2019 (3) TMI 2028 - AT - Income Tax

TP Adjustment - Comparable selection - Universal Print System Ltd - HELD THAT - There is no specific findings as to the analysis regarding the functioning of Universal Print Systems Ltd vis a vis the function of the assessee company before holding it to be a comparable company. As M/s XL Health Corporation India Pvt. ltd 2018 (4) TMI 82 - ITAT BANGALORE we direct the AO/TPO to exclude the Universal Print System Ltd from the list of comparables with regard to the assessee herein.

Summary

Issues Involved:
1. Inclusion of Universal Print Systems Limited in the list of comparable companies by the TPO.
2. Functional dissimilarity between the assessee and Universal Print Systems Limited.
3. Revenue from ITES segment of Universal Print Systems Limited.
4. High-end ITES services provided by Universal Print Systems Limited.
5. Super normal profit of Universal Print Systems Limited.
6. Working Capital Adjustments and calculation of PLI.

Detailed Analysis:

1. Inclusion of Universal Print Systems Limited in the list of comparable companies by the TPO:
The primary issue in this case was the inclusion of Universal Print Systems Limited by the TPO in the list of comparable companies for determining the arm's length price. The assessee objected to this inclusion on the grounds that Universal Print Systems Limited was not functionally comparable and did not meet the necessary criteria for comparability, specifically the revenue from ITES segment.

2. Functional dissimilarity between the assessee and Universal Print Systems Limited:
The assessee argued that Universal Print Systems Limited was functionally different from the assessee. The assessee provided support services in the nature of data entry, data compilation, data cleaning, and data structuring, whereas Universal Print Systems Limited was engaged in "Pre press BPO" activities, which included processes and procedures between the creation of print layout and final printing. The Tribunal noted that neither the TPO nor the CIT(A) had adequately analyzed the functional details of Universal Print Systems Limited to determine its comparability with the assessee.

3. Revenue from ITES segment of Universal Print Systems Limited:
The assessee contended that Universal Print Systems Limited did not satisfy the selection criteria for comparables, which required that income from ITES should be greater than 50% of the operating revenue. The revenue from ITES segment for Universal Print Systems Limited was only 21.63% of the total revenue, thus failing to meet the filter introduced by the TPO. The Tribunal found merit in this argument and noted that the TPO's criteria should have been consistently applied.

4. High-end ITES services provided by Universal Print Systems Limited:
The assessee also argued that Universal Print Systems Limited provided specialized services requiring expertise and a skilled workforce, unlike the ITES activities undertaken by the assessee, which did not require technical knowledge or experience. The Tribunal agreed that this functional difference further supported the exclusion of Universal Print Systems Limited from the list of comparables.

5. Super normal profit of Universal Print Systems Limited:
The assessee highlighted that Universal Print Systems Limited had a PLI of 59.40%, which was considered super normal and not comparable to the business line of the assessee. The Tribunal noted that such high margins were indicative of functional differences and supported the exclusion of Universal Print Systems Limited from the comparables.

6. Working Capital Adjustments and calculation of PLI:
The assessee requested that if Universal Print Systems Limited was not excluded, the PLI should be recalculated after considering Working Capital Adjustments, which the TPO had accepted but not applied in the final calculation. The Tribunal directed the AO/TPO to exclude Universal Print Systems Limited from the list of comparables, thereby addressing the issue of PLI calculation.

Conclusion:
The Tribunal, after considering the arguments and evidence presented, directed the AO/TPO to exclude Universal Print Systems Limited from the list of comparables. This decision was based on the functional dissimilarity, failure to meet the revenue filter, and the super normal profit margins of Universal Print Systems Limited. The appeal of the assessee was partly allowed, and the order was pronounced on 12th March 2019.