2017 (12) TMI 650 - AT - Income Tax

TPO - selection of comparable - Held that - Assessee is engaged in provision of information technology (IT) enabled services in the nature of survey programming, data collection, data analysis and business research, thus companies functionally dissimlar with that of assessee need to be deselected from final list. Working capital adjustment - Held that - We are in agreement with the Ld. Counsel, that while comparing the margins earned by the comparable companies there is always the assessee, the difference on account of working capital employed should also be factored into. In order to improve the reliability of results, the financial data of comparable companies are required to be adjusted. This Tribunal in Mentor Graphics Noida Pvt. Ltd. 2007 (11) TMI 339 - ITAT DELHI-H and Sony India 2006 (10) TMI 88 - DELHI HIGH COURT has held that in practice such adjustments usually include adjustments for accounts payable, accounts receivable and inventory.

Issues Involved:

1. Selection of comparables for Transfer Pricing.
2. Use of multiple year data and the appropriateness of filters applied by the TPO.
3. Working capital adjustment.
4. Initiation of penalty proceedings under Section 271(1)(c).
5. Charging of interest under Section 234B.

Detailed Analysis:

1. Selection of Comparables for Transfer Pricing:

The primary issue revolves around the selection of comparables for determining the Arm’s Length Price (ALP) for international transactions. The assessee adopted the Transactional Net Margin Method (TNMM) using operating profits to operating cost (OP/OC) as the profit level indicator (PLI). The TPO disputed the selection of comparables by the assessee, applying various filters and selecting a new set of comparables.

Exclusion of Comparables:

- Eclerx Services Ltd: The Tribunal found Eclerx Services Ltd. to be functionally dissimilar, providing high-end Knowledge Process Outsourcing (KPO) services, and thus directed its exclusion.
- Infosys BPO Ltd: The Tribunal excluded Infosys BPO Ltd. due to its high-end integrated services and significant differences in risk profile and revenue.
- TCS E-Serve Ltd: This company was excluded as it provided financial services and had a different functional profile.
- Excel Infoways Ltd: The Tribunal set aside this comparable for verification of its financial details, especially regarding turnover and employee cost.
- BNR Udyog Ltd: The Tribunal retained this company in the list of comparables as there was no functional dissimilarity and the related party transactions were not significant.

Inclusion of Comparables:

- R Systems International Ltd: The Tribunal directed the inclusion of this company, following its decision in the previous assessment year, despite the different financial year ending.
- Caliber Point Business Solutions Ltd., Datamatics Financial Services Ltd., CG-VAK Software & Exports Ltd: The Tribunal set aside these comparables for reconsideration by the TPO based on new data provided by the assessee.

2. Use of Multiple Year Data and Filters:

The Tribunal addressed the appropriateness of using single-year data versus multiple-year data and the various filters applied by the TPO. The assessee's objections included the rejection of companies based on turnover, different financial year data, and employee cost filters. The Tribunal emphasized the need for a consistent and fair approach in selecting comparables, considering the functional profile and risk factors.

3. Working Capital Adjustment:

The assessee argued for a working capital adjustment, which the Tribunal upheld, citing various judicial rulings. The Tribunal agreed that differences in working capital should be factored into the comparability analysis to improve the reliability of results.

4. Initiation of Penalty Proceedings under Section 271(1)(c):

The Tribunal deemed the ground regarding the initiation of penalty proceedings as premature and did not address it substantively.

5. Charging of Interest under Section 234B:

The ground related to charging interest under Section 234B was considered consequential, and the Tribunal did not provide a detailed ruling on this issue.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, directing the exclusion and inclusion of certain comparables and upholding the need for working capital adjustment. The issues regarding penalty proceedings and interest under Section 234B were not substantively addressed. The decision emphasized the importance of a consistent and fair approach in transfer pricing analysis, considering the functional profile and risk factors of the assessee.

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