2020 (11) TMI 1094 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee is engaged in providing coordination and quality assurance services for the medical transcription work outsourced to Home Based Medical Transcriptionist (HMTs) and third party medical transcription service providers (suppliers) by Spryance USA thus companies functionally dissimilar with that of assessee need to be deselected.

Issues Involved:
1. Completion of assessment by AO under Section 143(3) read with Section 144C(13) of the Act.
2. Reference made by AO to TPO and violation of natural justice.
3. Transfer pricing adjustment on account of provision of Medical Transcription services.
4. Rejection and modification of comparable companies by AO/DRP/TPO.
5. Non-provision of appropriate working capital, comparability, risk, and other economic adjustments.
6. Ignoring provisions of Rule 10B(4) and judicial pronouncements.
7. Misunderstanding of Rule 10B(1)(e)(ii) by AO/DRP/TPO.
8. Non-provision of benefit of (+/-) 5% range as per proviso to Section 92C(2).
9. Charging of interest under Section 234B.

Detailed Analysis:

GROUND NO.1:
The issue of the AO completing the assessment at an income of Rs. 4,32,10,640 against the returned income of Rs. 2,70,33,386 was raised. However, this ground was deemed general in nature and did not require specific adjudication.

GROUND NO.2:
The taxpayer contended that the reference made by the AO to the TPO was void ab-initio and bad in law due to the failure to provide a copy of the approval granted by the Commissioner of Income Tax and lack of opportunity to be heard. This ground was dismissed as it was not pressed during the course of arguments.

GROUNDS NO.3 & 4:
The taxpayer used the Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) to benchmark its international transactions. The TPO accepted TNMM but rejected five comparables chosen by the taxpayer and introduced ten new comparables. The DRP partly allowed the taxpayer's objections and corrected computational errors, providing working capital adjustment. The final adjustment was Rs. 1,58,54,643. The Tribunal examined the suitability of comparables sought to be excluded and included by the taxpayer.

Comparables Sought to be Excluded:

Accentia Technologies Ltd.:
The taxpayer argued for exclusion due to functional dissimilarity, non-availability of segmental financials, and extra-ordinary events. The Tribunal found Accentia functionally dissimilar as it rendered numerous services under a single segment of ITES without segmental financials, and excluded it as a comparable.

I-Gate Global Solutions Ltd.:
The taxpayer sought exclusion due to functional dissimilarity, high turnover, non-availability of segmental financials, and extra-ordinary events. The Tribunal found I-Gate functionally dissimilar as it was into software development and services, and had high turnover, and excluded it as a comparable.

Infosys BPO Ltd.:
The taxpayer argued for exclusion due to high turnover, brand value, and extra-ordinary events. The Tribunal found Infosys BPO functionally dissimilar due to its high turnover and brand value, and excluded it as a comparable.

TCS E-Serve International Ltd.:
The taxpayer sought exclusion due to brand presence, functional dissimilarity, and abnormal growth. The Tribunal found TCS E-Serve International functionally dissimilar due to its high-end services and related party transactions, and excluded it as a comparable.

TCS E-Serve Ltd.:
The taxpayer argued for exclusion due to brand presence, functional dissimilarity, and supernormal profit. The Tribunal found TCS E-Serve functionally dissimilar due to its high-end services and high turnover, and excluded it as a comparable.

Comparable Sought to be Included:

R System International Ltd.:
The taxpayer sought inclusion of R System, which was rejected by the TPO due to different financial year. The Tribunal remitted this comparable back to the TPO for fresh consideration, noting that merely having a different financial year is not a valid ground for rejection.

GROUNDS NO.5, 6 & 7:
These grounds were dismissed as they were not pressed during the course of arguments.

GROUNDS NO.8 & 9:
These grounds were deemed consequential in nature and did not need specific findings.

Conclusion:
The appeal filed by the taxpayer was partly allowed for statistical purposes. The Tribunal ordered the exclusion of certain comparables and remitted the inclusion of one comparable back to the TPO for fresh consideration. The decision was pronounced in open court on November 25, 2020.

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