2018 (6) TMI 1822 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee is engaged in the business of providing non-binding investment advisory services pertaining to investment opportunity available in India to its Associated Enterprises (AE) named Apax Partners UK Ltd., located in UK, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Computation of RPT transactions - The co-ordinate bench in the case of Goldstar Jewellery Design P Ltd 2014 (11) TMI 904 - ITAT MUMBAI has observed that the term related party transaction cannot be considered in its generic sense. It will encompass only such transactions between the related parties which directly affect the overall profitability in one way or the other . A.R submitted that the reimbursements do not affect profitability and hence the same has to be excluded. We find merit in the said submissions. The reimbursement of expenses does not result in any profitability, i.e., it is mere compensation for the expenses incurred by one party on behalf of another party. Accordingly we direct the AO/TPO to exclude the reimbursements and accordingly compute RPT transactions. Accordingly we restore this comparable to the file of AO/TPO for considering it afresh. Assessee has opted for Advance Pricing Agreement (APA) for AY 2010-11, wherein the assessee has accepted determination of higher margins - We notice that Rule 10MA provides for the methodologies of Roll back of the APA and clause (iv) of sub rule (2) of Rule 10MA states that there should be a request from the assessee for roll back of APA. In the instant case, admittedly, there is no request from the assessee for roll back. Hence we do not agree with the submissions made by the Ld D.R. Accordingly we restore the issue of determination of ALP to the file of AO/TPO by considering the comparables approved by us in the preceding paragraphs by adopting single year data in terms of Rule 10B(4) of IT Rules. In the result, the appeal of the assessee is treated as allowed and the appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Classification of the assessee as a Knowledge Process Outsourcing (KPO) company.
2. Selection of comparables for Transfer Pricing (TP) analysis.
3. Use of current year data versus multiple year data for determining Arms Length Price (ALP).
4. Inclusion of IDC (India) Ltd. as a comparable.
5. Exclusion of certain comparables such as Coral Hubs Ltd., Eclerx Services Ltd., and Cosmic Global Ltd.
6. Inclusion of ICRA Management Consulting Services Ltd. as a comparable.
7. Computation of Related Party Transactions (RPT) and its impact on comparability.
8. Applicability of Advance Pricing Agreement (APA) terms to the assessment year in question.

Detailed Analysis:

1. Classification of the Assessee as KPO:
The Tribunal held that the assessee, engaged in providing non-binding investment advisory services, should not be classified as a KPO. The TPO had classified the assessee as a KPO based on services rendered, but the Tribunal referred to its earlier decision, which had accepted the assessee as an investment advisory company, not a KPO. Therefore, the Tribunal set aside the AO's order on this issue.

2. Selection of Comparables for TP Analysis:
The TPO and DRP had selected certain comparables, which the assessee contested. The Tribunal noted that the TPO had pointed out defects in the TP study conducted by the assessee and had selected comparables from the assessee's own TP study. The Tribunal emphasized the need to use functionally similar comparables.

3. Use of Current Year Data:
The Tribunal agreed with the tax authorities that current year data should be used for TP analysis as mandated by Rule 10B(4). The assessee's use of multiple year data was rejected.

4. Inclusion of IDC (India) Ltd. as a Comparable:
The Tribunal upheld the DRP's decision to include IDC (India) Ltd. as a comparable, noting that the revenue had accepted this in the previous assessment year (AY 2008-09). The Tribunal found no material to contradict the DRP's findings.

5. Exclusion of Certain Comparables:
- Coral Hubs Ltd.: The Tribunal directed the exclusion of Coral Hubs Ltd., consistent with its decision in AY 2008-09, as the company was functionally different and primarily outsourced its services.
- Eclerx Services Ltd.: Following its earlier decision, the Tribunal directed the exclusion of Eclerx Services Ltd.
- Cosmic Global Ltd.: The Tribunal noted that Cosmic Global Ltd. was engaged in translation services, which were functionally different from the assessee's services. Hence, it directed the exclusion of Cosmic Global Ltd.

6. Inclusion of ICRA Management Consulting Services Ltd.:
The Tribunal directed the inclusion of ICRA Management Consulting Services Ltd. as a comparable, consistent with its decision in AY 2008-09.

7. Computation of Related Party Transactions (RPT):
The Tribunal addressed the issue of RPT computation, noting that reimbursements should not be included in RPT as they do not affect profitability. The Tribunal directed the AO/TPO to exclude reimbursements and recompute RPT.

8. Applicability of APA Terms:
The Tribunal rejected the revenue's plea to extend the margins determined in the APA for AY 2010-11 to AY 2009-10, noting that there was no request from the assessee for such a roll back and that Rule 10MA requires a request from the assessee for APA roll back.

Conclusion:
The Tribunal restored the issue of determining the ALP to the AO/TPO, directing them to consider the comparables approved by the Tribunal, use current year data, and exclude reimbursements in RPT computation. The assessee's appeal was allowed, and the revenue's appeal was dismissed.