2021 (6) TMI 1136 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT - Companies need to be rejected as comparable as functionally not comparable with captive service provider like assessee - we direct Infosys BPO to be excluded from the list of comparables and remand Universal Paint to Ld.AO/TPO for fresh consideration. TCS e-Serve Ltd - company is into high-end KPO services and an assessee rendering low end BPO services cannot be compared with it. Further this company has been excluded due to absence of segmental information - we direct Ld.TPO to exclude this company from the list of comparables . BNR Udyog Ltd. (segmental) - As observed from annual report placed this company has segmental information of medical transcription and revenue earned under this segment is Rs.147.40 Lacs. It is also been observed that various other decisions by co-ordinate Benches of this Tribunal has remanded this comparable back to Ld.TPO for proper analysis and fresh consideration. See Indegene (P) Ltd vs ACIT 2017 (8) TMI 1576 - ITAT BANGALORE Thus we set aside this comparable back to Ld.TPO for considering it afresh. Excel Infoways Ltd. (segmental) - Objection raised by Ld.CIT DR stands clarified as this company for year under consideration made a statement under 133 (6) regarding allocating entire employee cost to IT-BPO segment with no allocation to other segment which amounts to almost 49% of its total revenue during the year under consideration - We therefore agree with contention raised by assessee regarding this comparable not satisfying employee cost filter. Acropetal Technologies Ltd - We direct the Ld.AO/TPO to correct the margins in respect of Acropetal Technologies Ltd. Consider Accentia Technologies Ltd. Informed Technologies Ltd. and Jindal Intellicon Ltd. these comparables in the final list of comparables in accordance with law. Computing negative working capital adjustment - We find that in the case of Lam Research India (P.) Ltd. 2021 (2) TMI 183 - ITAT BANGALORE and Software AG Bangalore Technologies (P.) Ltd. 2016 (3) TMI 1384 - ITAT BANGALORE passed by this Tribunal it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. We therefore direct Ld.TPO to compute the ALP in accordance with the directions contained in this order

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of Transfer Pricing Documentation
3. Comparability Analysis
4. Use of Financial Data
5. Application of Financial Year Ending Filter
6. Application of Export Earning Filter
7. Application of Employee Cost Filter
8. Application of Turnover Threshold
9. Selection of Comparable Companies
10. Negative Working Capital Adjustment
11. Corporate Tax Disallowance under Section 14A

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged the proposed Transfer Pricing addition of INR 2,59,80,979/- made by the AO and TPO, which was further increased by the DRP to INR 3,92,90,228/- for the international transactions with its Associated Enterprises (AEs) under section 92CA of the Income-tax Act, 1961.

2. Rejection of Transfer Pricing Documentation:
The AO, TPO, and DRP were criticized for rejecting the Transfer Pricing documentation maintained by the assessee without providing any cogent reason, invoking provisions of sub-section (3) of 92C of the Act.

3. Comparability Analysis:
The AO, TPO, and DRP were faulted for rejecting the comparability analysis undertaken in the Transfer Pricing documentation and conducting a fresh analysis by introducing various filters. The Tribunal remanded the comparability analysis of certain companies back to the AO/TPO for fresh consideration, specifically Universal Print Systems Ltd. and BNR Udyog Ltd., while directing the exclusion of Infosys BPO Ltd., TCS e-Serve Ltd., and Excel Infoways Ltd. due to functional dissimilarities and other reasons.

4. Use of Financial Data:
The assessee argued that the AO, TPO, and DRP erred in not considering the previous two years' financial data of comparable companies while determining the Arm's Length Price (ALP), relying only on single-year data for the year ended March 31, 2012.

5. Application of Financial Year Ending Filter:
The AO, TPO, and DRP applied different financial year ending filters while selecting comparable companies, leading to a narrower comparable set. The Tribunal did not specifically address this issue in the judgment.

6. Application of Export Earning Filter:
The AO, TPO, and DRP applied an export earning filter of 75% of total sales, which led to a narrower comparable set. The Tribunal did not specifically address this issue in the judgment.

7. Application of Employee Cost Filter:
The AO, TPO, and DRP applied a threshold limit of 25% in respect of employee cost on sales of comparable companies, leading to a narrower comparable set. The Tribunal found that Excel Infoways Ltd. failed the employee cost filter and directed its exclusion from the final list of comparables.

8. Application of Turnover Threshold:
The AO, TPO, and DRP did not apply an upper limit on turnover while selecting comparable companies. The Tribunal did not specifically address this issue in the judgment.

9. Selection of Comparable Companies:
The Tribunal directed the exclusion of certain companies due to functional dissimilarities and remanded others for fresh consideration. Specifically, it excluded Infosys BPO Ltd., TCS e-Serve Ltd., and Excel Infoways Ltd. due to functional dissimilarities and other reasons. It remanded Universal Print Systems Ltd. and BNR Udyog Ltd. for fresh consideration. It also directed the inclusion of Accentia Technologies Ltd., Informed Technologies Ltd., and Jindal Intellicom Ltd. in the final list of comparables.

10. Negative Working Capital Adjustment:
The Tribunal found that negative working capital adjustment should not be made in the case of a captive service provider, as there is no working capital risk. It directed the TPO to compute the ALP without making a negative working capital adjustment, following the consistent view of the Tribunal in similar cases.

11. Corporate Tax Disallowance under Section 14A:
The AO made a disallowance under section 14A of the Act read with rule 8D of the Income-tax Rules, 1962, to the extent of INR 3,46,454 while computing the business income of the assessee. The Tribunal did not specifically address this issue in the judgment.

Conclusion:
The Tribunal partially allowed the appeal filed by the assessee, directing the AO/TPO to reconsider certain comparables and exclude others based on functional dissimilarities and other reasons. It also directed the TPO to compute the ALP without making a negative working capital adjustment. The Tribunal's decision emphasized the need for a detailed and accurate comparability analysis and the proper application of filters and adjustments in Transfer Pricing cases.