2017 (12) TMI 345 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee provides engineering, design and related services for the offshore floaters/platform business of SHI Korea. The assessee has a pool of qualified manpower. It employs engineers having a background and experience in lay out design, electrical design, instrumentation design, piping design and mechanical design, etc., thus companies functionally dissimilar with that of assessee is to be excluded from final comparability list.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Comparable Companies

Detailed Analysis:

Transfer Pricing Adjustment:
The appeal concerns the addition on account of transfer pricing adjustment amounting to ? 4,01,72,876/-. The assessee company, a wholly-owned subsidiary of SHI Korea, provides engineering, design, and related services. The dispute revolves around the international transaction of 'Provision of engineering, design and related services' valued at ? 27,11,16,647/-. The assessee used the Transactional Net Margin Method (TNMM) with the Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC), computing its PLI at 15.16%. The Transfer Pricing Officer (TPO) introduced new comparables, resulting in an adjusted OP/OC mean of 31.73% and a transfer pricing adjustment of ? 4,01,72,876/-. The assessee contested this adjustment but was unsuccessful before the Dispute Resolution Panel (DRP), leading to the addition in the final assessment order.

Selection of Comparable Companies:
The core issue in the appeal is the inclusion of four companies in the list of comparables. The TPO classified the assessee’s services as 'IT enabled services,' and the dispute is whether the selected comparables are appropriate.

Accentia Technologies Ltd.:
The Tribunal previously excluded this company due to functional dissimilarity and substantial outsourcing. The current year's Annual Report shows income from both products and services, making it difficult to segregate IT enabled services income. Thus, the Tribunal ordered its exclusion from the comparables list.

Eclerx Services Ltd.:
The Tribunal had excluded this company in the preceding year due to functional differences. The Annual Report indicates that Eclerx provides diverse services like financial and sales & marketing services, which differ significantly from the assessee's activities. Consequently, the Tribunal directed its exclusion from the comparables list.

TCS E-Serve Ltd.:
This company was also excluded in the preceding year due to differences in functional profiles. The Annual Report for the current year shows activities similar to the previous year, including transaction processing and technical services primarily for Citigroup entities. Given the functional dissimilarity, the Tribunal upheld its exclusion.

TCS E-Serve International Ltd.:
Similar to TCS E-Serve Ltd., this company’s activities include transaction processing and technical services for Citigroup entities. The Tribunal excluded it in the preceding year for functional differences, and the same rationale applies for the current year, leading to its exclusion.

Conclusion:
The Tribunal set aside the impugned order on the issue of transfer pricing adjustment and remitted the matter to the AO/TPO for fresh determination of the ALP of the international transaction in line with the directions provided. The assessee will be granted a reasonable opportunity to be heard in the new proceedings. The appeal was allowed for statistical purposes. The order was pronounced in the open court on 22.08.2017.