2021 (2) TMI 1325 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee carries on IT enabled services ITes in the form of research activities according to the terms of its agreement with its AE which is driven by business information market research and intellectual property research thus companies functionally dissimilar with that of assessee need to be deselected. Working capital adjustment - CIT-A directed AO/TPO to grant working capital adjustment based on the OECD formula and by taking the PLR as adopted by the Slate Bank of India in FY 2008-09 for working capital loans - HELD THAT - We are of the considered opinion that no interference is required and while upholding the same we reject the challenge of the Revenue on this aspect.

Issues Involved:

1. Inclusion of Cosmic Global Limited as a comparable entity.
2. Exclusion of Eclerx Services Ltd. and Genesys International Corporation Ltd. as comparable entities.
3. Capacity underutilization adjustment.
4. Working capital adjustment.

Issue-wise Detailed Analysis:

1. Inclusion of Cosmic Global Limited as a Comparable Entity:

The assessee argued that Cosmic Global Limited is functionally dissimilar because it is engaged in medical transcription, translation services, and software development services. Cosmic operates on an outsourcing model, paying significant translation charges, which constitutes 57% of its total expenses. The assessee cited several judicial decisions, including NCS Pearson India Pvt. Ltd. and UT Starcom Inc., where Cosmic Global Ltd. was deemed not comparable due to its different business model and significant outsourcing activities. The Tribunal agreed, noting that Cosmic Global Ltd. has abnormal growth in sales and lacks complete segmental data. Consequently, the Tribunal directed the exclusion of Cosmic Global Ltd. from the final list of comparables.

2. Exclusion of Eclerx Services Ltd. and Genesys International Corporation Ltd. as Comparable Entities:

Eclerx Services Ltd.:

The Revenue argued that Eclerx Services Ltd. is a good comparable entity. However, the assessee contended that Eclerx is a Knowledge Process Outsourcing (KPO) unit engaged in high-end financial services and data analytics, making it functionally dissimilar. The Tribunal referred to its earlier decision in the assessee's own case for the assessment year 2010-11, where Eclerx was excluded due to its KPO nature and significant intangibles. The Tribunal upheld the exclusion of Eclerx Services Ltd., finding no change in facts and circumstances.

Genesys International Corporation Ltd.:

The assessee argued that Genesys is engaged in Geographical Information System (GIS) services, which are functionally different from the IT-enabled services provided by the assessee. The Tribunal noted that Genesys provides high-end GIS services, including 3D mapping and navigation maps, which do not match the ITES services offered by the assessee. The Tribunal referred to decisions in Mercer Consulting (India) vs. DCIT and CIT vs. M/s. Mercer Consulting, where Genesys was excluded as a comparable due to its different functional profile. The Tribunal upheld the exclusion of Genesys International Corporation Ltd.

3. Capacity Underutilization Adjustment:

The assessee claimed a capacity underutilization adjustment, which the TPO rejected, stating that the claim was not made in the TP study. However, the Tribunal found that the TP study did reference capacity underutilization adjustment, which the TPO overlooked. The Tribunal remanded the issue to the AO/TPO for reconsideration, directing them to examine the TP study and require additional details from the assessee if necessary.

4. Working Capital Adjustment:

The CIT(A) directed the AO/TPO to grant a working capital adjustment based on the OECD formula and the PLR adopted by the State Bank of India for FY 2008-09. The CIT(A) emphasized that differences in working capital positions affect profitability and comparability. The Tribunal upheld this decision, citing various judicial precedents that support working capital adjustments to improve comparability.

Conclusion:

The Tribunal allowed the assessee's appeal in part for statistical purposes, directing the exclusion of Cosmic Global Ltd., Eclerx Services Ltd., and Genesys International Corporation Ltd. from the list of comparables. The issue of capacity underutilization adjustment was remanded to the AO/TPO for reconsideration. The Tribunal upheld the CIT(A)'s decision on working capital adjustment, rejecting the Revenue's appeal on this aspect.

← Previous Next →