2021 (9) TMI 1502 - AT - Income Tax

TP Adjustment - provision of back-office support services/income received from ITES segment - comparable selection - HELD THAT - Exclusion of Universal Print TCS e-serve and Infosys BPO from the list of comparables and remand BNR Udyog Ld. AO/TPO to consider it afresh in light of the observations made by coordinate bench of this Tribunal reproduced hereinabove. Negative working capital computed by the Ld.TPO without appreciating the fact that assessee is a captive service provider - We find that in the case of 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.

Summary

Issues Involved:
1. Legality of the assessment and reference to the Transfer Pricing Officer (TPO).
2. Determination of arm's length price and erroneous data used by the TPO.
3. Comparability analysis for determining the arm's length price.
4. Non-allowance of appropriate adjustments to comparable companies by the TPO.
5. Variation of 5% from the arithmetic mean.
6. Levy of interest under section 234B of the Act.
7. Directions issued by the Dispute Resolution Panel (DRP).

Detailed Analysis:

1. Legality of the Assessment and Reference to the TPO:
The assessee argued that the final order issued by the Assistant Commissioner of Income Tax (ACIT) was bad in law and violated principles of natural justice. The ACIT erred in making a reference to the TPO without recording an opinion that any conditions in section 92C(3) of the Act were satisfied. The directions by the DRP and the order by the AO/TPO were without jurisdiction, as they purported to give effect to an invalid TPO order. The TPO and DRP failed to demonstrate that the assessee's motive was to shift profits outside India by manipulating prices in international transactions, a prerequisite for adjustments under Chapter X of the Act.

2. Determination of Arm's Length Price and Erroneous Data Used by the TPO:
The TPO rejected the value of international transactions related to IT Enabled Services (ITeS) recorded in the books, which the DRP upheld. The TPO conducted a fresh benchmarking analysis using non-contemporaneous data, substituting the assessee's analysis with his own, which the DRP confirmed. The TPO used data not available in the public domain at the time of the assessee's transfer pricing study and did not apply multiple-year data while computing the margin of comparable companies.

3. Comparability Analysis for Determining the Arm's Length Price:
The TPO rejected the filters, search process, and comparable companies selected by the assessee, conducting a fresh benchmarking analysis and wrongly comparing the assessee's activities with full-fledged entrepreneurs. The TPO and DRP erred in rejecting comparables based on different accounting years, employee cost greater than 25% of total revenues, and export sales less than 75% of total sales. The TPO also erred in not applying the turnover filter at the upper end to reject high turnover companies and in excluding Ace BPO Services Pvt. Ltd. as a comparable. The TPO's negative working capital adjustment was also erroneous.

4. Non-Allowance of Appropriate Adjustments to Comparable Companies by the TPO:
The TPO and DRP failed to allow risk adjustments under Rule 10B and did not consider adjustments for accounting practices, marketing expenditure, and research and development expenditure between the assessee and comparable companies.

5. Variation of 5% from the Arithmetic Mean:
The TPO and DRP did not grant the benefits of the proviso to section 92C(2) of the Act, which allows a variation of 5% from the arithmetic mean.

6. Levy of Interest Under Section 234B of the Act:
The AO erred in levying interest under section 234B of the Act.

7. Directions Issued by the DRP:
The DRP did not take cognizance of the objections filed by the assessee regarding the draft assessment order and erred in confirming the draft order of the AO/TPO.

Comparability Analysis (Ground 3(g)):
The assessee sought exclusion of Universal Print Systems Ltd., Infosys BPO Ltd., TCS e-Serve Ltd., BNR Udyog Ltd., and Excel Infoways Ltd. due to functional dissimilarities. The Tribunal, after reviewing the annual reports and previous decisions, found that these companies were not comparable to the assessee, a captive service provider working on a cost-plus basis. The Tribunal directed the exclusion of Universal Print Systems Ltd., Infosys BPO Ltd., and TCS e-Serve Ltd. from the list of comparables and remanded BNR Udyog Ltd. to the TPO for fresh consideration.

Negative Working Capital Adjustment:
The Tribunal found that negative working capital adjustments should not be made for a captive service provider, as there is no working capital risk and the service provider is compensated on a total cost-plus basis. The Tribunal directed the TPO to compute the ALP without making a negative working capital adjustment.

Conclusion:
The Tribunal allowed the assessee's appeal in part, directing the exclusion of certain comparables and remanding others for fresh consideration. The negative working capital adjustment was also directed to be removed. The order was pronounced in the open court on 29th September 2021.