2018 (4) TMI 637 - AT - Income Tax

TPA - comparable selection criteria - Held that - Assessee company as engaged in providing Data creation, content development and back office data processing services thus companies functionally dissimilar with that of assessee and also fails the ITES revenue being more than 75% filter need to be deselected from final list.

Issues Involved:
1. Exclusion of certain comparable companies by the DRP.
2. Inclusion of certain comparable companies requested by the assessee.
3. Use of different financial year-end filter for rejection of comparable companies.
4. Rejection of use of multiyear data.
5. Adjustment for risk differences.
6. Arm's length range of 5%.

Issue-wise Detailed Analysis:

1. Exclusion of Certain Comparable Companies by the DRP:
The DRP excluded Acropetal Technologies Ltd (Seg), eClerx Services Ltd, Infosys BPO, Jeevan Scientific Technologies Ltd, and TCS E-Serve Ltd on the grounds of functional dissimilarity. The Tribunal upheld the DRP's decision, referencing the case of S&P Capital IQ (India) Private Limited vs. DCIT, which had similar facts and circumstances. The Tribunal found that these companies provided high-end KPO services, making them functionally different from the assessee, who was characterized as a back-office support service provider. For Jeevan Scientific Technologies Ltd, the Tribunal remitted the issue back to the AO/TPO for reconsideration, emphasizing that only segmental results should be taken if the company is to be considered comparable.

2. Inclusion of Certain Comparable Companies Requested by the Assessee:
The assessee objected to the exclusion of Microgenetic Systems Ltd, e4e Healthcare Business Services Pvt. Ltd., and Mastiff Tech Pvt. Ltd., arguing that only margin rectification was required. The Tribunal directed the TPO to include these companies in the final list of comparables after making necessary adjustments to their margins. The Tribunal also directed the inclusion of Microgenetic Systems Ltd, as both parties agreed on its comparability.

3. Use of Different Financial Year-End Filter for Rejection of Comparable Companies:
The assessee contested the use of different financial year-end filters by the AO/DRP for rejecting comparable companies. However, the Tribunal did not provide a specific ruling on this issue, as the primary focus was on the inclusion and exclusion of comparable companies.

4. Rejection of Use of Multiyear Data:
The assessee argued against the AO/DRP's rejection of multiyear data, insisting on using data for the FY 2010-11 only. The Tribunal did not specifically address this issue in its judgment, focusing instead on the comparability of specific companies.

5. Adjustment for Risk Differences:
The assessee contended that the AO/DRP disregarded the risk profile differences between the assessee and the comparable companies selected by the TPO, and did not allow risk adjustment as per Rule 10B(1)(e). The Tribunal did not provide a detailed ruling on this issue, as the primary discussion centered around the functional comparability of the selected companies.

6. Arm's Length Range of 5%:
The assessee requested the AO/TPO to rework the profit margins and allow the benefit of the +/- 5% range as provided in the proviso to Section 92C(2) of the Act. The Tribunal did not specifically address this issue in its judgment, as the main focus was on the inclusion and exclusion of comparable companies.

Conclusion:
The Tribunal upheld the DRP's exclusion of certain companies due to functional dissimilarity and directed the inclusion of others after margin adjustments. The ruling emphasized that the assessee was a back-office support service provider, and only companies providing similar services could be considered comparable. The Tribunal remitted the issue of Jeevan Scientific Technologies Ltd back to the AO/TPO for reconsideration based on segmental results. Other grounds raised by the assessee were not adjudicated and were rejected as not pressed. The appeals were partly allowed.

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