company's engagement in software development, held that Acropetal Technologies Ltd. is functionally dissimilar to the assessee and cannot be considered a comparable.

R. Systems International Ltd.:
The assessee selected R. Systems International Ltd. based on functional similarity but it was rejected by the TPO due to a different financial year. The Tribunal noted that the rejection was purely based on the financial year difference. Despite the assessee not objecting before the DRP, the Tribunal allowed the issue to be raised, emphasizing that the data for comparability analysis should relate to the same financial year as per Rule 10B(4). The Tribunal remitted the issue back to the AO/TPO to re-examine the comparability in light of relevant judicial precedents and after providing the assessee an opportunity to be heard.

Aditya Birla Minacs Worldwide Ltd. and Tata Communication Transformation Ltd.:
The TPO rejected Aditya Birla Minacs Worldwide Ltd. due to failing the RPT filter, while Tata Communication Transformation Ltd. was included. The DRP directed the TPO to verify and reject Tata Communication Transformation Ltd. if its RPT exceeds 25%. The assessee argued that the RPT filter should apply only to international transactions with related parties, not the entire turnover. The Tribunal remitted the issue back to the AO/TPO to reconsider the application of the RPT filter in light of the ITAT Delhi Bench's decision in Nokia India Pvt. Ltd. v/s DCIT.

2. Application of Related Party Transaction (RPT) Filter:
The assessee contended that the RPT filter should be applied only to international transactions with related parties, not the entire turnover. The Tribunal agreed that the issue requires fresh consideration and remitted it back to the AO/TPO to re-evaluate the comparability of Aditya Birla Minacs Worldwide Ltd. and Tata Communication Transformation Ltd. after considering the ITAT's observations in Nokia India Pvt. Ltd.

Conclusion:
The Tribunal directed the AO/TPO to determine the arm’s length price afresh, considering the observations made regarding the selection/rejection of comparables and the application of the RPT filter. All other grounds not specifically argued were deemed not pressed and dismissed. The appeal was partly allowed, and the order was pronounced in open court on 18.10.2016.