2023 (7) TMI 1337 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Exclude the company M/s. Datamatics Business Solutions Ltd. from the list of comparables as this company is a KPO company and not comparable to assessee company. Infosys BPM Services Pvt. Ltd is to be excluded as this company is functionally dissimilar and use robotics automation and diversified activities. Manipal Digital Systems Pvt. Ltd. be excluded as this company is functionally dissimilar. CES Ltd. (seg) is functionally different and therefore ought to be rejected. Functionally Different as it is engaged in KPO services/. SPI Technologies India Pvt. Ltd. be excluded from the list of comparables as functionally dissimilar and ought to be rejected. He further submitted that the company had presence of extraordinary events, presence of intangibles and therefore ought to be rejected. See M/S. NTT DATA INFORMATION PROCESSING SERVICES PVT. LTD 2022 (7) TMI 1401 - ITAT BANGALORE R Systems International Ltd. is remitted to AO/TPO for fresh consideration to verify whether it satisfies all the filters adopted by TPO while selecting comparables. Ordered accordingly. BNR Udyog Ltd. is to be included in the list of comparables to determine the ALP of international transactions. Bhilwara Infotechnology Pvt. Ltd. - remit this issue to the file of AO/TPO to verify whether this company satisfies all the filters adopted by the AO/TPO while selecting comparables. Working capital adjustment - As there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. Treatment to lease equalization cost - Whether be excluded while computing the operating markup of the Appellant? - contention of the ld. A.R. is that the assessee has itself disallowed this expenditure while computing the income and not claimed any expenditure and this cannot be treated as operating item while computing the operating mark-up of the assessee in determining the ALP while applying the TNMM method - HELD THAT - In our opinion, it is appropriate to remit the issue to the file of AO/TPO to examine whether assessee has claimed any deduction towards lease equalization cost - If assessee itself has disallowed this expenditure while computing the total income of the assessee, it cannot be treated as operating expenditure while computing the operating mark-up of the assessee in determining the ALP while applying the TNMM method. Accordingly, the issue in dispute is remitted to the file of AO for reconsideration.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Selection and Rejection of Comparable Companies
3. Working Capital Adjustment
4. Lease Equalization Cost

Summary:

Transfer Pricing Adjustments:
The appeal by the assessee challenges the final assessment order for the AY 2017-18, specifically the transfer pricing adjustments made by the Deputy Commissioner of Income-tax Circle-2(1)(1), Bangalore. The assessee, a subsidiary of Mobil Rocky Mountain Inc, USA, provides business process outsourcing (BPO) and technical support services to its Associated Enterprises (AE). The Transfer Pricing (TP) Officer made adjustments towards BPO and Technical Support Services, rejecting the assessee's TP study and conducting a fresh analysis. The TP Officer selected 13 comparable companies, applied specific filters, and determined an adjustment of Rs. 41,52,50,000/-, later revised to Rs. 42,29,80,000/- under section 154 of the Act.

Selection and Rejection of Comparable Companies:
The assessee contested the inclusion and exclusion of several comparable companies. The Tribunal directed the exclusion of Datamatics Business Solutions Ltd., Infosys BPM Services Pvt. Ltd., Manipal Digital Systems Pvt. Ltd., CES Ltd., and SPI Technologies India Pvt. Ltd. on grounds of functional dissimilarity and other factors. The Tribunal also remitted the inclusion of R Systems International Ltd., BNR Udyog Ltd., and Bhilwara Infotechnology Pvt. Ltd. to the AO/TPO for fresh consideration to verify if they satisfy all the filters adopted by the TPO.

Working Capital Adjustment:
The Tribunal directed the AO/TPO to grant working capital adjustment, emphasizing that differences in working capital requirements between the tested party and comparable companies should be adjusted to ensure a fair arm's length price. The Tribunal referenced previous decisions, noting that the cost of capital and working capital adjustments should be considered to eliminate the impact of such differences on profit margins.

Lease Equalization Cost:
The assessee argued that the lease equalization cost of Rs. 3,60,96,753/- was not claimed as a deductible business expenditure in the return of income for AY 2017-18 and should be excluded while computing the operating markup. The Tribunal remitted the issue to the AO/TPO to examine whether the assessee claimed any deduction towards this cost, stating that if the expenditure was disallowed by the assessee, it should not be treated as an operating expenditure in determining the ALP.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to reconsider the inclusion/exclusion of certain comparables, grant working capital adjustment, and re-examine the lease equalization cost issue.