2021 (1) TMI 1291 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee is engaged in providing information technology enabled services ( ITES ) to its holding company and therefore has to be regarded as an Associated Enterprises ( AEs ) thus companies functionally dissimilar with that of assessee need to be deselected. Also if filter of sales Rs. 1 crore OR export turnover in excess of 75% of total sales is not satisfied exclusion of company as a comparable company confirmed. Also companies with huge brand value and diversified activities need to be deslected.

Issues Involved:

1. Determination of Arm's Length Price (ALP) for international transactions.
2. Selection of comparable companies for Transfer Pricing (TP) analysis.
3. Functional comparability of selected companies.
4. Application of filters for comparability.
5. Relief granted by the Dispute Resolution Panel (DRP).

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for international transactions:

The Assessee, a wholly-owned subsidiary of a U.S. company, provided IT-enabled services (ITES) to its holding company, making it an international transaction subject to the Arm's Length Price (ALP) test under Sec.92 of the Income Tax Act, 1961. The Transaction Net Margin Method (TNMM) was accepted as the most appropriate method for determining ALP, with the Profit Level Indicator (PLI) being Operating Profit on Operating Cost (OP/OC).

2. Selection of comparable companies for Transfer Pricing (TP) analysis:

The Assessee initially selected six comparable companies in its TP study, but the Transfer Pricing Officer (TPO) accepted only two and added eight of his own, resulting in a total of ten comparable companies. The TPO's selection and the arithmetic mean profit margin of these companies were central to the dispute.

3. Functional comparability of selected companies:

The DRP excluded several companies from the TPO's list due to functional dissimilarities with the Assessee's ITES:

- Acropetal Technologies Ltd.: Excluded as it provided high-end Knowledge Process Outsourcing (KPO) services, unlike the Assessee's routine ITES.
- Jeevan Scientific Technologies Ltd.: Excluded because its BPO segment revenue was less than Rs. 1 crore, failing the TPO's filter.
- iGate Global Solutions Ltd.: Excluded due to lack of segmental breakup and involvement in diverse services, including software services.
- Infosys BPO Ltd. and Mindtree Ltd.: Excluded due to their significant brand value, diversified activities, and extraordinary events affecting margins.

4. Application of filters for comparability:

The DRP applied various filters to ensure comparability, such as the service income filter (service income > 75% of total revenue) and the TPO's own filter of segmental revenue exceeding Rs. 1 crore. Companies failing these filters were excluded from the list of comparables.

5. Relief granted by the Dispute Resolution Panel (DRP):

The DRP's relief included the exclusion of several companies from the TPO's list due to functional dissimilarities and failure to meet the required filters. The Tribunal upheld these exclusions, finding the DRP's reasoning acceptable.

Additional Judgments:

- Cosmic Global Ltd. and e4e Healthcare Business Services Pvt. Ltd.: Directed to be included in the list of comparables as they were initially selected by both the Assessee and the TPO.
- Accentia Technologies Ltd. and ICRA Online Ltd.: Directed to be excluded due to lack of segmental details and functional dissimilarities, as they provided high-end services unlike the Assessee's routine ITES.

Conclusion:

The Tribunal partly allowed the appeals of both the Revenue and the Assessee. The TPO was directed to compute the ALP in the software development services segment as per the Tribunal's directions and after affording the Assessee an opportunity of being heard.

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