2017 (9) TMI 1913 - AT - Income Tax

Transfer pricing addition - international transaction of Provision of IT enabled services with transacted value - Comparable selection - application of the TNMM as the most appropriate method or the assessee s own computation of PLI - HELD THAT - It can be seen from the Annual Report of this company, a copy of which has been placed in the paper book, that it paid Outsourcing charges to the tune of ₹ 8 crore and odd in addition to payment of Salary and wages etc. to its staff, including director s remuneration, to the tune of ₹ 24.54 crore. This divulges that roughly 26% of the activity carried out by this company has been outsourced. As against this, the assessee is doing the entire business at its own without there being any expenditure on outsourcing. This reveals a significant difference in the business model adopted by the assessee and e-Clerx Services Ltd. In Rampgreen Solutions Pvt. Ltd. vs. CIT 2015 (8) TMI 931 - DELHI HIGH COURT excluded Vishal Information Technology Ltd. from the list of comparables on accounts of its different business model, namely, more of outsourcing than in-house services. When we advert to the facts of the instant case, we find that e-Clerx Services Ltd. has also spent more than 26% of the total cost of the employees and job work charges simply on outsourcing. Since the business model of e-Clerx Services Pvt. Ltd. is significantly different from that of the assessee, which is not outsourcing any of its work, the same, in our considered opinion, renders it non-comparable. We, therefore, direct to exclude this company from the final set of comparables. We set aside the impugned order on the issue of addition towards transfer pricing adjustment in the international transaction of Provision of IT enabled services and remit the matter to the file of AO/TPO for fresh determination of its ALP. Appeal is allowed for statistical purposes.

Summary

Issues:
Confirmation of transfer pricing addition

Analysis:
The appeal was filed against the order passed by the CIT (A) regarding the assessment year 2007-08. The main issue raised in the appeal was the confirmation of transfer pricing addition amounting to ?35,44,190. The assessee, a subsidiary of Ariba Inc., USA, provided various services to its associated enterprises, and the dispute revolved around the international transaction of 'Provision of IT enabled services' with a transacted value of ?5,45,07,381. The TPO determined the ALP at ?5,96,83,251, proposing a transfer pricing adjustment of ?51,75,870. The CIT(A) reduced the addition to ?35,44,190, leading to the appeal before the tribunal.

During the proceedings, the only issue raised was the exclusion of e-Clerx Services Ltd. from the list of comparables drawn by the TPO. The functional profile of the assessee involved providing various services under the 'Provision of IT enabled services' transaction, mainly supporting sales activities and maintaining accounts for associated enterprises. The TPO included e-Clerx Services Ltd. as a comparable despite objections from the assessee, who argued that the company was functionally different.

Upon examination, it was found that e-Clerx Services Ltd. had significant outsourcing expenses, indicating a different business model compared to the assessee, which did not outsource any work. Citing a similar precedent where a company was excluded due to a different business model, the tribunal concluded that e-Clerx Services Ltd. was noncomparable. As a result, the tribunal directed the exclusion of e-Clerx Services Ltd. from the list of comparables and remitted the matter to the AO/TPO for fresh determination of ALP.

In conclusion, the tribunal set aside the order on the transfer pricing adjustment issue, allowing the appeal for statistical purposes and providing the assessee with a reasonable opportunity to be heard in the fresh proceedings.