2016 (6) TMI 790 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - determination whether the assessee has to be categorized as a Knowledge Process Outsourcing Services Provider (KPO) or BPO service provider - Held that - As observed earlier, agreement with the AE for providing service was executed on 1.10.2004. It was valid upto 30.12.2012. In the year for which an order under section 10TE(6) was passed by the TPO, this agreement was relevant for the period 1.4.2012 to 30.12.2012 i.e. nine months. If an agreement for a period of nine months indicates that the assessee s services were of low-end services, and those services can be categorized as BPO, then, how for the earlier period, the nature of services would be different ? In other words, same agreement cannot be give rise two types of services, merely on the basis of providing at different times. The TPO in the proceedings for the purpose of Safe Harbour Rules paid a visit in the office of the assessee, and himself collected information regarding nature of services. Thus, there is a conflict in the stand of the Revenue in different assessment years on one agreement. Considering this aspect, we are of the view that impugned orders are not sustainable on this issue, therefore, we set aside the assessment order including that of DRP and restore this issue to the file of the AO for fresh adjudication. The ld.AO shall take into account, the TPO s order passed in subsequent period i.e. dated 26.2.2014 though passed for the subsequent period but deals with same agreement. If the assessee is being accepted as a BPO, then, all the comparable selected by the TPO would not be relevant, and a fresh inquiry has to be conducted. Considering all these aspects, we allow the appeal of the assessee for statistical purpose. Deduction under section 10A - whether Foreign exchange fluctuation gain is directly linked with export business carried on by the undertaking, and hence, deemed to be derived from undertaking s business eligible for deduction u/s.10A? - Held that - DRP has recorded a finding that foreign exchange fluctuation gain was directly linked with the export business carried out by the assessee, hence, it is to be treated as income derived by an undertaking. The ld.DR was unable to point out any significant error in the proposition canvassed by the ld.DRP for granting the deduction under section 10A of the Income Tax Act.

Summary

Issues Involved:
1. Classification of the assessee as a Knowledge Process Outsourcing (KPO) or Business Process Outsourcing (BPO) service provider.
2. Determination of the arm’s length price (ALP) for international transactions.
3. Eligibility of foreign exchange fluctuation gain for deduction under section 10A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of the Assessee as KPO or BPO:
The primary issue revolves around whether the assessee should be classified as a Knowledge Process Outsourcing (KPO) service provider or a Business Process Outsourcing (BPO) service provider. The classification significantly impacts the comparables used to determine the arm’s length price (ALP) of international transactions.

The assessee, a wholly-owned subsidiary of SNL US, is involved in gathering, collating, organizing, arranging, storing, and transmitting financial information. The assessee argued that it should be categorized as a BPO, which involves low-end services, as opposed to a KPO, which involves high-end IT solutions and advanced skills. The Transfer Pricing Officer (TPO) initially categorized the assessee as a KPO, leading to an upward adjustment in the value of international transactions. However, the assessee contested this, citing a subsequent TPO order that categorized it as a BPO under Safe Harbour Rules.

The Tribunal noted the distinction between KPO and BPO as elucidated by the Hon’ble Delhi High Court in Rampgreen Solutions P. Ltd. vs. CIT, emphasizing that KPO involves advanced skills and knowledge, whereas BPO does not. The Tribunal observed that the same agreement for services, valid from 1.10.2004 to 30.12.2012, cannot give rise to different types of services at different times. Given the conflict in the Revenue’s stand in different assessment years, the Tribunal set aside the assessment order and remitted the issue back to the AO for fresh adjudication, considering the TPO’s subsequent order.

2. Determination of the Arm’s Length Price (ALP):
The determination of the ALP for the assessee’s international transactions with its associated enterprise was another critical issue. The TPO had recommended an upward adjustment of ?3,36,21,812/- in the value of international transactions, which was contested by the assessee.

The Tribunal, considering the distinction between KPO and BPO services, noted that if the assessee is categorized as a BPO, the comparables selected by the TPO would not be relevant. Therefore, a fresh inquiry would be necessary to determine the ALP. The Tribunal allowed the assessee’s appeal for statistical purposes, directing the AO to re-adjudicate the issue in light of the subsequent TPO order and the principles laid down by the Hon’ble Delhi High Court.

3. Eligibility of Foreign Exchange Fluctuation Gain for Deduction under Section 10A:
The Revenue’s appeal included a ground challenging the DRP’s decision to allow the foreign exchange fluctuation gain of ?28,21,403/- as eligible for deduction under section 10A of the Income Tax Act.

The DRP had held that the foreign exchange fluctuation gain was directly linked with the export business carried out by the assessee and should be considered as income derived from the undertaking. The Tribunal upheld the DRP’s decision, noting that the foreign exchange fluctuation gain was indeed linked to the export business and eligible for deduction under section 10A. The Revenue’s appeal on this ground was dismissed.

Conclusion:
The Tribunal allowed the assessee’s appeal for statistical purposes, remitting the issue of classification as KPO or BPO and the determination of ALP back to the AO for fresh adjudication. The Tribunal dismissed the Revenue’s appeal, upholding the DRP’s decision to allow the foreign exchange fluctuation gain as eligible for deduction under section 10A.