2022 (4) TMI 1505 - AT - Income Tax

TP Adjustment in Information Technology enabled Services (ITeS) segment - comparable selection - HELD THAT - Accentia Technologies Ltd. - TPO in his order has made a remark that certain amount of functional dissimilarity is subsumed in TNMM at net margin level and hence this company is an appropriate comparable. We are unable to subscribe to this view of the Ld. TPO. In our opinion this indicates that the Ld. TPO himself is somewhere convinced that functions performed by this company are different than that of the assessee. CIT(A) has categorically recorded the finding that this company is functionally different than that of the assessee after looking at the annual report of this company and the information available in public domain submitted by the assessee before him. We notice that the Ld. CIT(A) directed to exclude this company as a comparable after recording cogent reasons backed with precedents. Cosmic Global Ltd. company be excluded from the list of comparable companies as this company is functionally different from that of the assessee and outsources major part of its work and that this company had an exceptional performance high turnover abnormal profits in the relevant assessment year. Hence this company should not be considered as comparable to that of the assessee. Coral Hub Limited company is not comparable as unlike the assessee this company is outsourcing its services to third parties thereby resulting in low employee cost as compared to that of the assessee. Also this company should not be included on account of significant intangibles owned by this company.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Transfer pricing adjustment in Information Technology enabled Services (ITeS) segment.
3. Exclusion of specific comparable companies (Accentia Technologies Ltd., Coral Hub Ltd., and Cosmic Global Ltd.) from the list of comparables.
4. Disallowance under Section 14A read with Rule 8D on account of exemption claimed on dividend income.

Detailed Analysis:

1. Condonation of Delay:
The Tribunal condoned the delay in filing the appeal by the Revenue after considering the contents of the condonation application and the absence of any objection from the assessee.

2. Transfer Pricing Adjustment in ITeS Segment:
The primary issue raised by both the Revenue and the assessee was the addition on account of transfer pricing adjustment in the ITeS segment. The assessee, a wholly-owned subsidiary of WNS North America Inc., reported international transactions with its AEs, applying the Transactional Net Margin Method (TNMM) and using the Profit Level Indicator (PLI) of Operating Profit to Total Cost (OP/TC). The assessee chose 11 companies as comparables, demonstrating that the international transaction was at arm’s length price (ALP). However, the Transfer Pricing Officer (TPO) conducted a fresh search and arrived at a different set of comparables, resulting in a transfer pricing adjustment of Rs. 1,78,63,746/-.

3. Exclusion of Specific Comparable Companies:
The CIT(A) excluded Accentia Technologies Ltd., Coral Hub Ltd., and Cosmic Global Ltd. from the list of comparables, leading to the Revenue's appeal.

(i) Accentia Technologies Ltd.:
The CIT(A) excluded this company due to its involvement in mergers and acquisitions during the relevant financial year and its functional dissimilarity, being engaged in software services and Knowledge Process Outsourcing (KPO) services. The Tribunal upheld this exclusion, noting that the company had exceptional financial results due to mergers and acquisitions, supported by several judicial precedents, including the Delhi High Court's decision in PCIT vs. Ameriprise India Pvt. Ltd.

(ii) Coral Hub Ltd.:
The CIT(A) excluded Coral Hub Ltd. because it outsourced its business operations, unlike the assessee, which did not outsource any part of its operations. The Tribunal upheld this exclusion, referencing the Delhi High Court's judgment in Rampgreen Solutions (P.) Ltd. vs. CIT, which emphasized that a business model involving outsourcing significantly differs from one that employs its own employees and infrastructure.

(iii) Cosmic Global Ltd.:
Despite the Revenue's argument that the assessee initially chose this company as a comparable, the CIT(A) excluded it due to its functional differences and outsourcing of major parts of its work. The Tribunal supported this exclusion, citing the Special Bench decision in Dy. CIT vs. Quark System (P.) Ltd., which allows for the exclusion of a company wrongly included as comparable.

4. Disallowance under Section 14A:
The assessee's cross-objection related to the disallowance under Section 14A read with Rule 8D for exemption claimed on dividend income. The assessee had already offered Rs. 3 lakhs to tax, and the grievance was limited to the additional disallowance of Rs. 1,33,608/-. The Tribunal did not adjudicate on this ground due to the small amount involved but allowed the assessee to reserve the right to argue this ground in succeeding years.

Conclusion:
The Tribunal dismissed the appeal of the Revenue, upholding the CIT(A)'s decision to exclude Accentia Technologies Ltd., Coral Hub Ltd., and Cosmic Global Ltd. from the list of comparables. The Tribunal directed the AO/TPO to determine the ALP of the international transaction of "provision of ITeS" afresh in consonance with its directions. The cross-objection of the assessee was allowed for statistical purposes.