2020 (11) TMI 1093 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Accentia technologies Ltd - We find that the revenue shown by this comparable company is only medical transcription billing and collection and income from coding. We do not find any product sale by this comparable company therefore the reason given by the learned Dispute Resolution Panel for exclusion of this comparable company is devoid of any merit. Therefore we reverse the finding of the learned Dispute Resolution Panel and direct the learned Transfer Pricing Officer to include the above comparable company for the comparability analysis. Therefore the ground of the learned assessing officer with respect to this comparable company for its inclusion is upheld. ACROPETAL TECHNOLOGIES LTD - In schedule 9 the comparable company is also debited software development expenses. The learned departmental representative on this aspect could not show us that whether the company is not engaged in development of software or not. This comparable has been selected by the learned Transfer Pricing Officer and therefore he should have brought on record necessary details to show that this company is not engaged in development of the software but in the similar kind of functions as performed by the assessee. For this reason we do not find any infirmity in the order of the learned Dispute Resolution Panel in directing the learned TPO to exclude this comparable company. Thus direction of the learned Dispute Resolution Panel with respect to exclusion of this comparable is upheld. E Clrex Services Limited - This company is in the business of providing Knowledge Process Outsourcing services which is not the function of the assessee. Therefore we do not find any infirmity in the direction of the learned dispute resolution panel in directing the learned transfer pricing officer to exclude this comparable company. Thus direction of the learned dispute resolution panel with respect to this comparable is upheld. Infosys BPO Ltd and TCS E serve Ltd - No infirmity in the direction of the learned dispute resolution panel to exclude both these comparable from the comparability analysis on the basis of their turnover being multiple times then the turnover of the assessee. Working capital adjustment granted by the learned dispute resolution panel despite the assessee does not bear any working capital risk - Substantial revenue of the assessee is locked into the sundry debtors. Therefore we do not find any infirmity in the order of the learned dispute resolution panel in upholding the working capital adjustment granted by the learned transfer pricing officer. Accordingly the cross objection filed by the assessee with respect to ground is dismissed.

Summary

Issues Involved:
1. Exclusion of certain comparable companies from the final set of comparables for arriving at arm’s-length price of the international transaction.
2. Grounds of cross objections raised by the assessee regarding the maintainability of the appeal, rejection of transfer pricing study, and other related adjustments.
3. Granting of working capital adjustment to the comparability analysis.

Detailed Analysis:

Issue 1: Exclusion of Comparable Companies
The Deputy Commissioner of Income Tax filed an appeal against the direction of the Dispute Resolution Panel (DRP) to exclude certain comparable companies from the final set of comparables for determining the arm’s-length price of the international transaction. The DRP directed the exclusion of Accentia Technologies Ltd., Acropetal Technologies Ltd., Eclerx Services Ltd., Infosys BPO Ltd., and TCS E-Serve Ltd.

Accentia Technologies Ltd.:
The DRP excluded this company on the grounds that it was engaged in software development and product sales. However, upon review, it was found that Accentia Technologies Ltd. was involved in medical transcription, billing, collection, and income from coding, without any product sales. Therefore, the exclusion was deemed incorrect, and the company was reinstated as a comparable.

Acropetal Technologies Ltd.:
The DRP excluded this company, citing its involvement in software development and product sales. The standalone accounts indicated that the company was engaged in software development. The Transfer Pricing Officer (TPO) failed to provide evidence to the contrary. Thus, the exclusion by the DRP was upheld.

Eclerx Services Ltd.:
The DRP excluded this company due to its diverse functionality in high-end business services. The annual accounts confirmed that Eclerx was involved in Knowledge Process Outsourcing services, which differed from the assessee's functions. The exclusion was upheld.

Infosys BPO Ltd. and TCS E-Serve Ltd.:
These companies were excluded due to their significantly larger turnovers compared to the assessee. Infosys BPO Ltd.'s turnover was 37 times, and TCS E-Serve Ltd.'s turnover was 47 times that of the assessee. The exclusion was consistent with previous rulings and upheld.

Issue 2: Grounds of Cross Objections by the Assessee
The assessee raised several grounds in their cross objection, including the maintainability of the appeal, rejection of the transfer pricing study, and other related adjustments. However, most grounds were not pressed by the assessee except for the issue of working capital adjustment.

Issue 3: Working Capital Adjustment
The assessee objected to the working capital adjustment granted by the DRP, arguing that it did not bear any working capital risk. The DRP found this contention flawed, noting that the assessee had substantial receivables, indicating a working capital risk. The annual accounts showed significant sundry debtors relative to the revenue, justifying the working capital adjustment. The objection was dismissed.

Conclusion:
The appeal of the Deputy Commissioner of Income Tax was partly allowed, reinstating Accentia Technologies Ltd. as a comparable. The exclusions of Acropetal Technologies Ltd., Eclerx Services Ltd., Infosys BPO Ltd., and TCS E-Serve Ltd. were upheld. The cross objection by the assessee regarding the working capital adjustment was dismissed. The final order was pronounced on 19/11/2020.